State Department Contract for Security Installation at Embassies 
Awarded to 8(a) Joint Venture (08-NOV-06, GAO-07-33R).		 
                                                                 
In March 2003, the Department of State (State) awarded a	 
sole-source contract to EmbSEC, a Virginia limited liability	 
corporation, for work at U.S. embassies. The contract currently  
has a ceiling price of $354 million. The contractor is required  
to install and maintain technical security equipment, such as	 
alarms, cameras, and controlled-access equipment; establish X-ray
capability for special projects; and maintain and repair physical
security products. The contractor also procures equipment and	 
materials and operates the warehouse where they are stored.	 
EmbSEC was created as a joint venture, mentor/protege partnership
under the Small Business Administration's (SBA) 8(a) business	 
development program. A joint venture in the 8(a) program is an	 
agreement between an 8(a) participant and one or more businesses 
to work together on a specific 8(a) contract. SBA regulations	 
state that the purpose of the mentor/protege relationship is to  
enhance the capabilities of the protege and to improve its	 
ability to successfully compete for contracts. The EmbSEC joint  
venture is comprised of RDR, Inc., the mentor, and BP		 
International (BPI), the protege, an 8(a) firm at the time the	 
contract was awarded. State had awarded 8(a) contracts to RDR for
the same type of work in 1992 and 1998. We received a tip on our 
fraud hotline regarding the EmbSEC contract. The objectives of	 
our review, conducted under the authority of the Comptroller	 
General to conduct evaluations on his own initiative, were to	 
determine (1) State's basis for awarding the contract to EmbSEC  
without competition and (2) the extent to which SBA has monitored
the roles and responsibilities of the companies under the joint  
venture arrangement. We are sending a separate management letter 
to State regarding this contract.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-33R 					        
    ACCNO:   A63145						        
  TITLE:     State Department Contract for Security Installation at   
Embassies Awarded to 8(a) Joint Venture 			 
     DATE:   11/08/2006 
  SUBJECT:   Embassies						 
	     Facility security					 
	     Federal procurement				 
	     Fraud						 
	     Improper award of contract 			 
	     Joint ventures					 
	     Security services contracts			 
	     Sole source procurement				 
	     Waivers						 
	     SBA 8(a) Business Development Program		 

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GAO-07-33R

   

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United States Government Accountability Office

Washington, DC 20548

November 8, 2006

The Honorable Stephen C. Preston Administrator Small Business
Administration

Subject: State Department Contract for Security Installation at Embassies
Awarded to 8(a) Joint Venture

Dear Mr. Preston:

In March 2003, the Department of State (State) awarded a sole-source
contract to EmbSEC, a Virginia limited liability corporation, for work at
U.S. embassies. The contract currently has a ceiling price of $354
million. The contractor is required to install and maintain technical
security equipment, such as alarms, cameras, and controlled-access
equipment; establish X-ray capability for special projects; and maintain
and repair physical security products. The contractor also procures
equipment and materials and operates the warehouse where they are stored.

EmbSEC was created as a joint venture, mentor/protege partnership under
the Small Business Administration's (SBA) 8(a) business development
program. A joint venture in the 8(a) program is an agreement between an
8(a) participant and one or more businesses to work together on a specific
8(a) contract. SBA regulations state that the purpose of the
mentor/protege relationship is to enhance the capabilities of the protege
and to improve its ability to successfully compete for contracts. The
EmbSEC joint venture is comprised of RDR, Inc., the mentor, and BP
International (BPI), the protege, an 8(a) firm at the time the contract
was awarded. State had awarded 8(a) contracts to RDR for the same type of
work in 1992 and 1998.

We received a tip on our fraud hotline regarding the EmbSEC contract.^1
The objectives of our review, conducted under the authority of the
Comptroller General to conduct evaluations on his own initiative, were to
determine (1) State's basis for awarding the contract to EmbSEC without
competition and (2) the extent to which SBA has monitored the roles and
responsibilities of the companies under the joint venture arrangement. We
are sending a separate management letter to State regarding this
contract.^2

Results in Brief

State relied on a waiver of 8(a) competitive thresholds, granted by SBA in
2001, to award the sole-source contract to EmbSEC. However, the waiver was
improper because SBA was not authorized to grant it. SBA can authorize
sole-source 8(a) awards above the competitive thresholds (1) for specific
procurements and (2) if it determines that other 8(a) firms cannot compete
for the requirement. In this case, SBA authorized State to make
sole-source 8(a) awards in any amount for contracts that "supplement the
security of U.S. Government diplomatic posts and protect the lives of
Departmental personnel." The waiver was not tied to a specific
procurement, but was a blanket waiver that could be applied to any
contract pertaining to security at diplomatic posts. The waiver was signed
by another official on behalf of SBA's Associate Administrator for 8(a)
Business Development; SBA headquarters officials were unaware of the
waiver until we brought it to their attention. They agreed that it was
unauthorized. State incorporated the waiver in its procurement regulation
in April 2004, but officials from State's offices of procurement policy
and Small Business Utilization told us it has been used only for the
EmbSEC contract. It is not clear why State used the waiver to award the
2003 contract to EmbSEC rather than using competitive procedures. Five
years earlier, in 1998, when RDR was awarded the prior contract as the
only 8(a) offerer, the contracting officer expressed concern with the lack
of competition, noting that "it would be in the best interest of the
government to re-compete this requirement at the earliest practical time."
State officials told us that a number of companies could perform this
work.

^1 The purpose of GAO's FraudNET is to facilitate reporting of allegations
of fraud, waste, abuse, or mismanagement of federal funds. Allegations are
received via e-mail at [email protected].

^2 GAO, Department of State Contract for Security Installation at
Embassies, GAO-07-34R (Washington, D.C.: Nov. 8, 2006).

Although SBA officials approved the EmbSEC joint venture and
mentor/protege agreement, they have not monitored the roles and
responsibilities of the two contractors, despite the fact that this is an
unusually large and complex 8(a) contract. According to contractor
representatives, as well as State officials, RDR sought out BPI as an 8(a)
joint venture partner for  the contract. At the time, BPI was a very small
firm specializing in information technology project management and
consulting. Under the EmbSEC contract, RDR and DynCorp, a subcontractor,
install and maintain security systems at embassies, and BPI provides
administrative services, such as operating the warehouse for the
equipment. SBA headquarters officials--the Associate Administrator for the
8(a) Business Development program and a representative from the office of
General Counsel--said that this arrangement does not appear to be
providing BPI, as the protege, with the experience that would be expected.
Officials in SBA's Washington, D.C., district office had not followed up
to ensure that the 8(a) firm was receiving the appropriate benefits from
the arrangement.

We are recommending that SBA retract the 2001 waiver and that it review
the roles and responsibilities of RDR and BPI under the 8(a) joint
venture. In written comments on a draft of this report, SBA agreed with
the recommendations. We also received a minor technical comment from
EmbSEC, which we incorporated.

Background

SBA's 8(a) business development program is one of the federal government's
primary means for developing small businesses owned by socially and
economically disadvantaged individuals. Firms approved as 8(a)
participants can receive business development assistance from SBA but may
only participate in the 8(a) program for a maximum of 9 years. BPI was an
8(a) firm at the time of contract award but has since graduated from the
program. Contracting officers can award contracts to 8(a) firms without
competition below certain dollar thresholds--namely up to $5 million for
manufacturing and up to $3 million for all other contracts. These
competitive thresholds may be waived by SBA's Associate Administrator for
8(a) Business Development if there is not a reasonable expectation that at
least two eligible 8(a) participants will submit offers at a fair price.

In 1998, SBA started negotiating memorandums of understanding that allow
federal agencies to contract directly with 8(a) firms. These memorandums
delegate contract execution responsibility to the agencies and require
them to monitor certain requirements of the contracts. Before contracting
with an 8(a) firm, however, agencies must request approval from the
relevant SBA district office (the Washington district office, in this
case).

Basis for the Sole-Source Award Was an Improper SBA Waiver

On September 18, 2001, State requested that SBA waive 8(a) competitive
thresholds for contracts that "supplement the security of U.S. Government
diplomatic posts and protect the lives of Departmental personnel." An SBA
official approved the waiver on behalf of the Associate Administrator for
8(a) Business Development the next day to apply "for the duration of the
national state of emergency" as declared by the President; the waiver
contains no expiration date. This waiver was improper because SBA was not
authorized to issue it. SBA can waive the competitive thresholds for a
specific contract opportunity after determining that there is not a
reasonable expectation that at least two eligible 8(a) participants will
submit offers at a fair price^3 but was not authorized to approve a
blanket waiver, as was done here. In its letter approving the waiver, SBA
agreed that "it is not reasonable that the Department of State would have
the time to advertise, evaluate and negotiate with several contractors to
obtain reasonable pricing." State, however, had identified no specific
requirement under which this would be the case. State officials said they
interpret the waiver as a "security policy" after the September 2001
terrorist attacks and never viewed it as pertaining to a specific
requirement. SBA headquarters officials were not aware of the waiver until
we brought it to their attention. They agreed that it was unauthorized.

State made the waiver authority effective on September 19, 2001, via a
procurement information bulletin. It was subsequently incorporated in
State's acquisition regulation^4 on April 13, 2004, so that, according to
officials, it would be more visible to contracting officers. Officials
from State's Office of Small Business Utilization and from the contracting
office told us the EmbSEC contract is the only one that has been awarded
under the waiver.

It is unclear why State relied on the SBA waiver rather than using
competitive procedures to award this contract. State contracting officers
had raised concerns in the past about the lack of competition for the
security installation work. In 1998, when RDR was the only 8(a) offerer,
the contracting officer expressed concern with the lack of competition and
concluded that "it would be in the best interest of the government to
re-compete this requirement at the earliest practical time." Contracting
officer's representatives in State's Bureau of Overseas Buildings
Operations indicated to us that a number of companies could perform the
security installation work. Nevertheless, State's desire to continue
contracting with RDR after it had graduated from the 8(a) program led RDR
to seek out an 8(a) company with which to form a joint venture for the
follow-on, sole-source contract.

SBA Has Not Monitored Roles and Responsibilities of 8(a) Joint Venture
Participants

SBA, which is responsible for monitoring the joint venture and ensuring
that the mentor/protege relationship complies with SBA regulations, has
not carried out these duties--despite the fact that this $354 million,
sole-source contract is, according to SBA headquarters officials,
extremely unusual under the 8(a) program. Under joint ventures, the 8(a)
firm is supposed to perform a significant portion of the contract,
according to SBA regulations. While the EmbSEC joint venture operating
agreement states that BPI shall perform a significant portion of the work,
its description of the roles and responsibilities of RDR and BPI states
that RDR is to perform operations support, database development, and
security system design and installation services. On the other hand, BPI
is to provide program management, subcontract management, warehousing,
administrative, computer resource, and procurement services. According to
contractor representatives, the division of work set forth in the joint
venture agreement is an accurate depiction of how the two parties'
responsibilities have been carried out, with DynCorp, a subcontractor,
providing security installation services along with RDR. According to RDR
and BPI representatives, as well as State officials, RDR sought out BPI as
an 8(a) partner with which to form the joint venture to win the follow-on
contract for security installation. BPI had no experience with security
installation; it was a very small firm specializing in information
technology project management and consulting.

^3 13 C.F.R. 124.506(d) (2001). These standards remain in place. See 13
C.F.R. 124.506(d) (2006).

^4 Department of State Acquisition Regulation, 48 C.F.R. 619.805-2 (2005).

SBA headquarters officials--the Associate Administrator for 8(a) Business
Development and a senior attorney in SBA's office of General Counsel--told
us that the division of responsibilities does not appear to be providing
BPI with experience in performing the basic intent of the
contract--security system installation. District officials explained that
they may approve a joint venture under the expectation that the 8(a) firm
would hire more people to learn the technical aspects of the contract
work. They had not followed up to see if this was happening under the
EmbSEC joint venture.

RDR and BPI also entered into a mentor/protege agreement, approved by SBA.
The agreement sets forth the support to be provided by the mentor,
consisting of, among other things, management assistance, assistance in
setting up an accounting system compliant with government standards, and
assistance in setting up lines of credit and obtaining loans. The
technical assistance RDR is to provide to BPI is broadly stated: "Identify
and issue subcontracts for work...to build capabilities and
qualifications" and "Provide access to technical training, equipment, and
qualified personnel." Contractor representatives told us that RDR has
issued no subcontracts to BPI. According to BPI's president, his company
has benefited in that he can now cite this large contract as a corporate
qualification for winning future government contracts. There was never an
intention that BPI receive technical experience installing security
systems under the contract.

SBA's 8(a) regulation states that it will not approve a mentor/protege
agreement if it determines that the agreement is merely a vehicle to
enable a non-8(a) participant to receive 8(a) contracts. SBA district
officials had not followed up to ensure that the 8(a) firm was receiving
the appropriate benefits from the arrangement, despite a requirement that
they review the relationship annually to determine whether to approve its
continuation for another year. At the time of our review, the EmbSEC
contract had been in place for over 3 years.

Conclusion

A lack of oversight at SBA contributed to the problems we identify in this
letter. Actions are needed at headquarters and at the district office to
address the issues we raised. We are making recommendations to State
regarding this contract in a separate letter.

Recommendations for Executive Action

We recommend that the Administrator of SBA take the following two actions:

           o Retract the September 2001 waiver of 8(a) competitive thresholds
           granted to the Department of State.

           o Direct the Washington district office to review the roles and
           responsibilities of BPI versus those of RDR under the EmbSEC 8(a)
           joint venture to determine whether the joint venture is meeting
           the intent of the SBA program.

Agency Comments

In written comments on a draft of this report, SBA agreed with the
recommendations, stating that it has retracted the waiver of 8(a)
competitive thresholds and instructed State to terminate, for convenience,
any contracts that were awarded under this waiver unless State believes
other authority exists for such awards. SBA has also directed the district
office to provide evidence of its annual assessments of the mentor/protege
relationship between RDR and BPI. If the assessments were not done, the
district office is to conduct them and provide an explanation as to why
they were not performed. SBA's comments are reproduced in appendix I. We
also received a minor technical comment from EmbSEC, which we
incorporated.

Scope and Methodology

We analyzed documents in State's EmbSEC contract files as well as the
prior contract with RDR. We reviewed pertinent sections of the Federal
Acquisition Regulation and State's supplement, and small business
regulations. We held discussions with SBA officials from headquarters and
the Washington district office. We interviewed State contracting officials
and met with contractor representatives. We conducted our review from May
2006 to August 2006 in accordance with generally accepted government
auditing standards. Key contributors to this correspondence were Michele
Mackin, Assistant Director; John Krump; Sylvia Schatz; and Tatiana Winger.

Sincerely yours,

Katherine V. Schinasi, Managing Director
Acquisition and Sourcing Management

Appendix: Comments from the U.S. Small Business Administration

(120595)

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