EVALUATION OF SBA’S CONTRACT FOR DISASTER
ASSISTANCE LOAN RECOMMENDATION SERVICES
REPORT NUMBER 22-10 | APRIL 14, 2022
SBA INSPECTOR GENERAL EVALUATION REPORT
EXECUTIVE SUMMARY
E
VALUATION OF
SBA’
S
D
ISASTER
A
SSISTANCE
L
OAN
RECOMMENDATION SERVICES
Report No. 22-00
April 14, 2022
What OIG Reviewed
We evaluated the U.S. Small Business
Administration’s (SBA) procedures to award a
contract for data analysis and loan
recommendation services for Economic Injury
Disaster Loan (EIDL) applications and Targeted
EIDL Advance applications related to the
Coronavirus Disease 2019 (COVID-19) pandemic.
To increase loan processing capabilities and
quickly disburse loans during the pandemic, SBA
used an existing contract awarded to RER Solutions
and its subcontractor Rocket Loans set aside for
small businesses.
SBA initially set a contract ceiling of $100 million
and then used emergency contracting authority to
increase the contract ceiling to $850 million. This
increase was done in a noncompetitive process to
quickly administer the COVID-19 EIDL program.
Our objectives were to determine whether SBA
procured services for data analysis and loan
recommendation services in accordance with
Federal Acquisition Regulation (FAR) and SBA’s
acquisition standards and effectively monitored
the contractor’s compliance with small business
set-aside subcontracting limitations.
We reviewed the FAR, Code of Federal Regulations,
and SBA policies and procedures to award
contracts. We evaluated the procurement practices
and reviewed SBA contract actions from December
2018 to December 2020.
What OIG Found
SBA awarded the contract for data analysis and
loan recommendation services without adequately
ensuring the contract prices were fair and
reasonable in accordance with Federal Acquisition
Regulation and agency policy.
To quickly award loans during the COVID-19
economic crisis, SBA relied on the 2018 contract
but did not follow the proper procedures to ensure
that contract provided the best value to the
government.
SBA’s needs also changed significantly from the
2018 disaster loan contract to the requirements for
processing COVID-19 EIDLs, and those changes
were not fully taken into consideration when
awarding following contracts. As a result, there is
no assurance that the rates SBA paid for services
under the data analysis and loan recommendation
contract were fair and reasonable.
SBA also did not ensure the contractor complied
with established size standards to be eligible for a
small business set-aside award. In addition, SBA
did not ensure the contractor complied with
subcontracting limitations, exceeding the limit by
$13 million.
These awards are intended to help small
businesses compete and win government
contracts. Instead, the COVID-19 contract was
noncompetitively awarded and largely performed
by an affiliate of one of the nation’s largest
mortgage lenders.
OIG Recommendation
We made six recommendations to strengthen
SBA’s procurement policies and enhance controls
to ensure compliance with SBA’s contracting
program requirements.
Agency Response
SBA agreed or partially agreed with all six
recommendations. Management’s planned actions
resolved two recommendations. Management took
corrective actions to close two other
recommendations. SBA plans to train acquisition
staff on small business size challenges and price
analysis techniques.
SBA established a template for contracting officers
to document their price analysis results. SBA also
established policy to require that contractors
report annually on compliance with subcontracting
limitations.
We did not reach resolution on recommendations
1 and 3. Although SBA partially agreed with these
recommendations, the proposed actions did not
fully address our recommendations. OIG will seek
resolution of those recommendations in
accordance with our audit resolution policies and
procedures.
U.S. Small Business Administration
Office of Inspector General
DATE: April 14, 2022
TO: Isabella Casillas Guzman
Administrator
FROM: Hannibal “Mike” Ware
Inspector General
SUBJECT: Evaluation of SBA’s Contract for Disaster Assistance Loan Recommendation
Services (Report 22-10)
This report presents the results of our evaluation of SBA’s Contract for Disaster Assistance
Loan Recommendation Services (Report 22-10). We considered management’s comments
on the draft of this report when preparing the final report. Management agreed or partially
agreed with all six recommendations in the report. However, two recommendations are
pending resolution.
We appreciate the courtesies and cooperation provided by your staff. If you have any
questions, please contact me or Andrea Deadwyler, Assistant Inspector General for Audits,
at (202) 205-6586.
cc: Antwaun Griffin, Chief of Staff
Arthur Plews, Deputy Chief of Staff
Therese Meers, Acting General Counsel
Katherine Aaby, Associate Administrator Office of Performance, Planning, and Chief
Financial Officer
Francisco Sanchez Jr., Associate Administrator, Office of Disaster Assistance
Barbara Carson, Deputy Associate Administrator, Office of Disaster Assistance
Michael Simmons, Attorney Advisor, Office of General Counsel
Joshua Barnes, Acting Director, Office of Continuous Operations and Risk
Management
Tonia Butler, Director, Office of Internal Controls
Table of Contents
Introduction ............................................................................................................................................................ 1
Economic Injury Disaster Loan Program ................................................................................................ 1
Pre-Pandemic Contract Award .................................................................................................................... 1
Pandemic Onset and Post-Award Contract Administration ............................................................ 2
Objectives ............................................................................................................................................................ 3
Finding 1: SBA Did Not Ensure Fair and Reasonable Prices or Contractor Compliance with
Size Standards for the 2018 Contract ........................................................................................................... 4
Price Reasonableness Determination ....................................................................................................... 4
Small Business Size Determination ........................................................................................................... 6
Recommendations ............................................................................................................................................ 8
Finding 2: SBA’s Application of Emergency Contracting Procedures Did Not Ensure Fair and
Reasonable Prices or Contractor Compliance with Subcontracting Limitations ......................... 9
Price Reasonableness Determination Methodology Affected Options Exercised During
Pandemic.............................................................................................................................................................. 9
Subcontracting Limitations Not Effectively Monitored .................................................................. 11
Recommendations ......................................................................................................................................... 12
Summary of Actions Necessary to Close the Report ........................................................................ 13
Recommendation 1 ................................................................................................................................... 13
Recommendation 2 ................................................................................................................................... 14
Recommendation 3 ................................................................................................................................... 14
Appendix I: Objectives, Scope, and Methodology .................................................................................. 17
Objectives ......................................................................................................................................................... 17
Scope and Methodology .............................................................................................................................. 17
Use of Computer-Processed Data ............................................................................................................ 17
Prior Audit Coverage .................................................................................................................................... 18
Appendix II: Questioned Costs ...................................................................................................................... 19
Appendix III: Management Comments ...................................................................................................... 20
1
Introduction
In the unprecedented demand for economic assistance in response to the COVID-19
pandemic, the U.S. Small Business Administration (SBA) increased the loan cap, expanded
use, and extended the deferment period for the Economic Injury Disaster Loan (EIDL) and
Targeted EIDL Advance programs.
As a result, the agency needed help processing the additional application volume. SBA also
needed an automated system capable of interfacing with its existing information systems to
track the increased number of applications while promptly assisting applicants.
Economic Injury Disaster Loan Program
The Small Business Act, as amended, authorizes SBA to make loans to eligible businesses,
nonprofits, homeowners, and renters after a declared disaster.
1
The SBA Office of Disaster
Assistance (ODA) plans, directs, and administers SBA’s responsibilities under the Act, by
providing businesses physical disaster loans, personal property loans, economic injury
loans, and other disaster related assistance.
ODA’s Economic Injury Disaster Loan (EIDL) program is designed to provide economic
relief to small businesses, small agricultural cooperatives, and most private nonprofit
organizations experiencing a temporary loss of revenue due to declared disasters. Small
businesses can use EIDL funds to meet financial obligations and operating expenses that
could have been met had the disaster not occurred. These loans provide vital economic
support to small businesses to help overcome the temporary loss of revenue.
Pre-pandemic Contract Award
In early 2018, SBA solicited proposals for services to help ODA process loans promptly. The
need for these services stemmed from processing delays because of increased disaster loan
applications following hurricanes Harvey, Irma, and Maria coupled with technical
difficulties related to SBA’s internal disaster loan processing platform.
SBA’s requirement included a system for receiving loan application information and
gathering necessary data for decision recommendations based on SBA and industry
standard practices. SBA also stated that it preferred a contractor with an existing technical
capability to interface with the agency’s platform and could provide recommendations
within 10 minutes. SBA limited the competition to small businesses.
Out of 10 proposals received, SBA awarded an indefinite-delivery, indefinite-quantity
contract to RER Solutions Inc. RER subcontracted with RockLoans Marketplace LLC, doing
business as Rocket Loans. Rocket Loans is an affiliate of Rock Holdings and Quicken Loans,
one of our nation’s largest mortgage lenders. Indefinite-delivery, indefinite-quantity
contracts are used to acquire services and supplies when it is not certain when and how
much is needed.
These contracts have stated limits during a fixed period while the government determines
the specific individual requirements, which is accomplished through issuing task order
1
Small Business Act of 1953, Pub. L. No. 85-536, 72 Stat. 384 (codified as amended at 15 U.S.C. §§ 631–657).
2
contracts. This initial contract with RER had options to extend the services for up to 4 years
with a price cap of $100 million.
SBA required the contractor to generate final electronic loan documents, offer electronic
signature capabilities, maintain loan documentation, and electronically transfer
information to SBA for final loan approval or denial. The payment terms included fixed fees
for each loan recommendation as part of a tiered structure that in some cases provided
minimal or no volume discounts, in addition to multimillion dollar fixed monthly fees.
2
The average estimated volume for this contract was 65,000 loans per year. SBA estimated
catastrophic events could generate more than 300,000 applications.
Pandemic Onset and Post-award Contract Administration
On March 13, 2020, the President declared the COVID-19 pandemic a nationwide
emergency pursuant to Section 501(b) of the Stafford Act. On March 27, 2020, the
Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, granting
additional funds for aid relief. The CARES Act designated funds for COVID-19 EIDLs and
emergency advance grants which allowed eligible businesses that applied for a COVID-19
EIDL to request an advance of up to $10,000. This prompted an unprecedented surge in
applications.
In a single day, on March 31, 2020, SBA reported receiving a record-breaking 680,000
COVID-19 EIDL applications. Over the next 10 days, SBA received more than 4.5 million
loan applications. SBA also found that its Disaster Credit Management System and Disaster
Loan Assistance Portal were not equipped to process the high volume of loan applications.
SBA’s system had technical difficulties that made it intermittently inoperable.
In response, exercising increased agency discretion authorized in connection with the
President's emergency declaration under section 501(b) of the Robert T. Stafford Disaster
Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121-5207 (the "Stafford Act"), SBA
awarded the RER-Rocket team a second task order contract to help meet needs during an
economic crisis, but without using a competitive bidding process. SBA used emergency
contracting procedures to increase the indefinite-delivery, indefinite-quantity contract
ceiling amount.
Under the second task order contract, SBA relied on RER’s second-tier subcontractor’s
system, the Rapid Finance Portal, to process COVID-19 EIDL applications. Rapid Financial
Services (Rocket Loans’ affiliate) began processing loan recommendations through a
subcontracting agreement with Rocket in late March 2020. Processing COVID-19 EIDL
applications required a change from processing primarily residential loan applications in
response to a physical disaster, such as a hurricane, to economic injury business loan
applications. SBA also added requirements for processing EIDL advance grant applications.
SBA increased the indefinite-delivery, indefinite-quantity contract ceiling from the initial
$100 million in 2018 to $600 million in April 2020, to support the COVID-19 EIDL program.
In August 2020, SBA used emergency contracting procedures again to increase the
2
Contracts 73351019F0015, 73351020F0071, and 73351020F0126.
3
indefinite-delivery, indefinite-quantity contract ceiling amount to $850 million and issued
another task order for COVID-19 EIDL and targeted EIDL loan recommendation services.
Objectives
The objectives of our evaluation were to determine whether SBA (1) procured services for
data analysis and loan recommendation services in accordance with Federal Acquisition
Regulation (FAR) and SBA’s acquisition standards, and (2) effectively monitored contractor
compliance with small business set-aside subcontracting limitations.
4
Finding 1: SBA Did Not Ensure Fair and Reasonable Prices or
Contractor Compliance with Size Standards for the 2018
Contract
SBA awarded the initial 2018 indefinite-delivery, indefinite-quantity contract for disaster
data analysis and loan recommendation services without adequately ensuring the contract
prices were fair and reasonable in accordance with FAR and agency policy. Program
officials included an independent government estimate as part of the acquisition planning
package sent to the contracting officers, as required.
However, the government estimate program officials used did not meet the acquisition
standard requirements that were in effect at that time. For example, the government
estimates did not identify significant labor categories required to perform the services. It
also did not explain the basis for the estimated labor rates and hours, nor did it specify
subcontract costs or other direct costs.
We were also unable to verify that the government estimates were prepared and approved
prior to receiving contractor cost proposals because it was not dated or signed in the
contract file. As a result, there is no assurance that the rates SBA paid for the services under
the indefinite-delivery, indefinite-quantity contract were fair and reasonable.
SBA also did not ensure the contractor was eligible for a small business set-aside award.
SBA’s contracting officers can accept an offer’s representation that it is small unless the
contracting officer has a reason to question the representation. SBA’s Market Research
Report and discussions with contracting personnel indicated that the agency had an early
awareness that participation of a larger firm would be required to satisfy the contract
requirements.
For this award, the size standard was $15 million dollars in annual revenue. For a business
concern that has affiliates, revenue is calculated by adding the average annual receipts of
the business with the average annual receipts of its affiliate.
However, SBA did not evaluate whether the business relationship between RER and its
subcontractor, Rocket Loans, presented an affiliation concern, which would have prevented
RER from being considered a small business for contract eligibility purposes. RER on its
own may have been a small business, but RER relied on Rocket to perform vital contract
requirements, which made them affiliates according to the ostensible subcontractor rule.
SBA should have combined their annual receipts when evaluating whether RER was
eligible for the small business set-aside award. As a result, the $850 million in government
funds set aside for a small business was not used as intended.
Price Reasonableness Determination
Federal Acquisition Regulation requires contracting officials to establish price
reasonableness before awarding contracts.
3
In addition, SBA’s acquisition standards for
this award also required SBA officials to compare the contractor’s proposed prices to an
independent government cost estimate as part of its price reasonableness assessment.
3
FAR 15.402.
5
SBA’s acquisition standards required program officials to document the methodologies
used to derive costs in the independent government cost estimates.
4
The acquisition
standards also required that program officials include the government estimates, signed by
the preparer, as part of the acquisition planning package sent to the contracting officers.
The acquisition standards stated that the contracting officers should consider the
acquisition package as incomplete if the methodology is not documented in the
government cost estimate or acquisition plan. However, neither the government cost
estimate nor acquisition plan for the 2018 contract explained the methodology used to
project loan decisioning rates.
The government estimates did not identify labor categories required to perform the
services. It also did not explain the basis for the estimated labor rates and hours, nor did it
specify subcontract costs or other direct costs. Further, we were unable to verify that the
government estimates were prepared and approved prior to receiving the contractor cost
proposals because the government estimates were not dated or signed in the contract file.
Program officials stated price reasonableness was achieved through adequate competition.
Contract documents indicated the requirement for these services were competed using
Acquisition of Commercial Items
5
and Contracting by Negotiation
6
procedures, with the
expressed intent of providing competition that would result in fair and reasonable prices at
the best value for the government. However, the competitive bids received were disparate
and did not provide a basis to indicate that the quoted prices were reasonable.
SBA’s acquisition standard explained that while some variation from the government
estimates is expected in comparison to the proposals, significant variance may be an
indication that the bidders did not understand the basis for the government’s request.
Significant variance may also indicate that “the Government did not understand the basis of
how industry provides the goods and/or services.”
7
The standard defined variance greater than 30 percent as significant. The variation range
in this case, from the lowest to highest bidders, spanned 163 percent. RER-Rocket’s
proposed prices were 55 percent more than the government’s independent estimate (see
Table 1).
SBA’s acquisition standard further stated that while contracting officers have authority to
make the final decision to accept or reject variations, when a variation is significant,
contracting officers should consider reaching back out to the marketplace to determine the
reason. The contracting officer did not analyze or address any of the significant variations.
4
SBA Standard Operating Procedure 20 21, Government Acquisition Program, January 13, 2017, p. 28.
5
FAR Part 12.
6
FAR Part 15.
7
SBA Standard Operating Procedure 20 21, Government Acquisition Program, January 13, 2017, p. 29.
6
Table 1: Evaluation of the Proposed Price Variances for the 10 offers received
compared to the Independent Government Cost Estimate
Prospective Contractors
Difference from
Government Cost
Estimate
(percent)
75.7
55.7
29.4
12.0
(50.8)
(60.6)
(72.1)
(73.0)
(81.0)
(88.1)
Source: OIG generated based on the award decision memorandum and the 10 offers SBA received for the
request for bids for the loan recommendation services requirement
Note: In financial notation, parentheses indicate negative numbers.
Another indication of a lack of understanding or clear communication of requirements was
the Award Decision Memo, which stated that team RER-Rocket proposed a fixed price
structure for 4 months rather than 6 months, as required in the solicitation, and noted that,
“It is hard to tell what we are paying for or what the level of effort is for the first 6
months.”
8
SBA noted team RER-Rocket’s proposed price and scope of work were double the amount
of hours that the government estimated for the first 6 months, and the agency awarded the
contract without determining if the additional hours were reasonable. Contract documents
provided by the agency also did not indicate what value the prime contractor added to the
partnership, or the continued need for RER’s services beyond the first 6 months of contract
performance.
Small Business Size Determination
SBA’s Market Research Report and discussions with contracting personnel indicated that
the agency had an early awareness that participation of a larger firm would be required to
satisfy the contract requirements. The Market Research Report, which was prepared early
in the planning phase in 2018, indicated that the small businesses who responded to the
solicitation either did not have the data and processes already in place and would need to
8
SBA Award Decision Memo, Solicitation Number 73351018R0010, December 7, 2018, p. 27.
7
build a system or partner with a large firm. The report further noted that given the urgency
of the need, the preference was for a small firm to subcontract with a large business.
Although it was clear to agency officials that a small business needed to subcontract with a
large business, SBA’s acquisition team did not assess whether the small business’s reliance
on the subcontractor to perform the service requirements presented an ostensible
subcontractor affiliation. Affiliated firms that exceed the size standards for a set-aside
contract would have been ineligible for the award.
The Ostensible Subcontractor Doctrine holds that SBA may determine a prime contractor
and its reported subcontractor are affiliated with one another for size purposes when the
subcontractor will be performing “primary and vital” contract requirements or if the prime
contractor is otherwise unusually reliant on the subcontractor for performance.
9
For this
award, SBA did not evaluate whether the prime contractor, RER, was unusually reliant on
its subcontractor, Rocket, to perform primary and vital contract requirements.
We found that the proposal, teaming agreement, and Award Decision Memorandum
indicated a prime-subcontractor teaming relationship that suggested unusual reliance on
the subcontractor for performance.
If the small business is found to violate the rule, the size of the small prime contractor and
the large subcontractor are grouped for size purposes, which can make the small prime
contractor ineligible for a small business set-aside award and result in penalties prescribed
in 15 U.S.C. 645(d).
10
Federal regulations consider a contractor’s failure to comply with the spirit and intent of a
subcontract limitation a violation of the terms of a government contract and could be used
to exclude a contractor from future federal contracts.
11
One indication that the subcontractor Rocket Loans’ performance was primary and vital
was the joint proposal, which consistently referred to prime small business contractor RER
Solutions Inc. and Rocket Loans collectively throughout as the RER-Rocket team. It
referenced use of the RER-Rocket platform that would be used to process loans.
We noted that the RER-Rocket teaming agreement asserted that the prime contractor
would perform the primary and vital requirements of the prime contract and would always
control the prime contract. However, the agreement also specified the use of the
subcontractor’s commercial computer software, called the Disaster Assistance Loan
Recommendation System, application programming interface endpoint, and associated
dashboard, which were significant for performing the contracted services.
12
Another indication that the subcontractor’s performance was primary and vital was SBA’s
Award Decision Memo, which stated that RER’s superior technical evaluation was based on
the subcontractor’s business systems and past performance. We found Rocket Loans’
business systems, capabilities, and experience were primary elements required to execute
9
13 C.F.R. § 121.103(h)(4).
10
13 C.F.R. § 125.6(g).
11
FAR 6.302-2(d).
12
RER Solutions Inc. and RockLoans Marketplace LLC Teaming Agreement, September 7, 2018, p. 3.
8
the Statement of Work and vital to the contract performance, which violates the contract
requirements. Rocket and Rapid are affiliates of Quicken Loans, one of the nation’s largest
mortgage lenders. Quicken Loans significantly exceeds the size thresholds for set-aside
contracts intended to benefit small and disadvantaged businesses.
Agency officials noted that it was clear to them that the small business would perform most
of the work because the cost proposal had shown that RER would perform 65 percent and
Rapid 35 percent of the work. However, we found that this cost breakout only showed how
the RER-Rapid team would perform on the first $6.8 million of the contract.
Most of this effort was for the first 6 months to integrate the Rapid system with the Office
of Disaster Assistance’s Disaster Credit Management System. For the remaining contracted
services, which at that time had a ceiling of $100 million, the RER-Rapid cost proposal
showed a fixed rate per loan recommendation that did not differentiate between RER and
Rapid’s cost. SBA had no visibility, from a cost perspective, of how RER would perform the
majority of the contracted services.
When awarding the small business set-aside contract to team RER-Rocket, SBA did not
carefully consider the relationship between Rocket Loans and its affiliate Rapid Financial
Services (which were not small businesses) as required by federal regulations.
13
As a
result, RER and Rocket Loans circumvented the subcontracting rule which was established
to prevent a larger business from using a small business as a pass-through to profit from
set-aside contracts meant to support diverse, small business enterprise.
Recommendations
We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to
1. Implement procedures to ensure contracting officers use effective proposal
analysis techniques to determine prices are fair and reasonable in accordance
with FAR 15.404.
2. Implement procedures to require contracting officers to assess compliance with
size requirements when small businesses propose using subcontractors to
perform significant work requirements.
3. Request a formal size determination in accordance with FAR 19.302 to evaluate
whether the loan processing contractor exceeded the size standard and remedy
any violation in accordance with 15 U.S.C. 645(d).
13
13 C.F.R. § 121.103(h)(2).
9
Finding 2: SBA’s Application of Emergency Contracting
Procedures Did Not Ensure Fair and Reasonable Prices or
Contractor Compliance with Subcontracting Limitations
To expedite the massive undertaking of administering the COVID-19 EIDL program in
March 2020, SBA used emergency contracting authority to increase the existing small
business set-aside contract awarded in 2018 to process disaster loans. SBA officials
concluded that was the best way to contract for these services and execute the COVID-19
EIDL program quickly. However, the services SBA needed changed substantially when it
began processing COVID-19 EIDL applications.
Notably, SBA changed the system it used to process the loans, and instead of processing
primarily home loans like in past disasters, COVID-19 EIDLs and advances primarily
involved business loans. When SBA leveraged the existing contract to meet the needs of the
COVID-19 programs, it did not fully consider how its needs differed from the 2018 contract
or the effect that significant contract requirement changes would have on the price of
services provided. SBA increased the small business set-aside contract to $850 million
without considering potential cost saving alternatives available under emergency
contracting authority.
For example, program officials did not consider selecting a prime contractor that had the
technical expertise and capability to fulfill requirements specific to the complexities of an
economic injury disaster loan program. Because SBA did not consider using alternative
contracting options available during the emergency, SBA likely overpaid to obtain these
services.
Though the agency worked to quickly provide financial aid to America’s small businesses,
they also carried forward the contracting flaws from the 2018 award. Contracting officials
for the original award did not follow the proper process to ensure the contract costs were
the best value for the government. SBA also did not ensure the contractor provided
adequate oversight of the subcontracting limitation, which exceeded the 50 percent ceiling
by $13 million.
Price Reasonableness Determination Methodology Affected Options
Exercised During Pandemic
As previously noted, contracting officials used inadequate government estimates to
evaluate the price reasonableness of prospective contractor proposals in 2018. SBA relied
on the 2018 contract prices and the government estimates for determining the sole-source
contract ceiling increases, and for determining that prices for subsequent task order
awards were fair and reasonable despite significant differences in scope of work from the
original 2018 contract.
The original contract requirement assumed that the agency's internal information systems
would interface with the subcontractor’s systems. However, the agency's needs changed
when SBA became aware that its systems did not have the capacity to process COVID-19
EIDL loans. Interviews with contractor representatives indicated Rapid Financial Services
was asked and agreed to provide business loan recommendation services as a second-tier
subcontractor using their business systems.
10
SBA’s decision to non-competitively increase the ceiling of the existing contract also did not
reflect the significant shift in application volume from residential to business loans, new
processes, and documentation storage requirements. Federal Acquisition Regulation states
task or delivery order contracts estimated to exceed $100 million (including all options)
may only be awarded to a single source when unit prices are established for products in the
contract, or prices for services are established in the contract for the specific tasks to be
performed.
14
Business loans were negotiated on a per-loan basis and the pricing used did not indicate all
price points. For example, no pricing was established for Uniform Commercial Code (UCC)
filing fees for Task Orders 1 or 3; and no pricing was established for business loans in Task
Order 2 (see Table 2).
Table 2: Residential and Business Loan Recommendation Rates
Residential Loan Rates Per Recommendation (dollars)
Business Loan Recommendations
(dollars)
Task Order
Home Loan
Tier 1 Rates
(0-66,000)
Home Loan
Tier 2 Rates
(66,001-
150,000)
Home Loan
Tier 3 Rates
(150,001+)
Business
Loan Rate
Dun and
Bradstreet
Report
UCC Code
Filing Fee
Task Order
1
Hurricanes
Harvey,
Irma &
Maria
175
170
165
425 each
125 each
Price Not
Indicated
Task Order
2 COVID-19
EIDLs &
Targeted
EIDLs
169.95
169.95
169.95
0 each
125 each
100 each
Task Order
3 Non-
COVID-19
EIDLs
180.25
175.10
169.95
437.75 each
128.75 each
Price Not
Indicated
Source: OIG generated analysis based on SBA’s contract awards
We also found that program officials did not consider alternate sources or further use of
emergency contracting provisions for the award, which was set up to perform through
March 2024. Typically, the period of performance of a contract awarded or modified using
this emergency contracting authority may not exceed 1 year unless the head of the agency
determines that exceptional circumstances apply.
15
The regulation is intended for agencies
to award another contract for the required goods and services using competitive
procedures by the time the 1-year period of performance ends. SBA's sole-source
14
FAR 16.504(c)(1)(ii)(D)(1)(ii)(A).
15
FAR 6.302-2(d)(1)(ii).
11
justification, which was based on unusual and compelling urgency, indicated the agency
“anticipates obtaining competition at the conclusion of this contract.”
In April 2020, the Administrator at that time approved the use of noncompetitive award
procedures for the unusual and compelling urgency. However, in this case, SBA had set
aside the contract for a small business which had to subcontract with a large business to
perform the vital work that yielded higher prices for up to 5 years before it would obtain
competition for future services.
SBA could have used the emergency contracting provisions that were available and
awarded the contract directly to a contractor that had the ability to fulfill the new
requirements of the EIDL program. SBA also could have pursued competitive contracting
procedures seeking a better value for the government after the first year of operating
under the emergency authority.
Subcontracting Limitations Not Effectively Monitored
SBA did not ensure the contractor provided adequate oversight of the subcontracting
limitation, which exceeded the 50 percent ceiling by $13 million (see Appendix II for a
schedule of questioned costs). Under federal set-aside contracting terms, small businesses
are prohibited from subcontracting a majority of work to larger businesses.
16
These subcontracting limitations apply to contracts set aside for small businesses when the
contract amount exceeds $250,000, or $800,000 if the head of the agency determines that
services are to be used to support response to an emergency or a major disaster under 42
U.S.C. 5122 (Stafford Act), 41 U.S.C. 1903.
17
As noted in Finding 1, SBA’s Market Research Report and interviews with contracting
personnel indicated that the agency had an early awareness that participation of a larger
firm would be required to satisfy the contract requirements. However, agency officials set
aside the requirement solely for small business without a documented plan for monitoring
compliance with subcontracting limitations.
As a result, SBA’s process for monitoring the prime contractor’s compliance relied on
contractor invoices that lacked sufficient detail to determine the division of labor and the
percentage of subcontracted work. We identified more than $13 million dollars paid to the
subcontractor in excess of the limitations on subcontracting (see Table 4).
18
16
13 C.F.R. § 125.6.
17
RER Solutions Inc. and RockLoans Marketplace LLC Teaming Agreement, September 7, 2018, p. 3.
18
13 C.F.R. § 125.6(a)(1).
12
Table 3. Subcontract Costs by Task Order
Task Order
Total Contract
Payments
(dollars)
Payments
Received by
Prime (dollars)
Payments
Received by
Sub (dollars)
Excess of 50
Percent
Threshold
(dollars)
Task Order 1
Hurricanes
Harvey, Irma, and
Maria
$6,597,210.60
$3,345,530.23
$3,251,680.37
--
Task Order 2
COVID-19 EIDLs &
Targeted EIDLs
740,506,022.40
357,338,310.65
383,167,711.75
12,914,700.55
Task Order
3Non-COVID-19
EIDLs
9,126,074.76
4,431,613.43
4,694,461.33
131,423.95
Total
$756,229,307.76
$365,115,454.31
$391,113,853.45
$13,046,124.50
Source: OIG generated analysis based on invoices retrieved from SBA’s Joint Administrative Accounting
Management System (JAAMS) and subcontractor invoices obtained from RER Solutions Inc.
Acquisition officials stated they ensured prime contractor compliance with subcontracting
limitations by monitoring invoices. However, the prime contractors’ invoices submitted to
SBA did not have sufficient detail to distinguish support provided by each entity to
facilitate effective monitoring. SBA requested the prime contractor confirm that they were
following subcontracting limitations in December 2020. The prime contractor asserted it
complied and SBA accepted the response without any supporting analysis or evidence.
As it relates to post-award oversight responsibilities, neither the Federal Acquisition
Regulation nor SBA policies specified how contracting officers were to ensure compliance
and there’s no documentation to support the contractor’s compliance. As a result, there is
an increased risk that ineligible businesses could receive the benefit of awards intended for
developing small businesses owned by socially and economically disadvantaged
entrepreneurs.
Recommendations
We recommend the Administrator require the Associate Administrator for the Office of
Performance, Planning, and the Chief Financial Officer to
4. Implement procedures to assess prospective firms’ ability to comply with
subcontracting limitations prior to contract award.
5. Implement procedures to monitor post-award compliance with subcontracting
limitations.
6. Before exercising options or awarding additional task orders against the contract,
assess alternative contracting actions, such as pursuing another contract using
competitive procedures to ensure fair and reasonable prices. SBA should then
document the determination in the award file.
13
Analysis of Agency Response
SBA management provided formal comments, included in Appendix III. Management
agreed or partially agreed with all six recommendations and implemented corrective
actions to close two recommendations.
Management’s planned actions resolved two recommendations, and comments included
general timelines for implementing the corrective actions. Program officials provided
specific target dates to implement corrective actions in internal communications.
Management’s proposed corrective actions did not fully address the remaining two
recommendations. In accordance with our audit follow-up policy, we will attempt to reach
agreement with SBA management on the unresolved recommendations within 60 days of
the date of this report. If we do not reach agreement, OIG will notify the audit follow-up
official of the disputed issues.
Summary of Actions Necessary to Close the Report
The following sections detail the status of the recommendation and actions necessary to
close them:
Recommendation 1
Implement procedures to ensure contracting officers use effective proposal analysis
techniques to determine prices are fair and reasonable in accordance with FAR 15.404.
Status: Unresolved
Management partially agreed with this recommendation. Management stated that FAR
15.404 prescribes price analysis techniques for actions that are procured under FAR part
15 procedures that govern competitive and noncompetitive negotiated acquisitions.
Management stated that further implementation of the techniques is not necessary because
they are already implemented in the FAR and SBA does not have an agency level
acquisition supplement. They plan to conduct training for acquisition staff on FAR part 15
price analysis techniques within the next 6 months, targeting September 30, 2022, for final
action.
Although the FAR outlines contracting officers’ responsibilities to ensure that the final
agreed-to contract price is fair and reasonable, it does not provide specific procedures on
how to successfully perform these techniques. OIG agrees that training is useful.
However, management did not specify that the training will include or be supplemented
with documented procedures for contracting officers to follow in performing proposal
analysis techniques, which is critical to ensuring fair and reasonable prices for the
government. Documented procedures would provide consistency in the application of the
FAR and clear guidance for new contracting officers.
This recommendation can be closed when management provides evidence that they
trained contracting officers and implemented procedures to ensure contracting officers
effectively applied the proposal analysis techniques.
14
Recommendation 2
Implement procedures to require contracting officers to assess compliance with size
requirements when small businesses propose using subcontractors to perform significant
work requirements.
Status: Resolved
Management partially agreed with this recommendation, stating that this requirement is
only applicable when FAR part 19 set-asides are used and may not apply at the order level
for certain contracts. Management stated that for the small business set-aside contract
reviewed, the regulation allowed for the contracting officer to accept the self-certification.
Management referred to FAR 19.301(f), which states that the contracting officer shall
accept an offeror’s representation unless the contracting officer has reason to question the
representation.
Management also stated that in this instance, the contracting officer raised concerns
directly with the small business prime contractor who reassured their ability to meet
subcontracting limitations. Management stated program officials will coordinate to conduct
training for acquisition staff on size challenges in accordance with FAR Part 19 within the
next 6 month, targeting September 30, 2022, for final action.
In this case, training contracting officers on size challenge procedures should improve their
ability to detect indicators that warrant concern that a firm self-certifying as a small
business may not be eligible for the award. Management asserted that the contracting
officer raised concerns directly with the small business prime contractor, but that was
several months after awarding the contract. As management stated, the contracting officer
must have determined that the firm was an eligible small business before making the
award.
We maintain our position that SBA did not carefully consider the relationship between
Rocket Loans and its affiliate Rapid Financial Services (which were not small businesses)
before awarding the contract. FAR part 19.301-1(f) provides for contracting officers to
accept the offeror’s representation that it meets the size standard unless the contracting
officer has a reason to question the representation. However, the proposal, teaming
agreement, and Award Decision Memorandum indicated a prime-subcontractor teaming
relationship that suggested unusual reliance on the subcontractor for performance.
SBA’s size regulations 13 C.F.R. § 121.103(h)(2) establish that a prime contractor with an
unusual reliance on a subcontractor to perform primary and vital requirements of a
contract should be treated as joint venturers for size determination purposes. In this
instance, SBA’s contracting officer should have questioned the representation as prescribed
by FAR part 19.301-1(f). This recommendation can be closed when management provides
evidence that they trained contracting officers on size challenge procedures.
Recommendation 3
Request a formal size determination in accordance with FAR 19.302 to evaluate whether
the loan processing contractor exceeded the size standard and remedy any violation in
accordance with 15 U.S.C. 645(d).
15
Status: Unresolved
Management partially agreed with this recommendation and noted that the procedures OIG
cited in the draft report (FAR 19.8) were not appliable to the contract and task orders we
reviewed. Upon further review, we revised the recommendation to appropriately reference
FAR 19.302 as the procedures for SBA to follow.
Management stated that at the time of award, RER self-certified as a small business concern
in accordance with the FAR, and that requesting a formal size determination of RER is not
appropriate at this point. Adding that FAR 19.301-2 requires size recertification in case of
novation, merger, or for contracts that exceed 5 years period of performance, which are not
applicable to this contract action. Management proposed requesting a formal size
representation from RER prior to issuing any new task orders or exercising available
option periods and updating its status should RER report that it no longer qualifies as a
small business concern.
Management stated that within the next 6 months, they plan to train Acquisition
Operations to adhere to FAR 19.3 and 19.505 when conducting small business set-aside
procurements. Management further stated that within the next 6 months they would
provide training to Acquisition Operations on their FAR authority for filing contracting
officer-initiated size protests and requesting formal size determinations from SBA.
We maintain our position that SBA should formally evaluate the contractor’s size to ensure
any further work is performed by an eligible small business. FAR part 19.302 (d)(2) allows
for contracting officers to file a small business representation protest before or after
award. SBA’s contracting officer should take prompt action to evaluate whether the loan
processing contractor exceeded the size standard and remedy any violation in accordance
with 15 U.S.C. 645(d).
This recommendation can be closed when management provides evidence that the
specified training was provided to Acquisition Operations and that SBA evaluated the loan
processing contractor’s size and any violations have been remedied.
Recommendation 4
Implement procedures to assess prospective firms’ ability to comply with subcontracting
limitations prior to contract award.
Status: Resolved
Management partially agreed with this recommendation, stating that FAR 19.5 provides
contracting officer with two compliance period options for measuring limitations on
subcontracts. Management stated SBA plans to increase post award compliance reviews
based on recommendation number 5.
Management further indicated that the contracting officer raised concerns that were
addressed by the prime contractor through written assurance that it could meet the
subcontracting limitation for the first two task orders. Management explained that these
measures document SBA’s actions for assessing a prospective firms’ ability to comply with
subcontracting limitations prior to award of task orders one and two. However, we found
that the contracting officer didn’t raise these concerns until December 2020, which was
several months after SBA issued the first two task orders.
16
Management further explained that they did not need to implement agency level policy
because FAR 19.3 outlines the process for size status and protesting status. It is our
position that although the FAR established the procedures, the agency is required to
implement those procedures.
Management stated program officials will coordinate and conduct size protest training for
contracting officers within 6 months, targeting September 30, 2022, for final action.
Training contracting officers on the procedures outlined in FAR part 19.3 and FAR part
19.5 would ensure staff are informed of their responsibilities for challenging an offeror’s
size status.
This recommendation can be closed when management provides evidence that they
trained staff on the procedures outlined in FAR part 19.3 and FAR part 19.5 to ensure
contracting officers are aware of their responsibilities to implement these procedures.
Recommendation 5
Implement procedures to monitor post-award compliance with subcontracting limitations.
Status: Closed
Management agreed with the recommendation and the questioned costs included in the
report. Management provided evidence that they established procedures for assessing and
documenting compliance with limitations on subcontracting requirements.
Management also established requirements for contractors to report annually on their
compliance with the subcontracting limitations. We consider this recommendation closed.
Recommendation 6
Before exercising options or awarding additional task orders against the contract, assess
alternative contracting actions, such as pursuing another contract using competitive
procedures to ensure fair and reasonable prices. SBA should then document the
determination in the award file.
Status: Closed
Management agreed with the recommendation and provided evidence that they added a
determination-and-findings template to PRISM, SBA’s contract writing system, to document
price analysis before exercising options. We consider this recommendation closed.
17
Appendix I: Objectives, Scope, and Methodology
Objectives
The objectives of our evaluation were to determine whether SBA procured services for data
analysis and loan recommendation services in accordance with Federal Acquisition
Regulation and SBA’s acquisition standards and effectively monitored the contractor’s
compliance with small business set-aside subcontracting limitations.
Scope and Methodology
Our scope covered contracts 73351019F0015, 73351020F0071, and 73351020F0126 and
related procurement actions awarded by SBA for data analysis and loan recommendation
services to support the Office of Disaster Assistance from December 2018 to December
2020, with an obligated total amount of $773.8 million. This amount represents over 90
percent of the maximum amount available under the indefinite-delivery, indefinite-
quantity contract that had a ceiling of $850 million.
To determine whether SBA complied with the FAR and SBA’s acquisition standards, we
reviewed the indefinite-delivery, indefinite-quantity contract and related task orders and
award modifications.
To determine whether SBA effectively monitored the contractor’s compliance with small
business set-aside subcontracting limitations, we inspected invoices and interviewed
contracting personnel to gain an understanding of the monitoring process. To achieve our
objectives, we reviewed the requirements in the FAR, Code of Federal Regulations,
applicable SBA standard operating procedures and policy guidance.
We reviewed award documentation to determine whether SBA met the requirements of
federal regulations and other guidance. In addition, we interviewed SBA personnel from
the Office of Performance, Planning, and the Chief Financial Officer and the Office of
Disaster Assistance.
We conducted this evaluation in accordance with the Council of the Inspectors General on
Integrity and Efficiency Quality Standards for Inspection and Evaluation. These standards
require that we adequately plan and perform the evaluation to obtain sufficient and
appropriate evidence to provide a reasonable basis for our findings and conclusions based
on our objective. We believe that the evidence we obtained provides a reasonable basis for
our findings and conclusions based on our evaluation objective.
Use of Computer-Processed Data
We relied on computer-processed data in the program office files as well as contract award
data from the government’s procurement database, Federal Procurement Data System-
Next Generation (FPDS-NG). FPDS-NG was used to verify completeness of the record of
contract actions applicable for this award.
We also retrieved contractor invoices from SBA’s Oracle Administrative Accounting
System-Joint Administrative Accounting Management System. We tested the reliability of
the data by comparing invoices obtained from the prime contractor as well as the 2020
subcontractor revenue reported by Rocket Loans to the SEC on Form 10-K. We believe the
computer-processed information is reliable for the purposes of this evaluation.
18
Prior Audit Coverage
Report Title
Objective
Report Number
Final Report Date
Inspection of Small
Business
Administration's
Initial Disaster
Assistance Response
to the Coronavirus
Pandemic
Assess SBA’s initial
disaster assistance
response to the COVID-
19 pandemic, including
staffing adequacy, loan
application volume,
timeliness of disaster
loan approval, and
customer service
SBA OIG 21-02
October 28, 2020
Serious Concerns of
Potential Fraud in
Economic Injury
Disaster Loan
Program Pertaining
to the Response to
COVID-19
Inform the agency of
strong indicators of
widespread potential
fraud in the Economic
Injury Disaster Loan and
Advance grant programs
that require immediate
attention and action
SBA OIG 20-16
July 28, 2020
White Paper: Risk
Awareness and
Lessons Learned from
Audits and
Inspections of
Economic Injury
Disaster Loans and
Other Disaster
Lending
Provide SBA information
regarding lessons
learned and identified
risks from prior audits
and inspections that it
should consider in
managing and mitigating
the risk of loss for
COVID-19 related loans
SBA OIG 20-12
April 3, 2020
19
Appendix II: Questioned Costs
Questioned costs are expenses not supported by adequate documentation at the time of the
audit, or which otherwise do not comply with legal, regulatory, or contractual
requirements.
Table 4. OIG Schedule of Questioned Costs for the Task Orders under contract
73351019D0001
Description Amount (dollars) Explanation
Unallowable
Expense
$13,046,125
Amount of costs paid in excess of subcontracting
limitations provided, according to 13 CFR § 125.6(g)
Source: OIG generated analysis based on invoices retrieved from SBA’s Joint Administrative Accounting
Management
20
Appendix III: Management Comments
SBA Response to Evaluation Report