Georgia Tech Procurement Assistance Center

Small minority businesses aim for gov’t tech contracts

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Twenty-three small, minority owned information technology companies have teamed up to form a consortium aimed at winning $7.06 billion in technology related government contracts from the United States Air Force.

Called the Minority Information Technology Consortium (MITC), the group wants to give opportunities to companies that traditionally do not get them. Harith Razaa, chief executive officer of the MITC, said when large military technology contracts are dished out, many smaller owned companies are left behind.

“We looked for smaller minority businesses that have past performance but don’t get any opportunities by the very nature of how contracts are scoped. What I wanted to do is find a process or a methodology that would allow small businesses to team up and pool their resources, get great bandwidth and more money. We want them to get together to go after some of these larger contracts,” Razaa said.

The companies in the MITC are all minority-owned. Razaa says such businesses are typically small, earning $3-$10 million in revenue. On top of lacking financial wherewithal to compete for prominent military contracts, the companies lack the proper security clearances. “You can’t apply to get a security clearance, it has to be conferred by someone who already has one. This is hard to get when you’re a small company,” Razaa said.

Razaa’s group will attempt to win government contracts from the Air Force’s NETCENTS 2 program, which will procure hardware and software for voice and data networking. The project has $7.06 billion allocated for small businesses, cut up into three sections: net operations, applications and IT services. He said he hopes the second NETCENTS will go a lot better for small, minority companies than the first.

“For the first NETCENTS project the Air Force decided it’d give out contracts to four large businesses and four small businesses. Well, the contract was so large that half of the four small businesses became large companies. The others got bought out by bigger companies. They all got to keep their contracts, even though they weren’t small anymore,” Razaa said.

If Razaa’s group gets awarded the contract, it has worked out a deal where everyone will get a piece of the pie. Some member companies will be the prime beneficiary while others will work as te prime sub-contractors. Either way, “We’re trying to go after as many contracts that make sure everyone can get something,” Razaa says.

To ensure involvement at a collegiate level, the MITC has partnered with three historically black colleges, Hampton University, North Carolina Agriculture and Technical University, and Tennessee State University.

— by Gabriel Perna – International Business Times – Tuesday, June 29, 2010 8:27 AM EDT

 

 

 

Chicago’s minority business program failing, report says

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Mayor Richard Daley’s administration has awarded more than $1 billion in contracts in recent years that were based on false claims of compliance with a program designed to boost businesses owned by minorities and women, a watchdog report released Thursday concluded.

Inspector General Joseph Ferguson’s study also said that minority- and women-owned construction firms got paid nearly $20 million less than the city reported in 2008. That amounts to about 16 percent. The city kept inadequate records to determine how much went to the minority- and women-owned firms for other types of work that make up the bulk of city contracts, Ferguson’s report concluded.

“Our investigations and analysis have revealed that the (minority- and women-owned business) program is poorly administered and the administration cannot determine whether or not it is achieving its goals,” the report states. “One official aptly summed up the program as ‘a lot of paperwork and pushing paper.’

“The result of this substandard administration is that the program has been beset by fraud and brokers, and . . . participation is likely far less than the publicly reported statistics.”

The $1 billion figure involves firms that had sustained or “soon-to-be-sustained” allegations of fraud, abuse or mismanagement lodged against them since 2003, Ferguson found. The related contracts involved minority fronts really owned by white men — or disallowed pass-through firms or brokers that did little to no work, it states.

The city’s top attorney quickly blasted the findings. “The report issued today by the inspector general . . . would lead you to believe that the city lacks commitment to the minority- and women-owned business program,” Corporation Counsel Mara Georges said. “We do not.”

The Daley administration views the report “as largely a rehashing of old bad news that relies on the wholesale acceptance that the IG’s office is the expert on all topics in city government,” Georges said.

She noted that the administration fought in court to justify and maintain the program, established in 1985 under Mayor Harold Washington, when its constitutionality was challenged in 2003.

Without the program — which calls for 25 percent of contract payments to go to minorities and 5 percent to women — the amount of city money flowing to minority- and women-owned firms would be lower, Georges said.

The Daley administration has been beset by a series of scandals involving phony front companies awarded contracts intended for minority- and women-owned firms.

In the most notorious case, James Duff, a member of a mob-connected family with close ties to Daley, was sentenced to 10 years in federal prison for a fraud involving more than $100 million in city contracts.

Ald. Ed Smith, 28th, the City Council’s longest-serving African-American, said he was disappointed by the report but not surprised.

“We’ve been yelling about this for years,” Smith said. “Every year, we talk about getting the manpower or whatever it takes to administer this program properly and actually make sure it’s doing what it’s supposed to.”

Georges said it is possible that the inspector general would get to oversee the program now run by the Office of Compliance.

— By Hal Dardick and John Byrne, Tribune Reporters – Copyright © 2010, Chicago Tribune – 8:45 PM CDT, May 20, 2010 – www.chicagotribune.com/news/local/ct-met-chicago-minority-contracts-20100520,0,4192165.story  

Barriers to small business participation in gov’t contracting is subject of study

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Have something to say about the hurtles involved in government contracting?  Now is your chance to let your views be known.

The Program to Increase Minority Contractors In Defense (PIMCID)  is conducting a nationwide survey of minority and other small businesses, Historically Black Colleges and Universities, and service providers to gain their views on barriers to small business participation in government contracting.  The study is being underwritten by the U.S. Air Force.

You can participate in the study by going to http://cirrusti.com/pimcidsurvey.  The password to take the survey is pimcid   (all lowercase letters).   Any questions can be directed to Carol Z. Smith at 267-972-8464 or carolsmith@bakerandcompanyllc.com.

Builder sues city over bid dispute

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Another businessman who reached his boiling point over the city’s purchasing practices is suing Augusta’s government.

Tony Ammar filed suit in Richmond County Superior Court on April 14 on behalf of his company, Ammar Construction Co., against the city and its procurement director, Geri Sams.

The city notified Ammar on Sept. 3 that his company was the low bidder on a job to do repairs at the Henry Brigham Center.

Ammar said he started to prepare for the job, obtaining a performance bond — which cost $925 — and lining up workers.

Eight days after he was awarded the bid, Ammar received a letter from Sams that said his bid was deemed “noncompliant.”

Ammar appealed unsuccessfully to Sams, the administrative services committee and Augusta commissioners.

Several other businesses have contended in lawsuits that they’ve faced the same frustration with the city’s procurement practices, particularly over Augusta commissioners’ refusal to waive any violation of the “materiality provision.”

That provision, noted in every bid request, states that a proposal will be thrown out if any error is discovered. That includes everything from a signature in the wrong place to the inability to obtain bonding.

Ammar’s bid was thrown out because of the way he filled out a form that is supposed to be submitted by subcontractors. Ammar had no subcontractors, according to his lawsuit.

“The form, the ‘Subcontractor’s Affidavit,’ does not include any blank lines or other designated place for a general contractor to complete the information (when) there are no subcontractors,” the lawsuit contends.

The repair project was put out for bid again recently. The bid proposals are to be opened May 18; until then it won’t be known whether the city might have saved money by waiving the alleged error in Ammar’s proposal.

LATE LAST MONTH, the city won a federal court battle against three other businesses and the Association for Fair Government. In awarding the city summary judgment, U.S. District Court Judge J. Randal Hall wrote:

“The city should not interpret this decision as endorsing the quality of its procurement operations. In fact, the record in this case suggests otherwise. The court empathizes with the plaintiffs’ understandable frustration with the city’s poor administration of the procurement process.

“However, the court will not, in the words of the Supreme Court, ‘constitutionalize’ these disappointed bidder disputes when the law does not allow such action.”

Thompson Building Wrecking, CSRA Testing and Artistic Design challenged the city’s practices as inconsistent and applied unfairly. The lawsuit also alleged the city is needlessly spending millions of dollars by rejecting the lowest bids over technicalities.

Hall wrote, “The reasonable inference that may be drawn from the evidence is that the city sometimes enforces the materiality provision and sometimes does not. Sometimes the enforcement favors minority-owned companies, and sometimes it favors nonminority-owned companies. In other words, at worst, the city is inconsistent in its application of the materiality provision, regardless of race. The record does not evidence purposeful race discrimination or enforcement based upon any other impermissible purpose.”

Therefore, he found there was no constitutional violation. If there is any issue with due process, that should be decided under state law by a Georgia court, he wrote.

City officials are working on proposed changes to the procurement ordinance to address some aspects of the materiality provision, said Andrew MacKenzie, the acting city general counsel.

Details on providing a local vendor preference are being worked out by the commission’s administrative committee.

The procurement department staff has already taken steps to improve some of the required forms to simplify the paperwork, MacKenzie said. More changes are being worked on to reduce the amount of paperwork and the chance for errors, he said.

There is no question that state law allows a local government to waive technical errors, but Augusta commissioners have chosen not to do so for the sake of consistency, MacKenzie said.

“The balance is tough,” he said.

– by Sandy Hodson, Staff Writer – Wednesday, April 28, 2010 – The Augusta Chronicle  – Source URL: http://chronicle.augusta.com/news/government/2010-04-28/builder-sues-city-over-bid-dispute

Contracting program to help the disadvantaged riddled with fraud

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It’s happened again. For the third time in as many years, a watchdog found that con artists and ineligible companies gamed the government’s procurement system to fraudulently win small business contracts, this time in a program designed to assist economically disadvantaged individuals.

In a report released on Friday to the House Small Business Committee, the Government Accountability Office identified 14 firms that received set-aside or sole-source 8(a) contracts worth a combined $325 million through fraud or abuse. All together, these firms won an additional $1.2 billion in contracts since entering the 8(a) program, including $17 million in Recovery Act awards.

“The 8(a) program needs to strengthen its fraud prevention, detection, monitoring and investigative controls to minimize its vulnerability to fraud and abuse,” the report said.

Investigators found companies representing themselves as disadvantaged despite owning yachts, luxury automobiles and millions of dollars in ocean-front property. The maximum threshold for entering the 8(a) Business Development Program is $250,000 in annual net worth, excluding the applicant’s ownership interest of the company and primary residence. Other executives misrepresented their ethnicity or used a pass-through company to continue winning contracts long after graduating from the program, GAO found.

Fraud in the Small Business Administration’s contracting programs is nothing new. In 2008, GAO created bogus companies to win small business contracts in the Historically Underutilized Business Zone program. Last November, the watchdog reported on extensive fraud in the veteran-owned service-disabled small business contracting program.

“Fraud has been a persistent problem with all of the SBA’s contracting programs and it is clear from this report, as well as previous work done by the committee and GAO, that SBA needs to do a better job of ensuring these initiatives work as intended,” said Rep. Nydia Velazquez, D-N.Y., chairwoman of the House Small Business Committee, in a statement to Government Executive.

To participate in the 8(a) program, an applicant must be considered a small business, be unconditionally owned and controlled by a socially or economically disadvantaged individual, show the potential for success and be of “good character.” Companies must graduate from the program within nine years.

But GAO found the program is easy to manipulate. For example, a Toms River, N.J., construction company owner reported his adjusted net worth to be $217,000 when it was actually more than $800,000, according to the watchdog. Nonetheless, the firm won $11.2 million in 8(a) contracts from the Defense and Homeland Security departments. The company withdrew from the 8(a) program in September 2009 as a result of GAO’s investigation.

In another case, investigators found that a roofing and construction company in Hyattsville, Md., with $48.3 million in contracts was acting as a pass-through for a graduated firm. Both firms were actually run by a white father-and-son team; the 8(a) program is designed for minority-owned firms. The two businesses essentially were operating as one company, the report said, sharing top executives, staff, administrative offices and warehouse space.

The fraud became apparent to investigators during a visit to the business. “The white vice president disclosed much of the operational knowledge of the firm during the site visit, while the black president rarely spoke,” GAO said. “The white executives both work out of large suites while the black president sits in a small room located at the back of the building.”

The report identified several other instances in which companies established shell companies that would win the award, but not perform any of the work. Some executives hid their lavish lifestyle from SBA, including the president of an information technology firm in Bethesda, Md., who owns a $2.5 million house on a private island in Miami, a $450,000 yacht and a $200,000 Lamborghini, investigators found.

GAO brought three cases to SBA, but the agency failed to take action, allowing the companies to continue winning contracts. For instance, an IT firm in Fairfax, Va., should have been removed from the program after its president failed to disclose $4.2 million in personal property, the report found.

“We brought the unreported assets to the attention of SBA,” the report said. “However, once SBA learned that the firm was scheduled to graduate in eight months, it no longer wanted to investigate the firm’s actions. Eleven days later, the firm was awarded a $1.7 million contract.”

Even firms that voluntarily disclosed ineligibility remained in the program. The president of a human resources firm in Alexandria, Va., told SBA she had an annual salary of nearly $750,000– well above the threshold to remain in the program — yet officials allowed the company to stay in the program for another five years.

In response to the findings, SBA conceded that its fraud prevention systems needed improvement. “Although the 8(a) business development program has enjoyed numerous successes, we recognize that there are weaknesses and areas that require increased monitoring and oversight,” wrote Joseph Jordan, associate administrator for government contracting and business development.

The agency did have a measure of success in screening out bogus applications GAO submitted. In three cases, SBA discovered questionable assets and income with the fake companies. But in another instance, investigators obtained 8(a) certification for a phony firm using fabricated documents.

“Certification of GAO’s bogus firm shows vulnerabilities in the process such as the lack of any face-to-face contact that could allow ineligible individuals or pass-through companies to enter the program,” the report said.

According to SBA, in fiscal 2008, there were 9,462 firms certified to participate in the 8(a) program, and about half had at least one active sole-source or set-aside contract. Agencies awarded more than $16 billion in 8(a) contracts that year, allowing the government to exceed its goal of giving 5 percent of all contracts to small disadvantaged businesses.

In October, SBA recommended major changes to the eligibility and income requirements of the 8(a) program. The rule is expected to be finalized by June.

SBA spokesman Michael Stamler said Friday that the proposed regulatory changes would address “several of the recommendations made by the GAO, and will strengthen the program and maximize its benefits for eligible small businesses.” He added SBA is “taking further steps, in line with GAO recommendations, to prevent fraud, waste and abuse.”

– By Robert Brodsky – govexec.com – April 30, 2010

Why Do Corporate Giants Land Federal Contracts Meant for Small Businesses?

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Few would disagree that federal contracts set aside for small businesses should go to small businesses — not corporate behemoths.

And yet it seems to happen again and again. Take one recent example: in late December, an IT company named QSS, a subsidiary of Dell Inc., landed a small-business contract for nearly $21 million from the U.S. Coast Guard.

What’s more, QSS — which in 2006 was purchased by Ross Perot’s “Perot Systems” before Perot was gobbled up by Dell last year — is listed in a federal database as a “self-certified small disadvantaged business.”

How can this be? After all, Dell employs some 76,000 people, and the government’s definition of a small business is one that, in this particular industry, employs no more than 1,000.

The answer depends on whom you ask. The most vocal small business activists insist that the government is acting negligently, even nefariously. Regulators in the federal Small Business Administration counter that the issue is mostly the byproduct of coding mistakes and mergers — human errors that the agency purports to be addressing aggressively under the Obama administration.

Whatever the case, the example with QSS — which Hispanic Business Magazine found through a simple search in the federal contracting database FedMine.Us — isn’t an isolated event. [GTPAC note: fedmine.us is a privately-operated, not government-operated web site.]

Other companies that have landed small-business contracts include General Dynamics — the fifth largest defense contractor in the world — Xerox, Office Depot, John Deere and McGraw Hill, according to a 2008 report from the Department of Interior’s Office of Inspector General. As for QSS, in 2008 it was the nation’s 28th largest recipient of small business federal contracts, according to FedMine.Us.

The 2008 report found that large corporations received $5.7 million in awards that should have gone to small businesses. But that was just within the Department of Interior. The total amount of small business contracts getting diverted to large corporations every year is difficult to ascertain, given the inherent murkiness of the issue. Some activists say it is well into the billions.

In October, the government organization in charge of watching over the SBA — that is, the SBA’s Office of Inspector General — said this issue is among the SBA’s most serious problems.

“Audits and other governmental studies have shown widespread misreporting by procuring agencies,” the report said. “Many contract awards recorded as going to small firms have actually been performed by larger companies.”

The issue is drawing more and more attention as politicians, economists and pundits talk about boosting small businesses in an effort to create jobs, reduce the unemployment rate and stimulate the lagging economy.

At least two bills are working their way through Congress to address this issue. One is co-authored by a duo of Senate moderates, Democrat Mary Landrieu of Louisiana and Republican Olympia Snowe of Maine; the other, by the lesser-known Congressman Henry Johnson, a Georgia Democrat.

By law, the federal government must strive to spend 23 percent of its entire purchasing budget for goods and services on small businesses. That’s a lot of money, seeing how the federal government spends more than half a trillion dollars every year. But by the government’s own admission, it hasn’t been meeting that mark.

It claims to come close. The federal government says it hit 21.5 percent in 2008. (The official report for 2009 hasn’t come out.)

But the American Small Business League, perhaps the nation’s most vocal critic on this issue, scoffs at this contention. Chris Gunn, ASBL’s communications director, insists the true amount is somewhere between 5 and 10 percent.

“The numbers speak to a very different reality,” he told Hispanic Business Magazine.

For starters, he said, the government exempts about a fifth of its purchasing budget from the goal, with the explanation that some contracts are too large for small businesses to handle. This alone, Mr. Gunn said, brings the true percentage down to 17.5 percent.

But Mr. Gunn says the bigger problem is that examples like the case of QSS are happening all the time. And those contracts, like QSS’s $20 million job with the U.S. Coast Guard for homeland security, count towards that 23 percent goal, he said.

In October, the ASBL ran a report, and found that eight of the top 10 small business contract awardees in 2008 were large businesses coded “small.” The ASBL further estimates that at least half of the $93 billion the government says is going to small businesses is actually being diverted to large businesses.

Officials with the federal Small Business Administration, which helps regulate federal contracting to small businesses, say the ASBL’s claims are exaggerated.

“We’re not going to stand for any large business that masquerades as a small business and tries to engage in any malfeasance,” Joe Jordan, the SBA’s associate administrator for government contracting, told Hispanic Business Magazine.

The problem, he said, has more to do with human error. For instance, he said, oftentimes a small business working on a small business contract gets consumed by a corporate giant, and the contracting officer forgets to go back into the database and re-code the business as “other than small.”

Also, after 2012, the problem should abate at least somewhat. That’s because, in July of 2007, a law passed forbidding large corporations from keeping the small business contracts of the small companies swallowed up in acquisitions. But the law grandfathered in, for five years, merger deals made prior to that date. This is what happened with QSS group, which, despite what the federal database says, no longer even exists as a company. (It is really just “Dell.”) That company’s five-year contract with the Coast Guard — which has been renewed every year — expires in late May, said Frank Islam, QSS’s founder and former owner, speaking to Hispanic Business Magazine.

Nonetheless, the phenomenon is a widely recognized problem, and reform efforts have thus far failed to catch hold. This owes in no small part to how the reform advocates themselves are divided. In short, the most vocal and visible activists — such as the ASBL — are out of synch with the most powerful and influential lawmakers putting forth their proposed solutions, such as Senators Landrieu and Snowe.

Ms. Landrieu and Ms. Snowe are the chair and ranking member of the Senate Committee on Small Business and Entrepreneurship.

When introducing their Small Business Contracting Improvements Act in February, Ms. Landrieu said it would create at least 163,000 jobs.

“In this past year, small businesses accounted for more than 85 percent of job losses,” she said on the floor. “When large businesses get new work they typically spread the work among existing employees. When small businesses get these contracts they must staff up to meet the increased demand.”

But where ASBL is often knocked for being too extreme, Sen. Landrieu’s effort is being criticized by some for being too mild.

Most notably, although the bill includes strong language about the illegality of large companies landing small-business contracts through misrepresentation, it exempts the Department of Defense, which by many accounts has the worst record on this matter.

“DOD is seriously challenged in its contracting to minority and small enterprises,” David Ferreira, vice president of government affairs for the U.S. Hispanic Chamber of Commerce, told HispanicBusiness Magazine. “They often rely on very large businesses and award them small-business contracts because of loopholes in the law.”

However, Mr. Ferreira said the U.S. Hispanic Chamber is pleased with some aspects of the bill, such as its focus on reducing a phenomenon known as contract bundling. This is when the federal government, for the sake of efficiency, will consolidate several contracts into one super-contract. This often precludes small businesses from competing because they lack the resources for such large jobs.

One particularly unsavory practice related to this is known as “bait and switch” sub-contracting. The term refers to when large corporations, under mandate from the feds, promise to hire, on bundled contracts, sub-contractors that are small businesses or minority-owned, and then renege after winning the job.

It’s a tactic with which Bill Miera, owner of a Hispanic-owned engineering and IT firm in New Mexico with 50 employees, is all too familiar.

For years, Mr. Miera’s Fiore Industries had been winning bids and working on two separate contracts with the U.S. Air Force, worth between $5 million and $10 million a year each.

About 10 years ago, the Air Force bundled one of the contracts into a mega-contract worth around $50 million — far too big for Miera’s firm to handle.

A Fortune 500 company put in for the bid, and in its proposal told the federal government it would be hiring a minority-owned small business — Fiore Industries — as a sub-contractor. (Mr. Miera declined to name the company, citing a reluctance to burn bridges in what is a relatively small industry.)

When the large company got the job, it dropped Fiore Industries and went with another firm, which was Caucasian-owned.

Mr. Miera, a former board member on the U.S. Hispanic Chamber, was forced to lay off five employees. A few years later, it happened again, with another Fortune 500 company, which went even further.

“They started hiring our people to work for them,” he told Hispanic Business Magazine. “They said, ‘If you want to keep your job, you’ve got to work for us.'”

As a result of these two bait-and-switch examples, Fiore Industries’s annual revenues dropped to about $5 million from $8.4 million. It lost about 10 of 50 employees.

Thanks in part to a contract with NASA, Fiore’s revenues have since climbed back to $6.5 million. But the company’s original plan was to be earning $50 million annually by now.

“That hurts, especially when you’ve done good work, and then lose your contract, but not because you’ve done a bad job or your prices are too high,” he told Hispanic Business Magazine.

Mr. Miera said the problem is that the law, as written, has no teeth to punish those who engage in such tactics.

“The large businesses know that,” he said.

For the entirety of the Bush administration, the ASBL, headed up by its colorful leader, Lloyd Chapman — a frequent pundit on cable news networks such as Fox, MSNBC and CNN — carped on the federal government on these issues. It also filed — and won — several lawsuits.

Mr. Chapman claims the Obama administration has been no better.

“I say it’s getting worse, because Obama has refused to close the existing loopholes that all Fortune 500 firms use to get small business contracts,” he told Hispanic Business Magazine.

Mr. Chapman is advocating the federal contracting bill sponsored by Rep. Johnson of Georgia. Mr. Chapman says he helped write the bill, and typically refers to it as his own.

“My bill has 20 co-sponsors,” he told HispanicBusiness Magazine. (They are mostly House Democrats, but the list does include two Republicans: Ralph Hall of Texas and Ileana Ros-Lehtinen of Florida.) “It will solve a 10-year-old contracting scandal, won’t increase the deficit and it’s permanent.”

Mr. Chapman and the ASBL are also highly critical of almost every other advocate on this issue. Senator Landrieu’s bill, they say, while well intentioned, gives recalcitrant corporate giants “a pass.” The U.S. Hispanic Chamber of Commerce is “backed by Fortune 500 companies.” But Mr. Chapman is particularly critical of U.S. Rep. Nydia Velazquez, (D-NY) — chair of the House Small Business Committee, whom he believes has done nothing to address the issue.

“She has chaired the small business committee for three or four years,” he said. “How come she hasn’t proposed legislation to address it?”

He added that Boeing, the world’s largest global aircraft manufacturer, is a major campaign donor to Velazquez and other small business committee members.

“My bill will take $100 million a year in federal small business contracts away from Boeing,” he said.

(Ms. Velazquez’s office did not provide a comment for this story, despite repeated requests from Hispanic Business Magazine.)

For its part, the federal SBA insists that it is working aggressively to fix the problems. By March, of the eight top awardees of small-business contracts that ASBL had highlighted in October, most had been re-coded as “small.”

Also, President Obama has proposed doubling the budget of the SBA, bringing it back to about $1 billion — which is where it was at the start of the Bush administration.

But despite their contention that the problem is most attributable to human error, SBA officials don’t deny that fraud is a factor.

“The U.S. Small Business Administration is making a tremendous effort to combat abuses in the federal contracting program,” SBA spokeswoman Hayley Matz told Hispanic Business Magazine in an email. “SBA recognizes the significant benefits of the program, but also acknowledges that instances of errors and potential abuse have occurred and resulted in negative consequences.”

Source: HispanicBusiness.com. All Rights Reserved – April 8, 2010 – by Rob Kuznia, Staff Writer

Virginia diversity-contract program is faulted

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A Virginia program to help small, women and minority firms win state business is largely ineffective at awarding contracts to companies with minority owners.

A key reason: The small-business definition is so broad that 99 percent of businesses in the state qualify.

“When you’re looking at minority business and small business, that’s two different issues on two different fronts,” said Darryl Samuels, executive vice president of the National Association of Minority Contractors. “The minority issue gets diluted.”

In a 2006 executive order, then-Gov. Timothy M. Kaine set a goal that 40 percent of state contracts should go to small, women and minority businesses, known as SWaMs. So far this year, small businesses have gotten 28 percent of the state’s spending, minority businesses 6.25 percent and white women businesses 5 percent.

The intent of the goal was to foster diversity among suppliers. But not everyone thinks it does.

“It is a program from hell,” said A. Hugo Bowers, president of the 48-member Black Business Alliance of Virginia, formed to press for public and private sector diversity. “[State agencies] can meet their SWaM goals and never hire a minority.”

To be considered small in Virginia, under a 2006 law, a business must be independently owned and operated with 250 or fewer employees, or have gross receipts of $10 million or less averaged over three years.

The “or” in the definition is a problem, said Stacy Burrs, former head of minority business enterprise offices for the city of Richmond and Virginia. “You could do $150 million in business as long as you don’t have 250 employees.”

An example: The top vendor awarded contracts under Kaine’s program in 2009 was Maryland-based Scheer Partners Management, which earned $37.02 million from Virginia while a year earlier it formed a $100 million equity investment group with another company. Scheer was classified as a small business and was still able to bid as a SWaM vendor through November.

Also, under reciprocal agreements, firms from other states are eligible to bid for state work, including one that was certified as small despite $9 billion in revenue. The state is barred from releasing the firm’s name because of privacy restrictions.

Of the top 10 SWaM vendors paid in 2009, one was minority — information technology firm KST Data Inc. in Ashburn, which has maintenance and hardware contracts with the Virginia Information Technologies Agency. KST received $15.76 million from the state last year.

The Virginia Department of Minority Business Enterprise certifies SWaM businesses. Of the 18,500 certified vendors, minority businesses make up 31 percent, according to director of operations Angela Chiang.

Despite those numbers, they win far fewer contracts.

“The good old boy network has already taken over the job. Nothing’s left for African-Americans, Asians and Hispanics,” said Tinh D. Phan, chairman of the Virginia Asian Chamber of Commerce and spokesman for the Minority Business Consortium.

Flooding the eligible pool with a large group of small, white businesses results in shallow returns for minority firms that lose out in the numbers game. “We’ve been fighting this thing day in and day out,” Phan said.

“The problem with the commonwealth of Virginia is, small is not really that small,” said Hilloah Reagh Driskill, an American Indian and owner of Brave Electrical Contracting in Norfolk who recently won a contract at Old Dominion University.

“I will never be that big,” she said.

. . .

Why should the state encourage its agencies to do business with small, women and minority firms?

“A lot of times, government work is the first work that [a business can] get,” said attorney Albert W. Thweatt II, who counsels small-business owners and teaches entrepreneurship at Virginia State University.

“If you don’t have access to the government work, you don’t have those things to be more successful in the private sector.”

In his executive order, Kaine wrote: “For Virginia to remain competitive, we must assure that all businesses and owners have an equal opportunity to share in state procurement.”

Diversity programs force governments and corporations to branch out from their normal stable of vendors and can help newer firms get projects, which may lead to better pricing from suppliers. That translates into more money and projects to grow a business, Samuels said.

Once work is flowing, businesses have better chances of getting financing and earning money rather than merely surviving.

It’s one reason supporters say diversity programs are important.

Another factor: the economy.

“Minority-owned businesses are . . . the fastest growing component of all small businesses and are likely to continue to be so into the future,” said Thomas “Danny” Boston, an economics professor at Georgia Tech. “The economic vitality of the nation will become more closely tied to the performance of these businesses.”

Minority businesses are slowly getting a piece of the state action. In 2007, they got 2.6 percent of the state’s total expenditure on contracts. In 2008, they got 5.44 percent and last year, they got 5.41 percent.

“It’s incremental movement,” said Samuel Hayes III, the state’s director of Minority Business Enterprise. “Under the program we have, it’s the best we can do.

“This is a not a gimme program. It is a raceand gender-neutral program.”

It’s not enough, Burrs said. “We have devised solutions that either weren’t going to be effective or were struck down because they were going to be in violation of the Constitution.”

A 1989 U.S. Supreme Court ruling based on a Richmond case bars localities and states from creating minority and gender set-aside programs unless they are narrowly tailored and discrimination has been proven.

Claire Guthrie Gastañaga, who serves on the Virginia Small Business Advisory Board, said one definition for small business covering all industries is not the way to go. She prefers the federal method, which uses industry-specific definitions.

The board is pushing the state to study the composition of small business in Virginia so it can be better defined.

. . .

Sixteen other states have set minority or women-owned business spending goals in line with the Supreme Court ruling.

The goals range from 4 percent of contract spending in Washington state to Maryland’s 25 percent, the highest in the nation, according to a database from the California-based Insight Center for Community Economic Development.

Maryland also separates small-business spending goals from minorityand women-owned firm spending, said Luwanda Jenkins, special secretary in the Governor’s Office of Minority Affairs.

The Supreme Court ruling does not bar a state or local government from creating minorityor gender-based programs, but it does place a heavy burden on justification for the program.

To justify the spending goals, governments use disparity or utilization studies.

Maryland’s current 25 percent goal is based on a 2006 study; minority spending programs have been in place since 1978.

Kaine, who declined to comment for this story, used a 2004 study as justification for his program.

The first part of another study was conducted in 2009 and released in January. It shows firms owned by African-Americans, Hispanics, Asians, Native Americans and nonminority women were nearly universally underused in favor of white male firms.

Gov. Bob McDonnell’s administration is “dissecting” Kaine’s initiative and the 2009 study, said spokeswoman Stacey Johnson. The governor is considering an advisory committee to “come up with effective and legal ways to increase the number of minority-owned firms that do business with the commonwealth.”

The McDonnell administration has not authorized the second part of the 2009 disparity study — the key component in creating minorityor gender-based affirmative-action programs.

Without that, big gains are unlikely, said Burrs, now a management consultant.

The disparity will not be eliminated unless there is more race-conscious or gender-conscious programming, which needs the legal backing of a full study, he said.

Michel Zajur, president and CEO of the Virginia Hispanic Chamber of Commerce, said it’s important that state spending on contracts reflects Virginia’s racial, ethic and gender diversity.

“No one’s asking for handouts or anything,” he said. “These businesses are very well capable of producing. But the way that it’s set up, they need an opportunity to put in bids for contracts. So many times they’re bundled in such big packages.”

King Salim Khalfani, executive director of the Virginia State Conference of the NAACP, said his organization and the Black Business Alliance are seeking a meeting with McDonnell on the issue.

“Race neutral hasn’t worked, and I don’t think it was ever intended to work,” he said. If the McDonnell administration doesn’t fund the next phase of the study, “it does not send a great signal they’re serious about improving the numbers.”

Oliver R. Singleton, president and CEO of the 400-member Metropolitan Business League that promotes small and minority businesses, said a lawsuit may be the only way to prompt change.

Or, Singleton suggests, forget race and make state goals favor local businesses. No high court rulings bar that, and supporting local businesses is all encompassing.

“I don’t believe the rural legislators will ever get on board with any minority goals — not in my lifetime,” he said. “But I do believe the rural legislators will get on board with a local provision.”

__________________________

READ THE ORIGINAL DOCUMENTS
• Supreme Court opinion – City of Richmond v. J.A. Croson Co. 1989
• State procurement disparity studies: 2004 | 2010
• 2006 Executive Order establishing Virginia’s diversity supplier program
• Virginia’s Diversity Expenditure Portal

WHAT’S A SMALL BUSINESS?
In Virginia, “small business” means an independently owned and operated business which, together with affiliates, has: 250 or fewer employees, or $10 million or less in annual gross receipts averaged over the previous three years.

STATE-CONTRACT GOALS
Then: In a 2006 executive order, Gov. Timothy M. Kaine set a goal for 40 percent of state contracts to go to small-, womenand minority-owned businesses.

Now: Gov. Bob McDonnell is now “dissecting” that initiative and considering forming an advisory committee to come up with legal and effective ways to increase minority contracting with Virginia agencies.

– from the Richmond Times-Dispatch – 3/28/2010

Suspected ‘front company’ has good city hall lobbyist

By

by Tim Novak – Chicago Sun Times-March 22, 2010 – It’s one of City Hall’s busiest woman- and minority-owned contractors. And, for the last two years, Azteca Supply Co. has been the target of a federal investigation that led to charges last month that the company is a sham “front” that fraudulently was awarded millions of dollars in government contracts.

This is the story of a Hispanic woman who found she could make millions by selling goods to government agencies eager to do business with women and minorities — and did so with the help of some of Chicago’s most well-connected Hispanic leaders, including a former chief of staff to Mayor Daley.

ONE WAREHOUSE, TWO SCANDALS

Two City Hall scandals are linked by a small warehouse on Chicago’s Southwest Side.

Aurora Venegas — a Hispanic woman accused of running a bogus minority-owned business to get city contracts — runs her company from a warehouse she began leasing three years ago from Calvin Boender, a developer who was convicted last week of bribing then-Ald. Isaac Carothers (29th).

Venegas, president of Azteca Supply Co., agreed to pay Boender a total of $252,860 during the three-year lease for 20,458 square feet in the one-story building at 4500 S. Kolin.

Azteca moved in Sept. 1, 2007. Four months later, Boender sold the warehouse for $4.7 million. He paid $4.3 million for the building in July 2004.

Venegas also leases space at National Concrete Pipe Co.’s yard in Franklin Park.

 

But there was one problem: Federal authorities say Aurora Valadez Venegas lied to the city to obtain certification as a woman- and minority-owned business so she could get government contracts set aside for women and minorities.

To get that certification, they say, Venegas “falsely represented to the City of Chicago . . . that she performed a commercially useful function” and wasn’t there just to allow the city and its contractors to take credit for doing business with minorities and women.

Instead, they say she acted merely as a conduit, passing along orders from the city and other governments to the companies that actually produced and supplied the goods. And, in some cases, they say, she didn’t even take the orders, which instead went directly to the suppliers.

Helping Venegas to keep that key city certification: Gery Chico, a Daley insider who has served as the mayor’s chief of staff and also as president of the Chicago Board of Education and of the Chicago Park District and now is chairman of the board of the City Colleges of Chicago.

For the last six years, Chico, a lawyer and lobbyist, has repeatedly — and successfully — urged city officials to renew Azteca’s certifications as a “minority business enterprise,” a “woman-owned business enterprise” and a “disadvantaged business enterprise.” That status as an MBE, WBE and DBE has made Azteca a popular government contractor and subcontractor.

Azteca doesn’t make anything. Nor does it keep much in stock, federal authorities say.

But it still has managed to get government contracts to provide everything from chemicals to treat Chicago’s drinking water, to concrete pipes for O’Hare Airport’s new runway. It has done work on the CTA Blue Line, Stroger Hospital and the Dan Ryan Expy. It has also gotten $638,000 to supply and dispose of feminine-hygiene products at O’Hare restrooms.

Chico — whose law firm has been paid $10,000 by Azteca since 2004, according to lobbyist reports he filed — doesn’t want to talk about the company.

But his firm, Chico & Nunes, says it “has never participated in or advised any client to perform improper activities — nor would we. … We are surprised by the allegations made in the indictment against Azteca, and our firm has not been contacted by any investigators.”

Venegas, 61, created Azteca Supply in February 1991 with $10,000 she borrowed from her 401(k) retirement fund from a clerical job she had at Edward Hospital in Naperville, city records show.

A year later, Azteca landed a lucrative deal, becoming the Chicago area’s “permanent exclusive distributor” for National Concrete Pipe Co., a Franklin Park business owned by John Esposito. Venegas worked for Esposito’s company in the 1970s, and her husband and co-defendant, Thomas Masen, is the comptroller of Esposito’s company.

Esposito often supplies the pipes that are used on government projects, such as O’Hare’s new runway. But the pipes can be purchased only through Azteca.

The Illinois Department of Transportation questioned that arrangement two years ago, when Venegas sought to renew her DBE certification with the agency. An IDOT official, Brian Su, visited the offices of Azteca and National Concrete Pipe in June and July 2008. Su concluded that Azteca was nothing more than a “pass-through,” an unnecessary middleman driving up the cost of buying materials that are made and stored at National Concrete Pipe.

“Mr. Masen explained their transaction process with Azteca: When Azteca phones in an order, NCPC transfers standard items immediately to Azteca’s lease space, which is just a few feet away from the [National Concrete Pipe] plant yard,” Su wrote in an IDOT report that also went to City Hall.

“Azteca does not have a necessary and useful role in the transaction,” Su wrote. “. . . The firm’s role is a superfluous step added in an attempt to obtain credit toward [DBE] goals.”

A few weeks after Su’s visit to National Concrete Pipe’s yard, two FBI agents showed up on July 17, 2008, and Esposito ended up attacking one of the agents and getting arrested. Esposito, 65, of Lake Forest, has pleaded guilty to a misdemeanor. He isn’t charged in the case against Azteca.

According to the indictment against Azteca, Venegas and Masen, Esposito’s company often took orders directly from Azteca’s customers — including Kiewit/Reyes, a contractor that needed concrete pipes for O’Hare’s new runway. It has paid Azteca more than $10 million, records show. Masen would determine how much money his wife’s company should charge for the pipes and other materials, according to the indictment — and how much profit she would make.

“None of this is true,” said a tearful Venegas, in a brief conversation at her Aurora home before referring questions to her criminal attorney, Joseph Duffy, who didn’t respond to a request for comment.

Over the last three years, city records show, Azteca and its seven employees have done a total of more than $30 million in business with City Hall — part of the Daley administration’s goal of giving at least 30 percent of every city contract to companies owned by women and minorities.

Azteca has also worked for other city contractors, including Walsh Construction and BCI Roofing, which was owned by Chris Kelly, the former adviser to and campaign fund-raiser for Gov. Rod Blagojevich who committed suicide last year, days before he was due to go to prison on a federal tax conviction.

As its government business has grown, Azteca has become a more-active political fund-raiser, contributing more than $137,000 to political funds including that of Daley’s now-defunct Hispanic Democratic Organization. Azteca also helped organize three fund-raisers for state Rep. Edward Acevedo (D-Chicago), one of HDO’s leaders.

Azteca’s certifications as a MBE, WBE and DBE were renewed Jan.1, 2009 — about six months after the FBI agent was beaten up during the Azteca investigation — and expire in April 2012, according to city records.

City Hall has now moved to bar Azteca, Venegas and her husband from getting any more city work.

“We are shocked at the lengths these few individuals went to to defraud the city and investigators and to hide their front company, including writing up dummy invoices and filling a warehouse full of supplies and materials that were not actually owned by the company,” says a statement from the mayor’s purchasing department.

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