Small Business: More Transparency Needed in Prime Contract Goal Program
Released: 2001-09-04T00:00:00

Letter

Background

The Small Business Act of 1953 created SBA, whose function is to aid, counsel, assist, and protect the interests of small businesses. The Act also stipulated that SBA would ensure small businesses a fair proportion of government contracts. The Business Opportunity Development Reform Act of 1988 amended the Small Business Act to require the President to establish an annual government-wide goal of awarding not less than 20 percent of prime contract dollars to small businesses. The Small Business Reauthorization Act of 1997 further amended the Small Business Act to increase this goal to not less than 23 percent. SBA is responsible for coordinating with executive branch agencies to ensure that the federal government meets the mandated goal. Of the federal agencies with procurement authority, 20 agencies accounted for over 99 percent of total government contract dollars in fiscal year 2000. These 20 agencies and their fiscal year 2000 procurement dollars, as reported to FPDC, are listed in appendix IV.

FPDC collects data on prime contract actions from over 50 executive branch agencies. These agencies report their prime contract actions to FPDC on standard forms. Since fiscal year 1998, FPDC has used this information to compile the “Report on Annual Procurement Preference Goal Achievements” that summarizes total government prime contract actions and each agency’s small business contract actions.

Small Business Goal-Setting Process Has Changed

In fiscal year 2000, SBA assigned small business prime contract goals directly to agencies after initial agency goals did not total the 23-percent government-wide goal. At the same time, SBA assigned fiscal year 2001 goals without engaging in a formal negotiation process as had been done in the past. SBA adopted this change in strategy to ensure that the 23-percent goal was established, and that it was done in a timely manner. The government had difficulty establishing the 23-percent goal in fiscal year 2000. In addition, only 22.26 percent of procurement dollars were actually awarded to small businesses. The difficulties were primarily because the Department of Energy was directed to change its method of calculating prime contract small business awards. While SBA’s direct assignment of goals was intended to meet the statutory goal-setting requirement, SBA has not documented the criteria it used to derive the assigned goals. Furthermore, the direct assignment of goals has reduced the consultation and negotiation process envisioned by Congress. Some agency officials noted that they did not have the opportunity to negotiate fiscal year 2001 goals.

Federal agencies’ initial goal submissions to SBA for fiscal year 2000 totaled only 20.4 percent in the aggregate, falling short of the mandated 23-percent government-wide goal. SBA’s requests to agencies to increase their goals resulted in a government-wide goal of only 21.2 percent. In February 2000, SBA decided to assign goals directly to the 20 agencies that account for over 99 percent of procurement dollars so that the 23-percentgoal could be met. At the same time, in a conference call between SBA and the agencies, SBA assigned fiscal year 2001 goals that were identical to the 2000 goals.

Department of Energy Was Directed to Change Its Method of Calculating Small Business Achievements

In a memorandum to the agencies, the SBA Associate Deputy Administrator cited a significant change in the way the Department of Energy calculates its small business achievements as a key reason for the difficulties in setting the fiscal year 2000 goal and a primary justification for SBA’s decision to unilaterally assign goals. As shown in appendix IV, the Department of Energy is second only to the Department of Defense in the procurement dollars it reports. Based on a 1991 letter from the Office of Management and Budget’s Office of Federal Procurement Policy, the Department of Energy had been counting contracts awarded by its management and operating contractors as prime contracts rather than subcontracts. Specifically, the letter stated that “a strong case can be made for management and operating contractors to be treated, for the purposes of small business goaling, as Government prime contracts.” The ruling noted that procurements made by management and operating contractors are for the direct benefit of the federal government and that these contractors are required to follow Department of Energy procurement rules and policies that are similar to those government agencies must use in awarding contracts.

Using this methodology, the Department of Energy awarded about 18 percent of its prime contracts to small businesses in fiscal year 1998 and about 17 percent in 1999, according to FPDC reports. However, in the opinion of SBA officials, awards made by the Department’s management and operating contractors are actually subcontracts, not prime contracts. Nevertheless, the Department of Energy continued to support its practice of counting them as prime contracts. In 1999, SBA and the Department of Energy asked the Office of Federal Procurement Policy to resolve this disagreement.

In November 1999, the Office of Federal Procurement Policy reversed its earlier position and, supporting SBA’s position, determined that the contracts awarded by the Department’s management and operating contractors should be counted as subcontracts. The Administrator, Office of Federal Procurement Policy, stated in the decision that federal agencies should be consistent in the types of awards counted as prime contracts. As a result of the change in methodology, the Department of Energy’s reported prime contract actions to small businesses fell sharply. In fiscal year 2000, the Department’s prime contract goal dropped to 5 percent from its 18-percent goal in fiscal year 1999. This reduction in the Department of Energy’s small business goal affected the government’s overall ability to establish the 23-percent goal.

SBA Cites Improved Timeliness as Benefit of Assigned Goals

According to SBA officials, the direct assignment of goals—as was done in fiscal years 2000 and 2001—has not only ensured that the mandated 23-percent goal will be established, but it has also ensured that goals will be established in a timely manner. Guidance issued by the Office of Management and Budget’s Office of Federal Procurement Policy stipulates that small business prime contract goals are to be established by the start of the fiscal year. However, both SBA and the agencies have been delinquent in setting goals in a timely manner. For example, in fiscal years 1998, 1999, and to a lesser extent in fiscal year 2000, many agency goals were established after the start of the fiscal year. However, we found no link between the timeliness of goal-setting and actual awards to small businesses.

According to SBA records, all 20 large agencies submitted goals after the start of fiscal year 1999. One reason for the delay was that SBA’s letter requesting goals from individual agencies was not distributed until more than 2 weeks after the fiscal year began. In addition, SBA’s deadline for agencies to submit their 1998 and 1999 goals was 1 to 2 months after the start of the fiscal year. SBA officials explained that designating a grace period enabled agencies to evaluate the prior year’s performance and develop strategies for improvement. The officials acknowledged, however, that the period was not used for this purpose because FPDC does not issue preliminary prior-year results until the second quarter of the following fiscal year.

Despite SBA’s lenient deadlines, most agencies did not submit their goals on time. For example, in fiscal year 1999 only one agency—the Department of Defense—met SBA’s deadline of November 1, 1998. Three agencies submitted goals in the second quarter, three submitted goals in the third quarter, and one submitted its goal in the fourth quarter. Some small agencies did not establish any goals at all. Timeliness improved in fiscal year 2000, when 11 agencies met SBA’s deadline. Once again, some small agencies did not submit goals at all.

When the large agencies were late in submitting goals, SBA followed up with letters. However, SBA conducted little if any follow-up with the small agencies because they represent a very small fraction of federal procurement dollars. Timeliness of goal submissions was not a problem in fiscal year 2001, because SBA assigned the goals directly.

We did not find a link between timeliness of goal-setting and actual small business achievements. For example, the Department of Commerce, which submitted its fiscal year 1999 goal 4 months after SBA’s deadline, exceeded its goal of 35 percent, awarding 40.83 percent of its prime contract actions to small businesses. On the other hand, the Department of Agriculture, which missed SBA’s deadline by only 2 days, did not achieve its goal of 45.1 percent, awarding small businesses only 37.96 percent of its prime contract actions.

SBA’s Approach for Assigning Goals Is Not Documented or Shared With Agencies

The approach and criteria SBA used to derive individual agency goals in fiscal years 2000 and 2001 have not been formalized or shared with the procurement agencies. Some agency officials expressed confusion about how SBA had determined the assigned goal for their agencies. The extent to which SBA changed individual agencies’ fiscal year 2000 goals from the negotiated fiscal year 1999 goals varied by agency. The February 2000 memorandum from SBA’s Associate Deputy Administrator stated that every agency was assigned an increased goal compared to the 1999 goals. However, while most of the agency goals were increased, goals for four agencies—in addition to the Department of Energy—decreased. SBA officials could not explain their methodology for assigning fiscal year 2000 goals.

Table 1 compares fiscal year 1999 negotiated goals with SBA’s assigned goals for fiscal year 2000.

Some Agencies Did Not Believe There Was Opportunity to Negotiate Fiscal Year 2001 Goals

According to SBA officials, given SBA’s mandate to establish a goal of not less than 23 percent and the difficulties in setting that goal in fiscal year 2000, they had little choice other than to assign goals that year. SBA notified agencies in a conference call early in 2000 that their fiscal year 2001 goals would be identical to their 2000 goals. Some agency officials said that they appreciated knowing their fiscal year 2001 goals well ahead of the start of the fiscal year. Other officials, however, noted that they did not have the opportunity to consult with SBA about the 2001 goals.

The head of each federal agency shall, after consultation with the Administration , establish goals for participation by small business concerns…in procurement contracts of such agency. Goals established under this subsection shall be jointly established by the Administration and the head of each Federal agency….

Agencies have recourse if they disagree with SBA. The law provides for agencies to submit their disagreement on established goals to the Administrator, Office of Federal Procurement Policy for final determination. Thus far, no agencies have done so in response to the assigned goals.

SBA’s Rationale for Exclusions Is Not Clearly Defined

Since fiscal year 1998, SBA has directed FPDC to exclude certain types of contracts when calculating annual small business prime contract achievements. SBA officials explained that the excluded contracts fall into three broad categories of contract actions: (1) those for which small businesses’ chances to compete are limited or nonexistent, (2) those using non-appropriated funds, and (3) those made by agencies that are not subject to the Federal Acquisition Regulation or are otherwise exempt from federal procurement regulations. SBA officials’ decision to exclude certain types of contracts from the small business calculations is consistent with SBA’s authority under the Small Business Act. However, SBA’s rationale for making these exclusions is not documented.

Prior to 1998, agencies reported their small business achievements directly to SBA and excluded from their calculations certain types of contracts, such as those for which small businesses had a limited or no chance to compete. SBA then published an annual report summarizing each agency’s achievements. SBA officials said that in some cases they were not aware of all exclusions the agencies made when reporting their numbers. In 1998, the reporting process changed, with FPDC reporting small business achievements based on information received from the agencies. With this change, some of the exclusions were no longer made. An example of this change is a contract between NASA and the California Institute of Technology to operate the Jet Propulsion Laboratory, a federally funded research and development center. SBA and NASA had agreed that this contract would be excluded from NASA’s small business reports to SBA, because small businesses would have little chance to compete for it. Since 1998, however, when the reporting method changed and FPDC began to report small business goals, the contract has been included in NASA’s business achievement results.

We found that one exclusion, made on the basis that small businesses would have a limited chance to compete, has not been applied consistently across the government. In 1998, SBA granted an exclusion to the Federal Highway Administration for its anticipated congressionally-directed contract actions, based on the premise that small businesses would have a limited chance to compete for these contracts. However, this exclusion has not been used, nor has such an exclusion been granted to any other government agency. In addition, while SBA excludes the United States Mint’s contract actions on the basis that it is a non-appropriated activity, an additional reason to exclude these actions is the Mint’s legislated exemption from federal procurement regulations.

Table 2 shows the types of contracts that are excluded from the small business achievement calculations and SBA’s explanation of its rationale for the exclusions.

Federal Highway Administration Exclusion Has Not Been Used

According to officials at the Department of Transportation and FPDC, the Department of Transportation’s Senior Procurement Executive requested in 1998 that FPDC exclude from the small business baseline those contract actions that Congress had encouraged the Federal Highway Administration to award to certain sources, primarily universities and research centers. SBA agreed, based on the rationale that small businesses would have no chance to compete for these contracts; and in 1998 FPDC implemented the exclusion. The Federal Highway Administration is the only government agency with this type of exclusion.

In practice, however, according to Department of Transportation officials, the Federal Highway Administration has awarded no contract actions to the sources cited by Congress. Rather, these awards are made in the form of assistance agreements (grants or cooperative agreements), which are not reported to FPDC, in accordance with FPDC’s guidelines. The officials said that when the Senior Procurement Executive requested the exclusion in 1998, it was anticipated that the Federal Highway Administration might award contracts—as opposed to assistance agreements—to congressionally-directed sources, but that this has not occurred to date.

Nevertheless, according to FPDC records, the Federal Highway Administration has reported contract actions meeting the exclusion criteria. In 1998, 1999, and 2000, FPDC subtracted $298,000, $20,000, and $1.7 million, respectively, from the Federal Highway Administration’s small business baseline based on the 1998 agreement. Further, FPDC data show that all of these actions were awarded to small businesses. Department of Transportation officials stated that Federal Highway Administration personnel had miscoded these actions and that they should not have been excluded from the baseline. The officials stated that the errors have been corrected in the agency’s database.

Legislative Basis Exists for U.S. Mint Exclusion

As noted in table 2, four Treasury bureaus report contract actions to FPDC, and SBA in turn has directed FPDC to exclude these contracts from the small business baseline on the basis that they use non-appropriated funds. The U.S. Mint operates under the Public Enterprise Fund. In the Public Enterprise Act of 1995, Congress exempted the Mint from all federal procurement regulations. This statutory exemption is an additional reason to exclude the Mint’s contract actions.

Exclusions Represent About 10 Percent of Total Procurements

From fiscal year 1998 through 2000, the excluded contracts that we could quantify accounted for about 10 percent of all federal procurement dollars. The vast majority of the exclusions are for Department of Defense contracts for foreign sales and contracts performed outside the United States. The excluded contract dollars are shown in table 3.

The Department of State’s policy is not to report its personal services contract actions to FPDC. However, according to FPDC data, some State Department contracting officers did report personal services contracts, in the amount of $6.5 million in fiscal year 2000. The Department of State could not quantify the total dollar value of its personal services contract actions.

Most Exclusions Pertain to Defense Department

In fiscal year 2000, Department of Defense contract actions accounted for about $17.4 billion, or 77 percent of the $22.6 billion in total exclusions for fiscal year 2000. Most of the Department’s excluded dollars were for foreign sales and contracts performed outside the United States. Figure 1 shows the percent of exclusions by agency.

Figure 2 shows the types of exclusions for the Department of Defense, which accounts for 77 percent of the excluded dollars.

Appendix VI lists the exclusions by agency for fiscal year 2000.

SBA Guidance Is Unclear and Incomplete

Although SBA’s annual guidance on goal-setting lists the types of contracts that FPDC excludes in its annual calculations of small business achievements, the guidance is confusing and incomplete. The absence of a rationale for each exclusion—as discussed above—and the lack of distinction between categories of exclusions, along with other short- comings, have made the guidance a less than “user-friendly” document. The guidance is the only source of information available to Congress, the small business community, and federal agencies on the contracts excluded from the small business achievement calculations. However, the guidance presents an unclear picture of the contract exclusions. Examples of weaknesses in the guidance are: FPDC instructs federal agencies not to report contracts that use predominantly non-appropriated funds and contracts from agencies that are not subject to the Federal Acquisition Regulation, such as the Federal Aviation Administration. However, when listing the exclusions, SBA’s guidance does not distinguish between these types of contracts--that are never included in the FPDC database--and contracts that SBA explicitly directed FPDC to exclude for purposes of calculating small business achievements (e.g., the Federal Highway Administration exclusion). Consequently, readers reviewing the guidance come away with the impression that SBA is directing more exclusions than is actually the case.

The guidance states that the exclusions include “Wholesale Supply Sources, such as stock programs of the Defense Logistics Agency, the Department of Veterans Affairs, and military inventory control points.” Wholesale supply sources are mandatory sources under the Federal Acquisition Regulation. SBA officials said that this exclusion pertains to transactions between federal agencies. For example, the military services purchase spare parts from the Defense Logistics Agency, which is a mandatory source. However, these transactions are not contract actions. Rather, they are simply intra-governmental transfers of funds and, as such, are not reported to FPDC. Thus, no exclusions are made in practice for the wholesale supply source category. The inclusion of this category in the guidance as an “exclusion” is confusing and misleading.

The guidance lists contracts awarded and performed outside the United States as a type of exclusion. In practice, however, the exclusion applies only to the place of performance, not to the location at which the contract was awarded. The exception is contract actions reported by certain Department of State embassies, which are specifically identified in FPDC’s programming logic and automatically excluded from the small business achievements. SBA officials explained that, except for these embassies, FPDC does not currently have a mechanism for capturing the location of the contract award. All other contract actions performed outside the United States are excluded, regardless of where the contract was awarded. SBA’s guidance is misleading in stating that excluded contracts necessarily have to be awarded and performed outside the United States.

Conclusions

The lack of transparency in SBA’s process for deriving individual agency goals is a matter of concern. SBA’s methodology for establishing these goals is neither clearly documented nor communicated to the procurement agencies. A transparent methodology is especially critical in light of the fact that the Small Business Act directs goals to be established through a consultation process and that this process has been weakened with the direct assignment of goals.

SBA’s failure to document the reasons for excluding certain types of contracts precludes a clear picture of how small business achievements are calculated. The lack of documentation has also contributed to confusion about the Federal Highway Administration exclusion. In addition, the lack of sufficient detail in SBA’s guidance makes it difficult for Congress, procurement agencies, and the small business community to be aware of the excluded contracts and the rationale for the exclusions.

Recommendations for Executive Action

We recommend that the Administrator of SBA Set forth clearly the approach and criteria used to establish individual agency goals. This documentation should be presented in SBA’s annual guidance and in letters to individual procurement agencies.

Ensure that all agencies have an opportunity to negotiate goals for fiscal year 2002 and future years.

Determine whether the exclusion for the Federal Highway Administration is appropriate.

Document SBA’s rationale for excluding contracts from the small business baseline and ensure that this documentation reflects the fact that the United States Mint is legislatively exempt from the Federal Acquisition Regulation.

Revise the goaling guidance to (1) clarify the types of contracts that are excluded at the behest of SBA versus those that are not reported to FPDC, (2) delete reference to the wholesale supply source exclusion if it is determined to be inapplicable, and (3) reflect the fact that FPDC excludes contracts performed outside the United States and, with the exception of specific State Department embassies, does not consider where the contract was awarded.

Agency Comments and Our Evaluation

We received written comments on a draft of this report from SBA, the Department of State, and NASA. We also received oral comments and comments via e-mail from 8 other agencies, as discussed below. All agencies generally agreed with our findings and recommendations.

SBA concurred with our findings and recommendations and offered additional technical comments which we have incorporated where appropriate. SBA’s comments appear in appendix I.

The Department of State noted that we had failed to distinguish between those contracts that are performed outside the United States and those that are awarded and performed outside the United States. We have clarified the wording on this issue in the report. The State Department’s comments appear in appendix II.

NASA concurred with our recommendations to the extent that they affect NASA as a procuring agency and noted that the agency continues to work closely with SBA in establishing and exceeding its small business goals. NASA’s comments appear in appendix III.

We received oral comments or comments via e-mail from the Departments of Defense, Energy, Treasury, and Transportation; the General Services Administration; the Office of Federal Procurement Policy; the U.S. Agency for International Development; and FPDC.

The Departments of Defense and Energy and the Office of Federal Procurement Policy concurred with our findings and had no further comments.

The General Services Administration’s Office of Enterprise Development concurred with our findings and recommendations. The Office added that, to enhance agency performance and results related to small business participation in federal procurement, it is imperative that a collaborative process, informed by reliable trend analysis, be instituted between federal agencies and SBA. The Administration remains committed to providing small businesses with maximum practical procurement opportunities and working with SBA to implement the recommendations in the report.

The Department of Transportation and FPDC concurred with the report’s findings and offered technical comments that we have incorporated where appropriate. FPDC noted that it was unaware that the State Department policy was not to report personal service contract actions. FPDC provided us with data showing that about $6.5 million had in fact been reported in fiscal year 2000.

The Department of Treasury had no comments on the substance of the report, but suggested the following ideas for improving the SBA goaling process: (1) SBA drafts a set of recommended goals for each agency based on statutory requirements, past performance, and prior goals. (2) SBA sends goals to agencies for review. (3) Agencies may accept goals or negotiate them based on special circumstances such as major special projects, budget, etc.

The U.S. Agency for International Development concurred with the State Department’s comment about clarifying our discussion regarding contracts awarded and performed overseas.

Scope and Methodology

To identify the process by which small business prime contract goals are established, we reviewed the Small Business Reauthorization Act of 1997 and other pertinent legislation; guidance issued by the Office of Federal Procurement Policy, SBA, and FPDC; prior GAO reports; and FPDC’s final reports on small business achievements for fiscal years 1998, 1999, and 2000. We reviewed correspondence between SBA and the Departments of Defense and Energy; the General Services Administration; and NASA. These four agencies awarded about 83 percent of federal prime contract dollars in fiscal year 2000. We also held discussions with officials at SBA, FPDC, and the Office of Federal Procurement Policy; the Departments of Defense, Energy, and State; the General Services Administration; NASA; and the Chair of the Office of Small and Disadvantaged Business Utilization Interagency Council.

To determine (1) the types of contracts that are excluded when FPDC calculates small business achievements, as well as the rationale for excluding these contracts and (2) the adequacy of SBA’s guidance, we reviewed SBA guidance from fiscal years 1998 through 2001, FPDC guidance and programming logic, relevant legislation, and prior GAO reports. We held discussions with officials at SBA and FPDC; the Departments of Defense, Energy, State, Transportation, and Treasury; the General Services Administration; the Office of Federal Procurement Policy; and NASA.

To determine the dollar value of the excluded contracts and the dollar value of total procurements, we used FPDC’s annual reports on the small business program from fiscal year 1998 through 2000 and special reports generated by FPDC. We obtained the dollar value of contracts awarded by the Federal Aviation Administration directly from the Administration, as these contracts are no longer reported to FPDC. Government-wide dollar value of contracts awarded with non-appropriated funds were not available.

We conducted our review between November 2000 and July 2001 in accordance with generally accepted government auditing standards.

We are sending copies of this report to other interested congressional committees and the Secretaries of Defense, Energy, State, Transportation, and Treasury. We also are sending copies to the Director, Office of Management and Budget; the Administrator, General Services Administration; the Administrator, NASA; the Administrator, SBA; the Administrator, Office of Federal Procurement Policy; and the Administrator, U.S. Agency for International Development. We will make copies available to others upon request.

As requested by your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to others who are interested and make copies available to others who request them.

Key contributors to this assignment were Michele Mackin, William McPhail, and James Smoak. If you have any questions regarding this report, please contact me on (202) 512-4125 or Hilary Sullivan on (214) 777-5652.

Appendix I: Comments From the Small Business Administration

Appendix II: Comments From the Department of State

Appendix III: Comments From the National Aeronautics and Space Administration

Appendix IV: Procurement Dollars Reported in Fiscal Year 2000

Procurement agency Department of Agriculture Department of Commerce Department of Defense Department of Education Department of Energy Department of Health and Human Services Department of Housing and Urban Development Department of Interior Department of Justice Department of Labor Department of State Department of Transportation Department of Treasury Department of Veterans Affairs Environmental Protection Agency General Services Administration National Aeronautics and Space Administration Social Security Administration Tennessee Valley Authority U.S. Agency for International Development Remaining agencies Total - all agencies

Appendix V: Agency Small Business Achievements in Fiscal Year 2000

Table 4 shows dollars obligated to small businesses for all federal agencies having procurement authority. As previously stated, 20 agencies account for over 99 percent of all federal purchases. The table also shows the percent of procurement dollars awarded to small businesses after taking into account each agency’s exclusions of certain procurement actions as discussed above.

Appendix VI: Total Federal Procurements and Exclusions for Fiscal Year 2000

Table 5 shows the total dollar value of fiscal year 2000 procurements and exclusions for all federal agencies having procurement authority. Twenty agencies account for 99.5 percent of all federal purchases.