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Audit of DoD Service-Disabled Veteran-Owned Small Business Contract Awards (DODIG-2020-063)

Audit

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Publicly Released: February 20, 2020

Objective

The objective of this audit was to determine whether the DoD awarded service-disabled veteran-owned small business (SDVOSB) contracts to eligible contractors.

Background

Executive Order 13360 requires heads of Federal agencies to provide the opportunity for service-disable veteran businesses to significantly increase their participation in Federal contracting. Accordingly, the U.S. Government’s goal is to award at least 3 percent of all Federal contracting dollars to service-disabled veteran businesses each year. To accomplish this goal, agency contracting officers may reserve, or set aside, certain procurements for such businesses to allow only SDVOSBs to compete.

The Office of Small Business Programs (OSBP) advises the Secretary of Defense on all matters related to small business, develops small business policy, and provides oversight to ensure all Military Departments and Defense agencies comply with those policies. The OSBP seeks to ensure maximum practicable opportunities for small businesses to participate in DoD procurements, establishes small business procurement goals for the DoD, monitors performance, and implements initiatives to achieve statutory goals across all small business socio-economic categories. Defense Pricing and Contracting (DPC) is responsible for all pricing, contracting, and procurement policy matters in the DoD. To develop small business policy, the DPC collaborates with the OSBP, which has the lead for advising the Secretary of Defense on all matters related to small business. The OSBP represents the DoD when working with the Small Business Administration (SBA) regarding small business interests. The SBA provides assistance to small businesses and helps service-disabled veterans get contracting opportunities with the Government.

An SDVOSB must be at least 51-percent unconditionally and directly owned by one or more service-disabled veterans. One or more service-disabled veterans must be in control of the management and daily business operations of the business, including both long-term decisions and day-to-day management and administration of operations. The service‑disabled veteran must hold the highest officer position and have the managerial experience needed to run the business. The SDVOSB can subcontract between 50 and 85 percent of a set-aside contract depending on the type of work performed under the contract, as defined in the Code of Federal Regulations (CFR).

Contracting officers use the System for Award Management (SAM) database as their primary source of vendor information. Businesses self-represent SDVOSB status in SAM in the socio‑economic section of their business profiles and must represent to the contracting officer that they are SDVOSBs when submitting an offer. Contracting officers must verify that the business is in SAM at the time of an offer or quote.

Finding

We found that DoD contracting activities awarded SDVOSB contracts to ineligible contractors and did not implement procedures to ensure compliance with SDVOSB subcontracting requirements after award. Specifically, of the 29 contractors we reviewed, we determined that:

  • the DoD awarded 27 contracts, valued at $827.8 million, to 16 contractors that did not meet the requirements for SDVOSB status. This occurred because the DoD relied on contractors to self-certify as an SDVOSB and did not have additional controls in place for DoD contracting activities to verify the accuracy of those representations.
     
  • DoD contracting personnel also did not verify compliance with the SDVOSB subcontracting requirements for 6 contracts awarded to 3 contractors, valued at $164.7 million. This occurred because the OSBP did not have procedures in place for contracting personnel to track subcontracting amounts for compliance with the SDVOSB subcontracting limitations.

In addition, the SBA determined through SBA protest procedures that 3 of the 29 contractors were ineligible and we confirmed that those contractors did not always update their status in SAM after notification of ineligibility. This occurred because the OSBP did not coordinate with the SBA to establish controls to ensure that all contracting personnel receive SBA protest results and there is no process in place to ensure that the contractor updates its status.

In sum, we determined that the DoD awarded $876.8 million in contracts to contractors that are not eligible for the SDVOSB set-aside program; therefore, we consider the $876.8 million as questioned costs. Without additional controls in place, we concluded that DoD contracting activities will continue to award SDVOSB contracts to ineligible contractors and DoD agencies may be overstating the amounts reported for SDVOSB participation.

Recommendations

We recommend that the OSBP Director:

  • coordinate with the Military Departments and Defense agencies and review contractors we determined to be ineligible and contractors that were denied SDVOSB status by the VA Center for Verification and Evaluation, and take action, through the SBA, as necessary;
     
  • implement procedures, in coordination with the Defense Pricing and Contracting (DPC), to require contractors to submit documentation to support their SDVOSB status, as well as other socio‑economic statuses, prior to contract award, and perform periodic reviews of SDVOSB contractors;
     
  • implement procedures, in coordination with DPC, for contracting personnel to track subcontracting percentages required for SDVOSB contracts;
     
  • coordinate with DPC, the General Services Administration and the SBA and implement procedures to ensure that contractors update their SAM status if the SBA determines the contractors are ineligible; and
     
  • coordinate with DPC and the SBA and implement procedures to ensure protest results are communicated to contracting personnel DoD-wide, and reinforce procedures to ensure contracting personnel are aware of the protest procedures and their responsibilities.

Management Comments and Our Response

The OSBP Acting Director disagreed with the report and did not address the specifics of the recommendations in his comments; therefore, the recommendations are unresolved. Additionally, the Acting Director stated that his office was not primarily responsible for procurement policy or contract operations and suggested that Defense Pricing and Contracting or the Component Senior Procurement Executives should address the recommendations. However, according to DoD Instruction 4205.01, “DoD Small Business Programs (SBP),” the OSBP is responsible for providing small business programs policy advice, proposing Defense-wide initiatives to the Office of the Secretary of Defense, and providing policy oversight of all DoD Component small business program activities. Therefore, we stand by our original conclusions and recommendations and request that the Acting Director provide additional comments in response to the final report that resolve the recommendations.

This report is a result of Project No. D2019-D000AX-0019.000.