Groups say veteran-owned contracting still broken

Despite a history of complaints to Congress and the Department of Veterans Affairs, veterans advocacy groups say VA is still placing far too many hurdles in front of veteran-owned small businesses in its contracting program. VA, meanwhile, says it’s making changes.

VA’s programs for preferentially awarding contracts to veteran-owned small businesses are unlike those of any other agency in government. In a 2006 law, Congress told VA to take a “veterans first” approach to procurement, making service-disabled veteran-owned small businesses its first choice for any given contract and all other veteran-owned small businesses its second choice.

But to deter fraud, Congress also told VA to set up a system to verify contractors’ veteran status before they could get set-aside contracts. That set up a careful balancing act for the agency between detecting potential fraud and making the process as easy as possible for legitimate veteran-owned businesses. And veterans groups are telling Congress VA has allowed that scale to fall way too far in one direction.

“The bottom line is many veterans find this process to be overly burdensome, distracting and not worth the effort,” Davy Leghorn, the assistant director for the American Legion’s National Economic Commission told a joint hearing of the House Veterans Affairs committee and Small Business committee Tuesday. “We want these businesses to be successful, not hamstrung.”

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With the exception of VA, when veteran-owned small businesses want to get contracts that are set aside for them, they can simply self-certify through the government’s System for Award Management that they meet the legal definitions of a veteran-owned firm. Potential competitors for a contract can challenge that veteran designation after-the-fact via the Small Business Administration, but those challenges are exceedingly rare.

VA, on the other hand, because of the verification requirement Congress created, requires an extensive, often months-long paperwork process upfront before a company can even be considered for a set-aside contract with the department.

Leghorn said his group supports verification in principle, but contends VA has gone overboard.

“Currently, to root out bad actors who maliciously seek to defraud the federal government, VA places a series of overzealous, bright-line rules to evaluate the applications,” he said. “Most of these rules apply to unconditional ownership and control requirements, and VA has formulated extreme interpretations that are unrealistic. The American Legion agrees with the U.S. Court of Federal Claims’ February 14 Miles ruling, where the court applied the U.S. Bankruptcy Court’s pragmatic definition that does not burden the veteran’s ownership interest. Neglecting to adopt this approach, VA will continue to make this process punitive and burdensome to the majority of firms seeking this verification.”

Groups decry maze of requirements

Joe Wynn, a special advisor to the Vietnam Veterans of America, said VA’s process for determining whether a company is actually owned and controlled by a veteran is extremely inconsistent in practice. He said the small firms he’s dealt with have had their applications denied for myriad and unpredictable reasons.

“Basically, a veteran has to be the majority owner, the majority board member, majority stockholder, the highest paid employee, hold the highest office, have the experience to manage the daily operations, make all the long term decisions, must devote full time to the business, offer no right of first refusal, don’t lease your office space, and by all means don’t live in a community property state,” he said. “Without absolute proof of any one of these things, the veteran will likely be denied.”

Veterans advocates also complain that it’s almost impossible for veteran-owned small businesses to navigate that maze of requirements that might cause their application to be denied, charging that VA’s approach so far has been to deny first and ask questions later.

Jonathan Williams, a federal procurement attorney who works with veteran-owned business clients, said the department is not exactly upfront about all the potential reasons it would decline to approve a given application.

“They don’t necessarily have to tell you all the reasons they’re denying you when they send you an initial denial letter,” he said. “So what we’ve started to do is ask the veteran to send us all of their documents, the entire application, even if it was denied for one needle in the haystack. And then we do a full review to see what else they might be denied for three months or six months from now. You can imagine that’s a very time consuming and costly exercise for veterans to go through, and many of them can’t afford to do it. But that’s a symptom of the fact that they don’t have to tell you every reason up front and they will often cite different reasons three or four months after you correct the initial problem.”

VA restructuring office

Tom Leney, the director of VA’s office of small and disadvantaged business utilization, said VA is trying to correct that particular problem by having its staff proactively communicate with veteran applicants about potential problems before a decision is made about their applications.

“Our analysis has revealed that most applicants fail because they do not fully understand the regulations,” he said. “To address this problem, we will expand our verification assistance program by adding pre-application workshops to our other three elements, which consist of an online self-assessment tool that walks the veteran through every element of the regulation, verification assistance briefs, eleven of which are on our website, and partnerships to provide counseling services to applicants. In May, we will adopt a practice of contacting an applicant with preliminary findings where there are issues of non-compliance that can be easily and quickly corrected, and we’ll allow applicants to make those corrections. We’re running some limited pilots right now to validate the process and to train our Center for Veterans Enterprise (CVE) staff.”

CVE has experienced ongoing staffing challenges, the Government Accountability Office found in an January report. VA increased the number of positions dedicated to the veteran verification process, adding three full-time federal employees and 64 contractors between 2011 and 2012, but as of November of last year, five of the total 27 full-time federal positions were still vacant, GAO found.

However, over the past year, VA has significantly restructured the makeup of its CVE verification staff, Leney said, in an attempt to make sure its decisions are not arbitrary or confusing.

“Sixty percent of the staff of CVE now have audit background, 33 percent have inspector general experience, 33 percent are lawyers, 53 percent have a business degree and 40 percent are former small business owners,” he said. “So we’ve brought a different staff together, that staff is almost entirely new in order to make sure we put together the kind of expertise that meets the objectives that have been set for us.”

The department is also in the midst of a senior executive task force review of the entire program, ordered by VA secretary Eric Shinseki. The results and recommendations are expected to be finalized later this year.

Group says VA hardest agency to do business with

In the meantime, veterans groups say VA’s approach to veteran owned small businesses is actually chasing those firms away. Leghorn said ironically, many well-established small veteran-owned firms find that VA is the hardest federal agency to do business with, so many don’t bother.

“So what you end up with is a lot of nascent businesses getting verified, because it’s easier for them to contort their operating agreements and by-laws to suit the current requirements. VA then complains that they’re ending up with too many inexperienced veteran businesses to draw from,” he said. “On the other hand, we identify an unfair advantage for the larger small businesses who have the personnel and resources you need to dedicate to the verification process.”

Mark Goldschmitt, who works as a verification assistance counselor for veterans groups, said VA needs to reform its program quickly, because more and more, its CVE process is turning into a seal of approval that the rest of government relies on.

“When I go to other agencies and talk to them about small business, one of the first things they ask is whether you’re CVE verified,” he said. “When I say yes, the response is, ‘tell me more.’ When I say no, the almost immediate response is body language that says, ‘How do I get out of this conversation and move on to somebody that I really want to talk to?'”

Veterans groups say veteran-owned businesses have also been hurt by the sheer length of time it takes VA to give a firm the green light for contracts. Leghorn said that’s happened even in cases where a firm already has received a veteran-owned small business certification from CVE, but lost it or had it lapse during the renewal process, and as a result, lost a contract.

“A few months ago, 20 full-time employees were laid off in Wisconsin when a service-disabled veteran-owned construction firm lost $1.7 million worth of work along with the ability to bid on future contracts,” he said. “This is a real shame, because the whole point of VA verification is to make these businesses eligible to compete for VA contracts. We can’t stress enough how detrimental this process can be for these veterans whose lives and family incomes are tied to their small businesses.”

But VA’s Leney said the department has made major progress in reducing the amount of time it takes for an application to be processed. And once an initial verification is done, firms will now have the option of going through a simplified re-verification process every two years, rather than having to start from scratch once every year.

“We did 569 determinations in February, and the average time was 34 days. In June of 2011 it was over 130 days,” he said. “So I think we’ve made some progress.”

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