Advisory Memorandum 12-19R: A Non-Manufacturer Rule Waiver Allowed an 8(a) Recovery Act Contract to Bypass Established Small Business Requirements

On September 4, 2012, the OIG issued Advisory Memorandum 12-19R, A Non-Manufacturer Rule Waiver Allowed an 8(a) Recovery Act Contract to Bypass Established Small Business Requirements.  This advisory memorandum is the first in a series of ongoing limited scope audits to review the extent to which selected 8(a) firms participating in the 8(a) Business Development Program are complying with prime contractor performance requirements for set-aside contracts.

For this audit, the OIG selected two contracts performed by 8(a) program participants: one 8(a) contract and one HUBZone contract.  The OIG found that one contractor complied with the performance of work requirements, and the other was exempt because of a waiver from the SBA.  One contract for $5.4 million was awarded to provide recruiting services for the Census Bureau; however, the contractor had not used any subcontractors to date.  An Alaska Native Corporation (ANC), who utilized a subcontractor to provide imaged personal computers and monitors for the Department of Labor, performed another 8(a) set-aside contract for $7.78 million.  However, the 8(a) set-aside contract was performed as a pass through contract where large businesses received most of the procurement dollars, and the ANC received $153,000.

The use of the non-manufacturer waiver enabled a firm to bypass small business subcontracting requirements resulting in a pass through contract to large businesses.  Although authorized under statute, these types of procurements may not provide the development opportunities to small businesses intended through participation in the 8(a) program.  Moreover, these types of procurements also funnel taxpayer funds to large businesses instead of developing small businesses to compete in the American economy.  As a result, a large business received 8(a) set-aside funds through a pass through without competing in the open market.