SBA to scrutinize HUBZone businesses

The Small Business Administration plans to add powers to its online Historically Underutilized Business Zones (HUBZone) registration system in an effort to prevent abuse.

The move came after SBA's inspector general examined 15 Idaho HUBZone companies and found that 11 of them were either out of compliance with the program or appeared to be out of business entirely.

HUBZone companies are entitled to some small- business set-asides. To qualify, a company must draw at least 35 percent of its workforce from a HUBZone and have its principal office in the zone. SBA urges federal agencies to spend at least 3 percent of their contracting dollars with HUBZone companies.

SBA officials hope to design new software modules that will help identify potential fraud cases and put additional scrutiny on companies applying to continue their HUBZone status, said Michael McHale, the program's associate administrator. The new modules could take up to a year to implement, he said.

In addition, SBA plans to re-examine the application process and find ways to put a larger magnifying glass on first-time applicants, McHale said. For example, "rather than just asking for the number of employees a company has and how many reside in the HUBZone, we'll ask who those employees are, get more detail," he said.

SBA also plans a rule change to require companies to recertify their status every three years, McHale said. Under the current HUBZone rule, companies are required to report changes in their status when they occur, a system that depends on the businesses being scrupulous. SBA also can require periodic recertification in specific cases.

The agency also looks to the vendor community to enforce the rules and report firms that may be in violation, he added. "We encourage companies to be vigilant and watch who is bidding on HUBZone contracts."

The program has been successful in signing up companies — SBA listed 7,555 HUBZone firms as of Jan. 21 — but not as effective in getting agencies to notice them. Agencies spent only 0.72 percent of their contracting funds with HUBZone firms in 2001, when the goal was 2 percent. However, that still meant $1.7 billion in contracts for companies that might have had nothing otherwise, McHale said.

"The challenge now is getting contract support from the agencies," he said. "The more contract dollars we can pump into the firms, the more jobs we can create and maintain in the communities."

The automation may not solve the problem, however, consultant Rob- ert Guerra cautioned. There are too many companies and too few federal workers to monitor them, he said, and SBA, like most agencies, is suffering from years of federal downsizing.

"If I'm going to downsize and eliminate jobs, but I want to continue the agency mission, I haven't seen an investment in how to do that," he said. "You can only stretch resources so far."

McHale said SBA called the IG's attention to the cluster of Idaho companies when his team noticed that several of them were listing employees in the same small geographic area, a "red flag." The IG found that of 15 firms, seven no longer met the workforce residency requirement and one had relocated its headquarters outside the HUBZone. Three had inactive addresses and telephone numbers, and the IG's office assumed they were out of business.

McHale decertified nine of the companies as soon as the report was filed in January and later decertified the remaining two after concluding they were not going to return to HUBZone status.

He has until late July to file a formal plan with the IG's office.

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Making the list

Small businesses must meet several criteria to qualify for the Small Business Administration's Historically Underutilized Business Zones (HUBZone) contracts:

* Their principal offices must be in one of the HUBZones, which include 7,000 urban census tracts in 900 rural counties and on every federally recognized Native American reservation.

* At least 35 percent of their employees must reside in a HUBZone.

* The firm must also be completely owned and controlled by U.S. citizens.

Contracts reserved for HUBZone firms can be awarded through competition limited to qualified HUBZone firms or on a sole-source basis. Another option allows contracting officers to give firms a price preference in bidding open to non-HUBZone firms.