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GAO Report Validates AGC Concerns Over HUBZone Program

Mon August 04, 2008 - National Edition
Construction Equipment Guide

The Associated General Contractors of America (AGC) July 17 endorsed the findings of a report released by the Government Accountability Office (GAO), which found that the Historically Underutilized Business Zone (HUBZone) program is highly susceptible to fraud and “widespread abuse.”

“The GAO report confirms the claims contractors have been making for years — that the Small Business Administration [SBA] has failed to execute its oversight authority over the HUBZone program,” said AGC’s Chief Executive Officer Stephen E. Sandherr. “The HUBZone program has been a huge administrative failure, which has cost the program its potential as a legitimate contracting vehicle, the opportunity for growth for these disadvantaged communities and billions of lost taxpayer dollars.”

AGC has long expressed significant concerns about the effectiveness and fairness of the HUBZone program as it is applied to the construction industry and has advocated that significant improvements be enacted to reform the program. The program does not realize its goal of increasing employment and reinvesting in economically disadvantaged areas, according to the AGC.

It does not require the SBA to measure the successes and failures of the program and it does not fairly reward firms in a manner consistent with the intent of the program. Consequently, this undermines not only the intent of the program, but hurts small businesses, HUBZones communities, and costs the American taxpayers billions of dollars, AGC said.

“For years the HUBZone program has failed to meet its goals of increasing employment opportunities, investment and economic development in low income and/or high unemployment areas,” added Sandherr. “We thank Chairwoman Nydia Velazquez [D-N.Y.] for her foresight in recognizing the problems facing the HUBZone program.”

For several years, AGC has recommended several changes to improve the HUBZone program:

• Limit the program to construction projects in or near a HUBZone. The SBA should apply the HUBZone program only to contracts for the construction of federal projects within a l50-mi. radius of the HUBZone contractor’s principal place of business. Only those projects can offer employment to a significant number of HUBZone residents, and only those projects can promise to make a lasting change in their economic circumstance.

• Require HUBZone contractors ensure that HUBZone residents receive at least 30 percent of the payroll needed to perform all HUBZone contracts. Current regulations require HUBZone contractors to self-perform only 15 percent of their general construction contracts. Using payroll as the correct measure will avoid pass through purchases of materials and supplies that encourage brokering by legal HUBZones entities that nonetheless are not actually building construction projects. This change also would help ensure that HUBZone contractors are really in the market to construct the projects on which they bid.

• Require annual reports on employment and income in the nation’s HUBZones. With the aid and assistance of the Departments of Labor and Commerce, the SBA can and should publish a report on employment and income in each of the nation’s HUBZones at least once each year.

• Require SBA to routinely investigate alleged abuses of the program. Some construction contractors have found the SBA indifferent to their complaints that individual firms are abusing the HUBZone program, or violating its terms or conditions. The SBA regulations should therefore require the agency’s local offices to investigate such complaints and publicly report their findings and decisions in a public writing within 10 days.

• Change the 10 percent price preference to 5 percent. Congress should authorize and require a smaller price preference for the construction industry, where prices rarely vary by as much as 10 percent. Such a bid preference would still exceed the profit margin on the vast majority of federal construction contracts. While Congress may want to give HUBZone contractors some kind of advantage, it should not go so far as to guarantee federal contracts for any firm.

• Authorize all contractors who stand ready, willing and able to build to protest. To help prevent fraud or other abuse of the HUBZone program, the regulations also should permit contractors to protest a sole source acquisition on the grounds that the HUBZone contractor does not actually qualify for the program.

• Require certification during periods of peak employment or require payroll records. Current regulations permit construction contractors to seek and obtain certification for the HUBZone program at any time. The SBA should either limit certification to the months of peak employment or require construction firms — companies that experience large fluctuations in employment throughout the course of any given year — to provide certified payroll records, at the end of each year. This would establish that HUBZone residents truly worked at least 35 percent of all the hours claimed in that year.

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