Department of Veterans Affairs: Agency Has Exceeded Contracting Goals for Veteran-Owned Small Businesses, but It Faces Challenges with Its Verification Program
Published: 2010-05-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Veterans Benefits, Health Care, and Information Technology Act of 2006 (the 2006 Act) requires the Department of Veterans Affairs (VA) to give priority to veteran-owned and service-disabled veteran-owned small businesses (VOSB and SDVOSB) when awarding contracts to small businesses. The 2006 Act also requires GAO to conduct a 3-year study of VA's implementation of the act. GAO evaluated (1) the extent to which VA met its prime contracting goals for VOSBs and SDVOSBs in fiscal years 2007-2009; (2) VA's progress in implementing procedures to verify the ownership, control, and status of VOSBs and SDVOSBs in its mandated database; and (3) VA's progress in establishing a review mechanism of prime contractors' subcontracts with VOSBs and SDVOSBs. GAO obtained and analyzed data on VA's prime and subcontracting accomplishments, and reviewed a sample of verified businesses to identify any deficiencies in VA's verification program.
section_title: What GAO Found
paragraphs: While VA exceeded its contracting goals with VOSBs and SDVOSBs for the past 3 years, it faces challenges in continuing to meet its other small business contracting goals and monitoring agreements with other agencies that conduct contract activity on VA's behalf. While VA was able to exceed its contracting goals for VOSBs and SDVOSBs, its contracting with women-owned small businesses and HUBZone firms fell short of its goals during this period. In addition, GAO's review of interagency agreements found that VA lacked an effective process to ensure that interagency agreements include required language that the other agency comply, to the maximum extent feasible, with VA's contracting goals and preferences for VOSBs and SDVOSBsand to monitor the extent to which agencies comply with the requirements. VA has made limited progress in implementing an effective verification program. While the 2006 Act requires VA to use the veteran preferences authorities only to award contracts to verified businesses, VA's regulation does not require that this take place until January 1, 2012. In fiscal year 2009, 25 percent of the contracts awarded using veteran preferences authorities went to verified businesses. To date, VA has verified about 2,900 businesses--approximately 14 percent of businesses in its mandated database of VOSBs and SDVOSBs. Among the weaknesses GAO identified in VA's verification program were files missing required information and explanations of how staff determined that control and ownership requirements had been met. In addition, VA's procedures call for site visits to further investigate the ownership and control of higher-risk businesses, but the agency has a large and growing backlog of businesses awaiting site visits. Furthermore, VA contracting officers awarded contracts to businesses that had been denied verification. Finally, although site visit reports indicate a high rate of misrepresentation, VA has not developed guidance for referring cases of misrepresentation for investigation and enforcement action. Such businesses would be subject to debarment under the 2006 Act. To ensure a thorough and effective verification program, VA needs robust procedures for reviewing businesses, an effective system to ensure that contracting officers do not use veteran preferences authorities with denied businesses, and clear guidance for referring businesses potentially abusing the program. VA has developed a mechanism to review prime contractors' subcontracts with VOSBs and SDVOSBs, but the agency has not yet implemented it. For the past 3 years, VA fell substantially short of achieving subcontracting goals for VOSBs and SDVOSBs. The agency acknowledged shortcomings in this area and intends to use a review mechanism to confirm all subcontracting activities by prime contractors with approved subcontracting plans for a sampling of contracts awarded in fiscal year 2010. VA expects increased performance for subcontracting goal attainment as a result. It is too soon to assess the effectiveness of VA's subcontracting efforts.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) awarded contracts for more than  $6.1 billion to veteran-owned small businesses (VOSB) and service- disabled veteran-owned small businesses (SDVOSB) from fiscal years   (FY) 2007 through 2009. The Veterans Benefits, Health Care, and  Information Technology Act of 2006 (Pub. L. No. 109-461 or the 2006 Act)  requires that VA give priority to these two categories of small businesses  when awarding contracts to small businesses and provides for the use of  limited competition contract awards (sole-source and set-aside) to achieve  contracting goals that VA is required to establish under the 2006 Act.  Additionally, the law requires VA to maintain a database of VOSBs and  SDVOSBs and verify the ownership, control, and veteran or service- disabled status of businesses listed in the database. Businesses must be  listed in the database to receive contracting preferences for VOSBs and  SDVOSBs. Finally, the 2006 Act requires VA to establish a subcontracting  review mechanism to ensure that prime contractors actually awarded  subcontracts to service-disabled or other veteran-owned businesses.  Specifically, under this review mechanism, VA must confirm subcontract  awards that it counts toward its small business subcontracting goal  achievements.
As required by the 2006 Act, we conducted a 3-year study on VA’s efforts  to meet its contracting goals for VOSBs and SDVOSBs. As part of the  study, we briefed Members of Congress in 2008, 2009, and 2010. This  report discusses (1) the extent to which VA met its prime contracting goals  for VOSBs and SDVOSBs in FY07, FY08, and FY09, and the challenges VA  faced in meeting these goals; (2) VA’s progress in implementing  procedures to verify the ownership, control, and, if applicable, service- disability status of firms in its mandated database of VOSBs and SDVOSBs;  and (3) VA’s progress in establishing a review mechanism for prime  contractors’ subcontracts with VOSBs and SDVOSBs.
To determine the extent to which VA met contracting goals for FY07  through FY09, we obtained and analyzed data on contracts from the Small  Business Administration’s (SBA) Goaling Reports and VA contracting data  from the Federal Procurement Data System-Next Generation (FPDS-NG).  We also used these data to determine whether other federal agencies met  VA’s contracting goals and preferences for VOSBs and SDVOSBs pursuant  to a statutory requirement governing agreements between VA and any  governmental entity to acquire goods or services. We found these data to  be sufficiently reliable for the purposes of this report. To determine VA’s  progress in implementing procedures to verify the veteran status, control,  and ownership of business, we reviewed the agency’s verification  guidelines as well as procedures for reviewing applications and  conducting site visits. Additionally, we conducted a file review of a sample  of verified businesses to determine the extent to which VA followed its  procedures and to identify any deficiencies in VA’s verification process. To  determine VA’s progress in establishing a subcontracting review  mechanism, we reviewed data from SBA’s Goaling Reports and the  Electronic Subcontracting Reporting System to determine whether goals  for subcontracting with VOSBs and SDVOSBs were met. Furthermore, we  interviewed agency officials to obtain information about the  subcontracting review mechanism and reviewed the agency’s associated  documents. See appendix I for additional information on our scope and  methodology.
We conducted this performance audit from October 2007 through May  2010, 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: The Small Business Reauthorization Act of 1997 sets a governmentwide  goal for small business participation of not less than 23 percent of the total  value of all prime contract awards––contracts that are awarded directly by  an agency––for each fiscal year. This act also sets goals for participation  by specific types of small businesses (see table 1). The statutorily  mandated, governmentwide prime and subcontracting goal for SDVOSBs  is 3 percent of all federal contract dollars. There is no governmentwide  numerical goal for VOSBs.
The 2006 Act provided VA with unique authority to award contracts to  VOSBs and SDVOSBs on a priority basis to increase contracting  opportunities for these businesses. This authority, referred to in this  report as the “goals and preferences authority,” applies only to VA. Among  other things, the 2006 Act requires VA to establish annual contracting goals  for VOSBs and SDVOSBs not less than the governmentwide goal and to  give preference to these businesses when awarding contracts. In FY07, VA  set prime contracting goals of 7 percent for VOSBs and 3 percent for  SDVOSBs. VA increased these goals for FY08 and FY09, to 10 percent for  VOSBs and 7 percent for SDVOSBs. The law also requires VA to maintain a  database of verified VOSBs and SDVOSBs and to confirm subcontract  awards that it counts toward its small business goals. While the Federal  Acquisition Regulation (FAR) is the overall governmentwide regulation  governing agency acquisitions, the Veterans Affairs Acquisition  Regulation (VAAR) governs acquisitions made under the 2006 Act. Under  the VAAR, preference for awarding contracts must be made in the  following order of priority: (1) SDVOSBs, (2) VOSBs, (3) HUBZones or  8(a) businesses, and (4) any other small business contracting preference.
VA’s Office of Small and Disadvantaged Business Utilization (OSDBU), in  conjunction with its Office of Acquisition and Logistics (OAL), is  responsible for the development of policies and procedures to implement  and execute the contracting goals and preferences under the 2006 Act.  Additionally, OSDBU serves as VA’s advocate for small business concerns;  provides outreach and liaison support to businesses (large and small) and  other members of the private sector for acquisition-related issues; and is  responsible for monitoring VA’s implementation of socioeconomic  procurement programs, such as encouraging contracting with women- owned small businesses (WOSB) and HUBZone businesses. OSDBU is  responsible for the development of VA policies and programs related to  small business concerns, including the following:    educating and training VA staff, including advising contracting officials on  procurement strategies to ensure equitable opportunities for small  business concerns;   negotiating prime and subcontracting goals; and  training, counseling, and assisting small businesses in their understanding  of federal and agency procurement procedures, including advising  businesses on marketing their products and services to VA and other  federal agencies.
The Center for Veterans Enterprise (CVE), within OSDBU, seeks to help  veterans interested in forming or expanding their own small businesses.  CVE also helps VA contracting offices identify veteran-owned small  businesses and works with SBA’s Veterans Business Development Officers  and Small Business Development Centers on veterans’ business financing,  management, and technical assistance needs. Additionally, CVE is  responsible for implementing VA’s verification program and maintains the  database, known as VetBiz.gov, of verified businesses required by the 2006  Act. VetBiz.gov allows business owners to register and apply online for  verification to CVE and also functions as a searchable database for  contracting officers and the public. Once CVE approves a business, the  business name appears with a verified logo within the database (see app. II  for more information). Once verified, a firm retains that status for 1 year.
section_title: VA Exceeded Its Veteran Contracting Goals since FY07, but It Faces Challenges in Meeting Its Other Small Business Goals and Monitoring Interagency Agreements
paragraphs: VA exceeded its VOSB and SDVOSB contracting goals since FY07 and  made significant use of its veteran preferences authorities but faces  challenges in continuing to meet its other small business contracting goals  and monitoring interagency agreements. For example, VA’s continued  success in contracting with VOSBs and SDVOSBs has coincided with  difficulties in meeting other small business goals, such as WOSB and  HUBZone goals. Beginning January 1, 2009, agreements into which VA  enters with federal agencies to acquire goods or services on VA’s behalf  must include language requiring the agencies to comply, to the maximum  extent feasible, with VA’s VOSB and SDVOSB contracting goals and  preferences when acquiring goods or services. We found that one  interagency agreement into which VA entered after January 1, 2009, did  not contain the required language. VA does not have an effective process  in place to ensure that all interagency agreements include the required  language. Without an effective process to review interagency agreements  for the required language, VA may not fully comply with the requirements  of the 2006 Act and cannot be assured that the agencies in its interagency  agreements are aware of the need to make maximum feasible efforts to  contract with VOSBs and SDVOSBs.
subsections: section_title: VA Exceeded Its VOSB and SDVOSB Prime Contracting Goals since FY07 and Increased Its Use of Veteran Preferences Authorities
paragraphs: For FY07, VA established a contracting goal for VOSBs at 7 percent––that  is, VA’s goal was to award 7 percent of its total procurement dollars to  VOSBs. In FY07, VA exceeded this goal and awarded 10.4 percent of its  contracting dollars to VOSBs (see fig. 1). VA subsequently increased its  VOSB contracting goals to 10 percent for FY08 and FY09 and exceeded  those goals as well––awarding 14.7 percent of contracting dollars to  VOSBs in FY08 and 19.7 percent in FY09.
For FY07, VA established a contracting goal for SDVOSBs equivalent to the  governmentwide goal of 3 percent and exceeded that goal by awarding   7.1 percent of its contracting dollars to SDVOSBs (see fig. 2). VA  subsequently increased this goal to 7 percent for FY08 and FY09 and  exceeded the goal in those years as well. Specifically, VA awarded 11.8 and  16.7 percent of its contracting dollars to SDVOSBs in FY08 and FY09,  respectively.
In nominal dollar terms, VA’s contracting awards to VOSBs increased from  $1.2 billion in FY07 to $2.8 billion in FY09, while at the same time,  SDVOSB contracting increased from $832 million to $2.4 billion   (see table 2).
The increase of awards to VOSBs and SDVOSBs largely was associated  with the agency’s greater use of the goals and preferences authorities  established by the 2006 Act. For example, veteran set-aside and sole- source awards represented 39 percent of VA’s total VOSB contracting  dollars in FY07. However, in FY09, VA’s use of these veteran preferences  authorities increased to 59 percent of all VOSB contracting dollars. In  nominal dollar terms, VA’s use of these veteran preferences authorities  increased by $1.2 billion over the past 3 years (see fig. 3).
VA’s use of set-aside and sole-source awards for SDVOSBs contributed to  an even greater extent to the increase in awards to these businesses from  FY07 through FY09. For each of these years, more than 90 percent of  contracts to SDVOSBs were awarded through set-aside and sole-source  mechanisms (see fig. 4). Additionally, as of February 2010, almost all  contracting officers (93 percent) had received training on the goals and  preferences authorities. According to VA officials and documents, the  training includes guidance on VA’s final rule implementing the 2006 Act;  the contracting order of priority; set-aside and sole-source procedures;  market research procedures for VOSB and SDVOSB businesses; and  guidelines applying to subcontracting, joint ventures, and interagency  acquisition agreements. OAL continued training contracting officers in  March 2010.
In contrast, VA’s use of general contracting authorities––that is,  governmentwide contract mechanisms to provide a simplified process for  acquiring goods––for VOSBs (including SDVOSBs) consistently decreased  from FY07 through FY09. For example, VA’s use of its other contracting  authorities decreased from 52 percent of all VOSB (including SDVOSB)  contracts in FY07 to 38 percent in FY09. In FY09, VA awarded $1.1 billion  in contracting dollars to VOSBs without the use of any set-aside or sole- source mechanisms. In these cases, the majority of these awards were  made using governmentwide contracts, such as the Federal Supply  Schedule (FSS), and governmentwide agency contracts. See appendix III  for more detailed information on the contracting dollars and percentages  that VA awarded to VOSBs in FY07 through FY09.
According to SBA’s Goaling Program, a small business can qualify for one  or more small business categories, and an agency may take credit for a  contract awarded under multiple goaling categories. For example, if a  small business is owned and controlled by a service-disabled woman  veteran, the agency may take credit for awarding a contract to this  business under the VOSB, SDVOSB, and WOSB goaling categories. In  addition, all awards made to SDVOSBs also count toward VOSBs goal  achievement. In FY09, of the $2.8 billion awarded to VOSBs, the majority  (63 percent) applied to both VOSBs and SDVOSBs and no other goaling  category (see fig. 5). Furthermore, of the $1.7 billion awarded through the  use of veteran preferences authorities (VOSB and SDVOSB set-aside and  sole-source) in FY09, an even greater majority (77 percent) applied solely  to the VOSB and SDVOSB goaling categories (see fig. 5).
section_title: VA’s Continued Success in Contracting with VOSBs and SDVOSBs Coincides with Challenges in Meeting Its Other Small Business Goals
paragraphs: Although VA exceeded its contracting goals for VOSBs and SDVOSBs in  FY07 through FY09, it did not meet its goals in other small business  categories for that period. For example, VA’s contracting with WOSBs and  HUBZone businesses decreased since the implementation of the 2006 Act  (see fig. 6). More specifically, VA contracting with WOSBs decreased from  $584 million in FY07 to $488 million in FY09. Additionally, VA contracting  with HUBZone businesses decreased from $388 million in FY07 to   $305 million in FY09.
Furthermore, for the past 2 years VA failed to meet its 5 percent goal for  WOSBs (see fig. 7). In FY08, VA’s total contracting dollars with WOSBs  was 4 percent, and, in FY09, it was 3.4 percent. Additionally, VA failed to  meet its 3 percent goal for contracting with HUBZone businesses for the  past 2 years. For example, VA awarded 2.8 percent of its contracting  dollars to HUBZone businesses in FY08, and awarded 2.1 percent in FY09.
VA officials acknowledged that the implementation of the contracting  priority required by the 2006 Act has led to a decrease in awards to WOSB  and HUBZone businesses. As we have previously stated, VA’s regulations  implementing the 2006 Act require contracting officers to award contracts  according to the following order of priority: (1) SDVOSBs, (2) VOSBs,   (3) HUBZones or 8(a) businesses, and (4) any other small business  contracting preference. According to OSDBU officials, if contracting  officers can easily identify VOSBs that also qualify as WOSB or HUBZone  businesses (because a business can qualify for one or more small business  categories), percentages of awards in all goal categories may increase.  However, women veterans currently represent 8 percent of the entire  veteran population, creating a challenge for VA to achieve the WOSB goal.
VA has taken some recent steps to increase contracting opportunities for  WOSB and HUBZone businesses. For example, in 2009, VA and SBA  formed a working group to develop training sessions, resources, and  marketing materials targeted to WOSB and HUBZone firms that also may  be VOSBs and SDVOSBs. The marketing and education materials focus on  explaining the nature of contracting preferences for VOSBs and SDVOSBs  and the benefits of registering and applying for verification through  VetBiz.gov. Additionally, OSDBU will continue to host monthly meetings  in which VA vendors learn about FSS and how the vendors may be  integrated into the system. Finally, according to VA, OSDBU has updated  the agency’s Web site to provide assistance for contracting officers to help  identify small businesses that fall into the various small business  categories when awarding FSS contracts. Additionally, CVE has updated  the VetBiz.gov database so that contracting officers can more readily  locate VOSBs and SDVOSBs that also fall into the other small business  categories. However, it remains to be seen whether VA’s recent efforts will  be successful in increasing contracting opportunities for other small  business categories.
section_title: VA Faces Challenges in Monitoring Interagency Agreements for the Use of Contracting Preferences
paragraphs: The Veterans’ Benefits Improvement Act of 2008 (Pub. L. No. 110-389 or  the 2008 Act) amended the 2006 Act’s provisions to require that any  agreements into which VA enters with other government entities to  acquire goods or services on VA’s behalf on or after January 1, 2009,  require the agencies to comply, to the maximum extent feasible, with VA’s  contracting goals and preferences for VOSBs and SDVOSBs. Since  January 1, 2009, VA has entered into six interagency agreements   (see table 3).
Additionally, VA has an interagency agreement with the U.S. Army Corps  of Engineers, but the agreement was signed in September 2007. Therefore,  the provisions of the 2008 Act are not applicable. According to agency  officials, VA has agreements in place with additional federal agencies, but  all were entered into before January 1, 2009. Therefore, the provisions of  the 2008 Act also are not applicable. VA issued guidance to all contracting  officers about managing interagency acquisitions in March 2009.  However, the agreement with the Department of the Interior (DOI) did not  include the required language addressing VA’s contracting goals and  preferences until it was amended on March 19, 2010, after we informed the  agency that the agreement was not in compliance with Pub. L. No. 110-389.  According to VA officials, the agency’s acquisition and contracting  attorneys are responsible for reviewing interagency agreements for  compliance with these requirements. Additionally, the interagency  agreement language comes from Office of Management and Budget (OMB)  templates. However, VA does not have an effective process in place to  ensure that all interagency agreements include the 2008 Act’s required  language and to monitor the extent to which agencies comply with the  requirements. For example, agency officials could not tell us whether  contracts awarded under these agreements met the SDVOSB and VOSB  preferences. Without a plan or oversight activity, such as monitoring, VA  cannot be assured that agencies have made maximum feasible efforts to  contract with VOSBs or SDVOSBs.
section_title: VA Has Made Limited Progress in Implementing Its Verification Program and Has Not Developed a Thorough and Effective Program
paragraphs: VA has made limited progress in implementing a program to verify the  veteran status, control, and ownership of businesses. As of April 8, 2010,  VA had verified about 2,900 businesses––approximately 14 percent of  VOSBs and SDVOSBs in the VetBiz.gov database. While VA has adopted  policies and procedures to review businesses and began to implement a  risk-based approach to conducting site visits, it has not met the  requirement in the 2006 Act that it only use its veteran preferences  authorities with verified businesses when awarding these types of  contracts. Additionally, our review identified a number of weaknesses in  the verification program. For example, files supporting verified businesses  contained missing information and explanations of how staff determined  that control and ownership requirements had been met has made it  difficult to know whether verified businesses are truly owned and  controlled by service-disabled veterans or veterans. VA’s procedures call  for site visits to further investigate the ownership and control of higher- risk businesses, but the agency has a large and growing backlog of  businesses awaiting site visits. VA has denied verification to more than   150 businesses but does not have a process in place to monitor contracting  awards to effectively ensure that contracting officers do not use veteran  preferences authorities to award contracts to denied businesses. Initial  site visit findings also indicated misrepresentation by some business  owners, but VA has not developed guidance for staff to follow when  misrepresentation may have occurred. The weaknesses in VA’s verification  process reduce assurances that verified firms are veteran-owned   and -controlled small businesses, and VA does not have an effective  process to ensure that contracting officers do not use veteran preferences  authorities with denied businesses or to ensure that VA staff take  appropriate action against businesses that may be misrepresenting their  VOSB or SDVOSB status.
subsections: section_title: VA Has Been Slow to Develop a Thorough Verification Program and Has Not Developed a Plan or Established Time Frames for Full Implementation
paragraphs: In May 2008—approximately 1½ years after Pub. L. No. 109-461 was  enacted—VA began verifying businesses and published interim final rules  in the Federal Register, which included eligibility requirements and  examination procedures, but did not finalize the rules until February 2010  (see fig. 8). According to VA officials, CVE initially modeled its  verification program on SBA’s HUBZone program; however, CVE  reconsidered verification program procedures after we reported on fraud  and weaknesses in the HUBZone program. More recently, in December  2009, the agency (1) finalized changes to the VAAR that included an order  of priority (preferences) for contracting officers to follow when awarding  contracts and (2) trained contracting officers on the preferences and the  VetBiz.gov database from January through March, 2010.
Leadership and staff vacancies plus a limited overall number of positions  have also contributed to the slow pace of implementation of the  verification program. For approximately 1 year, leadership in OSDBU was  lacking because the former Executive Director retired, and the position  remained vacant from January 2009 until January 2010. Furthermore, one  of two leadership positions directly below the Executive Director has been  vacant since October 2008, and the other position has been filled  temporarily by an Acting Director. The agency also faced delays in  obtaining contracting support, which slowed implementation of the  verification program. More than 1 year after the agency began verifying  businesses, a contractor began conducting site visits (which further  investigate control and ownership of businesses as part of the verification  process). As of April 2010, CVE had 6.5 full-time-equivalent position  vacancies, and VA officials told us existing staff have increased duties and  responsibilities that contributed to slowed implementation.
The slowness in implementing the verification program appears to have  contributed to VA’s inability to meet the requirement in the 2006 Act that it  only use its veteran preferences authorities to contract with verified  businesses. Currently, contracting officers can use the veteran preferences  authorities with both self-certified and verified businesses listed in the  VetBiz.gov database. However, in its December 2009 rule, VA committed to  only awarding contracts using the veteran preferences authorities to  verified businesses starting on January 1, 2012. According to our analysis  of FPDS-NG data, in FY09, the majority of contracting awards (75 percent)  made under veteran preferences went to unverified businesses. In March  2010, the recently appointed Executive Director of OSDBU acknowledged  in a congressional hearing the large undertaking and some challenges with  starting a new program like the verification program.
As of April 8, 2010, VA had verified about 2,900 businesses––approximately  14 percent of VOSBs and SDVOSBs in the VetBiz.gov database. VA has  been processing an additional 4,701 applications, but the number of  incoming applications continues to grow (see fig. 9). As of March 2010,  CVE estimated that it had received more than 10,000 applications for  verification since it started verifying businesses in May 2008.
According to the 2006 Act, VA must maintain a database of verified  businesses and, in doing so, must verify the veteran or service-disability  status, control, and ownership of each business. The rules that VA  developed pursuant to this requirement require VOSBs and SDVOSBs to  register in VetBiz.gov to be eligible to receive contracts awarded using  veteran preferences authorities. The small businesses must be owned  and controlled by eligible parties, and the business must qualify as “sm under federal size standards. According to VA’s rules, an applicant must  meet the following five eligibility requirements for verification: (1) be  all”  owned and controlled by a veteran or service-disabled veteran for a VOSB  or SDVOSB, respectively; (2) demonstrate good character (any small  business that has been debarred or suspended is ineligible); (3) make no  false statements (any small business that knowingly submits false  information is ineligible); (4) have no federal financial obligations (any  small business that has failed to pay significant financial obligations to the  federal government is ineligible); and (5) not have been found ineligible  due to an SBA protest decision.
VA has a two-step process to make the eligibility determinations for  verification. Under the first step, CVE staff review veteran status and, if  applicable, service-disability status and publicly available, primarily self- reported information about control and ownership for all businesses that  apply for verification (see fig. 10). Business owners submit an application  (VA Form 0877), which asks for basic information regarding the ownership  of the company seeking verification, through VetBiz.gov and, upon  request, must provide supporting documents to CVE. When applicants  submit their VA Form 0877, they also must be able to provide, upon  request, other items for review, such as financial statements, tax returns,  articles of incorporation or organization, lease and loan agreements,  payroll records, and bank account signature cards. Typically, these items  are reviewed at the business during the second step of the review  process—site visits, which can be announced or unannounced—but CVE  staff may also request that the applicant send copies of other items for  review during the first step. Apart from site visits, the CVE review is  centralized––all staff and files are located in Washington, D.C.
Under the second step, reviews or site visits are conducted to further  investigate control and ownership for select high-risk businesses. In  September 2008, VA adopted a risk-based approach to conducting site  visits by implementing risk guidelines to determine which businesses  would merit site visits. Staff are required to conduct a risk assessment  for each business and assign a level of risk ranging from 1 to 4––with 1  being a high-risk business and 4 being a low-risk business. When VA staff  conduct a risk assessment, they are to follow the agency’s risk guidelines which include criteria such as previous government contracting dollars  awarded, business license status, annual revenue, and percentage of veteran-ownership. For example, if a business has previous VA contracts  totaling more than $5 million, staff must assign that business a risk le 1 (high). Or, if a business is missing an active or business license in goodstanding, staff must assign a risk level of 2 (elevated). VA then uses these  risk assessments to identify businesses for site visits. According to VA, it  intends to examine all businesses assigned a high- or elevated-risk level  during a site visit or other means, such as extensive document review and  telephone interviews with the businesses’ key personnel.
VA plans to refine its verification processes to address recommendations  from a contractor’s review of the program and best practices identified in  federal, state, or private-sector programs. In July 2009, VA hired an outside  contractor to assess the verification program’s processes, benchmark VA’s  program to other similar programs, and provide recommendations to VA  on how to improve the program. VA received the contractor’s report and  recommendations in November 2009. The contractor recommended that  VA require business owners to submit key documents as part of the  application for verification––such as business and professional licenses,  copies of previous tax records, and lease or operating agreements. (VA  currently requires businesses to have these documents on file for a  possible review.) The contractor further recommended that VA upgrade its  data system to expand its functionality to allow business owners to submit  the documentation electronically and store electronic copies of the  information. For example, the contractor recommended that VA adopt  case-management software to better manage the flow of applications and  interface with the VetBiz.gov database. According to the contractor’s  analysis of CVE’s workforce and the growing application volume, CVE  would need an additional 13 full-time positions to conduct verifications–– even after it made necessary improvements to reduce processing times for  applications. VA officials told us that they plan to implement the  contractor’s recommendations to require business owners to submit  documentation as part of their initial application and to upgrade their data  systems. (We further discuss data systems issues later in this report.)
However, VA did not have a plan or specific time frames for implementing  a thorough and effective verification program, including filling vacant staff  positions, providing concrete steps and milestone dates for addressing the  contractor’s recommendations, and hiring additional positions to conduct  verifications. A plan, including specific time frames for completing  improvements, would help VA meet the requirements in the 2006 Act that  it maintain a database of verified businesses, and that VA contracting  officers only use the veteran preferences authorities to award contracts to  verified businesses.
section_title: Files Supporting Verified Businesses Were Missing Information and Limited Procedures Made It Difficult to Know Whether All Eligibility Requirements Were Met
paragraphs: Based on our review of a random sample of the files for 112 businesses  that VA had verified by the end of FY09, an estimated 48 percent of the  files lacked the required information or documentation that CVE staff  followed key verification procedures. Specifically,    20 percent were missing some type of required information, such as  evidence that veteran status had been checked or that a quality review had  taken place;   39 percent lacked information about how staff justified determinations  that control and ownership requirements were met; and   14 percent were missing evidence that either a risk assessment had taken  place or the risk assessment that occurred did not follow the agency’s risk  guidelines.
The overall estimated 20 percent of cases missing some type of required  information included files missing evidence that veteran status was  checked, eligibility to receive federal government contracts was checked,  application forms were complete and signed, or a quality review had taken  place. According to CVE’s verification procedures, staff should check the  Veteran Benefits Administration’s Beneficiary Identification Records  Locator Subsystem (BIRLS) to determine veteran and service-disability  status and record that BIRLS was checked in their internal database.  Although CVE staff must check BIRLS for each applicant, we found about  16 percent of files lacked information on whether staff had checked the  system to determine veteran or service-disability eligibility. Additionally,  we found 15 percent of files lacked information on whether CVE staff had  checked the Excluded Parties List System (EPLS)––which is used to  determine whether the business owner is eligible to receive federal  contracts. Also, 3 percent of the files lacked a completed or signed  verification application (VA Form 0877), and 5 percent lacked  documentation that a quality review had taken place. According to the  verification procedures, staff must check each VA Form 0877 for  completeness at the beginning of the process, and each file should  undergo a quality review at the end of the process.
Additionally, our file review found that in an estimated 39 percent of  cases, staff obtained information from a public database but failed to  record in the file what information they had reviewed to determine  whether control and ownership requirements had been met. According to  CVE’s verification procedures, staff are to review publicly available,  primarily self-reported information about control and ownership for each  business. For example, staff are to check for previous federal contracts by  reviewing information available on USAspending.gov, check for  certifications by reviewing the Online Representations and Certifications  Application (ORCA), and review company history through Dun &  Bradstreet reports. In addition, staff are to review information about  each business in the following databases: VetBiz.gov, Central Contractor  Registration (CCR), and Dynamic Small Business Search (DSBS)––all of  which contain information self-reported by business owners. According  to the verification procedures, staff are required to record business status  or discrepancies about information obtained through each public database  searched.
Finally, based on our file review sample, for an estimated 14 percent of  cases, the files were missing evidence that a risk assessment had taken  place, or staff incorrectly assigned a risk level lower than warranted. For  example, 4 percent of cases in this group were missing risk levels, and   8 percent of cases incorrectly were assigned a low- or moderate-risk  level—they had missing business licenses, which according to the risk  guidelines warranted assigning an elevated-risk level. According to VA,  staff received on-the-job training about the risk guidelines and assigned  risk levels are checked for accuracy during the quality review, but VA  officials also have observed incorrectly assigned risk levels. VA officials  told us that the staff have been learning how to better assign the risk  levels, and errors have been reduced since the agency hired a full-time  staff person as a risk manager in February 2009. Incorrectly assigning risk  levels reduces the chance that the agency is accurately identifying  businesses for site visits, which, in turn, may lead to some businesses not  receiving a site visit when it otherwise would be warranted.
We found that data system limitations appear to be contributing factors to  weaknesses identified in our review of files. For example, data entry into  CVE’s internal database is largely done manually, which can result in  missing information or data entry errors. Furthermore, CVE’s internal  database does not contain controls to ensure that only complete  applications that have received a quality review move forward. Internal  control standards for federal agencies require that agencies effectively use  information technology in a useful, reliable, and continuous way.  According to agency officials, two efforts are under way to enhance CVE’s  data systems. First, CVE plans to enhance its data systems to  automatically check BIRLS for veteran status and EPLS for good  character, and to store the information obtained. According to CVE, these  changes will require outside contractor assistance. On March 18, 2010, VA  released a solicitation for a contract that closed on April 16, 2010. Once a  contract is awarded, CVE staff told us that the upgrades will be ready to  implement in about 12 months. Second, CVE plans to adopt case- management software—as recommended in the contractor’s report—to  help manage its verification program files. According to VA officials, CVE  is considering a software application currently used by another VA  department. The new system will allow CVE to better track new and  renewal verification applications and manage the corresponding case files.  Furthermore, the new software will ensure that quality reviews take place  by not allowing an application to move forward if it contains any missing  information. However, as we have previously discussed, VA does not have  specific time frames for putting the case-management system in place.
Furthermore, CVE’s verification procedures do not provide guidance for  staff to follow in the event that they determine information is missing or  discrepancies exist after reviewing public databases. Staff do not have  specific guidance to follow about the circumstances under which they  might need to request additional information directly from business  owners. Based on our file review, we found in 79 percent of cases, staff  relied solely on information from the public databases but asked for  documentation from a business owner in the remaining cases. In these  examples, we found staff requested copies of active business licenses,  articles of incorporation, operating agreements, stock certificates, or tax  documents for further review. The verification procedures instruct staff to  “request a copy of all required documents needed to make a sound  decision” but do not provide examples of conditions under which staff  should request documents as evidence to support control or ownership  determinations. Furthermore, the procedures do not require staff to  document their assessments of whether eligibility requirements had been  met. Internal control standards for federal agencies require that agencies  collect and maintain documentation to confirm information in support of  their programs. According to VA officials, staff verbally discuss  assessments during a daily meeting but do not document these  discussions.
According to our file review, in the 21 percent of cases in which staff did  request information because they may have found a discrepancy in the  publicly available information, staff made the request directly to the  business owners, instead of using third-party sources to validate  information. Publicly available, primarily self-reported information may  not be reliable to determine whether control and ownership requirements  have been met. In October 2009, our investigators reported on the  governmentwide SDVOSB procurement program (administered by SBA,  along with federal procuring activities) and found fraud and abuse among  some SDVOSBs. For example, in 10 case studies, we showed that  SDVOSBs fraudulently received sole-source and set-aside contracts––and  that 5 of the 10 businesses receiving VA contracts were found ineligible  because of issues with management and control. While CVE’s process to  review publicly available, primarily self-reported information may be  consistent with SBA’s process for the governmentwide SDVOSB program,  these 5 cases provide evidence that self-reported information may not  always be reliable for determining control of a business.
Without timely improvements to CVE’s data systems and controls in place  to ensure the completeness and accuracy of information, the verification  program remains at higher risk for error, lacks quality control, and makes  it difficult to know whether eligibility requirements were met.  Furthermore, the verification procedures do not include guidance that  would help staff to assess control and ownership, particularly in examples  of missing information or discrepancies among public databases or within  self-reported information. Without enhancements to its verification  procedures that include clear guidance for staff to follow when reviewing  applications and require an assessment of each eligibility requirement, it is  difficult to know whether eligibility requirements have been met and  whether verified businesses legitimately qualified as VOSBs or SDVOSBs.
section_title: VA Faces a Growing Backlog for Site Visits, and Early Results Suggest a High Rate of Possible Misrepresentations, but VA Has Not Yet Taken Actions Based on Findings
paragraphs: VA started verifying businesses in May 2008 but did not start conducting  site visits until October 2009. As of April 8, 2010, VA had used contractors  to conduct 71 site visits but an additional 654 high- and elevated-risk  businesses awaited visits. Because of this delay, VA currently has a large  backlog of businesses awaiting site visits and some higher-risk businesses  have been verified months before their site visit occurred or were  scheduled to occur. According to VA officials, the agency plans to use  contractors to conduct an additional 200 site visits between May and  October, 2010. However, the current backlog will grow over future  months.
According to site visit reports, approximately 40 percent of the visits  resulted in evidence that control or ownership requirements had not been  met, but, as of April 2010, CVE had not canceled any business’ verification  status. The verification program rules contain procedures for cancellation  of verified status. Also, according to VA officials, CVE will follow the  cancellation procedures for any business for which the site visit findings  contradict the original verification determination. Because some  businesses are verified months before their site visits occurred and  findings were developed, it is difficult to know whether the businesses  actually met control and ownership requirements when they were verified.  By not incorporating site visit findings in a timely manner and canceling  verification status as necessary, some businesses receive an unwarranted  verified status and may receive veteran preferences contracts, thereby  taking contracting opportunities away from businesses that, in fact, are  owned and controlled by veterans or service-disabled veterans.
section_title: Contracting Officers Incorrectly Used Veteran Preferences Authorities to Award Contracts to Ineligible Businesses
paragraphs: We also found that businesses received veteran preferences contracts  after they had been denied verification. According to VA data, 154  businesses had been denied verification as of March 4, 2010. According to  our analysis of these data, the key reasons for denial of applications  included business owners failed to submit the required documentation   (44 percent), control requirements were not met (30 percent), ownership  requirements were not met (12 percent), and other eligibility requirements  were not met (14 percent).
As we have previously stated in this report, the 2006 Act provided VA with  unique authority to award veteran preferences contracts, and, under the  VAAR, contracting officers must only use these preferences with firms  listed in the VetBiz.gov database (from Jan. 1, 2012, only with verified  businesses). However, according to our analysis of FPDS-NG data, we  found that 11 (of 154) denied businesses had received veteran preferences  contracts. According to these data, VA contracting officers had awarded  contracts totaling almost $4 million using the veteran preferences  authorities––after CVE had denied these businesses verification.  According to VA officials, denied businesses should be removed from the  VetBiz.gov database, and contracting officers are required to check the  database before awarding a contract to ensure that the business is listed as  either verified or self-certified.
However, according to VA officials, contracting officers may not be  diligently checking the VetBiz.gov database before using the veteran  preferences authorities to award contracts. According to VA officials,  contracting officers received guidance in June 2007 and received training  on the 2006 Act’s authorities between January and March, 2010. While  contracting officers have been trained in the veteran preferences  authorities and are required to check the VetBiz.gov database prior to  making an award, they still have incorrectly used veteran preferences  authorities with denied businesses. According to VA, there is no function  within the agency’s electronic contract management system to stop a  contracting officer from awarding veteran preferences contracts to denied  businesses. Without a more effective system in place to ensure that  contracting officers only use veteran preferences authorities with verified  or self-certified businesses, VA will continue to make awards to ineligible  businesses (those denied verification), thereby taking contracting  opportunities away from eligible businesses.
section_title: VA Has Not Developed Guidance That Would Aid Compliance with the Enforcement Provision of the 2006 Act Relating to Misrepresentation by Businesses
paragraphs: As we have previously stated, approximately 40 percent of businesses that  received site visits did not meet ownership or control eligibility  requirements and may have misrepresented themselves. Contractors that  performed the site visits were required to submit reports on the results to  VA within 7 business days of the site visits. According to these reports,  evidence of misrepresentation dates to October 2009, but VA had not taken  actions against these businesses as of April 9, 2010. According to VA’s  Office of Inspector General, it has received one referral (on Apr. 5, 2010)  as a result of the verification program. Staff have made no requests for  debarment as a result of verification program determinations as of   April 9, 2010.
Under the 2006 Act, any “business concern that is determined by the  Secretary to have misrepresented the status of that concern as a small  business concern owned and controlled by veterans or as a small business  concern owned and controlled by service-disabled veterans … shall be  debarred from contracting with the Department for a reasonable period of  time.” The VAAR states that VA may debar businesses that have  misrepresented themselves for up to 5 years. Additionally, under the  verification program rules, whenever CVE determines that a business  owner submitted false information, the matter will be referred to the  Office of Inspector General for review, and CVE will request that  debarment proceedings be initiated. However, beyond the directive to  staff to make a referral and request debarment proceeding, VA does not  have detailed guidance in place (either in the verification program  procedures or the site visit protocol) that would instruct staff under which  circumstances to make a referral or a debarment request. Such guidance  would help to ensure that VA complies with this provision of the 2006 Act.  Without detailed guidance in place to help staff determine whether  businesses have misrepresented themselves, enforcement actions for  misrepresentation will not occur and businesses will continue to abuse the  program.
section_title: VA Has Not Met Subcontracting Goals for VOSBs and SDVOSBs but Has Developed a Review Process to Help Increase Subcontracting Achievements
paragraphs: VA has developed a mechanism to review prime contractors’ subcontracts  with VOSBs and SDVOSBs, but the agency has not yet implemented it. VA  currently focuses its oversight of subcontracting activities on prime  contractors with subcontracting plans, mainly by reviewing their  electronic reports of subcontracting activity. Large businesses with federal  contracts of $550,000 or more ($1 million for construction) generally must  have subcontracting plans that include goals for subcontracting with  VOSBs, SDVOSBs, and other types of small businesses. The 2006 Act  requires that VA “establish a review mechanism to ensure that, in the case  of a subcontract of a Department contract that is counted for purposes of  meeting a goal established pursuant to this section, the subcontract was  actually awarded to a business concern that may be counted for purposes  of meeting that goal.” For FY07, VA set agencywide goals for all  subcontracts awarded of 7 percent for VOSBs and 3 percent for SDVOSBs;  for FY08 and FY09, VA set goals of 10 percent for VOSBs and 7 percent for  SDVOSBs. According to SBA data, VA has not met its own goals for  subcontracts awarded to VOSBs and SDVOSBs since FY07 (see table 4).  VOSB and SDVOSB subcontractor participation did not exceed 1 percent  of all subcontracts awarded in FY08 and FY09. In July 2009, VA’s top  leadership acknowledged that the agency had fallen far short of its  subcontracting goals and publicly committed to take more aggressive  measures to improve its subcontracting record with VOSBs and  SDVOSBs.
VA has created a form—VA Form 0896a—that it plans to use to collect  subcontracting information from its prime contractors. OMB approved the  form on January 15, 2010. Initially, VA plans to use a hard-copy version of  VA Form 0896a and ultimately collect data from prime contractors through  the Internet. At the close of each fiscal year, VA staff will provide the form  to prime contractors with approved subcontracting plans. Once prime  contractors complete and return the form, VA staff will then review the  form and compare it with the information reported by prime contractors in  their subcontracting plans. VA staff also will contact the subcontractors  listed on the form to confirm that the subcontracting activity occurred as  well as confirm the dollar amount expended. VA staff then will determine  whether discrepancies exist and the reasons for the discrepancies.  Specifically, VA will attempt to determine instances in which valid reasons  for a discrepancy exist versus instances in which prime contractors may  not have made a good-faith effort to comply with their subcontracting  plans.
VA plans to centralize the subcontractor review function in its OSDBU.  Although contractors self-reported information into the SBA-maintained  Electronic Subcontracting Reporting System prior to development of this  subcontracting review mechanism, VA had not collected or confirmed the  accuracy of information on the specific dollar amount or percentage of the  contract value attributable to individual subcontractors. Finally, VA’s  OSDBU plans to develop standard operating procedures by September  2010 for its staff to ensure consistent implementation of the review  mechanism. According to VA, no additional regulatory action is required to  implement VA Form 0896a and the review process. According to VA, the  use of the form will improve the subcontractor data that the agency uses  to calculate its goal accomplishments. VA also expects to see increases in  performance toward subcontracting goal attainment as a result of  improved data collection. Additionally, VA will count subcontracting  accomplishments only with verified businesses starting on   January 1, 2012.
As of March 26, 2010, VA planned to use VA Form 0896a on a sampling of  contracts resulting from solicitations issued after January 7, 2010.  According to VA, SBA will have to certify FY10 subcontracting data before  OSDBU performs an analysis of information for contracts resulting from  these solicitations. In previous years, SBA’s data certification had taken  several months or up to a year to be available. VA officials have raised  concerns that certain challenges may slow implementation of the review  mechanism. These challenges include the limited staff resources that  OSDBU has to implement the program. VA estimated that more than 300  prime contractors may be required to supply data, which OSDBU must  analyze as we have previously described. In FY09, VA reported that it had  approved 198 new subcontracting plans. However, VA hired one full-time  employee to help one existing staff person working on this program.  According to an agency official, OSDBU will determine after  implementation of the new form whether additional personnel will be  required. Furthermore, VA has expressed concerns that prime contractors  and subcontractors initially may resist providing, or may not realize they  have to provide, information. According to VA officials, they have not  pretested the review mechanism with prime contractors but plan outreach  to prime contractors and subcontractors about the new program. VA also  plans to motivate prime contractors to complete the form and increase  subcontracting efforts with VOSBs and SDVOSBs by adopting a new  evaluation factor in addition to those factors VA currently uses to award  contracts. For example, VA’s procurement staff plans to use prime  contractors’ records in meeting goals detailed in subcontracting plans  when awarding future VA contracts. Finally, OSDBU plans to use the data  collected to annually provide findings to VA leadership. Because VA has  not yet implemented the review mechanism, it is too early to assess its  effectiveness.
section_title: Conclusions
paragraphs: More than 3 years after it was enacted, VA has not fully implemented  significant requirements of the 2006 Act. The 2006 Act provided VA with  unique authority to award contracts to VOSBs and SDVOSBs on a priority  basis to increase contracting opportunities for these businesses. In this  regard, VA has been highly successful. Since FY07, VA has established and  exceeded its contracting goals for VOSBs and SDVOSBs, primarily by  using authorities established under the 2006 Act. However, the agency  faces continuing challenges, and diminished achievement, in meeting  other small business goals. VA also faces challenges in monitoring  interagency agreements to ensure that other agencies are making efforts to  achieve its contracting goals, to the maximum extent feasible, as required  by an amendment to the 2006 Act’s provisions. VA does not have an  effective process in place to ensure that all interagency agreements  include the mandated language addressing VA’s contracting goals and  preferences or to monitor the extent to which agencies comply with the  requirements. By putting such a process in place, VA could help ensure  that statutory requirements are met and that the contracting activities of  other agencies also meet VA’s goals and preferences for VOSBs and  SDVOSBs, to the maximum extent feasible.
The agency has been slow to implement a comprehensive program to  verify the veteran status, ownership, and control of small businesses and  maintain a database of such businesses, also required by the 2006 Act.  Verification is a vital control to ensure that only eligible veteran-owned  businesses benefit from the preferential contracting authorities. VA has  faced several challenges in implementing its verification program,  including a lack of leadership and a limited number of staff positions with  which to conduct verifications. VA plans to implement recommendations  that an outside contractor made to improve the program and its data  systems. However, we identified several weaknesses in the verification  program, and the agency has been slow to fill staff vacancies and enhance  its technology. By expeditiously filling its vacant leadership and staff  positions within OSDBU, VA could better ensure that the verification  program will operate effectively and planned improvements will be  achieved. Many of the weaknesses in the files we reviewed appeared to be  the result of limitations in the software and the associated extensive  reliance on manual data entry. VA has not yet put software improvements  in place. Other weaknesses stemmed from gaps in the verification  guidance and procedures. For example, VA does not have guidance  requiring staff to document their assessment that each eligibility  requirement had been met or explaining under what circumstances to  request documentation from business owners or instances in which third- party data may be necessary to validate self-reported information. By  developing a plan to address leadership and staff vacancies, hire additional  staff as necessary, achieve timely implementation of enhancements to data  systems, revise procedures to include additional guidance for staff, and  provide training to staff on the revised procedures, VA could make the  verification process more effective. Timely improvements in these areas  also would likely help the agency reduce backlogs––which have continued  to grow.
VA also faces other challenges with respect to ensuring that veteran  preferences authorities are only used to award contracts to eligible  businesses (those that have not been denied verification) and taking  action against businesses that have misrepresented themselves during the  verification process. According to the 2006 Act, VA must use the veteran  preferences authorities only with verified businesses. However, VA  contracting officers used the authorities to award contracts––totaling  almost $4 million––to 11 businesses that had been denied verification.  According to VA officials, contracting officers received training on the  veteran preferences authorities, but the agency does not have an effective  process in place to ensure that the authorities are used correctly. Without  such a system, VA lacks assurance that it will not continue to make awards  to ineligible businesses (those denied verification), thereby taking  contracting opportunities away from eligible businesses. Moreover,  findings from the initial site visits indicated a high rate of  misrepresentation by VOSBs and SDVOSBs, coupled with a lack of  detailed guidance about how to handle such cases (which would be the  precursor to any investigations and enforcement actions), further suggest  that the agency will be challenged to conduct effective oversight in a  program vulnerable to fraud. Specifically, 40 percent of site visits resulted  in evidence that control and ownership requirements had not been met. An  effective process to make determinations and referrals that may result in  enforcement actions against businesses misrepresenting themselves is of  vital importance for the integrity of the program. Thus, to conduct an  effective verification program, VA’s processes would need to include not  only robust reviews to ensure that only eligible businesses are verified and  therefore benefit from contracting preferences, but also clear and detailed  guidance to ensure that ineligible businesses do not benefit from  contracting preferences by taking the appropriate enforcement actions.
Finally, the 2006 Act requires VA to establish subcontracting goals for  VOSBs and SDVOSBs and to develop a mechanism to review prime  contractors’ subcontracts with these businesses. While the agency has  developed a mechanism, it has not yet implemented it. VA’s subcontracting  accomplishments also have fallen short of goals for the past 3 years. The  agency has acknowledged the shortcomings in this area and agency  leadership has publicly committed to take measures to improve VA’s  subcontracting record. VA intends to start using the review mechanism in  FY10 and expects to see increases in performance toward subcontracting  goal attainment as a result. However, it is too early to assess the  effectiveness of VA’s subcontracting efforts.
section_title: Recommendations for Executive Action
paragraphs: To facilitate the Department of Veterans Affairs’ progress in meeting and  complying with the requirements of the 2006 Act, we recommend that the  Secretary of Veterans Affairs take the following four actions:    To ensure compliance with the 2006 Act, as its provisions were amended  by the 2008 Act (Pub. L. No. 110-389), VA should develop an effective  process to ensure that agreements it enters into with other federal  agencies for contracting on its behalf to acquire goods or services include  the required language and monitor other agencies’ contracting  performance under those agreements.
To help address the requirement in the 2006 Act to maintain a database of  verified veteran-owned businesses, VA should develop and implement a  plan that ensures a more thorough and effective verification program.  Specifically, the plan should address actions and milestone dates for  achieving the following:   promptly filling vacant positions within OSDBU, including the two  leadership positions, and hiring additional staff positions as necessary; improving its verification processes and procedures to ensure greater  completeness, accuracy, and consistency in verification reviews,  including updating data systems to reduce the amount of manual data  entry by staff and revising the verification procedures to include  additional guidance for staff on maintaining the appropriate  documentation, requesting documentation from business owners or  third parties under specific circumstances, and conducting an  assessment that addresses each eligibility requirement; and  conducting timely site visits at businesses identified as higher risk and  taking actions based on site visit findings, including taking prompt  action to cancel business’ verification status as necessary.
To better ensure that VA meets the requirement to use veteran preferences  authorities with verified businesses only, as required by the 2006 Act, VA  should develop a more effective system to ensure that contracting officers  do not use veteran preferences authorities to award contracts to  businesses that have been denied verification, and provide additional  guidance and training to contracting officers as necessary.
To ensure that VA takes enforcement actions against businesses that have  misrepresented themselves, as required by the 2006 Act, VA should  develop detailed guidance that would instruct staff under which  circumstances to make a referral or a debarment request as a result of the  verification program.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested the Department of Veterans Affairs’ comments on a draft of  this report, and the Chief of Staff from VA’s Office of the Secretary  provided written comments that are presented in appendix IV. VA also  provided a technical comment that we incorporated in this report where  appropriate. VA agreed with the four recommendations and provided  information about steps that VA has already taken and some additional  actions that are under way. For example, VA stated that it provided  training from January through March, 2010, to all of its acquisition  professionals regarding the language that must be included in all  interagency agreements entered into on VA’s behalf. VA also indicated that  it has made progress in filling vacant OSDBU positions, including filling all  leadership positions as of April 12, 2010, and that all remaining vacant  positions will be filled and staff will be on board no later than the end of  July 2010. VA stated that its OSDBU anticipates requesting a significant  number of additional full-time-equivalent authorizations in the near future  to support the verification program. Additionally, VA stated that it  provided training to contracting officers on the use of veteran preferences  authorities from January through March, 2010, and will periodically  rebroadcast the training through March 2011. Finally, VA stated that it is  currently developing the process and procedures to use when referring  businesses for debarment and plans to have this in place by   October 31, 2010.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Department of Veterans Affairs and other  interested parties. In addition, this report will be available at no charge on  the GAO Web site at http://www.gao.gov.
If you or your offices 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. Key contributors to this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our report objectives were to review (1) the extent to which the  Department of Veterans Affairs (VA) met its prime contracting goals for  veteran-owned small businesses (VOSB) and service-disabled veteran- owned small businesses (SDVOSB) in fiscal years (FY) 2007, 2008, and  2009, and what, if any, challenges VA faced in meeting these goals; (2) VA’s  progress in implementing procedures to verify the ownership, control,  and, if applicable, service-disability status of firms in its mandated  database of VOSBs and SDVOSBs; and (3) VA’s progress in establishing a  review mechanism of prime contractors’ subcontracts with VOSBs and  SDVOSBs.
To respond to these objectives, we reviewed agency documents related to  VA’s implementation of the Veterans Benefits, Health Care, and  Information Technology Act of 2006 (Pub. L. No. 109-461, sections 502 and  503), which requires VA to give priority to VOSBs and SDVOSBs when it  uses veteran preferences to award contracts. Additionally, we reviewed  regulations implementing the act, including the Veterans Affairs  Acquisition Regulation, which is the final rule implementing the unique  contracting preferences, and the final rule implementing the verification  program. We interviewed VA officials within the Office of Acquisition and  Logistics (OAL); Office of Small and Disadvantaged Business Utilization  (OSDBU); Center for Veterans Enterprise (CVE); and Office of Inspector  General (OIG). Finally, we obtained information from OSDBU and CVE  about authorized staffing levels and current allocations for staff working  on the verification and subcontracting review programs.
To determine the extent to which VA met its prime contracting goals for  VOSBs and SDVOSBs and to what extent contracts awarded to VOSBs and  SDVOSBs were on a set-aside and sole-source basis, we reviewed VA’s  agencywide contracting activity for which small businesses were eligible  and analyzed SBA’s Goaling Reports for FY06 through FY08. Because  SBA’s official Goaling Report was unavailable for FY09, we obtained and  analyzed Federal Procurement Data Systems-Next Generation (FPDS-NG)  data for VA contracting activities. Additionally, to assess the extent to  which VA awarded set-aside and sole-source contracts to verified VOSBs  and SDVOSBs, we compared those that were self-certified in FY09 with a  list of businesses verified by the end of FY09 (provided by CVE). We  compared the list provided by CVE with FPDS-NG data to determine VA’s  level of contracting with verified firms. Finally, we conducted  reasonableness checks on the FPDS-NG data and identified any missing,  erroneous, or outlying data and had an independent analyst review all  programming. We also obtained and reviewed VA’s FY09 FPDS-NG Data  Quality Report, as submitted to the Office of Management and Budget,  which stated that VA’s FPDS-NG data are 86 percent accurate and 95.8  percent complete. Based on this review, we determined the FPDS-NG data  to be sufficiently reliable for the purposes of this report.
To determine the extent to which VA agreements with other federal  agencies has language that referred to VA’s contracting goals and  preferences for VOSBs and SDVOSBs as mandated by Pub. L. No. 109-461,  and amended by Pub. L. No. 110-389, we interviewed VA officials from  OAL to obtain information on any policies, procedures, responsibilities,  and oversight efforts in place to monitor compliance with the Pub. L. No.  110-389 requirement. To determine the extent to which these agencies  awarded contracts to VOSBs and SDVOSBs, we evaluated FPDS-NG data  to obtain information about contracts awarded by federal agencies on VA’s  behalf and subject to Pub. L. No. 109-461 provisions. We evaluated the  accuracy and completeness of this analysis by obtaining data from VA on  contracting dollars awarded to the Department of the Interior, the General  Services Administration, the Department of the Navy’s Space and Naval  Warfare Systems Center, and the U.S. Army Corps of Engineers.
To evaluate the challenges, if any, VA faced in meeting its prime  contracting goals for VOSBs and SDVOSBs, we reviewed previous  congressional hearing transcripts that discussed VA’s challenges in  meeting its contracting goals as well as emerging challenges. We also  conducted several interviews with officials from OSDBU and members of  veteran service organizations, including representatives from the National  Veterans Business Development Corporation, Association for Service  Disabled Veterans, Disabled Veteran Americans, American Legion,  Veterans of Foreign Wars, Vietnam Veterans of America, and National  Veteran-Owned Business Association.
To determine VA’s progress in implementing procedures to verify firms in  its mandated database, we reviewed the agency’s verification guidelines  and risk guidelines as well as procedures for reviewing applications and  conducting site visits. Additionally, we conducted a file review of a sample  of verified businesses to determine the extent to which VA followed  procedures and to identify any deficiencies in the verification process. The  study population for our review consisted of all 1,723 businesses that had  been verified between May 2008 and the end of FY09 (Sept. 30, 2009). We  obtained a list of these businesses from CVE and selected a probability  sample of 112 businesses, which would allow us to estimate  characteristics of all applications verified by CVE during this period. This  sample contained approximately the same proportion of SDVOSBs as did  the full study population. We conducted the file review at CVE’s offices in  Washington, D.C., during the week of November 16, 2009, and reviewed  both electronic and paper files.
Because we followed a probability procedure based on random selections,  our sample is only one of a large number of samples that we might have  drawn. Since each sample could have provided different estimates, we  express our confidence in the precision of our particular sample’s results  as 95 percent confidence internal (plus or minus 10 percentage points).  This is the interval that would contain the actual population value for   95 percent of the samples we could have drawn. All percentage estimates  from our sample have 95 percent confidence intervals within plus or minus  10 percentage points of the estimate.
We created a data collection instrument based on requirements from  CVE’s verification procedures, pretested the instrument on sample  businesses, and then reviewed each business’ file according to the  finalized instrument. For example, for each business, we reviewed the  following: the verification application (VA Form 0877), quality control  form (Control Folder Signature Sheet), the business’ entry within the  agency’s internal Microsoft Access database (veteran status and eligibility  to receive contracts from the federal government), notes about public  databases checked for control and ownership information (Control Folder  Review Sheet), screenshots of information obtained from public databases  searched, and the approval letter. To determine risk levels assigned to  each business, CVE provided a comprehensive list of all verified  businesses and their assigned risk level. We used this list to obtain risk  levels for the 112 businesses in our random sample. Our random sample  produced estimates with margins of error of 9 percentage points or less at  the 95 percent confidence level. Based on findings from our file review  sample, we calculated percentage estimates with 95 percent confidence  intervals within plus or minus 10 percentage points of the estimated  percentage. The results of our sample are generalizable to the entire  population of applications verified by the end of FY09. We performed the  appropriate data reliability procedures for our sample. For example, to  ensure consistency in how the data collection instrument was completed,  we randomly selected 30 percent of files (34 out of 112) for which a  second independent analyst peer reviewed the information collected. We  determined, based on this 30 percent random sample, that there were very  few discrepancies in how the data collection instrument was completed,  and that the data were sufficient for the purposes of this report.
To determine why CVE denied applications, we obtained information on  the number of businesses denied verification and the reasons for denial.  CVE provided us with information for each application denied between  May 2008 and March 4, 2010, which we summarized in this report. We also  compared the denied businesses to FPDS-NG data to determine whether  any denied business had received a VOSB or SDVOSB set-aside in FY09 or  in FY10 (through Mar. 23, 2010) from VA after it had been denied  verification by CVE. We also obtained 10 (of 45) site visit reports from  CVE that contractors had prepared. We reviewed the 10 reports to  determine whether any businesses failed to meet eligibility requirements  based on evidence prepared by the contractor that conducted the site visit.  Finally, we requested information and interviewed agency officials from  OAL, CVE, and VA’s OIG to discuss any processes and procedures in place  to determine whether businesses had misrepresented themselves or to  refer businesses for a investigation or debarment.
To determine the extent to which VA met its own subcontracting goals for  VOSBs and SDVOSBs and the governmentwide statutory goal for  SDVOSBs, we reviewed data from SBA Goaling Reports and the Electronic  Subcontracting Reporting System for FY07 through FY09. We reviewed  Pub. L. No. 109-461, section 502, to identify the statutorily mandated  requirement that VA set its own goals for VOSB and SDVOSB  subcontracting activities, and to identify the requirement that VA confirm  reported subcontracting activity. We conducted interviews with OSDBU to  assess VA’s progress in establishing a review mechanism of prime  contractors’ subcontracts with SDVOSBs and other VOSBs. Finally, we  obtained and reviewed VA Form 0896a––which is the form that VA intends  to use to implement its subcontracting review mechanism.
We conducted this performance audit from October 2007 through May  2010, 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: VetBiz.gov Screenshot and Verified Logo
paragraphs: The VetBiz.gov database allows business owners to submit applictions for  verification and is also a searchable database for contracting officers and  the public (see fig. 11). Businesses that have been verified appear with a  verified logo (see fig. 12).
section_title: Appendix III: Department of Veterans Affairs’ Contracting with Veteran-Owned Small Businesses
subsections: section_title: Dollars
section_title: Appendix IV: Comments from the Department of Veterans Affairs
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Harry Medina, Assistant  Director; Paola Bobadilla; Julianne Dieterich; Beth Ann Faraguna; Julia  Kennon; John Ledford; Jonathan Meyer; Amanda Miller; Marc Molino;  Mark Ramage; Barbara Roesmann; Kathryn Supinski; Paul Thompson;  Julie Trinder; and William Woods made significant contributions to this  report.