The Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program provides federal contracting assistance to small firms located in economically distressed areas, with the intent of stimulating economic development. Questions have been raised about whether the program is targeting the locations and businesses that Congress intended to assist. GAO was asked to examine (1) the criteria and process that SBA uses to identify and map HUBZone areas and the economic characteristics of such areas, (2) the mechanisms SBA uses to ensure that only eligible small businesses participate in the program, and (3) the actions SBA has taken to assess the results of the program and the extent to which federal agencies have met their HUBZone contracting goals. To address these objectives, GAO analyzed statutory provisions, as well as SBA, census, and contracting data, and interviewed SBA and other federal and local officials.

SBA relies on federal law to identify qualified HUBZone areas based on provisions such as median income in census tracts, but the map it uses to publicize HUBZone areas is inaccurate, and the economic characteristics of designated areas vary widely. To help firms determine if they are located in a HUBZone area, SBA publishes a map on its Web site. However, the map contains areas that are not eligible for the program and excludes some eligible areas. As a result, ineligible small businesses have been able to participate in the program, and eligible businesses have not been able to participate. Revisions to the statutory definition of HUBZone areas (such as allowing continued inclusion of areas that ceased to be qualified) have nearly doubled the number of areas and created areas that are less economically distressed than areas designated under the original criteria. Such an expansion could diffuse the benefits to be derived from steering businesses to economically distressed areas. The mechanisms that SBA uses to certify and monitor firms provide limited assurance that only eligible firms participate in the program. Although internal control standards state that agencies should verify information they collect, SBA verifies the information reported by firms on their application or during recertification--its process for monitoring firms--in limited instances and does not follow its own policy of recertifying all firms every 3 years. GAO found that more than 4,600 firms that had been in the program for at least 3 years went unmonitored. Further, SBA lacks a formal policy on how quickly it needs to make a final determination on decertifying firms that may no longer be eligible for the program. Of the more than 3,600 firms proposed for decertification in fiscal years 2006 and 2007, more than 1,400 were not processed within 60 days--SBA's unwritten target. As a result of these weaknesses, there is an increased risk that ineligible firms have participated in the program and had opportunities to receive federal contracts based on their HUBZone certification. SBA has taken limited steps to assess the effectiveness of the HUBZone program, and from 2003 to 2006 federal agencies did not meet the government-wide contracting goal for the HUBZone program. While SBA has some measures to assess the results of the HUBZone program, they are not directly linked to the program's mission, and the agency has not implemented its plans to conduct an evaluation of the program based on variables tied to the program's goals. Consequently, SBA lacks key information to manage the program and assess performance. Contracting dollars awarded to HUBZone firms increased from fiscal year 2003 to 2006, but consistently fell short of the government-wide goal of awarding 3 percent of annual contracting dollars to HUBZone firms. According to contracting officials GAO interviewed, factors such as conflicting guidance on how to consider the various small business programs when awarding contracts and a lack of HUBZone firms in certain industries may have affected the ability of federal agencies to meet their HUBZone goals.

Status Legend:

Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

• In Process
• Open
• Closed - implemented
• Closed - not implemented

Recommendations for Executive Action

Recommendation: To improve SBA's administration and oversight of the HUBZone program, the Administrator of SBA should take immediate steps to correct and update the map that is used to identify HUBZone areas and implement procedures to ensure that the map is updated with the most recently available data on a more frequent basis.

Agency Affected: Small Business Administration

Status: Open

Comments: SBA, through its mapping contractor, updated its HUBZone map in September 2008. However, SBA does not have a process in place to ensure that its map remains accurate. SBA officials stated that a contractor is conducting business process re-engineering that will include a focus on its mapping processes. However, these efforts are in the early stages.

Recommendation: To improve SBA's administration and oversight of the HUBZone program, the Administrator of SBA should develop and implement guidance to more routinely and consistently obtain supporting documentation upon application and conduct more frequent site visits, as appropriate, to ensure that firms applying for certification are eligible.

Agency Affected: Small Business Administration

Status: Open

Comments: SBA issued a guide for analysts to use when reviewing applications to ensure that they consistently request supporting documentation. Further, since July 2008, SBA has requested supporting documentation from each new applicant. While SBA has not conducted more frequent site visits to verify the information it receives from firms, SBA officials stated that they planned to conduct site visits of all HUBZone firms that received a contract in fiscal year 2007 during fiscal year 2009. As of March 2009, SBA had conducted seven site visits of those firms.

Recommendation: To improve SBA's administration and oversight of the HUBZone program, the Administrator of SBA should establish a specific time frame for eliminating the backlog of recertifications and ensure that this goal is met, using either SBA or contract staff, and take the necessary steps to ensure that recertifications are completed in a more timely fashion in the future.

Agency Affected: Small Business Administration

Status: Open

Comments: In September 2008, SBA eliminated the backlog of recertifications by hiring additional staff but has yet to implement necessary procedures to ensure that future recertifications are completed in a timely fashion. SBA officials stated that the ongoing business process reengineering will include an assessment of the recertification process.

Recommendation: To improve SBA's administration and oversight of the HUBZone program, the Administrator of SBA should formalize and adhere to a specific time frame for processing firms proposed for decertification in the future.

Agency Affected: Small Business Administration

Status: Open

Comments: In December 2008, SBA formalized a specific time frame for decertifying firms, but it is not clear whether staff are adhering to the policy.

Recommendation: To improve SBA's administration and oversight of the HUBZone program, the Administrator of SBA should further develop measures and implement plans to assess the effectiveness of the HUBZone program that take into account factors such as (1) the economic characteristics of the HUBZone area and (2) contracts being counted under multiple socioeconomic subcategories.

Agency Affected: Small Business Administration

Status: Open

Comments: SBA has not begun to assess the effectiveness of the HUBZone program. In August 2008, SBA issued a notice of methodology in the Federal Register for measuring the impact of the HUBZone program. However, the proposed methodology was not well developed. For example, it did not incorporate expert input or a previous study conducted by SBA's Office of Advocacy. We do not believe that this effort was a useful process to address our recommendation.