New rules for disadvantaged businesses should maintain integrity

A growing and alarming trend threatens to undermine the integrity of vital federal government set-asides for minority, women, veteran-owned and small disadvantaged businesses.

Unscrupulous companies, often backed by larger financial institutions, are exploiting loopholes and weak oversight to falsely claim status with the federal government as “disadvantaged” firms.

Federal contracting is a zero-sum game. When dollars are given to one company on a given contract, it necessarily makes them unavailable to another. Falsely claiming to be a small disadvantaged business takes away opportunities from real, deserving businesses that need these federal contracting opportunities to grow and thrive. 

Two recent examples come to mind. First, Florida-based contractors HX5 LLC and HX5 Sierra LLC, together with their owner, agreed to pay more than $7.7 million to settle allegations of falsely claiming disadvantaged business status in June 2023. The companies were accused of misrepresenting the owner’s assets and failing to disclose payments to family members while securing contracts with NASA, the Army and the Air Force.

R&W Builders of Illinois paid $400,000 to resolve claims of fraudulently securing contracts meant for disadvantaged small businesses. The company allegedly collaborated with a qualified disadvantaged business but violated program rules by taking control of the joint venture and completing most of the work themselves.

These beliefs are deeply personal to me. I previously served as the special consultant to the head of the Small Business Association, during which time I drafted the standard operating procedures for the federal government’s 8(a) minority business program. 

The 8(a) program is a vital initiative designed to help socially and economically disadvantaged small businesses compete in the federal marketplace. This nine-year initiative provides participants with training, technical assistance and contracting opportunities to strengthen their ability to compete effectively in the American economy.

These policies and programs are lifelines for minority-owned businesses, women-owned businesses, veteran-owned businesses and other disadvantaged enterprises. The opportunities they provide are essential for leveling the playing field, allowing these businesses to compete in a marketplace that has historically favored larger, more established corporations.

It’s imperative that genuine small disadvantaged businesses can count on the access that the 8(a) and other similar programs provide. Small business set-asides provide an incredible opportunity for growth and innovation which federal agencies should encourage. 

I have seen firsthand the procedures required for verification, which are extensive and time-consuming, but necessary. The SBA should absolutely lean on partners that can offer a wealth of knowledge and experience to help ensure protections for small minority-owned businesses. 

Further, while government oversight remains essential, eligible and qualified small disadvantaged businesses should also have a direct hand in helping to close the loopholes that so clearly exist in the program’s self-certification process. 

Protecting the integrity of the small-business set-aside program is not just about fairness; it is about maintaining trust in the federal contracting system. Minority-owned businesses and other disadvantaged enterprises must be able to trust that the opportunities intended for them are not being siphoned off by companies that have no rightful claim to them. When this trust is eroded, the entire purpose of the program is undermined.

One solution to consider is robust oversight on firms that claim small disadvantaged business status. There are strict penalties for misrepresentation, such as fines up to $500,000 or up to 10 years of imprisonment, and/or both, and suspension and debarment from future contracts that should act as a significant deterrent, if enforced. 

These steps, combined with leveraging advanced technologies for more effective monitoring, would go a long way toward safeguarding the integrity of the program. If minority and small disadvantaged businesses are to succeed in today’s competitive marketplace, they must abide by the rules without interference by fraudulent companies. 

The SBA is currently rethinking the small disadvantaged business program after federal court rulings and has placed a “pause” on new 8(a) applications and new rules and regulations will be coming out this fall.  

My organization looks forward to enhanced collaboration with the SBA and other relevant federal agencies to drive immediate and decisive action to address this issue and prevent unqualified businesses from unfairly benefitting from a small disadvantaged business designation. 

Preserving small-business set-asides for rightful recipients will ensure that the businesses these programs were designed to help are the ones that truly benefit from them, promoting fairness, equity and economic opportunity for all.

Roger Campos is the chairman and founder of the Minority Business Round Table.