The Woman-Owned Small Business Certification Program is “Susceptible to Abuse,” Says SBA’s Inspector General

The SBA’s Office of Inspector General isn’t sugar-coating its opinion: in a recent report, the SBA OIG says that although the SBA has made some positive strides, the SBA’s woman-owned small business certification program is nonetheless “susceptible to abuse” due to “weaknesses in the SBA’s controls intended to ensure only eligible firms receive federal contracts set aside for” WOSBs.

In its report, the SBA OIG expresses two main concerns with the SBA’s oversight of the WOSB certification process.

First, the SBA OIG notes that, alone among the SBA’s certification programs, the WOSB Program does not require that the SBA award the certification. Instead, applicants can choose to be certified by one of four non-profit organizations that have agreements with the SBA to process WOSB applications.

In my view, and with apologies to the third-party certifiers, who I'm sure are delightful people, WOSB third-party certification is sort of like the fax machine—a clunky relic that has outlived its purpose and would be best consigned to history's proverbial dustbin.

When the WOSB program was created, the underlying law allowed self-certification--which of course is what most companies chose. Although the SBA was allowed to certify WOSBs if it wished, it chose not to do so in the self-certification era. Instead, it partnered with the four non-profits to provide third-party certifications to WOSBs that wanted more certainty than a self-certification afforded.

In 2020, however, WOSB self-certification was eliminated and the SBA began processing WOSB certifications in-house. Nevertheless, third-party certification remains on the books. The SBA OIG is concerned that the SBA is not effectively overseeing those third-party certifications.

The SBA OIG points out that a 2022 audit found that while federal law requires the SBA to “periodically review third-party certifiers and their underlying certification determinations to ensure that they are properly applying SBA’s WOSB program requirements,” the SBA was not effectively doing so. In the more recent report, the SBA OIG says that the SBA “is still not conducting consistent reviews of [third-party certifiers] to make sure only qualifying women-owned businesses receive the benefit” of the WOSB Program.

You might think that once the SBA began offering a free in-house WOSB certification, everyone would have stopped using the third-party certifiers, which charge a processing fee. And if nobody uses the "TPCs" anymore, then who really cares if the SBA’s oversight is effective? In the words of Brooks & Dunn, "ain't no big deal, it's just whiskey under the bridge." (Sorry, I'm a Gen X'er who grew up in North Dakota, I have a thing for '90s country).

But like fax machines (raise your hand if, sometime in the Year of Our Lord 2023 you've been asked to fill out a form requesting your fax number--I sure have), third-party certification is somehow still a thing. The 2022 report found that 906 of 2,505 SBA-certified WOSBs, or roughly 36 percent, had used third-party certifiers. With a significant number of applicants still selecting third-party certification, for whatever reason, it’s troubling that the SBA OIG continues to believe that the SBA’s oversight of those third-party certifications is lacking.

If I were in charge over at the SBA, I’d take the fax machine analogy to its logical conclusion and go full Office Space on third-party certification. (I'd also look into what special incentives I could offer to get a Bojangles franchise here in the Midwest; my inability to obtain Bo-Tato Rounds and that famous sweet tea when I desperately need them seems like a problem government should be able to solve).

As I mentioned earlier, the WOSB Program is the only SBA socioeconomic certification program to provide a third-party option. The SBA alone processes certifications for the 8(a) Program, HUBZone Program and Service-Disabled Veteran-Owned Small Business Program.

In my view, eliminating the dinosaur of third-party certification (which, as I read it, is merely authorized by the underlying statute, not required) would better align the WOSB Program with the SBA's other major socioeconomic preference programs and—more importantly—improve Contracting Officers’ trust in WOSB certifications.

After all, when Contracting Officers hear that the SBA's own Inspector General is questioning the SBA's oversight of the TPCs, it's not a stretch for those same Contracting Officers to wonder whether they can rely on WOSB certifications. And with the government still struggling to meet its 5% WOSB goal, anything the SBA can do to assure Contracting Officers that the WOSB certification is trustworthy can only help.

The SBA OIG’s second major concern is that the SBA does not verify that WOSBs are small businesses as part of the certification process. Instead, the SBA reviews an applicant's ownership and control, but allows applicants to self-certify that they qualify as small businesses. The SBA OIG “believes that removing self-certification [of small business size] from the WOSB Program is essential to reducing risk,” but the SBA has declined to do so, and has informed the SBA OIG that it will continue to allow size self-certification.

The SBA’s refusal to conduct small business size status analyses of WOSB applicants seems odd to me because SBA specifically requires its third-party certifiers to conduct these analyses. In 13 C.F.R. 127.354, the primary regulation governing WOSB third-party certifiers, the SBA states that in order for a third-party organization to be approved as a WOSB certifier, the entity must establish that, among other things:

Its certification process will require applicant concerns to register in SAM (or any successor system) and submit sufficient information as determined by SBA to enable it to determine whether the concern qualifies as a WOSB. This information must include documentation demonstrating whether the concern is:(i)?A small business concern under the SBA size standard corresponding to the concern's primary industry, as defined in [13 C.F.R. Part 127]; and (ii)?At least 51 percent owned and controlled by one or more women who are United States citizens.

In other words, although SBA's regulations require its third-party certifiers to evaluate a WOSB applicant's small business size status—with “documentation demonstrating” that the company qualifies as small under its primary NAICS code—the SBA says that when it processes WOSB applications in-house, it simply accepts applicants’ small business self-certifications.

I have no way to know if the approved third-party certifiers are complying with the regulatory size analysis requirement, but it seems to me that if the SBA is allowing the third-party certifiers to accept size self-certifications, the SBA has deviated from its own regulations--even though such a deviation would simply align the third-party certifiers with SBA's own in-house practice.

That said, in my view, 13 C.F.R 127.354 is itself problematic in that a company is not required to be a small business in its “primary industry” to qualify for WOSB certification. Instead, 13 C.F.R. 127.102 merely requires that the company [qualify] as small . . . under the size standard corresponding to any NAICS code listed in its SAM profile.”

To the extent that third-party certifiers are rejecting WOSB applications because applicants don’t qualify as small in their primary industries, I think those rejections would be contrary to the SBA's regulatory definition of a WOSB. But, if the TPCs are not evaluating WOSB applicants' size statuses under their primary NAICS codes, it seems that the TPCs wouldn't be complying with 13 C.F.R. 127.354. For the TPCs, it sounds like a no-win situation.

For its part, I can’t really blame the SBA for not wanting to spend the effort to determine whether a WOSB applicant is small under every NAICS code listed on its SAM profile. After all, some companies stuff their SAM profiles with more NAICS codes than there were calories in Burger King’s short-lived Big Meaty, which included the wholesome ingredient list of “two flame-grilled beef patties, a crispy chicken patty, six bacon strips, two slices of cheese, BBQ sauce, mayo, and onion on a sesame seed bun.”

Still, if the SBA isn't going to take the Office Space approach to third-party certification, I think the SBA ought to standardize the requirements for SBA in-house reviews and TPC reviews, and should consider intermediate measures, like analyzing whether a WOSB applicant is small under the largest size standard associated with its SAM profile. While such an analysis wouldn’t assure Contracting Officers that the company was eligible for every WOSB contract, it should at least help weed out applicants affiliated with very large businesses. Again, anything the SBA can do to help build Contracting Officers’ trust in WOSB certifications can only help meet (and exceed) the five percent goal.

The WOSB program has come a long way since its origins, and I think SBA's in-house certifications have helped build trust in the program. As the SBA OIG report shows, however, the SBA could do more to continue building that trust and better ensure that any company with a woman-owned small business certification actually qualifies as a WOSB.

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Boring but important disclaimer: The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.?