Report to the Ranking Minority

Member, Committee on Small Business

and Entrepreneurship, U.S. Senate

United States General Accounting Office

GAO

October 2001 SMALL BUSINESS

HUBZone Program

Suffers From

Reporting and

Implementation

Difficulties

GAO-02-57
Page 1 GAO-02-57 Small Business

October 26, 2001

The Honorable Christopher S. Bond

Ranking Minority Member

Committee on Small Business and Entrepreneurship

United States Senate

Dear Senator Bond:

The Congress created the Historically Underutilized Business Zone

(HUBZone) program to stimulate economic development and create jobs

in distressed urban and rural areas, called HUBZones. To achieve these

goals, the HUBZone program provides more access to federal contracting

opportunities for small businesses. The Small Business Administration

(SBA) administers the program, and federal agencies report their program

achievements—the number and value of contract awards—to the Federal

Procurement Data Center (FPDC). In fiscal year 2000, federal agencies

reported awarding $663 million in contracts under the HUBZone program.

In response to your request, we examined (1) whether HUBZone program

achievements are being accurately reported, and if not, the reasons for

inaccuracies and (2) whether federal agencies are having difficulty

implementing the HUBZone program to award contracts to certified

HUBZone firms, and if so, the reasons for the difficulty.

Reported HUBZone program achievements for fiscal year 2000 were

significantly inaccurate. We found that the value of contracts awarded to

HUBZone firms could be hundreds of millions of dollars different than the

reported achievements. The federal agencies’ data (1) included contracts

awarded to firms that SBA had not certified as qualified to participate in

the program, (2) included contracts awarded before the HUBZone

program began in March 1999, and (3) did not include contracts awarded

to firms that SBA may have certified as qualified HUBZone firms. We could

not conclusively determine actual HUBZone program achievements

because of these inaccuracies. The inaccuracies resulted from data entry

errors and insufficient guidance on how to report agency data. FPDC

includes the inaccurate data in its annual report on federal procurement

activities. As a result of data problems, the Congress and federal agencies

cannot use this data to gauge the program’s success or to ensure that the

program is working as intended.

United States General Accounting Office

Washington, DC 20548

Results in Brief
Page 2 GAO-02-57 Small Business

After interviewing contracting officials and analyzing FPDC and SBA

information, we concluded that federal agencies are having difficulties

implementing the HUBZone program. Federal agencies did not achieve the

fiscal year 2000 participation goal of 1.5 percent of the value of all prime

contract awards. Further, federal agencies obligated only $24 million to

HUBZone firms as a result of applying the provisions of the HUBZone Act.1

The primary reasons that federal contracting personnel gave for not using

the HUBZone program to award contracts were: (1) the small number of

SBA certified HUBZone firms, (2) difficulty identifying certified firms with

the capabilities needed by federal agencies, (3) SBA’s guidance that

emphasizes the 8(a) program2

 over the HUBZone program, and (4) easier

and quicker procedures to award contracts under the 8(a) program.

We are making recommendations to the Office of Federal Procurement

Policy and SBA concerning the need to more accurately report the

achievements under the HUBZone program and for additional and clarified

guidance on how to more effectively locate certified HUBZone firms with

capabilities that meet agencies’ needs. In commenting on a draft of this

report, SBA and the Office of Federal Procurement Policy generally agreed

with our findings and provided clarifying suggestions for two

recommendations, which we incorporated. SBA did express a concern

about our characterization of SBA’s emphasis on the 8(a) program. We

believe our report accurately reflects the policies in effect at the time of

our review and acknowledges the changes initiated by SBA. SBA’s written

comments appear in appendix II.

The Historically Underutilized Business Zone (HUBZone) Act of 1997

established a program to provide assistance in securing federal contracts

to small businesses located in HUBZones. HUBZones are metropolitan

area census tracts or nonmetropolitan counties in which low-income

levels or high unemployment rates qualify them as economically

distressed. Also, all federally-recognized Indian reservations are

HUBZones. The purpose of the HUBZone program is to increase

employment opportunities, investment, and economic development in

these areas.

 1

 Title VI of the Small Business Reauthorization Act of 1997 (P.L. 105-135).

2

 The 8(a) program, also administered by the SBA, is one of the federal government’s

vehicles for developing small businesses that are owned by socially and economically

disadvantaged individuals.

Background
Page 3 GAO-02-57 Small Business

The HUBZone Act established (1) eligibility requirements that firms must

meet to participate in the program, (2) contracting preferences that federal

agencies can use to award contracts to firms certified by SBA as qualified

HUBZone firms, and (3) goals for program participation by HUBZone firms

as a percent of the total value of prime contract awards. The act identified

ten federal agencies for initial participation in the program through the

end of fiscal year 2000, and three more agencies were added in November

1999. (See appendix I for a list of the 13 agencies.) Currently, the

HUBZone program applies to all federal agencies.3

SBA must certify that a firm qualifies for participation before federal

agencies can award a contract under the program. To be qualified, the firm

must apply with SBA and meet the following requirements:

• The firm must be a small business owned and controlled by one or more

U.S. citizens.4

• The firm’s principal office must be located in a HUBZone.

• Finally, at least 35 percent of the firm’s employees must reside in a

HUBZone.

Once SBA has certified that a firm is qualified, SBA adds the firm’s name,

address and certification date to its List of Qualified HUBZone Small

Business Concerns maintained on SBA’s World Wide Web site. In addition,

SBA adds this certification to the firm’s profile in SBA’s on-line PRO-Net

database, which contains information supplied by over 200,000 small

businesses. SBA’s list and PRO-Net are federal contracting officers’

primary information sources for determining a firm’s eligibility under the

HUBZone program.

To increase employment and encourage economic development in areas

designated as HUBZones, federal agencies can use any of three

preferences specified in the HUBZone Act when awarding contracts to

certified small businesses, as follows:

 3

 13 CFR part 126.101.

4

 The HUBZones in Native America Act of 2000 (P.L. 106-554, Title VI), among other things,

expanded the definition of HUBZone small business ownership and control to include

Alaska Native Corporations, Indian tribal governments, and community development

corporations, and more precisely defined the term “Indian reservation”.
Page 4 GAO-02-57 Small Business

• First, a contracting officer can give a HUBZone firm a price evaluation

preference when participating in a full and open competition. In these

cases, the contracting officer can deem the price offered by the HUBZone

firm as lower than a price offered by another firm if (1) the other firm is

not a small business and (2) the HUBZone firm’s offered price is not more

than 10 percent higher than the otherwise lowest price.

• Second, a contracting officer can set aside a contract for competition only

among certified HUBZone firms if two or more responsible HUBZone

firms are expected to submit offers and the agency can award the contract

at a fair market price.5

• Finally, a contracting officer can award a sole source contract to a

HUBZone firm if the officer determines among other things that two or

more responsible HUBZone firms are not likely to submit offers and the

agency can award the contract at a fair and reasonable price.

The HUBZone Act established participation goals for certified firms

starting with fiscal year 1999. The fiscal year 1999 goal was 1 percent of

the year’s total value of prime contract awards, and the fiscal year 2000

goal was 1.5 percent. The act increased the goal by one-half percent each

year, reaching 3 percent in fiscal year 2003 and each fiscal year thereafter.

Because of delays in HUBZone program implementation, fiscal year 2000

was the first year agencies reported data to FPDC. Under the Small

Business Act, SBA must report to the Congress and the President on the

agencies’ achievements in meeting their small business goals, including

those for HUBZone concerns.6

 This annual report relies on FPDC data.

The data that federal agencies reported on fiscal year 2000 HUBZone

contracting achievements is significantly inaccurate. In fact, we identified

data inaccuracies that put hundreds of millions of dollars in reported

achievements in question. The inaccuracies were due to data entry errors

and insufficient guidance for federal contracting personnel on how to

complete the forms used to submit data to FPDC. Inaccurate reporting of

 5

 A prospective contractor is considered responsible if it has the capability and financial

resources to perform a contract. FAR 9.104-1.

6

 The Small Business Act, states that SBA shall annually report to the President and the

Congress on the extent of participation of small business concerns, including qualified

HUBZone small business concerns, in agencies’ procurement contracts. The annual report

is called The State of Small Business. P.L. 100-656, as codified in 15U.S.C. 644(h).

Reported HUBZone

Program Contracting

Achievements Are

Inaccurate
Page 5 GAO-02-57 Small Business

HUBZone achievements limits the ability of federal agencies and the

Congress to gauge the success of the program.

For fiscal year 2000, federal agencies reported to FPDC that they awarded

1,803 contracts valued at $663 million to certified HUBZone firms.

However, we found that federal agencies were overcounting some

achievements while potentially undercounting others. First, 61 percent of

the reported contracts and 53 percent of the reported dollars should not

have been reported as fiscal year 2000 HUBZone program achievements.

Specifically, we found that federal agencies actually awarded 1,034 of the

1,803 reported HUBZone contracts (with obligations of about $325 million)

to firms not certified to participate in the HUBZone program. Also, we

identified another 57 contracts with obligations of about $24 million that

were awarded before the start of the program. Second, when we compared

SBA’s contractor certification data with FPDC’s contracting activity data,

we found that federal agencies did not report up to 1,712 contracts—

$589 million—awarded to firms that may have been qualified as HUBZone

program participants. However, because FPDC collects only the month

and year of contract awards, we could not readily compare a firm’s

certification date with a specific contract award date. As a result, we could

not determine the actual number or value of contracts awarded to

HUBZone firms.

We identified problems at the contracting officer level and the agencywide

level that contributed to inaccurate data reported to FPDC. FPDC

perpetuates these errors by including the inaccuracies in its annual report

on federal procurement activities.

• First, contracting officers are not accurately filling out the forms used to

report contracting data to FPDC. In some cases, contracting officers

simply entered the wrong data when completing the forms. In other cases,

contracting officers stated that they were unfamiliar with agency forms

and lacked guidance on how to fill them out. Agency forms change

regularly to incorporate new reporting requirements or when an agency

implements an automated reporting system. Contracting officers receive

limited guidance on completing agency forms from an FPDC manual. An

FPDC official agreed that the manual does not provide sufficient guidance

to preclude errors in overcounting or undercounting achievements. FPDC

plans to publish additional guidance to address these inaccuracies before

fiscal year 2002.

• Second, agencies are unsure of what qualifies as a HUBZone contract

award because SBA did not provide guidance about which contracts to

count towards HUBZone program achievements. According to SBA
Page 6 GAO-02-57 Small Business

officials, a contract awarded to a firm that is not certified to participate in

the HUBZone program should not count as a HUBZone achievement,

regardless of whether the firm became certified during the term of the

contract. However, some agencies are counting obligations on multiple

year contracts7

 even though the contract award occurred before the

contractors became HUBZone certified. In recent discussions with federal

agency officials, SBA officials recognized that for some long-term, multiple

year contracts, following SBA’s current policy could result in agencies not

receiving credit for directing funds to certified HUBZone firms.

Consequently, SBA is reviewing its policy on which contract obligations to

count towards the HUBZone program.

• Third, FPDC perpetuates inaccurate reporting by publishing reports that

contain known errors. FPDC checks agency-provided data to identify

apparent inconsistencies, notifies agencies of the errors identified, and

requests corrective actions. Agencies took varying degrees of corrective

action on errors identified in the preliminary HUBZone data for fiscal year

2000, but they did not correct all the errors that FPDC identified. An FPDC

official stated that FPDC does not have the knowledge to correct the data

nor the authority to require agencies to correct the data. As a result, the

data appears as reported by federal agencies.

SBA relies on FPDC data to report on the HUBZone program to the

President and the Congress. SBA’s Associate Administrator for the

HUBZone program stated that HUBZone information in SBA’s fiscal year

2000 report on small business programs will have to include a disclaimer

because of data inaccuracies.

Despite the inaccuracies in FPDC data, we determined that there are

problems implementing the HUBZone program. None of the original ten

agencies authorized to implement the program met the fiscal year 2000

statutory goal of awarding 1.5 percent of their prime contract awards to

HUBZone firms. Further, one agency awarded only one contract to a

HUBZone firm, and another did not award any. Moreover, our analysis of

the agencies’ contract awards revealed that out of the 10 agencies, 7 used

 7

 Multiple year contracts contain option years beyond a base period that the agencies can

exercise so the contractors can continue performing the contract. After the contractors

begin performance on the multiple year contract, the SBA may certify the firm as a

HUBZone firm. In such cases, when exercising contract options, the agencies are counting

the amounts paid to the firm subsequent to certification as HUBZone contract awards.

Federal Agencies Are

Having Difficulty

Implementing the

HUBZone Program
Page 7 GAO-02-57 Small Business

the HUBZone Act preferences to award only 52 contracts with $24 million

in obligations.

Contracting officers and agency officials confirmed that they are having

difficulty implementing the program and cited several reasons for this.

First, there is a relatively small number of certified HUBZone firms. We

found that in approximately 8,000 HUBZones, SBA had certified 290 firms

for participation in the program at the start of fiscal year 2000 and by the

end of the fiscal year had certified a total of 1,940 firms nationwide.

According to several contracting officers and SBA officials, many small

businesses are not aware of the need to apply for certification. To address

this problem, SBA officials and agency contracting officers have been

informing small businesses about HUBZone program requirements,

helping them complete applications to get certified, and holding seminars

to encourage more applications. However, while the number of

applications to SBA has increased significantly in 2001, the number of

certifications has not. As of September 30, 2001, SBA had certified about

4,100 firms.

Second, contracting officers cannot easily locate certified HUBZone firms

that provide particular goods and services. Contracting officers told us

that they rely on SBA’s PRO-Net database as a primary source for

identifying potential HUBZone firms. However, sometimes the information

the companies enter into the database is not specific or reliable enough to

ascertain the firms’ capabilities. For example, a General Services

Administration contracting officer stated that building mechanical

maintenance is a common capability cited by firms listed in PRO-Net, but

he had difficulty identifying a company that could perform mechanical

maintenance on building elevators. SBA officials stated that they

periodically remind the small businesses of the need to regularly update

their PRO-Net information so that the database contains the information

needed by federal contracting personnel.

Third, SBA instructs agencies in informal guidance to place more

emphasis on the 8(a) program than the HUBZone program when federal

agencies award contracts to small businesses. Specifically, the SBA

guidance ranks the small business programs and places an 8(a) firm that is

also a certified HUBZone firm before an 8(a) firm and an 8(a) firm before a
Page 8 GAO-02-57 Small Business

HUBZone firm.8 Because several agencies expressed concerns about the

perceived lack of flexibility in this order of precedence, SBA is reviewing

its guidance in this regard.

Finally, it is easier and quicker for agency officials to award a contract

using the 8(a) sole source program. A contracting officer can notify the

SBA of the intent to award a sole source contract to an 8(a) firm by

providing a brief justification for the selection of the specific 8(a) firm and

can negotiate directly with the firm to achieve a fair market contract price.

Federal agencies can complete this process in as few as 3 months. In

contrast, a contracting officer must determine that only one HUBZone firm

exists to perform the work on a sole source contract to a HUBZone firm.

Contracting officials can determine this (1) by conducting market research

or (2) by having only one responsible firm respond to an announcement

for a HUBZone set-aside procurement. A contracting officer stated that

completing this process could take as long as a year.

Accurate reporting of HUBZone program information would allow federal

officials to better gauge the success of the program. However, the quality

of fiscal year 2000 HUBZone contracting data that federal agencies

reported to the FPDC was not credible. Without accurate data, the

Congress and the President are not able to ensure that the program is

working as intended to provide assistance to economically distressed

areas of the United States. Most of the reporting errors could have been

avoided had contracting personnel had adequate guidance on how to

complete the forms submitted to FPDC. Also, some errors could be

corrected if the federal agencies and FDPC work together to address the

inaccuracies identified in FPDC’s review of data.

Further, the ten federal agencies that Congress charged with implementing

the program awarded only 52 contracts using HUBZone Act preferences

during all of fiscal year 2000. Clearer guidance on how firms should inform

agencies about their capabilities would enable contracting officers to more

easily locate firms for specific contract opportunities and could increase

the number of contracts awarded to certified HUBZone firms using the

act’s preferences.

 8

 While SBA’s regulations (13 CFR 126.607) and the Federal Acquisition Regulation (FAR

19.800(e)) allow contracting officers discretion when deciding whether to use the 8(a) or

HUBZone programs, federal agencies usually rely on SBA’s informal guidance on the order

of precedence when awarding contracts to small businesses.

Conclusions
Page 9 GAO-02-57 Small Business

To improve the accuracy of the data reported by federal agencies, we

recommend the Administrator, Office of Federal Procurement Policy, in

consultation with SBA when appropriate, strengthen the guidance for all

federal agencies about reporting small business program contracting

activities to the Federal Procurement Data Center. At a minimum, this

guidance should address how the forms should be completed and verified,

and clarify how to report which small business preference program was

used to award the contract.

To improve the accuracy of data at an agencywide level, we recommend

the Administrator of SBA develop guidance for all federal agencies about

identifying contracts to be reported to the FPDC that meet the HUBZone

Act criteria.

To help ensure that FPDC does not perpetuate data inaccuracies, we also

recommend that the Administrator, Office of Federal Procurement Policy,

develop follow-up review procedures to emphasize to federal agencies

their responsibility in providing accurate data and promptly correcting

inaccurate data.

To help contracting officers identify firms with the appropriate

capabilities, we also recommend the Administrator of SBA inform small

businesses listed in PRO-Net about the importance of entering and

maintaining timely, complete, and accurate data.

We received written comments from SBA and oral comments from the

Office of Federal Procurement Policy on a draft of this report. SBA

generally agreed with our findings and recommendations although SBA

had three concerns. First, SBA suggested that the first recommendation

be revised to indicate that the Office of Federal Procurement Policy

should consult with SBA in developing new guidance. We revised the

recommendation accordingly. Second, SBA felt that our report title could

be misleading and suggested that our title should be changed to HUBZone

Program Suffers From Procuring Agency Reporting and Implementation

Difficulties. We believe our title appropriately captures the findings of

our review, with which SBA agreed; therefore, we did not make this

change. Third, SBA took issue with our characterization of the emphasis

given to the 8(a) program relative to the HUBZone program. SBA cited a

letter the agency sent to Senator Bond dated August 17, 2001, which states

that there is parity between the 8(a) program and the HUBZone program,

although “regulatory language could be read to give priority to awards to

the 8(a) program over HUBZone awards.” We noted in our report that

Recommendations for

Executive Action

Agency Comments

and Our Evaluation
Page 10 GAO-02-57 Small Business

regulations allow contracting officer’s discretion in deciding on whether to

use the 8(a) or HUBZone programs when awarding contracts. However,

SBA’s training materials on the HUBZone program, which are given to

federal agencies, establish an order of precedence giving the 8(a) program

priority over the HUBZone program. As noted in our report and SBA’s

August 17th letter, SBA is drafting changes to its HUBZone and 8(a)

regulations to clarify that contracting officers have discretion to use either

program. Therefore, we believe our report accurately reflects SBA’s

guidance at the time of our review. SBA’s comments and enclosure appear

in appendix II.

The Office of Federal Procurement Policy generally agreed with our

findings. However, based on the Office of Federal Procurement Policy’s

comments, we revised the recommendation on FPDC reported data to

clarify the role that the Office of Federal Procurement Policy should play

in ensuring the accuracy of data that agencies provide to FPDC.

To determine whether federal agencies are accurately reporting HUBZone

contract achievements, we obtained FPDC’s database of all reported

obligations to federal government contracts during fiscal year 2000 and

SBA’s official list of certified HUBZone firms. We reviewed the database

and list for three kinds of potential inaccuracies in the FPDC database:

(1) contracts reported as HUBZone contracts that were awarded to firms

not certified as HUBZone firms, (2) contracts reported as HUBZone

contracts that were awarded to firms certified after contract award, and

(3) contracts not reported as HUBZone contracts that were awarded to

firms that were certified HUBZone firms.

To determine whether federal agencies are having difficulty implementing

the HUBZone program to award contracts to certified HUBZone firms, and

if so, the reasons for the difficulty, we reviewed the HUBZone Act of 1997

and other pertinent legislation; and HUBZone program implementation

guidance contained in Title 13, Code of Federal Regulations (CFR), Part

126 (13 CFR 126), contracting guidance contained in the Federal

Acquisition Regulation (48 CFR Chapter 1), and other relevant guidance

issued by SBA, FPDC, and the ten program implementing agencies (listed

in appendix I). We held discussions about HUBZone program management

with officials at the Small Business Administration. We also held

discussions with procurement officials at the Small and Disadvantaged

Business Utilization Office, and HUBZone program officials at the

headquarters level of the ten agencies identified in the HUBZone Act and

various field locations of six of those agencies.

Scope and

Methodology
Page 11 GAO-02-57 Small Business

In addition, we determined the extent that agencies used the HUBZone

preferences to award contracts. We used FPDC data to identify 136

contracts that the 10 federal agencies reported as being awarded using

preferences in fiscal year 2000. We requested relevant contract file

information for each of the contracts. We also discussed contract file

information with selected contracting officers, who were responsible for

39 of these contracts.

We conducted our review between December 2000 and October 2001 in

accordance with generally accepted government auditing standards.

As requested by your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution of it until 30 days from

the date of this letter. At that time, we will send copies to other interested

congressional committees and the secretaries of Defense, Agriculture,

Health and Human Services, Transportation, Energy, Housing and Urban

Development, and Veterans Affairs. We will send copies to the Director,

Office of Management and Budget; the Administrator, General Services

Administration; the Administrator, SBA; the Administrator, NASA; the

Administrator, EPA; and the Administrator, Office of Federal Procurement

Policy. We will also make copies available to others upon request.

Please contact me at (202) 512-4125 or Hilary Sullivan at (214) 777-5652 if

you have any questions regarding this report. Major contributors to this

report were Frederick G. Day, John E. Clary, and Enemencio S. Sanchez.

Sincerely yours,

David E. Cooper

Director

Acquisition and Sourcing Management
Appendix I: Federal Agencies Initially

Designated to Implement the HUBZone

Program

Page 12 GAO-02-57 Small Business

Agencies designated in the HUBZone Act of 1997 (P.L. 105-135),

December 2, 1997:

1. Department of Defense

2. Department of Agriculture

3. Department of Health and Human Services

4. Department of Transportation

5. Department of Energy

6. Department of Housing and Urban Development

7. Department of Veterans Affairs

8. Environmental Protection Agency

9. National Aeronautics and Space Administration

10. General Services Administration

(Each of these ten agencies was included in our review.)

Agencies Added by the Fiscal Year 2000 Appropriation Act (P.L. 106-113),

November 29, 1999:

11. Department of Commerce

12. Department of Justice

13. Department of State

(None of these three agencies was included in our review.)

Appendix I: Federal Agencies Initially

Designated to Implement the HUBZone

Program
Appendix II: Comments From the Small

Business Administration

Page 13 GAO-02-57 Small Business

Appendix II: Comments From the Small

Business Administration
Appendix II: Comments From the Small

Business Administration

Page 14 GAO-02-57 Small Business
Appendix II: Comments From the Small

Business Administration

Page 15 GAO-02-57 Small Business
Appendix II: Comments From the Small

Business Administration

Page 16 GAO-02-57 Small Business
Appendix II: Comments From the Small

Business Administration

Page 17 GAO-02-57 Small Business
Appendix II: Comments From the Small

Business Administration

Page 18 GAO-02-57 Small Business
Appendix II: Comments From the Small

Business Administration

Page 19 GAO-02-57 Small Business
Appendix II: Comments From the Small

Business Administration

Page 20 GAO-02-57 Small Business (120012)
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