Agencies defend charges of contracting fraud

Officials blame ignorance, not dishonesty, for cases

Two federal small business program officials have warned against overreacting to a recent investigation that found 10 small companies had defrauded the government out of $100 million in contracts set aside for service-disabled veterans.

The problem isn’t evil intent,  but ignorance on the part of the business owners and the contracting officer, the two officials told the House Small Business Committee's Contracting and Technology Subcommittee on July 15.  (See video of their testimony here.)

Tim Foreman, executive director of the Veterans Affairs Department’s Office of Small and Disadvantaged Business Utilization, said the largest factor is that many service-disabled veterans in the program don't fully understand the requirements of ownership and control  for the business to be certified to compete for set-aside contracts.

“We have to be careful about how high we ramp up the guard against allowing legitimate firms in,” Foreman said.

Related stories:

Fake firms rip off SBA set-aside program for $100M

SBA leader vows to crack down on small-business fraud

GAO finds $325M awarded to ineligible firms under SBA

The hearing was based on a GAO investigation from last October that found at least 10 fake SDVOSBs had swindled roughly $100 million from the Small Business Administration’s set-aside contracts. Some were front companies that passed all of the work on to companies in foreign countries. Others were not who they claimed to be, according to the report.

In one case the GAO detailed, a contracting employee started an SDVOSB, won a contract from the Air Force and passed the $900,000 of work to a company where his wife worked, which also then passed the work on to another company, according to GAO.

Some legitimate service-disabled veterans don’t fully understand the filing and certification process and will do things incorrectly on their paperwork, Foreman said. Although that is technically fraud, those business owners often can fix their errors, file again and receive the service-disabled, veteran-owned small businesses status, he said.

“I’m very hesitant to condemn everybody,” Foreman said. “There are people who do make mistakes.”

Linda Oliver, director of the Defense Department’s Office of Small Business Programs, told the subcommittee that contracting officers say they don’t know enough about joint ventures to ask the right questions, which makes it unlikely that they will uncover a buisness that has made mistakes in its filings in time to head off inappropriate contract awards. 

But Rep. Glenn Nye (D-Va.), the subcommittee’s chairman, rejected the officials' explanation. "This report is a frustrating indication of the deplorable state of federal contracting programs,” he said.

Oliver said that one contracting officer involved in one of the GAO's cases had developed a system of market research intended to ask pointed questions to businesses in small-business programs and ensure that they're there legitimately. But Nye said he was disappointed that no one from the five agencies who sent small-business officials to testify — the VA, DOD, Environmental Protection Agency, Small Business Adminitration and the Federal Emergency Management Agency — had suspended any fraudulent companies that were uncovered by the GAO’s investigation.

While the small-business contracting dollars are increasing, “there’s a big asterisk there for me now,” Nye said.


About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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Reader comments

Sat, Aug 7, 2010 Jaime Gracia Washington, DC

I also find in hard to believe that mistakes are to blame for the deplorable state of small business contracting. Whether it be SDVOB, HUBZone, or 8a, the amount of waste, fraud, and abuse is at an intolerable level. Until accountability is brought to bear, these abuses will continue, as the government is as complicit to the fraud as any small business, knowingly or not.

Mon, Jul 19, 2010

You get what you pay for when you set aside for SB and/or award to a SB on cost. I chuckle every time I walk past the Acquisition Division parking lot and see all the BMWs and Audis driven by KOs who advocate SBs against the requests of their line customers and then always award to the lowest bidder. I'm not an English major, but is that hypocrisy, irony or just the sorry state of our Government acquisition process?

Mon, Jul 19, 2010 curious florida

This article grouped companies that made detectable errors (that apparently should have been identified by the approval process) with companies that set out to deceive (fraud). Shouldn't some type of breakout regarding the amount of erroneous versus deceptive companies have been included in this article?

Mon, Jul 19, 2010 Raul Espinosa

In their 2006 GAO-06-838R report GAO acknowledged that DOD faced vulnerabilities to contracting fraud, waste, and abuse. It was no surprised that in 2010, GAO unveiled, AGAIN, ‘size misrepresentation’ AKA ‘fraud’ this time in the SDB program for veterans and disabled veterans. Sorry, but DoD has no excuse.

The problem has persisted all these years because the government has never taken any action to stop the abuses. Businesses have continued to ‘misrepresent their status’ and DoD Agencies have continued to ‘misrepresent their results’ in contracting with socio-economic businesses to appear as if they were meeting their goals. Both sides are equally at fault.

According to our Think Tank, the only acceptable solution now that there is no longer any trust is to begin applying consequences against both sides! OMB must begin implementing the Data Quality Act (DQA) to make sure the data submitted by DoD for the SBA Scorecard is accurate as my guest editorial on POGO had suggested.

SBA, on the other hand, must revamp their size standards - especially their protest system - to make sure justice takes place when a size misrepresentation violation takes place as the Think Tank has shown:

Again, the only solution is consequences for both sides.

Raul Espinosa
FPA Think Tank at UNF

Mon, Jul 19, 2010

The claim of not understanding the requirements is BS and the Agencies who allow this are as complicit as the companies doing it. The company should be disbared and the contracting officer fired. The rules are very simple, but there is so little desire to do the right thing at many of these agencies that this is just the tip of the iceberg. A complete investigation and immediate cancellation of contracts found to be illegal needs to be initiated

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