A recent INPUT blog discussed the advantage that small businesses within the Washington DC area have for winning federal contracting dollars. It turns out that not all of those small businesses are on the up and up.

Recent GAO testimony identified substantial deficiencies in SBA's application and monitoring process, specifically as it relates the HUBZone program (designed to provide opportunities to small businesses in economically depressed areas). HUBZone small businesses raked in about $8 billion in contracting money in FY2007, but some of them were not actually eligible for HUBZone status. GAO asserts that SBA, at least within their area of investigation, failed to verify even the most basic information of small businesses applying for HUBZone certification.

GAO's report highlighted 10 case studies of HUBZone-certified small businesses in the DC metro area that were not eligible, but had earned $105 million in prime federal contracts since 2006. They either had "virtual" principal offices that held no employees and minimal equipment, provided addresses that were not in HUBZones (e.g., McLean, VA was not in a HUBZone the last time I checked), or failed the employee HUBZone residency requirement. In a scenario rivaling Dateline NBC's "To Catch a Predator," GAO investigators also set up four phony small businesses and submitted applications to SBA for HUBZone status. They created bogus employees, addresses, and documentation, and in all cases their applications were approved within weeks. One of the addresses belonged to a Starbucks located in a HUBZone, and two others were rented P.O. boxes (which as explicitly disallowed according to SBA's own rules).

This is disheartening for the thousands of eligible and legitimate small businesses struggling to find federal opportunities. Organizations like the American Small Business League work to prevent fraud and abuse when it comes to size certifications and improper government awards, but perhaps they should widen the net to include companies among their own ranks that are claiming special status unfairly.

Interestingly, the Small Business Administration is tasked with monitoring and tracking federal agencies' small business contracting, but it seems that some of that monitoring and tracking needs to be directed internally.