SBA’s “8(a) Program”: Overview, History, and Current Issues

Summary: The Minority Small Business and Capital Ownership Development Program—commonly known as the "8(a) Program"—provides participating small businesses with training, technical assistance, and contracting opportunities in the form of set-aside and sole-source awards. A set-aside award is a contract in which only certain contractors may compete, whereas a sole-source award is a contract awarded, or proposed for award, without competition. In FY2017, 3,421 8(a) firms were awarded more than $27.1 billion in federal contracts, including $8.0 billion in 8(a) set-aside awards and $8.4 billion in 8(a) sole-source awards. Other programs provide similar assistance to other types of small businesses (e.g., women-owned, HUBZone, and service-disabled veteran-owned).

Summary: 8(a) Program eligibility is generally limited to small businesses "unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of and residing in the United States" that demonstrate "potential for success."

Summary: Members of certain racial and ethnic groups are presumed to be socially disadvantaged, although individuals who do not belong to these groups may prove they are also socially disadvantaged. To be economically disadvantaged, an individual must have a net worth of less than $250,000 (excluding ownership in the 8(a) firm and equity in his or her primary residence) at the time of entry into the program. This amount increases to $750,000 for continuing eligibility. In determining whether an applicant has good character, the SBA takes into account any criminal conduct, violations of SBA regulations, or debarment or suspension from federal contracting. For a firm to demonstrate potential for success, it generally must have been in business in its primary industry classification for two years immediately prior to applying to the program. However, small businesses owned by Alaska Native Corporations, Community Development Corporations, Indian tribes, and Native Hawaiian Organizations are eligible to participate in the 8(a) Program under somewhat different terms. Each of these terms is further defined by the Small Business Act, Small Business Administration (SBA) regulations, and judicial and administrative decisions.

Summary: This report examines the 8(a) Program's historical development, key requirements, administrative structures and operations, and the SBA's oversight of 8(a) firms. It also discusses two SBA programs designed to support 8(a) firms, the 7(j) Management and Technical Assistance Program and the 8(a) Mentor-Protégé Program, and provides various program statistics. It concludes with an analysis of the following current 8(a) Program issues:

Summary: The SBA's decision to address recent declines in the number of program participants by revising and streamlining the program's application process, an action which the SBA's Office of Inspector General (SBA OIG) reports "may erode core safeguards that prevented questionable firms from entering the 8(a) Program." Reported variation in 8(a) Program service delivery. Reported deficiencies in the oversight of 8(a) Program participant's continuing eligibility. Disagreements concerning the financial thresholds used to determine economic disadvantage, including the SBA's decision to exclude equity in a primary residence from the calculation of an individual's net worth. The adequacy of the performance measures used to evaluate the program's effectiveness in meeting its statutory goals.

The Minority Small Business and Capital Ownership Development Program—commonly known as the "8(a) Program"—provides participating small businesses with training and technical assistance designed to enhance their ability to compete effectively in the private marketplace. One of the program's major benefits is that 8(a) firms can receive federal contracting preferences in the form of set-aside and sole-source awards. A set-aside award is a contract in which only certain contractors may compete, whereas a sole-source award is a contract awarded, or proposed for award, without competition. As a business development program, its overall goal is for 8(a) firms to graduate from the program and continue to do well in a competitive business environment.

8(a) Program eligibility is generally limited to small businesses which are "unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of and residing in the United States" and demonstrate "potential for success." However, small businesses owned by Alaska Native Corporations (ANCs), Community Development Corporations (CDCs), Indian tribes, and Native Hawaiian Organizations (NHOs) are also eligible to participate in the 8(a) Program under somewhat different terms. In FY2017, 3,421 8(a) firms were awarded more than $27.1 billion in federal contracts, including $8.0 billion in 8(a) set-aside awards and $8.4 billion in 8(a) sole-source awards. Other programs provide similar assistance to other types of small businesses (e.g., women-owned, HUBZone, and service-disabled veteran-owned).

Congress has a perennial interest in small business programs, including the 8(a) Program. As stated in the Small Business Act

It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small-business enterprises, to insure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the Nation.

The Small Business Act also indicates "that the opportunity for full participation in our free enterprise system by socially and economically disadvantaged persons is essential if we are to obtain social and economic equality for such persons and improve the functioning of our national economy." To help achieve these goals, the 8(a) Program's stated statutory purposes are to

(A) promote the business development of small business concerns owned and controlled by socially and economically disadvantaged individuals so that such concerns can compete on an equal basis in the American economy;

(B) promote the competitive viability of such concerns in the marketplace by providing such available contract, financial, technical, and management assistance as may be necessary; and

(C) clarify and expand the program for the procurement by the United States of articles, supplies, services, materials, and construction work from small business concerns owned by socially and economically disadvantaged individuals.

Recent Congresses have had particular interest in the 8(a) Program largely because of its effects on minority-owned small businesses and small businesses' overall role in job creation.

8(a) business development assistance has many forms, including business counseling and mentoring, both in online and traditional face-to-face settings; access to capital and surety bond guarantees; contract marketing guidance; and assistance with acquiring federal government surplus property. In addition, the Small Business Administration (SBA) reviews and certifies eligible clients; assigns SBA personnel (Business Opportunity Specialists, BOSs) to monitor and measure each firm's progress through annual reviews, business planning collaboration, and systematic evaluations; helps to identify potential contract opportunities; and markets each firm's technical capabilities to federal agency procurement officials.

This report examines the 8(a) Program's historical development, key requirements, administrative structures and operations, and the SBA's oversight of 8(a) firms. It also discusses two SBA programs designed to support 8(a) firms, the 7(j) Management and Technical Assistance Program and the 8(a) Mentor-Protégé Program, and provides various program statistics.

It concludes with an analysis of the following current 8(a) Program issues:

The current 8(a) Program is the result of the merger of two distinct types of federal programs: those seeking to assist small businesses in general and those seeking to assist racial and ethnic minorities. The merger first occurred, as a matter of executive branch practice, in 1967 and was given a statutory basis in 1978.

In 1942, Congress first authorized a federal agency to enter into prime contracts with other agencies and subcontract with small businesses for the performance of these contracts. The agency was the Smaller War Plants Corporation (SWPC), which was partly created for this purpose, and Congress gave it these powers to ameliorate small businesses' financial difficulties while "mobiliz[ing] the productive facilities of small business in the interest of successful prosecution of the war." The SWPC's subcontracting authority expired along with the SWPC at the end of the World War II. However, in 1951, at the start of the Korean War, Congress created the Small Defense Plants Administration (SDPA), which was generally given the same powers that the SWPC had exercised. Two years later, in 1953, Congress transferred the SDPA's subcontracting authorities, among others, to the newly created SBA, with the intent that the SBA would exercise these powers in peacetime, as well as in wartime. When the Small Business Act of 1958 transformed the SBA into a permanent agency, this subcontracting authority was included in Section 8(a) of the act. At its inception, the SBA's subcontracting authority was not limited to small businesses owned and controlled by the socially and economically disadvantaged. Under the original Section 8(a), the SBA could contract with any "small-business concerns or others," but it reportedly seldom, if ever, employed this subcontracting authority, focusing instead upon its loan and other programs.

Federal Programs for Racial and Ethnic Minorities

Federal programs for racial and ethnic minorities began developing at approximately the same time as those for small businesses, although there was initially no explicit overlap between them. The earliest programs were created by executive orders, beginning with President Franklin Roosevelt's order on June 25, 1941, requiring that all federal agencies include a clause in defense-related contracts prohibiting contractors from discriminating on the basis of "race, creed, color, or national origin." Subsequent Presidents followed Roosevelt's example, issuing a number of executive orders seeking to improve the employment opportunities for various racial and ethnic groups. These executive branch initiatives took on new importance after the Kerner Commission's report on the causes of the 1966 urban riots concluded that African Americans would need "special encouragement" to enter the economic mainstream.

Presidents Lyndon Johnson and Richard Nixon laid foundations for the present 8(a) Program in the hope of providing such "encouragement." Johnson created the President's Test Cities Program (PTCP), which involved a small-scale use of the SBA's authority under Section 8(a) to award contracts to firms willing to locate in urban areas and hire unemployed individuals, largely African Americans, or sponsor minority-owned businesses by providing capital or management assistance. However, under the PTCP, small businesses did not have to be minority-owned to receive subcontracts under Section 8(a). Nixon's program was larger and focused more specifically on minority-owned small businesses. During the Nixon Administration, the SBA promulgated its earliest regulations for the 8(a) Program. In 1970, the first of these regulations articulated the SBA's policy of using Section 8(a) to "assist small concerns owned by disadvantaged persons to become self-sufficient, viable businesses capable of competing effectively in the market place." A later regulation, promulgated in 1973, defined disadvantaged persons as including, but not limited to, "black Americans, Spanish-Americans, oriental Americans, Eskimos, and Aleuts." However, the SBA lacked explicit statutory authority for focusing its 8(a) Program on minority-owned businesses until 1978, although courts generally rejected challenges alleging that SBA's implementation of the program was unauthorized because it was "not specifically mentioned in statute."

1978 Amendments to the Small Business Act and Subsequent Regulations

In 1978, Congress amended the Small Business Act to give the SBA express statutory authority for its 8(a) Program for minority-owned businesses. Under the 1978 amendments, the SBA can only subcontract under Section 8(a) with "socially and economically disadvantaged small business concerns," or businesses that are least 51% owned by one or more socially and economically disadvantaged individuals and whose management and daily operations are controlled by such individual(s).

The 1978 amendments established a basic definition of socially disadvantaged individuals , which included those who have been "subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities." They also included congressional findings that "Black Americans, Hispanic Americans, Native Americans, and other minorities" are socially disadvantaged. Thus, if an individual was a member of one of these groups, he or she was presumed to be socially disadvantaged. Otherwise, the amendments were generally seen to grant the SBA discretion to recognize additional groups or individuals as socially disadvantaged based upon criteria promulgated in regulations. Under these regulations, which include a three-part test for determining whether minority groups not mentioned in the amendment's findings are disadvantaged, the SBA recognized the racial or ethnic groups listed in Table 1 as socially disadvantaged for 8(a) purposes. The regulations also established standards of evidence to be met by individuals demonstrating personal disadvantage and procedures for rebutting the presumption of social disadvantage accorded to members of recognized minority groups.

The 1978 amendments also defined economically disadvantaged individuals , for purposes of the 8(a) Program, as "those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged." In 1989, the SBA established by regulation that personal net worth of less than $250,000 at the time of entry into the program ($750,000 for continuing eligibility) constitutes economic disadvantage. As will be discussed, these financial thresholds have not been adjusted for inflation.

Although the 8(a) Program was originally established for the benefit of disadvantaged individuals , in the 1980s, Congress expanded the program to include small businesses owned by four disadvantaged groups .

The first owner-group to be included was Community Development Corporations (CDCs). A CDC is

a nonprofit organization responsible to residents of the area it serves which is receiving financial assistance under part A of this subchapter [42 U.S.C. §§9805 et seq .] and any organization more than 50 percent of which is owned by such an organization, or otherwise controlled by such an organization, or designated by such an organization for the purpose of this subchapter [42 U.S.C. §§9801 et seq .].

Congress created CDCs with the Community Economic Development Act of 1981 and instructed the SBA to issue regulations ensuring that CDCs could participate in the 8(a) Program.

In 1986, two additional owner-groups, Indian tribes and Alaska Native Corporations (ANCs), became eligible for the program when Congress passed legislation providing that firms owned by Indian tribes, which include ANCs, were to be deemed socially disadvantaged for 8(a) Program purposes. In 1992, ANCs were further deemed to be "economically disadvantaged."

The final owner-group, Native Hawaiian Organizations (NHOs), was recognized in 1988. An NHO is defined as

any community service organization serving Native Hawaiians in the State of Hawaii which (A) is a nonprofit corporation that has filed articles of incorporation with the director (or the designee thereof) of the Hawaii Department of Commerce and Consumer Affairs, or any successor agency, (B) is controlled by Native Hawaiians, and (C) whose business activities will principally benefit such Native Hawaiians.

Detailed statutory and regulatory requirements govern 8(a) Program eligibility, set-aside and sole-source awards, and related issues. These requirements are generally the same for all 8(a) firms, although there are instances where there are "special rules" for group-owned 8(a) firms. An Appendix to this report compares the requirements applicable to individual owners of 8(a) firms to those applicable to groups owning 8(a) firms (i.e., ANCs, CDCs, NHOs, and Indian tribes).

As mentioned previously, 8(a) Program eligibility is limited to "small business[es] which [are] unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of and residing in the United States, and which demonstrates potential for success." Each of these terms is defined by the Small Business Act; SBA regulations; and judicial and administrative decisions. The eligibility requirements are the same at the time of entry into the program and throughout the program unless otherwise noted.

Except for small agricultural cooperatives, a business is a for-profit entity that has a place of business located in the United States and operates primarily within the United States or makes a significant contribution to the U.S. economy by paying taxes or using American products, materials, or labor. For 8(a) Program purposes, businesses are individual proprietorships, partnerships, limited liability companies, corporations, joint ventures, associations, trusts, or cooperatives.

A business is small if it is independently owned and operated; is not dominant in its field of operations; and meets any definitions or standards established by the SBA Administrator. These standards focus primarily upon the size of the business as measured by the number of employees or average annual receipts (gross income for sole proprietorships), but they also take into account the size of other businesses within the same industry. For example, businesses in the field of scheduled passenger air transportation are small if they have 1,500 or fewer employees, whereas those in the data processing field are small if they have average annual receipts of $32.5 million or less.

Affiliations among businesses, or relationships allowing one party control or the power of control over another, generally count in size determinations, with the SBA considering "the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit." Businesses can thus be determined to be other than small because of their involvement in joint ventures, subcontracting arrangements, or franchise or license agreements, among other things, provided that their income or personnel numbers, plus those of their affiliate(s), are over the pertinent size threshold.

8(a) firms must be "at least 51% unconditionally and directly owned by one or more socially and economically disadvantaged individuals who are citizens of the United States" unless they are owned by an ANC, CDC, NHO, or Indian tribe. Ownership is unconditional when it is not subject to any conditions precedent or subsequent, executory agreements, voting trusts, restrictions on or assignments of voting rights, or other arrangements that could cause the benefits of ownership to go to another entity. Ownership is direct when the disadvantaged individuals own the business in their own right and not through an intermediary (e.g., ownership by another business entity or by a trust that is owned and controlled by one or more disadvantaged individuals). Non-disadvantaged individuals and nonparticipant businesses that own at least 10% of an 8(a) business may generally own no more than 10% to 20% of any other 8(a) firm. Nonparticipant businesses that earn the majority of their revenue in the same or similar line of business are likewise barred from owning more than 10% (increasing to 20%-30% in certain circumstances) of another 8(a) firm.

In addition, 8(a) firms must be controlled by one or more disadvantaged individuals. "Control is not the same as ownership" and includes both strategic policy setting and day-to-day management and administration of business operations. Management and daily business operations must be conducted by one or more disadvantaged individuals unless the 8(a) business is owned by an ANC, CDC, NHO, or Indian tribe. These individuals must have managerial experience "of the extent and complexity needed to run the concern" and generally must devote themselves full-time to the business "during the normal working hours of firms in the same or similar line of business." A disadvantaged individual must hold the highest officer position within the business. Non-disadvantaged individuals may otherwise be involved in the management of an 8(a) business, or may be stockholders, partners, limited liability members, officers, or directors of an 8(a) business. However, non-disadvantaged individuals may not exercise actual control or have the power to control the firm or its disadvantaged owner(s), or receive compensation greater than that of the highest-paid officer (usually the chief executive officer or president) without the SBA's approval.

Socially disadvantaged individuals are "those who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities." Members of designated groups, listed in Table 1 , are entitled to a rebuttable presumption of social disadvantage for 8(a) Program purposes, although this presumption can be overcome with "credible evidence to the contrary." Individuals who are not designated-group members must prove they are socially disadvantaged by a preponderance of the evidence. Such individuals must show (1) at least one objective distinguishing feature that has contributed to social disadvantage (e.g., race, ethnic origin, gender, physical handicap, long-term residence in an environment isolated from mainstream American society); (2) personal experiences of substantial and chronic social disadvantage in American society; and (3) negative impact on entry into or advancement in the business world. In assessing the third factor, the SBA will consider all relevant evidence the applicant produces, but must consider the applicant's education, employment, and business history to see if the totality of the circumstances shows disadvantage. Groups not included in Table 1 may obtain eligibility by demonstrating disadvantage by a preponderance of the evidence.

Economically disadvantaged individuals are "socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged." Individuals claiming economic disadvantage must submit financial documentation for eligibility purposes. The SBA will examine the individual's personal income for the past three years, their net worth, and the fair market value of their assets. However, principal ownership in a prospective or current 8(a) business is generally excluded when calculating net worth, as is equity in individuals' primary residence. For initial eligibility, applicants must have a net worth of less than $250,000. For continued eligibility, net worth must be less than $750,000.

In determining whether an applicant to, or participant in, the 8(a) Program possesses good character , the SBA considers any criminal conduct, violations of SBA regulations, current debarment or suspension from government contracting, managers or key employees who lack business integrity, and the knowing submission of false information to the SBA.

For a firm to have demonstrated potential for success, it generally must have been in business in its primary industry classification for at least two full years immediately prior to the date of its application to the 8(a) Program. However, the SBA may grant a waiver allowing firms that have been in business for less than two years to enter the program under specified circumstances.

Set-Asides and Sole-Source Awards Under Section 8(a)

Section 8(a) of the Small Business Act authorizes agencies to award contracts for goods or services, or to perform construction work, to the SBA for subcontracting to 8(a) firms. The act also authorizes the SBA to delegate the function of executing contracts to the procuring agencies and often does so.

A set-aside award is a contract awarded in which only certain contractors may compete, whereas a sole-source award is a contract awarded, or proposed for award, without competition. The Competition in Contracting Act (CICA) generally requires federal agencies to allow full and open competition through the use of competitive procedures when procuring goods or services. However, set-aside and sole-source awards to 8(a) firms are permissible under CICA under certain circumstances. In fact, an 8(a) set-aside is a recognized competitive procedure. Agencies are effectively encouraged to subcontract through the 8(a) Program because there are government-wide and agency-specific goals regarding the percentage of procurement dollars awarded to small disadvantaged businesses, which include 8(a) firms (the current government-wide goal is 5% of all small business eligible federal contracts).

Discretion to Subcontract Through the 8(a) Program

There are few limits on agency discretion to subcontract through the 8(a) Program. However, the SBA is prohibited by regulation from accepting procurements for award under Section 8(a) when

1. the procuring agency issued a solicitation for or otherwise expressed publicly a clear intent to reserve the procurement as a set-aside for small businesses not participating in the program prior to offering the requirement to the SBA for award as an 8(a) contract; 2. the procuring agency competed the requirement among 8(a) firms prior to offering the requirement to the SBA and receiving the SBA's acceptance of it; or 3. the SBA makes a written determination that "acceptance of the procurement for 8(a) award would have an adverse impact on an individual small business, a group of small businesses located in a specific geographical location, or other small business programs."

In addition, the SBA is barred from awarding an 8(a) contract, either via a set-aside or on a sole-source basis, "if the price of the contract results in a cost to the contracting agency which exceeds a fair market price."

Otherwise, agency officials may offer contracts to the SBA "in [their] discretion," and the SBA may accept requirements for the 8(a) Program "whenever it determines such action is necessary or appropriate." The courts and the Government Accountability Office (GAO) will generally not hear protests of agencies' determinations regarding whether to procure specific requirements through the 8(a) Program unless it can be shown that government officials acted in bad faith or contrary to federal law.

Monetary Thresholds and Subcontracting Mechanisms

Once the SBA has accepted a contract for the 8(a) Program, the contract is awarded through either a set-aside or on a sole-source basis, with the contract amount generally determining the acquisition method used. When the contract's anticipated total value, including any options, is less than $4 million ($7 million for manufacturing contracts), the contract is normally awarded without competition. In contrast, when the contract's anticipated value exceeds these thresholds, the contract generally must be awarded via a set-aside with competition limited to 8(a) firms so long as there is a reasonable expectation that at least two eligible and responsible 8(a) firms will submit offers and the award can be made at fair market price. Sole-source awards of contracts valued at $4 million ($7 million or more for manufacturing contracts) may be made only when (1) there is not a reasonable expectation that at least two eligible and responsible 8(a) firms will submit offers at a fair market price or (2) the SBA accepts the requirement on behalf of an 8(a) firm owned by an Indian tribe, an ANC or, in the case of Department of Defense contracts, an NHO. Requirements valued at more than $4 million ($7 million for manufacturing contracts) cannot be divided into several acquisitions at lesser amounts in order to make sole-source awards.

In addition, the Federal Acquisition Regulatory Council has the responsibility of adjusting each acquisition-related dollar threshold (including those for the 8(a) Program), on October 1, of each year that is evenly divisible by five. The next adjustment for inflation will take place on October 1, 2020.

Other key 8(a) Program requirements include the following:

Inability to protest an 8(a) firm's eligibility for an award . When the SBA makes or proposes an award to an 8(a) firm, the firm's eligibility cannot be challenged or protested as part of the solicitation or proposed contract award. Instead, information concerning a firm's eligibility must be submitted to the SBA in accordance with separate requirements contained in Section 124.517 of Title 13 of the Code of Federal Regulations . Nine-year m aximum participation. Firms may participate in the program for no more than nine years from the date of their admission, although they may be terminated or graduate from the program before nine years have passed. One-time eligibility . Once a firm or a disadvantaged individual upon whom a firm's eligibility was based has exited the program after participating in it for any length of time, neither the firm nor the individual is generally eligible to participate in the program again. Firms are considered identical for purposes of program eligibility when at least 50% of the assets of one firm are the same as those of another firm. Ownership l imit ation s on family members of current or former 8(a) firm owners . Individuals generally may not use their disadvantaged status to qualify a firm for the program if the individual has an immediate family member who is using, or has used, the disadvantaged status to qualify a firm for the program. Award Limit ations. In general, 8(a) firms may not receive additional 8(a) sole-source awards once they have been awarded a combined total of competitive and sole-source awards in excess of $100 million, in the case of firms whose size is based on their number of employees, or in excess of an amount equivalent to the lesser of (1) $100 million or (2) five times the size standard for the industry, in the case of firms whose size is based on their revenues. In addition, 8(a) firms in the transitional stage , or the last five years of participation, must achieve annual targets for the amount of revenues they receive from non-8(a) sources. These targets increase over time, with firms required to attain 15% of their revenue from non-8(a) sources in the fifth year, 25% in the sixth year, 35% in the seventh year, 45% in the eight year, and 55% in the ninth year. Firms that do not display the relevant percentages of revenue from non-8(a) sources are ineligible for sole-source 8(a) contracts "unless and until" they correct the situation. Subcontracting Limitations . Federal subcontracting limitations require small businesses receiving contracts under set-asides to perform work that equals certain minimum percentages of the amount paid under the contract. Specifically, small businesses must generally perform at least 50% of the costs of the contract incurred for personnel with its own employees, in the case of service contracts; and at least 50% of the cost of manufacturing supplies or products (excluding the cost of materials), in the case of manufacturing contracts.

Requirements for Tribally, ANC-, NHO-, and CDC-Owned Firms

Tribes, Alaska Native Corporations (ANCs), Native Hawaiian Organizations (NHOs) or Community Development Corporations (CDCs) themselves generally do not participate in the 8(a) Program. Rather, businesses that are at least 51% owned by such entities participate in the program, although the rules governing their participation are somewhat different from those for the program generally.

Firms owned by Indian tribes, ANCs, NHOs, and CDCs must be deemed small under the SBA's size standards. However, certain affiliations with the owning entity or other business enterprises of that entity are excluded in size determinations unless the SBA Administrator determines that a small business owned by an ANC, CDC, NHO, or Indian tribe "[has] obtained, or [is] likely to obtain, a substantial unfair competitive advantage within an industry category" because of such exclusions. Other affiliations of small businesses owned by ANCs, CDCs, NHOs, and Indian tribes may be included in size determinations, and ANC-owned firms, in particular, have been subjected to early graduation from the 8(a) Program because they exceeded size standards.

Firms owned by ANCs, CDCs, NHOs, and Indian tribes must be "businesses" under the SBA's definition. Although ANCs themselves may be for-profit or nonprofit, ANC-owned businesses must be for-profit to participate in the program.

Firms owned by ANCs, CDCs, NHOs, or Indian tribes must be unconditionally owned and substantially controlled by the ANC, CDC, NHO, or Indian tribe, respectively. However, under SBA regulations, tribally or ANC-owned firms may be managed by individuals who are not members of the tribe or Alaska Natives if the firm can demonstrate:

that the Tribe [or ANC] can hire and fire those individuals, that it will retain control of all management decisions common to boards of directors, including strategic planning, budget approval, and the employment and compensation of officers, and that a written management development plan exists which shows how Tribal members will develop managerial skills sufficient to manage the concern or similar Tribally-owned concerns in the future.

NHO-owned firms must demonstrate that the NHO controls the board of directors. However, the individual who is responsible for the NHO-owned firm's day-to-day management need not establish personal social and economic disadvantage. CDCs are to be managed and have their daily operations conducted by individuals with "managerial experience of an extent and complexity needed to run the [firm]."

As owners of prospective or current 8(a) firms, Indian tribes, ANCs, NHOs, and CDCs are all presumed to be socially disadvantaged.

By statute, ANCs are deemed to be economically disadvantaged, and CDCs are similarly treated as economically disadvantaged. In contrast, Indian tribes and NHOs must establish economic disadvantage. Indian tribes must present data on, among other things, the number of tribe members; the tribe members' unemployment rate and per capita income; the percentage of the local Indian population above the poverty level; the tribe's access to capital and assets as disclosed in current financial statements; and all businesses wholly or partially owned by tribal enterprises or affiliates, as well as their primary industry classification. Effective August 24, 2016, NHOs establish economic disadvantage in the same manner as Indian tribes. Prior to this revision, the SBA considered "the individual economic status of NHO's members," the majority of whom had to qualify as economically disadvantaged, under the same standards as individual applicants to the program.

Once a tribe or NHO has established that it is economically disadvantaged for purposes of one 8(a) business, it need not reestablish economic disadvantage in order to have other businesses certified for the program unless the Director of the Office of Business Development requires it to do so.

The SBA's regulations governing tribally and ANC-owned 8(a) firms explicitly state that the good character requirement applies only to officers or directors of the firm, or shareholders owning more than a 20% interest. NHO-owned firms may be subject to the same requirements in practice. With CDC-owned firms, the firm itself and "all of its principals" must have good character.

Firms owned by ANCs, CDCs, NHOs, and Indian tribes may provide evidence of potential for success in several ways:

1. The firm has been in business for at least two years, as shown by individual or consolidated income tax returns for each of the two previous tax years showing operating revenues in the primary industry in which the firm seeks certification. 2. The individuals who will manage and control the firm's daily operations have substantial technical and management experience; the firm has a record of successful performance on government or other contracts in its primary industry category; and the firm has adequate capital to sustain its operations and carry out its business plan. 3. The owner-group has made a firm written commitment to support the firm's operations and has the financial ability to do so.

The first of these ways for demonstrating potential for success is the same for individually owned firms, and the second arguably corresponds to the circumstances in which the SBA may waive the requirement that individually owned firms have been in business for at least two years. There is no equivalent to the third way for individually owned firms, and some commentators have suggested that this provision could "benefit ANCs [and other owner groups] by allowing more expeditious and effortless access to 8(a) contracts for new concerns without having to staff new subsidiaries with experienced management."

Report of Benefits for Firms Owned By ANCs, Indian Tribes, NHOs, and CDCs

8(a) firms owned by ANCs, CDCs, NHOs, and Indian tribes must submit information with its annual financial statement to the SBA showing

how the Tribe, ANC, NHO or CDC has provided benefits to the Tribal or native members and/or the Tribal, native or other community due to the Tribe's/ANC's/NHO's/CDC's participation in the 8(a) … program through one or more firms. This data includes information relating to funding cultural programs, employment assistance, jobs, scholarships, internships, subsistence activities, and other services provided by the Tribe, ANC, NHO or CDC to the affected community.

Similar to other participants, firms owned by ANCs, CDCs, NHOs, and Indian tribes are eligible for 8(a) set-asides and may receive sole-source awards valued at less than $4 million ($7 million for manufacturing contracts). However, firms owned by ANCs and Indian tribes can also receive sole-source awards in excess of $4 million ($7 million for manufacturing contracts) even when contracting officers reasonably expect that at least two eligible and responsible 8(a) firms will submit offers and the award can be made at fair market price. NHO-owned firms may receive sole-source awards from the Department of Defense under the same conditions.

Firms owned by ANCs, CDCs, NHOs, and Indian tribes are governed by the same regulations as other 8(a) firms in which certain of the "other requirements" are involved, including (1) inability to protest an 8(a) firm's eligibility for an award; (2) maximum of nine years in the program (for individual firms); and (3) limits on subcontracting. However, requirements for such firms differ somewhat from those for other 8(a) firms, including the one-time eligibility for the 8(a) Program; limits on majority ownership of 8(a) firms; and limits on the amount of 8(a) contracts that a firm may receive. Firms owned by ANCs, CDCs, NHOs, and Indian tribes may participate in the 8(a) Program only one time. However, unlike the disadvantaged individuals upon whom other firms' eligibility for the 8(a) Program is based, ANCs, CDCs, NHOs, and Indian tribes may confer program eligibility upon firms on multiple occasions and for an indefinite period. In addition, ANCs, CDCs, NHOs, and Indian tribes may not own 51% or more of another firm that "either at the time of application or within the previous two years," obtains the majority of its revenue from the same "primary" industry as the applicant. However, there are no limits on the number of firms they may own that operate in other primary industries. Moreover, ANCs, CDCs, NHOs, and Indian tribes may own multiple firms that earn less than 50% of their revenue in the same "secondary" industries. Finally, firms owned by ANCs, CDCs, NHOs, and Indian tribes may continue to receive additional sole-source awards even after they have received a combined total of competitive and sole-source 8(a) contracts in excess of the dollar amount set forth in Section 124.519 of Title 13 of the Code of Federal Regulations . Individually owned firms may not exceed this threshold. However, firms owned by any of these four types of entities are subject to the same requirements regarding the percentages of revenue received from non-8(a) sources at various stages of their participation in the program as other 8(a) firms.

The SBA's Office of Business Development (BD), housed within the Office of Government Contracts and Business Development, oversees the 8(a) Program. BD has three offices: the Office of Certification and Eligibility (OCE), the Office of Management and Technical Assistance (OMTA); and the Office of Program Review (OPR). Their functions are provided in the footnote below.

Applications for the 8(a) Program are processed at one of two central office duty stations (CODS), one located in San Francisco, CA, and the other in Philadelphia, PA. Applicants apply to the CODS that serve the territory where the applicant's principal place of business is located. Business Opportunity Specialists (BOSs) work directly with 8(a) firms in district offices under the general supervision of the SBA's Office of Field Operations (OFO). Although BOSs report to the SBA's OFO, they interact extensively with BD, which is located in the SBA's headquarters building in Washington, DC. As will be discussed, GAO and others have argued that this overlapping organizational structure may "create programmatic challenges."

Prior to applying for certification, firms must complete all requirements for contracting with the federal government (e.g., get a free D-U-N-S number—a unique nine-digit identification number of each physical business location from Dun and Bradstreet; obtain a free tax identification number or employer identification number from the Internal Revenue Service; create a profile in the federal System for Award Management, and get a free SBA general login system user ID).

The SBA's district office staff generally encourage potential 8(a) Program applicants "to attend an information session to obtain information regarding the program and its eligibility criteria prior to filing an application … [and] also refer the applicant to SBA's website for forms, specific eligibility criteria, pertinent regulatory sections in the Code of Federal Regulations, and overall information on the program."

In an attempt to encourage more applicants, the SBA revised and streamlined the 8(a) Program's application process in 2016 by accepting online applications only (hard copy applications are no longer accepted) and eliminating the requirement for a wet signature application; a completed IRS Form 4506T, Request for Copy or Transcript of Tax Form, in every case; and narrative statements in support of the applicants' claims of economic disadvantage. That determination is now based solely on an analysis of objective financial data relating to the individual's net worth, income and total assets. In addition, to prevent what it viewed as unnecessary delays for minor infractions that may have "occurred many years ago" and may have "nothing to do with the individual's business integrity," the SBA made optional the automatic suspension of consideration and referral to the SBA OIG of all applications with adverse information regarding the applicant's or any of its principals' possible criminal conduct.

Despite these changes, applicants still have a relatively long list of supporting documents (and required SBA Forms) that they must submit, including the following:

Signed and dated federal income tax returns for the firm and all individuals that either own more than 10% of the firm or have a key position in the firm for the past three years preceding the date of application (including all forms, statements, schedules and attachments). The firm's financial statements, balance sheet, and profit and loss statements for the past three years (including the most recent balance sheet, current within 90 days of application). A completed personal financial statement form (from all principals and their spouses), including a list of all assets, liabilities, real estate and other personal property, including transferred assets, information on delinquent federal obligations, past due taxes or liens, bankruptcy filings and pending civil lawsuits, and a list of any SBA loans for the firm and other businesses owned by the principal(s). A list or chart of the firm's current and past federal and nonfederal contracts within the most recently completed fiscal year. A list of any lease agreements. Proof of signature authority on the firm's bank account(s) (i.e., signature card(s) for firm bank account(s) or letter from the bank). Documented proof of contributions: (1) used to acquire ownership (for each owner), (2) of any transfer of assets to or from the firm, and (3) of any transfer of assets to or from any of the firm's owners over the past two years. State filings (signed, dated and stamped by the state where the firm does business) and certificate of good standing. List of any foreign corporation filings. Articles of incorporation, articles of organization, any DBA ("doing business as") filings, governing documents signed by the principals, bylaws, operating agreements, partnership agreements, and meeting minutes. Any stock certificates and ledgers. Proof of social disadvantage from majority owners and firm managers. Background information and personal information from all principals, including a resume, a completed Statement of Personal History form, proof of U.S. citizenship or naturalization, duties within the firm and time devotion, a list of other business interests and time devotion, and the nature of outside employment and time devotion. Documentation addressing how the firm meets specified objectives, if it is applying for a two-year waiver.

As mentioned previously, applications are processed at the San Francisco or Philadelphia CODS. In general, the SBA processes an application and issues a decision letter within 90 days of the receipt of an application package. The processing time will be suspended only if an applicant is referred to the SBA OIG, for a formal size determination, or both.

Applicants are notified within 15 days of receipt whether the application package is complete or incomplete. The SBA will not process an incomplete application. Complete means that the application is ready to be processed.

A BOS, at one of the CODS, initially reviews the application. If, during the eligibility review process, it is determined that an application is incomplete, the BOS may request additional information or clarification "via a delivery method that tracks delivery and provides return receipt capability." The applicant must provide the requested information within five calendar days of receipt of the request. Failure to meet the deadline may result in the applicant's ineligibility to participate in the program. However, a request for additional information does not stop the 90-day processing clock. "Once the requested information is provided, the case may require priority handling in order for the CODS to complete the eligibility review within the required timeframe."

After the initial review, the BOS submits the case file, the BOS analysis, and a decision letter to the CODS' chief for review. The chief examines the BOS analysis and decision letter to verify that all required steps and regulations have been properly applied. Upon completing the examination, the chief returns the case file and attachments to the BOS along with any applicable comments and recommendations.

The BOS then makes any changes or corrections to the analysis or decision letter as requested by the chief. The chief then signs and returns the case file to the processing BOS. The chief makes his or her recommendation in the electronic application system (which is equivalent to transmitting it to the OCE's director, who approves or declines the application largely based on the CODS' review).

After the OCE review, the associate administrator for Business Development (AA/BD) ultimately approves or declines the application in writing. The electronic application system notifies the firm by issuing an approval or declination letter. All declination letters must clearly explain the reason(s) why the firm was found to be ineligible, including a direct reference to regulatory provisions that the applicant failed to satisfy. The letter must also include the applicant's right to request reconsideration and, if applicable, to appeal the decision to the SBA's Office of Hearings and Appeals.

As discussed below in the "Current Issues" section, the SBA and others have identified the application process, and its relatively high rate of rejection, as an impediment to the 8(a) Program's growth.

Business Opportunity Specialists and Reporting Requirements

BOSs assist both prospective and existing 8(a) firms with questions related to the application process, required forms, and the program's various eligibility, reporting, and performance requirements. BOSs also provide general business development assistance, assist with the firm's planning and establishment of goals, work with the firm as it develops and submits its required business plan, and ensure that the firm is on track regarding anticipated business growth. BOSs "on-going responsibility is to assist the Participant in developing its business to the fullest extent possible so that it attains competitive viability during its program participation term, and maintains viability thereafter." As directed, BOSs accomplish this by (1) helping the firm identify its strengths and weaknesses; (2) providing advice, counsel, and guidance in the areas of marketing to the federal government, prime contracting, and contract administration; (3) referring the firm to appropriate internal and external resources for assistance in technical, management, and financial matters; and (4) monitoring the firm's progress in the program and its compliance with program requirements.

8(a) firms must demonstrate program compliance by reporting specific information to the SBA on an as needed, periodic, or requested basis. Much of the reporting is accomplished through the required annual review, which focuses on the firm and its business development, and the continuing eligibility review.

The annual review requires numerous forms and documentation, including the following:

Form 1450—8(a) Annual Update Review (information about the firm, including its tenure in the program, current financial data, business development targets, loans and other sources of capital, and applicable bonding information); Form 1623—Certification Regarding Debarment, Suspension, and Other Responsibility Matters Primary Covered Transactions (detailed information regarding any debarments, suspensions, or other potentially adverse matters); Form 1790—Representatives Used and Compensation Paid for Services in Connection with Obtaining Federal Contracts (required semiannually, includes a list of any agents, representatives, accountants, consultants, etc. that receive fees, commissions, or compensation of any kind to assist the firm in obtaining or seeking federal contracts); Form 912—Statement of Personal History (information related to claiming disadvantaged status for all officers, directors, general partners, managing members, and holders of more than 10% ownership in the firm); and Form 413—Personal Financial Statement (information concerning the owner's and their spouse's personal net worth).

8(a) firms are also required to provide any updates or modifications to their business plan. If the firm participates in the 8(a) Mentor-Protégé Program (see below) it must provide "a narrative report detailing the contracts it has had with its mentor and benefits it has received from the mentor/protégé relationship." In addition, the firm must provide a report for each 8(a) contract performed during the year "explaining how the performance of work requirements are being met for the contract, including any 8(a) contracts performed as a joint venture."

In 2010, GAO reported that the district staff's "dual role of advocacy for and monitoring of the firms may have contributed in part to the retention of ineligible firms." In response, in 2012, the SBA shifted responsibility for processing the continued eligibility portion of the required annual review from BOSs located in the SBA district offices to its Washington, DC, office. While BOSs continue to perform other components of the annual review, "shifting the responsibility for processing continued eligibility to headquarters was designed to eliminate conflict of interest for district offices associated with performing both assistance and oversight roles."

8(a) firms may leave the program by any of the following means:

voluntary withdrawal; voluntary early graduation (where the firm voluntarily decides to leave the program after the SBA has determined that the firm has substantially achieved its business plan's targets, objectives, and goals and has demonstrated the ability to compete in the marketplace without program assistance); involuntary early graduation (where the SBA requires a firm to leave the program because it has determined that the firm has substantially achieved its business plan's targets, objectives, and goals and has demonstrated the ability to compete in the marketplace without program assistance; or one or more of the disadvantaged owners upon whom the firm's eligibility is based are no longer economically disadvantaged); termination for good cause; expiration of the program term (maximum of nine years) without meeting the SBA's graduation requirements; or graduation at the expiration of the program term.

7(j) Management and Technical Assistance Program

The SBA's 7(j) Management and Technical Assistance Program assists 8(a) firms by providing management and technical assistance training. The program's origin dates back to 1970 when the SBA issued regulations creating the 8(a) contracting program to "assist small concerns owned by disadvantaged persons to become self-sufficient, viable businesses capable of competing effectively in the market place." Using its statutory authority under Section 7(j) of the Small Business Act to provide management and technical assistance through contracts, grants, and cooperative agreements to qualified service providers, the regulations specified that "the SBA may provide technical and management assistance to assist in the performance of the subcontracts."

On October 24, 1978, P.L. 95-507 , To amend the Small Business Act and the Small Business Investment Act of 1958, provided the SBA explicit statutory authority to extend financial, management, technical, and other services to socially and economically disadvantaged small businesses. The SBA's current regulations indicate that the 7(j) Management and Technical Assistance Program will, "through its private sector service providers [deliver] a wide variety of management and technical assistance to eligible individuals or concerns to meet their specific needs, including: (a) counseling and training in the areas of financing, management, accounting, bookkeeping, marketing, and operation of small business concerns; and (b) the identification and development of new business opportunities." Eligible individuals and businesses include "8(a) certified firms, small disadvantaged businesses, businesses operating in areas of high unemployment or low income, or small businesses owned by low income individuals."

As shown in Table 2 , 6,483 small businesses received 7(j) program assistance in FY2018. The SBA has been marketing the 7(j) program to 8(a) firms in an effort increase awareness of the program, to help those small businesses "better prepare themselves for federal contracting opportunities," and to retain 8(a) firms in the 8(a) program.

Table 2 also shows the amount of total administrative resources the SBA provides the 7(j) program each year.

The SBA established the 8(a) Mentor-Protégé Program on July 30, 1998. The program is designed to "enhance the capabilities" of 8(a) firms and "improve [their] ability to successfully compete for contracts" by providing various forms of assistance, including technical or management training, financial assistance in the form of equity investments or loans, subcontracts, trade education, and assistance in performing prime contracts with the federal government through joint venture agreements.

Although the SBA established the 8(a) Mentor-Protégé Program and SBA rules govern participation in the program, the 8(a) Mentor-Protégé Program is government-wide in the sense that firms may enjoy the benefits of participation in the program while performing the contracts of any federal agency. In fact, when agencies that do not have their own mentor-protégé programs are involved, the 8(a) Mentor-Protégé Program may be referred to as if it were that agency's program.

The SBA's Office of Business Development (BD) administers the 8(a) Mentor-Protégé Program. This makes it somewhat different from agency-specific mentor-protégé programs, which are generally administered by the agency's Office of Small and Disadvantaged Business Utilization (OSDBU) and may involve coordination with agency contracting offices.

SBA regulations govern various aspects of the 8(a) Mentor-Protégé Program, including who may qualify as a mentor or protégé, the content of written agreements between mentors and protégés, and the SBA's evaluation of the mentor-protégé relationship. For example, mentors must be for-profit concerns that demonstrate a commitment and the ability to assist developing 8(a) firms, including large firms, other small businesses, firms that have graduated from the program, and other 8(a) firms that are in the transitional stage , or final five years of the program. Only SBA approved firms may serve as mentors, and each mentor must (1) demonstrate that it "is capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement"; (2) possess good character; (3) not be debarred or suspended from government contracting; and (4) be able to "impart value to a protégé firm due to lessons learned and practical experienced gained because of the [8(a) program], or through its knowledge of general business operations and government contracting."

Protégés, in turn, are required to be small businesses owned and controlled by socially and economically disadvantaged individuals that are in good standing in the 8(a) Program. Protégés must also qualify as small for the size standard corresponding to their primary (or, under specified circumstances, their secondary) North American Industry (NAICS) code and demonstrate how the business development assistance to be received through the mentor-protégé relationship would advance the goals and objectives set forth in their business plans.

Mentors are generally expected to have only one protégé at a time. However, mentors may have up to three protégés at one time provided they can demonstrate that "the additional mentor/protégé relationship[s] will not adversely affect the development of either protégé firm." Similarly, protégés are expected to have one mentor at a time. However, protégés may, under specified circumstances, have two mentors.

Mentors and protégés are required to enter a written agreement, approved by the SBA's AA/BD which sets forth the protégé's needs and describes the mentor's assistance. This agreement generally obligates the mentor to furnish assistance to the protégé for at least one year, although it does allow either mentor or protégé to terminate the agreement with 30 days' advance notice to the other party and the SBA.

Unless rescinded in writing, the mentor-protégé agreement automatically renews for another year. The term of a mentor-protégé agreement is limited to three years but may be extended for a second three-year period.

The 8(a) Mentor-Protégé Program is intended to benefit both mentors and protégés. Serving as a mentor to an 8(a) firm counts toward any subcontracting requirements to which the mentor firm may be subject under Section 8(d) of the Small Business Act. Section 8(d) requires that all federal contractors awarded a contract valued in excess of $700,000 ($1.5 million for construction contracts) that offers subcontracting possibilities agree to a "subcontracting plan" that ensures small businesses have "the maximum practicable opportunity to participate in [contract] performance."

In addition, in certain circumstances, mentors may form joint ventures with their protégés that are eligible to be awarded an 8(a) contract or another contract set aside for small businesses. Mentor firms and joint ventures involving mentor firms would otherwise generally be ineligible for such contracts because they would not qualify as small under SBA regulations. Mentor firms may also acquire an equity interest of up to 40% in the protégé firm in order to help the protégé firm raise capital. Because mentor firms are not 8(a) participants, they would generally be prohibited from owning more than 10%-20% of an 8(a) firm. However, their participation in the 8(a) Mentor-Protégé Program permits them to acquire a larger ownership share.

Protégés not only receive various forms of assistance from their mentors, but also may generally retain their status as "small businesses" while doing so. If they received similar assistance from entities other than their mentors, they could risk being found to be other than "small" because of how the SBA determines size. The SBA combines the gross income of the firm, or the number of its employees, with those of its "affiliates" when determining whether the firm is small, and the SBA could potentially find that firms are affiliates because of assistance such as that which mentors provide to protégés. However, SBA regulations provide that "[n]o determination of affiliation or control may be found between a protégé firm and its mentor based on the mentor-protégé agreement or any assistance provided pursuant to the agreement."

As of September 30, 2017, there were 314 active 8(a) mentor-protégé agreements.

As shown in Table 3 , the number of 8(a) firms assisted by SBA Business Opportunity Specialists (BOS) has declined somewhat since FY2010, the number of federal contracts awarded to 8(a) firms increased from 3,421 in FY2017 to 3,709 in FY2018, and the 8(a) program's administrative costs have increased.

As shown in Table 4 , in FY2017, 8(a) firms were awarded $27.167 billion in federal contracts (5.14% of all federal contracts awarded). Of that amount, these firms received $7.971 billion through an 8(a) set-aside award, $8.445 billion through an 8(a) sole-source award, and $6.110 billion through either open competition or with another small business preference applied (e.g., small business set-aside and HUBZone set-aside or sole-source award).

From FY2010 through FY2017, 8(a) firms were awarded, on average, approximately 5.45% of the total amount of federal contracts awarded, ranging from a low of 4.97% of all federal contracts in FY2011 to a high of 6.11% in FY2014.

During this period, 8(a) firms received about $214.902 billion in federal contracts: $58.609 billion through an 8(a) set-aside (27.2% of all 8(a) contracts), $73.544 billion through an 8(a) sole-source award (34.3% of all 8(a) contracts), and $82.749 billion through either open competition or with another small business preference applied (38.5% of all 8(a) contracts).

The SBA faces several challenges concerning the 8(a) Program, including a recent decline in participation, reported variation in program service delivery, disagreements related to the program's financial thresholds used to determine economic disadvantage, and concerns related to the performance measures used to evaluate the program's success.

Noting that the number of certified 8(a) firms had declined from 2010 to 2015, the SBA announced in 2015 that it was establishing a goal to "increase the number of approved firms" in the program by 5% in FY2016 and FY2017. In an effort to achieve this goal and increase 8(a) Program retention, the SBA

initiated a pilot program to streamline the program's application process; increased its marketing of the 7(j) Management and Training Assistance Program to 8(a) firms; increased its efforts to expand the 8(a) Mentor-Protégé Program by streamlining that program's application process, shortening its application response time from 45 days to 10 days, and initiating an annual mentor-protégé conference to help 8(a) firms become more knowledgeable about the potential benefits of joint ventures and the various rules and compliance requirements for mentor-protégé agreements.

The SBA presented four reasons to streamline the program's application process:

1. Although regulatory guidance provides the SBA approximately 90 days to process a complete application, several firms endured delays that extended anywhere from six months to several years. 2. Nearly three-quarters of 8(a) applications are initially rejected due to incomplete or missing documentation. 3. Less than half of complete applications are approved. 4. The SBA's low rate of approval has led to an industry of third party firms that charge 8(a) applicants from $5,000 to $75,000 to prepare the application and respond to the SBA's processors. The SBA argued that some of these firms are taking advantage of applicants, and regardless of the amount paid, there is no guaranteed approval because the approval rate is consistently less than 50%.

The SBA reported that it certified 568 applicants to the 8(a) Program in FY2015 (before the streamlined process), 911 in FY2016 (after the streamlined process was instituted on a pilot basis), and 557 in FY2017. The agency declared the pilot streamlined application process a success. However, the SBA's OIG has argued that shortening the review process by eliminating required documents may erode core safeguards that prevented questionable firms from entering the program:

Federal prosecutors have told OIG that it would be difficult for them to describe SBA, the procuring agency, or honest 8(a) competitors as fraud victims when SBA is perceived not to have exercised proper due diligence in admitting firms' into the 8(a) Program. Although SBA's efforts to increase the participation in the 8(a) Program is commendable, SBA still needs to ensure that only eligible firms are admitted into the program, and the documentation supporting 8(a) Program application approvals is maintained in a method ensuring clear eligibility of the applicant.

In a related development, a recent SBA OIG audit of the 8(a) Program's application determination process found that the SBA did not always document why the AA/BD approved applications even though lower-level "reviewers [had] identified one or more eligibility issues" with the applications. The OIG concluded that this lack of documentation resulted in "potentially ineligible firms" being accepted into the program. To address this situation, the SBA agreed with the OIG's recommendation to clearly document, in its Business Development Management Information System (BDMIS) which tracks 8(a) Program applications, justifications for approval when they differ from that of lower-level reviewers. The SBA asserted that this lack of documentation was not an indication that ineligible firms were being certified into the program without adequate review.

Witnesses at congressional hearings have reported that common Business Opportunity Specialists (BOS) practices, including the interpretation and implementation of standardized policies and procedures, vary from SBA district office to SBA district office and across state lines. Some Members of Congress have argued that "many of the problems with … BOS advocates are compounded by the fact that" the position's responsibilities are not laid out in statute. Instead, they argue, the position's responsibilities "have been left to develop with SOPs [Standard Operating Procedures] and common practices." They have also asserted that BOSs are "often pulled by their district offices to help with other small business programs rather than overseeing the 8(a) participants as intended."

During the 115 th Congress, P.L. 115-91 , the National Defense Authorization Act for Fiscal Year 2018, among other provisions, amended the Small Business Act to clarify the responsibilities of Business Opportunity Specialists by providing them a statutory list of duties.

Those concerned about variation in 8(a) Program service delivery also note that a 2010 GAO report found a "breakdown in communication between SBA district offices and headquarters … that resulted in inconsistencies in the way district offices delivered the program." In addition, in 2015, GAO indicated that the SBA's overlapping organizational structure may contribute to variation in 8(a) Program service delivery:

SBA's organizational structure often results in working relationships between headquarters and field offices that differ from reporting relationships, potentially posing programmatic challenges. District officials work with program offices at SBA's headquarters to implement the agency's programs, but these officials report to regional administrators, who themselves report to the Office of Field Operations. For example, … business opportunity specialists in the district offices work with the Office of Government Contracting and Business Development at SBA headquarters to assist small businesses with securing government contracts but report to district office management.

During the 114 th Congress, legislation ( H.R. 4341 ) was introduced to require GAO to review the SBA's Office of Government Contracting and Business Development (GCBD) and make recommendations to address several administrative concerns, including issues related to the SBA's organizational overlap.

In a related development, GAO reported that a "skill gap" among BOSs may also contribute to the possibility of variation in the program's service delivery.

GAO noted that the SBA's Office of Field Operations (OFO) revised its field office operations in 2012 following a 2010 review of all position descriptions to ensure that the descriptions aligned with the SBA's strategic plan and district office strategic plans. The SBA informed GAO that it undertook this review because district office staff were given new responsibilities after the SBA moved loan processing from district offices to loan processing centers in 2004. Before the review, district office staff had two principal program delivery positions, lender relations specialist and business development specialist. As a result of the review, descriptions for both of these positions were rewritten and the business development position was split into two separate positions, economic development specialist and business opportunity specialist. The skills and competencies for the new position descriptions focused on the change in the district office's function from loan processing to program compliance and community outreach. Staff were retrained for the rewritten positions.

The SBA reported that the change in the position descriptions created a "skill gap" because employees who were originally required to have a financial background for loan processing were now required to have different skills, such as a marketing background and interpersonal skills needed for assisting and overseeing 8(a) firms and conducting outreach to small businesses.

The SBA informed GAO that the skill gap was particularly pronounced among 885 employees in two job series, GS-1101 and GS-1102, including BOSs, economic development specialists, and procurement staff, and that despite its efforts to address this skill gap through training and offering early retirement and separation incentives in FY2012 and FY2014 in an effort to restructure its personnel, "the competency gap remains." The SBA also noted that its skill gap had been compounded by recent changes in job requirements and new initiatives that require new skill sets for its employees. For example, P.L. 114-92 , the National Defense Authorization Act of FY2016, requires BOSs to obtain federal acquisition certification in contracting as a prerequisite for employment.

Arguably, the SBA's relatively recent issuance of a new 300-page SOP (effective September 2016) for the Office of Business Development, which oversees the 8(a) Program, may help to address the reported skill gap. The new SOP provides all SBA staff, including BOSs, specific guidance concerning their roles and responsibilities in 8(a) Program service delivery.

Oversight of 8(a) Program Participant's Continuing Eligibility

As mentioned previously, two SBA offices, the GCBD and the OFO, share responsibility for overseeing the 8(a) Program. Within GCBD, BOSs assigned to the Office of Certification and Eligibility (OCE) evaluate all 8(a) program applications and conduct continuing eligibility reviews of "high-risk" or "complex" 8(a) firms, including those firms with total 8(a) revenue exceeding $10 million, are part of a joint venture, are party to a mentor-protégé agreement, or are an entity-owned firm such as an Alaska Native Corporation, and those that are requested from district office field staff. However, an SBA OIG audit found that the OCE reviewed the continuing eligibility of less than half of the firms identified as high risk in FY2016 (352 of 859 firms, or 41%) and in FY2017 (350 of 798 firms, or 44%).

Within OFO, BOSs in each of the SBA's 68 district offices work directly with their assigned 8(a) firms and, among other duties, conduct annual reviews of those firms' progress toward achieving the targets, objectives, and goals set forth in their business development plan. According to the 8(a) Program's Standard Operating Procedures (SOP) manual, BOSs in each of the SBA's 68 district offices conduct continuing eligibility reviews for all 8(a) firms not reviewed by the GCBD to ensure their compliance with all continuing eligibility requirements during the annual review process. However, in practice, the SBA OIG's audit found that district office BOSs assess continuing eligibility as part of the annual review process for all 8(a) firms, including those deemed to be high risk or complex.

The SBA is also required to review the participant's continuing eligibility "upon receipt of specific and credible information alleging that a participant no longer meets the eligibility requirements." Generally, the SBA receives this information from the SBA OIG's Hotline. However, the SBA OIG's audit found that the OCE did not conduct continuing eligibility reviews for any of the 44 OIG Hotline complaints that were referred to the GCBD from October 1, 2015, through May 4, 2017. In addition, GCBD did not inform district office BOSs of complaints filed against firms within their purview. As a result, district office BOSs took no action regarding the complaints.

The SBA OIG's audit reviewed the continuing eligibility of two samples of 8(a) firms to determine whether the SBA's continuing eligibility review process "consistently identify ineligible firms enrolled in the program": the 15 individually owned 8(a) firms with the highest set-aside dollars in FY2016 that were scheduled to have continuing eligibility reviews within the first half of FY2017 and 10 individually owned 8(a) firms that were identified as being ineligible in Hotline complaints received between October 1, 2015, and May 4, 2017.

The SBA OIG found that "despite OCE and district offices having shared responsibility for assessing 8(a) firms' continuing eligibility, they did not detect that 4 of the 15 individually-owned 8(a) firms we reviewed were ineligible for the 8(a) Program," and "our review of the 10 firms referred by the OIG Hotline revealed that they were all ineligible for the 8(a) program, based on issues such as excessive income and lack of good character." In addition, the SBA OIG found that the SBA had identified eligibility concerns through its annual reviews and continuing eligibility reviews for 6 of the 15 individually owned 8(a) firms the OIG had reviewed, but "did not take timely action to remove these firms from the 8(a) Program or document resolution of eligibility issues."

The SBA OIG concluded that 20 of the 25 firms it reviewed should have been removed from the 8(a) Program and made 11 recommendations "to improve the overall management and effectiveness" of the 8(a) Program's continuing eligibility review process. SBA management agreed with seven of the recommendations, partially agreed to the other four recommendations, and indicated that it would conduct continuing eligibility reviews for the firms identified in the SBA OIG's audit as ineligible and take appropriate action.

Financial Thresholds for Economic Disadvantaged Status

Section 8(a)(6)(A) of the Small Business Act defines economically disadvantaged individuals as "socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged." In determining the degree of diminished credit and capital opportunities, Section 8(a)(6)(A) authorizes the SBA to "consider, but not be limited to, the assets and net worth of such socially disadvantaged individual."

As mentioned previously, in 1989, the SBA established by regulation that personal net worth of less than $250,000 at the time of entry into the program (and $750,000 for continuing eligibility) constitutes economic disadvantage.

Some Members of Congress have argued that these financial thresholds should be increased or periodically adjusted for inflation. During the 112 th Congress, H.R. 3754 , the Not Too Small to Succeed in Business Act of 2011, would have increased these thresholds to $750,000 for 8(a) Program admission and $2.25 million for continued participation after admission. H.R. 2424 , the Expanding Opportunities for Main Street Act of 2011, would have amended Section 8(a)(6)(A) by inserting after "disadvantaged individual" the following: "For purposes of this section, an individual having a net worth of more than $1,500,000 is not economically disadvantaged." Legislation with provisions similar to those in H.R. 2424 was also introduced during the 113 th Congress ( H.R. 2550 , the Minority Small Business Enhancement Act of 2013, and H.R. 2551 , the Expanding Opportunities for Main Street Act of 2013).

Advocates for increasing the program's personal net worth threshold noted that the Department of Transportation (DOT) increased the personal net worth threshold for determining eligibility for the Disadvantaged Business Enterprise (DBE) program in 2011 to account for inflation. The DBE threshold was increased from $750,000 (which was set by DOT in 1999, and was based on the 8(a) Program's $750,000 threshold) to $1.32 million. DBE firms, which are provided special consideration in the awarding of federal transportation contracts, argued that the limit penalized success and imposed "a glass ceiling on the growth and competitiveness of DBE firms." Opponents argued that the $1.32 million limit was too high and would include business owners who were not truly disadvantaged and that raising the limit would favor larger, established, and richer DBEs at the expense of smaller, start-up firms because the larger companies would be able to stay in the program longer.

More recently, the SBA's OIG has argued that the SBA's 1989 decision to exclude equity in a primary residence from an individual's net worth calculation "serves as a loophole allowing affluent business owners to shelter wealth in personal real estate, while taking advantage of a program designed to help the socially and economically disadvantaged."

Pursuant to P.L. 100-656 , the Business Opportunity Development Reform Act of 1988, the SBA is required to "develop and implement a process for the systematic collection of data on the operations of the [8(a)] Program" and to report this data, not later than April 30 of each year, to Congress. The act requires the report to include the following:

The average personal net worth of individuals who own and control concerns that were initially certified for program participation during the immediately preceding fiscal year and the dollar distribution of each of these individual's net worth, at $50,000 increments. A description and estimate of the benefits and costs that have accrued to the economy and the federal government in the immediately preceding fiscal year due to the operations of those business concerns that were performing 8(a) contracts. A compilation and evaluation of those business concerns that have exited the program during the immediately preceding three fiscal years, including the number of concerns actively engaged in business operations, those that have ceased or substantially curtailed operations, including the reasons for such actions, and those concerns that have been acquired by other firms or organizations owned and controlled by other than socially and economically disadvantaged individuals. For those businesses that have continued operations after they exited from the program, the SBA Administrator is required to separately detail the benefits and costs that have accrued to the economy during the immediately preceding fiscal year due to their operations. A listing of all program participants during the preceding fiscal year identifying, by state and region, for each firm: the concern's name, the race or ethnicity, and gender of the disadvantaged owners, the dollar value of all contracts received in the preceding year, the dollar amount of advance payments received by each concern pursuant to contracts awarded under Section 8(a), and a description including (if appropriate) an estimate of the dollar value of all benefits and loans received during such year. The total dollar value of 8(a) contracts and options awarded during the preceding fiscal year and such amount expressed as a percentage of total sales of all firms participating in the program during such year; and of firms in each of the nine years of program participation. A description of additional resources or program authorities required to provide the types of services needed over the next two-year period to service the expected portfolio of 8(a) certified firms. The total dollar value of 8(a) contracts and options, at such dollar increments as the SBA Administrator deems appropriate, for each four digit standard industrial classification code under which such contracts and options were classified.

The SBA's FY2014 report (the latest one available) indicated that 8(a) firms "contributed an estimated 158,018 jobs to the Nation's economy," and that 2,209 of the 2,288 firms that had exited and completed the program during the three preceding fiscal years (October 1, 2010 through September 30, 2013) were still active, 45 had ceased operations, and 34 did not have data available for determining their status as reported by Dun and Bradstreet. Of the active firms, "two were acquired by another firm or organization owned and controlled by other than socially and economically disadvantages individuals and 144 firms were substantially curtailed within the past three years." In addition, the 2,209 still active firms reported FY2014 revenue of approximately $5.49 billion and provided jobs for approximately 70,330 persons.

In 2000, GAO recommended that the SBA augment its data collection activities by periodically surveying a nationwide sample of 8(a) firms. GAO argued that a survey would improve the SBA's ability to determine how well the program is working, further arguing that "at a minimum, the survey should assess whether SBA assistance is meeting the firms' expectations and needs."

The SBA currently contracts with a third-party to conduct an annual client satisfaction survey of small businesses that have received management training and technical assistance from Small Business Development Centers, SCORE, and Women Business Centers. The survey's objective is to measure these programs' impact "on the creation, financial development and survival of client firms." The wording of many of that survey's questions, which focus on client satisfaction and the programs' impact on client behavior and economic success, could prove useful should the SBA decide to conduct a nationwide survey of 8(a) firms.

Appendix. Comparison of the Requirements Pertaining to Different Types of 8(a) Firms