U.S. SMALL BUSINESS ADMINISTRATION 

OFFICE OF INSPECTOR GENERAL 

ADVISORY MEMORANDUM 

REPORT NUMBER 12-19 

DATE: September 4, 2012 

TO: John Shoraka 

Associate Administrator, Government Contracting and Business Development 

Calvin Jenkins 

Deputy Associate Administrator, Government Contracting and Business Development 

Robert Hill 

Associate Administrator, Office of Field Operations 

SUBJECT: A Non-Manufacturer Rule Waiver Allowed an 8(a) Recovery Act Contract to Bypass 

Established Small Business Requirements 

This advisory memorandum is the first in a series of ongoing limited scope audits. These audits will 

review the extent to which selected 8(a) firms participating in the 8(a) Business Development Program 

(8(a) program) are complying with prime contractor performance requirements for set-aside contracts. 

In this audit, we determined that one of the selected contracts complied with the performance of work 

requirements, and the other was exempt due to a waiver issued by the Small Business Administration 

(SBA). However, one contract was a pass through contract that resulted in large businesses receiving 

funds specifically designated for the 8(a) program. 

The objective of this series of audits is to determine whether selected 8(a) firms are performing the 

required percentage of work. For this audit, we judgmentally selected these two firms1 from a universe 

of contracts where the contract was: (1) awarded in fiscal year 2009 or 2010 as a set-aside or solesource contract; and (2) performed by a contractor located in the Washington, D.C. metropolitan area.2 

To conduct our audit, we examined contract documentation as well as company financial documents 

and contract performance tracking mechanisms for each selected contract. We also interviewed 

company officials and the SBA Business Opportunity Specialists who have purview over the selected 

8(a) contractors. Additionally, during the course of this limited scope audit, we did not identify any 

material internal control weaknesses at the two selected prime contractors pertaining to our audit 

objective. We conducted this audit in accordance with generally accepted government auditing 

standards from January to July 2012. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis on our audit objectives. 

1 One of the selected contracts was awarded and funded as a contract under the American Recovery and Reinvestment Act of 2009. 2 As of December 31, 2011, the Washington, DC SBA District Office managed approximately 19 percent of the entire 8(a) program participant 

portfolio. 

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We believe that the evidence obtained provides a reasonable basis for our findings and conclusions 

based on our audit objective. 

Background 

The SBA has a number of programs that provide benefits and assistance to help small and disadvantaged 

businesses grow and develop. These benefits include program participants receiving sole source and 

set-aside federal contracts so that small businesses do not need to compete with large businesses that 

may have an industry advantage. Two of these SBA programs are the 8(a) Business Development 

Program and the Historically Underutilized Business Zone (HUBZone) Program. There have been 

longstanding concerns about fraud in these SBA preferential contracting programs, and we have 

identified problems with S!’s management of these programs in prior audits. 

8(a) Program 

The 8(a) program was created to assist small disadvantaged businesses compete in the American 

economy through business development. As of December 31, 2011, the program included 6,863 

participants. To qualify for this program, the 8(a) contractor must be at least 51 percent owned and 

controlled by an individual or individuals who meet SB!’s criteria of socially and economically 

disadvantaged, United States citizens, and of good character. The participant must also be a small 

business as defined by the SBA, and show a reasonable potential for success. Additionally, the primary 

industry classification code identified by the 8(a) participant determines its size and eligibility as a small 

business. However, some restrictions apply to the 8(a) program, specifically, an 8(a) participant cannot 

receive a sole-source contract exceeding $4 million for services and $6.5 million for manufacturing.3 

According to the fiscal year (FY) 2011 Small Business Goaling Report, the number of contract actions for 

8(a) Small Businesses4 totaled 117,907, which represented around $16.7 billion in federal contract 

funding.5 

HUBZone Program 

The HUBZone program was designed to help small businesses—located in economically challenged 

communities (or HUBZones)—increase employment opportunities, investment, and economic 

development in such areas. As of January 31, 2012, the HUBZone Program included 5,914 participants. 

Program participants must maintain their primary office in a HUBZone and must attempt to maintain a 

workforce composed of 35 percent of their employees who reside within a HUBZone. In FY 2011, there 

were 91,864 contract actions for Certified HUBZone Small Businesses,6 or approximately 

$9.9 billion in federal contract dollars, according to the FY 2011 Small Business Goaling Report. 

3	 The Code of Federal Regulations (CFR), Title 13, Section 124.506(a) outlines the specific thresholds for set-aside contracts. When the 

contracts were awarded, the value of set-aside contracts could not exceed $3 million for services and $5 million for manufacturing. 

However, 13 CFR § 124.506 (b) states that 8(a) Alaska Native Corporations (ANC) are eligible to receive sole-source 8(a) contracts regardless 

of the amount of the contract, unlike non-ANC 8(a) contractors. 4 A contract action includes any new contract awarded, any modification to an existing contract, or any new task order awarded against an 

existing contract. Additionally, an 8(a) small business contract action includes any action for which the type of set-aside is 8(a) competed, 

8(a) sole-source, or 8(a) HUZone and the ontracting Officer’s Selection of usiness Size is “small;” 5	 The Small Business Goaling Report is generated using the Federal Procurement Data System-Next Generation on an annual basis and displays 

the dollars, actions, and percentages for small business contracts. The goaling exclusions apply to this report, and this small business goaling 

report is run by the “funding agency” designated for the contract; 6 ! ertified HUZone Small usiness ontract !ction includes any contract action where the ontracting Officer’s Selection of Business Size 

equals “small” and the vendor’s business type is HUZone ertified; 

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Prime Contractor Performance Requirements for 8(a) and HUBZone Participants 

As a participant in either the 8(a) or the HUBZone program, a small business must agree to specific 

performance requirements when receiving set-aside contracts. The performance requirements state 

that the prime contractor must generally perform at least 50 percent of the work on the contract for all 

service or supplies contracts, as outlined in federal regulations.7 See Table 1 for a breakdown of the 

specific prime contractor performance requirements for 8(a) and HUBZone participants. 

Table 1 Prime Contractor Performance Requirements for 8(a) and HUBZone Participants 

8(a) Program HUBZone Program 

Service 

Contracts 

(Except 

Construction) 

The 8(a) participant must incur at least 50 

percent of the costs of personnel performing 

the contract. 

The HUBZone prime contractor must incur at least 

50 percent of the costs of personnel performing 

the contract, or may include employee costs of 

another qualified HUBZone participant to meet 

the required 50 percent performance minimum. 

Products or 

Supplies 

Contracts 

(Except 

Regular 

Dealers) 

The 8(a) participants must incur at least 50 

percent of the cost of manufacturing the 

supplies, not including the cost of materials. 

These requirements apply to all contracts for 

supplies or products, other than 

procurements from a non-manufacturer in 

such supplies or products 

The HUBZone prime contractor must incur a 

minimum of 50 percent of the cost of 

manufacturing the supplies, or can include the 

manufacturing costs of another HUBZone 

participant to calculate the percentage of work 

performed. In either scenario, manufacturing 

costs do not include the cost of materials. 

Results 

Contractors Complied with, or Were Exempt from, Performance of Work Requirements 

For our audit, we selected two contracts performed by 8(a) program participants: one 8(a) contract and 

one HUBZone contract. We found that one contractor complied with the performance of work 

requirements, and the other was exempt because of a waiver from the SBA. The HUBZone set-aside 

contract8 performed by Aspen of D.C., Inc. for $5.4 million was awarded to provide recruiting services 

for the Census Bureau; however, the contractor had not used any subcontractors to date. The 8(a) 

set-aside contract9 performed by TKC Global Solutions, LLC—an Alaska Native Corporation—for 

$7.78 million utilized a subcontractor to provide imaged personal computers and monitors for the 

Department of Labor (DOL).10 However, the 8(a) set-aside contract was performed as a pass through 

7	 13 CFR § 125.6 - Prime contractor performance requirement (limitations on subcontracting) and FAR Subpart 52.219-14 - Limitations on 

Subcontracting. These prime contractor performance requirements contain exclusions for construction services and purchasing supplies 

from a regular dealer. 8 Contract Number YA132309CN0017 was awarded on February 1, 2009 to Aspen of D.C., Inc. for $5,416,552 to provide recruiting services at 

12 regional offices. 9 Contract Number DOLJ099628917 was awarded on August 21, 2009 to TKC Global Solutions, LLC for $7,783,648 to provide 11,028 imaged 

personal computers and monitors. 10	 Documentation obtained from TKC Global Solutions, LLC shows that the company would use a large business subcontractor to fulfill the 

contract requirements. Because the SBA granted TKC Global Solutions, LLC a waiver to the non-manufacturer rule it enabled them to 

subcontract the performance of the contract requirements to World Wide Technologies, Inc., a large business. An approved nonmanufacturer waiver provides a small business with an exemption to the subcontracting limitations outlined in 13 CFR § 125.6. This 

exemption allowed the small business to pass through almost all of the performance of the contract to a large business rather than requiring 

the small business to perform at least 50 percent of the awarded contract. 

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contract where large businesses received most of the procurement dollars, and TKC Global Solutions, 

LLC received $153,000. 

8(a) Contractor Received a Pass through Contract to Benefit Large Business 

The DOL awarded a $7.78 million, sole source, 8(a) contract to TKC Global Solutions, LLC (TKC) to 

purchase Dell© personal computers and monitors. Subsequently, TKC placed an order with a large 

business to purchase and deliver Dell© personal computers and monitors. The true beneficiary of 8(a) 

funds in this scenario was a large business, World Wide Technologies, Inc. Therefore, TKC received 

$153,000 of the total contract for only performing minimal oversight support of the contract and not 

adding value to the personal computers or monitors. 

Federal regulations allow small businesses to supply manufactured products of large businesses in 

accordance with an approved waiver to the non-manufacturer rule. According to the Code of Federal 

Regulations (CFR), Title 13, Part 121, Subsection 406, Size Eligibility Requirements for Government 

Procurement,

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To qualify as a small business concern for an 8(a) contract<, a small business must either be: 

(1) the manufacturer of the item being purchased, to include modification of an item which the 

small business increased the value of the end item by 50 percent or more; or (2) a nonmanufacturer, which normally sells the type of item being supplied, and the end item must be 

the product of a small business, or the contracting officer must obtain a waiver from the SBA 

Administrator. 

In this case, the DOL’s waiver request to the S! stated that it needed the waiver so that TK could 

purchase Dell© products because no small business manufactured the desired Dell© products. The SBA 

approved the non-manufacturer waiver allowing the DOL to purchase Dell© personal computers and 

monitors through an 8(a) sole source contract. The contract awarded undermined the intent of the 

8(a) program due to the reasons outlined below. 

(1) TKC did not obtain business development experience through the awarded contract as intended by its 

participation in the 8(a) program. 

According to SBA regulations, the purpose of the 8(a) program is to assist eligible small disadvantaged 

business concerns compete in the American economy through business development.12 Additionally, 

the regulations provide that to assist the business development of participants in the 8(a) program, an 

8(a) contractor must perform certain percentages of work with its own employees.13 Pass through 

contracts do not provide business development experience, as the 8(a) small business performs very 

little of the contract. For example, federal regulations dictate that value added services to a contract 

can include configuration consulting and design, installation of multi-vendor computer equipment, 

customization or hardware or software, or end user support.14 Our review found that TKC performed 

very little work on the contract, and the contract was performed as a pass through to a large company, 

World Wide Technologies, Inc. Therefore, this pass through contract did not fulfill the purpose of the 

11 13 CFR § 121.406 - Size Eligibility Requirements for Government Procurement 12 13 CFR § 121.1204(b)(3) 13 13 CFR § 124.1 14 13 CFR § 121.201 

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8(a) program. The waiver approved by the SBA allowed the DOL to use TKC to procure the computers 

from Dell©, as indicated in the waiver request. However, TKC used World Wide Technologies, Inc. to 

procure the products from Dell© and only monitored the product delivery. In addition, as part of 

federal regulations, the SBA must determine that the small business normally sells the type of item 

being supplied prior to approving the waiver.15 However, the waiver approval records do not provide 

documentation that the SBA approving official determined that TKC normally sold the Dell© products. 

(2) The waiver allowed the DOL to count $7.63 million of large business revenue as part of its annual 

small business goal. 

Each agency negotiates, with the SBA, annual percentages of total procurement dollars for contracts to 

small businesses and small, disadvantaged businesses in addition to other SBA program participants. 16 

Counting the $7.78 million pass through contract as both a small business contract and a small, 

disadvantaged business contract—when $7.63 million went to large business—can make the Federal 

government small business contracting statistics misleading. 

Conclusion 

The use of the non-manufacturer waiver enabled a firm to bypass small business subcontracting 

requirements resulting in a pass through contract to large businesses. Although authorized under 

statute, these types of procurements may not provide the development opportunities to small 

businesses intended through participation in the 8(a) program. Moreover, these types of procurements 

also funnel taxpayer funds to large businesses instead of developing small businesses to compete in the 

American economy. As a result, a large business received 8(a) set-aside funds through a pass through 

without competing in the open market. We are not making recommendations at this time, as we will 

continue additional limited scope audits on the extent that other 8(a) firms are complying with prime 

contractor performance requirements for set-aside contracts. 

Agency Comments 

On July 20, 2012, we provided a draft of this memorandum to the S!’s Office of Government ontracts 

and Business Development and to the Office of Field Operations. On August 8, 2012, the Associate 

Administrator for Government Contracts and Business Development submitted formal comments, which 

are included in their entirety in !ppendix I; ! summary of management’s comments and our response 

follows. 

Management Comments 

Management disagreed with the findings in our Advisory Memorandum. Management believes that 

non-manufacturers gain business development experience when performing supply contracts through 

the 8(a) Business Development Program. Additionally, management stated that the Small Business Act 

allows the SBA to grant non-manufacturer rule waivers and that companies can use subcontractors to 

15 13 CFR § 121.406(b)(1)(ii)
 16 The SBA negotiates with Federal departments concerning their prime contracting goals and achievement with small businesses to ensure that
 

small businesses have the maximum practicable opportunity to provide goods and services to the Federal government. The negotiation 

ensures that the Federal government will achieve not less than 23 percent to small businesses; not less than 5 percent to woman-owned 

small businesses and small disadvantaged businesses; and not less than 3 percent to service disabled veteran-owned small businesses and 

certified HUBZone small businesses. 

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acquire the goods when a waiver has been granted. Therefore, management believes that contracts 

performed through a non-manufacturer waiver are not considered pass through contracts. Further, 

management stated that all contracts, regardless of the type, are counted towards an agency’s small 

business goals. For example, large business contracts that subcontract to small businesses count 

towards an agency’s small business goals; It is management’s opinion that it would take an act of 

Congress and extensive record keeping and system changes to track, accurately, all of the annual small 

business contract dollars. 

OIG Response 

As noted in the agency comments, the SBA believes that small businesses can obtain business 

development experience if a non-manufacturer waiver has been issued. However, we do not believe 

that the 8(a) small business gained business development experience on this contract since it passed 

through almost all of its work to a large business. Additionally, the SBA did not provide us with 

examples of how the selected contractor obtained business development experience through the 8(a) 

sole source contract. In response to agency comments, we have made technical changes and expanded 

the discussion of business development experience for 8(a) BD program participants to the draft 

advisory memorandum. The OIG also acknowledges that the SBA has the authority to grant a 

non-manufacturer waiver when it determines that no small business manufacturer can offer a product 

meeting the required specifications. However, the DOL waiver request states that the agency wanted to 

purchase Dell© personal computers and monitors—a trademarked product—which no small business 

can provide unless they do so as a dealer. Further, the small business only monitored the delivery of the 

personal computers and monitors that the large business delivered directly to the DOL. Moreover, the 

large business that performed this 8(a) sole source contract received $7.63 million of the $7.78 million 

total contract value. However, the entire $7;78 million counted toward the DOL’s annual small business 

goaling results, even though the small business only received $153,000 of the contract. 

Actions Required 

No further actions are required at this time. We appreciate the courtesies and cooperation of the Small 

Business Administration during this audit. If you have any questions concerning this report, please call 

me at (202) 205-7390 or Riccardo R. Buglisi, Director, Business Development Programs Group at 

(202) 205-7489. 

*** 

/s/ 

John K. Needham 

Assistant Inspector General for Auditing 

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Appendix I SBA Management Comments 

U.S. SMALL BUSINESS ADMINISTRATION 

WASHINGTON, D.C. 20416 

DATE: August 6, 2012 

TO: John K. Needham 

Assistant Inspector General for Auditing 

FROM: John Shoraka /s/ 

Associate Administrator 

Office of Government Contracting & 

Business Development 

SUBJECT: OIG Advisory Memorandum – Project Number 12501 

This is in response to your Advisory Memorandum dated July 20, 2012 entitled, A Non-Manufacturer 

Rule Waiver Allowed 8(a), Recovery Act Contract to Bypass Established Small Business Requirement. 

The Office of Government Contracting and Business Development disagrees with your statement that 

non-manufacturers do not gain business development experience performing supply contracts through 

the 8(a) BD program. Information technology (IT) product dealers are allowed to enter the 8(a) program 

and there is an extensive Federal IT market for such firms to pursue. Further, many IT service providers 

also provide products as part of a total solution package. See for example the definition of a Value 

Added Technology Reseller. 13 CFR 121.201, footnote 18. The statutory non-manufacturer rule does 

not prohibit firms from using subcontractors to acquire the goods where a waiver has been granted. In 

addition, the purpose of the requirement that the firm normally sell the item is to prevent brokers from 

qualifying as non-manufacturers. Brokers are ineligible to participate in the 8(a) BD program. 13 CFR 

124.108(d). The fact that the subject firm is in the 8(a) program and approved under the appropriate 

NAICS means that the firm is an IT service/product provider. Any other conclusion would be a rebuttal 

of the !ssociate administrator for usiness Development’s determination that the firm is eligible for the 

8(a) program. 

Further, your conclusion that: “The use of the non-manufacturer waiver enabled a firm to bypass 

established requirements resulting in what we consider a pass through contract to large businesses” is in 

direct conflict with the Small Business Act. Section 8(a)17(B) of the Small Business Act provides 

authority for a waiver where a determination has been made by the contracting officer that no small 

business manufacturer can offer a product meeting the required specifications. 

We also disagree with your conclusion concerning counting awards to non-manufacturers towards the 

statutory prime contracting goals. All contracts, including those awarded in full and open competition 

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(where no limitations on subcontracting apply), are counted. Likewise, an award to a large business is 

counted in total, even where a large percentage is subcontracted to small business concerns. It would 

take an act of Congress and extensive record-keeping and system changes to track the ultimate 

destination of each dollar of the approximately $500 billion awarded every year. 

In view of our response above, we ask that you reconsider your following statements: 

(1) Company B did not obtain business development experience through the awarded contract as 

intended by its participation in the 8(a) program. 

(2) The waiver allowed the DOL to count $7.63 million of large business revenue as part of its annual 

small business percentage. 

Thank you for the opportunity to provide comments and we look forward to further discuss this matter. 

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