healthcarereimagined

By Steven Koprince. October 23, 2023

As the government’s prime contracting goal for Small Disadvantaged Businesses continues to climb, the U.S. Small Business Administration’s Office of Inspector General is sounding the alarm, saying that many of those contracts may be going to ineligible companies.

The SBA OIG’s concern: a big chunk of the SDB dollars the government takes credit for each year go to self-certified SDBs. In a recent report, the SBA OIG points out that in Fiscal Year 2022 “as much as $16.5 billion in prime contracts was awarded to small, disadvantaged businesses without a certification overseen by SBA.” The SBA OIG says that counting awards to self-certified SDBs is “inherently risky” and questions whether the SBA has effective measures in place to identify unqualified self-certified SDBs.

This is a complicated topic, but here are a a few of my thoughts.

First, I think it is very likely that a significant percentage of the self-certified SDBs in SAM don’t meet the eligibility criteria.

The criteria to qualify as a self-certified SDB are essentially the same as for the 8(a) Program, which means they are complex and can be quite confusing. I think that many businesses either misunderstand what it takes to qualify, or don’t bother taking the time to do their due diligence before checking the SDB box in SAM. I have spoken to plenty of folks who didn’t realize that SDB status includes income and net worth tests; they believed that they could check the SDB box simply because their company was minority-owned. I even had one gentleman several years ago tell me he self-certified because he “felt” disadvantaged.

Second, I think that when it comes to SDB oversight, SBA has largely acted like Charlie Brown’s parents–that is, SBA has been almost completely out of the picture. For instance, SBA has told self-certified SDBs that the 8(a) Program eligibility criteria apply, but hasn’t provided guidance about how fit the square SDB peg into the round 8(a) hole in cases where the 8(a) rules don’t seem to make sense for self-certified companies. SBA’s SDB website simply links to the 8(a) regulations with an implicit “good luck!” for companies trying to figure out how the rules apply to them.

Where could this sort of 8(a)/SDB confusion arise? Well, for example, in the wake of the Ultima federal court decision, most 8(a) Program applicants must provide written narratives demonstrating that they qualify as socially disadvantaged. SBA has provided fairly extensive guidance to 8(a) Program applicants and participants regarding the narratives. But how are self-certified SDBs supposed to meet the requirement to demonstrate their social disadvantage? Do they need to write a narrative and keep it in a desk drawer or in the cloud somewhere? Just ignore the whole discussion about narratives and hope that if they “feel” disadvantaged, that’s good enough? As far as I know, SBA has been completely silent.

Likewise, SBA hasn’t explained how a self-certified company is supposed to address 13 C.F.R. 124.106(a)(4), which says:

Any disadvantaged manager who wishes to engage in outside employment must notify SBA of the nature and anticipated duration of the outside employment and obtain the prior written approval of SBA. SBA will deny a request for outside employment which could conflict with the management of the firm or could hinder it in achieving the objectives of its business development plan.

SBA presumably wouldn’t process an “outside employment” request for approval from a self-certified SDB, but the regulation certainly seems to suggest that SBA’s approval is required. After all, nothing in the regulations exempts self-certified firms from this requirement–and again, to my knowledge, SBA hasn’t explained what SDBs are supposed to do to comply.

And what about all the 8(a) rules that call for something of a subjective judgment call? How does a self-certified company appropriately assess its own “potential for success” under 13 C.F.R. 124.107? How does it decide if the top officer has “managerial experience of the extent and complexity needed to run the concern” or if “[b]usiness relationships exist with non-disadvantaged individuals or entities which cause such dependence that the applicant or Participant cannot exercise independent business judgment without great economic risk” under 13 C.F.R. 124.106? And on and on.

The fact is that when it comes to complying with a set of eligibility rules that weren’t written for them, SDBs have been left without any concrete guidance–at leat, that I’m aware of–from SBA. Without SBA guidance, even the the SDBs that do their best due diligence have no choice but to guess how some of these 8(a) rules apply to them.

And that brings me to my third and final point. I think it’s almost inevitable that at some point in the not-too-distant future, the GAO or another watchdog will audit the self-certified component of the SDB program.

The report following this audit will make headlines and give SBA a black eye. The government’s SDB achievement on the annual scorecard will (appropriately) be called into question. Some unlucky and essentially random self-certified SDBs will be proposed for debarment and/or assessed other penalties to make an example of them and show that the government is super serious about getting tough on SDB misrepresentation. False Claims Act attorneys will suggest that anyone who won a federal contract while improperly certifying as an SDB should be liable for three times the contract’s value in damages.

Maybe for some companies, the SDB self-certification is worth it–perhaps because large primes they work with need SDB credit for their subcontracting goals. In my experience, though, many companies check the SDB box because there doesn’t seem to be any downside, and why not add “small disadvantaged business” to your marketing materials if you can?

If I were a self-certified SDB, though, I’d think twice about keeping that box checked. Are you really sure you qualify? And are the limited upsides of this self-certification really worth the risk, particularly given that the government no longer offers set-aside contracts for self-certified SDBs?

Stay tuned–I’m quite confident we haven’t heard the end of this one.

Article link: https://www.linkedin.com/pulse/sba-office-inspector-general-sounds-alarm-small-steven-koprince-mgzxc