The Historically Underutilized Business Zone (HUBZone) Act of 1997 established a program to provide assistance in securing federal contracts to small businesses located in HUBZones. HUBZones are metropolitan area census tracts or nonmetropolitan counties in which low-income levels or high unemployment rates qualify them as economically distressed. Also, all federally-recognized Indian reservations are HUBZones. The purpose of the HUBZone program is to increase employment opportunities, investment, and economic development in these areas. The HUBZone Act established (1) eligibility requirements that firms must meet to participate in the program, (2) contracting preferences that federal agencies can use to award contracts to firms certified by SBA as qualified HUBZone firms, and (3) goals for program participation by HUBZone firms as a percent of the total value of prime contract awards. The act identified ten federal agencies for initial participation in the program through the end of fiscal year 2000, and three more agencies were added in November 1999. (See appendix I for a list of the 13 agencies.) Currently, the HUBZone program applies to all federal agencies. SBA must certify that a firm qualifies for participation before federal agencies can award a contract under the program. To be qualified, the firm must apply with SBA and meet the following requirements: The firm must be a small business owned and controlled by one or more U.S. citizens. The firm’s principal office must be located in a HUBZone. Finally, at least 35 percent of the firm’s employees must reside in a HUBZone. Once SBA has certified that a firm is qualified, SBA adds the firm’s name, address and certification date to its List of Qualified HUBZone Small Business Concerns maintained on SBA’s World Wide Web site. In addition, SBA adds this certification to the firm’s profile in SBA’s on-line PRO-Net database, which contains information supplied by over 200,000 small businesses. SBA’s list and PRO-Net are federal contracting officers’ primary information sources for determining a firm’s eligibility under the HUBZone program. To increase employment and encourage economic development in areas designated as HUBZones, federal agencies can use any of three preferences specified in the HUBZone Act when awarding contracts to certified small businesses, as follows: First, a contracting officer can give a HUBZone firm a price evaluation preference when participating in a full and open competition. In these cases, the contracting officer can deem the price offered by the HUBZone firm as lower than a price offered by another firm if (1) the other firm is not a small business and (2) the HUBZone firm’s offered price is not more than 10 percent higher than the otherwise lowest price. Second, a contracting officer can set aside a contract for competition only among certified HUBZone firms if two or more responsible HUBZone firms are expected to submit offers and the agency can award the contract at a fair market price. Finally, a contracting officer can award a sole source contract to a HUBZone firm if the officer determines among other things that two or more responsible HUBZone firms are not likely to submit offers and the agency can award the contract at a fair and reasonable price. The HUBZone Act established participation goals for certified firms starting with fiscal year 1999. The fiscal year 1999 goal was 1 percent of the year’s total value of prime contract awards, and the fiscal year 2000 goal was 1.5 percent. The act increased the goal by one-half percent each year, reaching 3 percent in fiscal year 2003 and each fiscal year thereafter. Because of delays in HUBZone program implementation, fiscal year 2000 was the first year agencies reported data to FPDC. Under the Small Business Act, SBA must report to the Congress and the President on the agencies’ achievements in meeting their small business goals, including those for HUBZone concerns. This annual report relies on FPDC data. The data that federal agencies reported on fiscal year 2000 HUBZone contracting achievements is significantly inaccurate. In fact, we identified data inaccuracies that put hundreds of millions of dollars in reported achievements in question. The inaccuracies were due to data entry errors and insufficient guidance for federal contracting personnel on how to complete the forms used to submit data to FPDC. Inaccurate reporting of HUBZone achievements limits the ability of federal agencies and the Congress to gauge the success of the program. For fiscal year 2000, federal agencies reported to FPDC that they awarded 1,803 contracts valued at $663 million to certified HUBZone firms. However, we found that federal agencies were overcounting some achievements while potentially undercounting others. First, 61 percent of the reported contracts and 53 percent of the reported dollars should not have been reported as fiscal year 2000 HUBZone program achievements. Specifically, we found that federal agencies actually awarded 1,034 of the 1,803 reported HUBZone contracts (with obligations of about $325 million) to firms not certified to participate in the HUBZone program. Also, we identified another 57 contracts with obligations of about $24 million that were awarded before the start of the program. Second, when we compared SBA’s contractor certification data with FPDC’s contracting activity data, we found that federal agencies did not report up to 1,712 contracts— $589 million—awarded to firms that may have been qualified as HUBZone program participants. However, because FPDC collects only the month and year of contract awards, we could not readily compare a firm’s certification date with a specific contract award date. As a result, we could not determine the actual number or value of contracts awarded to HUBZone firms. We identified problems at the contracting officer level and the agencywide level that contributed to inaccurate data reported to FPDC. FPDC perpetuates these errors by including the inaccuracies in its annual report on federal procurement activities. First, contracting officers are not accurately filling out the forms used to report contracting data to FPDC. In some cases, contracting officers simply entered the wrong data when completing the forms. In other cases, contracting officers stated that they were unfamiliar with agency forms and lacked guidance on how to fill them out. Agency forms change regularly to incorporate new reporting requirements or when an agency implements an automated reporting system. Contracting officers receive limited guidance on completing agency forms from an FPDC manual. An FPDC official agreed that the manual does not provide sufficient guidance to preclude errors in overcounting or undercounting achievements. FPDC plans to publish additional guidance to address these inaccuracies before fiscal year 2002. Second, agencies are unsure of what qualifies as a HUBZone contract award because SBA did not provide guidance about which contracts to count towards HUBZone program achievements. According to SBA officials, a contract awarded to a firm that is not certified to participate in the HUBZone program should not count as a HUBZone achievement, regardless of whether the firm became certified during the term of the contract. However, some agencies are counting obligations on multiple year contracts even though the contract award occurred before the contractors became HUBZone certified. In recent discussions with federal agency officials, SBA officials recognized that for some long-term, multiple year contracts, following SBA’s current policy could result in agencies not receiving credit for directing funds to certified HUBZone firms. Consequently, SBA is reviewing its policy on which contract obligations to count towards the HUBZone program. Third, FPDC perpetuates inaccurate reporting by publishing reports that contain known errors. FPDC checks agency-provided data to identify apparent inconsistencies, notifies agencies of the errors identified, and requests corrective actions. Agencies took varying degrees of corrective action on errors identified in the preliminary HUBZone data for fiscal year 2000, but they did not correct all the errors that FPDC identified. An FPDC official stated that FPDC does not have the knowledge to correct the data nor the authority to require agencies to correct the data. As a result, the data appears as reported by federal agencies. SBA relies on FPDC data to report on the HUBZone program to the President and the Congress. SBA’s Associate Administrator for the HUBZone program stated that HUBZone information in SBA’s fiscal year 2000 report on small business programs will have to include a disclaimer because of data inaccuracies. Despite the inaccuracies in FPDC data, we determined that there are problems implementing the HUBZone program. None of the original ten agencies authorized to implement the program met the fiscal year 2000 statutory goal of awarding 1.5 percent of their prime contract awards to HUBZone firms. Further, one agency awarded only one contract to a HUBZone firm, and another did not award any. Moreover, our analysis of the agencies’ contract awards revealed that out of the 10 agencies, 7 used the HUBZone Act preferences to award only 52 contracts with $24 million in obligations. Contracting officers and agency officials confirmed that they are having difficulty implementing the program and cited several reasons for this. First, there is a relatively small number of certified HUBZone firms. We found that in approximately 8,000 HUBZones, SBA had certified 290 firms for participation in the program at the start of fiscal year 2000 and by the end of the fiscal year had certified a total of 1,940 firms nationwide. According to several contracting officers and SBA officials, many small businesses are not aware of the need to apply for certification. To address this problem, SBA officials and agency contracting officers have been informing small businesses about HUBZone program requirements, helping them complete applications to get certified, and holding seminars to encourage more applications. However, while the number of applications to SBA has increased significantly in 2001, the number of certifications has not. As of September 30, 2001, SBA had certified about 4,100 firms. Second, contracting officers cannot easily locate certified HUBZone firms that provide particular goods and services. Contracting officers told us that they rely on SBA’s PRO-Net database as a primary source for identifying potential HUBZone firms. However, sometimes the information the companies enter into the database is not specific or reliable enough to ascertain the firms’ capabilities. For example, a General Services Administration contracting officer stated that building mechanical maintenance is a common capability cited by firms listed in PRO-Net, but he had difficulty identifying a company that could perform mechanical maintenance on building elevators. SBA officials stated that they periodically remind the small businesses of the need to regularly update their PRO-Net information so that the database contains the information needed by federal contracting personnel. Third, SBA instructs agencies in informal guidance to place more emphasis on the 8(a) program than the HUBZone program when federal agencies award contracts to small businesses. Specifically, the SBA guidance ranks the small business programs and places an 8(a) firm that is also a certified HUBZone firm before an 8(a) firm and an 8(a) firm before a HUBZone firm. Because several agencies expressed concerns about the perceived lack of flexibility in this order of precedence, SBA is reviewing its guidance in this regard. Finally, it is easier and quicker for agency officials to award a contract using the 8(a) sole source program. A contracting officer can notify the SBA of the intent to award a sole source contract to an 8(a) firm by providing a brief justification for the selection of the specific 8(a) firm and can negotiate directly with the firm to achieve a fair market contract price. Federal agencies can complete this process in as few as 3 months. In contrast, a contracting officer must determine that only one HUBZone firm exists to perform the work on a sole source contract to a HUBZone firm. Contracting officials can determine this (1) by conducting market research or (2) by having only one responsible firm respond to an announcement for a HUBZone set-aside procurement. A contracting officer stated that completing this process could take as long as a year. Accurate reporting of HUBZone program information would allow federal officials to better gauge the success of the program. However, the quality of fiscal year 2000 HUBZone contracting data that federal agencies reported to the FPDC was not credible. Without accurate data, the Congress and the President are not able to ensure that the program is working as intended to provide assistance to economically distressed areas of the United States. Most of the reporting errors could have been avoided had contracting personnel had adequate guidance on how to complete the forms submitted to FPDC. Also, some errors could be corrected if the federal agencies and FDPC work together to address the inaccuracies identified in FPDC’s review of data. Further, the ten federal agencies that Congress charged with implementing the program awarded only 52 contracts using HUBZone Act preferences during all of fiscal year 2000. Clearer guidance on how firms should inform agencies about their capabilities would enable contracting officers to more easily locate firms for specific contract opportunities and could increase the number of contracts awarded to certified HUBZone firms using the act’s preferences. To improve the accuracy of the data reported by federal agencies, we recommend the Administrator, Office of Federal Procurement Policy, in consultation with SBA when appropriate, strengthen the guidance for all federal agencies about reporting small business program contracting activities to the Federal Procurement Data Center. At a minimum, this guidance should address how the forms should be completed and verified, and clarify how to report which small business preference program was used to award the contract. To improve the accuracy of data at an agencywide level, we recommend the Administrator of SBA develop guidance for all federal agencies about identifying contracts to be reported to the FPDC that meet the HUBZone Act criteria. To help ensure that FPDC does not perpetuate data inaccuracies, we also recommend that the Administrator, Office of Federal Procurement Policy, develop follow-up review procedures to emphasize to federal agencies their responsibility in providing accurate data and promptly correcting inaccurate data. To help contracting officers identify firms with the appropriate capabilities, we also recommend the Administrator of SBA inform small businesses listed in PRO-Net about the importance of entering and maintaining timely, complete, and accurate data. We received written comments from SBA and oral comments from the Office of Federal Procurement Policy on a draft of this report. SBA generally agreed with our findings and recommendations although SBA had three concerns. First, SBA suggested that the first recommendation be revised to indicate that the Office of Federal Procurement Policy should consult with SBA in developing new guidance. We revised the recommendation accordingly. Second, SBA felt that our report title could be misleading and suggested that our title should be changed to HUBZone Program Suffers From Procuring Agency Reporting and Implementation Difficulties. We believe our title appropriately captures the findings of our review, with which SBA agreed; therefore, we did not make this change. Third, SBA took issue with our characterization of the emphasis given to the 8(a) program relative to the HUBZone program. SBA cited a letter the agency sent to Senator Bond dated August 17, 2001, which states that there is parity between the 8(a) program and the HUBZone program, although “regulatory language could be read to give priority to awards to the 8(a) program over HUBZone awards.” We noted in our report that regulations allow contracting officer’s discretion in deciding on whether to use the 8(a) or HUBZone programs when awarding contracts. However, SBA’s training materials on the HUBZone program, which are given to federal agencies, establish an order of precedence giving the 8(a) program priority over the HUBZone program. As noted in our report and SBA’s August 17th letter, SBA is drafting changes to its HUBZone and 8(a) regulations to clarify that contracting officers have discretion to use either program. Therefore, we believe our report accurately reflects SBA’s guidance at the time of our review. SBA’s comments and enclosure appear in appendix II. The Office of Federal Procurement Policy generally agreed with our findings. However, based on the Office of Federal Procurement Policy’s comments, we revised the recommendation on FPDC reported data to clarify the role that the Office of Federal Procurement Policy should play in ensuring the accuracy of data that agencies provide to FPDC. To determine whether federal agencies are accurately reporting HUBZone contract achievements, we obtained FPDC’s database of all reported obligations to federal government contracts during fiscal year 2000 and SBA’s official list of certified HUBZone firms. We reviewed the database and list for three kinds of potential inaccuracies in the FPDC database: (1) contracts reported as HUBZone contracts that were awarded to firms not certified as HUBZone firms, (2) contracts reported as HUBZone contracts that were awarded to firms certified after contract award, and (3) contracts not reported as HUBZone contracts that were awarded to firms that were certified HUBZone firms. To determine whether federal agencies are having difficulty implementing the HUBZone program to award contracts to certified HUBZone firms, and if so, the reasons for the difficulty, we reviewed the HUBZone Act of 1997 and other pertinent legislation; and HUBZone program implementation guidance contained in Title 13, Code of Federal Regulations (CFR), Part 126 (13 CFR 126), contracting guidance contained in the Federal Acquisition Regulation (48 CFR Chapter 1), and other relevant guidance issued by SBA, FPDC, and the ten program implementing agencies (listed in appendix I). We held discussions about HUBZone program management with officials at the Small Business Administration. We also held discussions with procurement officials at the Small and Disadvantaged Business Utilization Office, and HUBZone program officials at the headquarters level of the ten agencies identified in the HUBZone Act and various field locations of six of those agencies. In addition, we determined the extent that agencies used the HUBZone preferences to award contracts. We used FPDC data to identify 136 contracts that the 10 federal agencies reported as being awarded using preferences in fiscal year 2000. We requested relevant contract file information for each of the contracts. We also discussed contract file information with selected contracting officers, who were responsible for 39 of these contracts. We conducted our review between December 2000 and October 2001 in accordance with generally accepted government auditing standards. 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. At that time, we will send copies to other interested congressional committees and the secretaries of Defense, Agriculture, Health and Human Services, Transportation, Energy, Housing and Urban Development, and Veterans Affairs. We will send copies to the Director, Office of Management and Budget; the Administrator, General Services Administration; the Administrator, SBA; the Administrator, NASA; the Administrator, EPA; and the Administrator, Office of Federal Procurement Policy. We will also make copies available to others upon request. Please contact me at (202) 512-4125 or Hilary Sullivan at (214) 777-5652 if you have any questions regarding this report. Major contributors to this report were Frederick G. Day, John E. Clary, and Enemencio S. Sanchez. Agencies designated in the HUBZone Act of 1997 (P.L. 105-135), December 2, 1997: 1. Department of Defense 2. Department of Agriculture 3. Department of Health and Human Services 4. Department of Transportation 5. Department of Energy 6. Department of Housing and Urban Development 7. Department of Veterans Affairs 8. Environmental Protection Agency 9. National Aeronautics and Space Administration 10. General Services Administration (Each of these ten agencies was included in our review.) Agencies Added by the Fiscal Year 2000 Appropriation Act (P.L. 106-113), November 29, 1999: 11. Department of Commerce 12. Department of Justice 13. Department of State (None of these three agencies was included in our review.)

Summary: Congress created the Historically Underutilized Business Zone (HUBZone) program to stimulate economic development and create jobs in distressed urban and rural areas. To achieve these goals, the HUBZone program provides small businesses with greater access to federal contracting opportunities. Reported HUBZone program achievements for fiscal year 2000 were inaccurate because of data entry errors and insufficient guidance on how to report agency data. Federal agencies are having difficulty implementing the HUBZone program. The primary reasons that federal contracting personnel gave for not using the HUBZone program to award contracts were (1) the small number of Small Business Administration (SBA) certified HUBZone firms, (2) difficulty identifying certified firms with the capabilities needed by federal agencies, (3) SBA's guidance that emphasizes the 8(a) program over the HUBZone program, and (4) easier and quicker procedures to award contracts under the 8(a) program.