What Does it Take to Enter SBA's 8(a) Business Development Program

GSA recently announced that it had added approximately 500 qualified industry partners to its GSA 8(a) STARS II Government-wide Acquisition Contract (GWAC). The 8(a) STARS II GWAC is a multiple-award, indefinite-delivery/indefinite-quantity (ID/IQ) contract engineered to provide federal agencies flexible sources of IT services and IT services-based solutions including computer programming services, computer systems design services, computer facilities management services, and other computer related services.

To gain entry to the 8(a) BD Program, a business entity must be unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of “good character,” are citizens of the United States, and who can demonstrate the potential for business success (see 13 C.F.R. § 124.101). A socially disadvantaged individual is someone who has been “subjected to racial or ethnic prejudice or cultural bias within American society.” (see 13 C.F.R. § 124.104(a)). An economically disadvantaged individual is a socially disadvantaged individual whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to non-socially disadvantaged competitors in the same or similar line of business.

When determining economic disadvantage, the SBA considers the personal financial condition of the person claiming disadvantaged status, including income from the past three years, personal net worth, and the fair market value of all assets (see 13 C.F.R. § 124.104(c)). An individual with a personal net worth of more than $250,000 is not considered economically disadvantaged. When calculating net worth, the SBA excludes the ownership percentage in the applicant company, and the equity in the owner's primary personal residence. Funds invested in an official retirement account are also excluded from the net worth calculation, as is income from the applicant company that is reinvested in the company or used to pay the company's normal taxes.

ORB Solutions Inc. (OSI) was denied admission into the 8(a) business development program because the owner of the company was not economically disadvantaged. The principle, Ms. Gupta's net worth exceeded $250,000. It wouldn't have exceeded $250,000 had it not been for the fact that OSI made a $132 thousand dollar loan to Ms. Gupta. And since Ms. Gupta was the sole owner of OSI, the SBA concluded that there was no assurance that Ms.Gupta would enforce the terms of the loan to herself - that and the fact that there was no formal loan agreement. So then the loan becomes an asset rather than a liability.

Owners of closely held companies often commingle their personal and company finances but an application for admission into the 8(a) business development program will open both personal and company finances to audit and a lot of scrutiny. The SBA is well aware of and on the lookout for firms and owners attempting to hide assets in order to qualify for the program.

SBA Cutting Corners to Sign Up New "8(a)" Business Development Firms

The Small Business Administration (SBA) 8(a) business development program provides economically and socially disadvantaged, small business owners with business development assistance and preference-based Federal contracts. The SBA has established stringent eligibility criteria for entrance into the program including (i) American citizenship, (ii) majority owned controlled and managed by socially and economically disadvantaged individuals, (iii) a potential for success, and (iv) showing good character. From January through May 2015, the SBA approved 249 firms applications for the 8(a) program.

The SBA's Office of Inspector General (OIG) recently published an audit report on its assessment of whether the 8(a) applicants met the SBA's eligibility criteria for the program. The results were not encouraging. Of the 249 firms approved for the 8(a) program, the OIG selected 48 of them to determine whether they qualified. Of the 48 selected, reviewers recommended not approving 46 of them because the firms did not meet one or more criteria for eligibility. These concerns included potential for success, economic disadvantaged, whether the disadvantaged individuals exerted control of the company among others. In two cases, the reviews questioned whether the applicants demonstrated good character. Some of the applicants approved were previously rejected by SBA.

Not to be undone, the director of the Office of Certification and Eligibility (OCE) and the Associate Administrator for Business Development (AA/BD) gathered  additional information for 18 of the 46 firms and based on this information, approved the 18 firms for entrance into the 8(a) program. However, for the remaining 28 firms (or 30 firms if you trust the OIG's math), the AA/BD approved the firms without documenting how the areas of concern raised by lower-level reviewers were resolved. As a result, the OIG concluded that it was not clear whether those 28 firms (or 30 firms) should have been approved into the 8(a) program.

The OIG noted that during the past year within SBA, the 8(a) program has experienced a change in leadership, identified an aggressive growth plan for the coming years, began testing a streamlined application process, and shifted responsibilities for continuing eligibility reviews. This new emphasis on expanding the program most likely contributed to the management override of lower-level concerns and recommendations.

The OIG recommended that the SBA improve its documentation of 8(a) eligibility. The SBA, of course, concurred, promising to do a better job of documenting applicants' qualifications.

You can read the entire OIG report here.