oversight

Federal Contracting: Monitoring and Oversight of Tribal 8(a) Firms Need Attention

Published by the Government Accountability Office on 2012-01-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States Government Accountability Office

GAO            Report to Congressional Requesters




January 2012
               FEDERAL
               CONTRACTING
               Monitoring and
               Oversight of Tribal
               8(a) Firms Need
               Attention




GAO-12-84
                                            January 2012

                                            FEDERAL CONTRACTING
                                            Monitoring and Oversight of Tribal 8(a) Firms Need
                                            Attention
Highlights of GAO-12-84, a report to
congressional requesters




Why GAO Did This Study                      What GAO Found
Tribal firms—those owned by Alaska          Federal dollars obligated to tribal 8(a) firms grew from $2.1 billion in fiscal year
Native Corporations, Native Hawaiian        2005 to $5.5 billion in 2010, a greater percentage increase than non-tribal 8(a)
Organizations, and Indian tribes—are        obligations (160 percent versus 45 percent). Obligations to 8(a) firms owned by
afforded special advantages within the      Alaska Native Corporations (ANC) represented the majority of tribal obligations
Small Business Administration’s (SBA)       every year during the period, rising to $4.7 billion in 2010. While tribal 8(a) firms
8(a) business development program.          comprised 6.2 percent of total 8(a) firms, their obligations accounted for almost a
GAO was asked to (1) identify trends in     third of total 8(a) obligations in fiscal year 2010. Over the 6 years, the percentage
government 8(a) contracting with tribal     of competitively awarded obligations to tribal 8(a) firms rose; however, sole-
firms; (2) determine why the
                                            source contracts remained the primary source of growth, representing at least 75
government awarded sole-source
                                            percent of all tribal 8(a) obligations in a given year.
contracts to tribal 8(a) firms and the
methods used to make price                  Consistent with GAO’s 2006 review of ANC 8(a) contracting, contracting officials
determinations; (3) assess the              said that awarding contracts to tribal firms under the 8(a) program allows officials
procuring agencies’ oversight of            to award sole-source contracts for any value quickly, easily, and legally, and
contracts for compliance with               helps agencies meet their small business goals. However, the officials added that
subcontracting requirements; and (4)        the program offices’ push for awarding follow-on contracts to the same firm also
examine SBA’s new 8(a) regulation,          plays a role. GAO’s review of noncompetitive tribal 8(a) contracts shows the
intended to clarify program rules, to       methods used to determine price reasonableness in a sole-source environment.
determine how the changes could
                                            In some cases, when agencies moved away from sole-source tribal 8(a)
affect oversight of tribal 8(a) firms.
                                            contracts toward competition, agency officials estimated savings as a result.
GAO reviewed non-generalizable
samples of 87 contracts (based on           To ensure that 8(a) firms do not pass along the benefits of their contracts to their
dollar value and location) and 62 tribal    subcontractors, regulations limit the amount of work that can be performed by the
8(a) firms’ SBA files and spoke with        subcontractors. Of the 87 contracts in GAO’s review, 71 had subcontractors.
SBA headquarters and district officials     GAO found that required monitoring of limitations on subcontracting by procuring
as well as officials from 9 agencies.       agencies was not routinely occurring. Similar to what GAO reported in 2006,
What GAO Recommends                         some contracting officers do not understand that ensuring compliance is their
                                            responsibility under partnership agreements with SBA, and the regulations do not
GAO recommends that the Office of           make this clear. Further, agency officials did not know how to monitor
Federal Procurement Policy (OFPP)           subcontracting limitations, particularly for indefinite-quantity contracts, as the
amend acquisition regulations and           data are not readily available. Not monitoring the limits on subcontracting can
provide guidance (including data            pose a major risk that an improper amount of work is being done by large firms.
collection) on monitoring the limits on
subcontracting. OFPP generally              In March 2011, SBA revised 8(a) regulations to clarify program rules, correct
agreed with the recommendations.            misinterpretations, and address program issues. Although a positive step, SBA
GAO’s recommendations also include          will have difficulty enforcing new regulations pertaining to tribal 8(a) follow-on
that SBA include specific capabilities in   contracts and joint ventures given the information currently available. SBA told
its 8(a) database to improve tribal 8(a)    GAO it is currently in the process of developing the requirements for a new 8(a)
tracking and that it examine tribal         tracking database. Further, the new regulations do not address some issues
participation to determine whether          GAO has previously raised, such as ANC 8(a) firms under the same parent
certain practices align with the 8(a)       corporation generating a majority of revenue in the same line of business. SBA
program’s business development goal.        regulations do not allow a tribal organization to have more than one 8(a)
SBA questioned GAO’s methodology,           subsidiary perform most of its work under the same primary business line. GAO
which GAO continues to believe is           also discusses practices that highlight how some tribal 8(a) firms operate, in
appropriate, but did not address GAO’s
                                            effect, as large businesses because of their parent corporation’s backing and
recommendations.
                                            interconnectedness with sister subsidiaries. SBA has not reviewed these
View GAO-12-84. For more information,       practices to determine whether they are congruent with the business
contact John Hutton at (202) 512-4841 or    development purpose of the 8(a) program.
huttonj@gao.gov.

                                                                                     United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                  5
               Obligations to Tribal 8(a) Firms Have Grown Steadily, with Most
                 under Sole- Source Contracts                                             12
               Sole-Source Contracts to Tribal 8(a) Firms Viewed as Expedient,
                 but Could Lead to Missed Opportunities for Savings                       17
               Agency Oversight of Subcontracting under Tribal 8(a) Contracts
                 Continues to Be Lacking                                                  30
               SBA’s New Regulations Will Be Difficult to Implement, and Other
                 Problems and Practices Have Not Been Addressed                           35
               Conclusions                                                                51
               Recommendations for Executive Action                                       52
               Agency Comments and Our Evaluation                                         54

Appendix I     Scope and Methodology                                                      59



Appendix II    Comments from the Small Business Administration                            64



Appendix III   GAO Contact and Staff Acknowledgments                                      73



Tables
               Table 1: Differences in Requirements for Tribal 8(a) Firms and
                        Other 8(a) Firms                                                   7
               Table 2: Number of Tribal and Non-tribal 8(a) Firms and
                        Obligations in Fiscal Year 2010                                   14
               Table 3: Percentage of Obligations under Competitively Awarded
                        Contracts to Tribal 8(a) Firms for Fiscal Year 2005 and
                        2010                                                              14
               Table 4: Example of the Declared Primary Industries and Actual
                        Revenue Generators of 8(a) Subsidiaries under One ANC
                        Parent Entity                                                     44
               Table 5: Summary of Tribal 8(a) Firms That Have Left the Program           50




               Page i                                        GAO-12-84 Tribal 8(a) Contracting
Figures
          Figure 1: Notional ANC with Holding Company and Multiple
                   Subsidiaries                                                                      6
          Figure 2: Flow of Work and Profits As Allowed in the 8(a) Program
                   under an Illustrative Joint Venture Contract for Services                        11
          Figure 3: Obligations to Non-Tribal and Tribal 8(a) Firms, Fiscal
                   Years 2005 through 2010 (dollars in billions)                                    13
          Figure 4: Competitive and Sole-Source Obligations to Tribal and
                   Non-Tribal 8(a) Firms, Fiscal Years 2005 through 2010 (in
                   billions)                                                                        15
          Figure 5: Monthly Sole-Source Obligations for New Awards to
                   Tribal and Non-Tribal 8(a) Firms, Fiscal Year 2005
                   through 2010                                                                     16
          Figure 6: Example of Relationship between Large Business and
                   Tribal 8(a) Firm That Were Found Affiliated                                      45

          Abbreviations

          ANC               Alaska Native Corporation
          ANCSA             Alaska Native Claims Settlement Act
          BOA               basic ordering agreement
          DCAA              Defense Contract Audit Agency
          DOD               Department of Defense
          DUNS              Data Universal Numbering System
          FAR               Federal Acquisition Regulation
          FPDS-NG           Federal Procurement Data System-Next Generation
          GSA               U.S. General Services Administration
          NAICS             North American Industry Classification System
          NHO               Native Hawaiian Organization
          OFPP              Office of Federal Procurement Policy
          OMB               Office of Management and Budget
          SBA               Small Business Administration




          This is a work of the U.S. government and is not subject to copyright protection in the
          United States. The published product may be reproduced and distributed in its entirety
          without further permission from GAO. However, because this work may contain
          copyrighted images or other material, permission from the copyright holder may be
          necessary if you wish to reproduce this material separately.




          Page ii                                                   GAO-12-84 Tribal 8(a) Contracting
United States Government Accountability Office
Washington, DC 20548




                                   January 31, 2012

                                   Congressional Requesters:

                                   The federal government obligates hundreds of billions of dollars in
                                   contracts for goods and services each year—about $537 billion in fiscal
                                   year 2010. That year, about $18.5 billion was obligated to firms
                                   participating in the Small Business Administration’s (SBA) 8(a) program.
                                   The 8(a) program is one of the federal government’s primary means for
                                   developing small businesses owned by socially and economically
                                   disadvantaged individuals. Congress has repeatedly emphasized in
                                   legislation that the purpose of the 8(a) program is business development,
                                   with a goal of enabling these businesses to compete on an equal basis in
                                   the mainstream American economy. Over two decades ago, Congress
                                   expanded participation in the 8(a) program to include not just firms owned
                                   by disadvantaged individuals, but also firms owned by tribal entities. In
                                   this report, “tribal entities” refers to Alaska Native Corporations (ANC),
                                   Indian tribes, and Native Hawaiian Organizations (NHO). We use the term
                                   “tribal 8(a) firm” to refer to a firm that is majority owned by an ANC, Indian
                                   tribe, or NHO.

                                   Firms owned by tribal entities have been afforded special advantages in
                                   the 8(a) program. For example, they can receive sole-source 8(a)
                                   contracts for any amount, whereas sole-source awards to other 8(a) firms
                                   generally must be made under certain competitive dollar thresholds ($6.5
                                   million for manufacturing or $4 million for all other acquisitions). ANCs,
                                   created in 1971 through the Alaska Native Claims Settlement Act
                                   (ANCSA), were established to distribute land and monetary benefits to
                                   Alaska Native shareholders in lieu of a reservation system. 1 Relevant
                                   legislation defines the term Indian tribes to include bands, nations, or
                                   other organized groups of communities of Indians, which are recognized
                                   as eligible for the special programs and services provided by the United
                                   States because of their status as Indians. NHOs are not-for-profit
                                   community service organizations controlled by Native Hawaiians whose
                                   business activities are to principally benefit Native Hawaiians. These tribal


                                   1
                                     The goal of the Act was, in part, to resolve long-standing aboriginal land claims and to
                                   foster economic development for Alaska Natives. ANCs are eligible to participate in
                                   federal procurement programs, such as the 8(a) program, pursuant to ANCSA. See 43
                                   U.S.C. §§ 1602, 1626(a) and (e).




                                   Page 1                                                     GAO-12-84 Tribal 8(a) Contracting
entities generally provide, to varying extents, economic and community
development for their native populations through different programs.

In a 2006 report, we noted that the legislative history leading to the
procurement advantages for ANCs was sparse and confusing. 2 We also
reported on the challenge SBA officials cited in overseeing ANC activity in
the 8(a) program. The officials attributed this challenge to the fact that the
program’s business development goals can be in conflict with ANCs’
charter under ANCSA—economic and community development for
Alaska Natives. We made a number of recommendations, focused on the
need for improved SBA oversight of the special advantages afforded to
ANCs under the 8(a) program. The Small Business Act does not provide
tribal entities a purpose in the 8(a) program that is different from the
program’s stated goal of business development. In fact, in a 1989 revision
to the 8(a) program regulations, SBA stated that the 8(a) program is
intended to be used exclusively for business development purposes to
help small businesses owned and controlled by socially and economically
disadvantaged individuals, Indian tribes, ANCs, and NHOs to compete on
an equal basis in the mainstream of the American economy. 3 We also
reported in 2006 that agencies were not effectively monitoring compliance
with required percentages of work to be performed by 8(a) firms versus
their subcontractors. While our 2006 report focused on 8(a) firms owned
by ANCs, the scope of this report includes 8(a) firms owned by Indian
tribes and NHOs as well.

SBA revised the 8(a) regulations, effective in March 2011, to clarify and
refine certain provisions in the program, with some revisions specifically
focused on tribal participation. Also in March 2011, the Federal
Acquisition Regulation (FAR) was amended, 4 on an interim basis, to


2
  GAO, Contract Management: Increased Use of Alaska Native Corporations’ Special 8(a)
Provisions Calls for Tailored Oversight, GAO-06-399 (Washington, D.C.: Apr. 27, 2006).
For example, legislative language suggests that 8(a) businesses owned by Indian tribes
and ANCs were exempt from sole source dollar thresholds because such businesses are
located on reservations and account for the major employment of the workforce. ANCs,
however, do not have reservations.
3
  13 C.F.R. § 124.1. (1989) The regulations were revised in 1998 to restate the business
development purpose of the program for “small disadvantaged business concerns,” which
include tribal 8(a) firms.
4
  FAR 6.303-1(b). The written justification must be approved in writing by the appropriate
official depending on the dollar value (see FAR 6.304) and made publicly available (see
FAR 6.305).




Page 2                                                    GAO-12-84 Tribal 8(a) Contracting
implement a provision in the National Defense Authorization Act for Fiscal
Year 2010 that required a written justification prior to awarding sole-
source 8(a) contracts over $20 million 5 Previously, no justification was
required for any dollar amount for 8(a) contracts, including those awarded
to tribal 8(a) firms.

In response to your request, we (1) identified trends in federal obligations
under 8(a) contracts with tribal firms; (2) determined the reasons federal
agencies awarded sole-source contracts to tribal 8(a) firms and the
methods used to make price determinations; (3) assessed the procuring
agencies’ oversight of tribal 8(a) contracts for compliance with
subcontracting requirements; and (4) examined SBA’s new 8(a)
regulations to determine how the changes could affect oversight of tribal
firms and the extent to which previously identified problems are
addressed. During the course of our work, we also discussed with
procuring agency officials the potential impact of the recent FAR
requirement for written justifications for sole-source 8(a) awards over $20
million. This requirement was not applicable to the contracts we reviewed.
We evaluated the administration of the tribal 8(a) program; the scope of
our work did not include an evaluation of the program’s merits.

To identify trends in 8(a) contracting with tribal firms, we analyzed data
from the Federal Procurement Data System-Next Generation (FPDS-NG)
for fiscal years 2005 through 2010 (the last year of complete information
at the time of our review). We found the FPDS-NG data fields that identify
firms owned by ANCs, NHOs, and Indian tribes to be unreliable because
these data were not available during the entire time period. We therefore
obtained from SBA tribal 8(a) firms’ Data Universal Numbering System
(DUNS) numbers and used this information to obtain the FPDS-NG data,
which we determined was sufficiently reliable to identify trends in tribal
8(a) contracting. To address our second and third objectives, we used a
stratified purposeful, selected sampling approach to identify 87 contracts
for review. 6 This nonprobability sample included contracts over the
competitive 8(a) threshold amounts ($6.5 million for manufacturing and $4


5
    National Defense Authorization Act for Fiscal Year 2010, § 811 (2009).
6
  Our initial sample included 90 contracts; however, we excluded 2 from the sample
because they had been incorrectly coded in FPDS-NG as being awarded through the 8(a)
program to tribal 8(a) firms. A third contract was excluded because obligations under one
indefinite quantity contract had been listed in FPDS-NG as being under two separate
contracts.




Page 3                                                     GAO-12-84 Tribal 8(a) Contracting
million for other acquisitions), focusing on those with large dollar value
obligations in fiscal year 2009 (the latest data available at the time we
selected our contract sample). We also focused on contracting activities
that had higher levels of sole-source tribal 8(a) activity. The majority of
the contracts in our sample (62) were awarded by defense agencies, and
25 were awarded by civilian agencies, including the departments of
Agriculture, Energy, Health and Human Services, Homeland Security,
Justice, Labor, and State, and the Social Security Administration. Most
(75) of the contracts were with ANC 8(a) firms; 10 were with firms owned
by Indian tribes and 2 were with firms owned by NHOs. Of the 87
contracts, 7 were competitively awarded, and 79 were sole-source
procurements. For the one remaining contract we could not confirm
whether it was awarded competitively or not because the entire pre-award
file was missing. We reviewed the contract files and spoke with
contracting and program officials and small business advocates at the
agency locations. The results of our contract file analysis are not
generalizable to the population of tribal 8(a) contracts.

To address the potential effect of the new SBA regulations on oversight of
tribal firms and the extent to which previously identified problems were
addressed, we visited SBA headquarters as well as district offices in
Anchorage, AK; Philadelphia, PA; and Washington, DC. We also spoke
with SBA district officials in Hawaii, New Mexico, and Oklahoma. We
selected these particular district offices primarily based on their relatively
higher level of involvement with tribal 8(a) firms. In addition to the 87
contract files we reviewed, we also reviewed a sample of 62 SBA files for
tribal 8(a) firms’ application information, annual reviews, and business
plans. In selecting the firms for this portion of our work, we focused on
those that had relatively high representation in our contract sample as
well as those that had relatively low representation. The results of our
review of the firms’ SBA files are not generalizable to the universe of tribal
8(a) firms. We did not assess the extent to which benefits from tribal 8(a)
contracts flow to the parent entity.

To understand the potential impact of the new FAR requirement for
written justifications of 8(a) sole-source awards over $20 million, we
reviewed the FAR and public comments on the new rule: interviewed
agency small business advocates, Office of Federal Procurement Policy
(OFPP) officials, and contracting officers for the contracts we reviewed;




Page 4                                           GAO-12-84 Tribal 8(a) Contracting
             and drew from the findings in our prior report on ANC 8(a) contracting. 7
             The Administrator of OFPP serves as chair of the Federal Acquisition
             Regulatory Council; the council oversees development and maintenance
             of the FAR.

             Appendix I contains more information on our scope and methodology. We
             conducted this performance audit from October 2010 to January 2012 in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             ANCs, Indian tribes and NHOs—i.e., the parent entities of tribal 8(a)
Background   firms—can be large, with worldwide operations and revenues in the
             hundreds of millions of dollars. They can own 8(a) and non-8(a)
             subsidiaries and sometimes form complicated corporate structures.
             Figure 1 illustrates a notional corporate structure of an ANC with a
             holding company—a non-8(a) subsidiary that provides shared
             administrative services to other subsidiaries for a fee. The figure depicts a
             mix of 8(a) and non-8(a) subsidiaries that may be only partly owned by
             the ANC.




             7
                 GAO-06-399.




             Page 5                                           GAO-12-84 Tribal 8(a) Contracting
Figure 1: Notional ANC with Holding Company and Multiple Subsidiaries




Note: Only the 8(a) subsidiaries would be eligible for 8(a) contracts.


According to SBA, in fiscal year 2010, there were over 8,400 firms in the
8(a) program, 354 of which were owned by a tribal entity. For any firm
(including tribal firms) to be eligible to participate in the 8(a) program, it
must qualify as small under a primary industry size standard as measured
by the number of employees or average revenues from the previous 3
years. In addition, the firm must be, among other things, majority-owned
by one or more socially and economically disadvantaged individuals or a
qualified entity, such as a tribal entity. Firms approved as 8(a) participants
can receive business development assistance from SBA and are eligible
to receive contracts that agencies offer to SBA for the 8(a) program. All
8(a) firms, including tribal 8(a) firms, are subject to a 9-year limit on
participation in the 8(a) program. During the last 5 years in the program,
known as a transitional period, firms are required to obtain a certain
percentage of non-8(a) revenue to demonstrate their progress in
developing a viable business that is not solely reliant on the 8(a) program.
SBA’s district offices are responsible for tracking this business mix on an
annual basis. If a firm does not meet its required business mix during one
of the last 5 years, SBA invokes a plan of remedial action for the next
year, in which the firm is to report to SBA on its progress. Until the
required mix is demonstrated, the firm will generally not be eligible for
sole-source 8(a) contracts.

Congress has provided tribal 8(a) firms with distinct advantages over
other 8(a) businesses, in addition to the ability to receive sole-source 8(a)
contracts for any amount. In some cases, there are also differences




Page 6                                                             GAO-12-84 Tribal 8(a) Contracting
                                             among the advantages provided to firms owned by ANCs, Indian tribes,
                                             and NHOs. Table 1 provides more details.

Table 1: Differences in Requirements for Tribal 8(a) Firms and Other 8(a) Firms

                                                               Firms owned by an        Firms owned by an
Requirement              Firms owned by an ANC                 Indian Tribe             NHO                     Other 8(a) firms
Number of firms a        No limit as long as each business is in a different primary industry.                  Only one in a lifetime.
participant may own
Size determination for   Other affiliated companies not considered in size determination; however, the SBA      For-profit, nonprofit,
eligibility in 8(a)      Administrator may find the existence of affiliation if, for example, SBA determines    domestic, and foreign
program                  that the tribal 8(a) firm or firms have a substantial unfair competitive advantage     affiliates considered in
                         within an industry.                                                                    size determination.
Competitive threshold    No threshold.                                                  No threshold for DOD    Can receive sole-
                         Procurements need not be competed before being                 contracts only.         source contracts for up
                         accepted on a sole-source basis.                               DOD procurements        to $6.5 million for
                                                                                        need not be competed    manufacturing or $4
                                                                                        before being accepted   million for all other
                                                                                        on a sole-source        acquisitions.
                                                                                        basis.
Dollar limits on amount No limits on the amount of sole-source contracts.                                       May not receive sole-
of sole-source 8(a)                                                                                             source 8(a) contract
contracts                                                                                                       awards if the
                                                                                                                combined total of
                                                                                                                competitive and sole
                                                                                                                source 8(a) contracts
                                                                                                                received is above (1)
                                                                                                                $100 million where a
                                                                                                                firm’s size is based on
                                                                                                                its number of
                                                                                                                employees, or, (2) the
                                                                                                                lesser of $100 million
                                                                                                                or five times the size
                                                                                                                standard for the
                                                                                                                industry where a firm’s
                                                                                                                size is based on
                                                                                                                           a
                                                                                                                revenues.




                                             Page 7                                                   GAO-12-84 Tribal 8(a) Contracting
                                                                    Firms owned by an                Firms owned by an
Requirement             Firms owned by an ANC                       Indian Tribe                     NHO                       Other 8(a) firms
Demonstration of        Deemed in legislation as socially           Defined as socially              Deemed socially           Must (1) be a member
social and economic     and economically disadvantaged.             disadvantaged, but               disadvantaged but         of a group deemed as
disadvantage                                                        must demonstrate that            must establish            socially disadvantaged
                                                                    the tribe is                     economic                  or prove social
                                                                    economically                     disadvantage and that     disadvantage by
                                                                    disadvantaged in                 its business activities   meeting certain
                                                                    connection with the              principally benefit       standards and (2)
                                                                    application for one              Native Hawaiians.         must prove economic
                                                                                        b
                                                                    tribally-owned firm.             Economic                  disadvantage.
                                                                    The tribe need not               disadvantage for an
                                                                    reestablish its                  NHO is determined
                                                                    economic                         when the majority of
                                                                    disadvantage to have             an NHO’s members—
                                                                    other businesses it              or if no members, the
                                                                    owns certified for 8(a)          board of directors—
                                                                    participation, unless            qualify as
                                                                    requested to do so by            economically
                                                                    SBA.                             disadvantaged
                                                                                                     individuals. Economic
                                                                                                     disadvantage must be
                                                                                                     determined for every
                                                                                                     8(a) applicant.
Management              President/chief executive officer           Management and daily             President/chief           President/chief
background              need not be a disadvantaged                 operations must be               executive officer need    executive officer
                        individual.                                 controlled by the tribe.         not be a                  must be a
                                                                    The concern may be               disadvantaged             disadvantaged
                                                                    controlled by the tribe          individual.               individual.
                                                                    through one or more
                                                                    individuals who
                                                                    possess sufficient
                                                                    management
                                                                    experience to run the
                                                                    firm or through
                                                                    management, which
                                                                    can be a non-tribal
                                                                              c
                                                                    member.
Potential for success   (1) Must be in business in primary industry classification for at least 2 years before                 Must be in business in
                        8(a) application date; or                                                                              primary industry
                        (2) generally, the individuals who will manage and control the daily business                          classification for at
                        operations of the firm have substantial technical and management experience; the                       least 2 years before
                        applicant has successful past performance on contracts from government and non-                        8(a) application date.
                        government sources in its primary industry, and the applicant has adequate capital                     SBA can waive the
                        to sustain its operations and carry out its business plan as a participant; or                         requirement if certain
                        (3) the tribal entity made a firm written commitment to support the operations of the                  conditions are met,
                        applicant concern and it has the financial ability to do so.                                           such as substantial
                                                                                                                               business experience,
                                                                                                                               adequate capital, and
                                                                                                                               past success on
                                                                                                                               contracts.
                                            Source: GAO analysis of SBA 8(a) laws and regulations.
                                            a
                                             8(a) contracts awarded under $100,000 will not be considered in the $100 million limit.




                                            Page 8                                                                   GAO-12-84 Tribal 8(a) Contracting
b
 This includes consideration of available data such as present tribal unemployment rate, the per
capita income of tribal members, and percentage of local Indian population below the poverty level.
c
 Management is provided by either (1) committees, teams, or Board of Directors controlled by at least
one economically disadvantaged tribe member; or (2) non-tribal members if the tribe can hire and fire
those individuals, retains control of all management decisions, and a written plan exists which shows
how tribal members will develop managerial skills sufficient to manage the 8(a) firm or similar tribally-
owned firms in the future.


For tribal 8(a) firms, SBA has specific oversight responsibility for

•     accepting the firm into the program, which includes ensuring that the
      tribal entity owning the firm does not have more than one 8(a) firm in
      the same primary line of business, defined by a North American
      Industry Classification System (NAICS) code 8 and
•     annually reviewing 8(a) firms to track their progress in the 8(a)
      program, including their mix of 8(a) and non-8(a) revenue in the last 5
      years in the program and any changes to the firms’ business targets,
      objectives, and goals.

The procuring agency offers, and SBA may accept, a procuring agency’s
requirement into the 8(a) program either as a competitive procurement—
to be competed among all eligible 8(a) firms—or as a sole-source
procurement. The agency’s offer letter must identify the requirement, any
procurement history, the estimated dollar amount, and NAICS code,
among other things. 9 Before accepting a procurement as an 8(a) sole-
source contract, SBA is to verify the proposed firm’s size status to ensure
that it qualifies as small under the identified NAICS code. Once accepted
into the program, 8(a) firms may pursue contracts in additional lines of
work, called secondary NAICS codes. Once a requirement is awarded as
an 8(a) contract, it must remain in the 8(a) program unless the procuring
agency decides it would like to fulfill the follow-on requirement outside of
the program and requests approval from SBA to do so. Procuring agency
contracting officers also have responsibilities under the 8(a) program. For


8
  The NAICS assigns codes to all economic activity within 20 broad sectors, and the codes
reflect the industry in which the firm operates, e.g., wireless telecommunication carriers or
industrial building construction. SBA has designated a small business size standard for
every NAICS code. Applicants to the 8(a) program must qualify as small under their
primary NAICS code at the time of application and SBA’s certification date. SBA regulation
requires that at least 2 years lapse after a tribal firm exits the 8(a) program before another
firm owned by the same parent entity can enter the program with the prior firm’s primary
NAICS code.
9
    FAR 19.804-2.




Page 9                                                             GAO-12-84 Tribal 8(a) Contracting
all of the agencies in our review, SBA has delegated responsibility for
contract administration to the contracting officers through partnership
agreements. 10 These responsibilities include, for example, ensuring
compliance with the limitations on subcontracting requirements under 8(a)
contracts.

SBA’s 8(a) program regulations allow for involvement of other businesses
and non-disadvantaged individuals as a way of helping the 8(a) business
grow and develop. For example, 8(a) firms can hire outside agents to
assist them in obtaining 8(a) contracts; however, SBA’s revised
regulations now prohibit agreements in which agents receive a
percentage of the contract value as compensation for their assistance. In
addition, large businesses can create a mentor-protégé joint venture with
an 8(a) firm to win 8(a) prime contracts or can act as a subcontractor
under an 8(a) contract. 11 Certain limitations apply regarding the
percentage of labor costs that 8(a) firms and non-8(a) partners may incur
under service and construction contracts. For service contracts with
subcontracting activity, the 8(a) firm must incur at least 50 percent of the
personnel costs with its own employees (15 percent for construction
contracts). Further, a non-disadvantaged individual can own up to a 49
percent interest in an 8(a) firm, retaining his or her percentage of
ownership in the profits the firm generates. These arrangements with
other businesses or non-disadvantaged individuals can result in a
relatively small percentage of contract profits being retained by the tribal
entity that owns the 8(a) firm. Figure 2 is an illustrative example of how
these arrangements could occur when a tribal 8(a) firm forms a joint
venture with a large business under the mentor-protégé program, as
allowed by SBA regulations.




10
  For agencies where there is no partnership agreement in place, SBA is generally
responsible for the contract administration function.
11
   SBA must approve the mentor/protégé agreement before the two businesses submit an
offer as a joint venture to receive exclusion from affiliation. 13 C.F.R. §§ 124.513(b)(3) and
124.520(b) and (d)(1)(i).




Page 10                                                    GAO-12-84 Tribal 8(a) Contracting
Figure 2: Flow of Work and Profits As Allowed in the 8(a) Program under an Illustrative Contract for Services




                                          Notes: In our example, the joint venture is unpopulated—meaning it merely exists through a written
                                          agreement and uses the employees of the firms in the joint venture. The profits from an unpopulated
                                          joint venture are distributed commensurate with the work performed; thus, in this example the 8(a)
                                          firm receives 10 percent in profit from the 40 percent of the work it performed.




                                          Page 11                                                        GAO-12-84 Tribal 8(a) Contracting
                        For 8(a) construction contracts, the prime contractor must incur at least 15 percent of the personnel
                        costs with its own employees. Thus, if our illustrative example above were a construction contract, the
                        tribe that owns a 51 percent interest in the firm would receive $31,000 in profit distribution.


                        In 2006, we reported that ANCs used the 8(a) program as one of many
                        sources of revenue (which could include revenue generated outside of
                        government contracts) to provide benefits to their shareholders. 12 We also
                        found that there was no explicit link between the revenues ANCs
                        generated from the 8(a) program and the benefits they provided to
                        shareholders, because ANCs only tracked benefits generated from their
                        consolidated revenue sources. The recently revised 8(a) regulations
                        require tribal 8(a) firms to report annually to SBA on the benefits they are
                        providing their members or community from their participation in the 8(a)
                        program.


                        From fiscal year 2005 through 2010, federal dollars obligated to tribal 8(a)
Obligations to Tribal   firms grew from $2.1 billion to $5.5 billion. Obligations to 8(a) firms owned
8(a) Firms Have         by ANCs—which represented the majority of these tribal obligations
                        during each fiscal year—rose steadily, from $1.9 billion to $4.7 billion.
Grown Steadily, with    Obligations to 8(a) firms owned by Indian tribes and NHOs also grew
Most under Sole-        steadily during this time frame, to $690 million and $109 million,
Source Contracts        respectively, in fiscal year 2010. Total 8(a) obligations (to tribal and non-
                        tribal 8(a) firms) increased from $11.3 billion to $18.8 billion during the
                        six-year period. Obligations to tribal 8(a) firms represented a 160 percent
                        increase over this time, while obligations to non-tribal 8(a) firms increased
                        45 percent. Figure 3 shows the growth of non-tribal and tribal 8(a)
                        obligations.




                        12
                             GAO-06-399.




                        Page 12                                                          GAO-12-84 Tribal 8(a) Contracting
Figure 3: Obligations to Non-Tribal and Tribal 8(a) Firms, Fiscal Years 2005 through
2010 (dollars in billions)




Note: Obligation amounts are inflation adjusted to 2010 dollars.


Tribal firms represented a very small percentage of all 8(a) firms, but
accounted for almost 30 percent of 8(a) obligations—about $5.5 billion—
in fiscal year 2010, as shown in table 2.




Page 13                                                            GAO-12-84 Tribal 8(a) Contracting
Table 2: Number of Tribal and Non-tribal 8(a) Firms and Obligations in Fiscal Year
2010

                                                  Percentage of                 8(a) Percentage of
                            Number of 8         total number of        obligations      FY 10 8(a)
                               (a) firms               8(a) firms     (in millions)    obligations
 Non-tribal 8(a)                        5,340               93.8           $13,310              70.8
 firms
 Tribal 8(a)                             353                 6.2             5,480              29.2
 firms
 Total                                  5,693                100            18,790              100
Source: GAO analysis of FPDS-NG data.



The percentage of obligations under competitively awarded tribal 8(a)
contracts increased from fiscal year 2005 to 2010. In fiscal year 2010,
sole-source obligations to ANC 8(a) firms decreased slightly, for the first
time since 2005. Table 3 compares the percentage of obligations under
competitively awarded contracts for ANC, Indian tribe, and NHO 8(a)
firms in fiscal year 2005 and 2010.

Table 3: Percentage of Obligations under Competitively Awarded Contracts to
Tribal 8(a) Firms for Fiscal Year 2005 and 2010

                                                      Fiscal year 2005             Fiscal year 2010
 8(a) firms owned by                                          (percent)                    (percent)
 ANC                                                                14.8                       21.8
 Indian tribe                                                       10.2                       18.1
 NHO                                                                 4.2                         26
Source: GAO analysis of FPDS-NG data.



Even with this increase in obligations under competitively awarded
contracts to tribal 8(a) firms, sole-source contracts still accounted for at
least 75 percent of all tribal 8(a) obligations annually. In terms of
obligations, in fiscal year 2010, sole-source awards to tribal 8(a) firms
accounted for $4.3 billion of the total $5.5 billion in tribal 8(a) obligations.
Figure 4 shows the breakdown of sole-source and competitive 8(a)
obligations for tribal and non-tribal 8(a) firms from fiscal years 2005
through 2010.




Page 14                                                             GAO-12-84 Tribal 8(a) Contracting
Figure 4: Competitive and Sole-Source Obligations to Tribal and Non-Tribal 8(a)
Firms, Fiscal Years 2005 through 2010 (in billions)




Note: Obligation amounts are inflation adjusted to 2010 dollars.


As shown in figure 4, the percentage of competitive obligations for non-
tribal 8(a) firms—about 45 percent in fiscal year 2010—still far outpaces
those of tribal 8(a) firms.

Further, our analysis of FPDS-NG obligation data for new sole source
awards under the 8(a) program, issued from fiscal years 2005 through
2010, reveals that for both tribal and non-tribal 8(a) firms, obligations on
sole-source 8(a) awards increased during the last month of each fiscal




Page 15                                                            GAO-12-84 Tribal 8(a) Contracting
                                         year. 13 Figure 5 shows the dramatic spike in 8(a) obligations in
                                         September of each year.

Figure 5: Monthly Sole-Source Obligations for New Awards to Tribal and Non-Tribal 8(a) Firms, Fiscal Year 2005 through 2010




                                         Note: Obligation amounts are inflation adjusted to 2010 dollars.


                                         One tribal 8(a) firm’s business plan we reviewed, submitted to SBA,
                                         alluded to increased obligations at the end of the fiscal year and noted
                                         that it changes its marketing strategy accordingly during that time. The
                                         plan noted that “[Our] business is not seasonal with the exception of the
                                         end of fiscal year spending for the U.S. Government. During this period,
                                         we concentrate our efforts directly at the government by increasing our


                                         13
                                           Interestingly, this trend is the opposite of what we reported in 2010 regarding
                                         obligations under all contracts (not just those awarded to 8(a) firms). We found that the
                                         majority of noncompetitive obligations from fiscal years 2006 to 2009 occurred in the first
                                         quarter of the fiscal year. GAO, Federal Contracting: Opportunities Exist to Increase
                                         Competition and Assess Reasons When Only One Offer is Received, GAO-10-833
                                         (Washington, D.C.: July 26, 2010).




                                         Page 16                                                            GAO-12-84 Tribal 8(a) Contracting
                            visits and solicitations at the locations where we have the most successful
                            and loyal contacts.”


                            Contracting officials at the agencies we reviewed, similar to what we
Sole-Source Contracts       reported in 2006, told us that using tribal firms under the 8(a) program
to Tribal 8(a) Firms        allows them to award sole-source contracts for any value quickly, easily
                            and legally. 14 They further stated these awards help procuring agencies to
Viewed as Expedient,        meet their small business goals, but added that the program offices’
but Could Lead to           preference for using the same firms for follow-on contracts also plays a
Missed Opportunities        role. 15 Our review of 79 sole-source tribal 8(a) contracts revealed some of
                            the methods used by contracting officials to determine price
for Savings                 reasonableness in a sole-source environment. However in several cases
                            we found that contracting officers were moving away from sole-source
                            tribal 8(a) contracts toward competition. We also found examples where
                            tribal 8(a) contracts that had previously been awarded on a sole-source
                            basis were competed, resulting in savings.


Tribal 8(a) Sole-Source     Contracting officials viewed sole-source contract awards to tribal 8(a)
Contracts Viewed as Quick   firms as a way to expedite the federal acquisition process, avoid some
and Easy and Contributing   potential bid protests, and help them meet their agencies’ small business
                            goals. Prior to SBA’s acceptance of any sole-source requirement into the
to Small Business Goals     8(a) program, the procuring agency need only identify a qualified 8(a) firm
                            and obtain approval from SBA to award a contract. It is the procuring
                            agency’s responsibility to conduct market research, including determining
                            whether offers can be obtained from two or more firms at fair market
                            prices. However, SBA also considers market research requirements to be
                            satisfied when a participant in the 8(a) program self-markets its abilities to
                            a procuring agency and is subsequently offered a sole-source 8(a)
                            requirement. 16




                            14
                                 GAO-06-399.
                            15
                              The federal government has an annual agencywide goal of awarding not less than 23
                            percent of all prime contract dollars to small businesses. See 15 U.S.C. § 644(g)(1).
                            16
                              SBA may not accept a procurement into the 8(a) program under certain circumstances
                            and if the contract pricing exceeds a fair market price.




                            Page 17                                                GAO-12-84 Tribal 8(a) Contracting
Award of Sole-Source Tribal      Acquisition planning activities are intended to ensure that the government
8(a) Contracts Allows            meets its needs in the most effective, economical, and timely manner
Expedited Acquisition Planning   possible. Some contracting officers awarded sole-source 8(a) contracts to
and Market Research              tribal firms because this approach allowed them to avoid lengthy
                                 acquisition planning and market research procedures, thereby expediting
                                 the procurement process. 17 For example, documentation in a Department
                                 of Homeland Security contract revealed that the contracting official
                                 awarded a $96 million sole-source contract to a tribal 8(a) firm because
                                 this was the most streamlined approach to obtain services. According to
                                 the contract file, the agency saved considerable time in the acquisition
                                 process and thereby ensured a timely award. In another example, one
                                 contracting officer told us that she sees many more sole-source contracts
                                 to tribal 8(a) firms at the end of the fiscal year, likely because of poor
                                 acquisition planning. Recalling a time when a program office needed to
                                 award a contract quickly during the fourth quarter of the fiscal year, she
                                 said she was able to award the contract on a sole-source basis to a tribal
                                 8(a) firm within 2 weeks. She estimated that to award the contract
                                 competitively would have taken 60 to 90 days.

                                 In another scenario, DOD contracting officials used the expedited
                                 procurement process of sole-source contracts to tribal 8(a) firms to
                                 maintain the quality of critical services. They awarded two contracts—
                                 each valued at over $500 million for a 10-year period (base period plus 9
                                 option years)—for base engineering support at two different military
                                 installations. A large part of the justification for this acquisition strategy
                                 was that annual DOD appropriations acts permitted the department to
                                 avoid using the Office of Management and Budget’s Circular No. A-76
                                 competitive sourcing process by contracting with tribal 8(a) firms. 18 The
                                 purpose of the competitive sourcing process is to determine whether the


                                 17
                                   We recently reported on opportunities to strengthen acquisition planning. See GAO,
                                 Acquisition Planning: Opportunities to Build Strong Foundations for Better Service
                                 Contracts, GAO-11-672 (Washington, D.C.: Aug. 9, 2011).
                                 18
                                   The A-76 process is a federal government policy which subjects commercial activities to
                                 competition and requires agency officials to identify all activities performed by government
                                 personnel as either commercial or inherently governmental.OMB, Circular A-76 (Revised),
                                 Performance of Commercial Activities 4, (May 29, 2003). The provisions in these
                                 appropriations acts allowed DOD to avoid the A-76 process when contracting with tribal
                                 8(a) firms. DOD used the authority in section 8(a) of the Small Business Act to make the
                                 sole source awards. See, for example, Consolidated Security, Disaster Assistance, and
                                 Continuing Appropriations Act, 2009, Pub. L. No. 110-329 § 8016, 122 Stat. 3623-24
                                 (Sept. 30, 2008).




                                 Page 18                                                   GAO-12-84 Tribal 8(a) Contracting
government should be performing a function with its personnel or
contracting those functions to private sector firms. DOD officials believed
awarding the sole-source contracts was necessary, since concerns about
the time frames to conduct the A-76 process—which officials at one base
estimated could take up to 3 years—were causing the government
employees performing the work to become increasingly concerned about
their job security and to seek employment elsewhere.

In some cases, as allowed, contracting officials awarded sole-source
contracts to tribal 8(a) firms even though market research had revealed
other firms capable of performing the work. For example, Army
contracting officials’ request for information for medical services resulted
in six firms’ submitting comments. However, citing the current contract’s
expiration time frame, the contracting officer stated that a successful
competition would require a great deal of acquisition planning and, as
such, would likely result in a break in services. In another example,
market research identified 93 potential contractors for a base engineering
support requirement; several of which were known to possess the
capabilities to handle the requirement if it were competitively solicited. In
fact, the previous contract for this requirement had been competitively
awarded in the 8(a) program, with seven offers received. Our review of
the acquisition plan and discussion with the contracting officer revealed
that the reason for awarding the sole-source follow-on contract was
because of the significant delay in obtaining the statement of work from
the program office. Because the requirement was critical and the new
contractor would have to “hit the ground running,” a sole-source contract
was awarded to a tribal 8(a) firm that had subcontracted with the
incumbent contractor.

At one Army Corps of Engineers location we visited, contracting officials
told us that they put basic ordering agreements (BOA) in place—such as
the one we reviewed for design and construction services with a tribal
8(a) firm—because BOAs can be quickly set up, sometimes in only a
matter of hours. The regulations require that an agency offer, and SBA
accept, each order under a BOA to the 8(a) program prior to award,
because the BOA itself is not a contract. 19 As part of this process, SBA


19
  A BOA is a written instrument of understanding between an agency and contractor that
generally contains terms and clauses applying to future orders, a description of supplies
and services to be provided, and methods for pricing future orders under the BOA. FAR
16.703(a).




Page 19                                                  GAO-12-84 Tribal 8(a) Contracting
                                  would ensure that the tribal 8(a) firm still meets the size standard for the
                                  NAICS code for the requirement at the time the order is offered to SBA.
                                  However, we found that the contracting officer was not offering each
                                  order under this $10 million BOA (which had been awarded in June 2009)
                                  to SBA, in violation of FAR and SBA regulations. The DOD contracting
                                  official in this case sent notices of the orders to the SBA district office
                                  after the award. SBA district officials did not follow up to determine why
                                  these orders had not been offered prior to the award. By not offering each
                                  order under the BOA, there is a risk that a tribal 8(a) firm could outgrow
                                  the size standard and be improperly awarded a sole-source contract
                                  through the 8(a) program. In subsequent discussions, SBA and an Army
                                  Corps of Engineers legal representative confirmed that all orders under
                                  BOAs in the 8(a) program should be offered to SBA. According to the
                                  legal representative, the contracting office is no longer using BOAs to
                                  meet its requirements and is instead using indefinite quantity contracts. 20

Reduced Likelihood That Tribal    Tribal 8(a) sole-source contracts are also attractive because there are
8(a) Sole-Source Contracts Will   limitations on their ability to be protested. Although 8(a) sole-source
Be Protested                      awards have been protested, the following issues may not be challenged
                                  of any 8(a) participant by any party, either to SBA or any administrative
                                  forum as part of a bid or other contract protest: (1) the eligibility of the
                                  participant for a sole-source or competitive 8(a) requirement, (2) the
                                  NAICS code assigned to a sole-source 8(a) requirement, or (3) the size
                                  status of a nominated participant for a sole-source 8(a) procurement. 21
                                  According to contracting officials, bid protests can result in significant and
                                  costly delays and potentially disrupt critical services. Moreover, the
                                  officials stated that responding to bid protests absorbs their already
                                  limited time and resources. One tribal 8(a) company, in its marketing
                                  materials to the government, mentioned that one of the many benefits of
                                  a sole-source award to their company was that it would not be subject to
                                  a bid protest.

                                  Competitive 8(a) awards can be protested by other 8(a) firms, and we
                                  found an example of this in one of the seven competitively awarded


                                  20
                                     This type of contract provides for an indefinite quantity, within stated limits, of supplies
                                  or services during a fixed period. The government places orders for individual
                                  requirements. Quantity limits may be stated as number of units or as dollar values.
                                  21
                                    As examples, 8(a) sole-source awards to tribal 8(a) firms have been protested in
                                  Mission Critical Solutions, B-401057, May 4, 2009 and JMX, Inc., B-402643, June 25,
                                  2010.




                                  Page 20                                                      GAO-12-84 Tribal 8(a) Contracting
                                  contracts we reviewed. After an 8(a) contract was awarded competitively
                                  to a tribal firm, the incumbent firm’s sister subsidiary, who had competed
                                  under the solicitation, protested the award. 22 This sister subsidiary did not
                                  receive the award because its proposal relied on the past performance of
                                  its sister firm (the incumbent). According to the solicitation’s instructions,
                                  past performance of sister firms would not be considered as highly as the
                                  firm’s own past performance. 23 Further, its offer was 86 percent higher
                                  than that of the winning tribal 8(a) contractor. As a result of the protest,
                                  the expiring contract was extended 5 months, resulting in over $800,000
                                  in additional revenue for the incumbent firm.

Sole-Source Tribal 8(a)           Another reason contracting officials gave for awarding sole source tribal
Contracts Can Help Agencies       8(a) contracts is to help their agencies meet their small business prime
Meet Small Business Goals         contracting goals. Some tribal 8(a) firms also recognize that this is an
                                  attractive feature and promote it in their marketing materials. However, at
                                  one location we visited, agency officials told us that they chose to
                                  compete a follow-on procurement outside of the 8(a) program even
                                  though they knew it would significantly affect their ability to meet their
                                  small business goals. The previous 8(a) contractor had been awarded a
                                  5-year, $250 million dollar contract. Obligations under this contract had
                                  helped the agency meet its small business goals. Nevertheless, agency
                                  officials, including the small business advocate, thought the potential to
                                  obtain a better price and service through full and open competition was
                                  more important at that time.

Officials Also Award Sole-        Contracting officials we spoke with noted that some program officials
Source Contracts to Tribal 8(a)   prefer to continue working with specific tribal 8(a) firms, especially when
Firms for Continuity              program officials had established a working rapport with the incumbent
                                  contractors. Our prior work has shown that program officials generally
                                  have a preference for working with incumbent firms. 24 Program officials
                                  play an important role in the contracting process—developing


                                  22
                                       A sister subsidiary is another tribal 8(a) firm that is owned by the same parent entity.
                                  23
                                     GAO bid protest decisions have established that an agency may consider the
                                  experience or past performance of an offeror’s parent or affiliated company under certain
                                  circumstances, for instance where the proposal demonstrates that the resources of the
                                  parent or affiliate will affect contract performance. However, reliance on a third party’s
                                  experience, even if otherwise permissible, could be precluded from consideration by a
                                  solicitation provision.
                                  24
                                     GAO-10-833. We also recently reported on the program offices’ roles in acquisition
                                  planning (GAO-11-672).




                                  Page 21                                                       GAO-12-84 Tribal 8(a) Contracting
requirements, performing market research, and interfacing with
contractors. For one Army contract we reviewed to provide direct
healthcare services at military medical-treatment facilities, program
officials had decided that a follow-on sole-source 8(a) contract award to
one of the incumbent firm’s sister subsidiaries was the best option
because there was a potential for risk if the procurement start date was
not met. Additionally, in its proposal, the incumbent’s sister subsidiary
highlighted the fact that SBA regulations permitted it to share senior
management with the incumbent and that as a result, their services were
provided under the same team.

We found instances in which contracting officials awarded bridge or
follow-on sole-source contracts to incumbent tribal 8(a) firms or to their
sister subsidiaries for continuity. 25

•    Forest Service contracting officials had a history of awarding sole-
     source bridge or follow-on contracts for similar requirements to the
     same incumbent 8(a) firm or one of its sister subsidiaries. The
     contracting official responsible for the three contracts in our sample
     explained that the program office pressured her to continue awarding
     to this particular firm because the program office believed that
     awarding the requirement to a new contractor would cause a
     disruption in services. One of these contracts—a $125-million sole-
     source 8(a) contract for computer hardware and enterprise software—
     was awarded to a firm’s sister subsidiary when the incumbent was no
     longer eligible to receive 8(a) contracts. An email from an official from
     the sister firm to the contracting officer, in suggesting that the new
     contract be awarded to the sister firm, told the agency that all
     incumbent personnel working on the contract, as well as equipment,
     would be transferred over and that essentially the agency “will see
     only a name change in the firm providing the service.”
•    A contracting official at the Department of Energy told us that she
     awarded a sole-source contract for facility maintenance and support
     services to the sister subsidiary of a tribal 8(a) firm because the
     incumbent firm had graduated from the 8(a) program, thus making it
     ineligible for the follow-on contract. Further, she stated that this made




25
   All of the contracts in our sample were awarded prior to the March 2011 effective date
of SBA’s new regulations, which now prohibit the award of a follow-on sole source 8(a)
contract to an Indian tribe or ANC sister subsidiary under the same tribal entity.




Page 22                                                  GAO-12-84 Tribal 8(a) Contracting
                                    the transition very easy to manage, since nearly 100 percent of the
                                    incumbent’s staff transferred directly to the sister firm.
                                We also found examples where bridge contracts to tribal 8(a) firms were
                                used to ensure continuity while competing the follow-on requirement;
                                however, it was not always a smooth transition. In one case, a contracting
                                officer at an Army acquisition activity awarded a one-year bridge contract
                                to the incumbent tribal 8(a) firm to avoid unnecessary delays and provide
                                sufficient time to compete the requirement in the future. The incumbent’s
                                contract—awarded out of a different Army contracting office—had been
                                terminated after one and a half years on the grounds that it was legally
                                insufficient. However, when awarding the bridge contract, contracting
                                officials learned that the incumbent contractor’s employees had assisted
                                the Army in developing the follow-on requirement. The contracting officer
                                had the contractor put in place a plan to mitigate this conflict of interest,
                                but still awarded the sole-source bridge contract to meet the immediate
                                need. In another case, Army officials tried to award a task order under an
                                existing contract as a bridge contract to maintain the service while they
                                competed the follow-on award. According to Army officials, the tribal 8(a)
                                firm refused to negotiate, stating it would only agree to a 6-month bridge
                                contract with three 1-year option periods. The contracting officer told us
                                that they believed they were in a bind, agreed to the terms, and ended up
                                exercising all 3 option years. The follow-on requirement is currently being
                                competed.

Potential Impact of New Sole-   In March 2011, the FAR was revised to incorporate a new rule, pursuant
Source Justification            to section 811 of the National Defense Authorization Act for Fiscal Year
Requirement Unclear             2010, which requires a written justification for sole-source 8(a) contracts
                                over $20 million. The justification must be approved by the appropriate
                                officials—dictated by dollar thresholds—and be publicly posted within 14
                                days of award. This provision may have an impact on how quickly and
                                easily sole-source tribal 8(a) contracts are awarded. The new justification
                                must include, at a minimum

                                •   a description of the needs of the agency that will be addressed by the
                                    contract,
                                •   specification of the statutory provision allowing for the exception to
                                    competition,
                                •   a determination that the use of a sole-source contract is in the best
                                    interest of the agency concerned,
                                •   a determination that the anticipated cost of the contract will be fair and
                                    reasonable, and
                                •   other matters the head of the agency would like included.



                                Page 23                                          GAO-12-84 Tribal 8(a) Contracting
                             While these requirements were not in effect for the contracts we
                             reviewed, we discussed with the contracting officials the potential impact
                             on future sole-source tribal 8(a) awards. Their opinions varied. Several
                             officials stated that it will be more difficult to award sole-source contracts
                             to tribal 8(a) firms, and in some cases these officials said they were
                             pleased to have a tool to encourage program offices to increase
                             competition. Others thought it would make no difference, stating that the
                             justification is simply additional paperwork for the contract file. Still others
                             stated that the new requirement will not affect them because their office
                             had already moved away from awarding sole-source 8(a) contracts to
                             tribally owned firms toward more competition. Some officials attributed
                             this change in attitude in part to congressional and media attention on
                             large dollar, sole-source awards to tribally owned firms.


Various Methods Used to      When awarding an 8(a) contract, contracting officers are required to
Negotiate Prices for Sole-   determine that the overall price is a fair market price, which can be done
Source Awards, and Some      through a cost or price analysis. The fair market price does not have to be
                             the lowest price. However in a sole-source environment, there are
Savings Realized through     increased concerns that the prices may not be the best for the
Subsequent Competition       government, as competition is the cornerstone of the acquisition system
                             and a critical tool for achieving the best possible return on investment for
                             taxpayers. These concerns would be no different under non-tribal 8(a)
                             sole-source contracts. We found that contracting officials used various
                             methods to determine price reasonableness of contractors’ proposed
                             costs or prices. We also found examples where the follow-on
                             requirements were subsequently competed and agency officials
                             estimated savings.

                             In finding a fair market price, contracting officers must first determine that
                             the costs or prices proposed are fair and reasonable. According to the
                             FAR, price analysis shall be used when certified cost or pricing data are
                             not required. Price analysis is the process of examining and evaluating a
                             proposed price without evaluating its separate cost elements and
                             proposed profit. One of the preferred price analysis techniques is
                             comparing proposed prices from more than one contractor in response to
                             a competitive solicitation, as adequate price competition establishes a fair
                             and reasonable price. The other preferred price analysis method is a
                             comparison to historical pricing for the same or similar items. When using
                             this method, however, the contracting officer must ensure that the pricing
                             is a valid basis for comparison, such as ensuring that significant time has
                             not lapsed between the prior acquisition and the present one. In addition,
                             the prior price must be adjusted to account for materially differing terms


                             Page 24                                            GAO-12-84 Tribal 8(a) Contracting
                                   and conditions, quantities, and market and economic factors. If
                                   contracting officers determine that these two techniques are unavailable
                                   or insufficient, they are encouraged to use other methods appropriate to
                                   the circumstances, such as comparison with competitive published price
                                   lists or independent government estimates. The FAR also states that cost
                                   analysis shall be used to evaluate the reasonableness of individual cost
                                   elements when certified cost or pricing data are required (however, price
                                   analysis is used to determine that the overall price offered is fair and
                                   reasonable). Cost analysis is the review and evaluation of any separate
                                   cost elements and profit or fee in an offeror’s or contractor’s proposal.
                                   Some cost analysis techniques include evaluating the government’s need
                                   for proposed cost elements, verifying labor rates, or comparing proposed
                                   costs to actual costs previously incurred by the same offeror. Cost
                                   analysis may also be used to determine cost reasonableness or cost
                                   realism when a fair and reasonable price cannot be determined through
                                   price analysis alone.

Comparison to Historical           For many of the sole-source contracts in our review, agency officials
Pricing or Published Price Lists   compared contractors’ proposed prices to the prices on the prior contract,
                                   U.S. General Services Administration (GSA) schedule prices, or pricing
                                   data from other sources. The following cases indicate the complexities of
                                   this price analysis technique. For example:

                                   •   A price analyst at the Social Security Administration found that a tribal
                                       8(a) firm’s proposed prices for a $100-million sole-source contract
                                       were generally 5 to 192 percent higher than the prior, non-8(a)
                                       contractor’s prices. As a result, the price analyst recommended
                                       negotiating price reductions with the tribal firm. The contracting officer
                                       then performed an additional analysis of the same proposal and noted
                                       that the tribal firm’s proposed rates were 8 to 51 percent lower than
                                       the prior firm’s GSA schedule rates and were at or below the schedule
                                       rates of a subcontractor. The documented analysis noted that
                                       comparing the proposed rates to the incumbent contractor’s rates
                                       could be potentially misleading because performance problems also
                                       needed to be taken into account and that the incumbent contractor
                                       had not always provided qualified personnel, among other things. The
                                       tribal 8(a) firm’s proposed prices were accepted.
                                   •   For another Social Security Administration contract, the contracting
                                       officer evaluated the tribal 8(a) firm’s proposed prices for a sole-
                                       source, fixed-price contract based on pricing information from the
                                       current contract and noticed a significant increase in the tribal 8(a)
                                       firm’s price for installation and storage of the equipment being
                                       purchased. Upon further investigation, the contracting officer learned



                                   Page 25                                          GAO-12-84 Tribal 8(a) Contracting
                                    that the previous pricing had not accounted for substantial
                                    government delays that had added to the costs; the new proposal was
                                    attempting to appropriately include those costs. The contracting officer
                                    noted that the government would work to improve the inefficiencies
                                    that were causing this increase in cost, and based on these
                                    circumstances, the proposed higher price was determined fair and
                                    reasonable.
Independent Government Cost     Independent government cost estimates were also used to determine
Estimates Are Another Tool to   price reasonableness for the sole-source contracts in our review. The
Assess Price Reasonableness     examples below illustrate some challenges faced when the estimates
                                relied in part on outdated costs or inaccurate assumptions. For example:

                                •   In one Army contract, the initial independent government estimate had
                                    to be revised from about $49 million to about $100 million, because it
                                    had not taken into account many different factors, such as travel and
                                    overtime for subcontractors. The contract was awarded for about
                                    $113 million.
                                •   In another example at the Army, an independent government estimate
                                    was $2.7 million, compared to the contractor’s proposal of $4.7
                                    million. The price negotiation memorandum noted that the
                                    government’s estimate was found to have several missing items,
                                    outdated estimates, and inaccurate assumptions. The estimate was
                                    used as the primary basis for conducting negotiations with the
                                    contractor and to determine that the contractor’s higher price was fair
                                    and reasonable. The contract was ultimately awarded for about $4.0
                                    million.
                                For one Army contract we reviewed, the contracting officer told us that
                                she stopped using a competed, single-award indefinite quantity contract
                                to a tribal 8(a) firm because the firm’s proposals for two of three task
                                orders were significantly over the government estimates and the
                                government officials did not believe they were getting a fair market price.
                                In this case, the Army had simultaneously competed and awarded the
                                base contract and the first task order. The contractor’s proposed price for
                                the second task order, however, was almost $6 million, whereas the initial
                                government estimate was just below $4 million. Contracting and program
                                officials pushed back on the contractor’s proposed price, but the firm
                                would not negotiate. The government ultimately awarded the second task
                                order at the contractor’s proposed price. The contracting officer told us
                                that the same thing happened on the third task order, so the Army
                                officials canceled the procurement and stopped using that contract.




                                Page 26                                         GAO-12-84 Tribal 8(a) Contracting
                               Some officials told us that developing independent government estimates
                               can be challenging, as the pricing environment can change and the
                               estimate—which may be prepared 6 months to a year prior to contract
                               award—can become outdated before negotiations begin. For example,
                               when construction work is in high demand, prices for those services can
                               increase over the course of a year, according to contracting officers.
                               Other contracting officials told us that they question how independent the
                               government estimates are when the tribal 8(a) incumbent works closely
                               with the program staff who develop the estimates.

Contracting Officers May Use   For many of the sole-source awards we reviewed, contracting officials
Audits to Negotiate Lower      requested support from the Defense Contract Audit Agency (DCAA) to
Overall Prices                 evaluate the reasonableness of the proposed costs. 26 Some contracting
                               officials effectively used this support to negotiate a lower overall price. For
                               example, in our review of one DOD contract, DCAA submitted findings to
                               the procuring agency 3 months prior to the award date, citing, among
                               other things, $6.9 million in unsupported costs. Consequently, the
                               contracting officials negotiated a 15 percent reduction of the proposed
                               price, which amounted to a savings of nearly $9 million. In an Army
                               contract, contracting officials agreed with the lower rates suggested by
                               DCAA for certain cost categories and ultimately negotiated those rates
                               with the tribal 8(a) firm, reducing the contract price by over $6 million.

                               In another instance, agency officials awarded a sole-source contract to a
                               tribal 8(a) firm quickly to ensure that critical services were maintained, but
                               asked DCAA to audit the proposal with the understanding that the officials
                               would further negotiate the costs after award based on the findings.
                               DCAA’s assessment of the firm’s proposed costs was provided 2 months
                               after the contract’s award. The audit questioned some of the contractor’s
                               proposed costs, such as duplicative labor positions and staff positions
                               that were vacant but for which salaries, wages, fringes, and retirement
                               contributions were included in the final cost of the contract. The
                               contracting officers faced challenges negotiating the contract’s price, as
                               they were still negotiating some of these costs with the contractor nearly a
                               year and a half after contract award.




                               26
                                 DCAA provides services that can help DOD and other federal agencies by performing
                               audits and providing financial advisory services in connection with the negotiation,
                               administration, and settlement of contracts and subcontracts.




                               Page 27                                               GAO-12-84 Tribal 8(a) Contracting
Some Contracting Officers    For sole source procurements, the government and contractor may use
Used Alpha Negotiation       what is known as “alpha” procedures, where they work as a team during
Procedures                   negotiations to define or refine requirements and come to agreement on
                             prices. A number of contracting officers had used this method to work
                             with a tribal 8(a) contractor to agree on a fair market price. One
                             contracting official told us that negotiating prices face-to-face with the
                             contractor using alpha procedures is easier and less time intensive,
                             primarily because he can tell the 8(a) contractor how much funding he
                             has to spend. From there, the contractor can explain to him what the
                             government needs to “take off the table” and what items in the scope of
                             work the contractor can provide at that price. Another contracting official
                             told us that he used alpha procedures because the program office had
                             failed to set all of the contract requirements prior to commencing
                             negotiations with the tribal 8(a) contractor.

                             Contracting officials at one location we visited noted that alpha
                             contracting in a sole-source environment can lead to the best deal for the
                             government for a variety of reasons, such as leveraging the insight of
                             technical experts throughout the price negotiation process and providing
                             a forum for the contractor to ask for additional clarification about the
                             government’s requirements. At another location we visited, one
                             contracting official told us that he believed the government got a better
                             price using alpha procedures than by using full and open competition
                             when contracting for construction of identical buildings. He attributed this
                             in part to the fact that the contractor in the alpha process had a better
                             understanding of the government requirements and the government did
                             not have to go back and correct or make adjustments to the contract.

With Focus on Competition,   Several contracting officers we spoke with noted that they are moving
Some Estimate That Savings   away from sole-source contracts to tribal 8(a) firms and towards
Occurred                     competition. We recently highlighted the benefits of competition in federal
                             government contracting, including that it can save money, improve
                             contractor performance, and promote accountability for results. 27 We
                             recommended appropriate actions, including that both program and
                             contracting officials encourage competition, so that federal agencies
                             would have greater opportunities to take advantage of the effectiveness
                             of the marketplace and potentially achieve billions of dollars in cost


                             27
                               GAO-10-833 and GAO, Opportunities to Reduce Potential Duplication in Government
                             Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.:
                             Mar. 1, 2011).




                             Page 28                                             GAO-12-84 Tribal 8(a) Contracting
savings. Recent policy and guidance from agencies, most significantly the
Office of Management and Budget (OMB) and DOD, have also
emphasized the importance of competition. 28 With regard to ANCs, the
Acting Deputy Assistant Secretary of the Army (Procurement) issued a
memo in January 2011, stating that high-dollar sole-source awards to 8(a)
ANC firms should be the exception rather than the rule, and laid out the
expectation that these awards be scrutinized to ensure they are in the
government’s best interest. Further, in November 2011, DOD’s Director of
Defense Procurement and Acquisition Policy called for a review of all
active sole-source contracts to ANCs that were awarded prior to the new
requirement for a written justification for awards over $20 million. As part
of the review, DOD services, agencies, and activities must review the
justifications (if any) that support the contract awards and describe
actions to ensure there is no abuse of these types of contracts.

In the sole-source contracts we reviewed, we found examples where the
follow-on requirements were subsequently competed, resulting in savings
according to agency officials.

•    The Air Force awarded a contract competitively for base operation
     support and, according to officials, saved about $17 million for a
     requirement that was valued at over $100 million. Officials stated that
     the previous contractor had high management costs.
•    At the Army, we reviewed an approximately $8.9 million sole-source
     contract with a tribal 8(a) firm for one year of medical services. The
     contracting activity recompeted the follow-on requirement, and the
     contracting officer estimated savings of $2.3 million annually, for a
     total of $11.5 million over the life of the contract.
•    At the Federal Emergency Management Agency, the contracting
     officer told us that when the follow-on to the sole-source tribal 8(a)
     contract in our review had been competed among small businesses,
     the labor rates on the new contract were, with one exception, between
     5 and 46 percent lower than the previous sole-source contract.
•    Department of Energy officials told us that they competed a
     requirement that was previously awarded sole source to a tribal 8(a)




28
  See GAO, Federal Contracting: OMB’s Acquisition Savings Initiative Had Results, but
Improvements Needed, GAO-12-57 (Washington, D.C.: Nov. 15, 2011) for our
observations on an OMB initiative to reduce spending under high-risk contracts, including
noncompetitive awards and awards receiving only one offer.




Page 29                                                  GAO-12-84 Tribal 8(a) Contracting
                              firm, and while they could not estimate dollar savings, they believed
                              they were getting better performance as a result of the competition.

                        To ensure that 8(a) firms do not pass along the benefits of their contracts
Agency Oversight of     to their subcontractors, regulations limit the amount of work that can be
Subcontracting under    performed by subcontractors. Specifically, for service contracts with
                        subcontracting activity, the 8(a) firm must incur at least 50 percent of the
Tribal 8(a) Contracts   personnel costs with its own employees (for general construction
Continues to Be         contracts, the firm must incur at least 15 percent of the personnel
                        costs). 29 In 2006, we reported that procuring agency contracting officers
Lacking                 were not monitoring compliance with the limitations on the percentage of
                        work performed by subcontractors as required—largely because they
                        were confused about whose responsibility it was to do so. 30 Based on our
                        recommendations, SBA took some actions to clarify this issue, including
                        providing training to contracting officers and revising its partnership
                        agreements with procuring agencies. Nevertheless, we have continued to
                        find that monitoring of subcontracting limitations is not routinely occurring
                        due to a lack of clarity as to who is responsible for the monitoring and
                        uncertainty on the part of contracting officers about how to conduct the
                        monitoring. Of the 87 contracts in our review, 71 had one or more
                        subcontractors. We found no evidence of regular and systematic
                        monitoring of the limitations on subcontracting. 31 Some of these contracts
                        had large dollar values, up to $500 million. When the subcontracting
                        limitations are not being monitored, there is an increased risk that an
                        inappropriate degree of the work is being done by large business
                        subcontractors rather than the 8(a) firm. These risks can be significant
                        given the large dollar value contracts awarded to tribal 8(a) firms.




                        29
                             13 C.F.R § 125.6(a)(1); FAR 52.219-14, “Limitations on Subcontracting.”
                        30
                             GAO-06-399.
                        31
                           In one contract file we reviewed at the Department of Energy, the contractor’s invoices
                        reflected the amount of work that was subcontracted; however, there was no evidence
                        that agency officials were actively monitoring the subcontracting limitations. For an Army
                        contract in our sample, contracting officials told us they started monitoring the amount of
                        work that was subcontracted after their Principal Assistant Responsible for Contracting
                        directed them to do so; until that time, the limitations on subcontracting had not been
                        monitored.




                        Page 30                                                   GAO-12-84 Tribal 8(a) Contracting
Confusion Remains about     In response to our 2006 recommendations, SBA clarified in its partnership
Accountability for          agreements with the procuring agencies that it is the contracting officer’s
Monitoring Subcontracting   responsibility to monitor compliance with the limits on subcontracting
                            under 8(a) contracts. 32 In addition, SBA standardized language in its 8(a)
Limitations
                            acceptance letters to state that contracting officers are responsible for the
                            monitoring. 33 SBA also provided additional training and guidance for
                            agency contracting officers about this responsibility, among other 8(a)
                            contracting requirements. Even with these actions, however, we still
                            found that some contracting officers do not understand that ensuring
                            compliance with the limitations on subcontracting is their responsibility.
                            Some stated that it was SBA’s responsibility as part of the annual review
                            process for tribal 8(a) firms, and officials for one agency thought that it
                            was ultimately the prime contractor’s responsibility. 34 A contracting official
                            from the State Department told us that he did not have the time or staff to
                            monitor compliance, but he believed that the prime contractor self-
                            monitored because the firm was hiring some subcontractor employees to
                            work for it to ensure that the required work percentages were met.

                            We found situations where there is an increased risk that the
                            subcontractor may be performing more than the limitations allow. In some
                            cases, these subcontractors were large firms or firms that had graduated
                            from the 8(a) program, yet the government was not monitoring
                            compliance with the limits on subcontracting. For example, in one case,
                            the subcontractor to a tribal 8(a) firm under a base engineering support
                            contract had held the prior contract for the requirement, and the



                            32
                              In another report, we recommended that SBA incorporate regular assessments of 8(a)
                            contracting into its surveillance reviews that monitor small business contracting at federal
                            agencies. This would include assessing how agencies administer and oversee 8(a)
                            contracting under the partnership agreements. See GAO, Small Business Administration:
                            Agency Should Assess Resources Devoted to Contracting and Improve Several
                            Processes in the 8(a) Program, GAO-09-16, (Washington, D.C.: Nov. 21, 2008).
                            33
                              SBA regulations provide that, through special contract clauses in the 8(a) contract
                            documents or by separate agreement, SBA may delegate to procuring activities
                            responsibility for certain contract administration matters. 13 C.F.R. § 124.512.
                            34
                               SBA regulations require 8(a) firms to certify in their offers that they will meet the
                            applicable percentage of work requirement for each contract when subcontracting.
                            However, for agencies with partnership agreements, monitoring compliance with the
                            limitations on subcontracting clause after contract award is the procuring agency’s
                            responsibility. As noted above, for all of the agencies in our review, SBA has delegated
                            responsibility for contract administration to the contracting officers through partnership
                            agreements.




                            Page 31                                                    GAO-12-84 Tribal 8(a) Contracting
subcontractor’s president had part-ownership in the tribal 8(a) firm. For
another contract, to build an airplane hangar at an Air Force base—in
which the percentage of work subcontracted was not monitored—the
tribal 8(a) firm had subcontracted with a large business that had extensive
experience in hangar building. During the negotiation process, after much
discussion about the project, a government representative asked the
tribal 8(a) firm what work it would be doing; up to that point the
subcontractor had been answering all the questions. In another example,
for construction of an aircraft facility at another Air Force base, the prime
contractor stated in its proposal that it could not meet the 15 percent of
work requirement, and thus a legal review initially found the pending
award to be legally insufficient and unacceptable. The contracting
specialist wrote a note on the legal memo stating that the prime
contractor would meet the required work percentages, with no additional
explanation. Notwithstanding the concerns raised, the contract was
awarded. The contracting officer told us that she does not monitor the
percentage of work that is subcontracted on this contract.

Although contracting officers should consider all applicable regulations
when awarding and administering 8(a) contracts, several contracting
officers we spoke with told us they depend primarily on the requirements
outlined in the FAR for guidance. The FAR only directs contracting
officers to include the “limitations on subcontracting” clause—under which
the prime contractor agrees to perform a certain percentage of the
contract work itself in its 8(a) contract. The FAR does not state who is
accountable for monitoring compliance with the required percentages.
While the partnership agreements between SBA and the agencies clearly
state that the procuring agencies are responsible for the monitoring, these
agreements are signed by high level SBA and agency procurement
officials; contracting officials may not be aware of the content of the
agreements.

Adding to the confusion over which agency is responsible for monitoring
subcontracting, in reviewing 8(a) files in the SBA Alaska district office, we
found examples where prime contractors had reported to SBA that they
were complying with the limitations on subcontracting. However, SBA
officials told us that they do not consistently collect this information from
8(a) firms and that it is ultimately the responsibility of the procuring
agency to monitor compliance.




Page 32                                          GAO-12-84 Tribal 8(a) Contracting
Contracting Officers     Many contracting officials told us they do not know how to monitor the
Unclear about How to     percentage of work that is subcontracted. Based on our review of agency
Monitor Subcontracting   contract files, data were not readily available, making it difficult to
                         determine how much work was being performed by the prime contractor
Limitations              versus the subcontractor. For example, contractor invoices in some of the
                         files we reviewed did not reflect the subcontracting activity. And for those
                         invoices that did include subcontractor information, the separation
                         between labor and materials costs was unclear. This information would
                         be needed for contracting officers to properly monitor compliance with the
                         limits on subcontracting, which excludes the costs of materials. Some
                         contracting officials noted that the prime contractor itself would have
                         ready access to the subcontracting percentages (such as in its financial
                         systems). One contracting official noted that contractor invoices for time-
                         and-materials services under a contract in our sample identified the
                         subcontracted work, but the invoices for fixed-price services, billed under
                         the same contract, did not. She estimated that it would take her several
                         weeks to calculate the percentage of work that was subcontracted.

                         A further complication pertains to monitoring subcontracting under
                         indefinite quantity contracts, the government’s use of which is now
                         outpacing stand-alone contracts. Of the 41 indefinite quantity contracts in
                         our sample that had subcontractors, we found no evidence that the
                         subcontracting limits were being routinely monitored. SBA regulations
                         state that the 8(a) participant must demonstrate semi-annually whether it
                         has incurred 50 percent of personnel costs with its own employees for the
                         combined total of all task or delivery orders at the end of each 6-month
                         period. 35 However, the FAR does not cross-reference to this provision or
                         otherwise describe how to monitor subcontract limitations in indefinite
                         quantity contracts.

                         Contracting officials told us they would appreciate additional guidance
                         regarding methods they should employ to track compliance with the limits
                         on subcontracting. The FAR is silent on this subject, and the SBA 8(a)
                         regulation does not provide detailed instructions on how to do so. In the
                         absence of specific guidance, some of the contracting officers we spoke
                         with pointed to techniques that they have used to try to gauge the amount


                         35
                            For supply or service contracts, this 50 percent minimum requirement does not apply to
                         work performed under each individual task order, nor does it oblige a contractor to meet
                         the required percentages cumulatively for work performed under all task orders at any
                         given point in time during the contract’s life. 13 CFR § 124.510 (c).




                         Page 33                                                 GAO-12-84 Tribal 8(a) Contracting
of work that is subcontracted. For example, one official said that he
monitored subcontractors by “walking the ground,” so he can easily sight-
check contractor badges to determine who is a prime contractor and who
is a subcontractor. In another scenario, officials stated that they visit the
worksite to check the company names on the trucks parked there. Others
relied on their personal knowledge of the contractors, stating that
because they were very familiar with the prime contractor, they would
know if the firm was not performing its required percentage of the work.
And still others tallied the number of workers employed by the prime
versus subcontractor to get a general picture of the amount
subcontracted, but did not calculate the percentage of labor costs
associated with the subcontractors. While these actions are ways to get a
general sense of subcontracting activity, they are not adequate to
determine the extent of personnel costs that are incurred by the
contractor.

Many contracting officials also told us they reviewed contractor proposals
to verify that the prime contractor planned to perform the required
percentage of the work. However, this level of review alone does not
ensure compliance with the limitations on subcontracting clause because
subcontractors, and the amount of work they do, can change once the
contract is awarded. In addition, contracting officers may not even be
aware that work is being subcontracted. The tribal 8(a) contractor’s
proposal for one contract we reviewed, for example, noted as a benefit to
the government that the contractor’s own employees would be
indistinguishable from those of its subcontractor. We also found cases in
our review where contracting officials inadvertently learned that their
prime contractors were using subcontractors. One Department of
Agriculture official told us that he did not realize certain positions were
going to be subcontracted until he questioned a particular wage rate
during the negotiation process, and the firm stated that it needed to seek
additional information from the subcontractor. In another instance, a
contracting official at the Department of Justice was unaware that the
prime contractor had subcontracted work until we brought it to her
attention based on our review of the contract file. She added that often
“the contracting officer is the last to know” about the prime contractor’s
hiring subcontractors, because of a lack of communication among the
contractor, program office, and contracting office. In yet another example,
a DOD contracting officer said that he only learned that work was being
subcontracted when a subcontractor employee was caught speeding on
the base.




Page 34                                          GAO-12-84 Tribal 8(a) Contracting
                       During our review of contract files, we found a few instances where the
                       file included a recently performed analysis of subcontracting percentages
                       that appeared to have been prepared in anticipation of our visit. In one
                       case, at the Centers for Medicare and Medicaid Services, an analysis,
                       which the contracting officer said was prepared for our visit, showed that
                       the prime contractor had subcontracted almost 72 percent of the total
                       costs for the 3-month base period of a 5-year, almost $205 million
                       contract, but a few years into the contract the overall subcontracting level
                       had dropped to about 40 percent. The contracting officer explained that
                       he knew that the 8(a) firm would have to initially subcontract out a
                       substantial portion of the work, but the expectation was that the contractor
                       would meet the required work percentage over the course of the period of
                       performance. In another case, a recent analysis of the subcontracting
                       percentages for several 6-month periods on an Army indefinite quantity
                       contract showed that the prime contractor was performing the required
                       percentage of the work, but when we asked the contracting officer about
                       the analysis, he was not sure who had completed it or the basis for the
                       figures. In another example, a document in a Food and Drug
                       Administration contract file showed the prime contractor was performing
                       the required percentage of the work. The contracting officer said that, in
                       preparation for our visit, she had requested the analysis from the
                       contractor, as she did not have the information to do it herself. She told us
                       that she requests this information periodically from the vendor; however,
                       there was no record of these periodic analyses in the contract file. We
                       also talked to contracting officials who told us that they requested regular
                       reports from the contractor on the amount of work subcontracted, but
                       when we asked for examples of the reports, none could be provided, and
                       there were no examples of these reports in the contract files.


                       SBA made the first significant revision to 8(a) program regulations,
SBA’s New              effective March 14, 2011, in over 10 years, aimed at clarifying program
Regulations Will Be    rules, correcting misinterpretations, and addressing program issues. The
                       revised rules include new requirements that will affect tribal firm
Difficult to           participation in the 8(a) program, such as rules related to sole-source
Implement, and Other   follow-on contracts and work performed by joint ventures. However, SBA
Problems and           will have difficulty enforcing some of these new regulations given the
                       information currently available. Further, SBA, in its regulations or
Practices Have Not     elsewhere, has still not addressed some issues we raised in our 2006
Been Addressed         report. Finally, in this review we discuss practices that highlight how some
                       tribal 8(a) firms operate, in effect, like large businesses due to their parent
                       corporation’s backing and relationships with their sister subsidiaries. SBA



                       Page 35                                           GAO-12-84 Tribal 8(a) Contracting
                               has not reviewed these practices to determine whether they are
                               acceptable given the business development purpose of the 8(a) program.


SBA Lacks Data to              Although the recent SBA rule changes are intended, in part, to address
Implement and Enforce          tribally owned firms’ participation in the 8(a) program, SBA does not have
Some of the New                critical data it needs to implement or enforce compliance with some of the
                               new requirements. These include new restrictions on agencies’ ability to
Regulations                    award sole-source follow-on contracts to firms under the same tribal entity
                               and restrictions on work performed by the non-8(a) partner in a joint
                               venture. SBA headquarters officials told us they are currently in the initial
                               stages of developing the requirements for a new system intended to
                               provide necessary data on 8(a) firms, and estimate that it will be
                               operational between September 2012 and January 2013. They are also in
                               the process of re-writing their Standard Operating Procedures for district
                               officials to implement the new regulations; however, they could not
                               estimate at this time when the final version will be completed.

SBA Will Have Difficulty       In 2006, we reported that ANC 8(a) firms were taking advantage of their
Tracking Sole-Source Follow-   ability to create new subsidiaries to win follow-on work from subsidiaries
on Contracts with Sister       that had left the 8(a) program. One of the new SBA rules prohibits the
Subsidiaries                   award of successive follow-on sole-source 8(a) contracts to multiple firms
                               owned by the same tribal entity. Specifically, agencies are now prohibited
                               from awarding a follow-on 8(a) sole-source contract to another subsidiary
                               firm owned by the same entity—also called a sister subsidiary. 36 In its
                               explanation of this new provision, SBA stated that having one subsidiary
                               take over work previously performed by a sister subsidiary does not
                               advance the business development of two distinct firms. SBA expects
                               that, when it accepts multiple firms under the same tribal entity into the
                               8(a) program, each firm will operate and grow independently in line with
                               the business development purposes of the program. SBA’s intention was
                               to address a negative perception that businesses could operate in the
                               8(a) program in perpetuity by changing their structure or form to continue
                               to perform work as they had under previous contracts. As an example of
                               this perception, we found that one tribal 8(a) firm stated in its marketing
                               materials that it would “never graduate” from the 8(a) program. Agency
                               officials told us that it is their general impression that by awarding follow-



                               36
                                 NHOs are also subject to the new prohibition; however, it applies only 2 years from the
                               date on which the firms have been admitted to the 8(a) program.




                               Page 36                                                  GAO-12-84 Tribal 8(a) Contracting
on contracts to the incumbent firm’s sister subsidiary, they are, for all
intents and purposes, working with the same company.

In our current review, we found multiple examples of follow-on sole-
source 8(a) contracts being awarded to a sister subsidiary. While these
contracts had all been awarded prior to the effective date of the new rule,
these examples suggest that it is not unusual for agencies to turn to sister
subsidiaries for follow-on sole-source 8(a) contracts. For example:

•   When we spoke to one contracting officer’s representative with the
    Army in May 2011, we found that he was unaware of the new
    regulation. He explained that when a tribal firm graduates from the
    8(a) program, his office would typically award a sole-source follow-on
    contract to one of the firm’s sister subsidiaries based upon the past
    performance of the incumbent. Noting that a current sole-source tribal
    8(a) contract to provide research and development support was set to
    expire in 2012 and that the incumbent was graduating from the 8(a)
    program, he stated that it made sense to award the follow-on to one of
    the firm’s sister subsidiaries, especially since the incumbent had
    performed well. After we told him this was no longer permissible under
    SBA regulations, he said that the new rule put a “kink” in his plans and
    that he would need to start planning right away to ensure there was
    adequate time to successfully award the requirement competitively.
In another example from our review, a procuring agency had awarded a
follow-on contract to a sister subsidiary without realizing the relationship
between the firms. In September 2007, the Social Security Administration
awarded a $48 million 8(a) sole- source follow-on contract for information
technology support services. The incumbent 8(a) ANC firm recommended
that the agency make the award to its protégé, as the incumbent was no
longer in the 8(a) program. When we spoke to agency officials in July
2011, the agency was not aware that the protégé firm, which received the
follow-on award, was also a sister subsidiary of the incumbent. According
to the officials, they will rely on SBA to know if a firm targeted for a follow-
on procurement is eligible for an 8(a) award based on the new rules.

Although prohibiting this practice of awarding sole-source follow-on
contracts to sister subsidiaries of 8(a) firms is a positive step toward
curbing some perceived abuses of the 8(a) program, the required
information is not always available to enforce this new rule. For example,
SBA’s data system for tracking 8(a) participants does not provide district
offices with the full information needed to track compliance. District
officials have access only to information on the firms that they service.
Yet a number of tribal entities have firms in multiple locations throughout


Page 37                                            GAO-12-84 Tribal 8(a) Contracting
the country, and those firms are serviced by different SBA district offices.
To illustrate, one ANC parent company has eight subsidiaries serviced in
six different district offices. Because SBA’s Alaska district office services
the majority of ANC 8(a) firms, its insight into the activities of those parent
corporations’ subsidiaries may be greater than that of other SBA districts,
which may service only one of several subsidiaries under the same
parent corporation. When we visited the Alaska district office 7 weeks
after the new rule had taken effect, we found evidence that SBA had
turned down a follow-on contract offer from a procuring agency because
the contract violated the new regulation; district officials informed us that
they had declined four to five other contract offers for the same reason.
However, the officials explained that they maintain paper files and that
they would have limited procurement history information—including
information about the prior, incumbent firm—unless the requirement had
always been serviced by that district. Conversely, officials at an SBA
district office that services relatively few tribal 8(a) firms told us that they
have not turned down any offer letters that violate this new regulation, but
that they also would not necessarily know if the incumbent was a sister
firm given the information they can access in the 8(a) tracking system.

SBA headquarters officials are aware of the limitations of the data system
and told us that they are currently developing a new system that is
intended to provide a more global view of tribal entities to the officials at
all district offices. They are also considering ways to access more
information on a contract’s procurement history, including linking their
new system to FPDS-NG to obtain more information on 8(a) contract
awards. Officials reported that, as of September 2011, they were in the
process of awarding a contract to develop the system; they estimated it
would be operational between September 2012 and January 2013.

Further, SBA regulations require procuring agencies to discuss the
requirement’s acquisition history, if any, in their 8(a) offer letter and
information on any small business contractors which had performed the
requirement in the past 2 years. 37 In some cases, however, we found that
contracting officers did not include the complete procurement history in
their offer letters to SBA even when the requirement had been performed
by a prior 8(a) contractor. For one contract we reviewed, the contracting


37
  These regulations were in place prior to the revisions in SBA’s 2011 final rule and were
used to determine if other small businesses would be adversely impacted by accepting the
requirement into the 8(a) program. 13 CFR § 124.502(c)(9) and 13 CFR § 124.502(c)(10).




Page 38                                                  GAO-12-84 Tribal 8(a) Contracting
                                   officer had provided no acquisition history in its offer letter to SBA even
                                   though he told us that the requirement had previously been performed by
                                   the same contractor under another contract awarded by a different
                                   agency. He explained that he did not provide the procurement history to
                                   SBA because his office had no acquisition history with the requirement. In
                                   another example, the contracting officer told SBA there was no
                                   acquisition history for the procurement; however, documents in the
                                   contract file showed that the agency clearly considered it a follow-on
                                   requirement. The contracting officer could not recall why no acquisition
                                   history was included in the SBA offer letter, but noted that the scope of
                                   work had significantly expanded. SBA district officials also told us that
                                   they do not always receive complete procurement history information. In
                                   some cases, this is because agency contracting officials are unaware of
                                   the full procurement history, which can be a result of contracting officer
                                   turnover. Without access to a complete and accurate procurement
                                   history, SBA district offices will have difficulty enforcing this new
                                   regulation.

SBA Cannot Implement New           Non-8(a) businesses can create a mentor-protégé joint venture with an
Rules Intended to Strengthen       8(a) firm to win 8(a) prime contracts. In 2006, we reported that there was
8(a) Role in Joint Ventures with   a risk that large businesses could take advantage of the 8(a) status of
Current Information                firms for their own benefit and that SBA may not obtain the information
                                   necessary to determine if the partnership is working as intended. 38 SBA
                                   officials told us that they had seen cases where the non-8(a) partner in a
                                   joint venture was performing the vast majority—80 to 90 percent—of work
                                   on a contract. SBA’s new rules require that the 8(a) partner in certain
                                   kinds of joint ventures perform a specific portion of the work. Application
                                   of this new rule depends on whether the joint venture is populated (i.e., it
                                   is a separate legal entity that has its own employees) or unpopulated (i.e.,
                                   it merely exists through a written agreement and would use the
                                   employees of the 8(a) and non-8(a) partners). The new regulation
                                   specifies that the 8(a) partner in (1) an unpopulated joint venture or (2) a
                                   populated joint venture with one or more administrative personnel, must
                                   perform at least 40 percent of the work performed by the joint venture.



                                   38
                                     GAO-06-399. In another report, also issued in 2006, we found that SBA had not carried
                                   out its responsibilities to monitor an 8(a) joint venture, mentor/protégé partnership that had
                                   won a $354 million sole source contract where the protégé firm did not appear to be
                                   getting the beneficial experience expected. See GAO, State Department Contract
                                   Awarded for Security Installation at Embassies Awarded to 8(a) Joint Venture,
                                   GAO-07-33R (Washington, D.C.: Nov. 8, 2006).




                                   Page 39                                                    GAO-12-84 Tribal 8(a) Contracting
The previous regulations simply stated that the 8(a) partner must perform
a “significant portion” of the contract. 39 SBA officials believe that this is an
improvement because it gives an exact measure of how much work
should be done by the 8(a) partner, to better ensure that the firm receives
significant benefit from the venture. However, the agency does not have
the information necessary to implement this new requirement.

SBA relies on information from 8(a) firms on their joint venture
agreements, but SBA officials told us that they do not always get the
information they need to determine how the work would be performed.
For example, one joint venture mentor-protégé agreement we reviewed—
approved by SBA but formed prior to the new rule—stated that the 8(a)
firm would have full responsibility in overseeing performance of any
contract awarded to the venture. It further stated that the 8(a) partner
would perform at least 51 percent of the work for the contract, but did not
provide any details on how the work would be divided. Questions were
subsequently raised about this joint venture. In 2008, DCAA—at the
request of Army officials who had concerns about the amount of work the
tribal 8(a) firm in this joint venture would perform—found that there was
not enough financial information available to perform an assessment of
either the joint venture or tribal 8(a) firm. DCAA noted, however, that the
8(a) firm had only one employee and that a majority of its work had been
subcontracted. 40 An SBA official from the district office overseeing the
firm said the agency generally receives an annual statement that a firm is
complying with joint venture requirements, but does not receive further
information on how the work is split between the 8(a) and non-8(a)
partner. SBA officials acknowledge having little insight into how joint




39
  While the new rule specifies that the 8(a) partner in a populated joint venture with
administrative personnel must perform at least 40 percent of the work, the new rule does
not address the amount of work the 8(a) partner must perform in a joint venture populated
with employees intended to actually perform the contract work. For these joint ventures,
the 8(a) participant must demonstrate what it will gain from performance of the contract
and how this will assist in its business development. The new rule also states that the 8(a)
participant must demonstrate that it controls the joint venture. 13 CFR § 124.513 (d)(1).
40
  SBA records we reviewed showed that the 8(a) firm had grown to almost 100
employees in 2010.




Page 40                                                   GAO-12-84 Tribal 8(a) Contracting
                        venture partners share the work, making it difficult to enforce new
                        regulations. 41

                        The new rule also requires that, for populated joint ventures, the non-8(a)
                        firm and its affiliates cannot receive subcontracts at any level—first tier or
                        below—under a joint venture 8(a) contract. 42 For example, the new rule
                        would be violated if a joint venture subcontractor further subcontracted
                        work to a firm that was an affiliate of the non-8(a) partner. Thus, enforcing
                        this rule requires knowledge of all subcontractors at all levels, as well as
                        the ability to identify whether any of the subcontractors are affiliated with
                        the non-8(a) partner. Given SBA’s limited insight into subcontracting on
                        8(a) contracts, this new regulation will be hard to enforce. SBA officials
                        state that they do not see information on planned subcontractors, noting
                        that this information may be included in the contract proposal, which they
                        currently do not review. They also acknowledged that a significant
                        amount of research would be required to uncover any relationship
                        between the non-8(a) firm and all levels of its subcontractors and
                        affiliates. According to SBA headquarters officials, district officials could
                        request contract proposals that would include more information on the
                        planned subcontractors. However, SBA officials do not receive
                        information on changes to the planned subcontractors after contract
                        award.


SBA Has Not Addressed   While the new regulations address certain issues pertaining to the
Previously Identified   primary and secondary lines of business under which 8(a) firms can
Issues                  operate, the rules’ impact on tribal firms, given their special advantages in
                        the program, are not clear. Specifically, SBA has not addressed, in
                        regulation or otherwise, issues we raised in our 2006 report regarding (1)
                        the need for SBA to track the various industries under which multiple 8(a)
                        subsidiaries of one tribal organization are generating revenue and (2)




                        41
                           The new SBA rules require the 8(a) participant in a joint venture to annually, and at
                        contract completion, describe how it is meeting or has met the performance of work
                        requirements for 8(a) contracts performed as a joint venture. However, SBA officials did
                        not explain whether or how they will use this reporting requirement to ensure compliance
                        with the new regulations.
                        42
                          The final rule provides an exception to this rule if SBA determines that other potential
                        subcontractors are not available, or the joint venture is populated only with administrative
                        personnel.




                        Page 41                                                    GAO-12-84 Tribal 8(a) Contracting
                              SBA’s statutory requirement to determine if firms in a tribal organization
                              will obtain a substantial unfair competitive advantage in an industry.

SBA Still Has Not Addressed   In 2006, we reported that SBA was not tracking the business industries in
Need to Track Revenue         which ANC subsidiaries won 8(a) contracts under secondary NAICS
Generators                    codes. Thus, SBA was not ensuring that a firm’s secondary NAICS codes
                              did not, in effect, become the primary business line under which the firm
                              generated the majority of its revenue. Prior to the recent regulatory
                              changes, if an 8(a) firm outgrew its primary NAICS code, it could still
                              operate in the program and be awarded contracts under one or more of
                              its secondary NAICS codes, as long as it qualified as small for these
                              secondary codes. 43 The new regulations now state that, when an 8(a)
                              participant outgrows the size standard for its primary NAICS code, SBA
                              considers that firm to have met its goals in the program, and SBA may
                              graduate the firm prior to the expiration of its program term. Although this
                              change may shorten the length of time that a tribal 8(a) firm is in the
                              program, its impact is not clear because tribal entities can simply create a
                              new subsidiary with a different stated primary industry, and the subsidiary
                              can continue to work in any industry under secondary NAICS codes. 44
                              Conversely, non-tribal 8(a) firms can only own one 8(a) firm in a lifetime.

                              A second regulatory change allows 8(a) participants to change their
                              primary NAICS code if they can show that they have been performing
                              work in a different industry. 45 Previously, the primary NAICS code
                              identified at the time of application was in effect through the firm’s tenure
                              in the 8(a) program. For tribal 8(a) firms, this new requirement means
                              that, if they are outgrowing the size standards for their initial primary
                              NAICS code, they can change to a secondary code with larger size
                              standards to stay in the program (as long as it is not the same primary
                              code as a sister subsidiary). However, SBA officials have said that firms
                              will have to show that they are moving into a new industry through a
                              thoughtful process and that outgrowing the size standard cannot be the



                              43
                                 A firm outgrows its primary NAICS code when it exceeds the size standard for that
                              NAICS code for three successive program years.
                              44
                                 New tribal 8(a) firms cannot operate under the same primary NAICS code as a sister
                              firm that has already been admitted to the program or that graduated within the last 2
                              years.
                              45
                                This is demonstrated when a majority of a firm’s revenues during a 2-year period has
                              evolved from its former primary code to another code in a different industry.




                              Page 42                                                 GAO-12-84 Tribal 8(a) Contracting
only reason for changing their industry as this would not be in the spirit of
the 8(a) program. At the same time, 8(a) firms are allowed to pursue
multiple, diverse lines of business in an unlimited number of secondary
NAICS codes. We found that one tribal firm in the 8(a) program had 49
declared NAICS codes, including industrial building construction,
investigation services, and religious organizations. Another firm reported
25 different NAICS codes under which it may pursue work, including
computer and software stores, advertising agencies, and educational
support services.

While the regulatory changes are a step in the right direction in enforcing
and enhancing the business development aspects of the program, SBA
has not taken steps to address a key finding and recommendation from
our 2006 report pertaining to tracking secondary lines of business of 8(a)
firms under the same ANC. We reported that SBA was not tracking
revenue generated under these firms’ secondary lines of business. Thus,
SBA was not ensuring that a firm’s secondary NAICS codes did not, in
effect, become the primary business line by generating the majority of
revenue. This situation could allow for a tribal organization to have more
than one 8(a) subsidiary perform most of its work under the same primary
NAICS code, which SBA regulation does not allow. We recommended
that SBA collect data on primary revenue generators for 8(a) ANC firms to
ensure that multiple subsidiaries under one parent company were not
generating their revenue in the same industry.

SBA systems that track 8(a) participant data do not collect information on
the industries in which firms generate their income. In fact, in reviewing
annual reports that tribal 8(a) firms had submitted to SBA, we found
cases where multiple 8(a) firms under the same tribal entity reported
generating most of their revenue in the same industry. For example, SBA
records showed that six 8(a) firms under one ANC parent entity
generated most of their 2009 revenue in the same lines of business,
although each firm has declared a unique primary industry. Table 4
shows the declared primary revenue and actual main revenue generators
for 2009 for each subsidiary.




Page 43                                          GAO-12-84 Tribal 8(a) Contracting
                               Table 4: Example of the Declared Primary Industries and Actual Revenue
                               Generators of 8(a) Subsidiaries under One ANC Parent Entity

                                                                                                 Primary revenue-generating
                                                           Declared primary industry             industry, 2009
                                Subsidiary A               Site preparation contractors          Commercial and institutional
                                                                                                 building construction
                                Subsidiary B               Industrial-building construction      Commercial and institutional
                                                                                                 building construction
                                Subsidiary C               Facilities support services           Commercial and institutional
                                                                                                 building Construction
                                Subsidiary D               Highway, street, and bridge           Commercial and institutional
                                                           construction                          building construction
                                Subsidiary E               Engineering services                  Facilities support services
                                Subsidiary F               Commercial and institutional building Facilities support services
                                                           construction
                               Source: GAO analysis of SBA files.



SBA Has Not Articulated a      SBA has not addressed another recommendation we made in 2006 as to
Process for Addressing the     how it will comply with an existing law requiring the Administrator to
Statutory Requirement to       determine whether and when one or more ANC firms are obtaining, or are
Determine Unfair Competitive   likely to obtain, a substantial unfair competitive advantage in an industry.
Advantage                      “Substantial unfair competitive advantage” is not clearly defined in statute
                               or regulation. 46 We found that the SBA Administrator has never made this
                               determination, nor is there a process in place to do so. Making such a
                               determination would result in all the subsidiaries under a tribal entity
                               being considered affiliated and thus no longer considered independent for
                               size purposes. A finding of affiliation with the parent organization or a
                               sister 8(a) firm could result in a tribal 8(a) firm exceeding small business
                               size standards and not being eligible for 8(a) contracts.

                               In our current review, we found a few cases where the SBA district office
                               had made such an affiliation determination between tribal 8(a) firms and
                               related non-8(a) firms. In one case, SBA’s Alaska district office found
                               affiliation between a tribal 8(a) firm and its part-owner, a business that
                               had previously graduated from the 8(a) program. In another complex
                               situation, a tribal 8(a) firm was 40 percent owned by a large business that
                               was also a subcontractor to one of the 8(a) firm’s sister subsidiaries. SBA
                               eventually determined that there was affiliation between the large


                               46
                                    15 U.S.C. § 636(j)(1)(J)(ii)(II) and 13 C.F.R. § 124.109(c)(2)(iii).




                               Page 44                                                          GAO-12-84 Tribal 8(a) Contracting
business and the sister subsidiary, resulting in the two firms’ revenues
being considered together for the sister firm’s size standard
determination. As a result, SBA rejected a contract offer for the sister
subsidiary where the large business would be a subcontractor, because
the firm could not meet the size standards when its revenues were jointly
considered with those of the large business. Figure 6 illustrates the
relationships between the parent entity, the 8(a) firm and its sister
subsidiary, and the large business.

Figure 6: Example of Relationship between Large Business and Tribal 8(a) Firm
That Were Found Affiliated




Because SBA has not taken steps to more rigorously determine how to
ascertain substantial unfair competitive advantage, there is a risk that
tribal 8(a) firms are being considered independent for size determinations
when they should be considered affiliated. SBA officials told us that they
are in the early stages of drafting a policy that will outline the process for
making determinations of unfair competitive advantage.




Page 45                                            GAO-12-84 Tribal 8(a) Contracting
SBA Has Not Considered        In 2006, SBA officials told us that the charter of ANCs under ANCSA—
Whether Tribal 8(a) Firms’    economic development for Alaska natives from a community standpoint—
Large Business-Like           can be in conflict with the business development intent of the 8(a)
                              program. We pointed out ways that ANCs use the 8(a) program differently
Practices Are Consistent      than individually owned 8(a) businesses do. Congress has stated that the
with the Business             8(a) program purpose is exclusively for business development purposes
Development Purpose of        to help small businesses owned and controlled by the socially and
the 8(a) Program              economically disadvantaged to compete on an equal basis in the
                              mainstream of the American economy. SBA, in changing its rules to
                              disallow the award of follow-on contracts to tribal 8(a) sister subsidiaries,
                              stated that it expects that two or more firms under the same tribal
                              organization are to operate and grow independently, in line with the
                              business development purposes of the 8(a) program. However, we found
                              other practices, not addressed under the regulations, that highlight the
                              particular nature of tribal 8(a) firms’ interconnectedness. These practices
                              result in some firms essentially operating like large businesses and not
                              developing as independent 8(a) firms. For example, the tribal firms often
                              have common management and subcontract with each other or otherwise
                              draw resources from one another or from the parent corporation. Access
                              to these additional resources can help promote their significant business
                              growth over a short period of time, sometimes resulting in firms leaving
                              the 8(a) program early after outgrowing their size standards. By not
                              participating in the transition phase of the program, these firms are
                              missing out on some of the business development aspects of the
                              program, such as competing for non-8(a) contracts to demonstrate their
                              progress in developing into viable businesses that are not solely reliant on
                              the 8(a) program.

                              SBA headquarters officials recognize that tribal 8(a) firms have some
                              advantages over other 8(a) firms because of the resources they can draw
                              from their parent organization and sister firms. But SBA has not
                              determined whether these other practices we identified are congruent
                              with the business development purpose of the 8(a) program. SBA officials
                              look at individual firms during annual reviews, but do not consider the
                              consequences of their interconnectedness with sister subsidiaries and the
                              parent company in the areas discussed below.

Common Management of Sister   One way firms under tribal organizations are generally interconnected is
Subsidiaries                  through common management. Common management was evident in
                              many of the tribal 8(a) firms’ applications we reviewed. For example, the
                              manager of one 8(a) firm also served as Chief Executive Officer to three
                              sister subsidiaries under the same parent, including a sister subsidiary
                              that provides administrative support services to the “family of


                              Page 46                                          GAO-12-84 Tribal 8(a) Contracting
                                companies.” 47 This practice of common management is a key factor in
                                tribal 8(a) firms’ ability to show potential for success in the 8(a) program.
                                SBA requires applicants to show potential for success by having at least 2
                                years of experience in their primary industry or by showing that their
                                managers have technical and management experience in that industry,
                                among other things. Of the 62 tribal 8(a) firms we reviewed, 44 entered
                                the 8(a) program with less than 2 years of experience in their primary
                                industry. Most of the firms demonstrated potential for success by showing
                                corporate managers’ significant experience in the stated primary industry
                                through work with a sister subsidiary. For example, in considering an
                                applicant that was applying to the 8(a) program just 6 months after it was
                                organized, SBA pointed to the extensive managerial and technical
                                experience of the firm’s president, including his previous position as vice
                                president to a sister subsidiary. Further, the interconnectivity of some
                                tribal 8(a) firms is also evident where the same board members oversee
                                multiple firms under their parent entity. For example, we found that a
                                member of the board of directors had served on the board of three
                                different 8(a) subsidiaries, while also serving as a member of the board of
                                directors for the parent entity.

Using Sister Subsidiaries for   Another way tribal 8(a) firms become interconnected is through
Subcontracting and Past         subcontracts with their own sister subsidiaries. During negotiations with
Performance                     the Army for an 8(a) contract, one tribal firm noted its ability to quickly
                                subcontract with its sister firms as a benefit. We found that some tribal
                                firms demonstrated their potential for success when they did not have 2
                                years in business, using these subcontracts as a record of successful
                                performance in their primary industry. Of the 44 firms we reviewed that
                                entered the program with less than 2 years of experience in their industry,
                                we identified 20 that had obtained some initial experience through
                                subcontracts with a sister subsidiary. For example, we reviewed seven
                                firms owned by one Indian tribe, and five of those seven firms used
                                subcontracts from sister firms to demonstrate their ability to successfully
                                perform work in their primary industry.




                                47
                                   Federal laws provide that a tribal 8(a) firm may own more than one firm eligible for
                                assistance from the 8(a) program if, among other things, the individuals responsible for
                                the management and daily operations of the concern do not manage more than two
                                program participants. We did not assess whether these individuals met the requirements
                                for management and control of the daily operations of the tribal 8(a) firm.




                                Page 47                                                  GAO-12-84 Tribal 8(a) Contracting
                            As another example of firms’ interconnectedness, we found that tribal 8(a)
                            firms can leverage subcontracts from sister subsidiaries to generate
                            required percentages of non-8(a) revenue as the firm progresses in the
                            8(a) program. During the last 5 years in the program, known as the
                            transition period, firms are required to obtain a certain percentage of non-
                            8(a) revenue to demonstrate their progress in developing a viable
                            business that is not solely reliant on the 8(a) program. In one example, a
                            firm did not meet its non-8(a) revenue requirements in its seventh year in
                            the program. Consequently, the SBA district office placed the firm under
                            remedial action, wherein it was ineligible to receive sole-source 8(a)
                            contracts. However, SBA reinstated the firm after a sister subsidiary
                            awarded it a $20 million subcontract that boosted its non-8(a) revenue to
                            the required annual level. The firm then regained its eligibility to receive
                            sole-source 8(a) contracts.

                            Tribal 8(a) firms may also cite the past performance of sister firms to
                            demonstrate their own capability to perform under an 8(a) contract. In our
                            review of contract files, we found a number of examples where firms
                            pointed to the past performance of sister subsidiaries in their proposals to
                            demonstrate their capability. One firm, in its business plan presented to
                            SBA, pointed out that leveraging the past performance of a sister
                            company was extremely important as a basis for demonstrating capability
                            to perform. The firm noted that during its first 2 months of operation, it
                            was often asked to provide past performance documentation and that
                            “this is a requirement that is obviously difficult to meet given that we are a
                            brand new company that has only been just recently certified and
                            approved to begin accepting contracts.” Another firm pointed out that it
                            had an advantage over competitors because of the history of successful
                            contract performance by sister subsidiaries.

Capitalizing on Corporate   Some tribal 8(a) firms promote the fact that they are part of a larger
Resources and “Brand” to    corporate brand and can access resources from their parent organization
Promote Business            and sister firms. Even though tribal 8(a) firms must be “small” under the
                            SBA size standard for their primary industry, their ability to leverage these
                            additional resources can vastly increase the breadth and depth of their
                            capabilities. As the following examples show, the firms can operate, in
                            effect, more like large businesses.

                            •   One ANC 8(a) firm reported to SBA that it is without “geographical
                                limitations as the ANC presence has been established in 49 states.
                                [The firm] will continue to work with its existing customer base as well
                                as network with agencies familiar with the ANC name.”




                            Page 48                                          GAO-12-84 Tribal 8(a) Contracting
                                •   One ANC firm reported the intention to transfer staff and management
                                    from other subsidiaries as workloads dictate, “with reach back
                                    capabilities to access 6,700 employees nationwide and the means of
                                    accessing many in-house subject matter experts when necessary.” In
                                    another contract, the same firm advertised to a procuring agency that
                                    its resources included over 7,000 employees at over 90 locations in
                                    31 states to support construction projects. For a different ANC 8(a)
                                    firm, procuring agency officials noted that the firm had 4,000
                                    employees it could draw from to perform the contract.
                                •   One firm owned by an Indian tribe, in describing its prior experience,
                                    advertised in its proposal to the Army the overall success of firms
                                    under the parent entity in providing services to the federal government
                                    and managing contract employees. The firm also stated in the
                                    proposal that its performance on the contract would be at the same
                                    high level as its successful sister firm that had graduated from the 8(a)
                                    program, as the firms share the same senior management.
                                •   One ANC has a marketing and proposal services center that is
                                    dedicated to supporting all of its subsidiaries in developing cost and
                                    technical proposals for government contracts. This ANC also
                                    designated an employee to act as the sole point of contact to the SBA
                                    for all correspondence and filings for seven of its 8(a) subsidiaries.
                                •   An ANC firm stated in its business plan that a benefit of its
                                    organizational structure is the ability to operate as a small company
                                    while having access to corporate backing “that typically only a large,
                                    seasoned company can provide.” Another firm—in its capabilities
                                    briefing to a procuring agency—advertised that while the firm is an
                                    8(a) small business, it operates within a resource environment of a
                                    large business.
                                •   In its business plan to SBA, an ANC 8(a) firm listed some large
                                    businesses as primary competitors in its market, including Lockheed
                                    Martin, Northrop Grumman, CACI and General Dynamics.
Tribal 8(a) Firms Can Quickly   Access to these additional resources, plus the special advantages
Outgrow the 8(a) Program        afforded tribal 8(a) firms, can help promote their significant business
                                growth in the 8(a) program over a short period of time. For example, one
                                tribal 8(a) firm reported average revenues of $31,000 from landscaping
                                contracts when entering the program in 2009. Subsequently, the firm
                                received a $500 million contract for construction. In 2011, the firm
                                reported sales of $21.3 million, an increase of 764 percent from the
                                previous year. In another example, a firm had one employee when it
                                applied to the 8(a) program, but had grown to 124 employees by its first
                                annual review by SBA.




                                Page 49                                          GAO-12-84 Tribal 8(a) Contracting
Many tribal 8(a) firms have left the program prior to completing the full 9
year term. Table 5 shows that of the 165 tribal 8(a) firms that have left the
program, 70 left prior to completing the full 9 year term. Furthermore,
more ANC firms withdrew or graduated from the program early than
completed the 9 year term.

Table 5: Summary of Tribal 8(a) Firms That Have Left the Program

                                                           ANC        Indian tribe       NHO       Total
    Firms completing full 9 years of program                  60                  22         3          85
    Firms that withdrew or graduated early                    64                   6         0          70
                                    a
    Firms that were terminated                                 5                   5         0          10
    Total firms                                              129                  33         3         165
Source: GAO analysis of SBA data.
a
 SBA may terminate a firm’s participation in the 8(a) program for a number of reasons, including
submitting false information in its 8(a) application and failing to maintain eligibility for program
participation.


For some tribal 8(a) firms, their rapid growth prevents them from reaching
the transition phase of the 8(a) program because they have outgrown the
small business size standards. The small business regulation states that
to ensure participants do not develop an unreasonable reliance on 8(a)
awards and to ease their transition into the competitive marketplace after
graduating from the 8(a) program, participants must make maximum
efforts to obtain business outside the 8(a) program. As a result of
withdrawing from the program early, these firms never have to compete
for contract awards and thus do not experience some of the intended
business development aspects of the 8(a) program. For example:

•      In its review of an ANC firm’s third year in the 8(a) program, SBA
       found that the firm had average annual revenue of $78.4 million,
       which exceeded its small business size standards. Furthermore, SBA
       pointed out that the firm likely would not meet its targets for non-8(a)
       revenue once it reached the transition phase and recommended early
       graduation from the program as a result of these factors. During the
       firm’s time in the program, 99 percent of its revenue came from 8(a)
       contracts.
•      SBA stated in its analysis of another ANC firm’s 8(a) application that
       rapid growth could be a weakness, as subsidiaries under the firm’s
       parent entity tended to grow too large to continue in the 8(a) program
       after just 4 to 5 years. This firm had reported $318 million in revenue
       from 8(a) contracts in its third year in the program, and SBA
       recommended that the firm be graduated early from the program as it


Page 50                                                            GAO-12-84 Tribal 8(a) Contracting
                  was no longer a small business. However, the firm remained in the
                  program for one more year.
              •   In another example, an ANC firm voluntarily withdrew from the 8(a)
                  program after almost 4 years. In commenting to SBA about its
                  experience, the firm suggested that SBA should increase size
                  standards for industries because of the size of large government
                  contracts that tribal firms win.
              For tribal 8(a) firms that do continue to the transition phase, some have
              difficulty meeting non-8(a) revenue requirements because they were
              awarded large 8(a) sole-source contracts in their early years in the
              program. In one example, a tribal firm reported to SBA that large 8(a)
              sole-source contracts were taking up a lot of its existing labor pool, not
              allowing it to seek non-8(a) contract opportunities. Another firm did not
              meet its non-8(a) revenue requirements in the transition years, and SBA
              district officials eventually recommended that this firm voluntarily withdraw
              as officials believed the firm had not complied with the spirit of the 8(a)
              program. When a firm does not meet its non-8(a) revenue requirements, it
              is generally prohibited from receiving further sole-source contracts.
              However, we found that in 2009, SBA accepted an offer from the Army for
              a $45 million sole-source award on behalf of a firm that had not met its
              non-8(a) revenue requirements. SBA district officials thought they may
              have accepted the offer on behalf of the firm because of severe financial
              hardship, but they could not locate the file to determine the exact reason.


              It has been more than 20 years since Congress began granting tribal
Conclusions   firms special advantages under the 8(a) program. The steady growth in
              government obligations to these firms, largely through sole-source
              contracts, draws attention to policies that are designed to promote small
              businesses and the need to spend taxpayer dollars wisely. SBA has
              taken some steps, based on our earlier recommendations, to clarify
              program rules, including the need for monitoring the limitations on
              subcontracting. However, contracting officers generally are not
              performing the monitoring—often because of confusion about how to go
              about doing so and a lack of clarity in existing regulations, particularly
              with respect to indefinite quantity contracts. Not monitoring the limitations
              on subcontracting can pose a major risk that an improper amount of work
              is being done by large business subcontractors under large-dollar value,
              sole-source contracts to tribal 8(a) firms.

              Tribal firms, because of their special advantages in the 8(a) program, can
              operate under more complex contracts and business relationships than



              Page 51                                          GAO-12-84 Tribal 8(a) Contracting
                      typical 8(a) firms, making oversight difficult. SBA’s recent revisions to the
                      8(a) regulations are intended to address several issues we had raised in
                      the past regarding improved oversight of ANC 8(a) contracting that also
                      apply to all tribal 8(a) firms. However, SBA does not have a way to track
                      the information it needs and lacks clear procedures to deter certain
                      prohibitions addressed in the regulations—for example, sister subsidiaries
                      winning follow-on sole-source contracts and joint-venture partners unduly
                      benefiting from their 8(a) partners’ contracts by performing most of the
                      work or improperly subcontracting to an affiliate. The new 8(a) tracking
                      database, which is in the initial stages of development, could, if structured
                      to capture key information, better position SBA to implement these new
                      regulations and to address issues we identified, such as tracking
                      revenues from tribal 8(a) firms’ primary and secondary industries. Further,
                      when agencies do not provide the full acquisition history in offer letters,
                      SBA may not have the necessary information to enforce the new
                      regulations. Finally, while SBA officials recently told us they are in the
                      early stages of drafting a policy that will outline a process for determining
                      unfair competitive advantage, SBA still has not addressed in its
                      regulations the process for implementing the statutory requirement to
                      determine whether substantial unfair competitive advantage exists for one
                      or more tribal 8(a) firms.

                      Finally, some tribal 8(a) firms effectively operate as large firms in a small
                      business program. The practices we have identified, such as capitalizing
                      on corporate resources to promote business and using sister subsidiaries
                      for subcontracting and past performance, are currently allowed, even
                      under SBA’s revised regulations. However, it is within SBA’s purview as
                      the agency statutorily authorized for the 8(a) program to determine if
                      these practices are congruent with the purpose of the 8(a) program—
                      which is to develop sustainable, small, disadvantaged businesses in the
                      U.S. economy.


                      To improve oversight of the limitations on subcontracting clause and to
Recommendations for   clarify who has responsibility for monitoring compliance with the clause,
Executive Action      we recommend the Administrator of the Office of Federal Procurement
                      Policy, in consultation with the Administrator of SBA, take the following
                      two actions:

                      1. Provide specific guidance (including data collection options) to agency
                         officials, including to contracting officers, about how to monitor the
                         extent of subcontracting under 8(a) contracts, including for orders
                         under indefinite quantity contracts.


                      Page 52                                          GAO-12-84 Tribal 8(a) Contracting
2. Take actions to amend the FAR to (1) direct contracting officers at
   agencies that have been delegated responsibility for ensuring
   compliance with the limitations on subcontracting clause to document
   in the contract file the steps they have taken to ensure compliance
   and (2) clarify the percentage of work required by an 8(a) participant
   under indefinite quantity contracts.

To improve oversight of tribal firms’ participation in the 8(a) program, we
recommend that the Administrator of SBA take the following five actions:

1. As the new 8(a) tracking database is being developed, take steps to
   ensure that it has the capability to

    •     provide visibility to district offices into all tribal 8(a) firms’ activity by
          tribal entity to ensure compliance with new prohibition to award
          sole-source 8(a) follow-on contracts to sister subsidiaries;
    •     track revenue from tribal 8(a) firms’ primary and secondary
          industry codes to ensure that subsidiaries under the same parent
          company are not generating the majority of their revenue from the
          same primary industry; and
    •     track information on 8(a) contracts and task or delivery orders,
          including orders awarded under basic ordering agreements, to
          help ensure that district officials have information necessary to
          enforce the 8(a) program regulations.
2. In light of the new prohibition on awarding 8(a) sole-source follow-on
   contracts to sister subsidiaries, reinforce to procuring agencies the
   requirement to provide the full acquisition history of the procurement
   in the offer letter, when available, and direct district office business
   development specialists to focus on this issue when they review offer
   letters for tribal 8(a) firms.
3. Establish procedures to enforce new joint venture rules, including how
   SBA district officials will ascertain that the 8(a) partner performs the
   required percentage of the joint venture’s work and, for populated joint
   ventures, that the non-8(a) partner and its affiliates do not receive
   subcontracts under the 8(a) contract.
4. Examine relationships between subsidiaries under tribal entities to
   determine whether practices such as subcontracting to a sister
   subsidiary or using the past performance of a sister subsidiary to
   show capability to perform on an 8(a) contract are in line with the
   business development purposes of the 8(a) program and should be
   allowed under program rules. If SBA determines that these practices
   are not in line with the 8(a) program purposes—and to the extent that




Page 53                                                 GAO-12-84 Tribal 8(a) Contracting
                        Congress has not authorized a practice in law—SBA should address
                        them in its regulations.
                     5. Establish and communicate to Congress the time frame for
                        developing and implementing SBA’s new, planned policy regarding
                        determination of substantial unfair competitive advantage in an
                        industry, and when the policy will be incorporated into the regulations.

                     We provided a draft of this report to SBA; OFPP; the departments of
Agency Comments      Agriculture, Defense, Energy, Health and Human Services, Homeland
and Our Evaluation   Security, Justice, Labor, and State; and the Social Security
                     Administration. We received written comments from SBA, which are
                     reproduced in appendix II. SBA did not address our recommendations.
                     OFPP provided comments on our recommendations via email. The Social
                     Security Administration provided technical comments, which we
                     incorporated as appropriate. The other agencies responded with no
                     comment.

                     In written comments, SBA provided background information pertaining to
                     the history of Indian tribes’ and ANCs’ special preferences and their
                     purpose in the 8(a) program. We believe this information is adequately
                     reflected in our report. Although the SBA did not specifically comment on
                     our recommendations, it stated that it will work with us to further
                     strengthen its administration of the 8(a) program. SBA also stated that it
                     will make changes as necessary to continue its efforts to eliminate waste,
                     fraud, and abuse and to ensure that the 8(a) program is operating
                     according to its statutory intent, but did not specify what these actions
                     would entail. In addition, SBA stated that it is fully committed to
                     implementing all of the provisions of its March 2011 regulations, but did
                     not specifically address the issues we raised that may impede such
                     implementation or our related recommendations.

                     SBA also acknowledged the challenges in administering the 8(a) program
                     with respect to tribal entities because the purpose of including tribally
                     owned entities in the 8(a) program can be contradictory to the program’s
                     business development purpose. We recognize in the report that 8(a)
                     businesses owned by tribal entities have special preferences in the
                     program. However, we also note that these entity-owned businesses are
                     subject to the business development purpose of the 8(a) program. This
                     requirement led to our recommendations that SBA determine whether
                     certain practices we found that are currently allowed under the 8(a)
                     regulations—such as firms subcontracting to a sister subsidiary—are
                     consistent with the business development purpose of the 8(a) program.




                     Page 54                                         GAO-12-84 Tribal 8(a) Contracting
SBA also commented that its foremost concern with our report was our
use of a nonprobability sample, with the suggestion that this sampling
technique can be biased based on the judgment of the sampler and that
we used this technique to generalize results for tribal 8(a) firms. We
strongly disagree. Our use of a nonprobability sample was a sound
methodological approach to address our reporting objectives.
Nonprobability samples are appropriate to provide illustrative examples or
to provide information on a specific group within a population. We used
this sampling technique to balance a sample that was large enough to
provide a sufficiently comprehensive understanding of the issues with one
that was small enough to study within our time and resource constraints.
Further, we took a number of steps to ensure the factual accuracy of our
findings, including traveling to locations where contract files were located
so that we had access to the complete available records and the ability to
ask follow-up questions as appropriate to ensure that we did not
misinterpret or misrepresent any information in the files. Appendix I of the
report sets forth the many steps we took to ensure that our contract file
and tribal 8(a) file samples were selected in a non-biased, transparent,
and objective manner. In accordance with generally accepted government
auditing standards, we appropriately state the results of our work in the
report, including the clear statement that our results are not generalizable
to the population of tribal 8(a) firms. We did not attempt to generalize our
results because that approach was not necessary to meet our objectives.

In an email response, OFPP generally agreed with our recommendations
and with our conclusion that steps need to be taken to provide clarity to
the acquisition community regarding limitations on subcontracting. OFPP
also noted that steps need to be taken to strengthen the application of
these requirements to all small business set-aside programs in FAR Part
19. Regarding our recommendation that OFPP provide guidance on how
to monitor the extent of subcontracting, OFPP noted that agency officials
other than contracting officers—such as agency offices that perform
acquisition management reviews and SBA officials—would also be
interested parties. We agreed and modified our recommendation to
include “agency officials” and not only contracting officers. OFPP stated
that it intends to work with the FAR Council and the Chief Acquisition
Officers Council to review the roles of various agency officials and
evaluate strategies for monitoring and receiving data about the
percentage of work performed by a small business prime contractor. It
also stated that, with respect to data collection, it anticipates seeking
input from the public on strategies to receive and monitor data regarding
the percentage of work performed by small business prime contractors.



Page 55                                         GAO-12-84 Tribal 8(a) Contracting
OFPP added that, in taking this action, it intends to minimize the burden
on both small businesses and agencies.

OFPP also commented on our recommendation that it take actions to
amend the FAR to direct contracting officers to document steps taken to
ensure compliance with the limits on subcontracting and to address
monitoring requirements for indefinite quantity contracts. OFPP stated
that it intends to ask that the FAR Council open a case so that
appropriate regulatory refinements may be made to support
improvements in the implementation of the limitation on subcontracting.
OFPP stated that this action will include reviewing existing clauses that
implement the limitation, considering alternatives for collecting
information, and documenting steps taken. OFPP also plans to obtain
comments from the public, including small businesses, as it develops
amendments and evaluates alternatives that can accomplish goals in the
least burdensome manner for industry and agencies. Consistent with our
recommendation, OFPP plans to clarify in the FAR the percentage of
work required by an 8(a) participant under an indefinite quantity contract,
but OFPP asked that the recommendation be amended to allow the FAR
Council and SBA to work together to determine the best way to clarify this
point. We agreed that this would be appropriate and modified the
recommendation to reflect this approach.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 7 days from the
report date. At that time, we will send copies of this report to interested
congressional committees; the Secretaries of Agriculture, Defense,
Energy, Health and Human Services, Homeland Security, Labor, and
State; the Administrator of SBA; the Attorney General; the Commissioner
of the Social Security Administration; and the Acting Director of the Office
of Management and Budget. This report will be available at no charge on
GAO’s Web site at http://www.gao.gov.

If you or your staff have any questions about this report or need additional
information, please contact me at (202) 512-4841 or huttonj@gao.gov.




Page 56                                         GAO-12-84 Tribal 8(a) Contracting
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Staff
acknowledgments are provided in appendix III.




John P. Hutton
Director
Acquisition and Sourcing Management




Page 57                                       GAO-12-84 Tribal 8(a) Contracting
List of Congressional Requesters

The Honorable Claire McCaskill
Chairman
Subcommittee on Contracting Oversight
Committee on Homeland Security and Governmental Affairs
U.S. Senate

The Honorable Mark Begich
U.S. Senate

The Honorable John McCain
U.S. Senate

The Honorable Darrell E. Issa
Chairman
The Honorable Elijah Cummings
Ranking Member
Committee on Oversight and Government Reform
House of Representatives

The Honorable Edward J. Markey
Ranking Member
Committee on Natural Resources
House of Representatives

The Honorable Edolphus Towns
House of Representatives

The Honorable Don Young
House of Representatives




Page 58                                    GAO-12-84 Tribal 8(a) Contracting
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             The objectives of this review were to (1) identify trends in government
             8(a) contracting with firms owned by Alaska Native Corporations (ANC),
             Native Hawaiian Organizations (NHO), and Indian tribes; (2) determine
             the reasons federal agencies awarded sole-source contracts to tribal 8(a)
             firms and the methods used to make price determinations; (3) assess the
             procuring agencies’ oversight of tribal 8(a) contracts for compliance with
             subcontracting requirements; and (4) examine the Small Business
             Administration’s (SBA) new 8(a) regulation, effective March 14, 2011, to
             determine how the changes could affect oversight of tribal firms and the
             extent to which previously identified problems are addressed. In this
             report, “tribal entities” refers to ANCs, NHOs, and Indian tribes. We use
             the term “tribal 8(a) firm” to refer to a firm that is majority-owned by an
             ANC, NHO, or Indian tribe. During the course of our work, we also
             discussed with procuring agency officials the potential impact of the
             recent Federal Acquisition Regulation (FAR) requirement for written
             justifications for sole-source 8(a) awards over $20 million. This
             requirement was not applicable to the contracts we reviewed. We
             evaluated the administration of the tribal 8(a) program; the scope of our
             work did not include an evaluation of the program’s merits.

             To identify the trends in government tribal 8(a) contracting, we analyzed
             data from the government’s procurement database—the Federal
             Procurement Data System-Next Generation (FPDS-NG) for fiscal years
             2005 through 2010. To assess the reliability of the FPDS-NG we (1)
             reviewed related documentation, and (2) performed electronic testing on
             required data fields. We found the FPDS-NG data fields that identify firms
             owned by ANC, NHO, and Indian tribes to be unreliable because these
             data were not available during the entire time period. Subsequently, we
             requested that SBA provide Data Universal Numbering System (DUNS)
             numbers for 8(a) firms owned by ANC, NHO, and Indian tribes, in addition
             to mentor-protégé joint ventures that participated in the 8(a) program, for
             fiscal years 2005 through 2010. 1 We tested the reliability of these DUNS
             numbers by using them to search for the tribal 8(a) firms and joint
             ventures in the Central Contractor Registry and SBA’s Dynamic Small
             Business Search database. We used these systems to verify the data
             SBA had provided, including to identify additional DUNS numbers that
             were not included among the data SBA had provided. We also requested



             1
               A DUNS number is a 9-digit identification number assigned by Dun & Bradstreet, Inc., to
             identify unique business entities.




             Page 59                                                  GAO-12-84 Tribal 8(a) Contracting
Appendix I: Scope and Methodology




additional DUNS numbers from SBA on joint ventures with tribal 8(a)
firms; however, the information provided was on all joint ventures in the
8(a) program. To select contracts for our sample that were awarded to
joint ventures with at least one tribal 8(a) partner, we identified those that
had obligations in fiscal year 2009 and then used the Central Contractor
Registry to determine whether the joint venture was listed as owned by an
ANC, Indian Tribe, or NHO. Once we substituted the compiled final list of
DUNS numbers for the tribal 8(a) data fields, we determined that the
FPDS-NG was sufficiently reliable to identify trends in tribal 8(a)
contracting for fiscal years 2005 through 2010. We adjusted the obligation
data for inflation using a gross domestic product price index with a base
year of 2010.

To identify the reasons agencies have awarded 8(a) sole-source
contracts to firms owned by ANCs, NHOs, and Indian tribes and the
methods contracting officials use to determine fair and reasonable price,
we selected and reviewed a stratified nonprobability sample of 87
contracts, 7 of which had been competitively awarded. This nonprobability
sample was based upon contracts (1) with fiscal year 2009 obligations
over the competitive threshold, 2 especially if those obligations exceeded
$100 million (fiscal year 2009 data were the most recent at the time) and
(2) in locations where multiple tribal 8(a) contracts had been awarded.
The majority of the contracts we reviewed (75) were with ANC firms; 10
were with Indian tribes, and 2 were with NHOs. The majority of contracts
in our sample (62) were awarded at the Department of Defense (DOD).
Our findings from the contract reviews are not generalizable to the
population of all tribal 8(a) contracts.

We originally selected 90 contracts for review, 10 of which were coded as
competitively awarded. In reviewing the source documentation, we found
that two of the contracts had been incorrectly coded: one was not owned
by a tribal entity and the other was not awarded through the 8(a) program.
We eliminated these contracts from our sample. We also found that
obligations under one indefinite quantity contract were listed as two
separate contracts in our initial sample; therefore, this was counted as
only one contract. Another three contracts had been incorrectly coded in




2
 The competitive 8(a) threshold is $6.5 million for manufacturing or $4 million for all other
acquisitions.




Page 60                                                    GAO-12-84 Tribal 8(a) Contracting
Appendix I: Scope and Methodology




FPDS-NG as competitively awarded or as sole-source. These three
contracts remained in our sample.

The specific locations of the contracts in our review were as follows:

DOD:
• Air Force Metrology and Calibration, Heath, OH
• National Guard Bureau, Arlington, VA
• Defense Advanced Research Projects Agency, Arlington, VA
• Defense Supply Center, Philadelphia, PA
• Fleet and Industrial Supply Center, Pearl Harbor, HI
• Fort Sam Houston Army Base, TX
• Fort Wainwright Army Base, AK
• Joint Base Elmendorf-Richardson, AK
• Kirtland Air Force Base, NM
• MacDill Air Force Base, FL
• Marine Corps Systems Command, Quantico, VA
• Naval Facilities Engineering Command, Pearl Harbor, HI
• Redstone Arsenal Army Base, AL
• U.S. Army Corp of Engineers locations in Anchorage, AK; Alexandria,
  VA; Baltimore, MD; Fort Worth, TX; Philadelphia, PA; and Vicksburg,
  MS
• U.S. Army Research Development and Engineering Command,
  Natick, MA
• Washington Navy Yard, District of Columbia
• Wright-Patterson Air Force Base, OH

Civilian:
•   Department of Agriculture’s Forest Service, New Mexico
•   Department of Energy’s National Nuclear Security Administration-
    Service Center, New Mexico
•   Department of Health and Human Service’s Centers for Disease
    Control and Prevention Atlanta, GA; Centers for Medicare and
    Medicaid Services, Baltimore, MD; and Food and Drug Administration,
    Rockville, MD
•   Department of Homeland Security’s Bureau of Customs and Border
    Protection, Federal Emergency Management Agency, and Office of
    Procurement Operations, Washington, D.C.
•   Department of Justice’s Drug Enforcement Administration,
    Washington, D.C., and Federal Bureau of Investigation, Chantilly, VA
•   Department of Labor’s Office of Procurement Services, Washington,
    D.C.
•   Department of State’s Office of Acquisition Management, Arlington,
    VA


Page 61                                         GAO-12-84 Tribal 8(a) Contracting
Appendix I: Scope and Methodology




•   Social Security Administration’s Office of Acquisition and Grants,
    Baltimore, MD.
For the contracts in our sample, we examined contract file
documentation, including acquisition plans, market research reports, and
price negotiation memorandums. However, for three of the contracts we
reviewed, one each at the Army Corps, Department of Homeland
Security, and the State Department, pre-award information was
completely missing from the files. For one of these, we were unable to
determine whether or not it had been competitively awarded, as coded in
FPDS-NG, because of the missing information. We also interviewed
contracting officials, small business advocates, and program officials.

To determine the extent to which procuring agencies are overseeing tribal
8(a) contracts for compliance with the 8(a) program’s subcontracting
requirements, we reviewed and analyzed documentation for the contracts
in our review, including acquisition plans, price negotiation
memorandums, contractor proposals, and SBA offer and acceptance
letters, in addition to any additional information pertaining to
subcontractor monitoring. We also interviewed contracting and program
officials, as well as agency small business advocates, about the methods
they employ to monitor compliance. Additionally, we reviewed agency-
specific guidance or operating instructions, various statutory provisions,
the Federal Acquisition Regulation, and Title 13 of the Code of Federal
Regulations. We also drew from the findings in our 2006 report on 8(a)
contracting with ANC firms. 3

To determine the extent to which SBA’s new regulations could affect
oversight of tribal firms’ participation in the 8(a) program and to which
previously identified problems have been addressed, we reviewed SBA
documents, such as annual reviews and 8(a) program applications, for
selected tribal firms. These firms were strategically chosen based upon
their parent entity’s (i.e., ANC, NHO, or Indian tribe) representation in our
overall contract sample. We selected those firms whose parent entities
had higher representation in our sample and those with less
representation. Consequently, we examined the files for 49 ANC, 3 NHO,
and 10 Indian tribe firms. For the ANC firms, the 49 firms fell under 11
parent entities. The results of our review are not generalizable to the


3
 GAO, Contract Management: Increased Use of Alaska Native Corporations’ Special 8(a)
Provisions Calls for Tailored Oversight, GAO-06-399 (Washington, D.C.: Apr. 27, 2006).




Page 62                                                GAO-12-84 Tribal 8(a) Contracting
Appendix I: Scope and Methodology




population of tribal 8(a) firms. Moreover, we reviewed SBA regulations,
operating procedures and business systems (such as the system used to
process 8(a) applications), and interviewed officials at SBA headquarters
and the Alaska, Hawaii, Oklahoma, New Mexico, and Washington, D.C.,
district offices. We also met or spoke with ANC, NHO, and Indian tribe
representatives in three “town hall” meetings to explain the scope and
methodology for this review. We did not assess the extent to which
benefits from tribal 8(a) contracts flow to the parent entity.

We conducted this performance audit from October 2010 to January 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 63                                        GAO-12-84 Tribal 8(a) Contracting
Appendix II: Comments from the Small
                            Appendix II: Comments from the Small
                            Business Administration



Business Administration

Note: GAO comments
supplementing those in
the report text appear at
the end of this appendix.




                            Page 64                                GAO-12-84 Tribal 8(a) Contracting
Appendix II: Comments from the Small
Business Administration




Page 65                                GAO-12-84 Tribal 8(a) Contracting
Appendix II: Comments from the Small
Business Administration




Page 66                                GAO-12-84 Tribal 8(a) Contracting
Appendix II: Comments from the Small
Business Administration




Page 67                                GAO-12-84 Tribal 8(a) Contracting
                 Appendix II: Comments from the Small
                 Business Administration




See comment 1.



See comment 1.




                 Page 68                                GAO-12-84 Tribal 8(a) Contracting
                 Appendix II: Comments from the Small
                 Business Administration




See comment 2.




See comment 3.



See comment 2.


See comment 4.




See comment 5.


See comment 6.




                 Page 69                                GAO-12-84 Tribal 8(a) Contracting
                 Appendix II: Comments from the Small
                 Business Administration




See comment 7.




                 Page 70                                GAO-12-84 Tribal 8(a) Contracting
                 Appendix II: Comments from the Small
                 Business Administration




                 1. SBA said that we had incorrectly reported that employee-based size
GAO’s Comments      standards are calculated over a 3-year period. We disagree; the
                    statement in the report accurately states that the size standards are
                    based on the number of employees or on the average revenues from
                    the previous 3 years. Therefore, no change is needed.

                     SBA also characterized as “not true” our statements that a firm that
                     does not meet its applicable business activity or mix target is not
                     eligible for 8(a) sole-source contracts. SBA noted that if the
                     competitive business mix target is not met, the prohibition on the
                     award of further 8(a) sole-source contracts can be waived. We agree
                     and, to be consistent in how we addressed this issue later in the
                     report, we added the word “generally” the first time it was mentioned
                     to reflect the potential for a waiver.

                 2. SBA stated that the report relied on anecdotal information and
                    hypothetical scenarios, without analyzing the issue from other
                    perspectives, including those of the tribal and ANC participants, and
                    that this reliance gives a negative view of the participation of tribally
                    owned 8(a) firms. We disagree with this comment. As stated in our
                    report, we did not generalize our findings. Our findings are not
                    anecdotal and did not rely on hypothetical scenarios. Nonetheless,
                    our objectives for this review were to examine SBA’s and procuring
                    agencies’ administration of various aspects of the 8(a) program and
                    not to capture the views of program participants. We provided one
                    illustrative example to give the reader insight into how 8(a) firms—
                    both tribal and nontribal—are able to form relationships with non-8(a)
                    businesses and non-disadvantaged individuals under current SBA
                    regulations. This illustrative example is factually correct in terms of
                    what the current regulations allow. All of our findings are based on
                    criteria for the program as set forth in statute and regulation.

                 3. SBA stated that, in discussing joint ventures with other-than-small
                    businesses, we provide an overly simplistic explanation and do not
                    explain the benefits of the mentor-protégé initiative within the 8(a)
                    program. Our purpose was simply to discuss this program in the
                    context of one way that 8(a) businesses can grow and develop. We
                    believe this discussion is adequate for the purposes of this report.

                 4. Regarding the section of our report that discusses challenges SBA will
                    face in implementing parts of its new regulations, SBA stated that its
                    ability to implement the regulations has been “pre-judged” without
                    affording SBA an opportunity to see the results of the regulatory
                    changes, and that there is little mention of the agency’s current


                 Page 71                                          GAO-12-84 Tribal 8(a) Contracting
Appendix II: Comments from the Small
Business Administration




    initiatives. We disagree. As we stated in our report, SBA has
    recognized some of the challenges it faces in implementing the new
    regulations. The report also includes information on SBA’s initial steps
    to develop a new data collection system and notes that the agency is
    in the process of re-writing its standard operating procedures. SBA did
    not provide us with any evidence that it will address the data
    limitations we identified in our report, which was the basis for several
    of our recommendations. Because SBA did not comment on our
    recommendations, the agency’s planned actions remain uncertain.

5. SBA stated that we did not take into account tribal 8(a) entities’
   special statutory benefits. We disagree. The background section of
   our report clearly presents information on these preferences. The
   existence of the preferences is what allows some firms to, as we
   state, operate in effect as large businesses in a small business
   program.

6. SBA stated that we implied that the agency as a whole lacked
   knowledge in administering entity-owned 8(a) companies, based on
   our findings at a specific SBA district office. Our point was not what
   was known at the policy level, but at the implementation level. Our
   findings were based on interviews with agency officials and file
   reviews at several SBA district offices, as discussed in appendix I of
   the report. As our report states, the data system gaps we identified
   do, in fact, create knowledge gaps across SBA, which led to our
   recommendation on this issue. SBA did not address our
   recommendations intended to improve oversight of tribal firms’
   participation in the 8(a) program. For example, we recommended
   several actions SBA could take as it develops its new 8(a) tracking
   database that may help provide more visibility across district offices.

7. SBA commented that we implied that cost savings could be realized
   by using procedures other than 8(a). We disagree with this
   characterization. Our focus in this section of the report was on
   competitive versus noncompetitive awards, not on 8(a) versus non-
   8(a). As we have reported in the past, competition is a cornerstone of
   the acquisition system and a critical tool for achieving the best
   possible return on investment for taxpayers. Further, as we explain in
   the background of this report, once a requirement is awarded as an
   8(a) contract, it must remain in the 8(a) program unless the procuring
   agency decides it would like to fulfill the follow-on requirement outside
   of the program and requests approval from SBA to do so.




Page 72                                         GAO-12-84 Tribal 8(a) Contracting
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  John P. Hutton, (202) 512-4841 or huttonj@gao.gov
GAO Contact
                  In addition to the person named above, Michele Mackin, Assistant
Staff             Director; Tatiana Winger; Virginia Chanley; Celina Davidson; Julia
Acknowledgments   Kennon; Jeff Malcolm; Kenneth Patton; Sylvia Schatz; Erin Stockdale;
                  Roxanna Sun; and Holly Williams made key contributions to this report.




(120946)
                  Page 73                                       GAO-12-84 Tribal 8(a) Contracting
GAO’s Mission         The Government Accountability Office, the audit, evaluation, and
                      investigative arm of Congress, exists to support Congress in meeting its
                      constitutional responsibilities and to help improve the performance and
                      accountability of the federal government for the American people. GAO
                      examines the use of public funds; evaluates federal programs and
                      policies; and provides analyses, recommendations, and other assistance
                      to help Congress make informed oversight, policy, and funding decisions.
                      GAO’s commitment to good government is reflected in its core values of
                      accountability, integrity, and reliability.

                      The fastest and easiest way to obtain copies of GAO documents at no
Obtaining Copies of   cost is through GAO’s website (www.gao.gov). Each weekday afternoon,
GAO Reports and       GAO posts on its website newly released reports, testimony, and
                      correspondence. To have GAO e-mail you a list of newly posted products,
Testimony             go to www.gao.gov and select “E-mail Updates.”

Order by Phone        The price of each GAO publication reflects GAO’s actual cost of
                      production and distribution and depends on the number of pages in the
                      publication and whether the publication is printed in color or black and
                      white. Pricing and ordering information is posted on GAO’s website,
                      http://www.gao.gov/ordering.htm.
                      Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
                      TDD (202) 512-2537.
                      Orders may be paid for using American Express, Discover Card,
                      MasterCard, Visa, check, or money order. Call for additional information.
                      Connect with GAO on Facebook, Flickr, Twitter, and YouTube.
Connect with GAO      Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts.
                      Visit GAO on the web at www.gao.gov.
                      Contact:
To Report Fraud,
Waste, and Abuse in   Website: www.gao.gov/fraudnet/fraudnet.htm
                      E-mail: fraudnet@gao.gov
Federal Programs      Automated answering system: (800) 424-5454 or (202) 512-7470

                      Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-
Congressional         4400, U.S. Government Accountability Office, 441 G Street NW, Room
Relations             7125, Washington, DC 20548

                      Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
Public Affairs        U.S. Government Accountability Office, 441 G Street NW, Room 7149
                      Washington, DC 20548




                        Please Print on Recycled Paper.