Puerto Rico: Information on Trends and Challenges to Small Business Federal Contracting
Published: 2017-06-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: SBA administers several programs nationwide and in Puerto Rico that provide federal contracting preferences to small businesses. The Puerto Rico Oversight, Management, and Economic Stability Act includes a provision for GAO to review the application and utilization of SBA programs in Puerto Rico.
GAO examined, among other things, (1) trends in small business contracting and the use of SBA programs in Puerto Rico that provide contracting preferences to small businesses and (2) stakeholder views on any challenges that small businesses in Puerto Rico face in obtaining federal contracting opportunities.
To analyze trends in the use of SBA programs, GAO obtained data on prime contracts for Puerto Rico for fiscal years 2006 through 2016 and used nationwide data as a reference point. GAO interviewed stakeholders such as federal agency contracting officials, industry associations in Puerto Rico, and economic development entities about any challenges small businesses in Puerto Rico face in obtaining federal contracts and steps SBA has taken to promote participation in its programs. Additionally, GAO conducted a literature review to identify challenges cited for the 8(a), HUBZone, WOSB, and SDVOSB programs and challenges faced by small businesses in federal contracting in Puerto Rico.
GAO makes no recommendations in this report.
section_title: What GAO Found
paragraphs: From fiscal years 2006 through 2016, a higher percentage of federal contracting obligations was awarded to small businesses within Puerto Rico for contracts performed there compared to the percentage for small businesses nationwide, particularly in the last 4 fiscal years of the period (see fig.). In fiscal year 2016, small businesses in Puerto Rico received about 47 percent of federal contracting obligations to Puerto Rico (about $319 million out of $682 million) compared to 23 percent of federal obligations awarded to small businesses nationwide. Of the four Small Business Administration (SBA) programs that provide contracting preferences based on socioeconomic designations, a higher percentage of obligations was awarded in Puerto Rico through the 8(a) Business Development program compared to the Historically Underutilized Business Zone (HUBZone), Women-Owned Small Business (WOSB), and Service-Disabled Veteran-Owned Small Business (SDVOSB) programs. The use of 8(a) contract awards in Puerto Rico was somewhat higher than nationwide, while the use of the other three SBA programs was roughly comparable.
Agencies and industry associations GAO interviewed identified several challenges small businesses in Puerto Rico may face in obtaining federal contracting opportunities. Challenges they identified included a lack of knowledge about the federal contracting process; difficulty meeting procurement requirements; and difficulty accessing bonding, financing, and capital. Many of these challenges are similar to those GAO identified in a September 2012 report (GAO-12-873) that small businesses in general face in seeking federal contracting opportunities. However, stakeholders indicated that some challenges may be exacerbated by Puerto Rico's geography and economic conditions. Stakeholders did not identify any federal laws that have created unique contracting challenges for small businesses in the region. SBA and the three other federal agencies GAO contacted identified examples of conducting outreach, providing training and seminars, coordinating with local organizations, and other efforts intended to help Puerto Rican small businesses obtain federal contracting opportunities.

section_title: Letter
paragraphs: Small businesses play an important role in the U.S. and Puerto Rican  economies. According to the U.S. Census Bureau, over 99 percent (about  44,000) of the businesses in Puerto Rico are small. Total federal  contracting obligations in Puerto Rico have ranged from a low of $404  million to a high of $1 billion during the past 10 fiscal years. The Small  Business Administration (SBA) administers several programs in Puerto  Rico and nationwide that provide federal contracting preferences to small  businesses, including the 8(a) Business Development (8(a)), Historically  Underutilized Business Zone (HUBZone), Women-Owned Small Business  (WOSB), and Service-Disabled Veteran-Owned Small Business  (SDVOSB) programs. Small businesses certified with these  socioeconomic designations benefit from federal contracting preferences,  such as sole source contracts (awards are made without competition) and  set-aside contracts (awards are limited to a designated pool of competing  firms). The federal government has additionally specified annual prime  contracting and subcontracting goals for designated small business  categories.
Puerto Rico currently faces many economic challenges. U.S. Census  Bureau’s Puerto Rico Community Survey and American Community  Survey from 2015 show that about 46 percent of Puerto Rico’s residents  live below the federal poverty level, compared to a national average of  about 15 percent. Additionally, as of June 2017, Puerto Rico’s  government faces a debt crisis. In June 2016, Congress enacted the  Puerto Rico Oversight, Management, and Economic Stability Act to  address the debt crisis and Puerto Rico’s fiscal affairs. The act includes a  provision for us to evaluate the application and utilization of SBA  programs in Puerto Rico (including contracting activities relating to  HUBZone small business concerns) and identify any provision of federal  law that may create an obstacle to efficient implementation of such  activities related to these programs. This report examines (1) trends in  small business contracting and the use of SBA programs that provide  federal contracting preferences to small businesses in Puerto Rico from  fiscal years 2006 through 2016, and (2) stakeholder views on any  challenges small businesses in Puerto Rico face in obtaining federal  contracting opportunities, including those posed by federal laws, and  steps SBA and other agencies have taken to assist Puerto Rican small  businesses in obtaining federal contracting opportunities.
To identify trends in the use of SBA programs that provide federal  contracting preferences to small businesses in Puerto Rico from fiscal  years 2006 through 2016, we analyzed data on prime contract obligation  amounts for Puerto Rico and nationwide from the Federal Procurement  Data System–Next Generation (FPDS-NG) for those fiscal years. We  also analyzed data from the U.S. Census Bureau’s American Community  Survey on HUBZone census tracts. We assessed the reliability of the  FPDS-NG and U.S. Census Bureau data by reviewing relevant related  documentation and determined that they were sufficiently reliable for  analyzing trends and for describing economic conditions in HUBZone  areas. To identify stakeholder views on any challenges that small  businesses in Puerto Rico face in obtaining federal contracting  opportunities, including those posed by federal laws, and steps SBA and  other agencies have taken to assist Puerto Rican small businesses in  obtaining federal contracting opportunities, we interviewed SBA officials  and other stakeholders such as federal agency contracting officials,  industry associations, and economic development entities in Puerto Rico.  We did not assess the extent to which steps SBA and other agencies  have taken address the challenges stakeholders identified. Appendix I  provides more detail on our scope and methodology.
We conducted this performance audit from September 2016 to June 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Under the Small Business Act, SBA plays an important role in ensuring  that small businesses gain access to federal contracting opportunities.  SBA negotiates specific agency-wide goals to help ensure that the federal  government collectively meets the 23 percent statutory goal for contract  dollars awarded to small businesses. In addition, SBA administers the  8(a), HUBZone, WOSB, and SDVOSB programs that are intended to  assist small businesses of various socioeconomic categories. Firms with  multiple socioeconomic designations can receive set-asides or sole  source contracts under one or more of the four programs. For example, a  HUBZone firm that also qualifies as an SDVOSB could receive an award  under the SDVOSB program as well as another under the HUBZone  program. Each program has different requirements. As of March 2017,  Puerto Rico had 76 8(a) certified businesses, 40 HUBZone certified  businesses, 256 WOSBs, and 56 SDVOSBs.  8(a) Program: The purpose of the 8(a) program is to develop small  businesses owned by socially and economically disadvantaged  individuals. A business must meet several initial eligibility requirements to  qualify for the 8(a) program. For example, the firm must be a small  business as defined by SBA, it must be owned and controlled by one or  more socially and economically disadvantaged individuals who are of  good character and U.S. citizens, and it must demonstrate the potential  for success. Upon certification by SBA, the business may stay in the  program for 9 years if it meets other requirements for continued  participation.
HUBZone Program: Congress created the HUBZone program in 1997 to  stimulate economic development in economically distressed communities  by designating certain areas as HUBZones. There are several types of  HUBZone areas, including qualified census tracts, which are determined  by the area’s poverty rate or household income. SBA updates HUBZone  designations based on whether areas meet statutory criteria, such as  having certain income levels or poverty or unemployment rates. For  example, SBA revised the designation of HUBZones based on the  release of the 2010 U.S. Census Bureau data in October 2011. For a  business to be certified by SBA as a HUBZone business, it must meet the  following criteria: be small by SBA size standards, be at least 51 percent owned and controlled by U.S. citizens, have its principal office—the location where the greatest number of  employees perform their work—located in a HUBZone, and have at least 35 percent of its employees reside in a HUBZone.
On June 16, 2016, SBA announced that it had revised the definition of  qualified census tracts eligible to be designated as HUBZones to provide  additional opportunities for small businesses in Puerto Rico and  nationwide to participate in the HUBZone program. Previously, in addition  to poverty rate and income, a statutory population cap limited the number  of eligible census tracts. Under the cap, in metropolitan areas where more  than 20 percent of the population qualified, the list of eligible census  tracts was ordered from the highest percentage of eligible households to  the lowest until the 20 percent limit was exceeded. By lifting the  population cap, SBA expanded the number of eligible census tracts in  Puerto Rico by 516 (from 260 to 776). As a result, nearly all of Puerto  Rico now qualifies as a HUBZone (see fig.1). In the rest of the United  States, the number of eligible census tracts increased by 1,499 (from  15,938 to 17,437). (See app. II for maps of the newly eligible and existing  census tracts in the United States, excluding U.S. territories.)
WOSB Program: In 1994, Congress established a goal of not less than 5  percent of the total value of all prime contract and subcontract awards for  each fiscal year for WOSBs to increase federal contracting opportunities  for WOSBs. In 2000, Congress authorized the WOSB program and SBA  issued implementing regulations that became effective in 2011. Under the  program, contracts are reserved for WOSBs in designated industries in  which WOSBs and economically disadvantaged WOSBs were historically  underrepresented. Set-aside and sole source awards can be made to  WOSBs only in those designated industries. Various changes have  been made to the WOSB program since it was established, including the  removal of limitations on the amount of contract dollars in a set-aside that  WOSBs can compete for in 2013 and allowing sole source awards  starting in October 2015. Among other eligibility requirements, a business  must be at least 51 percent owned and controlled by one or more women;  it must be certified as eligible by a third party or be self-certified by the  business owner; and the owner must provide documents demonstrating  that the business meets program requirements.
SDVOSB Program: The Veterans Entrepreneurship and Small Business  Development Act of 1999 established an annual government-wide goal of  not less than 3 percent of the total value of all prime contract and  subcontract awards for SDVOSBs. In addition, the Veterans Benefits  Act of 2003 gave federal contracting officers the authority to restrict  competition to SDVOSBs and award a sole source or set-aside contract  where certain criteria are met. To be eligible, the business must be  majority-owned by one or more service-disabled veterans who manage  and control daily business operations, and it must qualify as a small  business under the North American Industry Classification System Code  industry-size standards. The Veterans Benefits, Health Care, and  Information Technology Act of 2006 requires the Department of Veterans  Affairs (VA) to set aside contracts for SDVOSBs and other veteran-owned  small businesses (unless a sole source contract is used) if the contracting  officer expects two or more such firms to submit awards. VA may make  sole source awards of up to $5 million, without a determination that only  an SDVOSB or a veteran-owned small business is available.
Other categories. Other socioeconomic programs include those for  veterans, small disadvantaged businesses, and other small businesses.
To help ensure that small businesses receive a share of federal  procurement contract dollars, Congress has set an annual government- wide goal of awarding not less than 23 percent of prime contract dollars to  small businesses. To promote this goal, the Small Business Act permits  contracting officers at federal agencies to award contracts to small  businesses through set-aside or sole source to 8(a), HUBZone, WOSB,  and SDVOSB businesses, under certain requirements. Federal agencies  are generally required to set aside contracts with values exceeding  $150,000 if the contracting officer expects at least two small businesses  to submit bids for the procurement. Under the HUBZone, WOSB, and  SDVOSB programs, a contracting officer may award sole source  contracts valued up to $4 million if the contracting officer does not have a  reasonable expectation that two or more small businesses would submit  offers and the award can be made at a fair and reasonable price. Under  the 8(a) program, federal agencies are to make sole source awards for  contracts valued up to $4 million. Federal agencies are also required to  reserve contracts with values exceeding $3,000 but less than $150,000  for small businesses exclusively if the contracting officer expects at least  two small businesses to submit bids.
The Small Business Act also established other programs and resources  to assist small businesses nationwide, including with small business  contracting activities. Among them, SBA employs Procurement Center  Representatives (PCR) to assist small businesses in obtaining federal  contracts. Among other activities, PCRs can make recommendations to  agency contracting officers that proposed contracts be set aside for  eligible small businesses. In addition, the act generally requires federal  agencies with procurement authorities to establish an Office of Small and  Disadvantaged Business Utilization to oversee the agency’s functions and  duties related to the awarding of contracts to small and disadvantaged  businesses.
section_title: Among Other Trends, the Percentage of Obligations to Small Businesses in Puerto Rico Was Relatively High, and Use of SBA Programs Varied
paragraphs: Our analysis of federal prime contracting data identified a number of  trends in federal contracting obligations to small businesses in Puerto  Rico from fiscal years 2006 through 2016. For example, we found that  small businesses in Puerto Rico received a relatively high proportion of  federal prime contracting obligations for work performed in Puerto Rico  compared to small businesses nationwide. Additionally, we found that a  greater percentage of obligations was awarded to small businesses in  Puerto Rico through full and open competition and the 8(a) program  compared to the other three SBA socioeconomic contracting programs.  We also found that the number of HUBZone applications has increased  since SBA expanded the number of HUBZone-eligible census tracts in  June 2016; about half of the applicants were located in newly designated  HUBZone-qualified census tracts.
subsections: section_title: Small Businesses in Puerto Rico Received a Relatively High Percentage of Federal Prime Contracting Obligations
paragraphs: The percentage of federal prime contracting obligations awarded to small  businesses within Puerto Rico for contracts performed there was  relatively high from fiscal years 2006 through 2016, particularly in the last  4 fiscal years. Of the total obligations awarded to businesses of all sizes  for contracts performed in Puerto Rico, the percentage awarded to small  businesses located there ranged from about 24 percent in fiscal year  2006 to about 51 percent in fiscal year 2015. In fiscal year 2016, small  businesses in Puerto Rico received about 47 percent of federal prime  contracting obligations (about $319 million out of $682 million) for work  performed there. In contrast, federal prime contracting obligations  awarded to small businesses nationwide were consistently around 20  percent from fiscal years 2006 through 2013 and increased to about 23  percent from fiscal years 2014 through 2016; in fiscal year 2016, small  businesses nationwide received about 23 percent of the federal prime  contracting obligations (see fig. 2).
For the contracts performed in Puerto Rico by small businesses, most  obligations went to businesses also located in Puerto Rico, although  some obligations were awarded to businesses located elsewhere, such  as on the U.S. mainland. Specifically, we found that of the obligations  awarded to all small businesses for contracts performed in Puerto Rico,  over 70 percent went to small businesses located in Puerto Rico for 7 of  the 11 fiscal years we reviewed; in fiscal year 2016, this figure was 81  percent. We also found that small businesses in Puerto Rico largely  performed contracts inside of Puerto Rico rather than outside of Puerto  Rico. Specifically, more than 94 percent of the small businesses located  in Puerto Rico that received contract awards received them for work  performed in Puerto Rico each fiscal year from 2006 through 2016, with  the exception of fiscal year 2006.
section_title: Full and Open Competition and the 8(a) Program Were the Most Prevalent Bases for Awards to Small Businesses in Puerto Rico for Work Performed There
paragraphs: As previously discussed, small businesses can receive federal prime  contracts based on full and open competition and through set-asides and  sole source awards they may qualify for based on their certifications from  one or more of the four SBA socioeconomic programs or other  socioeconomic designations. To illustrate how SBA certifications may  have influenced the ability of small businesses in Puerto Rico to obtain  prime contracts for work performed in Puerto Rico, we analyzed contract  obligations based on whether awards were obtained through the four SBA  programs or through other means. As shown in figure 3, we found that a  substantial percentage of contracting obligations for this period were  awarded to small businesses in Puerto Rico outside of these four  programs, either based on full and open competition or through set- asides or sole source awards based on other socioeconomic  designations. For fiscal years 2006 through 2016, the percentage of  obligations awarded without the use of the four SBA programs ranged  from a combined low of 49 percent in 2009 to a combined high of 82  percent in 2013 for Puerto Rico.
Consistent with nationwide results, we also found that a higher  percentage of federal prime contracting obligations were awarded through  the 8(a) program than through HUBZone, WOSB, or SDVOSB programs  combined for contracts awarded to small businesses located in Puerto  Rico. The percentage of obligations awarded using the 8(a) program was  higher in Puerto Rico than nationwide, as shown in figure 3. SBA,  Department of Defense (DOD), and General Services Administration  (GSA) officials provided a few potential reasons why the 8(a) program  may have been used more than HUBZone, WOSB, and SDVOSB  programs in Puerto Rico. SBA officials stated that federal agency  contracting officers consider the 8(a) program’s certification process to be  rigorous and believe in the competence of 8(a) businesses. Under the  HUBZone, WOSB, and SDVOSB programs, a contracting officer has the  authority to award using sole source only when it has been determined  that two or more qualified business are not likely to submit offers; this  restriction on the use of sole source contracts does not apply to the 8(a)  program. SBA, GSA, and DOD officials all noted this factor as a reason  why the 8(a) program is more widely used than others. DOD officials  stated that this enables contracting officers to award quickly while GSA  officials noted that using 8(a) sole source allows them to target  contractors, such as those located in Puerto Rico. DOD officials also cited  business development assistance provided by SBA to 8(a) program  participants as an advantage.
We also found instances in which a few relatively large contracts, in  addition to variation in the number of contracts awarded, caused  substantial variation in the award of obligations using 8(a), HUBZone,  WOSB, and SDVOSB programs in Puerto Rico, as seen in figure 3. For  example, for the 8(a) program, one contract awarded in fiscal year 2009  made up about 46 percent of the obligations awarded through the  program during that year. In fiscal years 2010 and 2011, four large  contracts awarded using the HUBZone program substantially increased  the amount of obligations awarded through the program during those  fiscal years as compared to the other fiscal years. The trends in  obligations awarded for these four programs did not appear to be related  to any particular regulatory or programmatic changes. See appendix V for  information on regulatory or programmatic changes made to these  programs.
In addition, we found that small businesses in Puerto Rico that had  HUBZone and WOSB designations received a majority of obligations  awarded to them without the use of these respective programs. For  example, in fiscal year 2015, only 7 percent of the obligations awarded to  businesses with HUBZone designations in Puerto Rico were through the  HUBZone program; the remainder were awarded to HUBZone  businesses using other programs—including the other three SBA  programs and other socioeconomic programs —or full and open  competition. In comparison, small businesses in Puerto Rico that had  SDVOSB and 8(a) designations received a majority of the obligations  awarded to them through those respective programs. Agencies can count  contracting dollars awarded to small businesses under more than one  socioeconomic category. For example, if a business with both HUBZone  and SDVOSB designations received a contract through the HUBZone  program, the contracting dollars would count towards both of these  programs’ contracting goals. See appendix VI for more detailed  information on the use of socioeconomic programs in obligations awarded  to businesses in Puerto Rico that have HUBZone, WOSB, SDVOSB, and  8(a) designations.
section_title: Small Business Obligations in Puerto Rico Were Concentrated in Three Economic Sectors, and DOD Awarded the Majority of Obligations
paragraphs: We found that in fiscal year 2016, federal prime contracting obligations  awarded to small businesses in Puerto Rico for contracts performed there  were concentrated in the manufacturing sector (about $215 million or 67  percent), the construction sector (about $69 million or 22 percent), and  the professional and business services sector (about $23 million or 7  percent). For contracts awarded using 8(a), HUBZone, WOSB, or  SDVOSB programs, these three economic sectors were also among  those that received the greatest amount of obligations (see table 1).
Among federal agencies, DOD, VA, and GSA awarded the greatest  percentages of federal prime contracting obligations to small businesses  in Puerto Rico for contracts performed there. Specifically, in fiscal year  2016, DOD awarded about $229 million (72 percent) in obligations to  small businesses in Puerto Rico, followed by VA at about $41 million (13  percent), and GSA at about $35 million (11 percent) (see table 2). For  awards that used 8(a) and WOSB programs, more than 80 percent of the  obligations were awarded by DOD; for awards that used the SDVOSB  program, 80 percent were awarded by VA. Additionally, about half of the  obligations awarded by VA for fiscal year 2016 went to SDVOSBs. VA  has a statutory mandate to prioritize SDVOSBs over other types of  businesses.
section_title: HUBZone Applications Increased in Puerto Rico after Expansion of Criteria, and New Census Tracts in Puerto Rico Were Generally More Economically Distressed Than HUBZone Census Tracts Nationwide
paragraphs: We found that the number of applications submitted to the HUBZone  program in Puerto Rico increased, and some businesses with primary  locations in newly eligible qualified census tracts applied to the program.  A total of 30 businesses submitted applications to the HUBZone program  between June 2016 and March 2017. Based on our analysis, 16 of the 30  businesses that applied between June 2016 and March 2017 had primary  locations in newly designated HUBZone-qualified census tracts. Fourteen  of the 30 HUBZone applicants had other SBA program designations— 8(a) program (7 applicants), WOSB (6 applicants), and SDVOSB (2  applicants). Of the 14 applicants with other SBA program designations,  7 had primary locations in newly designated census tracts. As previously  discussed, after the lifting of the cap in June 2016, most of Puerto Rico  had a HUBZone designation (see fig. 1).
The number of certified HUBZone firms also increased. Specifically, from  the end of fiscal year 2015 to the end of fiscal year 2016, the number of  certified HUBZone businesses in Puerto Rico increased by 2 (from 23 to  25), whereas for the first 6 months of fiscal year 2017 (October 2016 to  March 2017), the number of HUBZone businesses increased by 15 (from  25 to 40). Six of the newly certified HUBZone businesses were located in  newly designated qualified census tracts.
We found that the economic indicators for Puerto Rico for all census  tracts—including previously designated census tracts, newly designated  census tracts, and ineligible census tracts—generally showed greater  economic distress than the indicators for all census tract categories  nationwide, as indicated by American Community Survey estimates  covering 2011 to 2015 (see table 3). For example, the average poverty  rate in newly designated census tracts in Puerto Rico was about 44  percent, compared to 31 percent in newly designated census tracts  nationwide. The economic indicators also suggest that newly eligible  tracts are somewhat less economically distressed than previously  designated tracts but more distressed than tracts that are still ineligible.
section_title: Stakeholders Believe That Small Business Challenges in Puerto Rico May Be Exacerbated by Geography and Economic Conditions
paragraphs: Stakeholders we spoke with identified a number of challenges that small  businesses in Puerto Rico may face in obtaining federal contracting  opportunities. Many of these challenges were similar to those we found in  2012 that small businesses, including minority-owned businesses, face  nationwide in seeking federal contract opportunities. These challenges  included increased use of contract bundling or consolidation, difficulty in  meeting contract procurement requirements, and lack of knowledge about  the federal procurement process. In addition, some stakeholders we  interviewed indicated that the island geography of Puerto Rico and its  economic conditions may complicate or exacerbate some of these  challenges compared to small businesses elsewhere. None of the  stakeholders we interviewed identified federal laws that have created  unique challenges for small businesses in Puerto Rico in obtaining federal  contracting. In addition, SBA and other agencies identified examples of  efforts undertaken to further assist Puerto Rican small businesses in  obtaining federal contracting opportunities, such as holding training  events and conferences.
subsections: section_title: Increased Use of Contract Bundling or Consolidation
paragraphs: Representatives from one association and SBA representatives we  interviewed identified contract bundling or consolidation as a challenge for  small business federal contracting in Puerto Rico. According to SBA  officials, a trend in federal contracting toward contract consolidation or  bundling has led to a decrease in the number of small businesses  competing for federal contracts across the United States. Stakeholders in  our 2012 report stated that contract bundling could reduce the number of  contracting opportunities for small businesses. In that report,  representatives from advocacy groups stated that contract bundling could  reduce the number of contracting opportunities available for small and  minority-owned businesses. SBA’s procurement center representatives  (PCR) and officials from SBA’s Puerto Rico District Office both stated that  smaller businesses are less likely to have the capability or experience to  compete or qualify for the large scope of work associated with  consolidated contracts and noted that for an island like Puerto Rico small  businesses are generally smaller.
According to SBA, one of the roles that PCRs play is to work with  contracting officers to evaluate whether bundling is the best way to  acquire services and supplies. Additionally, bundling of acquisitions  undergoes several levels of review to ensure that bundling is necessary.  Specifically, the Small Business Act requires that procuring activities (1)  conduct market research to justify acquisition strategies that could lead to  consolidated procurement requirements, (2) provide advance notice of  substantial bundled solicitations on a public website, and (3) implement  certain procurement strategies when solicitations involve substantial  bundling. According to SBA, FPDS-NG and agency data collection  sources do not currently contain sufficient information to quantify the  extent to which bundling of contract requirements affects the ability of  small businesses to compete as prime contractors or to compare the  savings realized under an existing bundled contract with the potential  savings that may occur if that bundled contract is recompeted in its  current configuration.
section_title: Difficulty Meeting Procurement Requirements
paragraphs: Representatives from four associations and the Federal Contracting  Center stated that the procurement requirements for federal contracts,  such as performance history for construction contracts, posed challenges  for small businesses in Puerto Rico. In our 2012 report, officials from  federal agencies and advocacy groups also identified lack of performance  history as a challenge for small, minority-owned businesses. In addition,  representatives from two associations and the Federal Contracting Center  as well as the SBA PCR said that as an island, Puerto Rico faces specific  challenges in meeting procurement requirements. For example,  representatives from the Federal Contracting Center noted that the  construction of a cemetery required a business to demonstrate  experience in developing several cemeteries in the past 5 years. These  representatives stated that opportunities to construct cemeteries are  limited in Puerto Rico and that relevant experience may have been from  more than 5 years ago.
In addition, representatives from four associations and the Federal  Contracting Center said that the experience of construction businesses in  Puerto Rico does not match the procurement requirements, which are  often standardized to mainland building standards and do not consider  the unique conditions in Puerto Rico. They said that as a result, agencies’  contracting officers may not consider Puerto Rican businesses’  experience as qualifying. For example, representatives from four  associations stated that construction businesses in Puerto Rico  demonstrate greater understanding of building requirements in Puerto  Rico, such as accounting for tropical climate or the risk of seismic activity,  in their construction plans but these factors have not been part of federal  procurement requirements.
SBA and GSA officials stated they were aware of the concerns about the  procurement requirements from businesses located in Puerto Rico. GSA  officials stated they try to strike a balance by not creating prohibitively  strict procurement criteria and ensuring that they can identify businesses  that are capable of doing the work.
section_title: Lack of Access to Bonding, Financing, and Capital for Construction Projects
paragraphs: Federal construction contracts often require bonding. Bonding ensures  that businesses have the financial capacity to perform the work and pay  for labor and supplies. Representatives from two associations and GSA  officials stated that small businesses in Puerto Rico often could not obtain  bonding because they lacked access to capital. According to DOD and  GSA officials and representatives from two associations and the Federal  Contracting Center, small businesses may not be able to meet bonding  requirements based on the businesses’ credit or financial standards  required by the surety companies due to Puerto Rico’s economic  downturn. Representatives from one association stated that a surety  company may determine that a business is not competitive for a contract  and not provide bonding as a result. Additionally, representatives from  two other associations stated that bank failures in Puerto Rico in recent  years have affected access to capital and that banks are unwilling to  extend credit to small businesses. They said the resulting lack of credit  may have also decreased businesses’ ability to obtain bonding. In our  2012 report, officials from advocacy groups and federal agencies also  cited lack of access to capital, financing, and bonding as challenges for  minority-owned businesses. On April 24, 2017, SBA announced that it  had approved the first Puerto Rican surety company to participate in its  Surety Bond Guarantee Program. Through this program, qualifying surety  companies can receive a guarantee of a percentage of the losses  incurred on bonds issued to small businesses.
section_title: Lack of Knowledge of the Federal Contracting Process
paragraphs: Representatives from two associations and the Federal Contracting  Center, members of an association, and an industry observer stated that  a lack of knowledge of the federal contracting process can be a challenge  for small businesses in Puerto Rico. In our 2012 report, officials from  federal agencies and advocacy groups also identified lack of knowledge  about the federal contracting process as a challenge for small, minority- owned businesses. Representatives from one association we interviewed  stated that some small businesses in Puerto Rico may not know how to  complete a proposal for federal contracting and may not have the  infrastructure in place to prepare contracts accurately. Additionally  members from an association stated that small businesses do not have a  process in place to meet the proposal guidelines. DOD and GSA officials  stated that proposals submitted sometimes are not high quality and need  additional assistance. Representatives from one association stated that  some small businesses are unfamiliar with federal contracting  opportunities and where to find them.
Officials from SBA’s Puerto Rico District Office said that they hold regular  training on contracting programs and how to navigate the contracting  process. The District Office also holds one-on-one appointments with  businesses to help them navigate the federal contracting process and has  offered training on proposal writing. For example, the District Office  offered a class on cost and price analysis in March 2017. A  representative from the Small Business and Technology Development  Center (SBTDC) also stated that counselors at SBTDC often help to redo  the proposals.
section_title: Lack of Knowledge of SBA’s Small Business Contracting Programs
paragraphs: Representatives from two associations we interviewed and the Federal  Contracting Center stated that small businesses lack basic information  about SBA’s federal contracting programs and their benefits. According to  Federal Contracting Center representatives and an industry observer,  small businesses may not know where to obtain information about SBA’s  programs and how to complete the paperwork to become certified in  these programs. One association representative told us that businesses  in Puerto Rico needed more training and better education about the  programs’ benefits and requirements.
SBA has conducted various small business outreach activities in Puerto  Rico, including training and seminars, to promote participation in its small  business contracting programs. According to officials in SBA’s Puerto  Rico District Office, the office offered 61 training events with 424  attendees in fiscal year 2016; 47 training events with 517 attendees in  fiscal year 2015; and 56 training events with 701 attendees in fiscal year  2014. These training events focused on the 8(a), HUBZone, WOSB,  and SDVOSB programs. SBA’s Puerto Rico District Office has also  coordinated with local governments, nonprofits, chambers of commerce,  and other associations in order to provide information to small businesses  about the programs. For example, the District Office has a memorandum  of understanding with the Puerto Rico Chamber of Commerce for the  Chamber to inform its clients and members about SBA’s programs and  services and to refer its members to SBA’s resource partners when  appropriate; the District Office has 14 such agreements with other  organizations as of May 2017. SBA also relies on three resource partners  throughout Puerto Rico to promote SBA programs: SBTDC, which has  offices in six municipalities; two Women’s Business Centers; and 17  volunteers serving as business counselors through the SCORE (formerly  the Service Corps of Retired Executives) program.
With the expansion of the eligible HUBZone census tracts, SBA officials  stated that they have tried to reduce the burden of documentation and  approval time to encourage businesses to apply for certification.  Additionally, Federal Contracting Center representatives stated that they  are working with small businesses to certify them for the HUBZone  program. As of March 2017, 40 small businesses in Puerto Rico were  HUBZone businesses and 76 were 8(a) businesses, an increase in both  categories compared to the prior 2 fiscal years.
Limitations in SBA’s online system used to help small businesses identify  whether they are located in a HUBZone area may also pose a challenge  to small businesses in Puerto Rico seeking to determine if they may apply  to the HUBZone program. To help small business owners determine if  their business is located in a HUBZone, and therefore potentially eligible  to participate in the program, SBA provides an online locator. Business  owners can search the online locator using the business’s geographic  coordinates or its address, or they can use a color-coded HUBZone map.  Due to the unique formatting of addresses in Puerto Rico, SBA’s system  is not able to process certain addresses. SBA officials told us that they  are aware that SBA’s online tool is unable to process some addresses in  Puerto Rico and have generally advised businesses to search using  geographic coordinates. Additionally, SBA officials stated that they are in  the process of transitioning to a new mapping system that should provide  more accurate information. They estimated that the system will be  available in late 2017.
section_title: Lack of Access to Agency Contracting Officials
paragraphs: Representatives from one association and the Federal Contracting Center  cited the lack of access to contracting officials as an issue for small  businesses in Puerto Rico. In our 2012 report, advocacy group officials  also cited a lack of access to contracting officials as a significant  challenge for small businesses. An official from the Minority Business  Development Agency (MBDA) Business Center in Puerto Rico stated that  geographic barriers may be a challenge for small businesses there  because it is difficult for these businesses to market and maintain their  relationships with contracting officers, who are generally located at the  headquarters level on the mainland. Federal Contracting Center  representatives stated that for professional services (such as accounting),  most of the contracting opportunities are managed by agencies with  headquarters in Washington, D.C., and that businesses in Puerto Rico  found it difficult to enter the market in Puerto Rico. Additionally,  representatives from one association stated that contracting officers from  agencies do not have a presence in Puerto Rico and award contracts to  businesses that are local to these agencies rather than to businesses in  Puerto Rico.
Officials from SBA, DOD, VA, and GSA said they help to connect small  businesses to federal contracting officers through conferences and  matchmaking events where businesses can meet contracting officers  one-on-one.
section_title: Communication Barriers
paragraphs: Representatives from one association and the Federal Contracting Center  stated that language was an issue facing small businesses in Puerto  Rico. In our 2012 report, advocacy group officials cited linguistic and  cultural barriers as a challenge for minority-owned small businesses on a  limited basis. In addition, the language barrier may hinder the ability of  some small businesses to complete the applications to become certified  in SBA’s small business contracting programs or access the opportunities  for contracts once certified. Federal Contracting Center representatives  stated that language may prevent small businesses from developing  relationships with the contracting agency or may be a barrier in the  proposal development process.
SBA officials stated that they believe that the bigger challenge was that  documents need to be translated from Spanish, which can be onerous  and costly. They said that some small businesses do not have the  resources or the ability to perform these translations. Officials from SBA’s  Puerto Rico District Office stated that SBA offices accept documents in  Spanish if the office has a Spanish-speaking staff member. However, if  no Spanish-speaking staff member is available, documents must be  translated into English in order for SBA to review them. GSA officials  stated that its Puerto Rico office has bilingual staff and that they have  generally not encountered language barriers with businesses in Puerto  Rico.
section_title: Lack of a Procurement Center Representative
paragraphs: Representatives from the Federal Contracting Center and one association  identified the lack of an SBA PCR in Puerto Rico as a disadvantage for  small businesses seeking federal contracts. SBA PCRs work with  federal agencies and small businesses to identify contracting  opportunities for small businesses. According to a Federal Contracting  Center representative, having a PCR is important because the PCR can  advocate for small businesses in various ways. For example, the PCR  can work with contracting officers to determine small business set-asides,  make adjustments to procurement requirements, and make agency  contracting officers more aware of businesses in Puerto Rico. According  to one association’s representative, the PCR should assist local  businesses and promote businesses located in Puerto Rico to federal  agencies.
SBA officials we interviewed stated that SBA has limited resources and  cannot justify dedicating a PCR in Puerto Rico based on their analyses.  According to SBA officials, SBA has 3,000 federal procurement centers  and 57 PCRs. SBA officials stated that Puerto Rico has a low volume of  federal contracting activities and a relatively high percentage of prime  contract obligations awarded to small businesses as compared to the  federal government’s goal of at least 23 percent.
section_title: Award of Contracts to Businesses Located Outside of Puerto Rico
paragraphs: Representatives from four associations stated that challenges such as  lack of access to contracting officers and difficulty meeting procurement  requirements have led to concerns about contracts being awarded to  businesses located outside of Puerto Rico for work to be performed in  Puerto Rico. In a report prepared by the Congressional Task Force on  Economic Growth in Puerto Rico, the Task Force recommended that  Congress consider establishing a Puerto Rico small business contracting  preference for federal contracts performed in Puerto Rico. SBA and VA  officials stated that agencies do not have locational requirements for  procurements and all qualifying businesses can compete for contracts  located in Puerto Rico.
section_title: Agency Comments
paragraphs: We provided a draft of this report for review and comment to SBA, DOD,  GSA, and VA. Additionally, we provided relevant sections of the draft  report to the agencies, industry associations, and economic development  entities in Puerto Rico we interviewed to confirm the accuracy of  information they provided. SBA, DOD, and VA provided technical  comments, which we have incorporated, as appropriate.
We are sending copies of this report to congressional committees,  agencies, and other interested parties. In addition, this report will be  available at no charge on our website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines (1) trends in small business contracting and the use  of Small Business Administration (SBA) programs that provided federal  contracting preferences to small businesses in Puerto Rico from fiscal  years 2006 through 2016, and (2) stakeholder views on any challenges  small businesses in Puerto Rico face in obtaining federal contracting  opportunities, including those posed by federal laws, and steps SBA and  other agencies have taken to assist Puerto Rican small businesses in  obtaining federal contracting opportunities.
To identify trends in the use of SBA programs that provided federal  contracting preferences to small businesses in Puerto Rico from fiscal  years 2006 through 2016, we obtained data on federal prime contract  obligation amounts for Puerto Rico and nationwide from Federal  Procurement Data System–Next Generation (FPDS-NG) for those fiscal  years. For Puerto Rico, we used data on the obligations awarded to  businesses located in Puerto Rico for work performed there. We used the  nationwide data as a reference point for our analysis of small business  federal contracting trends in Puerto Rico. Using these data, we analyzed  the level of federal contracting obligations to small businesses and the  use of SBA’s socioeconomic programs to award obligations to businesses  located in Puerto Rico and nationwide. Those programs are 8(a)  Business Development (8(a)), Historically Underutilized Business Zones  (HUBZone), Women-Owned Small Business (WOSB), and Service- Disabled Veteran-Owned Small Business (SDVOSB). Additionally, using  fiscal year 2016 data from FPDS-NG, we analyzed the industries with the  highest amounts of obligations and the agencies that awarded the most  obligations. To identify regulatory changes that could have influenced  trends in the use of the SBA socioeconomic programs, we reviewed the  Federal Register and GAO reports. We determined that the data from  FPDS-NG were sufficiently reliable for analyzing trends by reviewing  relevant documents related to the data to determine their reliability.
To examine the potential influence of a change SBA made to the  HUBZone program in June 2016 that expanded the number of eligible  HUBZone areas, we analyzed monthly data provided by SBA on the number of applications to the HUBZone program in Puerto Rico from  October 2015 through March 2017. We also obtained information from  SBA on the names, addresses, and census tracts of the applicants that  applied between June 2016 and March 2017 to determine if the  applicants came from newly designated census tracts. Further, we  obtained information to determine if the applicants to the HUBZone  program had other certifications by downloading data from SBA’s  Dynamic Small Business Search (DSBS) database on businesses with  certifications in the 8(a), WOSB, and SDVOSB programs. Using DSBS  data, we searched for the names of the HUBZone applicants to determine  if they had these certifications. Additionally, we obtained economic data  from the U.S. Census Bureau’s American Community Survey and  compared economic conditions of the HUBZone census tracts that were  newly designated and previously existing as well as census tracts  ineligible for the program. We determined that the data from the Census  Bureau, the DSBS database, and other data provided by SBA were  sufficiently reliable for describing economic conditions in HUBZone areas  and for describing the status of HUBZone applicants. We made this  determination by reviewing relevant documents related to the data to  determine their reliability as well as interviewing SBA officials about the  data.
To identify stakeholder views on any challenges small businesses in  Puerto Rico face in obtaining federal contracting opportunities, including  those posed by federal laws, and steps SBA and other agencies have  taken to assist Puerto Rican small businesses in obtaining federal  contracting opportunities, we interviewed SBA officials and other  stakeholders, such as federal agency contracting officials, industry  associations, and economic development entities in Puerto Rico. For  SBA, we interviewed officials at the headquarters level and in the Puerto  Rico District Office, as well as Procurement Center Representatives  (PCR) responsible for federal contracting activities in Puerto Rico. For  federal agencies, we interviewed contracting officials at the three  agencies with the largest proportions of small business obligations in  Puerto Rico in fiscal year 2016: the Department of Defense (DOD),  Department of Veteran Affairs (VA), and General Services Administration  (GSA). We also interviewed representatives from the following  organizations located in Puerto Rico: Economic Development Bank for  Puerto Rico, Puerto Rico Trade and Export Company, Federal  Contracting Center, Chamber of Commerce (which included a  representative from the Small Business and Technology Development  Center (SBTDC)), Minority Business Development Agency (MBDA)  Business Center, Minority Development Council, Manufacturers  Association, Builders Association, General Contractors Association, and  an industry observer formerly with the Economist Association. Several of  these stakeholders, such as the Federal Contracting Center, MBDA  Business Center, and SBTDC, provide information and assistance for  federal contracting to businesses. We selected these organizations based  on our analysis of relevant stakeholders, including those representing the  largest industries in which obligations were awarded in Puerto Rico in  fiscal year 2016. Additionally, as we conducted interviews, we asked each  interviewee to suggest additional stakeholders we should interview. We  did not assess the extent to which steps SBA and other agencies have  taken address the challenges stakeholders identified. We reviewed data  on outreach events that SBA provided. We determined that the data  provided by SBA were sufficiently reliable for our purpose of describing  outreach SBA conducted in Puerto Rico. We also conducted a literature  review of trade articles, academic articles, testimonies, and GAO and  SBA reports to identify challenges cited for the 8(a), HUBZone, WOSB,  and SDVOSB programs and challenges faced by small businesses in  federal contracting in Puerto Rico. In our review, we searched several  databases, including ProQuest, Academic OneFile, SSRN, Scopus,  National Technical Information Service, PolicyFile, and Lexis Nexis. The  keywords used included “SBA,” “Puerto Rico,” and “contracting,” and the  names of the four SBA programs we reviewed in this report. We restricted  our review to items that were published from 2006 and 2016. Our review  did not yield any literature on challenges faced by small businesses in  Puerto Rico; additionally, literature on the four SBA programs generally  consisted of trade articles and testimonies.
We conducted this performance audit from September 2016 to June 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Eligible Historically Underutilized Business Zone Census Tracts in the United States
paragraphs: On June 16, 2016, the Small Business Administration (SBA) announced  that it had revised the definition of qualified census tracts eligible to be  designated as Historically Underutilized Business Zones (HUBZone).  Previously, in addition to poverty rate and income, a statutory population  cap limited the number of eligible census tracts. Under the cap, in  metropolitan areas where more than 20 percent of the population  qualified, the list of eligible census tracts was ordered from the highest  percentage of eligible households to the lowest until the 20 percent limit  was exceeded. By lifting the population cap, the number of eligible  census tracts increased by 1,499 (from 15,938 to 17,437) in the United  States, excluding U.S. territories. Figure 4 shows newly eligible and  previously eligible HUBZone census tracts in the United States.
section_title: Appendix III: Contract Awards and Obligations for Contracts Performed in Puerto Rico by Business Size and Location
paragraphs: From fiscal years 2006 through 2016, for contracts performed in Puerto  Rico, more contracts went to small businesses in Puerto Rico than to  large businesses in Puerto Rico and both small and large businesses  outside of Puerto Rico. Figure 5 shows the award of contracts performed  in Puerto Rico by business size and location.
From fiscal years 2013 through 2016, for contracts performed in Puerto  Rico, more obligations were awarded to small businesses in Puerto Rico  than to large businesses in Puerto Rico and both small and large  businesses outside of Puerto Rico. Figure 6 shows the award of  contracting obligations for contracts performed in Puerto Rico by business  size and location.
section_title: Appendix IV: Contract Obligation Awards for Contracts Performed in a State or Territory by Business Size and Location
paragraphs: Figure 7 provides information on the award of federal prime contracting  obligations to businesses by location and size for contracts where the  place of performance was in that state or territory in fiscal year 2016.
section_title: Appendix V: Selected Major Regulatory or Programmatic Changes Made to SBA’s Socioeconomic Programs, 2006–2016
paragraphs: The Small Business Administration (SBA) has issued various final rules  as well as made certain programmatic changes to the 8(a) Business  Development (8(a)), Historically Underutilized Business Zone (HUBZone),  Women-Owned Small Business (WOSB), and Service-Disabled Veteran- Owned Small Business (SDVOSB) programs.
section_title: Appendix VI: Award of Puerto Rico-Based Contracts to Puerto Rico-Based Businesses with Socioeconomic Program Designations
paragraphs: Agencies can count federal prime contracting dollars awarded to small  businesses under more than one socioeconomic category. For example,  if a business with both Historically Underutilized Business Zone  (HUBZone) and Service-Disabled Veteran-Owned Small Business  (SDVSOB) designations received a contract through HUBZone set-aside,  the contracting dollars would count towards both of these programs’  contracting goals. For a majority of the fiscal years from 2006 through  2016, businesses with HUBZone and Women-Owned Small Business  designations received small percentages of obligations using those  respective set-asides as compared to other set-asides or full and open  competition; see figures 9 and 10, respectively. In contrast, obligations to  businesses with 8(a) Business Development (8(a)) and SDVSOB  designations generally received obligations using those respective set- asides, rather than other set-asides or through full and open competition;  see figures 8 and 11, respectively. The Department of Veteran Affairs has  a statutory mandate to prioritize SDVOSBs over other types of small  businesses.
As shown in figure 8, 61 percent to 96 percent of obligations awarded to  8(a) businesses located in Puerto Rico for work performed there were  awarded using the 8(a) program from fiscal years 2006 through 2016.  Nationwide, the percentage was between 60 percent and 67 percent for  all years during the same period.
For obligations awarded to HUBZone businesses located in Puerto Rico,  around 0 to 7 percent of the obligations were awarded through the  HUBZone program with the exception of fiscal years 2010 through 2012,  in which it ranged from 34 percent to 69 percent (see fig. 9). Nationwide,  obligations to HUBZone businesses through the HUBZone program  ranged from around 12 percent to 17 percent from fiscal years 2006  through 2009 and from 23 percent to 28 percent in fiscal years 2010  through 2016.
In Puerto Rico and nationwide, 2 percent or less of the obligations to  WOSBs were WOSB set-asides or sole source awards from fiscal years  2006 through 2016 (see fig. 10).
In Puerto Rico, from fiscal years 2010 through 2016, around 70 percent to  90 percent of the obligations to SDVOSBs were SDVOSB set-aside or  sole source awards. Nationwide, the percentage of obligations to  SDVOSBs using SDVSOB set-asides or sole source awards was around  11 percent and 20 percent for fiscal years 2006 and 2007 but has since  ranged from around 30 percent to 40 percent from fiscal years 2008  through 2016 (see fig. 11).
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Harry Medina (Assistant  Director), Weifei Zheng (Analyst in Charge), Abiud Amaro Diaz, Pamela  Davidson, Julia Kennon, John McGrail, John Mingus, Jennifer Schwartz,  and Jena Sinkfield made key contributions to this report.