Will the Obama Administration Take on Contractor Corruption?

Now is the perfect time for the Obama administration to tackle the problem of government contractor corruption. Local government agencies are strapped for cash and small businesses are suffering in all sectors, making fraud and waste politically intolerable. Anti-corruption actions would bolster support for the administration among business owners and improve confidence in government among all citizens, even those on the far right such as libertarians and Tea Party members.

An initiative to eliminate programs and contracting approaches that have proven vulnerable to abuse would fit well with the Obama initiatives to reinvent government and to create openness and transparency. Obama’s core constituency would be hard pressed to argue against such reform.

To be successful, the initiative would have to target corruption in both large and small companies. The large contractors already seem to be the focus of audits and investigations. They are most likely to play the revolving door game of hiring former senior government officials and lobbying their way to large contracts. Many large integrators have taken over so many government functions that agencies cannot imagine how to operate without them, even if they do not perform up to expectations. The week Defense Secretary Rumsfeld announced cutbacks that will hit large companies hard, including bringing back functions that have been outsourced in the past.

Hundreds of millions of dollars could be saved by eliminating corrupt contracts with small companies. According to a July 2010 article in Federal Computer Week, the Small Business Administration (SBA) continues to certify fake companies for its Historically Underutilized Business Zone (HUBZone) program. Some companies have been certified with business addresses that do not exist, and SBA only visits in person a small fraction of HUBZone companies.

HUBZone is not the only setaside program which is attacked by unscrupulous contractors. The 8(a) small business program is for companies which meet criteria for being socially and economically disadvantaged. A Government Accountability Office (GAO) investigation found that federal agencies awarded $325 million in small business contracts to firms that were not eligible for the designation. Large companies with sales of over $1 billion have even won contracts set aside for small businesses.

The blatant violations are the tip of the iceberg with contractor fraud. For every HUBZone company which reports its address as the Alamo there are untold numbers that commit fraud on a more subtle scale. Some HUBZone companies maintain fake addresses in wiring closets in a disadvantaged neighborhood while in fact operating in an exclusive neighborhood or show employees on their books who do not actually work for the company. The 8(a) program had a time limit for companies which forces them to “graduate” and lose their preferential treatment and compete on the open market. Some successful multi-millionaire company owners evade this by transferring the company to their children who start a new 8(a) firm.

Well intentioned preferential contracting programs end up adding additional costs to government contracts and sometimes reducing the sucess rate of projects. Unqualified companies can win contracts, then subcontract to qualified companies after adding their markup. It would be difficult to determine how much the government wastes on extra layers of contracting, but markups of five to twenty percent are common.

Now that the oil is no longer leaking in the Gulf of Mexico, can the federal government stop the leaks from its spending programs?

This blog entry is published simultaneously on blogs.infostrat.com and www.govloop.com.