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Small Business Contracting: Opportunities Exist to Further Improve HUBZone Oversight

GAO-15-234 Published: Feb 12, 2015. Publicly Released: Feb 12, 2015.
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Highlights

What GAO Found

The Small Business Administration (SBA) designates economically distressed areas as Historically Underutilized Business Zones (HUBZone), based on demographic data such as unemployment and poverty rates, but lacks an effective way to communicate program changes to small businesses. The designations apply to areas such as nonmetropolitan counties and census tracts and are subject to periodic changes as economic conditions change. Small businesses in HUBZones can apply for certification to participate in the program. HUBZones that lose their qualifying status due to changes in economic conditions become “redesignated” and undergo a 3-year transition period. In 2015, 3,417 redesignated areas will lose their HUBZone status. There are 578 firms in those areas (see table below). SBA relies on website updates and broadcast e-mails to inform firms about program changes, and consequently not all affected may be informed about the changes before their resultant decertification. SBA has initiated efforts to improve notification of program changes, but its communications may not reach all affected firms and do not specify when the status of areas might change or what firms are located in those areas. As a result, some firms in the program lack timely awareness of information that could affect their eligibility.

Number of Firms and Amount of Contracts Received for Firms in HUBZone Areas in Fiscal Year (FY) 2013, by Designation Status

 

Number of certified firms, as of June 2014

Amount of contract obligations to firms in area (FY13)

 

Total

Percent

Total

Percent

Qualified areas

4,318

83%

$3,295,006,042

81%

Redesignated until 2014

146

3

$24,467,606

1

Redesignated until 2015

578

11

702,784,535

17

Redesignated until 2016

69

1

28,832,221

1

Redesignated until 2017

78

2

40,477,929

1

Total

5,189

100%

$4,091,568,333

100%

Source: GAO analysis of SBA data. | GAO-15-234

SBA has addressed weaknesses in its certification process that GAO previously identified, but lacks key controls for its recertification process. For instance, to receive certification SBA now requires all firms to provide documentation to show they meet the eligibility requirements. SBA also conducts site visits at selected firms based on, for example, the amount of federal contracts they received. However, SBA does not require firms seeking recertification to submit any information to verify their continued eligibility or provide guidance on when staff should request or verify documentation for recertification. Instead, it relies on firms attesting that they continue to meet the program's eligibility requirements. By not routinely requiring and reviewing key supporting documentation from recertification applicants, SBA is missing an additional opportunity to reduce the risk that ineligible firms obtain HUBZone contracts.

Why GAO Did This Study

Small firms participating in SBA's HUBZone program received about $4 billion in federal contracts in fiscal year 2013. The program's purpose is to stimulate economic development in economically distressed areas. A certified HUBZone firm is eligible for federal contracting benefits, including limited competition awards such as sole-source and set-aside contracts. GAO previously reported on weaknesses in SBA's internal controls and problems with ensuring that only eligible firms participate in the program. GAO was asked to examine the steps SBA has taken to address these issues. This report (1) describes HUBZone designations and how SBA communicates with interested parties about the program, and (2) examines SBA's certification and recertification processes for firms.

To address these objectives, GAO analyzed statutory provisions, SBA documents, and federal procurement data. GAO also interviewed SBA and representatives from applicant firms (certified, decertified, and denied) and local economic development agencies located in four HUBZones selected for geographic diversity.

Recommendations

SBA should (1) establish a mechanism to better ensure firms are notified of changes that could affect their participation in the program, and (2) assess the recertification process and implement additional controls, such as criteria and guidance for a risk-based approach to requesting and verifying information during recertification. SBA agreed with both recommendations.

Recommendations for Executive Action

Agency Affected Recommendation Status
Small Business Administration To improve SBA's administration and oversight of the HUBZone program and reduce the risk that firms that no longer meet program eligibility criteria receive HUBZone contracts, the Administrator of SBA should establish a mechanism to better ensure that firms are notified of changes to HUBZone designations that may affect their participation in the program, such as ensuring that all certified firms and newly certified firms are signed up for the broadcast e-mail system or including more specific information in certification letters about how location in a redesignated area can affect their participation in the program
Closed – Implemented
In response to this recommendation, SBA issued a procedural notice in 2019 regarding notifying firms of changes to geographic eligibility. According to the notice, SBA will include language in the approval letters regarding potential changes to the firm's geographic eligibility, as well as more specific language for businesses whose principal office is in a redesignated area. In addition, the notice says that SBA will notify all businesses at the beginning of a fiscal year when they expect there will be a change in area designation, and will send an email to all businesses whose principal office is located in a newly redesignated area updating them on their status and the future impact of the change. As a result, firms are more likely to be aware of changes that would affect their continuing program eligibility.
Small Business Administration To improve SBA's administration and oversight of the HUBZone program and reduce the risk that firms that no longer meet program eligibility criteria receive HUBZone contracts, the Administrator of SBA should conduct an assessment of the recertification process and implement additional controls, such as developing criteria and guidance on using a risk-based approach to requesting and verifying firm information, allowing firms to initiate the recertification process, and ensuring that sufficient staff will be dedicated to the effort so that a significant backlog in recertifications does not recur.
Closed – Implemented
In response to this recommendation, SBA informed GAO in August 2020 that it planned to recertify all HUBZone firms at least every three years, thereby shifting from a risk-based approach to recertification and removing the need for a risk assessment. SBA established procedures for this new recertification process in a December 2020 procedural notice, which took effect in January 2021 and included a review of eligibility documentation for all firms. In August 2020, SBA also provided documentation showing that it had increased staffing levels and implemented performance metrics for monitoring the timeliness of recertifications to avoid the recurrence of a significant backlog of recertifications. As a result, SBA will be better able to identify firms that are no longer eligible for HUBZone participation and a recurrence of a recertification backlog is less likely.

Full Report

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Topics

DocumentationEconomically depressed areasEligibility criteriaEligibility determinationsImpacted area programsMonitoringProgram managementRisk managementSmall business assistanceUrban development programs