Department of Veterans Affairs: Preliminary Observations on Issues Related to Contracting Opportunities for Veteran-owned Small Businesses
Published: 2010-04-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Veterans Benefits, Health Care, and Information Technology Act of 2006 (the 2006 Act) requires the Department of Veterans Affairs (VA) to give priority to veteranowned and service-disabled veteran-owned small businesses (VOSB and SDVOSB) when awarding contracts to small businesses. This testimony discusses preliminary views on (1) the extent to which VA met its prime contracting goals for SDVOSBs and VOSBs in fiscal years 2007-2009, and (2) VA's progress in implementing procedures to verify the ownership, control, and veteran status of firms in its mandated database. GAO obtained and analyzed data on VA's contracting activities, and reviewed a sample of verified businesses to assess VA's verification program.
section_title: What GAO Found
paragraphs: VA exceeded its contracting goals with SDVOSBs and VOSBs for the past 3 years, but faces challenges in monitoring agreements with other agencies that conduct contract activity on VA's behalf. The increase of awards to SDVOSBs and VOSBs was associated with the agency's use of the unique veteran preferences authorities established by the 2006 Act. However, GAO's review of interagency agreements found that VA lacked an effective process to ensure that interagency agreements include required language that the other agencies comply to the maximum extent feasible with VA's contracting goals and preferences for SDVOSBs and VOSBs. VA has made limited progress in implementing its verification program. While the 2006 Act requires VA to use veteran preferences authorities only to award contracts to verified businesses, VA's regulation does not require that this take place until January 1, 2012. To date, VA has verified about 2,900 businesses-- approximately 14 percent of businesses in its mandated database of SDVOSBs and VOSBs. Among the weaknesses GAO identified in VA's verification program were files missing required information and explanations of how staff determined that control and ownership requirements had been met. VA's procedures call for site visits to investigate the ownership and control of higher-risk businesses, but the agency has a large and growing backlog of businesses awaiting site visits. Although site visit reports indicate a high rate of misrepresentation, VA has not developed guidance for referring cases of misrepresentation for enforcement action. Such businesses are subject to debarment under the 2006 Act.

section_title: Letter
paragraphs: I am pleased to be here today to discuss issues associated with the federal  government’s contracting with veteran-owned and service-disabled  veteran-owned small businesses (VOSB and SDVOSB). The federal  government’s long-standing policy has been to use its buying power—the  billions of dollars it spends through contracting each year—to maximize  procurement opportunities for small businesses, including those owned by  veterans. In fiscal year (FY) 2009, federal agencies awarded $17 billion to  VOSBs, including $9 billion to SDVOSBs.
To increase contracting opportunities for SDVOSBs and VOSBs, the  Veterans Benefits, Health Care, and Information Technology Act of 2006  (the 2006 Act) requires the Department of Veterans Affairs (VA) to give  priority to these two categories of small businesses when awarding  contracts. It provides for the use of limited-competition contract awards  (sole-source and set-aside) to achieve contracting goals VA is required to  establish under the 2006 Act. Additionally, the law requires VA to  maintain a database of SDVOSBs and VOSBs and verify the ownership,  control, and veteran or service-disabled status of the businesses in th e  database. Businesses must be listed in the database, which VA ref VetBiz.gov, to receive the contracting preferences for SDVOSBs and  VOSBs.
My statement today is based on preliminary observations from our  ongoing 3-year study looking at VA’s efforts to contract with VOSBs and  SDVOSBs on which we plan to issue a report in the near future, as  required by the 2006 Act. Specifically, this statement discusses (1) the  extent to which VA met its prime contracting goals for SDVOSBs and  VOSBs in fiscal years 2007 through 2009, and (2) VA’s progress in  implementing procedures to verify the ownership, control, and veteran  status of firms in its mandated database of SDVOSBs and VOSBs.
In conducting this work, we obtained and analyzed data on contracts from  the Small Business Administration’s (SBA) Goaling Reports and VA  contracting data from the Federal Procurement Data System-Next  Generation (FPDS-NG) to determine the extent to which VA met  contracting goals for fiscal years 2007 through 2009. We reviewed VA’s  policies and procedures for administering the verification program and  conducted a file review of a random sample of verified businesses to  determine the extent to which VA followed its procedures and to identify  any deficiencies in VA’s verification process and maintenance of the  database of verified SDVOSBs and VOSBs. We interviewed agency officials  and representatives of veteran service organizations to obtain information  about VA’s contracting with veteran-owned small businesses and  administration of the verification program. Finally, we also relied upon  recent work by our fraud investigators that examined procurement  activities in the government-wide SDVOSB program.
The work on which this testimony is based was performed from October  2007 through April 2010, in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Federal agencies’ contracting with private businesses is, in most cases,  subject to goals for various types of small businesses, including SDVOSBs.  The Small Business Act sets a government-wide goal for small business  participation of not less than 23 percent of the total value of all prime  contract awards—contracts that are awarded directly by agencies—for  each fiscal year. The Small Business Act also sets annual prime  contracting goals for participation by four other types of small businesses:  small disadvantaged businesses (5 percent); women-owned (WOSB, 5  percent); service-disabled veteran-owned, (3 percent); and businesses  located in historically underutilized business zones (HUBZone, 3 percent).  Although there is no government-wide prime contracting goal for  participation by all VOSBs, VA had voluntarily set an internal goal for  many years before the enactment of the 2006 Act.
The Veterans Benefits Act of 2003 authorized agencies to set contracts  aside and make sole-source awards of up to $3 million ($5 million for  manufacturing) for SDVOSBs (but not other VOSBs). However, an agency  can make a sole-source award to an SDVOSB only if the contracting  officer expects just one SDVOSB to submit a reasonable offer. By contrast,  VA’s authorities under the 2006 Act apply both to SDVOSBs and other  VOSBs. The 2006 Act provides VA authorities to make noncompetitive  (sole-source) awards and to restrict competition for (set-aside) awards to  SDVOSBs and VOSBs. VA is required to set aside contracts for SDVOSBs  or other VOSBs (unless a sole-source award is used) if the contracting  officer expects two or more such firms to submit offers and the award can  be made at a fair and reasonable price that offers the best value to the  United States. VA may make sole-source awards of up to $5 million.
VA’s Office of Small Disadvantaged Business Utilization (OSDBU) in  conjunction with the Office of Acquisition and Logistics is responsible for  development of policies and procedures to implement and execute the  contracting goals and preferences under the 2006 Act. Additionally,  OSDBU serves as VA’s advocate for small business concerns; provides  outreach and liaison support to businesses (large and small) and other  members of the private sector for acquisition-related issues; and is  responsible for monitoring VA’s implementation of socioeconomic  procurement programs, such as encouraging contracting with WOSBs and  HUBZone businesses. The Center for Veterans Enterprise (CVE) within  OSDBU seeks to help veterans interested in forming or expanding their  own small businesses.
section_title: VA Exceeded Its Veteran Contracting Goals since FY07, but Faces Challenges in Monitoring Interagency Agreements
paragraphs: For FY07, VA established a contracting goal for VOSBs at 7 percent––that  is, VA’s goal was to award 7 percent of its total procurement dollars to  VOSBs. In FY07, VA exceeded this goal and awarded 10.4 percent of its  contract dollars to VOSBs (see fig. 1). VA subsequently increased its VOSB  contracting goals to 10 percent for FY08 and FY09, and exceeded those  goals as well––awarding 14.7 percent of its contracting dollars to VOSBs in  FY08 and 19.7 percent in FY09.
For FY07, VA established a contracting goal for SDVOSBs equivalent to the  government-wide goal of 3 percent and exceeded that goal by awarding 7.1  percent of its contract dollars to SDVOSBs (see fig. 2). VA subsequently  increased this goal to 7 percent for FY08 and FY09, and exceeded the goal  in those years as well. Specifically, VA awarded 11.8 and 16.7 percent of its  contract dollars to SDVOSBs in FY08 and FY09, respectively.
In nominal dollar terms, VA’s contracting awards to VOSBs increased from  $1.2 billion in FY07 to $2.8 billion in FY09, while at the same time,  SDVOSB contracting increased from $832 million to $2.4 billion. The  increase of awards to VOSBs and SDVOSBs largely was associated with  the agency’s greater use of the goals and preference authorities  established by the 2006 Act. For example, veteran set-aside and sole- source awards represented 39 percent of VA’s total VOSB contracting  dollars in FY07. But in FY09, VA’s use of these preference authorities  increased to 59 percent of all VOSB contracting dollars. In nominal dollar  terms, VA’s use of these authorities increased by $1.2 billion over the past  3 years.
According to SBA’s Goaling Program, a small business can qualify for one  or more small business categories and an agency may take credit for a  contract awarded under multiple goaling categories. For example, if a  small business is owned and controlled by a service-disabled, woman  veteran, the agency may take credit for awarding a contract to this  business under the SDVOSB, VOSB, and WOSB categories. All awards  made to SDVOSBs also count towards VOSB goal achievement. In FY09, of  the $2.8 billion awarded to VOSBs, the majority (63 percent) applied to  both the VOSB and SDVOSB categories and no other (see fig. 3).  Furthermore, of the $1.7 billion awarded through the use of veteran  preference authorities (VOSB and SDVOSB set-aside and sole-source) in  FY09, an even greater majority (77 percent) applied both to the VOSB and  SDVOSB categories and no other (see fig. 3).
In the Veterans’ Benefits Improvement Act of 2008 (the 2008 Act) Congress  enhanced the 2006 Act’s provisions by requiring that any agreements VA  enters with other government entities on or after January 1, 2009, to  acquire goods or services on VA’s behalf, must require the agencies to  comply, to the maximum extent feasible, with VA’s contracting goals and  preferences for SDVOSBs and VOSBs. Since January 1, 2009, VA has  entered into three interagency agreements (see table 1). According to  agency officials, VA entered into agreements with additional federal  agencies, such as the Army Corps of Engineers, before January 1, 2009,  and therefore the provisions of the 2008 Act do not apply.
VA issued guidance to all contracting officers about managing interagency  acquisitions in March 2009. However, the agreement with DOI did not  include the required language addressing VA’s contracting goals and  preferences until it was amended on March 19, 2010, after we informed the  agency the agreement did not comply with the 2008 Act. According to VA  officials, the agency’s acquisition and contracting attorneys are  responsible for reviewing interagency agreements for compliance with  these requirements. VA uses Office of Management and Budget templates  to develop its interagency agreements. However, VA did not ensure that all  interagency agreements include the 2008 Act’s required language or  monitor the extent to which agencies comply with the requirements. For  example, agency officials could not tell us whether contracts awarded  under these agreements met the SDVOSB and VOSB preferences. Without  a plan or oversight activity such as monitoring, VA cannot be assured that  agencies have made maximum feasible efforts to contract with SDVOSBs  or VOSBs.
section_title: VA Has Made Limited Progress in Implementing Its Verification Program and Has Not Developed a Thorough and Effective Program
paragraphs: In May 2008—approximately a year and a half after the 2006 Act was  enacted and a year after the provisions discussed here became effective— VA began verifying businesses and published interim final rules in the  Federal Register, which included eligibility requirements and examination  procedures, but did not finalize the rules until February 2010 (see fig. 4).  According to VA officials, CVE initially modeled its verification program  on SBA’s HUBZone program; however, CVE reconsidered verification  program procedures after we reported on fraud and weaknesses in the  HUBZone program. More recently, in December 2009, the agency finalized  changes to its acquisition regulations (known as VAAR) that included an  order of priority (preferences) for contracting officers to follow when  awarding contracts and trained contracting officers on the preferences  and the VetBiz.gov database from January through March 2010.
Leadership and staff vacancies plus a limited overall number of positions  also have contributed to the slow pace of implementation. For  approximately 1 year, leadership in VA’s OSDBU was lacking because the  former Executive Director retired and the position remained vacant from  January 2009 until January 2010. Furthermore, one of two leadership  positions directly below the Executive Director has been vacant since  October 2008 and an Acting Director temporarily filled the other position.  The agency also faced delays in obtaining contracting support. More than  a year after the agency began verifying businesses, a contractor began  conducting site visits (which further investigate control and ownership of  businesses as part of the verification process). As of April 2010, CVE had  6.5 full-time equivalent position vacancies, and VA officials told us existing  staff have increased duties and responsibilities that also contributed to  slowed implementation.
The slow implementation of the program appears to have contributed to  VA’s inability to meet the requirement in the 2006 Act that it use its veteran  preference authorities to contract only with verified businesses. Currently,  contracting officers can use the veteran preference authorities with both  self-certified and verified businesses listed in VetBiz.gov. However, in its  December 2009 rule VA committed to awarding contracts using these  authorities only to verified businesses as of January 1, 2012. According to  our analysis of FPDS-NG data, in FY09 the majority of contract awards (75  percent) made using veteran preferences went to unverified businesses. In  March 2010, the recently appointed Executive Director of OSDBU  acknowledged in a Congressional hearing before this committee how large  an undertaking the verification program has been and some challenges  associated with starting a new program.
As of April 8, 2010, VA had verified about 2,900 businesses––approximately  14 percent of VOSBs and SDVOSBs in the VetBiz.gov database. VA has  been processing an additional 4,701 applications but the number of  incoming applications continues to grow (see fig. 5). As of March 2010,  CVE estimates it had received more than 10,000 applications for  verification since May 2008.
As discussed previously, VA must maintain a database of verified  businesses and in doing so must verify the veteran or service-disability  status, control, and ownership of each business. The rules that VA  developed pursuant to this requirement require VOSBs and SDVOSBs to  register in VetBiz.gov to be eligible to receive contracts awarded using  veteran preference authorities. An applicant’s business must qualify as  “small” under federal size standards and meet five eligibility requirements  for verification: (1) be owned and controlled by a service-disabled veteran  or veteran; (2) demonstrate good character (any small business that has  been debarred or suspended is ineligible); (3) make no false statements  (any small business that knowingly submits false information is ineligible);  (4) have no federal financial obligations (any small business that has failed  to pay significant financial obligations to the federal government is  ineligible); and (5) have not been found ineligible due to an SBA protest  decision.
VA has a two-step process to make the eligibility determinations for  verification. CVE staff first review veteran status (and, if applicable,  service-disability status) and publicly available, primarily self-reported  information about control and ownership for all applicants. Business  owners submit applications (VA Form 0877), which ask for basic  information about ownership, through VetBiz.gov. When applicants  submit Form 0877, they also must be able to provide upon request other  items for review, such as financial statements; tax returns; articles of  incorporation or organization; lease and loan agreements; payroll records;  and bank account signature cards. Typically, these items are reviewed at  the business during the second step of the review, known as the site visit.
Site visits further investigate control and ownership for select high-risk  businesses. In September 2008, VA adopted risk guidelines to determine  which businesses would merit the visits. Staff must conduct a risk  assessment for each business and assign a risk level ranging from 1 to 4–– with 1 being a high-risk business and 4 a low-risk one. The risk guidelines  include criteria such as previous government contract dollars awarded,  business license status, annual revenue, and percentage of veteran- ownership. For example, if a business has previous VA contracts totaling  more than $5 million, staff must assign it a risk level of 1 (high). According  to VA, it intends to examine all businesses assigned a high or elevated risk  level with a site visit or by other means, such as extensive document  reviews and phone interviews with the business’ key personnel.
VA plans to refine its verification processes to address recommendations  from an outside contractor’s review of the program. VA hired the  contractor to assess the verification program’s processes, benchmark VA’s  program to other similar programs, and provide recommendations for  improving it. VA received the contractor’s report and recommendations in  November 2009. VA officials told us that they plan to implement the  contractor’s recommendations to require business owners to submit  additional documentation as part of their initial application and to upgrade  their data systems.
Based on our review of a random sample of the files for 112 businesses  that VA had verified by the end of FY09, an estimated 48 percent of the  files lacked required information or documentation that CVE staff  followed key verification procedures.  Specifically,    20 percent were missing some type of required information, such as  evidence that veteran status had been checked or a quality review took  place;    39 percent lacked information about how staff justified determinations  that control and ownership requirements were met; and    14 percent either were missing evidence that a risk assessment had taken  place or the risk assessment that occurred did not follow guidelines.
Data system limitations also appear to be contributing factors to  weaknesses we identified in our file review. For example, data entry into  CVE’s internal database largely is done manually, which can result in  missing information or errors. Furthermore, CVE’s internal database does  not contain controls to ensure that only complete applications that have  received a quality review move forward. Internal control standards for  federal agencies require that agencies effectively use information  technology in a useful, reliable, and continuous way. According to agency  officials, two efforts are underway to enhance CVE’s data systems. For  example, CVE plans systems enhancements that would automatically  check and store information obtained about veteran status and from some  public databases. Additionally, CVE plans to adopt case management  software—as recommended in the contractors’ report—to help manage its  verification program files. The new system will allow CVE to better track  new and renewal verification applications and manage the corresponding  case files.
VA started verifying businesses in May 2008, but did not start conducting  site visits until October 2009. As of April 8, 2010, VA has used contractors  to conduct 71 site visits but an additional 654 high- and elevated-risk  businesses awaited visits. Because of this delay, it currently has a large  backlog of businesses awaiting site visits and some higher-risk businesses  have been verified months before their site visits occurred or were  scheduled to occur. According to VA officials, the agency plans to use  contractors to conduct an additional 200 site visits between May and  October 2010. However, the current backlog likely will grow over future  months.
According to site visits reports, approximately 40 percent of the visits  resulted in evidence that control or ownership requirements had not been  met, but as of April 2010, CVE had not cancelled any business’ verification  status. According to these reports, evidence of misrepresentation dates to  October 2009, but VA had not taken actions against these businesses as of  April 2010. According to VA’s Office of Inspector General, it has received  one referral (on April 5, 2010) as a result of the verification program.
Staff have made no requests for debarment as a result of verification  program determinations as of April 2010.
Under the 2006 Act, businesses determined by VA to have misrepresented  their status as VOSBs or SDVOSBs are subject to debarment for a  reasonable period of time, as determined by VA for up to 5 years.  Additionally, under the verification program rules, whenever CVE  determines that a business owner submitted false information, the matter  will be referred to the Office of Inspector General for review and CVE will  request that debarment proceedings be initiated. However, beyond the  directive to staff to make a referral and request debarment proceeding, VA  does not have detailed guidance in place (either in the verification  program procedures or the site visit protocol) that would instruct staff  under which circumstances to make a referral or a debarment request.
To summarize our observations concerning VA’s verification efforts, the  agency has been slow to implement a comprehensive program to verify the  veteran status, ownership, and control of small businesses and maintain a  database of such businesses. The weaknesses in VA’s verification process  reduce assurances that verified firms are, in fact, veteran owned and  controlled. Such verification is a vital control to ensure that only eligible  veteran-owned businesses benefit from the preferential contracting  authorities established under the 2006 Act.
These remarks are based on our ongoing work, which is exploring these  issues in more detail. As required by the 2006 Act, we will issue a report on  VA’s contracting with VOSBs and SDVOSBs later this year. We anticipate  the forthcoming report will include recommendations to the Department  of Veterans Affairs to facilitate progress in meeting and complying with  the 2006 Act’s requirements.
Madam Chairwoman and Members of the Subcommittee, I appreciate this  opportunity to discuss these important issues and would be happy to  answer any questions that you may have. Thank you.
section_title: GAO Contact and Acknowledgements
paragraphs: For further information on this testimony, please contact William B. Shear  at (202) 512-8678 or ShearW@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Harry Medina, Assistant Director; Paola Bobadilla; Beth Ann  Faraguna; Julia Kennon; John Ledford; Jonathan Meyer; Amanda Miller;  Marc Molino; Mark Ramage; Barbara Roesmann; Kathryn Supinski; Paul  Thompson; and William Woods.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.