Author: Jeremy Higbee

Government contracting: An example of cheating and the solutions

Photo: House Oversight and Reform Committee

Photo: House Oversight and Reform Committee

As discussed in the previous post, there have been some issues in the U.S. government lately with government contracting.

Due to businesses misrepresenting their sizes, there have been several protests filed by the businesses that should have been awarded the contracts. The Small Business Administration is so backlogged, though, that they are having trouble keeping up with the number of complaints.

Ahead is a case of recent government contracting fraud along with the solutions that will soon be implemented in order to keep it from happening again.

The problem

One of the more famous instances of government contracting fraud is a case against Strong Castle, Inc., a government IT solutions company. The Committee on Oversight and Government Reform reported that a series of contracts adding up to $500 million were awarded to Strong Castle on less than trustworthy grounds.

The contracts were being awarded by the Internal Revenue Service who spends $2 billion annually on informational technology. Due to this huge amount of money being invested in IT, the competition among federal vendors for the IRS’s IT contracts is high.

The owner of Strong Castle, Braulio Castillo, claims his company certifies for woman and minority-owned (SWAM), a Service-Disabled Veteran-Owned (SDVOSB), and that their central quarters are located in the Chinatown district of Washington, D.C. (a certified HUBZone). The first claim is true, the second is questionable at best, and the third is a flat-out lie.

The set-aside contracts mentioned above are designed to help disadvantaged business or businesses owned by the economically disadvantaged compete in the federal market place.

So, in order to qualify for the small business set-aside contracts, Castillo committed fraud. Castillo was able to get away with most of this fraud because he had an insider relationship with the IRS Deputy Director for IT Acquisition, Greg Roseman. This relationship expedited an otherwise lengthy contracting process while favoring Castillo for the awards.

Because Castillo “qualified” for these set-aside contracts, his company was able to easily access and win contracts that were meant for small businesses that actually need them. According to the Committee on Oversight and Government Reform, Strong Castle took advantage of “weaknesses in the certification processes.”

Castillo took advantage of the loopholes by setting up an office in Chinatown and calling it the central office, in accordance with HUBZone regulations that the central office of a business must be located in an underutilized business zone. The problem is, Castillo and his wife – also an executive at Strong Castle – worked out of a house in a wealthy Virginia neighborhood.

HUBZone regulations also require that employees working in the HUBZone live in the HUBZone. To circumvent this regulation, Castillo hired full-time university students to work in the office who lived in the HUBZone, which might have been fine, but it turned out that the students didn’t actually live in the HUBZone. Castillo tried to get the students to move to HUBZone by threatening to fire the students if they didn’t.

The worst part is how Castillo qualified for SDVOSB status. Castillo injured his foot during football while he was at the U.S. Military Academy in 1984. He was the Academy for a year before he transferred to a university in Southern California where he continued to play football. Castillo claims that this foot injury gives him service-disabled veteran status.

He also later changed his story during the certification process to say that he received the foot injury during a school orientation to make it seem like he was injured while on duty. When he moved to Southern California he had several successful years of playing football with no problems.

The solutions: What’s being done, how is fraud being prevented

Outside of the government and the federal vendors, companies like BidSync are consolidating the whole procurement process, inadvertently preventing fraud: from soliciting vendors, receiving bid notifications, to requesting purchases. The product manager of BidSync, Adam Magalei, firmly believes there is more to the procurement process than just purchasing.

Government-wise, the in-depth report from the Committee on Oversight and Government Reform – from which the details on Castillo’s dealings were gathered – claims to be a deterrent to any federal contractor who may or may not consider getting involved in contracting fraud or abuse. While this may not be the end all solution, it is certainly a step in the right direction to keep federal contractors and government agencies honest in their work.

Truly, Castillo is very upset about the report, stating that it cost him “contracting partners, lines of credit, and goodwill among [their] important government customers.” View his full statement here. Any company who reads how much it cost Castillo’s business will think twice before attempting any unsavory contracting practices.

Because the set-aside contracting programs are so easy to manipulate the government is attempting to reform the weaknesses found within them. The programs are self-certifying, so anybody can apply and register under them, but it’s going to take a considerable amount of regulations in order to make sure everyone is staying honest when they are self-certifying, which is one of the reasons that the government is unifying contracts into an “open-book” format.

Even more so, contracting officials within the IRS and other agencies need to have more training when it comes to recognizing fraud, conflicts of interest, and other attempts to game the system. It’s important for officials to recognize when a company is attempting to acquire a contract that they don’t qualify, especially since that contract is set-aside for populations that really need it. The IRS is deemed at fault almost as much as Castillo in this case.

Conclusion

While there are businesses that attempt to dupe the system and take advantage of programs set-aside for disadvantaged populations, and sometimes get away with it, there are steps being taken in the right direction so that government contracting fraud, especially according to business size and qualifications, happens less often. There will be businesses that always try, but in the coming years they are less likely to succeed.

Government contracting: Business size and the implications of cheating

Acquiring government contracts is hard work. So, when some businesses hear that there are set-aside federal contracts that are awarded specifically to small businesses, is it any wonder that some businesses try to misrepresent their size to try and win a bid? Especially since small businesses were awarded around $96 billion dollars in federal contracts for 2011.

Business size

In order to be considered a small business, a company must have a certain amount of employees (depending on the industry) and make under a certain income bracket annually (also dependent on industry). So, for example, a company in the tech industry would have a larger maximum income bracket than a cleaning service.

Size protests

Since the competition for bids is increasing, there have been more and more protests. A protest is an action taken by a company that feels it lost a contract to a business that does not meet business size regulations. In May of 2012, according to Bloomberg BusinessWeek, there was a $7 million contract for an order of Coast Guard cutters (type of boat).

The company MTN Government Services won the bid. However, the company TrustComm filed a protest stating that MTN Government Services didn’t meet the size qualifications of a small business. TrustComm was right to file a protest, because after nine months of investigation by the Small Business Administration, they determined that MTNGS was indeed not a small business.

The SBA is so backed up with paperwork that any protest takes an exorbitant amount of time to investigate. So long, in fact, that by the time the SBA figured out the MTNGS wasn’t a small business, the Coast Guard was already testing the cutters and if the contract were pulled from MTN the costs would outweigh the benefit of awarding the contract to a small business.

This is unfortunate for small businesses who take the time and energy to comply with SBA regulations in order to take part in the set-aside government contracts for small businesses. The SBA, in order to help regulate non-small business from competing with small businesses, did make size protests a viable option for small businesses to help with the situation, but with such a massive backlog, a protest – as exemplified by MTNGS – does little if businesses that take advantage of regulations don’t get penalized.

Cheating

While the dealings with MTNGS and TrustComm seem like a simple business misunderstanding, cheating on government contracts goes much deeper. Besides the normal amount of set-aside for small businesses, there are set-aside contracts for small businesses that are owned by underrepresented populations. So, there are contracts specifically available for women-owned, veteran-owned, service-disable veteran-owned, and minority-owned small businesses.

There are also advantages to winning contracts if your business is located in a certified Historically Underutilized Business Zone (HUBZone). A business has to self-certify itself in order to qualify for these labels. As you could probably guess, big businesses have also tried taking advantage of these self-certifications. The SBA does screen these self-certifications, but again the backlogs make it impossible for the SBA to keep the businesses honest until another business files a protest.

Conclusion

These are the type of loopholes that business owners are taking advantage of. This is harmful to small businesses who are attempting to play fair, but get the help they need to stay competitive. The responsibility neither lies solely on the government or businesses, but both need to take steps to fix the problem. There’s no point in trying to keep disadvantaged businesses competitive if it only enables other businesses to take what they didn’t earn.

Luckily, there are some solutions that are being discussed and will soon be implemented. From stricter guidelines to “open-book” clauses, the government is working to keep government contracting honest.