HUBZone program faces economic uncertainties

Small companies in economically depressed regions have lost their priority status when it comes to set-aside contracts.

Acquisition officials are no longer required to check for companies in Historically Underutilized Business Zones before awarding a contract. Instead, they can choose to set aside a contract for any type of small business, such as those in the Small Business Administration’s 8(a) Business Development Program.

As a result, HUBZone companies might get fewer contracts as set-asides go to more popular programs.

Congress took away the HUBZone program’s priority status last year by changing the legal wording. The Small Business Jobs and Credit Act of 2010 changed the word “shall” to “may” in the language that governs HUBZone contracting. The so-called Rule of Two previously required contracting officers to award a contract to a HUBZone firm if there were at least two such companies that could offer reasonable bids on the project. By changing the requirement to an option, the government has put the HUBZone program on an equal footing with the other major set-aside programs.

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There had been an ongoing debate among the Obama administration, Government Accountability Office and U.S. Court of Federal Claims about whether the “shall” actually meant “shall.” Whichever interpretation officials took, the wording muddied the waters, and Congress just cleared them up.

However, the HUBZone program might now fall behind the other types of disadvantaged small businesses, such as those owned by service-disabled veterans and women, experts say.

“I believe current environmental factors at play still favor service-disabled veteran-owned small businesses,” said Guy Timberlake, CEO and chief visionary officer at the American Small Business Coalition. “But the impending launch of the women’s procurement program on Feb. 4 seems to have significant momentum and could be a game changer in the small-business community.”

On top of all that, the HUBZone program has had a lot of bad press. Business owners have to certify that the place where the company does most of its work is in a HUBZone before they can get the designation. In 2008, GAO investigators found at least 10 businesses in the Washington, D.C., area that were not meeting that requirement. And in 2009, GAO reported more fraudulent companies in the HUBZone program.

Clearly, agency officials weren’t checking on businesses. As part of its investigation, GAO auditors successfully certified bogus companies for the HUBZone program by using the addresses of the Alamo in Texas and a public storage facility in Florida.

The fraud problems were overshadowed by the shall vs. may debate. But with that resolved, such activities will likely get more scrutiny.

“Buyers may recall that not all businesses who call themselves HUBZones are — at least according to GAO,” said Larry Allen, president of Allen Federal Business Partners and former president of the Coalition for Government Procurement. Now that agencies are aware of the problem, federal officials are more likely to make sure HUBZone firms are what they say they are.

The checkups are laudable, but they could have a detrimental effect on legitimate HUBZone companies. “If [government] buyers think that it takes too much time, they may use another acquisition method,” Allen said.

Thriving on its own

Meanwhile, advocates say the program is strong enough to succeed on its own merits.

Ron Newlan, chairman of the HUBZone Council advocacy group, said the program is mature enough to survive without the legal preference. “Contracting officers know about the program and have used it for years,” he said. “I’m sure they’re going to continue to do so.”

Furthermore, the federal government’s spending has increased dramatically since 2001, making the pie large enough for everyone to get their fair share, he added.

HUBZone companies received an average of 2.8 percent of federal prime-contracting dollars in fiscal 2009, which is short of the 3 percent annual goal. Still, it was a slight increase from the 2.3 percent awarded in 2008, according to the Small Business Administration's annual reports.

Although the federal acquisition workforce might be familiar with the program, many new members of Congress don’t know anything about it. The HUBZone Council’s leaders are developing relationships with the new lawmakers to protect the program from budget cuts. One of its strategies is highlighting HUBZone success stories.

“We have story after story about how people would not have jobs or medical insurance if not for the HUBZone program,” Newlan said.