Federal Contracting: Monitoring and Oversight of Tribal 8(a) Firms Need Attention
Published: 2012-01-31T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Federal dollars obligated to tribal 8(a) firms grew from $2.1 billion in fiscal year 2005 to $5.5 billion in 2010, a greater percentage increase than non-tribal 8(a) obligations (160 percent versus 45 percent). Obligations to 8(a) firms owned by Alaska Native Corporations (ANC) represented the majority of tribal obligationsevery year during the period, rising to $4.7 billion in 2010. While tribal 8(a) firms comprised 6.2 percent of total 8(a) firms, their obligations accounted for almost a third of total 8(a) obligations in fiscal year 2010. Over the 6 years, the percentage of competitively awarded obligations to tribal 8(a) firms rose; however, solesource contracts remained the primary source of growth, representing at least 75 percent of all tribal 8(a) obligations in a given year.
Consistent with GAOs 2006 review of ANC 8(a) contracting, contracting officials said that awarding contracts to tribal firms under the 8(a) program allows officials to award sole-source contracts for any value quickly, easily, and legally, and helps agencies meet their small business goals. However, the officials added that the program offices push for awarding follow-on contracts to the same firm also plays a role. GAOs review of noncompetitive tribal 8(a) contracts shows the methods used to determine price reasonableness in a sole-source environment. In some cases, when agencies moved away from sole-source tribal 8(a) contracts toward competition, agency officials estimated savings as a result.
To ensure that 8(a) firms do not pass along the benefits of their contracts to their subcontractors, regulations limit the amount of work that can be performed by the subcontractors. Of the 87 contracts in GAOs review, 71 had subcontractors. GAO found that required monitoring of limitations on subcontracting by procuring agencies was not routinely occurring. Similar to what GAO reported in 2006, some contracting officers do not understand that ensuring compliance is their responsibility under partnership agreements with SBA, and the regulations do not make this clear. Further, agency officials did not know how to monitor subcontracting limitations, particularly for indefinite-quantity contracts, as the data are not readily available. Not monitoring the limits on subcontracting can pose a major risk that an improper amount of work is being done by large firms.
In March 2011, SBA revised 8(a) regulations to clarify program rules, correct misinterpretations, and address program issues. Although a positive step, SBA will have difficulty enforcing new regulations pertaining to tribal 8(a) follow-on contracts and joint ventures given the information currently available. SBA told GAO it is currently in the process of developing the requirements for a new 8(a) tracking database. Further, the new regulations do not address some issues GAO has previously raised, such as ANC 8(a) firms under the same parent corporation generating a majority of revenue in the same line of business. SBA regulations do not allow a tribal organization to have more than one 8(a) subsidiary perform most of its work under the same primary business line. GAO also discusses practices that highlight how some tribal 8(a) firms operate, in effect, as large businesses because of their parent corporations backing and interconnectedness with sister subsidiaries. SBA has not reviewed these practices to determine whether they are congruent with the business development purpose of the 8(a) program.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Office of Federal Procurement Policy (OFPP) amend acquisition regulations and provide guidance (including data collection) on monitoring the limits on subcontracting. OFPP generally agreed with the recommendations. GAOs recommendations also include that SBA include specific capabilities in its 8(a) database to improve tribal 8(a) tracking and that it examine tribal participation to determine whether certain practices align with the 8(a) programs business development goal. SBA questioned GAOs methodology, which GAO continues to believe is appropriate, but did not address GAOs recommendations.

section_title: Letter
paragraphs: The federal government obligates hundreds of billions of dollars in  contracts for goods and services each year—about $537 billion in fiscal  year 2010. That year, about $18.5 billion was obligated to firms  participating in the Small Business Administration’s (SBA) 8(a) program.  The 8(a) program is one of the federal government’s primary means for  developing small businesses owned by socially and economically  disadvantaged individuals. Congress has repeatedly emphasized in  legislation that the purpose of the 8(a) program is business development,  with a goal of enabling these businesses to compete on an equal basis in  the mainstream American economy. Over two decades ago, Congress  expanded participation in the 8(a) program to include not just firms owned  by disadvantaged individuals, but also firms owned by tribal entities. In  this report, “tribal entities” refers to Alaska Native Corporations (ANC),  Indian tribes, and Native Hawaiian Organizations (NHO). We use the term  “tribal 8(a) firm” to refer to a firm that is majority owned by an ANC, Indian  tribe, or NHO.
Firms owned by tribal entities have been afforded special advantages in  the 8(a) program. For example, they can receive sole-source 8(a)  contracts for any amount, whereas sole-source awards to other 8(a) firms  generally must be made under certain competitive dollar thresholds ($6.5  million for manufacturing or $4 million for all other acquisitions). ANCs,  created in 1971 through the Alaska Native Claims Settlement Act  (ANCSA), were established to distribute land and monetary benefits to   Relevant  Alaska Native shareholders in lieu of a reservation system.legislation defines the term Indian tribes to include bands, nations, or  other organized groups of communities of Indians, which are recognized  as eligible for the special programs and services provided by the United  States because of their status as Indians. NHOs are not-for-profit  community service organizations controlled by Native Hawaiians whose  business activities are to principally benefit Native Hawaiians. These tribal  entities generally provide, to varying extents, economic and community  development for their native populations through different programs.
In a 2006 report, we noted that the legislative history leading to the  procurement advantages for ANCs was sparse and confusing. We also  reported on the challenge SBA officials cited in overseeing ANC activity in  the 8(a) program. The officials attributed this challenge to the fact that the  program’s business development goals can be in conflict with ANCs’  charter under ANCSA—economic and community development for  Alaska Natives. We made a number of recommendations, focused on the  need for improved SBA oversight of the special advantages afforded to  ANCs under the 8(a) program. The Small Business Act does not provide  tribal entities a purpose in the 8(a) program that is different from the  program’s stated goal of business development. In fact, in a 1989 revision  to the 8(a) program regulations, SBA stated that the 8(a) program is  intended to be used exclusively for business development purposes to  help small businesses owned and controlled by socially and economically  disadvantaged individuals, Indian tribes, ANCs, and NHOs to compete on  an equal basis in the mainstream of the American economy. We also  reported in 2006 that agencies were not effectively monitoring compliance  with required percentages of work to be performed by 8(a) firms versus  their subcontractors. While our 2006 report focused on 8(a) firms owned  by ANCs, the scope of this report includes 8(a) firms owned by Indian  tribes and NHOs as well.
SBA revised the 8(a) regulations, effective in March 2011, to clarify and  refine certain provisions in the program, with some revisions specifically  focused on tribal participation. Also in March 2011, the Federal  Acquisition Regulation (FAR) was amended,  on an interim basis, to implement a provision in the National Defense Authorization Act for Fiscal  Year 2010 that required a written justification prior to awarding sole-  source 8(a) contracts over $20 million  Previously, no justification was  required for any dollar amount for 8(a) contracts, including those awarded  to tribal 8(a) firms.
In response to your request, we (1) identified trends in federal obligations  under 8(a) contracts with tribal firms; (2) determined the reasons federal  agencies awarded sole-source contracts to tribal 8(a) firms and the  methods used to make price determinations; (3) assessed the procuring  agencies’ oversight of tribal 8(a) contracts for compliance with  subcontracting requirements; and (4) examined SBA’s new 8(a)  regulations to determine how the changes could affect oversight of tribal  firms and the extent to which previously identified problems are  addressed. During the course of our work, we also discussed with  procuring agency officials the potential impact of the recent FAR  requirement for written justifications for sole-source 8(a) awards over $20  million. This requirement was not applicable to the contracts we reviewed.  We evaluated the administration of the tribal 8(a) program; the scope of  our work did not include an evaluation of the program’s merits.
To identify trends in 8(a) contracting with tribal firms, we analyzed data  from the Federal Procurement Data System-Next Generation (FPDS-NG)  for fiscal years 2005 through 2010 (the last year of complete information  at the time of our review). We found the FPDS-NG data fields that identify  firms owned by ANCs, NHOs, and Indian tribes to be unreliable because  these data were not available during the entire time period. We therefore  obtained from SBA tribal 8(a) firms’ Data Universal Numbering System  (DUNS) numbers and used this information to obtain the FPDS-NG data,  which we determined was sufficiently reliable to identify trends in tribal  8(a) contracting. To address our second and third objectives, we used a  stratified purposeful, selected sampling approach to identify 87 contracts  for review.competitive 8(a) threshold amounts ($6.5 million for manufacturing and $4   This nonprobability sample included contracts over the  million for other acquisitions), focusing on those with large dollar value  obligations in fiscal year 2009 (the latest data available at the time we  selected our contract sample). We also focused on contracting activities  that had higher levels of sole-source tribal 8(a) activity. The majority of  the contracts in our sample (62) were awarded by defense agencies, and  25 were awarded by civilian agencies, including the departments of  Agriculture, Energy, Health and Human Services, Homeland Security,  Justice, Labor, and State, and the Social Security Administration. Most  (75) of the contracts were with ANC 8(a) firms; 10 were with firms owned  by Indian tribes and 2 were with firms owned by NHOs. Of the 87  contracts, 7 were competitively awarded, and 79 were sole-source  procurements. For the one remaining contract we could not confirm  whether it was awarded competitively or not because the entire pre-award  file was missing. We reviewed the contract files and spoke with  contracting and program officials and small business advocates at the  agency locations. The results of our contract file analysis are not  generalizable to the population of tribal 8(a) contracts.
To address the potential effect of the new SBA regulations on oversight of  tribal firms and the extent to which previously identified problems were  addressed, we visited SBA headquarters as well as district offices in  Anchorage, AK; Philadelphia, PA; and Washington, DC. We also spoke  with SBA district officials in Hawaii, New Mexico, and Oklahoma. We  selected these particular district offices primarily based on their relatively  higher level of involvement with tribal 8(a) firms. In addition to the 87  contract files we reviewed, we also reviewed a sample of 62 SBA files for  tribal 8(a) firms’ application information, annual reviews, and business  plans. In selecting the firms for this portion of our work, we focused on  those that had relatively high representation in our contract sample as  well as those that had relatively low representation. The results of our  review of the firms’ SBA files are not generalizable to the universe of tribal  8(a) firms. We did not assess the extent to which benefits from tribal 8(a)  contracts flow to the parent entity.
To understand the potential impact of the new FAR requirement for  written justifications of 8(a) sole-source awards over $20 million, we  reviewed the FAR and public comments on the new rule: interviewed  agency small business advocates, Office of Federal Procurement Policy  (OFPP) officials, and contracting officers for the contracts we reviewed;  and drew from the findings in our prior report on ANC 8(a) contracting.The Administrator of OFPP serves as chair of the Federal Acquisition  Regulatory Council; the council oversees development and maintenance  of the FAR.
Appendix I contains more information on our scope and methodology. We  conducted this performance audit from October 2010 to January 2012 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: ANCs, Indian tribes and NHOs—i.e., the parent entities of tribal 8(a)  firms—can be large, with worldwide operations and revenues in the  hundreds of millions of dollars. They can own 8(a) and non-8(a)  subsidiaries and sometimes form complicated corporate structures.  Figure 1 illustrates a notional corporate structure of an ANC with a  holding company—a non-8(a) subsidiary that provides shared  administrative services to other subsidiaries for a fee. The figure depicts a  mix of 8(a) and non-8(a) subsidiaries that may be only partly owned by  the ANC.
According to SBA, in fiscal year 2010, there were over 8,400 firms in the  8(a) program, 354 of which were owned by a tribal entity. For any firm  (including tribal firms) to be eligible to participate in the 8(a) program, it  must qualify as small under a primary industry size standard as measured  by the number of employees or average revenues from the previous 3  years. In addition, the firm must be, among other things, majority-owned  by one or more socially and economically disadvantaged individuals or a  qualified entity, such as a tribal entity. Firms approved as 8(a) participants  can receive business development assistance from SBA and are eligible  to receive contracts that agencies offer to SBA for the 8(a) program. All  8(a) firms, including tribal 8(a) firms, are subject to a 9-year limit on  participation in the 8(a) program. During the last 5 years in the program,  known as a transitional period, firms are required to obtain a certain  percentage of non-8(a) revenue to demonstrate their progress in  developing a viable business that is not solely reliant on the 8(a) program.  SBA’s district offices are responsible for tracking this business mix on an  annual basis. If a firm does not meet its required business mix during one  of the last 5 years, SBA invokes a plan of remedial action for the next  year, in which the firm is to report to SBA on its progress. Until the  required mix is demonstrated, the firm will generally not be eligible for  sole-source 8(a) contracts.
Congress has provided tribal 8(a) firms with distinct advantages over  other 8(a) businesses, in addition to the ability to receive sole-source 8(a)  contracts for any amount. In some cases, there are also differences  among the advantages provided to firms owned by ANCs, Indian tribes,  and NHOs. Table 1 provides more details.
For tribal 8(a) firms, SBA has specific oversight responsibility for accepting the firm into the program, which includes ensuring that the  tribal entity owning the firm does not have more than one 8(a) firm in  the same primary line of business, defined by a North American  Industry Classification System (NAICS) code and annually reviewing 8(a) firms to track their progress in the 8(a)  program, including their mix of 8(a) and non-8(a) revenue in the last 5  years in the program and any changes to the firms’ business targets,  objectives, and goals.
The procuring agency offers, and SBA may accept, a procuring agency’s  requirement into the 8(a) program either as a competitive procurement— to be competed among all eligible 8(a) firms—or as a sole-source  procurement. The agency’s offer letter must identify the requirement, any  procurement history, the estimated dollar amount, and NAICS code,  among other things. Before accepting a procurement as an 8(a) sole-  source contract, SBA is to verify the proposed firm’s size status to ensure  that it qualifies as small under the identified NAICS code. Once accepted  into the program, 8(a) firms may pursue contracts in additional lines of  work, called secondary NAICS codes. Once a requirement is awarded as  an 8(a) contract, it must remain in the 8(a) program unless the procuring  agency decides it would like to fulfill the follow-on requirement outside of  the program and requests approval from SBA to do so. Procuring agency  contracting officers also have responsibilities under the 8(a) program. For  all of the agencies in our review, SBA has delegated responsibility for  contract administration to the contracting officers through partnership  agreements. These responsibilities include, for example, ensuring  compliance with the limitations on subcontracting requirements under 8(a)  contracts.
SBA’s 8(a) program regulations allow for involvement of other businesses  and non-disadvantaged individuals as a way of helping the 8(a) business  grow and develop. For example, 8(a) firms can hire outside agents to  assist them in obtaining 8(a) contracts; however, SBA’s revised  regulations now prohibit agreements in which agents receive a  percentage of the contract value as compensation for their assistance. In  addition, large businesses can create a mentor-protégé joint venture with  an 8(a) firm to win 8(a) prime contracts or can act as a subcontractor  under an 8(a) contract. percentage of labor costs that 8(a) firms and non-8(a) partners may incur  under service and construction contracts. For service contracts with  subcontracting activity, the 8(a) firm must incur at least 50 percent of the  personnel costs with its own employees (15 percent for construction  contracts). Further, a non-disadvantaged individual can own up to a 49  percent interest in an 8(a) firm, retaining his or her percentage of  ownership in the profits the firm generates. These arrangements with  other businesses or non-disadvantaged individuals can result in a  relatively small percentage of contract profits being retained by the tribal  entity that owns the 8(a) firm. Figure 2 is an illustrative example of how  these arrangements could occur when a tribal 8(a) firm forms a joint  venture with a large business under the mentor-protégé program, as  allowed by SBA regulations.
SBA must approve the mentor/protégé agreement before the two businesses submit an  offer as a joint venture to receive exclusion from affiliation. 13 C.F.R. §§ 124.513(b)(3) and  124.520(b) and (d)(1)(i).
For 8(a) construction contracts, the prime contractor must incur at least 15 percent of the personnel  costs with its own employees. Thus, if our illustrative example above were a construction contract, the  tribe that owns a 51 percent interest in the firm would receive $31,000 in profit distribution.
In 2006, we reported that ANCs used the 8(a) program as one of many  sources of revenue (which could include revenue generated outside of  government contracts) to provide benefits to their shareholders.found that there was no explicit link between the revenues ANCs  generated from the 8(a) program and the benefits they provided to  shareholders, because ANCs only tracked benefits generated from their  consolidated revenue sources. The recently revised 8(a) regulations  require tribal 8(a) firms to report annually to SBA on the benefits they are  providing their members or community from their participation in the 8(a)  program.
section_title: Obligations to Tribal 8(a) Firms Have Grown Steadily, with Most under Sole- Source Contracts
paragraphs: From fiscal year 2005 through 2010, federal dollars obligated to tribal 8(a)  firms grew from $2.1 billion to $5.5 billion. Obligations to 8(a) firms owned  by ANCs—which represented the majority of these tribal obligations  during each fiscal year—rose steadily, from $1.9 billion to $4.7 billion.  Obligations to 8(a) firms owned by Indian tribes and NHOs also grew  steadily during this time frame, to $690 million and $109 million,  respectively, in fiscal year 2010. Total 8(a) obligations (to tribal and non- tribal 8(a) firms) increased from $11.3 billion to $18.8 billion during the  six-year period. Obligations to tribal 8(a) firms represented a 160 percent  increase over this time, while obligations to non-tribal 8(a) firms increased  45 percent. Figure 3 shows the growth of non-tribal and tribal 8(a)  obligations.
Tribal firms represented a very small percentage of all 8(a) firms, but  accounted for almost 30 percent of 8(a) obligations—about $5.5 billion— in fiscal year 2010, as shown in table 2.
The percentage of obligations under competitively awarded tribal 8(a)  contracts increased from fiscal year 2005 to 2010. In fiscal year 2010,  sole-source obligations to ANC 8(a) firms decreased slightly, for the first  time since 2005. Table 3 compares the percentage of obligations under  competitively awarded contracts for ANC, Indian tribe, and NHO 8(a)  firms in fiscal year 2005 and 2010.
Even with this increase in obligations under competitively awarded  contracts to tribal 8(a) firms, sole-source contracts still accounted for at  least 75 percent of all tribal 8(a) obligations annually. In terms of  obligations, in fiscal year 2010, sole-source awards to tribal 8(a) firms  accounted for $4.3 billion of the total $5.5 billion in tribal 8(a) obligations.  Figure 4 shows the breakdown of sole-source and competitive 8(a)  obligations for tribal and non-tribal 8(a) firms from fiscal years 2005  through 2010.
As shown in figure 4, the percentage of competitive obligations for non- tribal 8(a) firms—about 45 percent in fiscal year 2010—still far outpaces  those of tribal 8(a) firms.
Further, our analysis of FPDS-NG obligation data for new sole source  awards under the 8(a) program, issued from fiscal years 2005 through  2010, reveals that for both tribal and non-tribal 8(a) firms, obligations on  sole-source 8(a) awards increased during the last month of each fiscal  year.September of each year.
section_title: Sole-Source Contracts to Tribal 8(a) Firms Viewed as Expedient, but Could Lead to Missed Opportunities for Savings
paragraphs: Contracting officials at the agencies we reviewed, similar to what we  reported in 2006, told us that using tribal firms under the 8(a) program  allows them to award sole-source contracts for any value quickly, easily  and legally. They further stated these awards help procuring agencies to  meet their small business goals, but added that the program offices’  preference for using the same firms for follow-on contracts also plays a  role.the methods used by contracting officials to determine price  reasonableness in a sole-source environment. However in several cases  we found that contracting officers were moving away from sole-source  tribal 8(a) contracts toward competition. We also found examples where  tribal 8(a) contracts that had previously been awarded on a sole-source  basis were competed, resulting in savings.
subsections: section_title: Tribal 8(a) Sole-Source Contracts Viewed as Quick and Easy and Contributing to Small Business Goals
paragraphs: Contracting officials viewed sole-source contract awards to tribal 8(a)  firms as a way to expedite the federal acquisition process, avoid some  potential bid protests, and help them meet their agencies’ small business  goals. Prior to SBA’s acceptance of any sole-source requirement into the  8(a) program, the procuring agency need only identify a qualified 8(a) firm  and obtain approval from SBA to award a contract. It is the procuring  agency’s responsibility to conduct market research, including determining  whether offers can be obtained from two or more firms at fair market  prices. However, SBA also considers market research requirements to be  satisfied when a participant in the 8(a) program self-markets its abilities to  a procuring agency and is subsequently offered a sole-source 8(a)  requirement.
Acquisition planning activities are intended to ensure that the government  meets its needs in the most effective, economical, and timely manner  possible. Some contracting officers awarded sole-source 8(a) contracts to  tribal firms because this approach allowed them to avoid lengthy  acquisition planning and market research procedures, thereby expediting   For example, documentation in a Department  the procurement process.of Homeland Security contract revealed that the contracting official  awarded a $96 million sole-source contract to a tribal 8(a) firm because  this was the most streamlined approach to obtain services. According to  the contract file, the agency saved considerable time in the acquisition  process and thereby ensured a timely award. In another example, one  contracting officer told us that she sees many more sole-source contracts  to tribal 8(a) firms at the end of the fiscal year, likely because of poor  acquisition planning. Recalling a time when a program office needed to  award a contract quickly during the fourth quarter of the fiscal year, she  said she was able to award the contract on a sole-source basis to a tribal  8(a) firm within 2 weeks. She estimated that to award the contract  competitively would have taken 60 to 90 days.
The A-76 process is a federal government policy which subjects commercial activities to  competition and requires agency officials to identify all activities performed by government  personnel as either commercial or inherently governmental.OMB, Circular A-76 (Revised),  Performance of Commercial Activities 4, (May 29, 2003). The provisions in these  appropriations acts allowed DOD to avoid the A-76 process when contracting with tribal  8(a) firms. DOD used the authority in section 8(a) of the Small Business Act to make the  sole source awards. See, for example, Consolidated Security, Disaster Assistance, and  Continuing Appropriations Act, 2009, Pub. L. No. 110-329 § 8016, 122 Stat. 3623-24  (Sept. 30, 2008). government should be performing a function with its personnel or  contracting those functions to private sector firms. DOD officials believed  awarding the sole-source contracts was necessary, since concerns about  the time frames to conduct the A-76 process—which officials at one base  estimated could take up to 3 years—were causing the government  employees performing the work to become increasingly concerned about  their job security and to seek employment elsewhere.
In some cases, as allowed, contracting officials awarded sole-source  contracts to tribal 8(a) firms even though market research had revealed  other firms capable of performing the work. For example, Army  contracting officials’ request for information for medical services resulted  in six firms’ submitting comments. However, citing the current contract’s  expiration time frame, the contracting officer stated that a successful  competition would require a great deal of acquisition planning and, as  such, would likely result in a break in services. In another example,  market research identified 93 potential contractors for a base engineering  support requirement; several of which were known to possess the  capabilities to handle the requirement if it were competitively solicited. In  fact, the previous contract for this requirement had been competitively  awarded in the 8(a) program, with seven offers received. Our review of  the acquisition plan and discussion with the contracting officer revealed  that the reason for awarding the sole-source follow-on contract was  because of the significant delay in obtaining the statement of work from  the program office. Because the requirement was critical and the new  contractor would have to “hit the ground running,” a sole-source contract  was awarded to a tribal 8(a) firm that had subcontracted with the  incumbent contractor.
At one Army Corps of Engineers location we visited, contracting officials  told us that they put basic ordering agreements (BOA) in place—such as  the one we reviewed for design and construction services with a tribal  8(a) firm—because BOAs can be quickly set up, sometimes in only a  matter of hours. The regulations require that an agency offer, and SBA  accept, each order under a BOA to the 8(a) program prior to award,  because the BOA itself is not a contract. As part of this process, SBA  would ensure that the tribal 8(a) firm still meets the size standard for the  NAICS code for the requirement at the time the order is offered to SBA.  However, we found that the contracting officer was not offering each  order under this $10 million BOA (which had been awarded in June 2009)  to SBA, in violation of FAR and SBA regulations. The DOD contracting  official in this case sent notices of the orders to the SBA district office  after the award. SBA district officials did not follow up to determine why  these orders had not been offered prior to the award. By not offering each  order under the BOA, there is a risk that a tribal 8(a) firm could outgrow  the size standard and be improperly awarded a sole-source contract  through the 8(a) program. In subsequent discussions, SBA and an Army  Corps of Engineers legal representative confirmed that all orders under  BOAs in the 8(a) program should be offered to SBA. According to the  legal representative, the contracting office is no longer using BOAs to  meet its requirements and is instead using indefinite quantity contracts.
Tribal 8(a) sole-source contracts are also attractive because there are  limitations on their ability to be protested. Although 8(a) sole-source  awards have been protested, the following issues may not be challenged  of any 8(a) participant by any party, either to SBA or any administrative  forum as part of a bid or other contract protest: (1) the eligibility of the  participant for a sole-source or competitive 8(a) requirement, (2) the  NAICS code assigned to a sole-source 8(a) requirement, or (3) the size  status of a nominated participant for a sole-source 8(a) procurement. According to contracting officials, bid protests can result in significant and  costly delays and potentially disrupt critical services. Moreover, the  officials stated that responding to bid protests absorbs their already  limited time and resources. One tribal 8(a) company, in its marketing  materials to the government, mentioned that one of the many benefits of  a sole-source award to their company was that it would not be subject to  a bid protest.
As examples, 8(a) sole-source awards to tribal 8(a) firms have been protested in  Mission Critical Solutions, B-401057, May 4, 2009 and JMX, Inc., B-402643, June 25,  2010. contracts we reviewed. After an 8(a) contract was awarded competitively  to a tribal firm, the incumbent firm’s sister subsidiary, who had competed  under the solicitation, protested the award. This sister subsidiary did not  receive the award because its proposal relied on the past performance of  its sister firm (the incumbent). According to the solicitation’s instructions,  past performance of sister firms would not be considered as highly as the  firm’s own past performance. Further, its offer was 86 percent higher  than that of the winning tribal 8(a) contractor. As a result of the protest,  the expiring contract was extended 5 months, resulting in over $800,000  in additional revenue for the incumbent firm.
Another reason contracting officials gave for awarding sole source tribal  8(a) contracts is to help their agencies meet their small business prime  contracting goals. Some tribal 8(a) firms also recognize that this is an  attractive feature and promote it in their marketing materials. However, at  one location we visited, agency officials told us that they chose to  compete a follow-on procurement outside of the 8(a) program even  though they knew it would significantly affect their ability to meet their  small business goals. The previous 8(a) contractor had been awarded a  5-year, $250 million dollar contract. Obligations under this contract had  helped the agency meet its small business goals. Nevertheless, agency  officials, including the small business advocate, thought the potential to  obtain a better price and service through full and open competition was  more important at that time.
Contracting officials we spoke with noted that some program officials  prefer to continue working with specific tribal 8(a) firms, especially when  program officials had established a working rapport with the incumbent  contractors. Our prior work has shown that program officials generally  have a preference for working with incumbent firms. Program officials  play an important role in the contracting process—developing  requirements, performing market research, and interfacing with  contractors. For one Army contract we reviewed to provide direct  healthcare services at military medical-treatment facilities, program  officials had decided that a follow-on sole-source 8(a) contract award to  one of the incumbent firm’s sister subsidiaries was the best option  because there was a potential for risk if the procurement start date was  not met. Additionally, in its proposal, the incumbent’s sister subsidiary  highlighted the fact that SBA regulations permitted it to share senior  management with the incumbent and that as a result, their services were  provided under the same team.
We found instances in which contracting officials awarded bridge or  follow-on sole-source contracts to incumbent tribal 8(a) firms or to their  sister subsidiaries for continuity.
Forest Service contracting officials had a history of awarding sole-  source bridge or follow-on contracts for similar requirements to the  same incumbent 8(a) firm or one of its sister subsidiaries. The  contracting official responsible for the three contracts in our sample  explained that the program office pressured her to continue awarding  to this particular firm because the program office believed that  awarding the requirement to a new contractor would cause a  disruption in services. One of these contracts—a $125-million sole-  source 8(a) contract for computer hardware and enterprise software— was awarded to a firm’s sister subsidiary when the incumbent was no  longer eligible to receive 8(a) contracts. An email from an official from  the sister firm to the contracting officer, in suggesting that the new  contract be awarded to the sister firm, told the agency that all  incumbent personnel working on the contract, as well as equipment,  would be transferred over and that essentially the agency “will see  only a name change in the firm providing the service.”
A contracting official at the Department of Energy told us that she  awarded a sole-source contract for facility maintenance and support  services to the sister subsidiary of a tribal 8(a) firm because the  incumbent firm had graduated from the 8(a) program, thus making it  ineligible for the follow-on contract. Further, she stated that this made  the transition very easy to manage, since nearly 100 percent of the  incumbent’s staff transferred directly to the sister firm.
We also found examples where bridge contracts to tribal 8(a) firms were  used to ensure continuity while competing the follow-on requirement;  however, it was not always a smooth transition. In one case, a contracting  officer at an Army acquisition activity awarded a one-year bridge contract  to the incumbent tribal 8(a) firm to avoid unnecessary delays and provide  sufficient time to compete the requirement in the future. The incumbent’s  contract—awarded out of a different Army contracting office—had been  terminated after one and a half years on the grounds that it was legally  insufficient. However, when awarding the bridge contract, contracting  officials learned that the incumbent contractor’s employees had assisted  the Army in developing the follow-on requirement. The contracting officer  had the contractor put in place a plan to mitigate this conflict of interest,  but still awarded the sole-source bridge contract to meet the immediate  need. In another case, Army officials tried to award a task order under an  existing contract as a bridge contract to maintain the service while they  competed the follow-on award. According to Army officials, the tribal 8(a)  firm refused to negotiate, stating it would only agree to a 6-month bridge  contract with three 1-year option periods. The contracting officer told us  that they believed they were in a bind, agreed to the terms, and ended up  exercising all 3 option years. The follow-on requirement is currently being  competed.
In March 2011, the FAR was revised to incorporate a new rule, pursuant  to section 811 of the National Defense Authorization Act for Fiscal Year  2010, which requires a written justification for sole-source 8(a) contracts  over $20 million. The justification must be approved by the appropriate  officials—dictated by dollar thresholds—and be publicly posted within 14  days of award. This provision may have an impact on how quickly and  easily sole-source tribal 8(a) contracts are awarded. The new justification  must include, at a minimum a description of the needs of the agency that will be addressed by the  contract,  specification of the statutory provision allowing for the exception to  competition, a determination that the use of a sole-source contract is in the best  interest of the agency concerned, a determination that the anticipated cost of the contract will be fair and other matters the head of the agency would like included.
While these requirements were not in effect for the contracts we  reviewed, we discussed with the contracting officials the potential impact  on future sole-source tribal 8(a) awards. Their opinions varied. Several  officials stated that it will be more difficult to award sole-source contracts  to tribal 8(a) firms, and in some cases these officials said they were  pleased to have a tool to encourage program offices to increase  competition. Others thought it would make no difference, stating that the  justification is simply additional paperwork for the contract file. Still others  stated that the new requirement will not affect them because their office  had already moved away from awarding sole-source 8(a) contracts to  tribally owned firms toward more competition. Some officials attributed  this change in attitude in part to congressional and media attention on  large dollar, sole-source awards to tribally owned firms.
section_title: Various Methods Used to Negotiate Prices for Sole- Source Awards, and Some Savings Realized through Subsequent Competition
paragraphs: When awarding an 8(a) contract, contracting officers are required to  determine that the overall price is a fair market price, which can be done  through a cost or price analysis. The fair market price does not have to be  the lowest price. However in a sole-source environment, there are  increased concerns that the prices may not be the best for the  government, as competition is the cornerstone of the acquisition system  and a critical tool for achieving the best possible return on investment for  taxpayers. These concerns would be no different under non-tribal 8(a)  sole-source contracts. We found that contracting officials used various  methods to determine price reasonableness of contractors’ proposed  costs or prices. We also found examples where the follow-on  requirements were subsequently competed and agency officials  estimated savings.
In finding a fair market price, contracting officers must first determine that  the costs or prices proposed are fair and reasonable. According to the  FAR, price analysis shall be used when certified cost or pricing data are  not required. Price analysis is the process of examining and evaluating a  proposed price without evaluating its separate cost elements and  proposed profit. One of the preferred price analysis techniques is  comparing proposed prices from more than one contractor in response to  a competitive solicitation, as adequate price competition establishes a fair  and reasonable price. The other preferred price analysis method is a  comparison to historical pricing for the same or similar items. When using  this method, however, the contracting officer must ensure that the pricing  is a valid basis for comparison, such as ensuring that significant time has  not lapsed between the prior acquisition and the present one. In addition,  the prior price must be adjusted to account for materially differing terms  and conditions, quantities, and market and economic factors. If  contracting officers determine that these two techniques are unavailable  or insufficient, they are encouraged to use other methods appropriate to  the circumstances, such as comparison with competitive published price  lists or independent government estimates. The FAR also states that cost  analysis shall be used to evaluate the reasonableness of individual cost  elements when certified cost or pricing data are required (however, price  analysis is used to determine that the overall price offered is fair and  reasonable). Cost analysis is the review and evaluation of any separate  cost elements and profit or fee in an offeror’s or contractor’s proposal.  Some cost analysis techniques include evaluating the government’s need  for proposed cost elements, verifying labor rates, or comparing proposed  costs to actual costs previously incurred by the same offeror. Cost  analysis may also be used to determine cost reasonableness or cost  realism when a fair and reasonable price cannot be determined through  price analysis alone.
For many of the sole-source contracts in our review, agency officials  compared contractors’ proposed prices to the prices on the prior contract,  U.S. General Services Administration (GSA) schedule prices, or pricing  data from other sources. The following cases indicate the complexities of  this price analysis technique. For example:
A price analyst at the Social Security Administration found that a tribal  8(a) firm’s proposed prices for a $100-million sole-source contract  were generally 5 to 192 percent higher than the prior, non-8(a)  contractor’s prices. As a result, the price analyst recommended  negotiating price reductions with the tribal firm. The contracting officer  then performed an additional analysis of the same proposal and noted  that the tribal firm’s proposed rates were 8 to 51 percent lower than  the prior firm’s GSA schedule rates and were at or below the schedule  rates of a subcontractor. The documented analysis noted that  comparing the proposed rates to the incumbent contractor’s rates  could be potentially misleading because performance problems also  needed to be taken into account and that the incumbent contractor  had not always provided qualified personnel, among other things. The  tribal 8(a) firm’s proposed prices were accepted.
For another Social Security Administration contract, the contracting  officer evaluated the tribal 8(a) firm’s proposed prices for a sole- source, fixed-price contract based on pricing information from the  current contract and noticed a significant increase in the tribal 8(a)  firm’s price for installation and storage of the equipment being  purchased. Upon further investigation, the contracting officer learned  that the previous pricing had not accounted for substantial  government delays that had added to the costs; the new proposal was  attempting to appropriately include those costs. The contracting officer  noted that the government would work to improve the inefficiencies  that were causing this increase in cost, and based on these  circumstances, the proposed higher price was determined fair and  reasonable.
Independent government cost estimates were also used to determine  price reasonableness for the sole-source contracts in our review. The  examples below illustrate some challenges faced when the estimates  relied in part on outdated costs or inaccurate assumptions. For example:  In one Army contract, the initial independent government estimate had  to be revised from about $49 million to about $100 million, because it  had not taken into account many different factors, such as travel and  overtime for subcontractors. The contract was awarded for about  $113 million.  In another example at the Army, an independent government estimate  was $2.7 million, compared to the contractor’s proposal of $4.7  million. The price negotiation memorandum noted that the  government’s estimate was found to have several missing items,  outdated estimates, and inaccurate assumptions. The estimate was  used as the primary basis for conducting negotiations with the  contractor and to determine that the contractor’s higher price was fair  and reasonable. The contract was ultimately awarded for about $4.0  million.
For one Army contract we reviewed, the contracting officer told us that  she stopped using a competed, single-award indefinite quantity contract  to a tribal 8(a) firm because the firm’s proposals for two of three task  orders were significantly over the government estimates and the  government officials did not believe they were getting a fair market price.  In this case, the Army had simultaneously competed and awarded the  base contract and the first task order. The contractor’s proposed price for  the second task order, however, was almost $6 million, whereas the initial  government estimate was just below $4 million. Contracting and program  officials pushed back on the contractor’s proposed price, but the firm  would not negotiate. The government ultimately awarded the second task  order at the contractor’s proposed price. The contracting officer told us  that the same thing happened on the third task order, so the Army  officials canceled the procurement and stopped using that contract.
Some officials told us that developing independent government estimates  can be challenging, as the pricing environment can change and the  estimate—which may be prepared 6 months to a year prior to contract  award—can become outdated before negotiations begin. For example,  when construction work is in high demand, prices for those services can  increase over the course of a year, according to contracting officers.  Other contracting officials told us that they question how independent the  government estimates are when the tribal 8(a) incumbent works closely  with the program staff who develop the estimates.
For many of the sole-source awards we reviewed, contracting officials  requested support from the Defense Contract Audit Agency (DCAA) to  evaluate the reasonableness of the proposed costs. Some contracting  officials effectively used this support to negotiate a lower overall price. For  example, in our review of one DOD contract, DCAA submitted findings to  the procuring agency 3 months prior to the award date, citing, among  other things, $6.9 million in unsupported costs. Consequently, the  contracting officials negotiated a 15 percent reduction of the proposed  price, which amounted to a savings of nearly $9 million. In an Army  contract, contracting officials agreed with the lower rates suggested by  DCAA for certain cost categories and ultimately negotiated those rates  with the tribal 8(a) firm, reducing the contract price by over $6 million.
In another instance, agency officials awarded a sole-source contract to a  tribal 8(a) firm quickly to ensure that critical services were maintained, but  asked DCAA to audit the proposal with the understanding that the officials  would further negotiate the costs after award based on the findings.  DCAA’s assessment of the firm’s proposed costs was provided 2 months  after the contract’s award. The audit questioned some of the contractor’s  proposed costs, such as duplicative labor positions and staff positions  that were vacant but for which salaries, wages, fringes, and retirement  contributions were included in the final cost of the contract. The  contracting officers faced challenges negotiating the contract’s price, as  they were still negotiating some of these costs with the contractor nearly a  year and a half after contract award.
For sole source procurements, the government and contractor may use  what is known as “alpha” procedures, where they work as a team during  negotiations to define or refine requirements and come to agreement on  prices. A number of contracting officers had used this method to work  with a tribal 8(a) contractor to agree on a fair market price. One  contracting official told us that negotiating prices face-to-face with the  contractor using alpha procedures is easier and less time intensive,  primarily because he can tell the 8(a) contractor how much funding he  has to spend. From there, the contractor can explain to him what the  government needs to “take off the table” and what items in the scope of  work the contractor can provide at that price. Another contracting official  told us that he used alpha procedures because the program office had  failed to set all of the contract requirements prior to commencing  negotiations with the tribal 8(a) contractor.
Contracting officials at one location we visited noted that alpha  contracting in a sole-source environment can lead to the best deal for the  government for a variety of reasons, such as leveraging the insight of  technical experts throughout the price negotiation process and providing  a forum for the contractor to ask for additional clarification about the  government’s requirements. At another location we visited, one  contracting official told us that he believed the government got a better  price using alpha procedures than by using full and open competition  when contracting for construction of identical buildings. He attributed this  in part to the fact that the contractor in the alpha process had a better  understanding of the government requirements and the government did  not have to go back and correct or make adjustments to the contract. savings. Recent policy and guidance from agencies, most significantly the  Office of Management and Budget (OMB) and DOD, have also  emphasized the importance of competition. With regard to ANCs, the  Acting Deputy Assistant Secretary of the Army (Procurement) issued a  memo in January 2011, stating that high-dollar sole-source awards to 8(a)  ANC firms should be the exception rather than the rule, and laid out the  expectation that these awards be scrutinized to ensure they are in the  government’s best interest. Further, in November 2011, DOD’s Director of  Defense Procurement and Acquisition Policy called for a review of all  active sole-source contracts to ANCs that were awarded prior to the new  requirement for a written justification for awards over $20 million. As part  of the review, DOD services, agencies, and activities must review the  justifications (if any) that support the contract awards and describe  actions to ensure there is no abuse of these types of contracts.
In the sole-source contracts we reviewed, we found examples where the  follow-on requirements were subsequently competed, resulting in savings  according to agency officials.
The Air Force awarded a contract competitively for base operation  support and, according to officials, saved about $17 million for a  requirement that was valued at over $100 million. Officials stated that  the previous contractor had high management costs.
At the Army, we reviewed an approximately $8.9 million sole-source  contract with a tribal 8(a) firm for one year of medical services. The  contracting activity recompeted the follow-on requirement, and the  contracting officer estimated savings of $2.3 million annually, for a  total of $11.5 million over the life of the contract.
At the Federal Emergency Management Agency, the contracting  officer told us that when the follow-on to the sole-source tribal 8(a)  contract in our review had been competed among small businesses,  the labor rates on the new contract were, with one exception, between  5 and 46 percent lower than the previous sole-source contract.
Department of Energy officials told us that they competed a  requirement that was previously awarded sole source to a tribal 8(a)  firm, and while they could not estimate dollar savings, they believed  they were getting better performance as a result of the competition.
section_title: Agency Oversight of Subcontracting under Tribal 8(a) Contracts Continues to Be Lacking
paragraphs: To ensure that 8(a) firms do not pass along the benefits of their contracts  to their subcontractors, regulations limit the amount of work that can be  performed by subcontractors. Specifically, for service contracts with  subcontracting activity, the 8(a) firm must incur at least 50 percent of the  personnel costs with its own employees (for general construction  contracts, the firm must incur at least 15 percent of the personnel  costs). In 2006, we reported that procuring agency contracting officers  were not monitoring compliance with the limitations on the percentage of  work performed by subcontractors as required—largely because they  were confused about whose responsibility it was to do so. Based on our  recommendations, SBA took some actions to clarify this issue, including  providing training to contracting officers and revising its partnership  agreements with procuring agencies. Nevertheless, we have continued to  find that monitoring of subcontracting limitations is not routinely occurring  due to a lack of clarity as to who is responsible for the monitoring and  uncertainty on the part of contracting officers about how to conduct the  monitoring. Of the 87 contracts in our review, 71 had one or more  subcontractors. We found no evidence of regular and systematic  monitoring of the limitations on subcontracting. Some of these contracts  had large dollar values, up to $500 million. When the subcontracting  limitations are not being monitored, there is an increased risk that an  inappropriate degree of the work is being done by large business  subcontractors rather than the 8(a) firm. These risks can be significant  given the large dollar value contracts awarded to tribal 8(a) firms.
subsections: section_title: Confusion Remains about Accountability for Monitoring Subcontracting Limitations
paragraphs: In response to our 2006 recommendations, SBA clarified in its partnership  agreements with the procuring agencies that it is the contracting officer’s  responsibility to monitor compliance with the limits on subcontracting  under 8(a) contracts. In addition, SBA standardized language in its 8(a)  acceptance letters to state that contracting officers are responsible for the  monitoring. SBA also provided additional training and guidance for  agency contracting officers about this responsibility, among other 8(a)  contracting requirements. Even with these actions, however, we still  found that some contracting officers do not understand that ensuring  compliance with the limitations on subcontracting is their responsibility.  Some stated that it was SBA’s responsibility as part of the annual review  process for tribal 8(a) firms, and officials for one agency thought that it  was ultimately the prime contractor’s responsibility. A contracting official  from the State Department told us that he did not have the time or staff to  monitor compliance, but he believed that the prime contractor self- monitored because the firm was hiring some subcontractor employees to  work for it to ensure that the required work percentages were met.
We found situations where there is an increased risk that the  subcontractor may be performing more than the limitations allow. In some  cases, these subcontractors were large firms or firms that had graduated  from the 8(a) program, yet the government was not monitoring  compliance with the limits on subcontracting. For example, in one case,  the subcontractor to a tribal 8(a) firm under a base engineering support  contract had held the prior contract for the requirement, and the  subcontractor’s president had part-ownership in the tribal 8(a) firm. For  another contract, to build an airplane hangar at an Air Force base—in  which the percentage of work subcontracted was not monitored—the  tribal 8(a) firm had subcontracted with a large business that had extensive  experience in hangar building. During the negotiation process, after much  discussion about the project, a government representative asked the  tribal 8(a) firm what work it would be doing; up to that point the  subcontractor had been answering all the questions. In another example,  for construction of an aircraft facility at another Air Force base, the prime  contractor stated in its proposal that it could not meet the 15 percent of  work requirement, and thus a legal review initially found the pending  award to be legally insufficient and unacceptable. The contracting  specialist wrote a note on the legal memo stating that the prime  contractor would meet the required work percentages, with no additional  explanation. Notwithstanding the concerns raised, the contract was  awarded. The contracting officer told us that she does not monitor the  percentage of work that is subcontracted on this contract.
Although contracting officers should consider all applicable regulations  when awarding and administering 8(a) contracts, several contracting  officers we spoke with told us they depend primarily on the requirements  outlined in the FAR for guidance. The FAR only directs contracting  officers to include the “limitations on subcontracting” clause—under which  the prime contractor agrees to perform a certain percentage of the  contract work itself in its 8(a) contract. The FAR does not state who is  accountable for monitoring compliance with the required percentages.  While the partnership agreements between SBA and the agencies clearly  state that the procuring agencies are responsible for the monitoring, these  agreements are signed by high level SBA and agency procurement  officials; contracting officials may not be aware of the content of the  agreements.
Adding to the confusion over which agency is responsible for monitoring  subcontracting, in reviewing 8(a) files in the SBA Alaska district office, we  found examples where prime contractors had reported to SBA that they  were complying with the limitations on subcontracting. However, SBA  officials told us that they do not consistently collect this information from  8(a) firms and that it is ultimately the responsibility of the procuring  agency to monitor compliance.
section_title: Contracting Officers Unclear about How to Monitor Subcontracting Limitations
paragraphs: Many contracting officials told us they do not know how to monitor the  percentage of work that is subcontracted. Based on our review of agency  contract files, data were not readily available, making it difficult to  determine how much work was being performed by the prime contractor  versus the subcontractor. For example, contractor invoices in some of the  files we reviewed did not reflect the subcontracting activity. And for those  invoices that did include subcontractor information, the separation  between labor and materials costs was unclear. This information would  be needed for contracting officers to properly monitor compliance with the  limits on subcontracting, which excludes the costs of materials. Some  contracting officials noted that the prime contractor itself would have  ready access to the subcontracting percentages (such as in its financial  systems). One contracting official noted that contractor invoices for time- and-materials services under a contract in our sample identified the  subcontracted work, but the invoices for fixed-price services, billed under  the same contract, did not. She estimated that it would take her several  weeks to calculate the percentage of work that was subcontracted.
A further complication pertains to monitoring subcontracting under  indefinite quantity contracts, the government’s use of which is now  outpacing stand-alone contracts. Of the 41 indefinite quantity contracts in  our sample that had subcontractors, we found no evidence that the  subcontracting limits were being routinely monitored. SBA regulations  state that the 8(a) participant must demonstrate semi-annually whether it  has incurred 50 percent of personnel costs with its own employees for the  combined total of all task or delivery orders at the end of each 6-month  period. However, the FAR does not cross-reference to this provision or  otherwise describe how to monitor subcontract limitations in indefinite  quantity contracts.
Contracting officials told us they would appreciate additional guidance  regarding methods they should employ to track compliance with the limits  on subcontracting. The FAR is silent on this subject, and the SBA 8(a)  regulation does not provide detailed instructions on how to do so. In the  absence of specific guidance, some of the contracting officers we spoke  with pointed to techniques that they have used to try to gauge the amount  of work that is subcontracted. For example, one official said that he  monitored subcontractors by “walking the ground,” so he can easily sight- check contractor badges to determine who is a prime contractor and who  is a subcontractor. In another scenario, officials stated that they visit the  worksite to check the company names on the trucks parked there. Others  relied on their personal knowledge of the contractors, stating that  because they were very familiar with the prime contractor, they would  know if the firm was not performing its required percentage of the work.  And still others tallied the number of workers employed by the prime  versus subcontractor to get a general picture of the amount  subcontracted, but did not calculate the percentage of labor costs  associated with the subcontractors. While these actions are ways to get a  general sense of subcontracting activity, they are not adequate to  determine the extent of personnel costs that are incurred by the  contractor.
Many contracting officials also told us they reviewed contractor proposals  to verify that the prime contractor planned to perform the required  percentage of the work. However, this level of review alone does not  ensure compliance with the limitations on subcontracting clause because  subcontractors, and the amount of work they do, can change once the  contract is awarded. In addition, contracting officers may not even be  aware that work is being subcontracted. The tribal 8(a) contractor’s  proposal for one contract we reviewed, for example, noted as a benefit to  the government that the contractor’s own employees would be  indistinguishable from those of its subcontractor. We also found cases in  our review where contracting officials inadvertently learned that their  prime contractors were using subcontractors. One Department of  Agriculture official told us that he did not realize certain positions were  going to be subcontracted until he questioned a particular wage rate  during the negotiation process, and the firm stated that it needed to seek  additional information from the subcontractor. In another instance, a  contracting official at the Department of Justice was unaware that the  prime contractor had subcontracted work until we brought it to her  attention based on our review of the contract file. She added that often  “the contracting officer is the last to know” about the prime contractor’s  hiring subcontractors, because of a lack of communication among the  contractor, program office, and contracting office. In yet another example,  a DOD contracting officer said that he only learned that work was being  subcontracted when a subcontractor employee was caught speeding on  the base.
During our review of contract files, we found a few instances where the  file included a recently performed analysis of subcontracting percentages  that appeared to have been prepared in anticipation of our visit. In one  case, at the Centers for Medicare and Medicaid Services, an analysis,  which the contracting officer said was prepared for our visit, showed that  the prime contractor had subcontracted almost 72 percent of the total  costs for the 3-month base period of a 5-year, almost $205 million  contract, but a few years into the contract the overall subcontracting level  had dropped to about 40 percent. The contracting officer explained that  he knew that the 8(a) firm would have to initially subcontract out a  substantial portion of the work, but the expectation was that the contractor  would meet the required work percentage over the course of the period of  performance. In another case, a recent analysis of the subcontracting  percentages for several 6-month periods on an Army indefinite quantity  contract showed that the prime contractor was performing the required  percentage of the work, but when we asked the contracting officer about  the analysis, he was not sure who had completed it or the basis for the  figures. In another example, a document in a Food and Drug  Administration contract file showed the prime contractor was performing  the required percentage of the work. The contracting officer said that, in  preparation for our visit, she had requested the analysis from the  contractor, as she did not have the information to do it herself. She told us  that she requests this information periodically from the vendor; however,  there was no record of these periodic analyses in the contract file. We  also talked to contracting officials who told us that they requested regular  reports from the contractor on the amount of work subcontracted, but  when we asked for examples of the reports, none could be provided, and  there were no examples of these reports in the contract files.
section_title: SBA’s New Regulations Will Be Difficult to Implement, and Other Problems and Practices Have Not Been Addressed
paragraphs: SBA made the first significant revision to 8(a) program regulations,  effective March 14, 2011, in over 10 years, aimed at clarifying program  rules, correcting misinterpretations, and addressing program issues. The  revised rules include new requirements that will affect tribal firm  participation in the 8(a) program, such as rules related to sole-source  follow-on contracts and work performed by joint ventures. However, SBA  will have difficulty enforcing some of these new regulations given the  information currently available. Further, SBA, in its regulations or  elsewhere, has still not addressed some issues we raised in our 2006  report. Finally, in this review we discuss practices that highlight how some  tribal 8(a) firms operate, in effect, like large businesses due to their parent  corporation’s backing and relationships with their sister subsidiaries. SBA  has not reviewed these practices to determine whether they are  acceptable given the business development purpose of the 8(a) program.
subsections: section_title: SBA Lacks Data to Implement and Enforce Some of the New Regulations
paragraphs: Although the recent SBA rule changes are intended, in part, to address  tribally owned firms’ participation in the 8(a) program, SBA does not have  critical data it needs to implement or enforce compliance with some of the  new requirements. These include new restrictions on agencies’ ability to  award sole-source follow-on contracts to firms under the same tribal entity  and restrictions on work performed by the non-8(a) partner in a joint  venture. SBA headquarters officials told us they are currently in the initial  stages of developing the requirements for a new system intended to  provide necessary data on 8(a) firms, and estimate that it will be  operational between September 2012 and January 2013. They are also in  the process of re-writing their Standard Operating Procedures for district  officials to implement the new regulations; however, they could not  estimate at this time when the final version will be completed.
In 2006, we reported that ANC 8(a) firms were taking advantage of their  ability to create new subsidiaries to win follow-on work from subsidiaries  that had left the 8(a) program. One of the new SBA rules prohibits the  award of successive follow-on sole-source 8(a) contracts to multiple firms  owned by the same tribal entity. Specifically, agencies are now prohibited  from awarding a follow-on 8(a) sole-source contract to another subsidiary  firm owned by the same entity—also called a sister subsidiary. In its  explanation of this new provision, SBA stated that having one subsidiary  take over work previously performed by a sister subsidiary does not  advance the business development of two distinct firms. SBA expects  that, when it accepts multiple firms under the same tribal entity into the  8(a) program, each firm will operate and grow independently in line with  the business development purposes of the program. SBA’s intention was  to address a negative perception that businesses could operate in the  8(a) program in perpetuity by changing their structure or form to continue  to perform work as they had under previous contracts. As an example of  this perception, we found that one tribal 8(a) firm stated in its marketing  materials that it would “never graduate” from the 8(a) program. Agency  officials told us that it is their general impression that by awarding follow- on contracts to the incumbent firm’s sister subsidiary, they are, for all  intents and purposes, working with the same company.
In our current review, we found multiple examples of follow-on sole- source 8(a) contracts being awarded to a sister subsidiary. While these  contracts had all been awarded prior to the effective date of the new rule,  these examples suggest that it is not unusual for agencies to turn to sister  subsidiaries for follow-on sole-source 8(a) contracts. For example:
When we spoke to one contracting officer’s representative with the  Army in May 2011, we found that he was unaware of the new  regulation. He explained that when a tribal firm graduates from the  8(a) program, his office would typically award a sole-source follow-on  contract to one of the firm’s sister subsidiaries based upon the past  performance of the incumbent. Noting that a current sole-source tribal  8(a) contract to provide research and development support was set to  expire in 2012 and that the incumbent was graduating from the 8(a)  program, he stated that it made sense to award the follow-on to one of  the firm’s sister subsidiaries, especially since the incumbent had  performed well. After we told him this was no longer permissible under  SBA regulations, he said that the new rule put a “kink” in his plans and  that he would need to start planning right away to ensure there was  adequate time to successfully award the requirement competitively.
In another example from our review, a procuring agency had awarded a  follow-on contract to a sister subsidiary without realizing the relationship  between the firms. In September 2007, the Social Security Administration  awarded a $48 million 8(a) sole- source follow-on contract for information  technology support services. The incumbent 8(a) ANC firm recommended  that the agency make the award to its protégé, as the incumbent was no  longer in the 8(a) program. When we spoke to agency officials in July  2011, the agency was not aware that the protégé firm, which received the  follow-on award, was also a sister subsidiary of the incumbent. According  to the officials, they will rely on SBA to know if a firm targeted for a follow- on procurement is eligible for an 8(a) award based on the new rules.
Although prohibiting this practice of awarding sole-source follow-on  contracts to sister subsidiaries of 8(a) firms is a positive step toward  curbing some perceived abuses of the 8(a) program, the required  information is not always available to enforce this new rule. For example,  SBA’s data system for tracking 8(a) participants does not provide district  offices with the full information needed to track compliance. District  officials have access only to information on the firms that they service.  Yet a number of tribal entities have firms in multiple locations throughout  the country, and those firms are serviced by different SBA district offices.  To illustrate, one ANC parent company has eight subsidiaries serviced in  six different district offices. Because SBA’s Alaska district office services  the majority of ANC 8(a) firms, its insight into the activities of those parent  corporations’ subsidiaries may be greater than that of other SBA districts,  which may service only one of several subsidiaries under the same  parent corporation. When we visited the Alaska district office 7 weeks  after the new rule had taken effect, we found evidence that SBA had  turned down a follow-on contract offer from a procuring agency because  the contract violated the new regulation; district officials informed us that  they had declined four to five other contract offers for the same reason.  However, the officials explained that they maintain paper files and that  they would have limited procurement history information—including  information about the prior, incumbent firm—unless the requirement had  always been serviced by that district. Conversely, officials at an SBA  district office that services relatively few tribal 8(a) firms told us that they  have not turned down any offer letters that violate this new regulation, but  that they also would not necessarily know if the incumbent was a sister  firm given the information they can access in the 8(a) tracking system.
SBA headquarters officials are aware of the limitations of the data system  and told us that they are currently developing a new system that is  intended to provide a more global view of tribal entities to the officials at  all district offices. They are also considering ways to access more  information on a contract’s procurement history, including linking their  new system to FPDS-NG to obtain more information on 8(a) contract  awards. Officials reported that, as of September 2011, they were in the  process of awarding a contract to develop the system; they estimated it  would be operational between September 2012 and January 2013.
Further, SBA regulations require procuring agencies to discuss the  requirement’s acquisition history, if any, in their 8(a) offer letter and  information on any small business contractors which had performed the  requirement in the past 2 years. In some cases, however, we found that  contracting officers did not include the complete procurement history in  their offer letters to SBA even when the requirement had been performed  by a prior 8(a) contractor. For one contract we reviewed, the contracting  officer had provided no acquisition history in its offer letter to SBA even  though he told us that the requirement had previously been performed by  the same contractor under another contract awarded by a different  agency. He explained that he did not provide the procurement history to  SBA because his office had no acquisition history with the requirement. In  another example, the contracting officer told SBA there was no  acquisition history for the procurement; however, documents in the  contract file showed that the agency clearly considered it a follow-on  requirement. The contracting officer could not recall why no acquisition  history was included in the SBA offer letter, but noted that the scope of  work had significantly expanded. SBA district officials also told us that  they do not always receive complete procurement history information. In  some cases, this is because agency contracting officials are unaware of  the full procurement history, which can be a result of contracting officer  turnover. Without access to a complete and accurate procurement  history, SBA district offices will have difficulty enforcing this new  regulation.
Non-8(a) businesses can create a mentor-protégé joint venture with an  8(a) firm to win 8(a) prime contracts. In 2006, we reported that there was  a risk that large businesses could take advantage of the 8(a) status of  firms for their own benefit and that SBA may not obtain the information  necessary to determine if the partnership is working as intended. SBA  officials told us that they had seen cases where the non-8(a) partner in a  joint venture was performing the vast majority—80 to 90 percent—of work  on a contract. SBA’s new rules require that the 8(a) partner in certain  kinds of joint ventures perform a specific portion of the work. Application  of this new rule depends on whether the joint venture is populated (i.e., it  is a separate legal entity that has its own employees) or unpopulated (i.e.,  it merely exists through a written agreement and would use the  employees of the 8(a) and non-8(a) partners). The new regulation  specifies that the 8(a) partner in (1) an unpopulated joint venture or (2) a  populated joint venture with one or more administrative personnel, must  perform at least 40 percent of the work performed by the joint venture.
The previous regulations simply stated that the 8(a) partner must perform  a “significant portion” of the contract. SBA officials believe that this is an  improvement because it gives an exact measure of how much work  should be done by the 8(a) partner, to better ensure that the firm receives  significant benefit from the venture. However, the agency does not have  the information necessary to implement this new requirement.
SBA relies on information from 8(a) firms on their joint venture  agreements, but SBA officials told us that they do not always get the  information they need to determine how the work would be performed.  For example, one joint venture mentor-protégé agreement we reviewed— approved by SBA but formed prior to the new rule—stated that the 8(a)  firm would have full responsibility in overseeing performance of any  contract awarded to the venture. It further stated that the 8(a) partner  would perform at least 51 percent of the work for the contract, but did not  provide any details on how the work would be divided. Questions were  subsequently raised about this joint venture. In 2008, DCAA—at the  request of Army officials who had concerns about the amount of work the  tribal 8(a) firm in this joint venture would perform—found that there was  not enough financial information available to perform an assessment of  either the joint venture or tribal 8(a) firm. DCAA noted, however, that the  8(a) firm had only one employee and that a majority of its work had been  subcontracted.firm said the agency generally receives an annual statement that a firm is  complying with joint venture requirements, but does not receive further  information on how the work is split between the 8(a) and non-8(a)  partner. SBA officials acknowledge having little insight into how joint   An SBA official from the district office overseeing the  venture partners share the work, making it difficult to enforce new  regulations.
The new rule also requires that, for populated joint ventures, the non-8(a)  firm and its affiliates cannot receive subcontracts at any level—first tier or  below—under a joint venture 8(a) contract. would be violated if a joint venture subcontractor further subcontracted  work to a firm that was an affiliate of the non-8(a) partner. Thus, enforcing  this rule requires knowledge of all subcontractors at all levels, as well as  the ability to identify whether any of the subcontractors are affiliated with  the non-8(a) partner. Given SBA’s limited insight into subcontracting on  8(a) contracts, this new regulation will be hard to enforce. SBA officials  state that they do not see information on planned subcontractors, noting  that this information may be included in the contract proposal, which they  currently do not review. They also acknowledged that a significant  amount of research would be required to uncover any relationship  between the non-8(a) firm and all levels of its subcontractors and  affiliates. According to SBA headquarters officials, district officials could  request contract proposals that would include more information on the  planned subcontractors. However, SBA officials do not receive  information on changes to the planned subcontractors after contract  award.
section_title: SBA Has Not Addressed Previously Identified Issues
paragraphs: While the new regulations address certain issues pertaining to the  primary and secondary lines of business under which 8(a) firms can  operate, the rules’ impact on tribal firms, given their special advantages in  the program, are not clear. Specifically, SBA has not addressed, in  regulation or otherwise, issues we raised in our 2006 report regarding (1)  the need for SBA to track the various industries under which multiple 8(a)  subsidiaries of one tribal organization are generating revenue and (2)
The final rule provides an exception to this rule if SBA determines that other potential  subcontractors are not available, or the joint venture is populated only with administrative  personnel.
SBA’s statutory requirement to determine if firms in a tribal organization  will obtain a substantial unfair competitive advantage in an industry.
In 2006, we reported that SBA was not tracking the business industries in  which ANC subsidiaries won 8(a) contracts under secondary NAICS  codes. Thus, SBA was not ensuring that a firm’s secondary NAICS codes  did not, in effect, become the primary business line under which the firm  generated the majority of its revenue. Prior to the recent regulatory  changes, if an 8(a) firm outgrew its primary NAICS code, it could still  operate in the program and be awarded contracts under one or more of  its secondary NAICS codes, as long as it qualified as small for these  secondary codes. The new regulations now state that, when an 8(a)  participant outgrows the size standard for its primary NAICS code, SBA  considers that firm to have met its goals in the program, and SBA may  graduate the firm prior to the expiration of its program term. Although this  change may shorten the length of time that a tribal 8(a) firm is in the  program, its impact is not clear because tribal entities can simply create a  new subsidiary with a different stated primary industry, and the subsidiary  can continue to work in any industry under secondary NAICS codes.  Conversely, non-tribal 8(a) firms can only own one 8(a) firm in a lifetime.
A second regulatory change allows 8(a) participants to change their  primary NAICS code if they can show that they have been performing  work in a different industry. Previously, the primary NAICS code  identified at the time of application was in effect through the firm’s tenure  in the 8(a) program. For tribal 8(a) firms, this new requirement means  that, if they are outgrowing the size standards for their initial primary  NAICS code, they can change to a secondary code with larger size  standards to stay in the program (as long as it is not the same primary  code as a sister subsidiary). However, SBA officials have said that firms  will have to show that they are moving into a new industry through a  thoughtful process and that outgrowing the size standard cannot be the  only reason for changing their industry as this would not be in the spirit of  the 8(a) program. At the same time, 8(a) firms are allowed to pursue  multiple, diverse lines of business in an unlimited number of secondary  NAICS codes. We found that one tribal firm in the 8(a) program had 49  declared NAICS codes, including industrial building construction,  investigation services, and religious organizations. Another firm reported  25 different NAICS codes under which it may pursue work, including  computer and software stores, advertising agencies, and educational  support services.
While the regulatory changes are a step in the right direction in enforcing  and enhancing the business development aspects of the program, SBA  has not taken steps to address a key finding and recommendation from  our 2006 report pertaining to tracking secondary lines of business of 8(a)  firms under the same ANC. We reported that SBA was not tracking  revenue generated under these firms’ secondary lines of business. Thus,  SBA was not ensuring that a firm’s secondary NAICS codes did not, in  effect, become the primary business line by generating the majority of  revenue. This situation could allow for a tribal organization to have more  than one 8(a) subsidiary perform most of its work under the same primary  NAICS code, which SBA regulation does not allow. We recommended  that SBA collect data on primary revenue generators for 8(a) ANC firms to  ensure that multiple subsidiaries under one parent company were not  generating their revenue in the same industry.
SBA systems that track 8(a) participant data do not collect information on  the industries in which firms generate their income. In fact, in reviewing  annual reports that tribal 8(a) firms had submitted to SBA, we found  cases where multiple 8(a) firms under the same tribal entity reported  generating most of their revenue in the same industry. For example, SBA  records showed that six 8(a) firms under one ANC parent entity  generated most of their 2009 revenue in the same lines of business,  although each firm has declared a unique primary industry. Table 4  shows the declared primary revenue and actual main revenue generators  for 2009 for each subsidiary.
SBA has not addressed another recommendation we made in 2006 as to  how it will comply with an existing law requiring the Administrator to  determine whether and when one or more ANC firms are obtaining, or are  likely to obtain, a substantial unfair competitive advantage in an industry.  “Substantial unfair competitive advantage” is not clearly defined in statute  or regulation. We found that the SBA Administrator has never made this  determination, nor is there a process in place to do so. Making such a  determination would result in all the subsidiaries under a tribal entity  being considered affiliated and thus no longer considered independent for  size purposes. A finding of affiliation with the parent organization or a  sister 8(a) firm could result in a tribal 8(a) firm exceeding small business  size standards and not being eligible for 8(a) contracts.
In our current review, we found a few cases where the SBA district office  had made such an affiliation determination between tribal 8(a) firms and  related non-8(a) firms. In one case, SBA’s Alaska district office found  affiliation between a tribal 8(a) firm and its part-owner, a business that  had previously graduated from the 8(a) program. In another complex  situation, a tribal 8(a) firm was 40 percent owned by a large business that  was also a subcontractor to one of the 8(a) firm’s sister subsidiaries. SBA  eventually determined that there was affiliation between the large  business and the sister subsidiary, resulting in the two firms’ revenues  being considered together for the sister firm’s size standard  determination. As a result, SBA rejected a contract offer for the sister  subsidiary where the large business would be a subcontractor, because  the firm could not meet the size standards when its revenues were jointly  considered with those of the large business. Figure 6 illustrates the  relationships between the parent entity, the 8(a) firm and its sister  subsidiary, and the large business.
Because SBA has not taken steps to more rigorously determine how to  ascertain substantial unfair competitive advantage, there is a risk that  tribal 8(a) firms are being considered independent for size determinations  when they should be considered affiliated. SBA officials told us that they  are in the early stages of drafting a policy that will outline the process for  making determinations of unfair competitive advantage.
section_title: SBA Has Not Considered Whether Tribal 8(a) Firms’ Large Business-Like Practices Are Consistent with the Business Development Purpose of the 8(a) Program
paragraphs: In 2006, SBA officials told us that the charter of ANCs under ANCSA— economic development for Alaska natives from a community standpoint— can be in conflict with the business development intent of the 8(a)  program. We pointed out ways that ANCs use the 8(a) program differently  than individually owned 8(a) businesses do. Congress has stated that the  8(a) program purpose is exclusively for business development purposes  to help small businesses owned and controlled by the socially and  economically disadvantaged to compete on an equal basis in the  mainstream of the American economy. SBA, in changing its rules to  disallow the award of follow-on contracts to tribal 8(a) sister subsidiaries,  stated that it expects that two or more firms under the same tribal  organization are to operate and grow independently, in line with the  business development purposes of the 8(a) program. However, we found  other practices, not addressed under the regulations, that highlight the  particular nature of tribal 8(a) firms’ interconnectedness. These practices  result in some firms essentially operating like large businesses and not  developing as independent 8(a) firms. For example, the tribal firms often  have common management and subcontract with each other or otherwise  draw resources from one another or from the parent corporation. Access  to these additional resources can help promote their significant business  growth over a short period of time, sometimes resulting in firms leaving  the 8(a) program early after outgrowing their size standards. By not  participating in the transition phase of the program, these firms are  missing out on some of the business development aspects of the  program, such as competing for non-8(a) contracts to demonstrate their  progress in developing into viable businesses that are not solely reliant on  the 8(a) program.
SBA headquarters officials recognize that tribal 8(a) firms have some  advantages over other 8(a) firms because of the resources they can draw  from their parent organization and sister firms. But SBA has not  determined whether these other practices we identified are congruent  with the business development purpose of the 8(a) program. SBA officials  look at individual firms during annual reviews, but do not consider the  consequences of their interconnectedness with sister subsidiaries and the  parent company in the areas discussed below.
One way firms under tribal organizations are generally interconnected is  through common management. Common management was evident in  many of the tribal 8(a) firms’ applications we reviewed. For example, the  manager of one 8(a) firm also served as Chief Executive Officer to three  sister subsidiaries under the same parent, including a sister subsidiary  that provides administrative support services to the “family of  companies.”tribal 8(a) firms’ ability to show potential for success in the 8(a) program.  SBA requires applicants to show potential for success by having at least 2  years of experience in their primary industry or by showing that their  managers have technical and management experience in that industry,  among other things. Of the 62 tribal 8(a) firms we reviewed, 44 entered  the 8(a) program with less than 2 years of experience in their primary  industry. Most of the firms demonstrated potential for success by showing  corporate managers’ significant experience in the stated primary industry  through work with a sister subsidiary. For example, in considering an  applicant that was applying to the 8(a) program just 6 months after it was  organized, SBA pointed to the extensive managerial and technical  experience of the firm’s president, including his previous position as vice  president to a sister subsidiary. Further, the interconnectivity of some  tribal 8(a) firms is also evident where the same board members oversee  multiple firms under their parent entity. For example, we found that a  member of the board of directors had served on the board of three  different 8(a) subsidiaries, while also serving as a member of the board of  directors for the parent entity.
Another way tribal 8(a) firms become interconnected is through  subcontracts with their own sister subsidiaries. During negotiations with  the Army for an 8(a) contract, one tribal firm noted its ability to quickly  subcontract with its sister firms as a benefit. We found that some tribal  firms demonstrated their potential for success when they did not have 2  years in business, using these subcontracts as a record of successful  performance in their primary industry. Of the 44 firms we reviewed that  entered the program with less than 2 years of experience in their industry,  we identified 20 that had obtained some initial experience through  subcontracts with a sister subsidiary. For example, we reviewed seven  firms owned by one Indian tribe, and five of those seven firms used  subcontracts from sister firms to demonstrate their ability to successfully  perform work in their primary industry.
As another example of firms’ interconnectedness, we found that tribal 8(a)  firms can leverage subcontracts from sister subsidiaries to generate  required percentages of non-8(a) revenue as the firm progresses in the  8(a) program. During the last 5 years in the program, known as the  transition period, firms are required to obtain a certain percentage of non- 8(a) revenue to demonstrate their progress in developing a viable  business that is not solely reliant on the 8(a) program. In one example, a  firm did not meet its non-8(a) revenue requirements in its seventh year in  the program. Consequently, the SBA district office placed the firm under  remedial action, wherein it was ineligible to receive sole-source 8(a)  contracts. However, SBA reinstated the firm after a sister subsidiary  awarded it a $20 million subcontract that boosted its non-8(a) revenue to  the required annual level. The firm then regained its eligibility to receive  sole-source 8(a) contracts.
Tribal 8(a) firms may also cite the past performance of sister firms to  demonstrate their own capability to perform under an 8(a) contract. In our  review of contract files, we found a number of examples where firms  pointed to the past performance of sister subsidiaries in their proposals to  demonstrate their capability. One firm, in its business plan presented to  SBA, pointed out that leveraging the past performance of a sister  company was extremely important as a basis for demonstrating capability  to perform. The firm noted that during its first 2 months of operation, it  was often asked to provide past performance documentation and that  “this is a requirement that is obviously difficult to meet given that we are a  brand new company that has only been just recently certified and  approved to begin accepting contracts.” Another firm pointed out that it  had an advantage over competitors because of the history of successful  contract performance by sister subsidiaries.
Some tribal 8(a) firms promote the fact that they are part of a larger  corporate brand and can access resources from their parent organization  and sister firms. Even though tribal 8(a) firms must be “small” under the  SBA size standard for their primary industry, their ability to leverage these  additional resources can vastly increase the breadth and depth of their  capabilities. As the following examples show, the firms can operate, in  effect, more like large businesses.
One ANC 8(a) firm reported to SBA that it is without “geographical  limitations as the ANC presence has been established in 49 states.   will continue to work with its existing customer base as well  as network with agencies familiar with the ANC name.”
One ANC firm reported the intention to transfer staff and management  from other subsidiaries as workloads dictate, “with reach back  capabilities to access 6,700 employees nationwide and the means of  accessing many in-house subject matter experts when necessary.” In  another contract, the same firm advertised to a procuring agency that  its resources included over 7,000 employees at over 90 locations in  31 states to support construction projects. For a different ANC 8(a)  firm, procuring agency officials noted that the firm had 4,000  employees it could draw from to perform the contract.
One firm owned by an Indian tribe, in describing its prior experience,  advertised in its proposal to the Army the overall success of firms  under the parent entity in providing services to the federal government  and managing contract employees. The firm also stated in the  proposal that its performance on the contract would be at the same  high level as its successful sister firm that had graduated from the 8(a)  program, as the firms share the same senior management.
One ANC has a marketing and proposal services center that is  dedicated to supporting all of its subsidiaries in developing cost and  technical proposals for government contracts. This ANC also  designated an employee to act as the sole point of contact to the SBA  for all correspondence and filings for seven of its 8(a) subsidiaries.
An ANC firm stated in its business plan that a benefit of its  organizational structure is the ability to operate as a small company  while having access to corporate backing “that typically only a large,  seasoned company can provide.” Another firm—in its capabilities  briefing to a procuring agency—advertised that while the firm is an  8(a) small business, it operates within a resource environment of a  large business.  In its business plan to SBA, an ANC 8(a) firm listed some large  businesses as primary competitors in its market, including Lockheed  Martin, Northrop Grumman, CACI and General Dynamics.
Access to these additional resources, plus the special advantages  afforded tribal 8(a) firms, can help promote their significant business  growth in the 8(a) program over a short period of time. For example, one  tribal 8(a) firm reported average revenues of $31,000 from landscaping  contracts when entering the program in 2009. Subsequently, the firm  received a $500 million contract for construction. In 2011, the firm  reported sales of $21.3 million, an increase of 764 percent from the  previous year. In another example, a firm had one employee when it  applied to the 8(a) program, but had grown to 124 employees by its first  annual review by SBA.
Many tribal 8(a) firms have left the program prior to completing the full 9  year term. Table 5 shows that of the 165 tribal 8(a) firms that have left the  program, 70 left prior to completing the full 9 year term. Furthermore,  more ANC firms withdrew or graduated from the program early than  completed the 9 year term.
For some tribal 8(a) firms, their rapid growth prevents them from reaching  the transition phase of the 8(a) program because they have outgrown the  small business size standards. The small business regulation states that  to ensure participants do not develop an unreasonable reliance on 8(a)  awards and to ease their transition into the competitive marketplace after  graduating from the 8(a) program, participants must make maximum  efforts to obtain business outside the 8(a) program. As a result of  withdrawing from the program early, these firms never have to compete  for contract awards and thus do not experience some of the intended  business development aspects of the 8(a) program. For example:  In its review of an ANC firm’s third year in the 8(a) program, SBA  found that the firm had average annual revenue of $78.4 million,  which exceeded its small business size standards. Furthermore, SBA  pointed out that the firm likely would not meet its targets for non-8(a)  revenue once it reached the transition phase and recommended early  graduation from the program as a result of these factors. During the  firm’s time in the program, 99 percent of its revenue came from 8(a)  contracts.
SBA stated in its analysis of another ANC firm’s 8(a) application that  rapid growth could be a weakness, as subsidiaries under the firm’s  parent entity tended to grow too large to continue in the 8(a) program  after just 4 to 5 years. This firm had reported $318 million in revenue  from 8(a) contracts in its third year in the program, and SBA  recommended that the firm be graduated early from the program as it  was no longer a small business. However, the firm remained in the  program for one more year.  In another example, an ANC firm voluntarily withdrew from the 8(a)  program after almost 4 years. In commenting to SBA about its  experience, the firm suggested that SBA should increase size  standards for industries because of the size of large government  contracts that tribal firms win.
For tribal 8(a) firms that do continue to the transition phase, some have  difficulty meeting non-8(a) revenue requirements because they were  awarded large 8(a) sole-source contracts in their early years in the  program. In one example, a tribal firm reported to SBA that large 8(a)  sole-source contracts were taking up a lot of its existing labor pool, not  allowing it to seek non-8(a) contract opportunities. Another firm did not  meet its non-8(a) revenue requirements in the transition years, and SBA  district officials eventually recommended that this firm voluntarily withdraw  as officials believed the firm had not complied with the spirit of the 8(a)  program. When a firm does not meet its non-8(a) revenue requirements, it  is generally prohibited from receiving further sole-source contracts.  However, we found that in 2009, SBA accepted an offer from the Army for  a $45 million sole-source award on behalf of a firm that had not met its  non-8(a) revenue requirements. SBA district officials thought they may  have accepted the offer on behalf of the firm because of severe financial  hardship, but they could not locate the file to determine the exact reason.
section_title: Conclusions
paragraphs: It has been more than 20 years since Congress began granting tribal  firms special advantages under the 8(a) program. The steady growth in  government obligations to these firms, largely through sole-source  contracts, draws attention to policies that are designed to promote small  businesses and the need to spend taxpayer dollars wisely. SBA has  taken some steps, based on our earlier recommendations, to clarify  program rules, including the need for monitoring the limitations on  subcontracting. However, contracting officers generally are not  performing the monitoring—often because of confusion about how to go  about doing so and a lack of clarity in existing regulations, particularly  with respect to indefinite quantity contracts. Not monitoring the limitations  on subcontracting can pose a major risk that an improper amount of work  is being done by large business subcontractors under large-dollar value,  sole-source contracts to tribal 8(a) firms.
Tribal firms, because of their special advantages in the 8(a) program, can  operate under more complex contracts and business relationships than  typical 8(a) firms, making oversight difficult. SBA’s recent revisions to the  8(a) regulations are intended to address several issues we had raised in  the past regarding improved oversight of ANC 8(a) contracting that also  apply to all tribal 8(a) firms. However, SBA does not have a way to track  the information it needs and lacks clear procedures to deter certain  prohibitions addressed in the regulations—for example, sister subsidiaries  winning follow-on sole-source contracts and joint-venture partners unduly  benefiting from their 8(a) partners’ contracts by performing most of the  work or improperly subcontracting to an affiliate. The new 8(a) tracking  database, which is in the initial stages of development, could, if structured  to capture key information, better position SBA to implement these new  regulations and to address issues we identified, such as tracking  revenues from tribal 8(a) firms’ primary and secondary industries. Further,  when agencies do not provide the full acquisition history in offer letters,  SBA may not have the necessary information to enforce the new  regulations. Finally, while SBA officials recently told us they are in the  early stages of drafting a policy that will outline a process for determining  unfair competitive advantage, SBA still has not addressed in its  regulations the process for implementing the statutory requirement to  determine whether substantial unfair competitive advantage exists for one  or more tribal 8(a) firms.
Finally, some tribal 8(a) firms effectively operate as large firms in a small  business program. The practices we have identified, such as capitalizing  on corporate resources to promote business and using sister subsidiaries  for subcontracting and past performance, are currently allowed, even  under SBA’s revised regulations. However, it is within SBA’s purview as  the agency statutorily authorized for the 8(a) program to determine if  these practices are congruent with the purpose of the 8(a) program— which is to develop sustainable, small, disadvantaged businesses in the  U.S. economy.
section_title: Recommendations for Executive Action
paragraphs: To improve oversight of the limitations on subcontracting clause and to  clarify who has responsibility for monitoring compliance with the clause,  we recommend the Administrator of the Office of Federal Procurement  Policy, in consultation with the Administrator of SBA, take the following  two actions:  1.  Provide specific guidance (including data collection options) to agency  officials, including to contracting officers, about how to monitor the  extent of subcontracting under 8(a) contracts, including for orders  under indefinite quantity contracts.  2.  Take actions to amend the FAR to (1) direct contracting officers at  agencies that have been delegated responsibility for ensuring  compliance with the limitations on subcontracting clause to document  in the contract file the steps they have taken to ensure compliance  and (2) clarify the percentage of work required by an 8(a) participant  under indefinite quantity contracts.
To improve oversight of tribal firms’ participation in the 8(a) program, we  recommend that the Administrator of SBA take the following five actions:  1.  As the new 8(a) tracking database is being developed, take steps to  ensure that it has the capability to provide visibility to district offices into all tribal 8(a) firms’ activity by  tribal entity to ensure compliance with new prohibition to award  sole-source 8(a) follow-on contracts to sister subsidiaries;  track revenue from tribal 8(a) firms’ primary and secondary  industry codes to ensure that subsidiaries under the same parent  company are not generating the majority of their revenue from the  same primary industry; and  track information on 8(a) contracts and task or delivery orders,  including orders awarded under basic ordering agreements, to  help ensure that district officials have information necessary to  enforce the 8(a) program regulations.  2.  In light of the new prohibition on awarding 8(a) sole-source follow-on  contracts to sister subsidiaries, reinforce to procuring agencies the  requirement to provide the full acquisition history of the procurement  in the offer letter, when available, and direct district office business  development specialists to focus on this issue when they review offer  letters for tribal 8(a) firms.  3.  Establish procedures to enforce new joint venture rules, including how  SBA district officials will ascertain that the 8(a) partner performs the  required percentage of the joint venture’s work and, for populated joint  ventures, that the non-8(a) partner and its affiliates do not receive  subcontracts under the 8(a) contract.  4.  Examine relationships between subsidiaries under tribal entities to  determine whether practices such as subcontracting to a sister  subsidiary or using the past performance of a sister subsidiary to  show capability to perform on an 8(a) contract are in line with the  business development purposes of the 8(a) program and should be  allowed under program rules. If SBA determines that these practices  are not in line with the 8(a) program purposes—and to the extent that  Congress has not authorized a practice in law—SBA should address  them in its regulations.  5.  Establish and communicate to Congress the time frame for  developing and implementing SBA’s new, planned policy regarding  determination of substantial unfair competitive advantage in an  industry, and when the policy will be incorporated into the regulations.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to SBA; OFPP; the departments of  Agriculture, Defense, Energy, Health and Human Services, Homeland  Security, Justice, Labor, and State; and the Social Security  Administration. We received written comments from SBA, which are  reproduced in appendix II. SBA did not address our recommendations.  OFPP provided comments on our recommendations via email. The Social  Security Administration provided technical comments, which we  incorporated as appropriate. The other agencies responded with no  comment.
In written comments, SBA provided background information pertaining to  the history of Indian tribes’ and ANCs’ special preferences and their  purpose in the 8(a) program. We believe this information is adequately  reflected in our report. Although the SBA did not specifically comment on  our recommendations, it stated that it will work with us to further  strengthen its administration of the 8(a) program. SBA also stated that it  will make changes as necessary to continue its efforts to eliminate waste,  fraud, and abuse and to ensure that the 8(a) program is operating  according to its statutory intent, but did not specify what these actions  would entail. In addition, SBA stated that it is fully committed to  implementing all of the provisions of its March 2011 regulations, but did  not specifically address the issues we raised that may impede such  implementation or our related recommendations.
SBA also acknowledged the challenges in administering the 8(a) program  with respect to tribal entities because the purpose of including tribally  owned entities in the 8(a) program can be contradictory to the program’s  business development purpose. We recognize in the report that 8(a)  businesses owned by tribal entities have special preferences in the  program. However, we also note that these entity-owned businesses are  subject to the business development purpose of the 8(a) program.  This  requirement led to our recommendations that SBA determine whether  certain practices we found that are currently allowed under the 8(a)  regulations—such as firms subcontracting to a sister subsidiary—are  consistent with the business development purpose of the 8(a) program.
SBA also commented that its foremost concern with our report was our  use of a nonprobability sample, with the suggestion that this sampling  technique can be biased based on the judgment of the sampler and that  we used this technique to generalize results for tribal 8(a) firms. We  strongly disagree. Our use of a nonprobability sample was a sound  methodological approach to address our reporting objectives.   Nonprobability samples are appropriate to provide illustrative examples or  to provide information on a specific group within a population. We used  this sampling technique to balance a sample that was large enough to  provide a sufficiently comprehensive understanding of the issues with one  that was small enough to study within our time and resource constraints.  Further, we took a number of steps to ensure the factual accuracy of our  findings, including traveling to locations where contract files were located  so that we had access to the complete available records and the ability to  ask follow-up questions as appropriate to ensure that we did not  misinterpret or misrepresent any information in the files. Appendix I of the  report sets forth the many steps we took to ensure that our contract file  and tribal 8(a) file samples were selected in a non-biased, transparent,  and objective manner. In accordance with generally accepted government  auditing standards, we appropriately state the results of our work in the  report, including the clear statement that our results are not generalizable  to the population of tribal 8(a) firms. We did not attempt to generalize our  results because that approach was not necessary to meet our objectives.
In an email response, OFPP generally agreed with our recommendations  and with our conclusion that steps need to be taken to provide clarity to  the acquisition community regarding limitations on subcontracting. OFPP  also noted that steps need to be taken to strengthen the application of  these requirements to all small business set-aside programs in FAR Part  19.  Regarding our recommendation that OFPP provide guidance on how  to monitor the extent of subcontracting, OFPP noted that agency officials  other than contracting officers—such as agency offices that perform  acquisition management reviews and SBA officials—would also be  interested parties. We agreed and modified our recommendation to  include “agency officials” and not only contracting officers. OFPP stated  that it intends to work with the FAR Council and the Chief Acquisition  Officers Council to review the roles of various agency officials and  evaluate strategies for monitoring and receiving data about the  percentage of work performed by a small business prime contractor. It  also stated that, with respect to data collection, it anticipates seeking  input from the public on strategies to receive and monitor data regarding  the percentage of work performed by small business prime contractors.
OFPP added that, in taking this action, it intends to minimize the burden  on both small businesses and agencies.
OFPP also commented on our recommendation that it take actions to  amend the FAR to direct contracting officers to document steps taken to  ensure compliance with the limits on subcontracting and to address  monitoring requirements for indefinite quantity contracts. OFPP stated  that it intends to ask that the FAR Council open a case so that  appropriate regulatory refinements may be made to support  improvements in the implementation of the limitation on subcontracting.   OFPP stated that this action will include reviewing existing clauses that  implement the limitation, considering alternatives for collecting  information, and documenting steps taken. OFPP also plans to obtain  comments from the public, including small businesses, as it develops  amendments and evaluates alternatives that can accomplish goals in the  least burdensome manner for industry and agencies.  Consistent with our  recommendation, OFPP plans to clarify in the FAR the percentage of  work required by an 8(a) participant under an indefinite quantity contract,  but OFPP asked that the recommendation be amended to allow the FAR  Council and SBA to work together to determine the best way to clarify this  point. We agreed that this would be appropriate and modified the  recommendation to reflect this approach.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 7 days from the  report date. At that time, we will send copies of this report to interested  congressional committees; the Secretaries of Agriculture, Defense,  Energy, Health and Human Services, Homeland Security, Labor, and  State; the Administrator of SBA; the Attorney General; the Commissioner  of the Social Security Administration; and the Acting Director of the Office  of Management and Budget. This report will be available at no charge on  GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report or need additional  information, please contact me at (202) 512-4841 or huttonj@gao.gov.
Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. Staff  acknowledgments are provided in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: The objectives of this review were to (1) identify trends in government  8(a) contracting with firms owned by Alaska Native Corporations (ANC),  Native Hawaiian Organizations (NHO), and Indian tribes; (2) determine  the reasons federal agencies awarded sole-source contracts to tribal 8(a)  firms and the methods used to make price determinations; (3) assess the  procuring agencies’ oversight of tribal 8(a) contracts for compliance with  subcontracting requirements; and (4) examine the Small Business  Administration’s (SBA) new 8(a) regulation, effective March 14, 2011, to  determine how the changes could affect oversight of tribal firms and the  extent to which previously identified problems are addressed. In this  report, “tribal entities” refers to ANCs, NHOs, and Indian tribes. We use  the term “tribal 8(a) firm” to refer to a firm that is majority-owned by an  ANC, NHO, or Indian tribe. During the course of our work, we also  discussed with procuring agency officials the potential impact of the  recent Federal Acquisition Regulation (FAR) requirement for written  justifications for sole-source 8(a) awards over $20 million. This  requirement was not applicable to the contracts we reviewed. We  evaluated the administration of the tribal 8(a) program; the scope of our  work did not include an evaluation of the program’s merits.
To identify the trends in government tribal 8(a) contracting, we analyzed  data from the government’s procurement database—the Federal  Procurement Data System-Next Generation (FPDS-NG) for fiscal years  2005 through 2010. To assess the reliability of the FPDS-NG we (1)  reviewed related documentation, and (2) performed electronic testing on  required data fields. We found the FPDS-NG data fields that identify firms  owned by ANC, NHO, and Indian tribes to be unreliable because these  data were not available during the entire time period. Subsequently, we  requested that SBA provide Data Universal Numbering System (DUNS)  numbers for 8(a) firms owned by ANC, NHO, and Indian tribes, in addition  to mentor-protégé joint ventures that participated in the 8(a) program, for   We tested the reliability of these DUNS  fiscal years 2005 through 2010.numbers by using them to search for the tribal 8(a) firms and joint  ventures in the Central Contractor Registry and SBA’s Dynamic Small  Business Search database. We used these systems to verify the data  SBA had provided, including to identify additional DUNS numbers that  were not included among the data SBA had provided. We also requested  additional DUNS numbers from SBA on joint ventures with tribal 8(a)  firms; however, the information provided was on all joint ventures in the  8(a) program. To select contracts for our sample that were awarded to  joint ventures with at least one tribal 8(a) partner, we identified those that  had obligations in fiscal year 2009 and then used the Central Contractor  Registry to determine whether the joint venture was listed as owned by an  ANC, Indian Tribe, or NHO. Once we substituted the compiled final list of  DUNS numbers for the tribal 8(a) data fields, we determined that the  FPDS-NG was sufficiently reliable to identify trends in tribal 8(a)  contracting for fiscal years 2005 through 2010. We adjusted the obligation  data for inflation using a gross domestic product price index with a base  year of 2010.
To identify the reasons agencies have awarded 8(a) sole-source  contracts to firms owned by ANCs, NHOs, and Indian tribes and the  methods contracting officials use to determine fair and reasonable price,  we selected and reviewed a stratified nonprobability sample of 87  contracts, 7 of which had been competitively awarded. This nonprobability  sample was based upon contracts (1) with fiscal year 2009 obligations   especially if those obligations exceeded  over the competitive threshold,$100 million (fiscal year 2009 data were the most recent at the time) and  (2) in locations where multiple tribal 8(a) contracts had been awarded.  The majority of the contracts we reviewed (75) were with ANC firms; 10  were with Indian tribes, and 2 were with NHOs. The majority of contracts  in our sample (62) were awarded at the Department of Defense (DOD).  Our findings from the contract reviews are not generalizable to the  population of all tribal 8(a) contracts.
We originally selected 90 contracts for review, 10 of which were coded as  competitively awarded. In reviewing the source documentation, we found  that two of the contracts had been incorrectly coded: one was not owned  by a tribal entity and the other was not awarded through the 8(a) program.  We eliminated these contracts from our sample. We also found that  obligations under one indefinite quantity contract were listed as two  separate contracts in our initial sample; therefore, this was counted as  only one contract. Another three contracts had been incorrectly coded in  FPDS-NG as competitively awarded or as sole-source. These three  contracts remained in our sample.
The specific locations of the contracts in our review were as follows:  DOD:
Air Force Metrology and Calibration, Heath, OH
National Guard Bureau, Arlington, VA
Defense Advanced Research Projects Agency, Arlington, VA
Defense Supply Center, Philadelphia, PA
Fleet and Industrial Supply Center, Pearl Harbor, HI
Fort Sam Houston Army Base, TX
Fort Wainwright Army Base, AK
Joint Base Elmendorf-Richardson, AK
Kirtland Air Force Base, NM
MacDill Air Force Base, FL
Marine Corps Systems Command, Quantico, VA
Naval Facilities Engineering Command, Pearl Harbor, HI
Redstone Arsenal Army Base, AL
U.S. Army Corp of Engineers locations in Anchorage, AK; Alexandria,  VA; Baltimore, MD; Fort Worth, TX; Philadelphia, PA; and Vicksburg,  MS
U.S. Army Research Development and Engineering Command,
Washington Navy Yard, District of Columbia
Wright-Patterson Air Force Base, OH Civilian:
Department of Agriculture’s Forest Service, New Mexico
Department of Energy’s National Nuclear Security Administration- Service Center, New Mexico
Department of Health and Human Service’s Centers for Disease  Control and Prevention Atlanta, GA; Centers for Medicare and  Medicaid Services, Baltimore, MD; and Food and Drug Administration,  Rockville, MD
Department of Homeland Security’s Bureau of Customs and Border  Protection, Federal Emergency Management Agency, and Office of  Procurement Operations, Washington, D.C.
Department of Justice’s Drug Enforcement Administration,  Washington, D.C., and Federal Bureau of Investigation, Chantilly, VA
Department of Labor’s Office of Procurement Services, Washington,  D.C.
Department of State’s Office of Acquisition Management, Arlington,  VA
Social Security Administration’s Office of Acquisition and Grants,  Baltimore, MD.
For the contracts in our sample, we examined contract file  documentation, including acquisition plans, market research reports, and  price negotiation memorandums. However, for three of the contracts we  reviewed, one each at the Army Corps, Department of Homeland  Security, and the State Department, pre-award information was  completely missing from the files. For one of these, we were unable to  determine whether or not it had been competitively awarded, as coded in  FPDS-NG, because of the missing information. We also interviewed  contracting officials, small business advocates, and program officials.
To determine the extent to which procuring agencies are overseeing tribal  8(a) contracts for compliance with the 8(a) program’s subcontracting  requirements, we reviewed and analyzed documentation for the contracts  in our review, including acquisition plans, price negotiation  memorandums, contractor proposals, and SBA offer and acceptance  letters, in addition to any additional information pertaining to  subcontractor monitoring. We also interviewed contracting and program  officials, as well as agency small business advocates, about the methods  they employ to monitor compliance. Additionally, we reviewed agency- specific guidance or operating instructions, various statutory provisions,  the Federal Acquisition Regulation, and Title 13 of the Code of Federal  Regulations. We also drew from the findings in our 2006 report on 8(a)  contracting with ANC firms.
To determine the extent to which SBA’s new regulations could affect  oversight of tribal firms’ participation in the 8(a) program and to which  previously identified problems have been addressed, we reviewed SBA  documents, such as annual reviews and 8(a) program applications, for  selected tribal firms. These firms were strategically chosen based upon  their parent entity’s (i.e., ANC, NHO, or Indian tribe) representation in our  overall contract sample. We selected those firms whose parent entities  had higher representation in our sample and those with less  representation. Consequently, we examined the files for 49 ANC, 3 NHO,  and 10 Indian tribe firms. For the ANC firms, the 49 firms fell under 11  parent entities. The results of our review are not generalizable to the  population of tribal 8(a) firms. Moreover, we reviewed SBA regulations,  operating procedures and business systems (such as the system used to  process 8(a) applications), and interviewed officials at SBA headquarters  and the Alaska, Hawaii, Oklahoma, New Mexico, and Washington, D.C.,  district offices. We also met or spoke with ANC, NHO, and Indian tribe  representatives in three “town hall” meetings to explain the scope and  methodology for this review. We did not assess the extent to which  benefits from tribal 8(a) contracts flow to the parent entity.
We conducted this performance audit from October 2010 to January 2012  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: Comments from the Small Business Administration
subsections: section_title: GAO’s Comments
paragraphs: 1.  SBA said that we had incorrectly reported that employee-based size  standards are calculated over a 3-year period. We disagree; the  statement in the report accurately states that the size standards are  based on the number of employees or on the average revenues from  the previous 3 years. Therefore, no change is needed.
SBA also characterized as “not true” our statements that a firm that  does not meet its applicable business activity or mix target is not  eligible for 8(a) sole-source contracts. SBA noted that if the  competitive business mix target is not met, the prohibition on the  award of further 8(a) sole-source contracts can be waived.  We agree  and, to be consistent in how we addressed this issue later in the  report, we added the word “generally” the first time it was mentioned  to reflect the potential for a waiver. 2.  SBA stated that the report relied on anecdotal information and  hypothetical scenarios, without analyzing the issue from other  perspectives, including those of the tribal and ANC participants, and  that this reliance gives a negative view of the participation of tribally  owned 8(a) firms. We disagree with this comment. As stated in our  report, we did not generalize our findings. Our findings are not  anecdotal and did not rely on hypothetical scenarios. Nonetheless,  our objectives for this review were to examine SBA’s and procuring  agencies’ administration of various aspects of the 8(a) program and  not to capture the views of program participants.  We provided one  illustrative example to give the reader insight into how 8(a) firms— both tribal and nontribal—are able to form relationships with non-8(a)  businesses and non-disadvantaged individuals under current SBA  regulations. This illustrative example is factually correct in terms of  what the current regulations allow.  All of our findings are based on  criteria for the program as set forth in statute and regulation.    3.  SBA stated that, in discussing joint ventures with other-than-small  businesses, we provide an overly simplistic explanation and do not  explain the benefits of the mentor-protégé initiative within the 8(a)  program. Our purpose was simply to discuss this program in the  context of one way that 8(a) businesses can grow and develop. We  believe this discussion is adequate for the purposes of this report.   4.  Regarding the section of our report that discusses challenges SBA will  face in implementing parts of its new regulations, SBA stated that its  ability to implement the regulations has been “pre-judged” without  affording SBA an opportunity to see the results of the regulatory  changes, and that there is little mention of the agency’s current  initiatives. We disagree. As we stated in our report, SBA has  recognized some of the challenges it faces in implementing the new  regulations. The report also includes information on SBA’s initial steps  to develop a new data collection system and notes that the agency is  in the process of re-writing its standard operating procedures. SBA did  not provide us with any evidence that it will address the data  limitations we identified in our report, which was the basis for several  of our recommendations. Because SBA did not comment on our  recommendations, the agency’s planned actions remain uncertain.  5.  SBA stated that we did not take into account tribal 8(a) entities’  special statutory benefits. We disagree. The background section of  our report clearly presents information on these preferences.  The  existence of the preferences is what allows some firms to, as we  state, operate in effect as large businesses in a small business  program.  6.  SBA stated that we implied that the agency as a whole lacked  knowledge in administering entity-owned 8(a) companies, based on  our findings at a specific SBA district office. Our point was not what  was known at the policy level, but at the implementation level. Our  findings were based on interviews with agency officials and file  reviews at several SBA district offices, as discussed in appendix I of  the report.  As our report states, the data system gaps we identified  do, in fact, create knowledge gaps across SBA, which led to our  recommendation on this issue.  SBA did not address our  recommendations intended to improve oversight of tribal firms’  participation in the 8(a) program. For example, we recommended  several actions SBA could take as it develops its new 8(a) tracking  database that may help provide more visibility across district offices.   7.  SBA commented that we implied that cost savings could be realized  by using procedures other than 8(a). We disagree with this  characterization. Our focus in this section of the report was on  competitive versus noncompetitive awards, not on 8(a) versus non- 8(a). As we have reported in the past, competition is a cornerstone of  the acquisition system and a critical tool for achieving the best  possible return on investment for taxpayers. Further, as we explain in  the background of this report, once a requirement is awarded as an  8(a) contract, it must remain in the 8(a) program unless the procuring  agency decides it would like to fulfill the follow-on requirement outside  of the program and requests approval from SBA to do so.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the person named above, Michele Mackin, Assistant  Director; Tatiana Winger; Virginia Chanley; Celina Davidson; Julia  Kennon; Jeff Malcolm; Kenneth Patton; Sylvia Schatz; Erin Stockdale;  Roxanna Sun; and Holly Williams made key contributions to this report.