21 2020 Small Business Administration Office Of Inspector General Small Business Administration S Implementation Of The

Summary

An audit report of the Department of Energy Office of Inspector General titled "Small Disadvantaged Business Program at the Chicago Operations Office," dated January 1999 and transmitted by a memorandum of January 25, 1999 to the Acting Manager of the Chicago Operations Office. The report finds that the office did not provide the maximum practicable opportunity for small disadvantaged businesses to participate in contract awards: as of June 1998 it had 12 open contracts with firms in the 8(a) Program with total estimated costs of $41.2 million, of which only 3, valued at $23.0 million, were awarded competitively. It states that changes to the terms of two procurements reduced anticipated costs below the $3 million competitive threshold, describing one estimate cut to $2,904,508 and another contract awarded for $2,956,380. It makes three recommendations; management did not concur.

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SMALL DISADVANTAGED
BUSINESS PROGRAM AT THE
CHICAGO OPERATIONS OFFICE

JANUARY 1999

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MASTER

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mendation, or favoring by the United States Government or any agency thereof.
The views and opinions of authors expressed herein do not necessarily state or
reflect those of the United States Government or any agency thereof.

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DEPARTMENT OF ENERGY
Washington, DC 20585

January 25, 1999

MEMORANDUM FOR THE ACTING MANAGER, CHICAGO OPERATIONS OFFICE

FROM: Terry L. Brendlinger, Manage _.
Eastern Regional Audit Offi 0)

Office of Inspector General

SUBJECT: INFORMATION: Audit Report on “Small Disadvantaged Business Program
at the Chicago Operations Office”

BA R

The Small Business Act (Act) requires that small business concerns owned and controlled by socially
or economically disadvantaged individuals have the maximum practicable opportunity to participate
in contracts awarded by any Federal agency. Section 8(a) of the Act establishes a program that
authorizes the Small Business Administration (SBA) to enter into contracts with other agencies and
award subcontracts for performing those contracts to firms enrolled in the 8(a) Program directly to
the agencies. Contracts are to be awarded competitively if the anticipated award price of the contract
will exceed $3 million and at least two responsible 8(a) firms could submit offers.

The objective of the audit was to determine whether the Chicago Operations Office (Chicago) was
providing the maximum practicable opportunity for small disadvantaged businesses to participate in
contract awards. ,

RE TS OF AUDIT

Chicago did not provide the maximum practicable opportunity for small disadvantaged businesses to
participate in contract awards. Chicago had 12 contracts with small disadvantaged businesses in June
1998, nine of which were awarded non-competitively. Full and open competition among eligible
small disadvantaged firms is essential if one of the most important goals of the program, to achieve
the "maximum practicable opportunity," is to be satisfied. Consistent with this goal, the
Department's objective should be to cast a "wide net" to ensure that eligible firms are: (1) aware of
Departmental procurement opportunities for small disadvantaged firms and (ii) given an opportunity,
in a competitive environment, to fully participate in such procurement activities. The approach taken
at Chicago, as disclosed by this audit, in essence, discouraged maximum opportunity.

We also found that changes to the terms and conditions of two of the procurements suggest that
adjustments were made to reduce the total anticipated costs to a level below the competitive
threshold, allowing the contracts to be awarded without competition. This condition existed because
Chicago did not require acquisition personnel to comply with all requirements of the Act.

As a result, the goal of the 8(a) program was not fully achieved at Chicago. Further, because of the
lack of competition, the Department may have paid more than necessary for services provided by
some 8(a) firms. We recommended that the Chicago Acquisition and Assistance Group establish a

policy to (1) require acquisition personnel to comply with the "maximum practicable opportunity"
requirements of the Act; (2) prohibit acquisition personnel from modifying the terms or conditions of
8(a) procurements to reduce cost estimates and avoid the requirement to seek competitive bids; and

(3) require acquisition personnel to seek competitive bids instead of awarding follow-on contracts to
incumbent contractors on a sole-source basis.

MANAGEMENT REACTION

SMALL DISADVANTAGED BUSINESS PROGRAM AT THE
CHICAGO OPERATIONS OFFICE

TABLE OF
CONTENTS

Overview
Introduction and Objective ............. cc eeeecceceessceceesetseteeesssneeees 1
Conclusions and Observations. .................ccccecccccccceseeeceeceeececeues 1

Maximum Practicable Competition

Details Of Finding ........... ccc ecccccsesececeesesssecesestseeseeeestsceseneesss 3
Recommendations and Comments ................cc.cccccccececucceesccesees 6
Appendix

Scope and Methodology .................c.ccceeeccceeeeeeceeseseeeseesereererseenea

Overview

INTRODUCTION AND
OBJECTIVE

CONCLUSIONS AND
OBSERVATIONS

Section 8(a) of the Act establishes a program that authorizes the SBA to
enter into contracts with other agencies and award subcontracts for
performing those contracts to firms eligible for program participation.
The SBA has delegated the authority to contract with firms enrolled in
the 8(a) Program directly to the agencies. Contracts are to be awarded
competitively if the anticipated award price of the contract will exceed
$3 million and at least two responsible 8(a) firms could submit offers.

The Office of Inspector General performed audits of the Small
Disadvantaged Business Program at five management and operating
contractors in FY 1994.’ The audits disclosed that none of the
contractors fully met the intent of the Act and implementing regulations.
The contractors awarded some subcontracts to firms of questionable
program eligibility. Also, two of the contractors concentrated awards
among a limited number of small disadvantaged businesses, and used
procurement practices that precluded opportunities for many small
disadvantaged businesses to participate.

The objective of this audit was to determine whether Chicago was
providing the maximum practicable opportunity for small disadvantaged
businesses to participate in contract awards.

Chicago did not provide the maximum practicable opportunity for small
disadvantaged businesses to participate in contract awards. Chicago had
twelve 8(a) contracts with small disadvantaged businesses in June 1998,
and only 3 were awarded on a competitive basis. Also, changes to the
terms and conditions of two of the procurements suggest that
adjustments were made to reduce the total anticipated costs to a level

' Audit of Administration of the Department of Energy's Small Disadvantaged Business
Program (Report DOE/IG-0364, December 1994)

Page 1

Small Disadvantaged Business Program
at the Chicago Operations Office

below the competitive threshold, allowing the contracts to be awarded
without competition. This condition existed because Chicago did not
require acquisition personnel to comply with all requirements of the Act.
As a result, the goal of the 8(a) Program was not fully achieved at
Chicago, and the Department may have paid more than necessary for
services provided by some 8(a) firms.

The audit identified an issue that management should consider when
preparing its yearend assurance memorandum on internal controls.

eof Ansel Huwrak

Office of Inspector General

Small Disadvantaged Business Program
at the Chicago Operations Office

Maximum Practicable Competition

Three of Twelve
Contracts Were
Awarded ona
Competitive Basis

As of June 1998, Chicago had 12 open contracts with small
disadvantaged businesses enrolled in the 8(a) program with total
estimated costs of $41.2 million. Only 3 of the contracts, valued at
$23.0 million, were awarded on a competitive basis. The other

9 contracts were awarded as sole-source procurements with estimated
costs below the $3 million threshold requiring competition.

Chicago awarded one-third of its 8(a) contracts at amounts minimally
below the threshold requiring competition (between $2,900,000 and
$2,999,999). Further, Chicago had a higher percentage of 8(a)
contracts minimally below the competitive threshold than any other
operations office or Headquarters procurement activity. Overall, less
than 6 percent of the Department's 8(a) contracts awarded by
Headquarters and the other 7 operations offices were valued between
$2,900,000 and $2,999,999. A summary of the procurement
organizations and their percentages of 8(a) contracts minimally below
the competitive threshold follows.

Total Between
Procurement Total 8(a) $2,9000,000 & Percent in
Activity Contracts $2,999,999 Range

Headquarters

Albuquerque

Oak Ridge

Idaho

Chicago

Nevada

Oakland

Richland

Savannah River

Chicago's percentage was more than twice that of any other
procurement office, and more than five times the average for the other
offices.

Additionally, 3 of the 4 contracts valued between $2,900,000 and
$2,999,999 were awarded as follow-on contracts to firms that had

Details of Finding

Contract Values Were
Reduced to Avoid
Competition

performed similar work for slightly more or less than $3 million in
the previous contracts. The contract files did not document any
effort to obtain competition for the award of the current contracts,
even though 2 of the 3 previous contracts exceeded $3 million. The
following schedule shows the estimated contract values for the
current and previous contracts and the current estimates to complete
or open obligations for the previous contracts:

Current Contract Previous Contract
Contract Estimated Estimated Current
Number Amount Amount Value
1 $2,994,815 $2,989,108 $3,134,107
2 $2,904,508 $2,957,789 $2,466,768

The previous contracts for Numbers 1 and 2 were awarded by the
Headquarters procurement organization. The Headquarters program
offices requested that Chicago award the follow-on contracts to the
incumbent firms. However, limiting the award of 8(a) contracts to
incumbent firms provides no opportunity for other 8(a) firms to
compete for the contracts.

Changes to the terms and conditions of two of Chicago's
procurements suggest that adjustments were made to reduce the total
anticipated costs to a level below the competitive threshold, allowing
the contracts to be awarded without competition. One contract was
awarded to an incumbent contractor after three Government cost
estimates were prepared and submitted by a Headquarters program
office. The first estimate was for a 3-year term at a cost of

$2.7 million. The program office decided that a 4-year term would
be more appropriate and increased the cost estimate to $3.2 million.
According to the program office’s file, Chicago informed the
program office that the second estimate was too high and needed to
be reduced to an amount below $3 million to allow the award of the
contract, without competition, to the incumbent contractor. The cost
estimate was subsequently reduced to $2,904,508 by lowering the
labor rates and using a lower escalation factor for annual increases.
After the cost estimate was reduced below $3 million, the award was
made to the incumbent contractor without competition from other
8(a) firms.

‘Page 4

Details of Finding

Small Business Act
Requires Maximum
Opportunity for Small
Disadvantaged
Businesses

Chicago Did Not
Enforce the
Requirements of the
Small Disadvantaged
Business Act

The Program Goal Was
Not Fully Achieved, and
the Department May Have
Paid More Than Necessary
for Some 8(a) Contracts

Another contract was awarded in a similar fashion. The program office
requested a cost proposal from the incumbent 8(a) contractor. The
contractor estimated total costs at $4.5 million. Rather than compete
the procurement, Chicago reduced the term of the acquisition by 1 year
and reduced the total cost estimate below $3 million. Afterward, the
award was made to the incumbent contractor for $2,956,380 without
competition.

The Act requires that small business concerns owned and controlled by
socially or economically disadvantaged individuals have the maximum
practicable opportunity to participate in contracts awarded by Federal
agencies, including the Department of Energy. The Congressional
policy implementing the Act requires that Federal agencies ensure a
competitive economic climate that reduces the concentration of
economic resources and expands competition. Section 8(a) of the Act
states that contracts are to be awarded competitively if at leasttwo
responsible 8(a) firms submit offers and the anticipated price of the
contract is expected to exceed $3 million.

Chicago did not require its acquisition personnel to comply with the
"maximum practicable opportunity" requirements of the Act. Chicago
had an internal review process for Small Disadvantaged Business
Program procurements. However, the review process did not identify
any procurements where the terms and conditions were modified to
reduce costs below the $3 million threshold.

As a result of these conditions, Chicago did not fully achieve the goal
of the Small Disadvantaged Business Program, and the Department
may have paid more than necessary for the services provided by some
8(a) firms. Chicago exceeded its goal of awarding 15 percent of its
contracts to small disadvantaged businesses. However, Chicago did not
give small disadvantaged businesses the maximum practicable
opportunity to participate in contract awards. Further, the Department
may have paid more than necessary for the services provided by some
8(a) firms because the contracts were awarded without the benefit of
competition. Had Chicago sought competitive bids instead of awarding
contracts to incumbents or sole sources on the basis of a single bid, the
competitive forces of the market place might have resulted in lower
prices for the Department.

Page 5

Details of Finding

RECOMMENDATIONS

MANAGEMENT REACTION

AUDITOR COMMENTS

We recommend that the Acting Manager, Chicago Operations Office,
direct the Acquisitions and Assistance Group to establish policy to:

1. Require acquisition personnel to comply with the “maximum
practicable opportunity” requirements of the Act,

2. Prohibit acquisition personnel from modifying the terms or
conditions of 8(a) procurements to reduce cost estimates and avoid
the requirement to seek competitive bids, and

3. Require acquisition personnel to seek competitive bids instead of
awarding follow-on contracts to incumbent contractors on a sole-
source basis.

Management did not concur with the finding or recommendations,
stating that the two examples in the report show Chicago did an
outstanding job in negotiating fair and reasonable prices. Management
stated that Chicago used cost proposals as the basis for negotiating
prices that were in the Government's best interest rather than reducing
estimates below the threshold for competition. Also, management
stated that Chicago is frequently approached by various Headquarters
program offices to handle their small, support-service type
agreements, thereby contributing to a higher percentage of 8(a)
contracts awarded at lower dollar levels.

We disagree with management's statement that the procurements in the
examples were negotiated in the Government's best interest. A
fundamental policy of Federal procurement is that competition is to be
obtained whenever practicable. Further, it is the responsibility of the
contracting officer to make every possible effort to obtain competition
in negotiated contracts. Had Chicago accepted the terms and
conditions of the procurements discussed in the report without regard
to the $3 million threshold, the procurements could have been
competed and the Government's best interests would have been fully
protected.

We recognize that Headquarters program offices frequently request
that Chicago handle their small, support-service type agreements. This
probably accounts for the frequency of contracts awarded for less than
$3 million at Chicago. However, it does not account for the high
percentage of 8(a) contracts awarded at prices between $2.9 million
and $3 million.

Page 6

Recommendations and Comments
Appendix 1

SCOPE

METHODOLOGY

The audit was performed at the Chicago Operations Office and
Headquarters program offices located in Washington, D.C., and
Germantown, Maryland, between June 30, 1998, and October 20, 1998.
The audit covered small disadvantaged business contracts in effect as of
June 15, 1998.

To accomplish the audit objective, we:
e Reviewed the requirements of the Small Business Act,

e Evaluated Federal and Departmental regulations concerning the
award of contracts to small disadvantaged businesses,

e Reviewed procureiment files maintained by Chicago’s
Acquisition and Assistance Group for contracts awarded to
small disadvantaged businesses, and

e Interviewed Chicago procurement personnel and Headquarters
program office personnel associated with 8(a) contracts at
Chicago.

The audit was conducted in accordance with generally accepted
Government auditing standards for performance audits, and included
such tests of internal controls and compliance with laws and regulations
to the extent necessary to satisfy the objective of the audit. Because our
review was limited, it would not necessarily have disclosed all internal
control deficiencies that may have existed at the time of our audit. We
placed minimal reliance on computer generated data, and validated
such data when possible.

Page 7

Scope and Methodology

IG Report No. ER-B-99-02

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21 2020 Small Business Administration Office Of Inspector General Small Business Administration S Implementation Of The

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