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Disabled Veteran’s Contracts Mismanaged, Watchdog Finds

March 5 (Bloomberg) -- The Defense Department is mismanaging a nine-year-old effort to set aside contracts for companies owned by disabled veterans, according to the Pentagon’s inspector general.

A sample of 27 contracts from fiscal 2010 found $340.3 million in work was awarded to contractors “who potentially misstated” their company’s eligibility, the inspector general said in a report to be posted today on the office’s website.

Congress created the program in 2003 to provide opportunities throughout the federal government to companies at least 51 percent-controlled by veterans disabled in service. The veteran must have responsibility for long-term decision-making and day-to-day management.

Controls “were not adequate” in verifying that recipients qualified, according to the inspector general’s Feb. 29 report. It said the Pentagon’s Office of Small Business must put better procedures in place to verify eligibility.

“If the office does not establish adequate procedures, it will continue to convey the message that assisting service-disabled veterans is not a priority,” according to the report signed by Amy Frontz, the inspector general’s principal assistant for auditing.

“The lack of action compromises the integrity and intention of the program, which is to serve veterans with disabilities incurred or aggravated in the line of duty,” according to the report.

A Navy contract to a Seattle company valued at as much as $200 million has been referred to the Small Business Administration for investigation, according to the report, which didn’t identify the company.

Potential Fraud

Three contractors have been referred to the Pentagon’s Defense Criminal Investigative Service for potential fraud because they received awards though their disabled-veteran status was rejected by the Small Business Administration.

Federal agencies must meet an annual goal of awarding at least 3 percent of contract amounts to such businesses under a 2004 executive order by President George W. Bush expanding the program. The Pentagon hasn’t hit the goal, awarding $5.3 billion in fiscal 2010, or 1.8 percent of its contracting dollars. That was a $1 billion increase over 1.4 percent in fiscal 2009, according to data listed by the Pentagon’s Small Business Office.

The inspector general’s report follows congressional testimony by the Government Accountability Office Feb. 7 that weaknesses throughout government left the program for service-disabled veterans vulnerable to fraud and abuse.

Veterans Department

The Veterans Affairs Department inspector general found in a July 2011 report that the VA awarded at least 1,400 contracts to ineligible businesses. The VA’s inspector general said last year that the agency overstated by 17 percent the number of contracts it awarded in fiscal 2010.

The Pentagon’s inspector general found similar overstatement. Citing human error, the report said $1.3 billion in contracts were inaccurately coded in the government’s primary online procurement database as having been awarded to companies headed by service-disabled veterans.

The federal government and industry rely on the database “to assess the impact of federal procurement on the nation’s economy and the extent to which awards are made to businesses in the various socioeconomic categories,” according to the report.

Pentagon Response

The Pentagon’s Small Business Program will issue guidance this year reminding contracting officers of their duty to verify contractor claims that they are certified to participate, Andre Gudger, the program’s director, said in a three-page response included in the inspector general’s report.

Gudger also said the department will continue its efforts to improve the accuracy of data entries into the federal procurement system.

Navy Rear Admiral Althea Coetzee said in a written response that the service was referring the case of the Seattle company uncovered by Pentagon auditors to the Small Business Administration.

The Naval Facilities Engineering Command-Northwest awarded the $200 million contract to the business “even though evidence was insufficient to support” its claimed status as owned by a service-disable veteran, the report found.

Business records indicated the company had six equal partners and the disabled veteran lived 2,266 miles (3,646 kilometers) away from Seattle in Anchorage, Alaska, according to the report.

“Considering the distance between the service-disabled veteran’s residence and the contractor’s location, it is not reasonable to believe that the contractor” met the program’s eligibility requirements, the report found.

The inspector general said $179.4 million not disbursed for the contract “should be put to better use.”

Bridget Serchak, a spokeswoman for the inspector general’s office, declined to identify the contractor, citing “a potential for future investigative actions.”

To contact the reporter on this story: Tony Capaccio in Washington at

To contact the editor responsible for this story: John Walcott at

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