Agencies defend charges of contracting fraud

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

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

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

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

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

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

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

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

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

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

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

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