In the six month long investigation, which ended in June 2008, the GAO obtained HUBZone certification from the Small Business Administration for four fake businesses. Certification qualifies the businesses for federal contracts under the Historically Underutilized Business Zone (HUBZone) program.
In addition, 10 of 17 HUBZone businesses the GAO looked into in Washington, D.C. failed to meet the eligibility requirements for the program. Those same 10 firms have received more than $105 million in federal contracts since 2006. In the case of one of the firms, the GAO made multiple visits to the site listed as the firm's principal office, but found that no employees were working at the location and the only business equipment present was a computer and a filing cabinet. That firm received $3.9 million in HUBZone contracts from the Army and the Air Force during fiscal year 2006-2007, but its principal office was actually in McLean, VA, an upscale Washington, D.C., suburb that is not in a HUBZone.
The House Committee on Small Business heard about the results of the investigation in a public hearing on July 17. The committee chair, Rep. Nydia Velazquez (D-N.Y.), said in her opening statement that the findings of the investigation were "appalling."
"It's tougher to get a library card than it is to get into the HUBZone program," she said. "All you need is a bit of White-out. It's absolutely shameful."
The investigation was undertaken at the committee's request.
Sen. Kit Bond (R-MO), wrote the 1997 bill that created the HUBZone program to promote economic development and employment growth in distressed rural and urban areas by giving small companies located in those areas preference in Federal contracting opportunities. Since then, he has pushed federal agencies to increase contracting through the program. A year ago, he criticized federal agencies for falling far short of meeting the goal set by Congress of awarding three percent of prime contracts to HUBZone companies.
To qualify for HUBZone certification, a firm must be owned and controlled by at least one U.S. citizen, 35 percent of its full-time employees must reside in a HUBZone, and the firm's principal office must be in a HUBZone area.
In the bi-state area, the City of St. Louis, University City, Pagedale, Pinelawn and additional parts of North County in Missouri and East St. Louis, Centreville, Washington, Fairmont City, Brooklyn, and Venice in Illinois are all in HUBZones.
The GAO estimated that $8 billion in federal spending flow to the 14,000 firms in the program. HUBZone firms are supposed to get a 10 percent price preference when competing against large businesses for contracts. In other words, HUBZone firms can charge up to 10 percent more than their non-HUBZone competitors and still get the federal contract. According to the Missouri Small Business Development Centers, federal contracting officers also can restrict contracts to HUBZone companies if they think two or more HUBZone companies will submit bids. For contracts worth less $3 million, they can designate a HUBZone company as a sole source provider. In addition, federal agencies are supposed to require a HUBZone subcontracting plan on any prime contract with a non-HUBZone company worth more than $500,000.
In a statement emailed by Sen. Bond's office, Missouri's senior senator said, "Fraud, abuse and poor management found by the GAO investigators was not just troubling, but unacceptable. While I am pleased that SBA has already taken steps to address these problems, I will monitor carefully their efforts to ensure that the program operates as intended by the Congress."
This not the first time that allegations of lax oversight and fraud have dogged the HUBZone program.
"The GAO report confirms the claims contractors have been making for years - that the Small Business Administration (SBA) has failed to execute its oversight authority over the HUBZone program," said AGC's chief executive officer Stephen Sandherr. "The HUBZone program has been a huge administrative failure, which has cost the program its potential as a legitimate contracting vehicle, the opportunity for growth for these disadvantaged communities and billions of lost taxpayer dollars."
AGC has long expressed significant concerns about the effectiveness and fairness of the HUBZone program as it is applied to the construction industry and has advocated that significant improvements be enacted to reform the program. The program does not realize its goal of increasing employment and reinvesting in economically disadvantaged areas.
AGC advocates the following changes to the HUBZone program: Applying the HUBZone program only to contracts for the construction of federal projects within a 150-mile radius of the HUBZone contractor's principal place of business. According to the AGC, only those projects can offer employment to a significant number of HUBZone residents, and only those projects can promise to make a lasting change in their economic circumstance. Requiring that HUBZone residents receive at least 30% of the payroll needed to perform all HUBZone contracts. According to AGC, using payroll as the measure will avoid pass through purchases of materials and supplies that encourage brokering by legal HUBZones entities that nonetheless are not actually building construction projects. Requiring the SBA to routinely investigate alleged abuses of the program within 10 days. Reducing the price preference in construction to five percent. Letting contractors protest a sole source designation on the grounds that the HUBZone contractor does not actually qualify for the program. Requiring construction firms - companies that experience large fluctuations in employment throughout the course of any given year - to provide certified payroll records at the end of each year to demonstrate that HUBZone residents truly worked at least 35% percent of all the hours worked in that year.