HUBZone Program: Actions Taken on February 2015 GAO Recommendations

What GAO Found

As of March 8, 2016, the Small Business Administration (SBA) had taken some actions to address but had not fully implemented the two recommendations GAO made in February 2015 to address weaknesses in SBA’s oversight of the Historically Underutilized Business Zone (HUBZone) program. The program provides federal contracting preferences to small businesses located in HUBZone areas that also employ residents of the areas.

GAO found in February 2015 that SBA relied on website updates and broadcast e-mails to inform firms about program changes such as area redesignations (loss of HUBZone status). But not all HUBZone firms may have signed up to receive the e-mails. As a result, GAO recommended that SBA take steps to inform all firms about such changes. In response, SBA officials said they now communicate such information in approval letters for newly certified firms and add newly certified firms to the e-mail distribution list. (Certified firms are those determined eligible for the program.) However, SBA has not taken steps to help ensure that all previously certified firms would be added to the e-mail distribution list. It is important that all certified firms potentially affected by such changes receive information about the changes or are made aware in a timely fashion of any effects on their program eligibility.

GAO’s February 2015 report also found that SBA had a 1-year backlog for recertifying firms and generally relied on firms’ attestation of continued eligibility. GAO recommended that SBA conduct an assessment of the recertification process and implement additional controls, such as developing guidance for requesting and verifying firm information and ensuring it had sufficient staff dedicated to recertifications to prevent recurring backlogs.

In response, SBA changed its processes so that firms are alerted on an ongoing basis when they are due for recertification. However, SBA still has a recertification backlog stemming from the transition to the new process. And SBA officials told GAO they have not issued guidance on requesting supporting documents during recertification because any potential risk of fraud would be mitigated by their policy of conducting site visits of firms. However, SBA visited a fraction of certified firms in fiscal years 2013–2015. For example, SBA conducted site visits on 10 percent and 11 percent of certified HUBZone firms in fiscal years 2013 and 2014, respectively. According to the officials, requiring supporting documentation as part of a firm’s recertification would slow application processing and be resource intensive. SBA’s reliance on site visits alone would not mitigate the recertification weaknesses that were the basis for GAO’s recommendation. In recognition of SBA resource constraints, in its 2015 report GAO noted that SBA could apply a risk-based approach to its recertification process (to review and verify information from firms that appear to pose the most risk to the program).Developing guidance on requesting supporting documentation from firms seeking recertification would provide SBA with greater assurance that only qualified firms continue in the HUBZone program and receive preferential contracting treatment.

GAO provided a draft of this report to SBA. SBA disagreed with GAO’s conclusions about the actions it has taken in response to GAO’s February 2015 recommendations. SBA officials believe that SBA has adequately responded to both recommendations. However, as noted in the report, SBA has made progress regarding the recommendations but the actions taken as of March 2016 do not fully address the recommendations. Additional actions by SBA would help ensure that all firms are aware of changes to HUBZone designations that could affect their continued eligibility for the program and provide greater assurance that only qualified firms continue in the program. SBA also provided technical comments that GAO incorporated into the report as appropriate.

The National Defense Authorization Act for Fiscal Year 2016 includes a provision for GAO to assess SBA oversight of the HUBZone program, including SBA’s process to approve or deny participation in the program and actions taken by SBA to prevent fraud, waste, and abuse.This report addresses the actions that SBA has taken in response to the two recommendations GAO made in February 2015 regarding weaknesses in its oversight of the HUBZone program. To update information on the status of the program and recommendations from the 2015 report, GAO reviewed SBA written responses and documents that reflect process changes the agency made, and interviewed SBA staff. GAO also used data from the Federal Procurement Data System-Next Generation to analyze the dollar amount of federal contracts obligated to HUBZone firms in calendar year 2015.