On Nov. 6, the U.S. Department of the Treasury (Treasury) announced a comprehensive, department-wide audit of all contracts and task orders awarded under preference-based contracting programs. Treasury specifically cited contracts awarded under the Small Business Administration’s (SBA) 8(a) Business Development Program (8(a) Program) and the “use of contracting preferences that fall outside normal procurement rules [that] may have enabled large companies to use pass-through arrangements where an eligible small business retains fees for minimal participation, while subcontracting nearly all work.”
8(a) Program Background
The 8(a) Program, authorized under the Small Business Act, 15 U.S.C. §§ 636(j)(1) and 637(a), allows eligible businesses to efficiently compete and receive set-aside and sole-source federal contracts, among other benefits. To qualify for the 8(a) Program, businesses must:
- Be a small business, as defined by reference to SBA’s size standards and North American Industry Classification System codes;
- Not have previously participated in the 8(a) Program;
- Be at least 51% owned or controlled by U.S. citizens who are socially and economically disadvantaged;
- Have a net worth of $850,000 or less, an adjusted gross income of $400,000 or less, and assets totaling $65 million or less;
- Demonstrate good moral character; and
- Demonstrate the potential for success, such as having been in business for two years.
Businesses owned by Alaska Native corporations, community development corporations (CDCs), Native American tribes and Native Hawaiian organizations are also eligible for the 8(a) Program. 8(a) Program certifications last for a maximum of nine years, with the first four years considered a development stage and the last five years considered a transitional stage. Continuation in the program is dependent on staying compliant with all program requirements.
The Department-Wide Investigation
Treasury cited the recent investigation and rapid government-wide suspension of ATI Government Solutions as one basis for its broad investigation. The government alleges that ATI, an 8(a) Program participant owned by a Native American tribe, acted as a pass-through entity and outsourced the majority of its work to contractors. On Oct. 20, the SBA Administrator posted her belief, on X, that the 8(a) Program “is rife with grift and fraud” and announced that SBA “launched an audit of the program to review every 8(a) contract for the last 15 years.” The SBA further encouraged whistleblowers to report alleged fraud through an online portal.
Treasury’s broader investigation – of all contracts and awards, department-wide, awarded under any of its preference-based programs – includes directing “acquisition officials to require detailed staffing plans and monthly workforce performance reports for all service contracts.” These efforts, Treasury noted, “will help detect non-performance and pass-through contracting that could point to potential fraud.”
Implications and Key Takeaways
Treasury’s announcement has significant implications for contractors and awardees participating in or supporting preference-based programs. The announcement makes clear Treasury will look beyond initial certifications of eligibility to evaluate continued compliance with program requirements and qualitative matters, such as who is managing and performing work under government awards. Potential consequences can be severe, including criminal charges, civil liability and treble damages under the federal False Claims Act, as well as administrative suspensions and debarments.
Businesses that are applying for or have received awards under preference-based programs should consider the following:
- Check Your Program: Treasury’s investigation will extend beyond the 8(a) Program to encompass other preference-based contracting programs, such as Women-Owned Small Business initiatives, Service-Disabled Veteran-Owned Business initiatives and the HUBZone program.
- Check Your Size: In the enforcement arena – including with respect to eligibility for the SBA’s Paycheck Protection Program loans – the government has been focused on alleged miscalculations of business size. Following the Treasury announcement, businesses receiving federal small business-based loans and benefits should evaluate whether, under program rules: (1) they are or were required to account for affiliates and shared ownership in calculating employee numbers, revenues, adjusted gross incomes and assets; and (2) they continue to qualify as eligible participants as a result of any growth or business acquisitions during the award period.
- Check Your Work: Contractors and awardees must know and meticulously document who is performing and managing work under government awards. Businesses should document compliance and anticipate Treasury may demand those supporting materials, including the detailed staffing plans and monthly workforce performance reports referenced in the Treasury announcement.
