United States General Accounting Office

GAO Report to the Ranking Minority Member,

Permanent Subcommittee on

Investigations, Committee on

Governmental Affairs, U.S. Senate

September 1995 SMALL BUSINESS

ADMINISTRATION

8(a) Is Vulnerable to

Program and

Contractor Abuse

GAO/OSI-95-15

GAO United States

General Accounting Office

Washington, D.C. 20548

Office of Special Investigations

B-261485 

September 7, 1995

The Honorable Sam Nunn

Ranking Minority Member

Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate

Dear Senator Nunn:

On October 5, 1994, you requested that we determine whether the Small

Business Administration’s (SBA) 8(a) program is being exploited by

individuals or corporations that have used illegal or improper means to

participate in and benefit from the program. SBA’s 8(a) program is designed

to develop and promote businesses that are owned and controlled by

socially and economically disadvantaged individuals. You were concerned

that weaknesses in program management and administration identified in

our September 19931

 report may make the 8(a) program vulnerable to

abusive activities.

You asked us to determine, within the context of case studies, whether

abuses such as the following have occurred in the 8(a) program.

• Has the improper participation of 8(a) firms resulted in their being

awarded contracts for which they were otherwise ineligible, and have 8(a)

firms misrepresented themselves to enter and/or stay in the program?

• Have any 8(a) contracts been inappropriately awarded to firms that were

ineligible because they exceeded size standard restrictions? Has SBA

allowed firms to remain in the program after their increased size indicated

that they should be graduated?

• Have federal contracting authorities improperly used the Indefinite

Delivery Indefinite Quantity (IDIQ)2

 contracting option to noncompetitively

steer 8(a) contracts that should have been competitive?

1

Small Business: Problems Continue With SBA’s Minority Business Development Program

(GAO/RCED-93-145, Sept. 17, 1993).

2

IDIQ contracts are used when agencies do not know the precise quantity of supplies or services to be

provided and consequently are able only to estimate a minimum value. For purposes of IDIQ contracts,

the guaranteed minimum value was $3 million for service contracts and $5 million for manufacturing

contracts. SBA recently amended its 8(a) regulations to eliminate the potential abuse of IDIQ contracts

to avoid competition. 13 C.F.R. § 124.311(a)(2) (1995) requires agencies to competitively award any

contract whose total value exceeds $3 million for service contracts and $5 million for manufacturing

contracts. Effective August 7, 1995, the applicable threshold amount will be applied to the agency’s

estimate of the contract’s total value, including all options. The minimum value of the contract will no

longer be used.

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B-261485 

To develop our case studies, we reviewed SBA application, eligibility, and

participation documents of the top 25 8(a) contractors in terms of total

dollars awarded for fiscal year 1992. (See app. II.) We looked for

indicators, or red flags, of potential regulatory violations and criminal

misconduct. We initially selected four firms for investigation based on the

strength of the indicators we found. Due to time constraints and the

destruction of records compiled for one firm as a result of the Oklahoma

City bombing tragedy, we narrowed our investigation to two firms—I-NET,

Inc. of Bethesda, Maryland, and Technical and Management Services

Corporation (TAMSCO) of Calverton, Maryland—for further investigation.

I-NET and TAMSCO:

An Overview

I-NET, Inc. is a high technology corporation that provides federal agencies

with computer systems and support services. For fiscal year 1992, it was

the third largest recipient of 8(a) contract awards, which totaled over

$65 million. During its nearly 10-year (Sept. 20, 1984, to June 16,

1994) program participation, I-NET obtained 145 8(a) contracts totaling at

least $508 million. At least 126 of the 145 contracts were awarded

noncompetitively.

TAMSCO is a high technology corporation that provides computer systems

and support services to federal agencies and large Department of Defense

contractors. For fiscal year 1992, it was the ninth largest recipient of 8(a)

contract awards, totaling over $30 million. During its program

participation from May 14, 1984, until September 18, 1993, TAMSCO

obtained 108 8(a) contracts totaling at least $356 million. At least 82 of the

108 contracts were awarded noncompetitively.

Results in Brief I-NET and TAMSCO were among the firms that were initially

recommended for nonacceptance into the 8(a) program because of

eligibility questions concerning who actually controlled each firm. SBA had

questions that were never fully answered about whether I-NET and

TAMSCO were owned and controlled by socially and economically

disadvantaged individuals, as defined by 8(a) program regulations. Based

on our review of SBA documentation and our interviews with SBA officials,

we questioned SBA’s justification to accept I-NET and TAMSCO into the

program.

On at least two occasions after entry into the program, I-NET’s owner did

not inform SBA about the true equity ownership in the firm, in violation of

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B-261485 

SBA regulations. I-NET also misrepresented information to SBA about its

owner’s personal qualifications: I-NET’s owner falsely certified on a

résumé submitted to SBA with her 8(a) application that she held an

Associate of Arts (AA) degree in computer science and technology. SBA

took no action when it learned of these misrepresentations.

I-NET received 8(a) contracts totaling millions of dollars after it had

grown too large for continued 8(a) program participation. To remain

eligible for contracts, I-NET excluded items from its financial statements,

understating its total revenue; and it represented itself as a company at

financial risk, although SBA found that I-NET’s access to credit was

considerable. Further, SBA allowed I-NET to stay in the program and obtain

contracts after it determined that I-NET had achieved the program goals.

In our investigation of TAMSCO, we determined that U.S. Coast Guard

officials had directed a sole source contract to TAMSCO, thus avoiding

federal competition requirements. Coast Guard officials changed the

contract’s classification code to one for which TAMSCO qualified and

altered the minimum value of the contract from the original solicitation by

lowering the total number of labor hours by 46 percent. Such changes

allowed the Coast Guard to award a sole source IDIQ contract to TAMSCO

and offer the company, according to a Coast Guard official’s written notes,

a “graduation present.”

Background

Previous GAO Findings In March and April 1995, as a part of our continuing work on the 8(a)

program, we testified3

 that the program has continued to experience

problems in achieving its objectives. As the value and number of 8(a)

contracts continue to grow, the distribution of those contracts remains

concentrated among a very small percentage of participating 8(a) firms,

while a large percentage get no awards at all. This is a long-standing

problem. For example, in fiscal year 1990, 50 firms representing fewer than

2 percent of all program participants obtained about 40 percent, or 

$1.5 billion, of the total $4 billion awarded. Of additional concern is that, of

the approximately 8,300 8(a) contracts awarded in fiscal 1990 and 1991

combined, 67 contracts were awarded competitively. In fiscal year 1994,

3

Small Business: Status of SBA’s 8(a) Minority Business Development Program (GAO/T-RCED-95-149,

Apr. 4, 1995) and Small Business: Status of SBA’s 8(a) Minority Business Development Program

(GAO/T-RCED-95-122, Mar. 6, 1995).

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B-261485 

the top 50 firms represented 1 percent of the program participants and

obtained 25 percent, or $1.1 billion, of the $4.37 billion awarded, while 56

percent of the firms got no awards. In fiscal year 1994, $383 million in

contracts were awarded competitively.

SBA Award and Eligibility

Data for Fiscal Year 1992

The eligibility and participation files for the top 25 8(a) contract award

recipients for fiscal year 1992, from which we selected I-NET and

TAMSCO, showed that approximately $816 million, or about 22 percent of

the total 8(a) contract dollars awarded that year,4

 went to the top 25 firms.

These firms had obtained, as of May 1995, a total of $4.9 billion in 8(a)

contracts. Of these firms, three were Black-owned; eight were

Hispanic-owned; six were Asian-owned; and five were Native

American-owned.5

SBA had initially recommended that 15 of these 25 firms not be accepted

into the program because the applicants did not meet eligibility standards

for one or more of the following reasons:

• The ownership or control of the firms resided in individuals other than

those who were applying (8 firms).

• The owners were not economically disadvantaged (2 firms).

• The firm was acting as a broker/dealer in violation of the Walsh-Healy Act

(1 firm).

• The firms lacked the financial capability to perform on the contracts they

wished to bid on (5 firms).

• SBA could not provide adequate contract support for the firms to succeed

(3 firms).6

These recommendations were overruled, in some cases by high-level SBA

officials, despite the fact that some of the firms had not been

recommended for acceptance up to three times previously for the same

reasons. As of May 1995, 18 of these 25 firms had exited from the program;

yet at least 17 are still performing on contracts awarded while they were in

the program. According to SBA, the total dollar value of contracts awarded

4

These data, the most current available when we initiated our investigation, were compiled from the

Federal Procurement Database System, operated by the General Services Administration. We did not

attempt to verify the data.

5

SBA could not provide the eligibility files for 3 of the 25 firms.

6

The cited numbers exceed 15 because some firms were not recommended for acceptance for multiple

reasons.

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B-261485 

to the firms initially not recommended for participation in the program is

at least $2.9 billion.

An SBA Office of Inspector General (OIG) audit report (Sept. 1994) also

questioned the continued eligibility of large 8(a) firms in the program and

identified some of the same causes. In its report, it cited findings wherein

• individuals in the program had overcome their economic disadvantage but

remained in the program by understating their net worth;

• SBA officials had miscalculated the net worth;

• high personal income was also not considered in the evaluation of net

worth; and

• individuals remained in the program because either the firm’s equity, the

owner’s personal residence, and/or the spouse’s net worth were not

considered factors in determining the owners’ net worth. Consequently,

individuals could remove equity from the firms and use it to purchase

expensive personal residences exempt from net worth evaluations.

SBA Admitted I-NET

and TAMSCO to the

8(a) Program

Although It

Questioned the Firms’

Negative Control

According to SBA 8(a) regulations, negative control is the lack of power by

a program participant to control a firm’s operations. For the 8(a) program,

SBA regulations state that a program applicant must unconditionally own at

least 51 percent of the firm and control its operations.7

 Control is further

defined as a condition that would not allow a noneligible person to benefit

from the program or subjugate the control of the firm’s operations. SBA had

concerns about negative control issues at both I-NET and TAMSCO, but it

ultimately admitted both firms to the 8(a) program.

I-NET—Negative Control

Issues

SBA officials recommended denying I-NET acceptance into the program in

four separate instances, but other SBA officials overruled these

recommendations. SBA officials had determined that I-NET’s owner and

president, Mrs. Kavelle Bajaj, lacked the technical and managerial

experience to run a high technology computer firm. They also determined

that, rather than Mrs. Bajaj, Mr. Bajaj, a recognized expert in the field,

would actually control and run the firm’s operations.

A former I-NET Vice President for Marketing and Operations told us that

Mrs. Bajaj lacked the technical and managerial skills needed to run a

computer company and that he was hired by Mr. Bajaj in January 1985 to

help start and run the firm and to “teach” Mrs. Bajaj how to run a business.

7

SBA regulations provide that the program applicant shall control the 8(a) firm’s board of directors

either in actual numbers of voting directors or through weighted voting. 13 C.F.R. §124.104 (1995).

Page 5 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
B-261485 

For this, Mrs. Bajaj gave the former vice president 24.5 percent of the

company. Shortly after leaving the company in 1988, this individual was

replaced by Mr. Bajaj, who was appointed Executive Vice President. Mr.

Bajaj formally became I-NET’s president after I-NET exited from the 8(a)

program in 1994. On the résumé he submitted to SBA-OIG during its 1992

audit, Mr. Bajaj stated that he was “responsible for day-to-day operations”

of I-NET. Mrs. Bajaj was adamant with us that she unconditionally owned

and controlled the firm. However, Mrs. Bajaj provided no explanation

when we asked her how she maintained control over I-NET while, at the

same time, her husband represented that he had the day-to-day

responsibilities for I-NET operations.

Further, a senior SBA official told us that the memorandum prepared by an

SBA regional staff member recommending acceptance into the program

used “circular reasoning” in overruling the District Office’s objections to

this firm. Other SBA officials who relied on the first official’s analysis

agreed that it was “double talk” that inadequately addressed the reason to

overrule the recommended refusal. One stated that I-NET’s admission to

the 8(a) program was “questionable.” Nevertheless, these officials stood by

their decision to recommend accepting I-NET.

TAMSCO—Negative

Control Issues

From the outset, SBA questioned the control that TAMSCO’s

nondisadvantaged (Caucasian) owner exercised over the disadvantaged

(Hispanic) owner due to the structure of the board of directors, the

owners’ prior relationship, and their compensation. However, SBA allowed

TAMSCO to participate fully in the 8(a) program.

SBA identified the ownership and negative control issue at TAMSCO during

the application process and twice recommended that the firm’s application

be denied. SBA determined that the firm was owned by two persons, with

the Hispanic owner having 51 percent and the Caucasian owner,

49 percent. SBA compared their résumés and other documentation in the

8(a) application and found that the Caucasian owner had previously held

supervisory positions over the Hispanic owner and that the two-man board

of directors, on which both served, allowed the Caucasian owner to have

negative control over the Hispanic owner. SBA officials concluded that the

firm should be rejected because the Caucasian owner would improperly

benefit from the program.

We also found that the personal financial statements and other

documentation showed that the Caucasian owner had a higher salary than

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B-261485 

the Hispanic owner and that the firm was located at the Caucasian owner’s

residence. A former official of the firm told us that the two owners were

“co-dependent” and functioned as equals. TAMSCO’s president (the

Hispanic owner) told us that (1) despite his previous relationship with the

Caucasian owner, ownership was structured so that TAMSCO would be

eligible for Small and Disadvantaged Business contracts and (2) it was

agreed that he would maintain total control over the firm’s operations.

The SBA official who overturned the two recommendations for denial had

no answers or explanations as to why he had accepted TAMSCO into the

8(a) program over the prior objections of SBA officials concerning negative

control. He also denied meeting or discussing the matter with TAMSCO’s

owners. However, the TAMSCO owners told us that they had had

substantive discussions and meetings with him on the issue of negative

control.

SBA Misled by I-NET

Misrepresentations

and Took no Action to

Remove It From the

Program

I-NET provided false and misleading information to SBA regarding its

equity ownership in the firm, the owner’s educational credentials, and the

owner’s citizenship status. Despite these misrepresentations, SBA did not

terminate I-NET from the program or suspend its contracts.

I-NET Submitted False

Statements About Equity

Ownership

I-NET submitted false statements to SBA about its equity ownership.

Documents, interviews, and a federal court case revealed that I-NET had

entered into partnership agreements with two individuals in January 1985

for a total of 49-percent ownership interest (each with a 24.5-percent

share) without disclosing these transactions to SBA, as required by SBA

regulations.8

One of the 24.5-percent equity owners also owned another computer

services company. At the time, SBA regulations prohibited a business

concern in a related field from owning any equity in an 8(a) firm.9

8

At the time, 13 C.F.R. § 124.1-1(e)(vii) (1985) stated that withholding information about changes in

ownership could result in termination from the program. Mrs. Bajaj had also signed a program

participation agreement in which she had agreed to notify SBA within 30 days of any changes in

ownership. Current regulation 13 C.F.R. § 124.103(i) (1995) requires written approval from SBA to

change ownership equity interests exceeding 10 percent.

9

SBA SOP 80-05 ch. 2, ¶ 7(b)(5)(1982) and revised at SOP 80-05 ch. 2, ¶ 7(b)(4). Current regulation 13

C.F.R. § 124.103(h) (1995) prohibits more than 10-percent ownership in an 8(a) firm by a related

concern.

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B-261485 

Although I-NET repurchased this ownership interest within a year of its

issuance, Mrs. Bajaj never informed SBA about this transaction.

Mrs. Bajaj submitted a false statement about I-NET’s ownership status to

SBA in January 1986, when I-NET notified SBA that 49 percent of the

company’s stock was unissued. However, 24.5 percent was still

outstanding with the one remaining partner. Believing that SBA would

approve only a 15-percent transfer of ownership, Mrs. Bajaj attempted to

reduce the remaining partner’s interest to 15 percent and privately

negotiate away the remaining difference.

In 1988, Mrs. Bajaj submitted a second document to SBA, stating that

49 percent of the stock was “unissued,” despite the outstanding

24.5-percent equity ownership by the remaining partner. She told us that

she considered the stock unissued until a dispute with this partner over

his ownership was resolved.

In August 1994, 2 weeks after agreeing to withdraw from the program,

I-NET notified SBA that it intended to sell 20 to 25 percent of the firm’s

stock through a private placement offered through a large investment

company. When SBA officials learned of the impending sale, SBA attorneys

recommended against approving it because its terms would have

relinquished control of the firm to the outside private investors.10 The

terms of the transactions, according to the SBA attorneys who reviewed the

documents, enabled the investors to have negative control over the firm’s

operations. SBA has not issued a decision, but I-NET completed the sale

without a waiver from SBA, thus potentially jeopardizing its current 8(a)

program contracts. The SBA Associate Administrator for Minority and

Enterprise Development told us that the matter was being handled

immediately; but, as of August 14, 1995, no final decision had been

rendered.

I-NET Misrepresented

Credentials to the SBA

Mrs. Bajaj provided false information about her educational credentials,

which SBA relied upon, in part, for admittance to the 8(a) program. She

certified on the résumé accompanying her 8(a) application to SBA in

January 1983 that she had obtained an AA degree in Computer Science and

Technology from Montgomery College in Rockville, Maryland. Transcripts

1013 C.F.R. § 124.317 (1995) requires that firms no longer in the program but still performing on 8(a)

contracts immediately notify SBA upon entering into an agreement to transfer any ownership to

another party. If SBA determines that the transfer would relinquish the ownership or control from the

person upon whom program eligibility is based, a waiver from the SBA Administrator is required.

Absent a waiver, the firm’s contracts can be terminated.

Page 8 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
B-261485 

from Montgomery College show that she never earned the stated degree.

SBA denied I-NET’s application for the 8(a) program in October 1983

because of lack of technical and managerial experience. Mrs. Bajaj again

submitted a résumé with the same false information in a reconsideration

appeal application later that month. According to a former I-NET senior

executive, Mrs. Bajaj attached a résumé that contained the same false

information to contract proposals submitted to agencies. In 1992, when the

SBA-OIG audited I-NET, I-NET provided the OIG another résumé claiming she

held the same nonexistent AA degree. Mrs. Bajaj admitted to us not having

the degree and stated that she “naively” thought that the credits she had

earned to obtain her Bachelor of Science degree in Home Economics from

the University of Delhi, India, counted toward an AA degree in computer

science and technology.

SBA documents show that SBA relied in part on Mrs. Bajaj’s false

information about the AA degree at the time when it was certifying I-NET

for program participation. In an October 1993 document, the SBA Regional

Counsel stated that the “original recommendation for I-NET’s approval

was based, at least in part, on false information submitted by the applicant

regarding Mrs. Bajaj’s degree.” Although SBA officials acknowledged this

fact in October 1993, I-NET remained in the program for another 9 months

and obtained additional contract awards totaling at least $13.5 million.

When asked about this document, the Regional Counsel stated that the

falsification was not itself sufficient to terminate the firm, despite SBA

regulations that providing false information to SBA is grounds for

termination from the program.11

Mrs. Bajaj also misrepresented her citizenship on her first application on

January 11, 1983. She said that she was a U.S. citizen, but she did not

obtain her citizenship until May 13, 1983. (U.S. citizenship is a requirement

for acceptance into the 8(a) program.) She told us that she thought she

would be a citizen by the time the application was processed. She also said

that although SBA had told her that she need not be a citizen at the time of

application, she was concerned that her pending citizenship status would

have held up her 8(a) application. I-NET was accepted into the program on

September 20, 1984.

1113 C.F.R. § 124.209(a)(19) (1995).

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SBA Failed to

Recognize in a Timely

Manner That I-NET

Had Exceeded Size

Standards

SBA did not recognize that I-NET had provided misleading financial

statements concerning its total revenues. Furthermore, I-NET misstated its

financial condition as being at risk in efforts to continue 8(a) program

contracts.

I-NET submitted financial statements to SBA that misrepresented its size by

excluding certain revenues from the total sales, which allowed it to meet

size standards for contracts in 1991 and 1992. I-NET explained the

exclusion of this revenue in footnotes to its audited 1988 through 1990

financial statements, claiming that it was entitled to exclude these

revenues because I-NET had earned no income on the revenues. SBA did

not recognize or react to the information in the 1988 through 1990

financial statement footnotes until 1992.12 These exclusions permitted

I-NET to obtain at least 11 contracts for which it was not eligible.

However, I-NET included these revenues in its yearly total sales figures in

submissions to an outside investment firm when it was seeking private

outside investment. Our review of I-NET’s 1989 and 1990 corporate tax

returns, submitted to SBA, shows that I-NET’s gross receipts as reported to

the Internal Revenue Service were also substantially greater than those

reported to SBA. In 1992, SBA found that the excluded revenue should have

been counted for 8(a) size purposes.

Therefore, in early 1993, SBA considered terminating certain contracts on

the grounds that I-NET was not eligible because it had exceeded its size

standards. In response, I-NET submitted an Impact Analysis Statement to

SBA in April 1993. The statement said, in part, “. . . (t)he banking industry

continues to label I-NET and Kavelle [Bajaj] in a negative way . . . and

maintaining adequate capital and credit are a constant challenge which

leaves the company at risk.”13 However, in reviewing the matter and

determining if I-NET met early graduation criteria, SBA found that I-NET

had a $25-million line of credit with its bank, had obtained loans and

financings exceeding $2 million, and had sales approaching $100 million

per year. Based on its review, SBA did not find that I-NET was at risk. When

asked about this apparent contradiction, Mrs. Bajaj told us that it was her

view that $25 million was not sufficient credit.

12SBA regulations require that an 8(a) firm certify that it is a small business for each contract that it

receives. SBA is responsible for verifying the certification. 13 C.F.R. § 124.102(d) (1995) and 13 C.F.R.

§ 121.1102(a)(2) (1995).

13Even if it were true that I-NET was a “company at risk,” this is not relevant to the issue of whether

I-NET was a small business and therefore eligible to receive 8(a) contracts under SBA regulations.

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During this same time period, however, I-NET did not portray itself as a

company at risk when it sought outside investors. A written private

placement memorandum about I-NET states that as of June 1993, I-NET

had a backlog of over $580 million in contracts and projected revenues

through 1997 of about $1.3 billion. Subsequent to our interview of Mrs.

Bajaj, I-NET provided us a written response to the risk issue. It stated that,

at the time the memorandum was written, I-NET “. . . had severe cash flow

problems and was having difficulty securing credit.”

Furthermore, in December 1993, SBA determined that I-NET again had

claimed erroneously that it lacked access to credit when it was appealing

SBA’s October 1993 proposed early graduation action. In its review, SBA also

determined that I-NET appeared to be misleading SBA by using

inappropriate time periods to calculate earnings.

SBA Allowed I-NET to

Remain in the 8(a)

Program After It

Exceeded Size Limits

Although SBA officials responsible for monitoring I-NET’s progress had

become aware that I-NET had grown too large for continued program

participation, SBA allowed the company to remain enrolled for almost 2

additional years. During this time, I-NET continued to obtain large

contract awards.

In fact, 6 days prior to I-NET’s initially being recommended for early

graduation in September 1992, it was awarded a $134-million contract. The

SBA official who approved the contract award was also responsible for

initially recommending I-NET’s early graduation. When we interviewed

him, he explained that, under SBA regulations, until a firm is officially out

of the program, it can still obtain contract awards for which it is eligible.

Although he wanted I-NET out of the program, he felt he could not deny

contract awards until I-NET had either graduated or been terminated.

However, SBA regulations14 and a 1982 federal court decision,15 in

conjunction with a Comptroller General decision16 on the same issue,

concluded differently. Both the court and the Comptroller General

determined that an 8(a) firm that has exceeded size limitations must have

its 8(a) contracts suspended. The regulations also state that contracts can

be suspended pending a termination action by SBA. When asked about this

contradiction, responsible SBA officials responded by stating that SBA

1413 C.F.R. § 124.211(a) (1995).

15Systems and Applied Sciences Corp. v. Sanders, 544 F. Supp. 576 (D.D.C. 1982).

16Matter of Computer Data Systems, Inc. 61 Comp. Gen. 545 (1982).

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lacked the proof required to terminate I-NET, despite regulations

regarding actionable offenses for termination, which include providing

false information to SBA—something that SBA concedes occurred.

In January 1993, the SBA-OIG provided a draft audit report to the SBA office

responsible for I-NET, recommending that no further contracts be

awarded to I-NET because it had exceeded its size standards and had

provided incorrect information to SBA for its annual size-standard

determinations. However, until I-NET left the program in June 1994, SBA

awarded I-NET additional contracts totaling at least $62 million.

U.S. Coast Guard

Officials Directed a

Noncompetitive IDIQ

Contract to TAMSCO

In 1993, the U.S. Coast Guard directed a noncompetitive IDIQ contract with

a maximum value of $14 million to TAMSCO. During the preaward phase

of the contract, Coast Guard contracting officials, who told us that it was

always their intention to award the contract to TAMSCO, met with

TAMSCO representatives and discussed the contract, competition

thresholds, and Standard Industrial Classification (SIC) codes.17 The Coast

Guard changed the original SIC code so that TAMSCO would be eligible for

the award; used the IDIQ contracting option; and lowered the labor hours to

avoid competition. Further, one Coast Guard official’s notes referred to

this IDIQ contract to TAMSCO as a “graduation present” from the 8(a)

program.

Coast Guard Officials

Changed SIC Code,

Contract Type, and Labor

Hours to Avoid

Competition Requirements

Coast Guard officials changed the SIC code assignment and minimum

contract value. Following these changes, TAMSCO was awarded a large

noncompetitive IDIQ contract 1 day before its term was to expire in the 8(a)

program in September 1993. Had the Coast Guard contracting officer’s

originally assigned SIC code been used, TAMSCO would not have been

eligible for the contract because the company had exceeded the size

standard for the originally assigned SIC code.

Based on notes that the Contracting Officer’s Technical Representative

(COTR) wrote during meetings between Coast Guard officials and TAMSCO,

it appears that the Coast Guard officials and TAMSCO had concerns about

the competition thresholds. In essence, we believe that they wished to

avoid the $3-million threshold required for competitive 8(a) service

contracts. The Coast Guard lowered the labor hours, thus being able to

award an IDIQ noncompetitive contract.

17SBA has established size standards for industries, which are defined in the classification categories

of the Standard Industrial Classification (SIC) Manual.

Page 12 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
B-261485 

Our analysis of labor costs determined that Coast Guard officials lowered

the total number of labor hours in the contract by 46 percent from what

was specified in the contract solicitation. Thus, the minimum contract

value dropped below the $3-million competition threshold, from

$4.6 million to $2.1 million. We interviewed a Coast Guard officer involved

in the contract award who also developed the original minimum contract

value. When we asked him about a Coast Guard finding that if fully loaded

labor rates had been used in the contract, the minimum value of the

contract would have exceeded competitive thresholds, he had no answer.

However, he stated that the Coast Guard officials had done everything

possible to get TAMSCO the contract, including changing the SIC codes and

using the IDIQ contracting option.

Coast Guard Officials

Viewed Competition as

Hindrance to Mission

The COTR also told us that the SIC code was intentionally changed to meet

TAMSCO’s eligibility and that the Coast Guard viewed competition of

contract awards as a hindrance to furthering the mission. A draft of an

internal Coast Guard memorandum, written to justify the contract award

to TAMSCO, sheds light on Coast Guard attitudes about the use of

competition and 8(a) sole source contracts. The COTR sent the

memorandum—in electronic mail (e-mail) format—to another Coast

Guard official for comment. The commenting Coast Guard official

responded to the COTR’s memorandum—also by e-mail—by interspersing

his remarks in all capital letters. (See fig. 1.)

Page 13 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
B-261485 

Figure 1: Draft E-Mail Memorandum Between the COTR and a Coast Guard Official

According to two former TAMSCO officials involved in the award, the COTR

had provided them with a later draft of the internal memorandum to

review before he submitted it to higher-level Coast Guard officials. One of

the TAMSCO officials told us that providing TAMSCO the memorandum to

review was inappropriate; the other felt uncomfortable with receiving the

document because the Coast Guard was always careful not to release

internal documents.

According to these two former TAMSCO officials and TAMSCO’s

president, while they did not think it improper for TAMSCO to provide

information on the 8(a) program and other contracting procedures to the

Coast Guard, they agreed that the Coast Guard should have been using its

own contracting officials to obtain the information.

IDIQ Contract to TAMSCO

Was Referred to as a

“Graduation Present”

Notes that the COTR took during Coast Guard/TAMSCO discussions also

referred to suggestions that the contract be awarded to TAMSCO as a

“graduation present” before the end of TAMSCO’s 8(a) program

participation. For example, one note stated, in part, “IDIQ: Grad[uation]

P[resen]t. -eligible until grad from program Sept 18, ’93.” In other words,

TAMSCO could get a sole source IDIQ contract as a graduation present

until its graduation date of September 18, 1993. (See fig. 2.)

Page 14 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
B-261485 

Figure 2: Excerpt From the COTR’s Notes

In addition to the Coast Guard contract, TAMSCO obtained at least 22

other 8(a) awards within 2 weeks of its “graduation”18 from the program

totaling at least $63 million. Thirteen of the awards were IDIQ contracts

from a number of government agencies, including the Coast Guard award.

Methodology We began our investigation by reviewing the application, eligibility, and

participation files for the top 25 8(a) contract award recipients for fiscal

year 1992, as compiled in our 1993 report. These records were located in

10 SBA District Offices nationwide. The files for two firms were unavailable

for review. A third file did not contain eligibility documents. We looked for

indicators of potential regulatory violations and criminal misconduct.

We initially selected four of the firms for further investigation. However,

the records we compiled for one firm were destroyed in the Oklahoma

City bombing tragedy on April 19, 1995, and our investigation of another

firm was not complete at the time of this publication. We then narrowed

our investigation to two firms—I-NET, Inc. of Bethesda, Maryland, and

Technical and Management Services Corporation (TAMSCO) of Calverton,

Maryland.

We interviewed officials and reviewed documents from the SBA, Office of

Inspector General; various SBA district and regional offices; SBA’s Central

Office; U.S. Department of Transportation, Office of Inspector General;

U.S. Coast Guard; Resolution Trust Corporation, Office of Inspector

General; Defense Contract Audit Agency; Department of Justice; and the

Federal Bureau of Investigation. We also interviewed current and former

employees of the firms, subcontractors, representatives of financial

institutions, and others.

18TAMSCO completed its program term on Sept. 18, 1993.

Page 15 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
B-261485 

As requested, we plan no further distribution of this report until 30 days

from the date of this letter. At that time, we will send copies of this report

to the Administrator of SBA and to others upon request. If you have any

questions concerning this report, please call me at (202) 512-6722 or

Robert H. Hast, Assistant Director for Investigations, New York Regional

Office, at (212) 264-0982. Major contributors to this report are listed in

appendix III.

Sincerely yours,

Richard C. Stiener

Director

Page 16 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
Page 17 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
Contents

Letter 1

Appendix I 

The 8(a) Program

20

Appendix II 

Top 25 8(a) Firms

Matrix

22

Appendix III 

Major Contributors to

This Report

23

Figures Figure 1: Draft E-mail Memorandum Between the COTR and a

Coast Guard Official

14

Figure 2: Excerpt From the COTR’s Notes 15

Abbreviations

AA Associate of Arts

COTR Contracting Officer’s Technical Representative

e-mail electronic mail

GAO General Accounting Office

IDIQ Indefinite Delivery Indefinite Quantity

OIG Office of Inspector General

OSI Office of Special Investigations

RCED Resources, Community, and Economic Development

Division

SBA Small Business Administration

SIC Standard Industrial Classification

Page 18 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
Page 19 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
Appendix I 

The 8(a) Program

Section 8(a) of the Small Business Act, as amended, established the

Minority Small Business and Capital Ownership Development Program, or

8(a) program, to promote the development of small businesses owned by

socially and economically disadvantaged individuals so that they could

develop into viable competitors in the commercial marketplace. To be

eligible for the program, a small business must be 51 percent

unconditionally owned and controlled by one or more socially and

economically disadvantaged individuals. The company must also meet the

small business size standards established by SBA for the firm’s industry as

defined in the classification categories prescribed by the Standard

Industrial Classification (SIC) Manual.

19 SBA approves applicable SIC codes

for participating firms. Participating 8(a) firms may have one or more SICs

assigned to them by SBA. To be considered a small business and remain

eligible for the program, participating firms must not have outgrown all

their SBA-approved SIC codes. Size standards for each SIC code are generally

defined by the firm’s number of employees or its average annual gross

sales.20

Under the program, SBA acts as a prime contractor, entering into contracts

with other federal agencies and then subcontracting work to firms in the

8(a) program. Firms in the program are also eligible for financial,

technical, and management assistance from SBA to aid their development.

Participating firms can stay in the program for up to 9 years.

The Small Business Act, as amended, and federal regulations define

“socially disadvantaged” as those persons who have been subjected to

racial, ethnic, or cultural bias because of their identities as members of

groups, without regard to their individual qualities. Certain racial and

ethnic groups such as Black Americans, Hispanic Americans,

Subcontinental Asian Americans, and Native Americans are presumed to

be socially disadvantaged. However, individuals in groups not cited in the

act, who can demonstrate that they are socially disadvantaged, may also

be eligible. SBA regulations define “economically disadvantaged” as socially

disadvantaged individuals who are unable to compete in the free

enterprise system because their opportunities to obtain credit and capital

have been more limited than those of others in similar businesses. Further,

program applicants must demonstrate a personal net worth that does not

exceed certain limits so as to meet and maintain the criteria for an

economic disadvantage.

19This manual is published by the Office of Management and Budget and assigns a numerical identifier

for each industry.

2013 C.F.R. § 121.601 (1995).

Page 20 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
Appendix I 

The 8(a) Program

Each 8(a) firm under SBA’s regulations is subject to a program term of 9

years.21 However, SBA may also, under its regulations, “graduate” an 8(a)

firm prior to the expiration of its 9-year program term if that 8(a) firm

substantially achieves the target objectives and goals set forth in its

business plan. To date, according to SBA, no 8(a) firm has graduated.

21The 1988 Amendments to the act created this limit. 13 C.F.R. § 124.303(b) (1995) grandfathered firms

that participated prior to 1988 so that firms with fewer than 5 years’ participation would obtain 5 more

years.

Page 21 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
Appendix II 

Top 25 8(a) Firms Matrix

8(a) Contracts

Rank Company Name Fiscal Year 92

Total Value of

8(a) Contracts

Awarded

1 Colsa Inc. $91,593,712 $497,821,732

2 Yancy Minerals Inc 81,931,200 210,750,390

3 I-NET Inc 65,338,088 508,284,206

4 Metters Industries Inc 43,921,758 156,314,914

5 Weeminuche Construction

Authority

39,611,263 65,706,219

6 NYMA Inc 37,526,951 234,569,348

7 Systems Engineering &

Management Co

35,182,607 185,816,251

8 R J O Enterprise Inc 30,532,192 385,034,793

9 TAMSCO 30,369,392 356,439,719

10 National Systems and Research

Corp

29,175,097 291,198,853

11 Sherikon Inc 29,166,605 77,431,185

12 Advance Sciences Inca 28,279,092 54,479,536

13 Turtle Mountain Manufacturing Co 27,894,845 200,786,724

14 Systematic Management Services

Inc

25,669,502 145,241,079

15 Modern Technologies Corp 24,146,726 225,118,715

16 Tresp Associates Incb 23,555,918 93,907,403

17 Frontier Engineering Inc 20,989,268 275,253,836

18 Maden Tech Consulting 20,775,446 78,951,336

19 Piquniq Management Corp 19,775,820 128,934,788

20 Galaxy Scientific Corp 18,876,444 118,071,790

21 Metrica Inc 18,826,263 82,476,450

22 Shadrock Petroleum Products 18,502,664 48,405,291

23 Hernandez Engineering Inc 18,265,616 106,104,461

24 Washington Consulting Groupa 17,972,076 140,839,773

25 Applied Technology Associates

Inc

17,901,795 278,756,205

TOTAL 8(a) AWARDS $815,780,340 $4,946,694,997

aSBA was unable to provide the files for these firms.

bThe eligibility documents were missing from this firm’s file.

Page 22 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
Appendix III 

Major Contributors to This Report

Office of Special

Investigations,

Washington, D.C.

Donald J. Wheeler, Deputy Director for Investigations

M. Jane Hunt, Senior Communications Analyst

Barbara W. Alsip, Communications Analyst

Boston/New York

Field Office

Robert H. Hast, Assistant Director for Investigations

William D. Hamel, Special Agent

Anne Kornblum, Senior Evaluator

Dallas Regional Office Jeannie B. Davis, Senior Evaluator

Denver Regional

Office

Jennifer L. Duncan, Senior Evaluator

Atlanta Regional

Office

Octavia Parks, Senior Evaluator

Johnnie E. Barnes, Senior Evaluator

San Francisco

Regional Office

Steve Myerson, Assistant Director for Investigations

Kansas City Regional

Office

Richard Clough, Senior Evaluator

Steve Pruitt, Evaluator

Cincinnati Regional

Office

Daniel L. McCafferty, Senior Evaluator

Office of the General

Counsel, Washington,

D.C.

Barry L. Shillito, Senior Attorney

Leslie Krasner, Attorney Adviser

(600372) Page 23 GAO/OSI-95-15 8(a) Vulnerablility to Program and Contractor Abuse
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