Report - Sba Pandemic Contractors

Filed July 26, 2023 in SBA Pandemic Contractors, the only filing from this case in the archive.

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U.S. SMALL BUSINESS ADMINISTRATION   OFFICE OF INSPECTOR GENERAL


SBA’s Awards for Staffing Support for
  COVID-19 Economic Relief Loan
            Programs




                   Evaluation Report
                       Report 23-11
                        July 26, 2023
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                  U.S. Small Business Administration
                       Office of Inspector General

                                      EXECUTIVE SUMMARY
     SBA’s Awards for Staffing Support for COVID-19 Economic
              Relief Loan Programs (Report 23-11)
What OIG Reviewed                                         basis for doing so. Instead of using the rates
We reviewed the U.S. Small Business                       originally contracted for each loan center, officials
Administration’s (SBA) blanket purchase                   approved that all labor rates could be billed at
agreement with Highlight Technologies, LLC                the Washington, D.C. region rates, which were
for loan support services. Over the course of SBA’s       the highest rates of all regions proposed.
contractual relationship with Highlight from 2017         Consequently, we found SBA paid at least
to 2021, SBA issued 29 separate contracts, known          $3.8 million more in just 1 year due to labor rate
as call orders, totaling $254 million, to assist with     adjustments without any added benefit received.
necessary loan support services. Specific to              Additionally, SBA missed opportunities for savings
Coronavirus Disease 2019 (COVID-19) pandemic              on high volume orders because contracting
needs, SBA awarded 4 of the 29 orders, totaling           officials did not consistently seek discounts as
$234 million, from April 2020 through June 2021.          required by Federal Acquisition Regulations.
The objectives of this review were to determine           We also found that SBA did not actively monitor
whether SBA 1) issued the blanket purchase                call orders to ensure compliance with the
agreement, orders related to COVID-19, and                Limitation on Subcontracting Rule, which resulted
contract modifications in accordance with federal         in Highlight assigning more than 50 percent of its
regulations and written policies and procedures;          work on five orders to subcontractors who should
and 2) effectively monitored contractor                   not have received the majority of the work. As a
compliance with small business set-aside                  result, an excess of $1.2 million of contract costs
subcontracting limitations.                               went to businesses that did not meet eligibility
                                                          standards for the set-aside contracts meant to
What OIG Found                                            benefit the small business community.
To meet the increased demand for COVID-19 loan            What OIG Recommended
program support services, SBA issued labor hour
contracts, e.g. call orders, using an existing blanket    We made four recommendations for the agency
purchase agreement.                                       to update guidance to clarify price analysis
                                                          requirements, document discount requests,
However, SBA contracting officials did not always
                                                          and evaluate compliance with limitations on
perform adequate price analyses, awarding
                                                          subcontracting.
contracts that were not the best use of taxpayer
funds. SBA did not establish adequate guidance to         Agency Response
ensure contracting officials consistently followed        SBA management agreed or partially agreed with
federal regulations. Regulations guide contracting        two recommendations and disagreed with two
officials in negotiating fair and reasonable prices       recommendations. Management’s planned action
for goods and services, ensuring taxpayer funds           to require contracting officers to seek price
are spent prudently.                                      reductions for blanket purchase agreements and
Specifically, contracting officials modified a critical   call orders resolved recommendation 2.
contract term that allowed Highlight to bill the          We did not reach resolution on recommendations 1,
government using labor rates that were higher             3, and 4. OIG will seek resolution in accordance
than originally contracted, without a reasonable          with our audit follow-up policy.
                           OFFICE OF INSPECTOR GENERAL
                       U.S. SMALL BUSINESS ADMINISTRATION

                                       MEMORANDUM

Date:     July 26, 2023

To:       Isabella Casillas Guzman
          Administrator
From:     Hannibal “Mike” Ware
          Inspector General
Subject: Evaluation of SBA’s Awards for Staffing Support for COVID-19 Economic Relief Loan
         Programs (Report 23-11)
This report represents the results of our evaluation of SBA’s Awards for Staffing Support for
COVID-19 Economic Relief Loan Programs. We considered management comments on the
draft of this report when preparing the final report. SBA management agreed with our
recommendation.

We appreciate the cooperation and courtesies provided by your staff. If you have any
questions, please contact me or Andrea Deadwyler, Assistant Inspector General for Audits,
at (202) 205-6586.

cc:     Arthur Plews, Chief of Staff, Office of the Administrator
        Therese Meers, General Counsel, Office of General Counsel
        Peggy Delinois Hamilton, Special Counsel for Enterprise Risk, Office of the Administrator
        Katherine Aaby, Associate Administrator, Office of Performance, Planning,
            and the Chief Financial Officer
        Melissa Atwood, Director, Office of Financial Operations and Acquisition
            Management
        James Patrick Ingram, Director, Chief Acquisition Officer, Office of Performance,
            Planning, and the Chief Financial Officer
        Bailey DeVries, Acting Associate Administrator, Office of Capital Access
        John Miller, Deputy Associate Administrator, Office of Capital Access
        Francisco Sanchez, Jr., Associate Administrator, Office of Disaster Recovery & Resilience
        Michael Simmons, Attorney Advisor, Office of General Counsel
        Tonia Butler, Director, Office of Internal Controls




        409 Third St. SW, Washington, DC 20416 • (202) 205-6586 • Fax (202) 205-7382
Contents
Introduction .................................................................................................................................... 1
     Pandemic Loan Programs .......................................................................................................... 1
           Paycheck Protection Program (PPP) .................................................................................... 1
           COVID-19 Economic Injury Disaster Loans (EIDL) ................................................................ 2
     Urgent Staffing Support Needs ................................................................................................. 2
     Objectives .................................................................................................................................. 3
Results ............................................................................................................................................. 3
     Finding 1: Consistent Pricing Practices Would Result in Cost Savings ....................................... 3
           Price Analysis ....................................................................................................................... 4
           Practice of Requesting Discounts ........................................................................................ 8
     Recommendations .................................................................................................................... 9
     Finding 2: Consistent Monitoring of Subcontract Limitations Needed for
       Set-aside Contracts ................................................................................................................ 9
     Recommendations .................................................................................................................. 11
Evaluation of Agency Response..................................................................................................... 12
     Summary of Actions Necessary to Close the Recommendation(s).......................................... 12


Tables

     1           Call Orders for COVID-19 Pandemic Loans .................................................................... 4
     2           Rate Differential for Actual Billed Hours ....................................................................... 7
     3           Call Orders Exceeding Limitation on Subcontracting Rule .......................................... 11


Appendices

     1           Objectives, Scope, and Methodology ......................................................................... 1-1
     2           Questioned Costs ....................................................................................................... 2-1
     3           Agency Response........................................................................................................ 3-1



                                                                           i
Introduction
The Coronavirus Aid, Relief, and Economic Security Act, enacted on March 27, 2020, and
subsequent pandemic economic assistance legislation 1 provided emergency financial assistance
to entrepreneurs and small business owners adversely affected by the Coronavirus Disease 2019
(COVID-19) pandemic.

The U.S. Small Business Administration (SBA) used an existing staff support and management
services contract with Highlight Technologies, LLC for loan support services. Specifically, over
the course of SBA’s contractual relationship with Highlight from 2017 to 2021, SBA issued
29 separate contracts, known as call orders, totaling $254 million, to assist with necessary loan
support services. Specific to COVID-19 pandemic programs, SBA awarded 4 of the 29 orders,
totaling approximately $234 million, from April 2020 through June 2021.


Pandemic Loan Programs
SBA contracted with Highlight to provide loan assistance support on two major programs:


Paycheck Protection Program (PPP)
SBA awarded nearly $800 billion in fully guaranteed SBA loans under the PPP to eligible small
businesses, individuals, and nonprofit organizations adversely affected by the pandemic.
Recipients were able to qualify for PPP loan forgiveness if the proceeds were used for allowable
expenses as required by the pandemic relief programs. Highlight assisted with processing
applications, performing risk management, financial analysis, and key functions to support loan
systems and processing.




1
 Public L. No. 116-142, Paycheck Protection Program Flexibility Act of 2020 and Public L. No. 117-2, American
Rescue Plan Act of 2021.

                                                         1
COVID-19 Economic Injury Disaster Loans (EIDL)
SBA awarded nearly $380 billion in COVID-19 EIDL loans. EIDL loans provide low-interest capital
to eligible small businesses, small agricultural cooperatives, and most private nonprofits to
help with economic loss from the pandemic. Highlight assisted with loan processing and
disbursement functions.


Urgent Staffing Support Needs
In 2017, SBA used an existing contract with General Services Administration (GSA), called a
schedule, to issue a blanket purchase agreement 2 to Highlight as a single awardee using the
existing labor rates. A GSA schedule is a government-wide contract with companies that provides
customers with access to millions of products and services for purchase. A blanket purchase
agreement is used by contracting officers to save time when purchasing goods or services that
officials know will be ordered repeatedly, reducing the work required for future orders with the
selected businesses.

SBA’s 2017 blanket purchase agreement with Highlight was established under a competitive 8(a)
Business Development Program set-aside award, which is a contracting opportunity that limits
competition to socially and economically disadvantaged firms that have received business
development assistance from SBA. The purpose of setting aside government contracts for small
business is to diversify the economy by helping more entrepreneurs compete in the federal
marketplace. At the time it was awarded, the agreement had a potential value of $20 million
over a 5-year period. SBA selected Highlight’s proposal from seven other 8(a) businesses because
it provided the best value to the government. When the COVID-19 pandemic hit, creating
unprecedented demand in SBA loans, contracting officers were able to draw on this 2017
agreement to issue labor hour contracts to quickly staff up and meet the demand of pandemic
assistance response.




2
    FAR 13.303-1 Blanket Purchase Agreements – General.

                                                          2
Objectives
The objectives of our evaluation were to determine whether SBA 1) issued the blanket purchase
agreement, call orders related to COVID-19, and contract modifications in accordance with
federal regulations and written policies and procedures; and 2) effectively monitored contractor
compliance with small business set-aside subcontracting limitations.



Results
At the start of the pandemic, SBA maximized its agreement with Highlight to quickly tackle the
high volume of loan processing services that would be required to meet the needs of struggling
small businesses during the pandemic. Contracting officials were able to expedite a series of call
orders to support the implementation of the PPP and COVID-19 EIDL programs.

Although SBA adhered to Federal Acquisition Regulations (FAR) in administering some of the call
orders to Highlight, we found inconsistent practices and instances where SBA’s internal controls
were not sufficient to ensure contracting officers conducted an adequate price analysis prior to
approving a critical modification that allowed Highlight to bill the government using higher
labor rates than originally agreed to. This resulted in SBA overpaying the contractor by at least
$3.8 million for staffing services used to administer its COVID-19 pandemic loan programs. Also,
SBA did not follow regulations in requesting volume discounts from the contractor for each
qualified order.

In addition, we found that SBA did not monitor subcontract limitations which resulted in 5 of
29 orders reviewed significantly exceeding the limitation. The limitation on subcontracting rule
ensures that eligible small businesses complete meaningful amounts of the work to gain
experience performing on contracts. For these five contracts, Highlight subcontracted more
than half of its work to entities that did not meet small business eligibility standards to be able
to obtain favorable contracting opportunities intended for small businesses.


Finding 1: Consistent Pricing Practices Would Result in Cost
Savings
Contracting officials responded to SBA’s high demands for professional support services by using
an existing blanket purchase agreement to help administer the COVID-19 pandemic loan
programs. We reviewed four high value call orders, totaling $234 million, issued to support


                                                  3
needs arising from the pandemic (see Table 1). For two of the four orders we reviewed,
contracting officials adhered to regulations and written policies, which led to at least $5.8 million
in savings. This demonstrates the value of following policies and regulations when negotiating
contracts.

However, for the remaining two orders, contracting officials did not adequately assess contract
prices as required by the FAR. Specifically, they did not assess price reasonableness or request
discounts on all qualifying orders, thus awarding these orders for loan support services without
ensuring they were the best value to the government. SBA did not establish adequate guidance
to ensure contracting officials consistently followed federal regulations in seeking the best value.
Without adequate justification, SBA overpaid Highlight at least an additional $3.8 million for
commercial loan services (see Appendix 2 for a schedule of questioned costs). We also found
that SBA’s contracting office has experienced high staff turnover resulting in a loss of historical
knowledge. These issues underscore the need for clear guidance and consistent processes (see
Table 1 below).


Table 1: Call Orders for COVID-19 Pandemic Loans
    SBA Contracts                Cost                                   Identified Concerns
    Call Order 23           $103,986,803          Contract modification to change labor rates was not analyzed.
                                                  Discount was not requested or applied.
    Call Order 24              91,848,205         No concerns identified

    Call Order 26              19,012,391         Contracted labor rates were not analyzed.

    Call Order 27              19,369,984         No concerns identified

                Total       $234,217,384          —

Source: Office of Inspector General analysis of Highlight Technologies contract portfolio as of May 2021, the end of
our review period. Minor difference due to rounding.



Price Analysis
Federal regulations require a price evaluation to be completed for the total order when GSA
schedule hourly rates are used. 3 By placing the order, SBA indicated that the order represented
the best value for the government because the listed rates are deemed fair and reasonable.




3
    FAR 8.405-3(c)(3) BPAs for hourly-rate services.

                                                           4
However, GSA determined the rates were fair and reasonable based on geographic localities
proposed by the contractor. 4 If the rates are increased, the assessment of fair and
reasonableness done by GSA is no longer valid for those localities.

On April 1, 2020, SBA issued Call Order 23 valued at $103.9 million using Highlight’s proposed
rates to increase loan staffing. Highlight proposed its rates based on position title and by the
specific locality of SBA regional offices where the employees were expected to be assigned
according to the Statement of Work. Shortly after performance began, SBA modified the order to
allow the contractor to bill all labor categories at the Washington, D.C. rates regardless of which
regional offices the employee supported, as these positions were being performed virtually
under pandemic conditions.

Contracting officials agreed the change was a “logical streamlined approach because of the
contingency environment, as well as [the fact that] the positions could actually be anywhere in
the continental United States” and, they “wanted to ensure that the rates would be fair and
reasonable across the board for all contractors regardless of location.” As a result, SBA issued a
modification to change all labor hour rates to the Washington, D.C. rates, which were the highest
rates of all proposed regions. A justification as to why the D.C. rates were appropriate was not
provided and the contracting officer did not perform an analysis to determine whether the
contract would remain the best value for the government.

Each time a contract ceiling price is increased, federal regulations require the contracting officer
to conduct a pricing analysis so that any changes to contract terms still ensure they would be in
the best interest of the government. 5 This analysis must consider all relevant factors and be
documented in the contract file. The first ceiling increase occurred after the rates were
streamlined, and the government cost estimate performed as part of the increase only used
the Washington, D.C. rates, number of hours, and cost. This lacked a comparison to rates as
originally proposed to serve as a meaningful analysis.

Federal regulations guide contracting officials in negotiating fair and reasonable prices for goods
and services, ensuring taxpayer funds are spent appropriately. Agency leaders have the authority
to issue regulations to carry out the intent of federal regulations through agency policies and
procedures. 6 For these orders, SBA contracting officials did not perform adequate analyses and
executed contracts that were not the best use of taxpayer funds.



4
  FAR 8.404(d) Use of Federal Supply Schedules.
5
  FAR 12.207(b)(1)(ii)(C) Special Requirements for the Acquisition of Commercial Items.
6
  FAR 1.301(a) Agency Acquisition Regulations.

                                                         5
We attribute this issue to recently changed contracting procedures. In December 2015, the
Office of Inspector General (OIG) recommended that SBA establish and implement clear, written
policies and procedures for preparing independent government cost estimates. 7 In response,
SBA revised its procedures related to preparing estimates; however, those procedures were
subsequently removed in 2019.

SBA’s procedural reversal was exacerbated by the rush to implement COVID-19 loan programs,
along with poor documentation practices, and staff turnover. Consequently, the file for Call
Order 23 did not contain an independent government cost estimate to provide insight into what
methodology, rationale, or assumptions were used to assess the reasonableness of Highlight’s
proposed labor rates.

SBA’s current acquisition standards for determining price reasonableness do not provide a
detailed set of procedures or job aids for adequate analysis. As a result, contracting officials
indiscriminately approved the labor rate change without considering the effect, and SBA paid
at least an additional $3.8 million for commercial loan services due to this change.

Table 2 shows the additional amount per hour the contractor was allowed to bill, and the
resulting increase in cost for the actual hours billed during the first year of the contract. For
example, by invoicing with Washington, D.C. rates, Highlight was allowed to bill for each loan
specialist supporting the Little Rock, Arkansas office at $7.90 more per hour than the originally
contracted rate. Since D.C. had the highest pay rate of the four locations, the 196,363 hours
billed cost the government $1.6 million more than the originally contracted rate would have
cost.

It is not a prudent business practice for SBA to allow Highlight to charge the government using
rates for the most expensive region when most of the work was projected to be performed
largely outside of the Washington, D.C. area. At the time contract performance began, the
D.C. area rates were approximately 12 percent higher than the rates for locations where much
of the work was performed.




7SBA Needs to Strengthen Its Information Technology Procurement Practice to Ensure Adequate Planning and

Financial Oversight (December 17, 2015).
https://www.oversight.gov/sites/default/files/oig-reports/Report_16-05_SBA_IT_Procurement_Practices.pdf.

                                                      6
Table 2: Rate Differential for Actual Billed Hours
                                                                      Differential Between
                                                                       Washington, D.C.          Additional Cost
     SBA Office                                     Number of          Rate and Original          Due to Rate
     Assignment              Position Title         Hours Billed              Rate                  Change
 Little Rock, AR         Loan Specialist              196,363                 $7.90                $1,551,265
 Little Rock, AR         Loan Processing                46,348                $6.64                   307,754
                         Assistant
 Little Rock, AR         Onsite Supervisor               7,900                $9.13                     72,129
 Fresno, CA              Loan Specialist              191,096                $7.90*                 1,509,662
 Fresno, CA              Loan Processing                41,414                $6.64                   274,987
                         Assistant
 Fresno, CA              Onsite Supervisor               6,848                $9.13                     62,522
 Citrus Heights, CA      Loan Specialist                 1,394                $2.05                      2,857
 Citrus Heights, CA      Loan Processing                   264                $1.63                        430
                         Assistant
                Total —                                       —                   —                $3,781,607
*Differences due to rounding and to a 10-cent decrease in D.C. rate at the start of contract.
Source: OIG analysis of Highlight Technologies April 15, 2021 invoice – invoice costs from April 1, 2020 through
April 15, 2021


In a related scenario, when additional loan support was needed at the Dallas-Ft. Worth, Texas
office, contracting officials considered adding onto Call Order 24, which was already in place
supplying support services for the Texas office, but decided to issue a separate order. Instead
of matching the previously negotiated and established rates on Call Order 24, the new
order used the same elevated Washington, D.C. rates from Call Order 23. Given the similar
work scope between Call Order 24 and the new order, it is not clear why SBA contracted to pay
the higher D.C. rates from Call Order 23. An analysis to support the increase in labor costs
was not provided.




                                                          7
Practice of Requesting Discounts
The Federal Acquisition Regulation requires agencies to ask for a discount when orders exceed
the simplified acquisition threshold, as well as when performing routine reviews of the
agreement. 8 In addition, GSA best practices state that discounts should be explored when
negotiating contracts since factors such as order volume, competitive forces, and labor
conditions could have impacted prices since the time of setting up the initial GSA schedule 9
in 2016.

SBA successfully obtained discounts for three of the four orders we reviewed, one of which
received a 5 percent discount, resulting in savings of $5.8 million. However, Call Order 23,
which was modified to allow Highlight to bill at higher labor rates, did not include a discount or
evidence that one had been requested.

All four orders exceeded the simplified acquisition threshold of $250,000, 10 which triggered a
requirement to seek a discount. But, more significantly, the orders that resulted from the
pandemic relief programs were higher in volume than were estimated for the blanket purchase
agreement for the entire 5-year period, providing a compelling opportunity for a discount to be
negotiated.

SBA contracting officials disagreed that documenting requests for discounts was required and
the requirement is not explicitly outlined in the procedures. Considering the tremendous
value of the orders, discounts must be fully explored to ensure the best value for the
government. Documenting the requests and associated discussions provide contracting
details that are useful for future negotiations and provide transparency to meeting contracting
regulations.




8
  FAR 8.405-4 Price Reductions; 8.405-3(e) Review of BPAs.
9
  U.S. General Services Administration, Schedule Pricing, www.gsa.gov/buy-through-us/purchasing-programs/gsa-
multiple-award-schedule/schedule-features/schedule-pricing.
10
   41 U.S.C § 134 - Simplified Acquisition Threshold.

                                                       8
Recommendations

We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to:

Recommendation 1: Establish and implement policies and procedures on how to use
appropriate analysis techniques when determining prices are fair and reasonable when GSA
scheduled list prices and rates are adjusted, in accordance with FAR Part 8.
Recommendation 2: Establish and implement policies and procedures to document discount
requests for applicable call orders to ensure all possible volume order discounts and changing
market conditions are considered at the time of each order, in accordance with FAR 8.405.
Recommendation 3: Determine the total additional amount paid to Highlight Technologies, LLC
due to using Washington, D.C. labor rates and pursue any applicable remedies to recover costs.


Finding 2: Consistent Monitoring of Subcontract Limitations
Needed for Set-aside Contracts
Highlight stayed within allowable limits in subcontracting work for 24 of the 29 call orders issued
under the blanket purchase agreement, ensuring at least 50 percent of the order value was
performed by an 8(a) small business. For 5 of 29 orders reviewed, Highlight exceeded the
subcontracting limits.

Under the Limitation on Subcontracting Rule for service contracts, small businesses are
prohibited from subcontracting more than 50 percent of the contract cost to larger businesses,
or to those without program status as a certified 8(a) small business. 11 By submitting an offer
and performing on the contract, contractors are agreeing not to pay subcontractors amounts
more than permitted levels. 12 Although the contractor is expected to demonstrate adherence
through maintaining its books and records, contracting officials are required to regularly monitor
the contractor’s compliance to ensure the majority of the contract is not being paid to large
businesses and that contracts are being performed in accordance with stated terms, as part of
contract management duties.




11
     13 C.F.R. §125.6 Prime Contractor’s Limitations on Subcontracting.
12
     48 C.F.R. §52.219-14(e) Limitations on Subcontracting.

                                                           9
However, SBA did not ensure Highlight complied with the subcontracting limitation rule.
Contracting officials relied on contractors to self-report compliance with the rule and did not
monitor the accuracy of self-reported assertions as part of normal management duties. Officials
told us that they lacked sufficient resources to be able to perform regular audits and only do so
when they become aware of a potential violation.

Federal regulations require officials to review compliance with subcontracting limits at the
conclusion of an order, which could then be used as a factor in the contractor’s performance
rating to justify awarding additional orders. 13 SBA was not able to make meaningful
determinations on the division of labor and the percentage of subcontracted work from
the invoices provided by Highlight.

Contracting officials have the authority to request information in connection with a contractor’s
compliance with the limitations rule. 14 The regulation emphasizes the contracting officer
has the discretion to request this information at any point during performance or upon
completion of the contract. For blanket purchase agreements, the subcontractor limitation
applies to the period of performance for each order and not on the combined value of the call
orders. 15

Based on our review of Highlight’s orders, we question $1.2 million in total payments made on
subcontracts exceeding the 50 percent limit (see Table 3). For example, Highlight invoiced
$681,152 for Call Order 3. The contractor is allowed to subcontract out up to half of the
work to businesses not eligible for the set-aside contract. Instead, Highlight contracted out
$182,808 more than the allowable limit. This means that Highlight subcontracted out 77 percent
of the contract value.

For the five call orders listed in Table 3, SBA awarded Highlight nearly $2.9 million. However,
Highlight subcontracted nearly $2.7 million to businesses not eligible for set-aside contracts,
which meant the small business retained only $200,000 among the five awards. In total,
Highlight exceeded the 50 percent subcontracting limit by $1.2 million.




13
   13 C.F.R. §125.6(d) Prime Contractor’s Limitations on Subcontracting; FAR 42.1503(b)(2)(vi) Procedures, Subpart
to Contractor Performance Information.
14
   13 C.F.R. §125.6(e)(4) Inapplicability of Limitations on Subcontracting.
15
   13 C.F.R. §125.6(d) Determining Compliance with Applicable Limitation on Subcontracting.

                                                        10
Table 3: Call Orders Exceeding Limitation on Subcontracting Rule
                                         Total Amount          Percentage
                                         Paid to Other-       Subcontracted      Amount Paid to
                        Total             than-Small           to Ineligible   Subcontractors that
     SBA Contracts    Invoiced*         Subcontractors          Businesses     Exceeded the Limit
 Call Order 3            $681,152           $523,384                 77%            $182,808
 Call Order 5            $568,219           $555,025                 98%            $270,916
 Call Order 12           $261,727           $253,891                 97%            $123,028
 Call Order 15           $339,836           $330,023                 97%            $160,105
 Call Order 22         $1,023,287         $1,003,562                 98%            $491,918
             Total    $2,874,221*         $2,665,885                 93%**        $1,228,775
*Total invoiced as of June 30, 2021, the end of our review period.
**Average percentage subcontracted out on identified call orders.
Source: OIG analysis of Highlight Technologies call order summary


As the main advocate for small businesses, SBA needs to safeguard contracting benefits meant
for intended recipients. We reported a similar finding and made several recommendations in
OIG’s evaluation of a contract SBA awarded for disaster loan recommendation services,
which will be resolved under that evaluation. 16 Therefore, we are not making any new
recommendations to implement additional controls but recommend assessing the financial
impact of not complying with the rule.


Recommendations

We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to:

Recommendation 4: Evaluate all call orders issued under the Highlight blanket purchase
agreement for compliance with the Limitation on Subcontracting Rule per 13 CFR § 125.6 and
pursue any applicable remedies.




16
  SBA Office of Inspector General, 22-10, Evaluation of SBA’s Contract for Disaster Assistance Loan
Recommendation Services (April 14, 2022). https://www.oversight.gov/report/SBA/Evaluation-SBA’s-Disaster-
Assistance-Loan-Recommendation-Services.

                                                         11
Evaluation of Agency Response
SBA management provided formal comments to our draft report, which are included in their
entirety in Appendix 3. Management agreed or partially agreed with two recommendations and
disagreed with two recommendations. We found that the agency’s planned actions resolved one
recommendation but are not sufficient to resolve three of the recommendations. In accordance
with our audit follow-up policy, we will attempt to reach agreement with SBA management on
the unresolved recommendations within 60 days of the date of this report. If we do not reach
agreement, OIG will notify the audit follow-up official of the disputed issues.


Summary of Actions Necessary to Close the Recommendation(s)
The following section summarizes the status of our recommendation(s) and the actions
necessary to close them.

Recommendation 1

We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to establish and implement policies and
procedures on how to use appropriate analysis techniques when determining prices are fair and
reasonable when GSA scheduled list prices and rates are adjusted, in accordance with FAR Part 8.

Status: Unresolved.

Management disagreed with this recommendation, stating that the agency is not required to
make a separate determination of fair and reasonable pricing when GSA established this
determination as outlined in FAR 8.404(d).

However, management’s basis for disagreement does not consider part of the FAR clause cited
that warns against accepting a determination of reasonableness without performing a price
evaluation. 17 According to the referenced subsection, ordering activities are required to evaluate
the level of effort and the mix of labor proposed to perform a specific task being ordered, and
for determining that the total price is reasonable. Although the language in FAR part 8 did not
clearly state that when contracting officials deviate from the scheduled rates to perform a price




17
     FAR 8.404(d) Use of Federal Supply Schedules.

                                                     12
evaluation, the guidance to evaluate other components (level of effort and mix of labor) is
distinct for contracts using a Blanket Purchase Agreement for hourly rate services. 18

Accordingly, we maintain our position that SBA should establish and implement policies and
procedures to address when GSA scheduled rates are adjusted. Contracting officials, when
ordering with scheduled rates, are required to perform an appropriate price evaluation when
other factors need to be considered to understand the total order price. At a minimum, an
analysis to understand the impact of the sweeping rate change should have been performed.

This recommendation can be closed when management provides evidence that it has
implemented policies and procedures on how to use appropriate analysis techniques when
determining prices are fair and reasonable when GSA scheduled list prices and rates are
adjusted, in accordance with FAR part 8.

Recommendation 2

We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to establish and implement policies and
procedures to document discount requests for applicable call orders to ensure all possible
volume order discounts and changing market conditions are considered at the time of each
order, in accordance with FAR 8.405.

Status: Resolved.

Management agreed with the recommendation, stating that it would clarify in its standard
operating procedures that contracting officers are required to seek price reductions at the
establishment of the blanket purchase agreement and when call orders from the agreement
exceed the Simplified Acquisition Threshold. Management plans to complete final action on this
recommendation by October 1, 2023.

This recommendation can be closed when management provides evidence that SOP changes
have been implemented to ensure contracting personnel seek price reductions as required.




18
     FAR 8.405-3(c)(3) BPAs for hourly rate services; FAR 8.405-3 Blanket purchase agreements (BPAs).

                                                          13
Recommendation 3

We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to determine the total additional amount
paid to Highlight Technologies, LLC due to using Washington, D.C. labor rates and pursue any
applicable remedies to recover costs.

Status: Unresolved.

Management disagreed with this recommendation, stating that the rates were negotiated in
good faith between SBA and the contractor and were within the approved rate range.
Management emphasized that due to the COVID-19 emergency, many federal contractors
were moved to a remote work posture. Management also stated there was no time to track and
reconcile locations from where personnel were physically working to support specific tasks
due to the historic and evolving emergency. As a result, the contracting officer determined
that paying the Washington, D.C. rate was the most expeditious solution in response to the
emergency. In addition, Management stated there was not a business or legal case to claim an
“overpayment” was made to the contractor, nor is there a precedent for recouping costs where
the rates were mutually agreed to, even if in hindsight there might be questions on the initial
business decision.

We maintain our position that SBA made a significant modification without evaluating the cost
impact of selecting the highest available rate to apply to all locations and future call orders. It is
important to note that the original Call Order 23 was already contracted to support regional
offices virtually. Workforce plans and locations were already in place, with business being
conducted virtually in accordance with the statement of work. The decision to bill using
Washington, D.C. rates was almost 2 weeks after performance began. Absent a sudden overnight
change in remote work status, SBA was not in a situation where it had to make a drastic decision
without being able to perform a basic analysis with workforce data that was readily available.
Therefore, management’s decision to increase rates without an understanding of the cost
impact did not demonstrate prudent actions.

Moreover, this decision led to issuing subsequent orders using the same Washington D.C. rates,
falsely establishing precedent that using adjusted rates for later call orders without sufficient
analysis was an acceptable and reasonable practice. Even given the extenuating circumstances,
performing an evaluation of the price difference was unlikely to have caused a significant delay.
The contractor had already been engaged to hire and perform the assigned work under the
initial call order.



                                                 14
Without consideration being given to the cost impact, the contracting officer did not ensure that
the decision could be fully supported.

We noted management’s concern of using the term “overpayment” for recouping some contract
costs. We have modified the recommendation but have kept it consistent with the underlying
intent to identify the additional amount paid to the contractor using the Washington D.C. labor
rates.

This recommendation can be closed when management provides evidence that it has conducted
an appropriate analysis of contract costs impacted by the rate change.

Recommendation 4

We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to evaluate all call orders issued under
the Highlight blanket purchase agreement for compliance with the Limitation on Subcontracting
Rule per 13 CFR § 125.6 and pursue any applicable remedies.

Status: Unresolved.

Management partially agreed with this recommendation, stating that the contracting officer
will examine compliance at the BPA level and report any violations of the Limitation on
Subcontracting Rule to OIG. Management stated that OIG would then pursue monetary
remedies through the Department of Justice. Management disagreed with our conclusion
that the Limitation on Subcontracting rule should be applied at the call order level. Instead,
management believes the rule should be applied at the blanket purchase agreement level but
did not justify the basis of their belief.

We maintain our position that the call orders should be individually evaluated under the
Limitation on Subcontracting Rule. As explained earlier in this report, the Limitation on
Subcontracting Rule states that under a contract for services, the contractor will not pay more
than 50 percent of the amount paid by the government to firms that are not similarly situated.
According to SBA’s regulations, an order issued under an agreement such as a blanket purchase
agreement is the contract. 19 FAR 2.101 further clarifies that the contract is the mutually binding
legal relationship that obligates the seller to provide the service and the Government to pay for
the service.




19
     13 CFR § 125.1.

                                                15
In the case of a blanket purchase agreement, it is a contracting vehicle to add efficiency to the
procurement process. However, the call order establishes the contractual obligation between
the contractor and the Government. A blanket purchase agreement itself does not obligate the
Government to commit to any future purchases when it is established, nor does it provide for a
minimum order guarantee to the contractor. It functions as a menu of supplies and services
available to federal agencies at a listed price.

Also, the Inspectors General Act requires each Inspector General to “report expeditiously to the
Attorney General whenever the Inspector General has reasonable grounds to believe there
has been a violation of Federal criminal law.” 20 Pursuing monetary remedies under a Blanket
Purchase Agreement is an action in contracts law under the terms of the BPA absent any
evidence that it is a criminal law matter. SBA did not provide any evidence, or make a referral
for OIG investigation, that the contractor’s noncompliance was criminal in nature. The
responsibility of pursuing any remedy under a government contract belongs to the contracting
officer. 21

This recommendation can be closed when management provides evidence that it conducted an
evaluation of call orders issued under the blanket purchase agreement to determine compliance
with the Limitation on Subcontracting Rule and pursues applicable remedies.




20
     5 U.S.C. 404(d).
21
     FAR section 1.602-2.

                                                16
Appendix 1: Objectives, Scope, and Methodology
Objectives
The objectives of our evaluation were to determine whether SBA 1) issued the blanket
purchase agreement, call orders related to COVID-19, and contract modifications to Highlight
Technologies, LLC in accordance with federal regulations and written policies and procedures
and 2) effectively monitored contractor compliance with small business set-aside subcontracting
limitations.


Scope and Methodology
We reviewed SBA’s acquisition practices in awarding the April 2017 blanket purchase agreement,
SBAHQ-17-A-0016, and orders issued to Highlight under the agreement. To meet our audit
objectives, we reviewed applicable public laws, federal regulations, and SBA policies and
procedures. We interviewed contracting officials responsible for awarding SBA contracts, issuing
contract modifications, and monitoring contractor performance on the orders. We reviewed
procurement files and contracts, as well as invoices and subcontract agreements provided by
Highlight.

For our review of award practices, we judgmentally selected the four highest-value call orders
(23, 24, 26, and 27) of 29, totaling $234 million, to gain an understanding of contracting
procedures used to support the SBA offices of capital access and disaster assistance (see
Table 1-1). Our selection represents 92 percent of all order funds issued against the agreement
between March 27, 2020 and June 16, 2021. Our analysis was limited to the locations and job
titles that were accepted in the original order with the SBA Office of Capital Access. Due to
emerging staffing needs, there were other labor categories that were billed but not originally
proposed and therefore, not included in this analysis. Overtime hours billed were excluded from
our analysis and would have also increased the cost impact.

For our review of the Limitations on Subcontracting Rule, we reviewed invoice details for all
29 orders issued through June 16, 2021 to analyze the breakdown of billed contract costs
between Highlight and its subcontractors.




                                               1-1
Table 1-1: All 29 Call Orders Reviewed for Contractor’s Compliance with
Subcontracting Limitation Rule
                      Official Contract                         Value of Base and
    SBA Contract          Number                Date Issued     Exercised Options
Call Order 1         SBA0001                    05/19/2017          $567,061
Call Order 2         SBA0002                    06/23/2017           350,009
Call Order 3         SBA0003                    07/07/2017           837,529
Call Order 4         SBA0004                    07/06/2017             86,016
Call Order 5         SBA0005                    09/08/2017           568,219
Call Order 6         SBA0006                    08/10/2017           351,458
Call Order 7         SBA0007                    08/31/2017           229,096
Call Order 8         SBA0008                    08/31/2017          2,585,141
Call Order 9         73351018F0099              03/13/2018           178,321
Call Order 10        73351018F0101              03/15/2018             18,697
Call Order 11        73351018F0134              04/10/2018           754,956
Call Order 12        73351018F0162              06/04/2018           265,042
Call Order 13        73351018F0192              07/16/2018          2,801,037
Call Order 14        73351018F0205              08/28/2018           419,709
Call Order 15        73351019F0013              12/07/2018           365,451
Call Order 16        73351019F0056              03/19/2019           295,507
Call Order 17        73351019F0057              03/19/2019           709,522
Call Order 18        73351019F0122              06/06/2019           890,381
Call Order 19        73351019F0127              06/07/2019          1,146,410
Call Order 20        73351020F0022              02/28/2020          2,916,322
Call Order 21        73351020F0031              02/27/2020          1,285,454
Call Order 22        73351020F0039              02/28/2020          1,702,284
Call Order 23        73351020F0076              04/01/2020        103,986,803
Call Order 24        73351020F0125              04/23/2020         91,848,205
Call Order 25        73351020F0147              06/23/2020          Cancelled
Call Order 26        73351020F0175              07/15/2020         19,012,391
Call Order 27        73351021F0012              02/12/2021         19,369,984
Call Order 28        73351021F0029              04/12/2021           158,685
Call Order 29        73351021F0077              06/16/2021                 —
                Total —                             —            $253,699,690




                                          1-2
We conducted this evaluation in accordance with the Council of the Inspectors General on
Integrity and Efficiency Quality Standards for Inspections and Evaluations. These standards
require that we adequately plan and perform the evaluation to obtain sufficient and appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our evaluation
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our evaluation objectives.


Use of Computer-processed Data
We obtained computer-processed data reported on the SAM.gov website and the Joint
Accounting and Administrative Management System. SAM.gov contained the contract dollars
associated with Highlight’s agreement for call orders through April 30, 2021. We reconciled
award generated totals from SAM.gov to contract details. We verified Highlight’s roster of
subcontractors paid to small business certifications reported on SAM.gov. We reviewed
Highlight’s invoices submitted through the Joint Accounting and Administrative Management
System, used by SBA to approve contractor invoices. We determined the computer processed
information and invoices were reliable for the purposes of this review.




                                              1-3
Appendix 2: Questioned Costs
Questioned costs are expenses not supported by adequate documentation at the time of the
audit, or which otherwise do not comply with legal, regulatory, or contractual requirements.


Table 2-1: OIG Schedule of Questioned Costs
            Description                     Amount                              Explanation
 Excess contract costs                     $3,781,607        Unreasonable costs paid without an adequate
                                                             price evaluation per FAR 8.405-3(c)3.
 Excess payments to ineligible              1,228,775        Amount of costs paid in excess of
 subcontractors                                              subcontracting limitations per 13 CFR
                                                             § 125.6(a)(1) and associated penalties per 6(g).
                               Total       $5,010,382        —
Source: OIG generated analysis based on the contractor invoice and subcontractor tracking data provided by
Highlight Technologies




                                                       2-1
Appendix 3: Agency Response


          U.S. Small Business Administration
                 Response to Report




                         3-1
                         U.S. SMALL BUSINESS ADMINISTRATION
                                   WASHINGTON, D.C. 20416




Date:          June 15, 2023

To:            Hannibal “Mike” Ware
               Inspector General
               Office of the Inspector General (OIG)

From:          Patrick Ingram
               Chief Acquisition Officer
               Office of Performance, Planning, and the Chief Financial Officer (OPPCFO)

Subject:       Evaluation of SBA’s Awards (Highlight) for Staffing Support for COVID-19
               Economic Relief Loan Programs.

OPPCFO recognizes and appreciates the opportunity to provide a response to the subject OIG
report. We have carefully considered each recommendation and look forwarding to working with
OIG to seek a path to strengthening procurement operations moving forward. As part of our
internal efforts to strengthen compliance with Federal and Agency level regulations, we make
continuous revisions to the SBA internal Review Process, which guide Policy Analysts (PA) in
their review of actions during pre-solicitation, pre-award, and post-award phases. Additionally,
the Office of the Senior Procurement Executive (OSPE) updated its Standard Operating
Procedure (SOP) in FY 23 after that SOP had gone without an update for four fiscal years.
Moving forward, that SOP will be reviewed and updated as needed on an annual basis to ensure
currency with acquisition regulations.

In addition to the action noted above, several personnel actions have been taken that will further
strengthen contracting and procurement oversight and expand opportunities for the contracting
workforce to be trained on a more regular basis. During Q2 of FY23 the SBA hired my position,
the Chief Acquisition Officer (CAO), to provide strategic leadership to not just the contracting
function, but also to the program and project management aspects of the Acquisition process. In
addition to the CAO, efforts are underway to strengthen the Acquisition Career Manager (ACM)
position. The ACM function is currently an other-duty-as-assigned to a full-time PA, but will
become more strategically aligned with a dedicated PA (billet has been requested, but not yet
approved), whose primary focus will be on training opportunities, acquisition career
development and certification.

For context, the BPA reviewed was previously competed on GSA as an 8(a) set aside in 2017
and was awarded to Highlight Technologies to better assist the Office of Capital Access (OCA)
in meeting ongoing programmatic requirements. Highlight Technologies, LLC was awarded this
BPA through a competitive process and has been successfully performing the orders under this
BPA. Prior to the COVID-19 Pandemic, there had been approximately 23 call orders placed
against this BPA totaling approximately $15M. Due to the urgency of the COVID-19 Pandemic
and new loan programs established under the CARES Act, the agreement vehicle was used to
rapidly perform loan processing services in support of OCA and Office of Disaster Assistance
(ODA). This BPA provided two of the primary labor categories used to facilitate loan
processing: Loan Specialist and the Loan Processing Assistants. The Loan Specialist required
thorough knowledge of the financial and credit factors related to business, commercial, and/or
home loans including business practices and financial structures, pertinent statutory, regulatory,
and administrative provisions. These positions required the application of extensive experience
and seasoned judgment as well as a broad knowledge and understanding of business systems,
elements of good management, financial organization and management, the economic climate
for small business, and earning potential of the business enterprise involved. Additionally, it
required knowledge and skill in analysis, evaluation and problem solving to identify and define
financial management problems and assist in the development of workable solutions. Loan
Processing Assistants served in a variety of professional duties necessary to the processing,
servicing, liquidating, or other transactions for all types of SBA loans. Guidelines consisted of
SBA policies, procedures, directives, and applicable legislation. During pre-COVID
performance, contractors worked in SBA facilities in Washington, D.C, Texas, and California;
however, during the Pandemic, all positions transitioned, nearly overnight, to a remote status
throughout the country.

Recommendation 1: Establish and implement policies and procedures on how to use
appropriate analysis techniques when determining prices are fair and reasonable when GSA
scheduled list prices and rates are adjusted, in accordance with FAR 8.

Response: Disagree

Explanation: 8.404(d) states "GSA has already determined the prices of supplies and fixed-
price services, and rates for services offered at hourly rates, under schedule contracts to be fair
and reasonable. Therefore, ordering activities are not required to make a separate determination
of fair and reasonable pricing, except for a price evaluation as required by 8.405-2(d). By placing
an order against a schedule contract using the procedures in 8.405, the ordering activity has
concluded that the order represents the best value (as defined in FAR 2.101) and results in the
lowest overall cost alternative (considering price, special features, administrative costs, etc.) to
meet the Government’s needs."

Proposed Action: None

Recommendation 2: Establish and implement policies and procedures to document discount
requests for applicable call orders to ensure all possible volume order discounts and changing
market conditions are considered at the time of each order, in accordance with FAR 8.405.

Response: Agree

Proposed Action: FAR 8.405-4 - Price reductions, requires agencies to seek price reductions
when "the order or BPA exceeds the simplified acquisition threshold." SBA will clarify in its
SOP that price reductions shall be sought at BPA establishment and BPA Call Orders above the
Simplified Acquisition Threshold (SAT). While we believe this action goes beyond the current
regulatory requirements of the FAR, it should be considered a best practice. The updated SOP
will be routed for clearance in the coming weeks and go into effect on October 1, 2023.
Recommendation 3: Determine the total amount of overpayments paid to Highlight
Technologies LLC due to using D.C. labor rates and pursue any applicable remedies to recover
costs.

Response: Disagree

Explanation: The DC labor rate was negotiated in good faith by the Contractor and
Government Contracting Officer and was within the GSA approved rate range for the Contractor.
The COVID emergency moved the vast majority of Federal contractors to a remote work posture
and displaced millions across the country from their onsite offices nearly overnight. In general
contractors were not allowed to report to a physical office location. Due to this historic and
evolving emergency, there was not time to track and reconcile locations where contractor’s
personnel were remotely logging in from in support of statement of work tasks. The Contracting
Officer made a determination for expediency and in the best interest of the program that paying
one location rate for the Washington D.C. area was an acceptable solution in response to this
once in a 100-year emergency. Additionally, there is no business or legal case to claim there was
an "overpayment" to Highlight nor precedent for recouping a mutually agreed to and contracted
for location rate, even if in hindsight there might be questions on the Contracting Officer’s initial
business decision now that we are in a more stable post-Pandemic environment.

Action: None

Recommendation 4: Evaluate all call orders issued under the Highlight blanket purchase
agreement for compliance with the Limitation on Subcontracting (LoS) Rule per 13 CFR § 125.6
and pursue any applicable remedies.

Response: Partially Agree

Proposed Action: After consulting with the Office of General Counsel, we believe compliance
with the LoS should be made at the BPA level versus at each individual BPA Call-Order. The
Contracting Officer will examine compliance at the BPA level and report any violations of the
LoS to OIG who would have the authority to then pursue monetary remedies through the
Department of Justice.


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