News Column

Reports Say Minority Contracts are Dwindling, Funds Misused

Oct 6 2000 1:20PM

By Patricia Guadalupe

October 2000 - Responding to recent reports indicating that fewer contracts are being awarded to minority firms and that funds for a federal certification program were misappropriated, legislators are promising a renewed emphasis on minority business programs in the coming months.

A July audit of the Small Business Administration program to certify minority contractors revealed that nearly half the program's funds were used for other purposes, including the purchase of office equipment for other programs. The findings have emboldened agency critics, including Missouri Senator Christopher "Kit" Bond, chair of the Senate Small Business Committee.

"The agency seems to think these funds are a honey pot they can dip into to sweeten other programs," he said in a statement. "Should taxpayers ever want to see how a government agency can look the other way while tax money is used for everything but its intended purpose, all they have to do is read the report."

The report noted that while the SBA has spent $22 million on the certification program over the past two years, it has certified only about 3,000 firms, a fraction of the number projected when the program was initiated.

Since last year, small, minority-owned businesses seeking contracting and subcontracting opportunities with the federal government have had to receive formal certification by the SBA before being listed in the agency's online database, PRO-NET. Ironically, the new program was implemented in response to the potential for fraud under the previous self-certification system.

Funding comes from federal agencies in proportion to their contracting needs. The Department of Defense is the program's largest federal participant. Perhaps underscoring the potential for problems, most of the 19 participating agencies have said they would prefer to run their own certification programs.

The program has been criticized for not keeping pace with the number of firms seeking certification and not spending enough time and money on advertising. In fact, last year the SBA was forced to extend the deadline for the new certification rules to allow firms more time to comply.

Investigators, reportedly alerted by an agency whistle-blower, examined a sample of $13 million and found that almost half was spent on unrelated items. They also found that more than $3 million was spent on building offices and hiring staff never used for the program. During the audit, the SBA canceled a $410,000 construction project after investigators questioned its relevance to the certification program.

According to the report, other SBA programs received certification funding – in abundance because the agency overestimated the number of minority firms that would participate – for computers, cell phones, and staff training. It also noted that the SBA could not account for an additional $3.2 million earmarked for the program.

Auditors ordered the SBA to repay the federal agencies for any misused funds, which SBA administrator Aida Alvarez says will be done "at no cost to taxpayers." Ms. Alvarez says funding problems had been reported to her earlier by the agency's chief financial officer and that she had ordered a review of the program.

The SBA report is not the only matter causing alarm in the minority business community. A "procurement report card" released over the summer by Rep. Nydia Velázquez (D-NY), the ranking Democrat on the House Small Business Committee and a minority business advocate, found that the number of federal contracts granted to small businesses has dropped at least 20 percent in recent years.

Many of the 21 federal agencies that have accounted for 96 percent of all federal procurement dollars in recent years are falling short of "very modest" minority and small-business contracting goals, according to the report. While small businesses continue to receive nearly 23 percent of federal contracting dollars (the goal set by Congress in 1997), the number of contracts awarded to such firms fell from 6.4 million in 1997 to 4.9 million last year.

"As a former college professor, I am used to handing out grades, and it's clear many agencies need to go back to school," Ms. Velázquez says. "The average grade for the federal government was a 'C,' which, if you ask any of my former students, would never have made it in my classes.

"Latinos are starting businesses faster than any other ethnic groups, with a phenomenal growth rate of 114 percent over the last five years. In the move to 'reinvent' government, we should not streamline small business out of business," she says.

The report castigates the Department of Defense for purchasing just 21 percent of its goods and services from small businesses. Of those businesses, only 6 percent are certified as disadvantaged. The report faults the DoD for failing to set higher standards and for placing what it said was a disproportionately heavy burden on other agencies to make up the difference – a challenge they have not met, the report notes.

"This shows that many federal agencies are not meeting their commitments to women-owned and minority-owned companies. The clear message is that as far as the billions of dollars' worth of contract money is concerned, they need not apply," the report says, in part.

In annual negotiations with the SBA, federal agencies regularly pursue minority contracting goals that are lower than those established by federal mandate, the report points out. For instance, of the 83 goals reviewed, 12 were found to be "unreasonably low," with another 17 below federally mandated standards. Additionally, the report criticizes what it calls a "lack of accountability" and "a lack of commitment" to follow through with goals, to the detriment of the fast-growing small-business sector.

"These groups [small, disadvantaged, and women-owned firms] are in danger of losing what little ground they have gained from the dismantling of the 'good-old-boy network' that still exists in federal contracting," the report says.

"Moreover, the failure to meet small-business goals comes at a potential cost to taxpayers in terms of higher costs and reduced efficiency. … These setbacks for small businesses have disproportionately hurt women- and minority-owned enterprises."

Ms. Velázquez adds, "It's clear that the federal government needs a lesson from the private sector when it comes to using small businesses to get the job done – and get it done well – especially when it comes to women and minorities."

The report blames contract bundling, the process of lumping together multiple contracts under one large purchase, ostensibly to save time and paperwork. But bundling, the report says, represents "a loss of clout [with] devastating effects on small businesses. They must depend on the large prime contractor to plead their case … and most importantly, they frequently don't get paid in a timely manner."

Ms. Velázquez has introduced legislation to address the problem of contract bundling. One bill would require federal agencies that bundle contracts to justify the savings and to receive approval from the SBA, which could block bundling requests. Another bill, introduced by House Small Business Committee chair James Talent (R-MO) would require the SBA to collect data on contract bundling and require the agency to compile a list of small businesses hurt by the practice.

Source: Hispanic Business magazine

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