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I
      \
      1
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
           WASHINGTON, D.C. 20460
                           July 22,  1994
                                                           OFFICE OF
                                                       THE INSPECTOR GENERAL
MEMORANDUM

SUBJECT:  Audit Report  Number E1BMF3-05-0018-4100452
          EPA's 8(a)  Contracting Program.
FROM:
TO:
            Elissa R.  Karpf _
            Associate  Assistant Inspector7General
              for Acquisition and Assistance Audits

            Jonathan Z.  Cannon
            Assistant  Administrator for Administration
              and Resources Management

            Leon H.  Hampton, Director
            Office of  Small and Disadvantaged
              Business Utilization
     Attached is  the  final audit report titled EPA's 8(a)
Contracting Program.   Our objectives were to determine if EPA:
(1) complied with the applicable laws,  regulations, and
directives in awarding and amending 8(a)  contracts;  (2) ensured
that initial contract estimates fairly represented the expected
maximum value of  the  contract;  and (3)  adequately directed
efforts to meet the Agency's 8(a)  contracting goals.

     This report  contains findings that describe the results  of
our audit of EPA's 8(a)  Contract Program.  This report represents
the opinion of the Office of the Inspector General  (OIG).   Final
determinations on matters in the report will be made by EPA
managers in accordance with established EPA audit resolution
procedures.  Accordingly,  the findings described in this report
do not necessarily represent the final EPA position.

     The issues in this report  regarding 8(a) contracts awarded
to firms just prior to their graduation from the 8(a) program
(See Chapter 3) are not matters of statutory or regulatory
compliance.  EPA's current practice is within the existing  legal
parameters.  Our  concerns are based on interpretation of
Congressional intent,  appearances of favoritism, and differing
views of organizational responsibilities.  None of these provide

                                                      Recycled/Recyclable
                                                      Printed with Soy/Canol* Ink on paper that
                                                      contain* at toast 50% recyded liber

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 a  firm  foundation  for  resolving  the  differences  of  opinion
 between the Agency and the OIG.  As  a  result,  we believe  Congress
 should  consider  (l)  the appropriateness  of  awarding sole  source
 contracts  to  8(a)  firms immediately  prior to expiration of
 program eligibility and (2) the  role awarding  agencies have  in
 monitoring development of 8 (a) firms with whom they do business.
 To encourage  attention to these  issues,  we  will  distribute this
 audit report  to  Congressional members  and committees responsible
 for overseeing and directing the Government's  small and minority
 business legislation.

     Your  responses to our draft report  are included as
 Appendices I  and II.   Based on those responses and  discussions at
 the,exit conference, we made appropriate changes to this  final
 report,  including  deleting and revising  text and recommendations
 made in the draft  report.

 Action  Required

     In accordance  with EPA Order 2750,  we  have  designated the
 Assistant  Administrator for Administration  and Resources
 Management as the Action Official for  this  report.   The Action
 Official is required to provide this office with a  written
 response to the  audit  report within  90 days of the  final  audit
 report  date.  For  corrective actions planned,  reference to
 specific milestones dates will assist  this  office in deciding
 whether to close this  report.  In addition  please track all
 action  plans and milestone dates in  the  Management  Audit  Tracking
 System.

     We  have no  objections to further  release  of  this report to
 the public.  Should you or your staff  have  any questions
 regarding  this report,  please contact  Charles  Allberry, Audit
Manager, Northern Audit  Division at  (312) 353-4222.

Attachment

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                                             8(a) Contracting
                      EXECUTIVE SUMMARY
PURPOSE

The Environmental Protection Agency's  (EPA) Office of
Inspector General  (OIG) has issued audit reports during the
past two years which examined specific Agency procurement
practices.  These reports questioned the appropriateness of
several awards made to small and disadvantaged firms within
the 8(a) program.  As a result, we conducted an audit focused
on EPA's 8(a) contracting activities.  The objectives of our
audit were to determine if EPA:  (1) complied with the
applicable laws, regulations, and directives in awarding and
amending 8(a) contracts;  (2) ensured that initial contract
estimates fairly represented the expected maximum value of
the contract; and  (3) adequately directed efforts to meet the
Agency's 8(a) contracting goals.
BACKGROUND

The Federal Government's commitment to improving the
opportunities of small and disadvantaged businesses has
evolved through several individual pieces of legislation.

  •   [1958] Public Law 85-536  (Small Business Act) -
     established statutory mandates for Federal assistance to
     small businesses.

  •   [1978] Public Law 95-507  - required portions of Federal
     procurements to be set-aside for small businesses;
     established the Minority  Capital Ownership Program
      (commonly referred to as  the 8(a) business development
     program); and required each Federal agency to establish
     an Office of Small and Disadvantaged Business
     Utilization (OSDBU).

  •   [1988] Public Law 100-656  (Business Opportunity
     Development Reform Act of 1988)  - redefined period of
     8(a)  program participation to nine years; divided
     participation period into a developmental stage  (4
     years) and a transitional stage  (5 years); and required
     competition for contracts above certain dollar limits.

The 8(a) program, as a subset  of the Government's small
business strategy,  is designed to assist small, disadvantaged
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                                              8(a) Contracting
businesses  in becoming  financially competitive through
increased access to Government contracts.   In general,
contracts awarded under the  8(a) program are exempt  from  the
requirements for full and open competition.  Therefore,
within the  8(a) program, EPA can award sole source contracts
to eligible firms.

The Small Business Administration  (SBA) is  responsible for
determining the eligibility  of firms to participate  in the
8(a) program.  In 8(a)  contracts, SBA serves as the  prime
contractor to EPA and,  in turn, subcontracts the work to
firms in the program.   For non-competitive  contracts, SBA
usually delegates the responsibility for negotiating with the
8(a) firm directly to EPA.

In 1979, EPA established its OSDBU under the Office  of the
Administrator.  OSDBU is responsible for:   (I) establishing
small business program  priorities, (2) setting and monitoring
EPA goals for preferential programs,  and (3) analyzing the
extent of small and disadvantaged business  participation  in
EPA acquisition activities.

Each Federal agency has an annual goal to provide a  specific
percentage of its contract dollars to 8(a)   firms.  In fiscal
1992 and 1993, EPA's goal was 8 percent.   During each of
these fiscal years, EPA awarded about 5 percent of its total
contract dollars to 8(a) firms.
RESULTS-IN-BRIEF

EPA complied with applicable laws and regulations in awarding
and amending 8(a) contracts during fiscal 1993.  The Agency's
8(a) contract awards during fiscal 1993 showed an increased
emphasis on detecting and correcting contracting problems
reported in past OIG audits, including developing appropriate
contract estimates.  These improvements helped EPA's 8(a)
program assist small disadvantaged businesses in a more
equitable manner.  However, the practice of awarding
contracts to 8(a) firms just days before the firms' program
eligibility expired was not consistent with the program's
legislative intent and did not serve the overall objectives
of the 8(a) program.

EPA did not meet its fiscal 1992 or 1993 goals for levels of
8(a) contracting.  OSDBU, the Agency's advocate for 8(a)
contractors, was hindered in its efforts to meet these annual
goals by (1) insufficient and untimely contract information,
(2) a lack of Agency-wide accountability for meeting 8(a)


                              ii

                            Report No. E1BMF3-05-0018-4100452

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                                              8(a) Contracting
contracting goals, and  (3) an inefficient organizational
structure.
PRINCIPAL FINDINGS

Increased Attention To Contracting Procedures Improves Recent
8(a) Awards

EPA's 8(a) contract awards during fiscal 1993 showed  (1) a
broader distribution of 8(a) contract awards among eligible
contractors and  (2) an increased emphasis on detecting and
correcting contracting problems reported in past DIG  audits.
These improvements helped EPA's 8(a) program assist small
disadvantaged businesses in an equitable manner.

The General Accounting Office has consistently reported on
the problem of Federal agencies awarding a large portion of
their 8(a) contract dollars to a relatively small number of
firms.  Although contract data showed that EPA's 8(a) awards
had followed this pattern in the past, fiscal 1992 and 1993
awards evidenced a significantly improved distribution of
awards.

In addition, several 8(a)  contracts awarded during fiscal
1991 and 1992 contained examples of contract splitting,
under-valuation, or conflicts of interest.  Each of these
problem areas was addressed in past OIG reports.  In
reviewing fiscal 1993 8(a) awards, we found examples  in which
contracting officials identified potential problems in these
areas and took steps to correct them prior to finalizing the
procurements.
Awards Made In Anticipation Of A^Firrn* s 8 (a) Graduation
Hinder Program Goals

EPA and other Federal agencies have often awarded contracts
to 8(a) firms just days before expiration of the firms'
program eligibility.  SBA has encouraged this practice.
Although such awards meet the legal requirements of the 8(a)
program, the practice:   (1) permits firms to benefit from
sole-source awards for several years after the conclusion of
their statutory 8(a) program eligibility,  (2) does not
encourage 8(a) firms to compete in the open marketplace, and
(3) creates a perception that EPA favors selected
contractors.   Thus, while legal, awarding sole source
contracts to 8(a) firms near the completion of their program
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                            Report No. E1BMF3-05-0018-4100452

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                                             8(a) Contracting
eligibility does not serve the overall objectives of the 8(a)
program.

EPA Must Strengthen OSDBU'sAdvocacy Role If The Agency Is To
AcjiieyeIts 8 (a) Contracting Goal

OSDBU has battled several obstacles in its role as the
Agency's advocate for 8(a) contractors.  These include:   (1)
insufficient and untimely contract information,  (2) a lack of
Agency-wide accountability for meeting 8(a) contracting
goals, and (3) an inefficient organizational structure.  As a
result, EPA did not meet its goal for 8(a) contracting in
either fiscal 1992 or 1993.  If EPA is to meet its
established goals in future fiscal years, it needs to:  (!)
gather more timely and comprehensive information on current
and future 8(a) contracting opportunities,  (2) increase
management accountability for 8(a) goals at all levels, and
(3) improve coordination between OSDBU and the Office of
Administration and Resources Management  (OARM) in directing
and supervising the Small and Disadvantaged Business
Specialists (SDBSs).
RECOMMENDATIONS

We recommend that:

  l. The Assistant Administrator, OARM, and the Director,
     OSDBU, establish a policy requiring their offices to
     concur and provide a written justification for awarding
     8(a) contracts whose base or option periods extend
     beyond the established Program Term of the recipient
     8(a) firm.

 2.  OSDBU review the mix of 8(a) and non-8(a) revenues of
     transitional firms while evaluating potential
     contractors or remove this standard from its existing
     guidance.

 3.  OSDBU develop a multi-year plan which identifies current
     8(a) contract levels and presents a strategy for
     obtaining sufficient future contracts to meet the
     Agency's projected goals.

 4.  The Assistant Administrator, OARM, and the Director,
     OSDBU, develop a method of setting 8(a)  program goals
     for Assistant Administrators, Regional Administrators,
     and Office and Division Directors, as appropriate.
                              IV
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                                             8(a) Contracting
     Also, a mechanism for timely tracking of actual
     achievements needs to be developed and implemented.

 5.  The Assistant Administrator, OARM, and the Director,
     OSDBU, implement procedures that improve the
     coordination between OSDBU and 0AM in directing and
     supervising the SDBSs.  This should, at a minimum,
     include input from the OSDBU Director to the SDBSs
     annual performance standards and evaluation.
AGENCY COMMENTS

The Agency generally agreed with the findings and
recommendations related to (!) improved planning and
information gathering within OSDBU,  (2) increased
accountability within program offices, and  (3) improved
coordination in directing and supervising SDBSs.  The Agency
did not agree with our finding or recommendations concerning
sole source contracts awarded to 8(a) firms near the
completion of their program eligibility.
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                                   8(a)  Contracting
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                   VI





                 Report No. E1BMF3-05-0018-4100452

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                                             8(a) Contracting
                      TABLE OF CONTENTS


                                                         Page

EXECUTIVE SUMMARY                                          i

CHAPTERS

  1 INTRODUCTION                                           1

      PURPOSE                                              1

      BACKGROUND                                           1

      SCOPE AND METHODOLOGY                                3

      PRIOR AUDIT REPORTS                                  4

  2 INCREASED ATTENTION TO CONTRACTING PROCEDURES
      IMPROVES RECENT 8(A)  AWARDS                          7

      IMPROVED DISTRIBUTION OF 8(A)  CONTRACT AWARDS        7

      POTENTIAL CONTRACT UNDERESTIMATION DETECTED
        AND CORRECTED                                      9

      TIMELY IDENTIFICATION AND RESOLUTION OF
        POTENTIAL CONFLICTS OF INTEREST                   11

      CONCLUSION                                          11

      AGENCY COMMENTS                      -               12

  3 AWARDS MADE IN ANTICIPATION OF A FIRM'S 8(A)
      GRADUATION HINDER PROGRAM GOALS                     13

      LEGISLATIVE HISTORY                                 13

      AWARDS AVOIDED LEGISLATIVE INTENT AND DID NOT
        ENCOURAGE OPEN MARKET COMPETITION                 15

      PERCEPTIONS OF FAVORITISM TOWARD INCUMBENT 8(A)
        CONTRACTORS                                       19

      CONCLUSION                                          19

      RECOMMENDATIONS                                     20
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                                              8(a)  Contracting
                TABLE OF CONTENTS  (Continued)


                                                          Page

      AGENCY COMMENTS                                       20

      OIG EVALUATION OF AGENCY COMMENTS                     21

      MATTERS FOR CONGRESSIONAL CONSIDERATION               22

 4   EPA MUST STRENGTHEN OSDBU'S ADVOCACY ROLE  IF THE
      AGENCY IS TO ACHIEVE ITS 8(A) CONTRACTING  GOALS       23

      CURRENT OSDBU ADVOCACY ACTIVITIES                     24

      ADDITIONAL ADVOCACY ACTIVITIES NEEDED TO
         INCREASE 8 £A) CONTRACTING OPPORTUNITIES             25

      LACK OF MANAGEMENT ACCOUNTABILITY  FOR MEETING
        AGENCY 8(A) CONTRACTING GOALS                       27

      EPA'S 8(A) ADVOCACY STAFF ARE NOT  CENTRALLY
        ORGANIZED                                           27

      CONCLUSION                                            28

      RECOMMENDATIONS                                       28

      AGENCY COMMENTS                                       29

      OIG EVALUATION OF AGENCY COMMENTS                     29


APPENDICES

      APPENDIX I:    OSDBU'S RESPONSE TO  OIG DRAFT REPORT    31

      APPENDIX II:   OARM'S RESPONSE TO OIG DRAFT REPORT     33

      APPENDIX III: OIG REVISIONS TO THE FINAL REPORT IN
                    RESPONSE TO OARM'S COMMENTS TO THE
                    DRAFT REPORT                            41

      APPENDIX IV:   ABBREVIATIONS                           43

      APPENDIX V:    RELATED REPORTS                         45

      APPENDIX VI:   DISTRIBUTION                            47
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                                               8(a) Contracting
                            CHAPTER 1

                           INTRODUCTION
  PURPOSE

  The Environmental Protection Agency's  (EPA) Office of
  Inspector General (OIG) has issued audit reports during the
  past two years which examined specific Agency procurement
  practices.1   These  reports questioned the appropriateness
  of several awards made to small and disadvantaged firms
  within the 8(a) program.  As a result, we conducted an audit
  focused on EPA's 8(a) contracting activities.  The objectives
  of our audit were to determine if EPA:   (1) complied with the
  applicable laws, regulations, and directives "in awarding and
  amending 8(a) contracts; (2) ensured that initial contract
  estimates fairly represented the expected maximum value of
  the contract; and (3) adequately directed efforts to meet the
  Agency's 8(a) contracting goals.
  BACKGROUND

  The Federal Government has been committed to improving the
  opportunities of small and disadvantaged. businesses for many
  years.  The methods of meeting this objective have evolved
  through several individual pieces of legislation.

    •   [1958] Public Law 85-536  (Small Business Act) -
       established statutory mandates for Federal assistance to
       small businesses.

    •   [1978] Public Law 95-507 - required portions of Federal
       procurements to be set-aside for small businesses;
       established the Minority Capital Ownership Program
        (commonly referred to as the 8(a) business development
       program); and required each Federal agency to establish
       an Office of Small and Disadvantaged Business
       Utilization (OSDBU).

    •   [1980] Public Law 96-481 - required the establishment of
       program completion dates for all 8(a) firms
     1  Contracting Activities at Environmental Research
Laboratory - Duluth. MN Report No. 2100443  (July 7, 1992)

Contracting Activities at Environmental Research
Laboratory - Athens. GA Report No. 3100156  (March 31, 1993,
revised)

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                                                8(a)  Contracting
        (implementing  regulations  limited  a  firm's participation
        to a maximum of  seven years).

     •   [1988]  Public  Law  100-656  (Business  Opportunity
        Development Reform Act of  1988)  -  redefined period  of
        8(a) program participation to nine years; divided
        participation  period into  a developmental stage  (4
        years)  and a transitional  stage  (5 years); and required
        competition for  contracts  above  certain dollar limits.

  The 8(a) program is a subset of the Government's small
  business strategy.  The 8(a) program  is designed to assist
  small, disadvantaged  businesses in becoming financially
  competitive  in the  open market.   This assistance is provided
  through increased access to Government  contracts.  In
  general, contracts  awarded under the  8(a) program are exempt
  from  the full and open  competition requirement of the
  Competition  in Contracting Act  (Public  Law 98-369, July  18,
  1984).2  Therefore,  within the 8(a)  program,  EPA can award
  sole  source  contracts to eligible firms.

  The Small Business  Administration  (SBA) is responsible for
  determining  the eligibility of  firms  to participate in the
  8(a)  program.  When EPA awards  an 8(a)  contract, SBA acts as
  the prime contractor  and enters into  a  contract with EPA.
  SBA,  in turn, subcontracts the  work to  firms in the program.
  If the proposed contract is below the threshold for
  competition, SBA can, and usually does, delegate the
  responsibility for  negotiating  with the 8(a) firm directly to
  SPA.

  In 1979, EPA established its OSDBU under  the Office of the
  Administrator.  OSDBU is responsible  for:   (1) establishing
  small business program  priorities,  (2)  setting and monitoring
  EPA goals for preferential programs,  and  (3) analyzing the
  extent of small and disadvantaged business participation in
  EPA acquisition activities.

  Each  Federal agency has an annual goal  to provide a specific
  percentage of its contract dollars to 8(a) firms.  In fiscal
  1992  and 1993, EPA's  goal was 8  percent.  During each of
  these fiscal years, EPA awarded about 5 percent of its total
  contract dollars to 8(a) firms.
     2 8(a)  contracts for manufacturing services valued at more
than $5 million and other services valued at more than $3 million
must be competed among eligible 8(a) firms.
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                                              8(a) Contracting
 In  1992 the DIG  issued a report  (Report No.  2100443)  critical
 of  EPA's contracting practices related to awards made to an
 8(a) contractor  at an Office of Research and Development
 laboratory.   In  response to this audit report, EPA's  Office
 of  Acquisition Management  (OAM)3 conducted a review of EPA's
 8(a) contracts.  The resulting report explored three  areas of
 concern:   (1) awards to former EPA employees during fiscal
 1988 to 1992,  (2) sole source contracts which were
 underestimated or split to avoid competition, and  (3) the
 appropriateness  of all contracts awarded to  the 8(a)  firm
 cited in the  OIG audit report.  OAM's report concluded that
 other than the contracts awarded to one firm, EPA did not
 appear to be  vulnerable in the selection and award of its
 8(a) contracts.
SCOPS AND METHODOLOGY

Our audit focused on EPA's 8(a) contracting activities
between October 1, 1990, and September 30, 1993.  We were
specifically interested in whether contracting problems which
had been reported in previous OIG audits were common and
continuing within the 8(a) program.  To test EPA's compliance
with applicable 8(a) laws and regulations, we obtained,
reviewed, and analyzed data on current and past 8(a) contract
awards from EPA's Contract Information System  (CIS).  We also
reviewed contract files for a judgmental sample of 8(a)
contract awards made by OAM during our audit period.  We
examined procurement requests, contractor proposals, award
documents, and related correspondence.

To ensure that initial contract estimates fairly represented
the expected maximum value of the contract, we calculated the
maximum potential contract value and compared it to the
initial Government estimate.

To determine whether EPA adequately directed efforts to meet
8(a) contracting goals, we reviewed the process for awarding
8(a) contracts, including OSDBU's procedures to monitor and
attain the Agency's 8(a) program goal.  We interviewed EPA
employees involved in the development of specific procurement
requests and the subsequent procurement actions, OSDBU staff,
and small business specialists in the contracting offices.
We also reviewed SEA reports regarding OSDBU's monitoring of
the small business program.
   3  Formerly the Procurement and Contracts Management Division
            v
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                                              8(a) Contracting
We reviewed OSDBU and OAM Annual Reports on Management
Controls.  OSDBU's report did not identify any material
weaknesses in the 8(a) program.  In 1992, OAM reported that
procurement and contract management was a material weakness.
OAM also reported that during fiscal 1992 its personnel had
spent many hours supporting the efforts of the Standing
Committee on Contracts Management in analyzing contract
management shortcomings.

We performed our audit in accordance with the Government
Auditing Standards issued by the Comptroller General  (1988
Revision).  We obtained our statistical data from EPA's CIS,
but the data were not an integral part of this audit and its
reliability was not crucial to accomplishing the objectives
of the audit.  Accordingly, we did not test or evaluate the
adequacy of manual or automated controls for CIS or the
validity of the data maintained in the system.  Therefore, we
cannot and do not attest to the accuracy or integrity of CIS
data used in this report.

We conducted our audit between July 1, 1993, and April 18,
1994.  We discussed our position papers with OSDBU and OAM
officials in Washington on April 6, 1994, and April 7, 1994,
respectively.  On May 12, 1994, we issued our draft report to
the Assistant Administrator, Office of Acquisition and
Resources Management  (OARM), and the Director, OSDBU.  OSDBU
responded on May 31, 1994, and OARM on June 23, 1994,  (see
Appendices I and II).  We held an exit conference with OSDBU
and OAM officials on July 6, 1994.  Based on their responses
and discussions at the exit conference, we made appropriate
changes for this final report, including deleting and
revising text and recommendations made in the draft report
(see Appendix III).
PRIOR AUDIT REPORTS

Over the past three years, the OIG has issued reports
regarding EPA's contract procurement practices related to
various Office of Research and Development laboratories.
Several of the reports identified similar problems in
awarding and managing 8(a) contracts.  For example, in 1992
the OIG reported  (Report No. 2100143) that an 8(a) contract.
was inappropriately split to avoid the competitive
requirements of the Business Opportunity Development Reform
Act of 1988.  In 1993, the OIG reported  (Report Nos. 31000156
and 3100236) similar problems at other EPA facilities.
                              4

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                                             8(a) Contracting
In 1992, the General Accounting Office  (GAO) issued a report
to SBA addressing problems in restructuring the Minority
Business Development Program, including the 8(a) program.
The report showed that distribution of 8(a) contract awards
has been a long-standing problem in the program.  GAO
reported that 2 percent of the firms in the program received
40 percent of the contracts awarded in fiscal 1990.
                              5

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                                   8(a)  Contracting
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                                              8(a) Contracting
                          CHAPTER 2

         INCREASED ATTENTION TO CONTRACTING PROCEDURES
                 IMPROVES RECENT 8(A) AWARDS
EPA's 8(a) contract awards during fiscal 1993 showed  (1)  a
broader distribution of 8(a) contract awards among eligible
contractors and  (2) an increased emphasis on detecting and
correcting contracting problems reported in past OIG  audits.
These improvements helped EPA's 8(a) program assist small
disadvantaged businesses in an equitable manner.

GAO has consistently reported on the problem of Federal
agencies awarding a large portion of their 8(a) contract
dollars to a relatively small number of firms.  Although
contract data showed that EPA's 8(a) awards had followed  this
pattern in the past, fiscal 1992 and 1993 awards evidenced a
significantly improved distribution of awards.

In addition, several 8(a) contracts awarded during fiscal
1991 and 1992 contained examples of contract splitting,
under-valuation, or conflicts of interest.  Each of these
problem areas was addressed in past OIG reports.  In
reviewing fiscal 1993 8(a) awards, we found examples  in which
contracting officials identified potential problems in these
areas and took steps to correct them prior to finalizing  the
procurements.
IMPROVED DISTRIBUTION OF 8(A) CONTRACT AWARDS

In fiscal 1992 and 1993, EPA showed a significant improvement
in distributing its 8(a) awards to a large number of eligible
contractors.  This trend furthered the 8(a) program goal of
providing the maximum number of eligible contractors with
access to Agency contracts.

One of the primary goals of the 8(a) program is to develop a
large number of small disadvantaged businesses.
Historically, however, the Federal Government has focused its
8(a)  contract awards in a small group of firms.  GAO has
described this practice as "a long standing phenomenon."
According to a 1981 GAO report, on average, the top 50 8(a)
firms annually received about 31 percent of all contract
awards over a previous 12-year period.  In 1987, the top 50
firms received about $1.1 billion, or about 35 percent of the
8(a)  contract awards.  In 1990, the top 50 firms received
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                                             8(a) Contracting
$1.5 billion, or about 40 percent of the total  8(a) contracts
awarded.

EPA's 8(a) program showed the same historical pattern as
other Federal agencies.  From fiscal 1986 through 1990, EPA
awarded 267 8(a) contracts to a total of 138 contractors.
However,  109 of these awards, or almost 41 percent, were
awarded to only 12 contractors.  These 12 contractors
received  $333,193,878, or 45 percent, of the total contract
value awarded during this 5-year period.  Each  of these
contractors received from 5 to 19 separate 8(a) contracts
during this five year period.

Over each of the last three fiscal years, EPA has steadily
increased the portion of its 8(a) contract dollars awarded to
first time recipients and reduced the percentage of contract
dollars awarded to companies with prior 8(a) awards.

      Analysis  of  Sole Source  8(a)  Contract Recipients
      Grouped by # of Prior EPA 8(a) Contracts  Received
                      Within  Fiscal  Year
Contacts
Received
by
Recipient
in Prior
FYs
0
1
2
3
4 or mote

FY91
%of
H of Tool Value Total
Contractors of Contracts Value
19 $15,984,019 32%
8 16,006,820 32%
0 00%
0 00%
4 18,261.344 36%
31 $50,252,183 100%
Mote: Competitive 8^a) awards were excl
over the selection of an award red
FY92
%of
H of Tola! Value Total
Contractors of Contracts Value
9 $14,684,203 54%
7 5,546,836 20%
1 2,097,268 8%
0 00%
3 4.917.365 18%
20 $27,245,672 100%
FY93
%of
# of Total Value Total
Contractors of Contracts Value
21 $28,571,813 63%
4 7,820,866 17%
1 143,856 0%
2 3,702,347 8%
2 5.041.882 11%
30 $45,280,764 99%
uded from this analysis since EPA does not exert direct influence
pient.
In fiscal 1991, EPA awarded 36 percent of its 8(a) contract
dollars to contractors who already had received four or more
8(a)  awards from EPA.  This figure improved to 18 percent in
fiscal 1992 and to 11 percent in fiscal 1993.  At the same
time, EPA has increased the value of 8(a) awards it has made
to contractors with-no prior EPA 8(a) contracts from 32
percent in fiscal 1991 to 54 percent in fiscal 1992 and to 61
percent in fiscal 1993.

OSDBU recently stressed the importance of continuing this
improvement.  The OSDBU Director wrote, in a memorandum to
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                                                8(a)  Contracting
   the  Director  of  the  Contract Management Division  (CMD)  at
   Research Triangle  Park  (RTF),

        ...we must  accelerate  our efforts to ensure  that
        the maximum number  of  prospective small
        disadvantaged firms...have  equal access  to business
        opportunities in the Agency...the Agency is  fully
        committed to  expanding the  number of 8(a) firms to
        receive  contract work  from  the Agency.

   This broader  distribution of 8(a) contractor  dollars was in
   line with the program's  objective of assisting the maximum
   number of eligible firms.   In addition, it reduced the
   possibility that EPA would  be perceived as favoring selected
   contractors.
  POTENTIAL CONTRACT UNDERESTIMATION
  DETECTED AND CORRECTED

  In fiscal 1993, EPA contracting officials examined and, when
  appropriate, challenged the program office's contract
  valuation.  This ensured that the competitive requirements of
  the 8(a) program were not improperly avoided.

  Public Law 100-656, The Business Opportunity Development
  Reform Act of 1988, established a dollar threshold for
  competition within 8(a) procurements.  When the estimated
  value for service contracts exceeds $3 million, the
  procurement must be competed among qualified 8(a) firms.
  Contracts valued at less than the statutory threshold can be
  awarded on a sole source basis to 8(a) program participants.

  In the past, EPA had side-stepped the competitive provisions
  of the 8(a) program by inappropriately valuing procurements
  below the $3 million competitive limit.  Recent OIG audits of
  EPA laboratory facilities reported this problem on contracts
  awarded for the Office of Research and Development.4  Our
  review of a sample of 8(a) awards during fiscal 1991 and 1992
     4 Contracting Activities at Environmental Research
Laboratory - Duluth. MN. Report No. 2100443  (July 7, 1992)

Management of Extramural Resources at the Environmental Research
Laboratory - Athens. GA. Report No. 3100156  (March 31, 1993)

Management of Extramural Resources at the Environmental Research
Laboratory - Narragansett. RI. Report No, 3100236 (June 16, 1993)
                              Report No. E1BMF3-05-0018-4100452

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                                             8(a) Contracting
found examples of this practice across other EPA program
offices as well.  For example, in 1991 EPA asked an 8(a)
company to submit a proposal for services required by the
Office of Pesticide Programs  (RFP  No. D100392L1).  The
resulting cost proposal totalled $3,151,458, thus exceeding
the competitive limit.  According to EPA's pre-negotiation
plan,

     The total amount proposed...is greater than the
     amount which requires that an 8(a) action be
     competed...In order to reduce the amount of the
     contract below the $3,000,000 limit, the
     prenegotiation position is to reduce the total
     level of effort by 1,000 hours each year...

Our review of several fiscal 1993 8(a) awards showed that
contracting officials were more vigilant in reviewing and
questioning the contract valuations provided by program
offices.  For example, in one case at EPA's CMD at RTP, a
contracting official questioned a program office's initial
Government estimate because it was "exactly" $3 million.  The
contracting official questioned the labor rates used by the
program office in computing the estimate as being
unreasonably, low.  The official also observed that the "odd
number of hours" projected for this level of effort contract
appeared to be computed by dividing the labor rate into the
competitive ceiling of $3 million rather than being based on
an analysis of actual need.  Using a more appropriate cost
factor for labor and the program office's projected hours,
the contracting officer concluded that the procurement should
be valued between $3.5 million and $3.8 million.  Program
officials were instructed to revise or justify the labor rate
used and the number of hours required.

Program officials concurred with the contracting office's
assessment.  As a result, program officials adjusted the
hourly rate and re-estimated the requirements based on the
statement of work.  The revised procurement request was
valued at $2.75 million.  The contracting office accepted
this estimate.  In September 1993, EPA negotiated and awarded
a sole source contract  (68-D3-0087) to an 8(a) company for
$2.6 million.

As shown in this example, the contracting office provides a
critical independent control over the valuation of
procurement requests.  This control, in turn, helps ensure
that competitive requirements of the 8(a) program are not
inappropriately avoided.
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                                               8(a) Contracting
  TIMELY  IDENTIFICATION AND RESOLUTION
  OF POTENTIAL CONFLICTS OF INTEREST

  In an 8(a) contract awarded during fiscal 1993, EPA timely
  investigated and resolved a reported conflict of interest
  between the proposed contractor and an EPA employee.  In a
  prior OIG audit5,  we reported that contracting officials did
  not resolve potential conflict of interest issues raised
  prior to awarding a sole-source contract to an 8(a) firm.   In
  response to the audit, EPA provided additional training to
  contract staff emphasizing conflict of interest issues.

  In April 1993, an EPA Contracting Specialist at RTP received
  information that the project officer for a proposed 8(a)
  contract  (68-D3-0088) had a potential conflict of interest
  with the selected firm.  A memorandum to the file stated that
  the project officer had selected the 8(a) firm and would
  administer the resultant contract.  According to the firm's
  Vice-President, the project officer had previously been an
  employee of his firm.

  Contracting officials followed-up on the information
  regarding this potential conflict of interest.  They notified
  the OIG and obtained information from the program office
  before finalizing the contract award.  The subsequent
  investigation determined that no conflict existed, and the
  contract award was finalized as planned.  EPA's actions to
  resolve this issue ensures the integrity of the contracting
  process.
  CONCLUSION

  EPA's 8(a) contract awards in fiscal 1992 and 1993
  demonstrated an effort to distribute contracting
  opportunities to a broader spectrum of eligible firms.  This
  reduced EPA's reliance on a small number of 8(a) contractors
  and contributed to the program's goal of maximizing the
  number of contractors receiving developmental assistance.

  In addition, our review of fiscal 1993 8(a) awards
  demonstrated a positive change from previous contracting
  practices.  The pattern of contracting problems which existed
  in 8(a) awards during fiscal 1991 and 1992 was not in
     5  Contracting Activities at Environmental Research
Laboratory - Duluth. MN. Report No. 2100443  (July 7, 1992)
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                                             8(a) Contracting
evidence in fiscal 1993 awards.  EPA contracting officials
were more alert in fiscal 1993 to potential problems
regarding splitting contracts, underestimating the value of
8(a) contracts, and situations involving potential conflicts
of interest.  Contracting officials actions helped safeguard
the integrity of the 8(a) selection process.
AGENCY COMMENTS

OARM expressed appreciation that our report acknowledged  (1)
the broader distribution of EPA's 8(a) contract awards during
recent fiscal years and (2) an increased emphasis on
detecting and correcting the contracting problems reported in
past OIG audits.
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                                                8(a) Contracting
                            CHAPTER 3

           AWARDS MADE IN ANTICIPATION OF A FIRM'S 8(A)
                 GRADUATION HINDER PROGRAM GOALS
  EPA and other Federal agencies have often awarded contracts
  to 8 (a) firms just days before expiration of the firms'
  program eligibility.  SBA has encouraged this practice.
  Although such awards meet the legal requirements of the 8(a)
  program, the practice:   (1) permits firms to benefit from
  sole-source awards for several years after the conclusion of
  their statutory 8(a) program eligibility,  (2) does not
  encourage 8(a) firms to compete in the open marketplace, and
  (3) creates a perception that EPA favors selected
  contractors.  Thus, while legal, awarding sole source
  contracts to 8(a) firms near the completion of their program
  eligibility does not serve the overall objectives of the 8(a)
  program.

  In May 1988, GAO reported6 that  this practice

       ...can result in the removal of future contracts
       for goods and services from the 8(a) program for
       several years...It could also impact upon the
       program's capacity for meeting the developmental
       needs of other firms in the program...

  The GAO suggested that if companies develop non-8(a) business
  in accordance with the program's objectives, then a policy to
  not award contracts with options to graduating firms is
  appropriate.
  LEGISLATIVE HISTORY

  Congress has amended the Small Business Act several times
  since its original enactment in 1953.  The original focus of
  the 8(a) program was to award as many contracts as possible
  to eligible firms.  However, SBA's data showed that between
  1968 and 1978, only four percent {149 of 3,726) of
  participating firms had ever "graduated" into the free
  enterprise system to compete for non-8(a) business.
     6  Status.  Operations,  and Views on the 8(a)  Procurement
Program (GAO/RCED-88-148BR, May 1988)

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                                               8(a) Contracting
  Public Law 95-507  (October 24, 1978) shifted the intent of
  the 8(a) program's focus from that of contract assistance to
  business development.  Underlying this change was a premise
  that after a period of assistance firms would "graduate" from
  the program.  The law did not establish a fixed period of
  program eligibility.  However, it was expected that firms
  leaving the program would have developed enough independence
  to survive in the private marketplace.

  In 1980, Public Law 96-481 required SBA to define a specific
  period of program participation for all 8(a) firms.  SBA
  instituted regulations which established a Fixed Program
  Participation Term  (Program Term).  Under these regulations,
  each eligible firm was allowed to participate in the 8(a)
  program for a term of five years.  SBA could grant a one time
  extension of two years.  Thus, the maximum period of
  participation was seven years.

  In June 1988, Congress expressed continued concerns that the
  8(a) program was mainly a contracts program and not a
  business development vehicle.  A Congressional survey showed
  that 8(a) firms often felt they did not have enough time in
  the 8(a) program.  Many survey respondents also stated that
  they were "dropped" from the program at the conclusion of
  their eligibility without adequate transitional assistance to
  enter the competitive marketplace.

  As a result, in 1988, Public Law 100-656:   (1) redefined the
  Program Term to nine years,  (2) prohibited SBA from extending
  the Program Term beyond the established expiration date, and
  (3) divided the nine year Program Term into a developmental
  stage (first four years)  and a transitional stage (last five
  years).   The developmental stage allows 8(a) firms to access
  markets and learn management skills.  The transitional stage
  is designed to gradually reduce a firm's reliance on the 8(a)
  program for its revenue and survival.

  In 1990, SBA established specific targets for "non-8(a)
  business activity" for firms in the transitional stage of
  their Program Term7.   These targets  require  a firm to
  demonstrate that as it progresses through the transitional
  stage of the 8(a) program, an increasing percentage of its
  total revenues come from non-8(a) sources.  Firms scheduled
  to graduate on or before August 15,  1992, were not subject to
  these specific targets.  They were,  however, expected to
     7  Minority Small  Business and Capital Ownership Development
Program. SOP 80 05 2,  pp. 196-197.

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                                              8(a) Contracting
 "make  substantial and  sustained  efforts  to attain the
 targeted  dollar  levels of non-8(a)  revenue approved  in  its
 business  plan."  If  a  firm did not  meet  these  target levels,
 it  could  lose  sole source contract  support.

 EPA's  guidance,  Preferential Procurement  Program Handbook For
 Pro-ject Officers. Contract Officers, and  Small Business
 Specialists  (August  1992} , acknowledges  that

     During  this [transitional stage], firms are
     permitted to continue to receive sole source and
     competitive 8(a)  contract support, however,
     concerns  must achieve certain  non 8(a) business
     activity  targets.

 This same document states that the  measure of  success in the
 8(a) program is  "the number of competitive firms that exit
 the program  without being unreasonably reliant on Section
 8(a) contracts..."
AWARDS AVOIDED LEGISLATIVE INTENT AND
DID NOT ENCOURAGE OPEN MARKET COMPETITION

Awarding contracts to 8(a) firms immediately prior to the
expiration of their eligible Program Term was not consistent
with the program's legislative intent and did not encourage
firms to compete in the open market.  Instead, the practice
primarily benefitted EPA by permitting selection of a
specific contractor and reducing the time and effort required
to award a contract.

We identified several examples in which EPA awarded large,
multi-year contracts or extended existing contracts to 8(a)
firms immediately prior to the expiration of the firms'
Program Term.  We found no evidence that EPA evaluated the
non-8(a) revenues of transitional firms or obtained such an
evaluation from SBA prior to awarding these contracts.

     Viking Systems International

In October 1990, EPA awarded two sole source contracts to
Viking Systems International (VSI) just days before the
firm's graduation from the 8(a) program.  The two contracts
had a combined value of $5.6 million.  Each contract became
effective on October 21, 1990,  the same date that VSI
graduated from the 8(a) program.  EPA documents related to
each of these contracts express the importance of making
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                                              8(a) Contracting
final awards prior to VSI's scheduled graduation  from the
8(a) program.

On  the first contract  (68-W1-0001), EPA reasoned  that if it
did not award a contract prior to  VSI's graduation date it
would "lose its ability to use Viking Systems" and "would
expend additional resources in starting the procurement
process over."  On the second contract  (68-W1-0002), an EPA
project manager's memorandum stated that it was desirable to
contract with VSI to "help assure  continuity in the project."
VSI was the contractor on a prior  phase of the project.  The
project officer also stated in the memorandum that VSI was
graduating from the 8(a) program soon and "we are most
interested in completing this contract before this crucial
deadline."  We found no evidence that EPA evaluated VSI's mix
of  8(a) and non-8(a) revenues at the time of these sole
source awards.  These contracts provided VSI with revenues
through the 8(a) program for almost five years beyond its
statutory Program Term.

     Mitchell Systems

On  June 8, 1992, EPA awarded a significant sole source
modification to an existing 8(a) contract (68-D9-0040) with
Mitchell Systems.  This was six days prior to Mitchell
Systems graduating from the 8(a) program.  The modification
increased the available labor hours in each of option periods
III and IV by 9,152 hours or 59 percent  (9,152/15,600).

EPA also modified contract 68-D1-0124, another Mitchell
Systems contract, just two days before the firm's graduation.
EPA signed the original contract in August 1991.  The
contract provided for a three year term that expired in
September 1994.  Nine months after the initial award, and
immediately before Mitchell Systems' 8(a) Program Term
expired,  EPA extended the period of performance by two years
to September 1996.  Documents in the contract file cited (1)
unanticipated austerity of funds and  (2) a need to balance
work requirements with the availability of funds as reasons
for the extension.

We found no evidence that EPA considered Mitchell Systems'
mix of 8(a)  and non-8(a)  revenues  at the time of either of
these modifications.
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                                              8(a)  Contracting
      Labat -Anderson  Int.ernat ional

EPA  curtailed the  final year of an existing contract with
Labat-Anderson  International  (LAI) and issued a new, long-
term,  sole source  contract to LAI in order to retain its
services beyond completion of its Program Term.  LAI was the
incumbent on EPA's contract  (68-01-7352) for library services
and  records management.  The dollar ceiling in this initial
three year contract  was exhausted several months before its
scheduled expiration on September 30, 1989.  To prevent a
lapse in service and to retain LAI as the contractor for
these services, EPA  awarded LAI a 5 year, $82 million
contract in May 1989  (68-W9-0052) under provisions of the
8(a)  program.   LAI's 8(a) Program Term was to expire in
October 1989.

The  Acquisition Plan for this contract stated:

      The Program Office wishes to take advantage of the
      8(a) program by contracting with LAI for the
      maximum period  allowable prior to their
      graduation...[the requirement] will have to be
      transitioned to another contractor once LAI
      graduates.  At  the end of this new contract, the
      EPA will no longer be able to utilize this company
      or their expertise for any future effort in this
      area.

EPA's Office of General Counsel completed a pre-award review
of this procurement.  The reviewing attorney questioned
awarding LAI the 5 year contract just prior to the firm's
exit  from the 8(a) program.  In review notes documented in
the  contract file, the attorney stated:

      I am not convinced that a 5 year POP  [period of
      performance]  is needed.  It seems that the reason is to
      keep LAI as the contractor.

The  attorney also raised concerns about EPA exercising
contract options after LAI had graduated from the 8(a)
program.  The attorney stated:

      [It]  seems strange to award an 8(a) contract for a
      total possible  5 years just 4 months before  [the]
      firm graduates  from the 8(a) program.

Despite these concerns, EPA awarded the sole source contract
to LAI for a base year plus four option years.


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                                             8(a) Contracting
     Vigyan Inc

Since 1988, EPA has awarded Vigyan eleven sole source 8(a)
contracts valued at $17 million.  In August 1993, EPA awarded
two of these contracts  (68-D3-0061 and 68-D3-0063) to Vigyan
within days of the firm's graduation from the 8(a) program.
The two contracts combined had a potential maximum value of
$2.9 million.

In March 1993, Office of Prevention, Pesticides and Toxic
Substances officials interviewed five 8(a) firms, including
Vigyan, about performing work for its 33/50 program  (68-D3-
0063).  These officials determined that Vigyan would be the
most effective in performing the tasks required.  EPA
officials were aware that Vigyan would graduate the 8(a)
program near the end of August 1993.  Therefore, EPA
accelerated its original award date  (September 30, 1993) for
this contract to satisfy the SBA requirement that the
contract be signed before the firm's graduation date.  EPA's
project officer-explained that if EPA missed Vigyan's 8(a)
graduation date, the program would be left without contract
support.  This, in turn, would adversely affect the program's
ability to meet its highly visible national goals.  On August
25, 1993, just 4 days before the end of the firm's 8(a)
program eligibility, EPA awarded Vigyan a sole source, three
year contract with a potential value of $2.3 million.

On August 18, 1993, 11 days before Vigyan's graduation from
the 8(a) program, EPA awarded it another sole source, five
year contract valued at $576,000 (68-D3-0061).  This contract
was a follow-on to a prior 3 year contract also held by
Vigyan.  Again, we found no evidence that EPA evaluated
Vigyan's mix of 8(a) and non-8(a) revenues before awarding
these contracts.

Awarding new 8(a) contracts and modifying existing 8(a)
contracts immediately before the expiration of a firm's
Program Term is done primarily to benefit EPA, not to further
the competitive development of the recipient firm.  Thus, the
practice does not further the objective of the 8(a) program.
EPA's existing guidance recognizes the importance of 8(a)
firms reducing their dependence on 8(a) awards over their
Program Term.  EPA's practice, however, has not ensured this
objective.
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                                             8(a) Contracting
PERCEPTIONS OF FAVORITISM TOWARD
INCUMBENT 8(A) CONTRACTORS

Awarding contracts to 8(a) firms immediately prior to the
expiration of their program eligibility creates a perception
of favoritism.  Although statutes governing the 8(a) program
give contracting officers greater latitude in selecting award
recipients, the primary objective of the program is to
develop small and economically disadvantaged businesses.  In
amending the Small Business Act in 1988, Congress found that
insufficient attention had been given to this business
development goal.  Congress concluded that many participants
had developed an unhealthy dependency on sole source
contracts by the time they were required to leave the
program.  To address these issues, Congress amended the
existing statute to (1)  provide a maximum period of program
participation and (2)  define a transitional period during
which a participant's reliance on sole source contracts
should steadily decrease.

In spite of these legislative changes, there is a continuing
view that new, developing 8(a) firms are excluded from the
available contracting activity because of a preference for
older, incumbent 8(a)  firms.   This creates an unfavorable
view of both the 8(a)  program and the specific Government
agency involved.  Throughout 1993, the National Aeronautics
and Space Administration (NASA) was the focus of several
articles in the Federal Computer Week criticizing its 8(a)
contracting practices.  An editorial cartoon clearly
illustrated a perception that NASA favors 8(a) firms who are
close to graduating from the program.  The effect of this
favoritism was that new 8(a)  firms were not given
opportunities to develop.  This perception, and the
unfavorable image that it creates, can be applied to EPA's
practices.
CONCLUSION

Awarding contracts to firms immediately before their 8(a)
Program Term expires is legal, but does not contribute to the
objective of developing minority and disadvantaged
businesses.  Congress has amended the statutory provisions of
the 8(a) program to define a finite period of participation.
EPA's practice of awarding contracts with renewable options
during the final days of a firm's Program Term effectively
voids this provision.  In addition, although EPA guidance
specifies that transitional firms must achieve certain non-
8(a) business activity levels, EPA did not evaluate
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                                             8(a) Contracting
prospective 8(a) contractor performance in this area.  These
practices foster a perception that incumbent contractors
receive preferential consideration in obtaining EPA
contracts.
RECOMMENDATIONS

We recommend that:

  l. The Assistant Administrator, OARM, and the Director,
     OSDBU, establish a policy requiring their offices to
     concur, and provide a written justification for,
     awarding 8(a) contracts whose base or option periods
     extend beyond the established Program Term of the
     recipient 8(a) firm.

  2. OSDBU review the mix of 8(a) and non-8(a) revenues of
     transitional firms while evaluating potential
     contractors or remove this standard from its existing
     guidance.
AGENCY COMMENTS

The Assistant Administrator, OARM, and the Director, OSDBU,
disagreed with our findings and recommendation 1.  OARM's
response emphasizes that awarding contracts to 8(a) firms
anytime prior to the expiration of their program eligibility
is legal and encouraged by the SBA.  OARM disagrees with our
conclusion that this practice is contrary to the legislative
intent of the 8(a) program.  OARM states that to deny firms
access to these awards would unfairly deprive firms of their
complete eligibility period.  In addition, OARM states that
these awards aid 8(a) firms in transitioning into the
competitive marketplace.

OARM also disagrees that EPA has a responsibility to review
or monitor the mix of 8(a) and non-8(a) revenues generated by
potential award recipients.  According to OARM, this
obligation rests solely with the SBA.   In addition, OARM
states that the Agency does not have the authority nor access
to this type of contractor information.

Finally, OARM states that our recommendation to create a new
documentation standard is contrary to current National
Performance Review initiatives to streamline and reduce such
requirements.
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                                             8(a) Contracting
OSDBU states that it is presumptuous to assume that 8(a)
firms who received contracts before graduation are not
pursuing other competitive opportunities.  The OSDBU response
concluded that "the rationale offered by the DIG...does not
provide a strong justification for changing the current
practice...."  OSDBU proposes, as an alternative, that SBA
and OAM join it in a pilot project to orient graduating 8(a)
firms toward other EPA business opportunities through grants
and cooperative agreements with state and local governments.
PIG EVALUATION OF AGENCY COMMENTS

As stated earlier in this chapter, we recognize that EPA's
current practice is both legal and encouraged by SBA.  We
accept that the practice may, on occasion, be in the best
interest of both EPA and the overall development of the 8(a)
firm.  We also agree that SBA holds primary responsibility
for monitoring the eligibility and progress of firms within
the 8(a) program.  However, EPA's discussion of non-8(a)
revenue levels within its internal guidance materials implies
a responsibility on the Agency's part to review a firm's
progress against this standard.

SBA's Associate Deputy Administrator for Government
Contracting and Minority Enterprise Development recently
stated that SBA wants to discourage firms from becoming
dependent on 8(a) contracts to stay afloat.  EPA's guidance
supports this concept by stating that the 8(a) program's
success is measured by "the number of competitive firms that
exit the program without being unreasonably reliant on
Section 8(a) contracts".  It is, therefore, fair to conclude
that EPA would routinely assess the level of contractor
reliance, particularly as a firm approaches completion of its
program eligibility.  Evaluating a firm's mix of 8(a) and
non-8(a) revenue is a strong indicator of reliance.   Based on
OARM's response and discussions at the exit conference, we
have added recommendation 2 which was not contained in the
draft report.

We agree that the current trend in Government operations, as
supported by the National Performance Review, is toward
reducing unnecessary controls and procedural requirements.
However, the National Performance Review does not envision
eliminating, or prohibit establishing, reasonable controls.
Given the history of Congressional concern over the use of
the 8(a) program as a contracting mechanism rather than a
business development strategy, it is reasonable to request
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                                             8(a) Contracting
documentation of EPA's rationale in awarding contracts that
may give the appearance of contractor favoritism.

We do not believe that the ability to award contracts to 8(a)
firms prior to graduation should be prohibited.  Our
recommendations are aimed at ensuring (1) an affirmative
management decision in these cases and  (2) that this practice
is used to further develop participating firms.
MATTERS FOR CONGRESSIONAL CONSIDERATION

The issues raised in this chapter are not matters of
statutory or regulatory compliance.  As acknowledged, EPA's
current practice is within the existing legal parameters.
Instead, our concerns are based on interpretation of
Congressional intent, appearances of favoritism, and
differing views of organizational responsibilities.  None of
these provide a firm foundation for resolving the differences
of opinion between the Agency and the OIG.  As a result, we
believe Congress should consider (1) the appropriateness of
awarding sole source contracts to 8(a) firms immediately
prior to expiration of program eligibility and  (2) the role
awarding agencies have in monitoring development of 8(a)
firms with whom they do business.  To encourage attention to
these issues, we will distribute this audit report to
Congressional members and committees responsible for
overseeing and directing the government's small and minority
business legislation.
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                                               8(a) Contracting
                            CHAPTER 4

            EPA MUST STRENGTHEN OSDBU'S ADVOCACY ROLE
      IF THE AGENCY IS  TO ACHIEVE  ITS  8(A)  CONTRACTING GOALS
  OSDBU has battled several obstacles in its role as the
  Agency's advocate for 8(a) contractors.  These include:   (1)
  insufficient and untimely contract information,  (2) a lack of
  Agency-wide accountability for meeting 8(a) contracting
  goals, and  (3) an inefficient organizational structure.  As a
  result, EPA did not meet its goal for 8(a) contracting in
  either fiscal 1992 or 1993.  If EPA is to meet its
  established goals in future fiscal years, it needs to:   (1)
  gather more timely and comprehensive information on current
  and future 8(a)  contracting opportunities, (2) increase
  management accountability for 8(a) goals at all levels, and
  (3) improve coordination between OSDBU and OARM in directing
  and supervising the Small and Disadvantaged Business
  Specialists (SDBSs).

  Public Law 95-5078  required each  Federal  agency having
  procurement authority to establish an OSDBU.   The law also
  prescribed that the OSDBU Director report directly to the
  head of the Agency, or its deputy.  In July 1979, EPA
  established its OSDBU under the Office of the Administrator.

  Public Law 100-6569 required EPA  to  establish small business
  and 8(a)  goals each year.  To set these goals, each EPA
  program office and region provides OSDBU with its individual
  procurement goals for the upcoming year.   OSDBU summarizes
  the goals, obtains the EPA Administrator's approval, and
  submits the information to SBA.  For fiscal 1989 through
  1991, EPA exceeded its annual 8(a) goal of 6 percent.  In
  fiscal 1992, EPA's goal increased to 8 percent; it achieved a
  level of 5 percent.  For fiscal 1993,  EPA's goal was again 8
  percent.   Actual 8(a)  contracting in fiscal 1993 totalled 5
  percent.
     8 Amendments  to  the  Small  Business  Act  and the Business
Investment Act of 1958, October 24, 1978.

     9 Business  Opportunity Development  Reform Act of 1988.

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                                              8(a) Contracting
 CURRENT OSDBU ADVOCACY ACTIVITIES

 OSDBU currently performs several functions in an effort to
 promote use of the  8 (a) contracting program.  These include
 attending seminars  and job fairs, compiling a forecast of
 contract opportunities for small or small disadvantaged
 firms, and providing information to project officers and
 large prime contractors about small and disadvantaged
 businesses.  These  activities are designed to ensure that
 small and disadvantaged businesses, including 8(a) firms, are
 provided the opportunity to compete for and receive a fair
 proportion of the Agency's total acquisition dollars.

 OSDBU takes part in trade fairs, seminars, and various
 conferences to promote the Agency's small and disadvantaged
 business goals for  direct procurement.  In cooperation with
 OAM, OSDBU conducts briefings to inform prospective small and
 disadvantaged businesses about new contracting opportunities.
 Within the Agency,  OSDBU provides information on available
 small and disadvantaged businesses to project officers and
 large prime contractors for consideration in their upcoming
 activities.

 Each year, OSDBU polls EPA program offices for information on
 planned procurements.  Using this information, OSDBU develops
 a forecast of small business and 8(a) contracts that it
 expects EPA to issue for the upcoming fiscal year.  OSDBU
 distributes the forecast to:  (1) small and disadvantaged
 businesses, (2) SBA, and (3) the Department of Commerce to
 alert them to potential EPA contracting opportunities.

 OSDBU or a SDBS receive selected solicitation packages from
 contracting officers.  OSDBU or SDBSs review all
 solicitations valued at more than $25,000 for possible 8(a)
 contracting opportunities.   If the solicitation is judged to
provide 8(a) contracting options, either OSDBU or the SDBS
may refer three to  five eligible firms for the program office
 to consider.

All of these actions increase the visibility of the 8(a)
program.   In turn, visibility increases the likelihood that
more contracting opportunities will be made available to 8(a)
 firms.
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                                              8(a) Contracting
ADDITIONAL ADVOCACY ACTIVITIES NEEDED TO
INCREASE  8(A) CONTRACTING OPPORTUNITIES

Contracting results from the last two years indicate that
more must be done to encourage EPA program offices to
participate in the 8(a) program.  EPA's advocacy of the  8 (a)
program can be strengthened through:   (I) improved
information on future contracting opportunities and  (2)
better monitoring of program progress.

     Improved Information on Contracting Opportunities

Both the quality and quantity of contracting information
available to OSDBU hindered its ability to adequately plan
8(a) activity.  The information in OSDBU's annual procurement
forecast was neither timely nor complete.  Improvements  in
this information would increase the ability of OSDBU to
intervene early in the contracting process on behalf of  8(a)
companies.

Identifying procurements that can be satisfied by 8(a)
eligible companies is a major function of OSDBU.  OSDBU's
annual contracting forecast is published in October and
contains only planned activities identified by EPA program
offices.  According to the OSDBU Director, contracting plans
provided by the program offices have often been incomplete.
That is, the plans did not identify all anticipated
contracting actions.  Efforts by OSDBU, to independently
identify contracting opportunities in combination with
program office input, will increase the universe of contract
awards available to qualified 8(a) contractors.

EPA's CIS contains extensive information on active contracts.
Reviewing this data would aid OSDBU in forecasting 8(a)
contract opportunities.  For example, by reviewing CIS,  we
identified a contractor who had completed its 8(a) program
participation term and held two contracts that would expire.
in fiscal 1994.  The project officers stated that these
contracts were to be offered as 8(a) contracts in fiscal
1994.  However, they were not included in the program's
submission to OSDBU.  Thus, they were not in OSDBU's fiscal
1994 forecast.  As a result, neither OSDBU nor 8(a) firms
were aware that these opportunities existed.  If OSDBU staff
routinely monitored expiring 8(a) contracts, they would  have
identified these two contracts for the fiscal 1994 forecast.
There may be similar contracts that OSDBU, and the 8(a)
community, are also unaware of.
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                                              8(a) Contracting
The Agency's acquisition plans for full and open competition
contracts also provide an additional opportunity for OSDBU to
identify 8(a) contract opportunities.  According to EPA's
Contract Management Manual, OSDBU should receive a copy of
the acquisition plans from each program office.  While OSDBU
had received acquisition plans in the past, it no longer
does.  An OSDBU official agreed that it is critical for 8(a)
contract opportunities to be considered early in the
acquisition planning process.  By the time the actual
procurement request is submitted, it is often too late to
obtain 8(a) participation.  Therefore, OSDBU should request
that it again receive the Agency's advance acquisition plans.

     Better Monitoring of Program Progress

OSDBU has insufficient information to monitor the Agency's
progress toward its 8(a) procurement goals.  As a result,
OSDBU was not able to effectively adjust its efforts during
the year to ensure that the goals were met.  For example, in
November 1993, the Director could not determine whether EPA
had met its 8(a) goal for fiscal 1993.  He also did not have
sufficient information to forecast how or whether the Agency
would meet its goal for fiscal 1994.

The SBA had reported problems with OSDBU's monitoring of the
small business programs in the past.  In its 1991
Surveillance Review Report, SBA said that EPA's Small
Business Office at RTP lacked an organized system for record
keeping, tracking, and follow-up on the small business
programs.  During the SBA's review, information on many
categories under the Small Business Award Goals could not be
supplied by EPA.  As a result, the SBA recommended that EPA
establish a data tracking system for the small business
programs.  To date, RTP has not developed an information
system to track small business goals.  According to the SDBS
at RTP, OSDBU sets the goals for the Agency.  Since RTP does
not have any specific small business goals, the SDBS believes
that tracking this information would not provide meaningful
statistical data.

OSDBU can take steps to improve its system for monitoring
progress toward meeting the 8(a)  procurement goals.  These
actions include periodically comparing each program's actual
procurements against the annual forecast and utilizing
information already available in EPA's management information
systems to monitor procurements.   By taking these actions,
OSDBU would be able to continually track contract awards
versus the established 8(a) goals.
                              26

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                                               8(a) Contracting
   If OSDBU periodically compared its annual forecast with each
   program's actual procurement activity, OSDBU would timely
   identify variances.  Doing this could prevent contracts
   targeted for 8(a) firms from going to full and open
   competition.  This would permit OSDBU to work with program
   offices to follow through with 8(a) procurement plans or
   recognize the need to identify other potential 8(a)
   opportunities.
  LACK OF MANAGEMENT ACCOUNTABILITY FOR MEETING
  AGENCY S(A) CONTRACTING GOALS

  EPA program officials were not held accountable for assisting
  the Agency in meeting its annual 8(a) program goal.  Each
  year program offices and regions set their individual 8(a)
  procurement goals for the upcoming year.  When consolidated,
  these individual goals may not be adequate to satisfy EPA's
  overall goal.  Program offices were not, however, measured on
  whether they contributed their "fair share" toward meeting
  the Agency's overall objective.

  In addition, according to the OSDBU'Director, the Agency's
  goal was generally not addressed through existing performance
  agreements.  The OSDBU Director stated that only his annual
  performance standards contain specific language aimed at
  meeting this objective.  Thus, there was no effect on
  individual contracting staff and program managers if the 8(a)
  goal was not met.  Establishing individual goals for each EPA
  program office and holding program and contracting managers
  accountable for meeting these goals would provide an
  incentive to identify and execute 8(a) contracts.
  EPA's 8(A) ADVOCACY STAFF WERE NOT CENTRALLY ORGANIZED

  EPA staff responsible for advocating the use of 8(a)
  contracting were not organized in a manner which insures a
  unified effort or provides independence from the overall
  contracting function.  The EPA Acquisition Regulation  (EPAAR)
  requires that the Director of each Contracting Office appoint
  a SDBS.  EPA guidance10 states that the SDBSs are
  responsible for carrying out the day-to-day responsibility
  for operating the Small and Disadvantaged Business
     10 Preferential Procurement Program Handbook for Project
Officers. Contract Officers, and Small Business Specialises
(August 1992).

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                                              8(a)  Contracting
Utilization  Program within  their  CMD.  According  to  the  SDBSs
in  Cincinnati  and  RTF,  they devote  100 percent of their
efforts  to the Agency's small business programs.   The  SDBS
receives technical direction from the OSDBU Director.
However,  the SDBS  is  administratively responsible to the
Contracting  Office Director.

EPA's OSDBU  Director  did not believe the EPAAR gave  him
authority over the SDBSs.   As a result, he had not monitored
their activities nor  required them  to report their activities
to  him.   For example, the Director  told us the SDBSs should
be  conducting  outreach  activities to potential 8(a)
contractors, but he did not know  if they actually did.   To
effectively  manage EPA's 8(a) contracting program, the OSDBU
Director needs to  exercise  supervisory authority  over  the
SDBSs and direct their  activity within the Agency's  overall
8{a) objectives.

The current  organization creates  a potential, if  not actual,
conflict  of  responsibilities.  The SDBSs are advocates for
EPA's 8(a) and other  small  business programs.  Contracting
divisions, in  turn, work to obtain the highest quality
contractual  support for EPA program offices.  Since  8(a)
contractors  are generally less experienced at competing  for
Government contracts  than non-8(a) contractors, these
objectives may conflict.  Improved coordination between  OARM
and OSDBU in directing  and  supervising the SDBSs  is  needed to
reduce this  potential conflict.
CONCLUSION

Despite the efforts of EPA's OSDBU, the Agency did not reach
its established goals for 8(a) contracting during fiscal 1992
or 1993.  OSDBU's advocacy role was hindered by:  (1)
insufficient and untimely contract information,  (2)  a lack of
Agency-wide accountability for meeting 8(a) goals, and  (3) an
inefficient organizational structure.
RECOMMENDATIONS

We recommend that:

 1.  OSDBU develop a multi-year plan which identifies current
     8(a) contract levels and presents a strategy for
     obtaining sufficient future contracts to meet the
     Agency's projected goals.
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                                              8(a) Contracting
     OSDBU develop and implement a plan to regularly  (a)
     update  its annual procurement forecast throughout the
     year and  (b) monitor the progress of Agency program
     offices in meeting their 8(a) obligation.

     The Assistant Administrator, OARM, require the Director,
     0AM, to obtain timely annual acquisition plans
      (including anticipated small business awards) from each
     Assistant and Associate Administrator and provide this
     information to OSDBU.

     The Assistant Administrator, OARM, and the Director,
     OSDBU,  develop a method of setting 8(a) program goals
     for Assistant Administrators, Regional Administrators,
     and Office and Division Directors, as appropriate.
     Also, a mechanism for timely tracking of actual
     achievements needs to be developed and implemented.

     The Assistant Administrator, OARM, and the Director,
     OSDBU,  implement procedures that improve the
     coordination between OSDBU and 0AM in directing and
     supervising the SDBSs.  This should, at a minimum,
     include input from the OSDBU Director to the SDBSs
     annual  performance standards and evaluation.
AGENCY COMMENTS

The OSDBU Director agreed with recommendations 1 and 2.  He
did not comment on recommendation 3 and 4.  The OARM
Assistant Administrator did not comment on recommendations 1
through 3 and agreed with the purpose of recommendation 4.
Both OSDBU and OARM agreed with the objective of improved
coordination between their offices in directing and
supervising the work of the SDBSs (recommendation 5).
However, OARM disagreed with our conclusion that there was an
inherent conflict of responsibilities between the SDBSs and
the Contract Management Divisions.  Both OSDBU and OARM
disagreed with the recommendation in the draft report  (which
has since been revised) that the positions should be
transferred to direct OSDBU control.  Instead, OARM stated
that there were various ways of accomplishing improvement in
this area.
PIG EVALUATION OF AGENCY COMMENTS

We continue to view the current organization of SDBSs
reporting to the Directors of CMD at Cincinnati and RTF as a
                              29
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                                             8(a) Contracting
potential conflict of responsibilities.  However, it is
appropriate for OARM and OSDBU to suggest alternative methods
of addressing the objective of improved coordination and
supervision.  As a result, we revised recommendation 5 to
provide this opportunity.  The Agency should provide a
specific plan and milestones for achieving this improved
oversight.

Since neither OSDBU nor OARM disagreed with recommendations 1
through 4,  the Agency should provide specific tasks and
milestones for addressing these recommendations.
                             30

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                                                         8(a)  Contracting
                                                              APPENDIX  I
                                                              Page 1  of 2
            OSDBU'S  RESPONSE TO PIG  DRAFT REPORT
               UNfTED STATES ENVIRONMENTAL PROTECTION AGENCY

                         WASHINGTON. D.C. 20460
                                                           •WTOH
 SUBJECT:  OSDBU Response to the Draft Audit Report No. E1BMF3-05-
          0018, EPA's 8(a)  Contracting Program

 FROM:     Leon H. Hampton,  Jr., Director^r""
          Office of Small 6 Disadvantage^
            Business utilization  (1230C)

 TO:       Elissa R. Xarpf
          Associate Assistant  Inspector General
            for Acquisition and Assistance Audits (2421)


     As per the administrative instructions issued in your May
 12, 1994 memorandum, the Office of Small and Disadvantaged
 Business Utilization (OSDBU) responds to the aforementioned draft
 audit report.

     Overall, X am pleased  with the in-depth review and the
 analyses of the 8(a) Program undertaken by the OIG,  and I see it
 having beneficial effects on the program.  The thought provoking
 comments have allowed me and my staff an opportunity to
 thoroughly reflect on the program and to take steps for its
 improvement.

     Having reviewed the subject report, I concur with three of
 the four recommendations for improving and advancing the  8 (a)
 program within the Agency.   The one exception is the
 recommendation that:

     1.   The Agency establish a policy requiring the Directors
 of 0AM and OSDBU to concur  and provide written justification for
awarding 6(a) contracts whose  base or option periods extend
beyond the established  program term of the recipient 6(a)  firm.

     It is important again  to  note that the Small Business
Administration (SBA) has  developed policies and guidelines for
awarding contracts to 8(a)  firms before expiration of the firms'
program eligibility. The award of such contracts, including
options, are  intended to  help  8(a) firms through the transitional
period to better assure long range viability which ultimately
result in employment opportunities for those communities  where
these firms are located.
                                   31
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                                                         8(a)  Contracting
                                                              APPENDIX  I
                                                              Page 2  of 2
     From this perspective,  it  ie presumptuous to assume that
8(a) firms who received such contracts before graduation are not
actively pursuing competitive opportunities.  Data reported by
the SBA indicates that a fair number of graduated 6(a)  firms are
winning competitive contracts.  We must be mindful that the 8(a)
program is a socioeconomic program designed to provide assistance
to the fullest extent practical.

     It is also important to point out that federal agencies,
including the EPA,  have a responsibility and obligation to help
bridge these firms  to assure that both the intent and spirit of
applicable statues  and regulations are adhered to.  Thus,  the
rationale offered by the 016, respecting the above-cited
recommendation, in  my opinion does not provide a strong
justification for changing the  current practices of awarding 8(a)
contracts which include options prior to the firm's graduation.
He can further strengthen the 8(a) program within EPA by having
each major program  seriously begin structuring their procurement
packages to make them suitable  for more 8(a) firms to win
contracts in a competitive manner.

     Alternately, I am asking the Small Business Administration,
the Commerce Department's Minority Business Development Agency,
and EPA'e Office of Acquisition Management to join me in a
demonstration project to orient graduating participating 8(a)
firms toward business opportunities generated through EPA's
financial assistance programs viz. grants and cooperative
agreements with states and local municipalities.
                                    32
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                                             8(a) Contracting
                                                 APPENDIX II
                                                 Page 1 of 8
             OARM'S RESPONSE TO OIG DRAFT REPORT
This appendix contains the Assistant Administrator for OARM's
response to our draft report in its entirety.  After
considering these comments, we made revisions to the final
audit report.  These changes are described in Appendix III.
We have placed reference numbers in the left margin of this
appendix to correspond to the notes in Appendix III.
                             33

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                                                       8(a)  Contracting
                                                            APPENDIX  II
                                                            Page 2  of 8
              UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                        WASHINGTON, D.C. 20460
                          JUN 23 1994
KgMQRXKPPK


SUBJECT:  Draft Audit Report No. E1BMF3-05-001B
          EPA's 8(a)  Contracting Problem

              /ea**Wr*~  V  Srffe^U^.
FROM*   ^—-i..«..
TO:
                                                        *DMINISTR»TION
                                                        WORE SOURCES
                                                        MANAGEMENT
i/  Assistant Administrator

   Elissa R. Karpf
   Associate Assistant Inspector General
     For Acquisition and Assistance Audits
     Thank you for the opportunity to comment on the draft audit
findings on EPA's 8(a) program.  Attached are our written
comments.

     We appreciate your recognition of improvements in our
procedures, and agree that additional emphasis must be placed on
meeting our goals for 8 (a)  contracting,  we do not concur,
however, with some of your specific findings and recommendations.

     EPA remains committed to  the Small Business Administration's
(SBA) 8(a) program and will continue to work with program offices
to meet our established goals.  As you know, we have initiated an
effort to break up our "umbrella" contracts.  As we break-up
large, level-of-effort requirements, we are making a concerted
effort to create more opportunities for 8(a) firms.

     We would be happy to discuss the findings with you at your
convenience.

Attachment
                                                    MmMMMir'BMItMlMMirlMt
                               34
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                                                                   8(a)  Contracting
                                                                        APPENDIX  II
                                                                        Page 3  of 8
                                                                   ATTACHMENT
Note 1
Note 2
                           CHAPTER 2

          INCREASED ATTENTION TO CONTRACTING PROCEDURES
                   IMPROVES RECENT 8(A) AWARDS

     We appreciate the acknowledgement that EPA's 8(a)  contract
awards during fiscal  year  1993 showed a broader distribution of
8(a) contract awards  among eligible contractors and an  increased
emphasis on detecting and  correcting contracting problems
reported in past Office of inspector General (OIG)  audits.

     We do not concur,  however, in the broad conclusions of  this
chapter that if we stopped making awards of contracts to firms
close to their graduation  date, we would improve our distribution
of 8(a) contracting dollars.  While changing this practice would
shift awards to other firms, those other firms could also be the
recipients of other EPA 8(a) awards.  The actual distribution of
awards could still remain  with a small number of firms.

     The OIG relates  an instance where the Agency estimated  a
procurement at $2.5 million, the proposal was greater than $12
million, and after revisions to the SOW and negotiations, the
award was just under  $3 million.  By way of clarification, it
should be noted that,  as long as the contracting officer (CO)
receives reasonable/believable independent government cost
estimates for less than $3 million, the regulations do  not
prohibit the CO from  negotiating and awarding a sole source  8(a)
contract in excess of $3 million.  Nor is it prohibited to revise
the statement of work during negotiations if the program office
indicates that its requirements have changed or were originally
stated in error.  Nonetheless, we will remain vigilant  in our
efforts to ensure that we  are not manipulating our requirements
just to get below $3  million.
                                            -l-
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                                                      8(a)  Contracting
                                                            APPENDIX  II
                                                            Page  4  of  8
                            CHAPTER 3

             AWARDS MADE IS ANTICIPATION OP A FIRM'S
               8(A) GRADUATION HINDER PROGRAM GOALS
     The OIG contends throughout this chapter that the award of
sole source 8(a) contracts to a firm near the end of its program
eligibility, while not technically illegal,  is contrary to the
intent oC the 8(a) Program.  The OIG .also believes that it is
EPA's responsibility to evaluate the 8(a) firm's aix of 8(a) and
non-8(a) revenues to ensure that sole source 8(a) awards do not
cause the firm to exceed the appropriate mix.  Me disagree with
both of these contentions.

     To assist firms transitioning into the  competitive Federal
marketplace, SBA created business aix targets for each of the
transitional phase years of the 8(a)  program.  Pursuant to 13 CFR
124.312, the responsibility rests with SBA to monitor that nix
and take action if a firm fails to attain the minimum required
business activity targets (13 CFR 124.312 (c) (12)).  EPA does
not have the authority nor access to the information required to
perform this function.

     As long as a firm is otherwise eligible to receive 8(a)
awards (has the appropriate Standard Industrial Code approval,
the capability to perform, etc.)  and SBA accepts an offer for
that firm, we may award contracts right up to the date the firm
becomes ineligible/graduates.  To do otherwise would, in effect,
be treating a firm as if the graduation date was actually earlier
than the date specified.

     SBA's regulations allow sole source awards to be made up to
the date of program termination (13 CFR 124.206(d)) and
specifically state that awards may contain options which may be
exercised after the firm's 8(a)  program term has ended.  (13 CFR
124.208(d) and 13 CFR 124.318(b).)   He feel  that such a practice
actually aids an 8(a)  firm in transitioning  into a 100%
competitive marketplace, since it will have  some on-going work to
sustain its business while it is competing for new contracts.

     It is our understanding that SBA is currently amending its
regulations to specify that in cases of 8(a) competitions, the
firm need only be eligible under the 8(a) program to receive the
award as of the date of its priced offer, rather than as of the
date of contract award.   This means that contract awards could be
made well after a firm actually graduates from the program and
that the entire performance of the contract  could occur after the
graduation date.
                               -2-
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                                                     8(a)  Contracting
                                                          APPENDIX II
                                                          Page  5  of  8
RECOMHENDATIOH

     Establish a policy requiring the Directors of the Office of
     Acquisition Management (0AM)  and the Office of Small  and
     Disadvantaged Business Utilization  (OSDBU) to concur  and
     provide  a written justification for awarding 8(a)  contracts
     whose base or option periods extend beyond the established
     program  term of the recipient 8(a) firm.

     Me oppose the QIC's recommendation that the Agency establish
policy which  requires the Directors of 0AM 6 OSDBU to concur and
justify in writing the award of any 8(a) contract with a period
of performance beyond an 8(a)  firm's graduation date.

     Such a policy is contrary to streamlining, re-engineering,
and vice-president Gore's National Performance initiatives, and
would create  a requirement for new written justifications  and
approvals to  accomplish something which is legal and encouraged
under existing regulations.
                              -3-
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                                                                   8(a)  Contracting
                                                                         APPENDIX  II
                                                                         Page  6  of  8
Note 3
Note  4
                           CHAPTER 4

           ETA MOST STRENGTHEN OSDBU'8 ADVOCACY ROLE
      IF THE AGENCY IS TO ACHIEVE ITS 8 (A)  CONTRACTING GOALS


     By way of clarification, please note that the Agency's Snail
Business specialists  (SBSs) rather than the OSDBU review all
solicitations over $25,000.  Either the SBSa or the OSDBU Day
refer 8(a)  firms to the  program offices for consideration.

     In addition, please note that.the Contracts Management
Division in Research  Triangle Park, N.C. (CMC-RTF) does not
maintain "an automated database to track the status of its
contracts."  Nor is true that the section chiefs update the
database bi-weekly.   The Chief, Contract Placement Branch, has
created a Lotus spreadsheet to track acquisitions in process and
contract awards made.  Information provided by the section chiefs
and specialists is used  to update the spreadsheet at least once a
month.

     Thus,  the OIG's  contention that "OSDBU could use information
from this system to identify potential contracts for the 8(a)
program and monitor the  status of awarded contracts" is
misleading.  There is not really enough information on the
spreadsheet to enable anyone to identify procurements for the
8 (a) program.   Once requirements are included on the spreadsheet,
they are too far in the  acquisition process for this to be a
productive mechanism  for identification of 8(a) candidates.

     The spreadsheet  is  used by CMD-RTP to track the status of a
procurement in the pre-award process.  If helpful, the OSDBU
could gather data from the spreadsheet regarding the number and
estimated dollar value of on-going 8(a) acquisitions for each
program office and subsequent award information.

EPA'S BfAJ  ADVOCACY STAFF ARE NOT CENTRALLY ORGANIZED

     The OIG contends that centralized tracking and coordination
of the activities of  the Agency's SBSs is necessary.  The OIC
also believes that having the SBSs administratively responsible
to the CMD division directors creates an appearance, if not an
actual, conflict of interest.

     The OIC notes that,

     "The SBSs are advocates for EPA's 8(a) and other small
     business programs.   Contracting divisions, in turn, work to
     obtain high quality, low cost contractual support for EPA
     program offices.  Since 8(a) contractors are acknowledged to
     be less competitive (i.e., higher price and/or lower

                              -4-
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                                                                   8(a)  Contracting
                                                                         APPENDIX  II
                                                                         Page  7  of  8
                   quality) than non-B(a)  contractors,
                   conflict."
                                        these objectives
Note  5
     The QIC's statement regarding  the  "higher price and/or lower
quality" of 8(a) contractors is  an  inappropriate and inaccurate
generalization.  It would be more accurate to say that 8(a)
contractors are generally inexperienced at competing for
Government contracts.

     Moreover, while we agree that  centralized tracking and
coordination makes sense,  we do  not agree that the SBS functions
conflict with the duties of COs.  COs are charged with awarding
contracts which neat program needs  within applicable regulations
and policies.  Those regulations require COs to utilize the 8(a)
Program when certain conditions  are met.  OAM has a high stake in
seeing the 8(a) program succeed,  and the SBSs are working to help
accomplish this.  While we agree that more centralized
coordination of the Agency's small  business program is needed,  we
believe there are various ways to achieve this short of direct
OSDBU supervision of the SBSs.


RECOMMENDATIONS

     Of the six recommendations  made by the OIG, we offer comment
on three:

     4.  The Agency develop policy  requiring written
     justification for removing  a requirement from the 8(a)
     Program.

     The procedures in place are sufficient to address this
concern, and we do not believe additional policy guidance is
necessary.  In accordance with Federal  Acquisition Regulation
subpart 19.5, Set-Asides for Small  Business, and EPA Acquisition
Regulation subpart 1519.501,  Set Asides for Small Business, EPA
form 1900-37, "Record of Procurement Request Review" must be
completed and approved for each  acquisition exceeding the small
purchase limitation ($25,000).  The form requires the CO to
document the history of a procurement and fully justify his/her
determination to set aside the procurement for small businesses,
offer it to SBA for the 8(a)  program, or openly compete the
requirement.  This includes the  determination to remove a
requirement from the 8(a)  program.  The SBS and a representative
from SBA must concur with the CO's  determination.

     please note that there are  valid reasons for moving
acquisitions out of the 8(a)  program.   An example is the SBA
provision for cases where a firm graduated from the program, but
because a particular contract constitutes a major percentage of
the firm's business,  the firm should not be precluded from

                              -5-
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                                                                 8(a)  Contracting
                                                                       APPENDIX II
                                                                       Page  8 of  8
                                                     e.r / 4)
              competing.  There are other instances where the incumbent has
Note  6      graduated, but no new qualified 8(a)  firm can be identified.

                  5.  The Agency include measurable 6(a) contracting goals
                  within the individual performance standards for all
                  Assistant Administrators, Office Directors, and Division
                  Directors.

                  He do not object to the requirement that performance
              standards include 8(a) goals as long as a reasonable method
              for setting goals is established and an accurate mechanism
              for timely tracking of achievements versus goals is implemented.

                  6.   The Agency transfer the Small and Disadvantaged
                  Business Specialist positions from QAM to the OSDBU.

                  He do not feel that transferring the SBSs from OAK to OSDBU
              is necessary since we believe that the current organizational
Note  8      structure does not inhibit the achievement of the goals of the
              OSDBU.
Note  7
                                           -6-
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                                             8(a) Contracting
                                                 APPENDIX  III
                                                 Page 1 of 1
       PIG REVISIONS TO THE FINAL REPORT IN RESPONSE TO
             OARM'S COMMENTS TO THE DRAFT REPORT
The Assistant Administrator for OARM's response to our draft
report is contained in Appendix II.  After considering these
comments, we made revisions to the final audit report.  The
following notes correspond to specific sections of OARM's
response as indicated by the reference numbers which we
placed in the left margin of Appendix II.
Note 1    We eliminated this conclusion from the final
          report.

Note 2    We eliminated this example from the final report.

Note 3    We clarified the text in the final report to
          indicate that OSDBU and SDBSs have responsibility
          for reviewing solicitations over $25,000.

Note 4    After further discussions with the Contract
          Management Division in RTP, we eliminated the
          referenced paragraph from the final report.

Note 5    We eliminated the referenced phrase from the final
          report and revised the paragraph to reflect OARM's
          suggested wording.

Note 6    We eliminated this recommendation and the related
          issue from the final report.

Note 7    We modified our original recommendation that
          increased accountability be obtained through
          performance standards.  The final report contains a
          more general recommendation based on OARM's
          comments.

Note 8    We modified our original recommendation that the
          SDBSs be transferred from OARM to OSDBU.  The final
          report contains a recommendation that OARM identify
          appropriate ways of improving coordination with
          OSDBU in directing and supervising the SDBSs.
          comments.
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                                             8(a) Contracting
                                                 APPENDIX IV
                                                 Page 1 of 1
CIS

CMD

EPA

EPAAR

GAO

LAI

NASA

OARM


0AM

DIG

OSDBU


Program Term

RTP

SBA

SDBS

VSI
                        ABBREVIATIONS
Contract Information System

Contract Management Division

Environmental Protection Agency

EPA Acquisition Regulations

Government Accounting Office

Labat-Anderson

National Aeronautics and Space Administration

Office of Administration and Resources
Management

Office of Acquisition Management

Office of Inspector General

Office of Small and Disadvantaged Business
Utilization

Fixed Program Participation Term

Research Triangle Park, NC

Small Business Administration

Small and Disadvantaged Business Specialist

Viking Systems International
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                                   8(a)  Contracting
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                      8(a) Contracting
RELATED REPORTS
                          APPENDIX V
                          Page 1 of 1
Report Title
Small Business Administration: Status,
Operations, and View on the 8 (a) Program
Special Review of Allegations of
Improprieties and Management of Interim
Computer Workstation Contract
Small Business: Problems in Restructuring
SBA's Minority Business Development Program
Contracting Activities at Environmental
Research Laboratory - Duluth, MN
Survey Report ORD Environmental Research
Laboratory - Gulf Breeze
Survey Report on Contracting Activities at
the Atmospheric Research and Exposure
Assessment Laboratory
Survey Report on Contracting Activities at
the Health Effects Research Laboratory
Survey Report on Contracting Activities at
the Environmental Research Laboratory -
Corvallis, OR
Survey of Contracting Activities at the Air
and Energy Engineering Research Laboratory
Management of Extramural Resources at the
Environmental Research Laboratory - Athens,
GA
Management of Extramural Resources at the
Environmental Research Laboratory -
Narragansett , RI
Report
Date
05/24/88
03/30/91
01/31/92
07/07/92
09/29/92
09/30/92
09/30/92
02/03/93
02/26/93
03/31/93
06/16/93
Source
(Number)
GAO
(RCED-88-148BR)
EPA OIG
(1400060)
GAO
(RCED-92-68)
EPA OIG
(2100443)
EPA OIG
(2300093)
EPA OIG
(2300100)
EPA OIG
(2700016)
EPA OIG
(3400019)
EPA OIG
(3400025)
EPA OIG
(3100156)
EPA OIG
(3100236)
      45
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                                   8(a)  Contracting
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                                              8(a)  Contracting
                                                 APPENDIX VI
                                                 Page  l of  2
                         DISTRIBUTION
Office of Inspector General

Inspector General  (2410)

Chief, Resources Management Unit  (2421)

Executive Assistant to the Inspector General  (2410)

EPA Headquarters Office

Administrator  (1101)

Deputy Administrator  (1102)

Assistant Administrator for Administration and Resources
  Management  (3101)

Director, Office of Small and Disadvantaged Business
  Utilization  (1230)

Director, Office of Acquisition Management  (3801F)

Director, Program and Policy Coordination Office  (3102)

Liaison, Office of Acquisition Management  (3801F)

Liaison, Office of Administration and Resources Management
(3102)

Special Assistant to the Director, Office of Acquisition
Management  (38OIF)

Agency Followup Official  (3304)
  Attention:   Assistant Administrator for the Office of
               Administration and Resources Management

Agency Followup Coordinator  (3304)
  Attention:   Director, Resources Management Division

Audit Followup Coordinator (3304)
  Attention:  Management Controls Branch
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                                              8(a)  Contracting
                                                 APPENDIX VI
                                                 Page  2  of 2
                         DISTRIBUTION
Audit Followup Coordinator  (3802F)
  Office of Policy, Training and Oversight Division Audit

Followup Coordinator  (1104)
  Executive Support Office

Associate Administrator for Regional Operations
  and State/Local Relations  (1501)

Associate Administrator for Communications, Education  and
  Public Affairs  (1701)

Associate Administrator for Congressional and
  Legislative Affairs  (1301)

EPA Regional Office

Director, Contract Management Division at Cincinnati,  OH

Director, Contract Management Division at Research Triangle
Park, NC

Audit Followup Coordinator  (CMD-Cincinnati)

Audit Followup Coordinator  (CMD-Research Triangle Park)
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