How multi-billion dollar defense contractors netted small business set-asides

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Some $339 million set aside for small business went to some of the largest defense contractors and that’s in a single year. This is according to the Project on Government Oversight. POGO reviewed spending patterns of the Defense Logistics Agency under its Special Operational Equipment tailored logistics support program. The Federal Drive with Tom Temin got details from POGO’s senior investigator, Nick Schwellenbach.

Interview transcript:

Tom Temin: Nick, good to have you back.

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Nick Schwellenbach: Hey, good to be on, Tom. Thanks.

Tom Temin: What got you on to this idea here of what was going on at the Defense Logistics Agency?

Nick Schwellenbach: Well, we’ve looked at the tailored logistics support program in a previous investigation when we were looking at one of their biggest contractors Atlantic Diving Supply. But we weren’t the only ones looking at this program. The House Small Business Committee, in particular, the Republicans on the House Small Business Committee, were also taking a look at this program. And they had figured out that there’s this obscure waiver, that the Small Business Administration grants to agencies that let them source from big businesses when it’s a small business set aside, but there are really narrow requirements that have to be met to use that waiver. And it turns out, at least according to the SBA, that the Defense Logistics Agency was violating those requirements and not using the waiver appropriately. And DLA at least according to the SBA is in violation of the law.

Tom Temin: And what do we know about the waivers, what is legitimately allowed when dollars are set aside for small business to go to some of the big contractors?

Nick Schwellenbach: So the way this is supposed to work is when an agency is using small business resellers, these are middleman companies. And an agency figures out, well, the small business middleman companies can’t buy from small business manufacturers, they have to go to big businesses. The agency needs to make a case to the SBA that a specific piece of equipment or gear or any other kind of good can’t be manufactured by small business companies. They have to make the case and it has to be item by item. And you have to go to the SBA and say, “Hey, we did all our market research. There are no small businesses that can meet this need.” So what the Defense Logistics Agency did is they went to the SBA and they said, “Hey, we want our entire $33 billion, 10-year tailored logistic support program to be waived of any requirement to go to small businesses. We want to be able to buy gear from any size business.” The SBA said no, they explicitly rejected that waiver request from the Defense Logistics Agency. So what the Defense Logistics Agency did is they used a waiver that they had previously received for just a $1.3 billion slice of the $33 billion program. And they basically asserted that it applied to the entire program. And the house Small Business committee’s Republicans got wind of this. They went to the SBA and said, hey, does this make sense to you? Is the Defense Logistics Agency doing this appropriately? The SBA took a look and said no, they’re misusing this waiver.

Tom Temin: And there’s documentation of their use of this waiver to extend from that slice to the entire program?

Nick Schwellenbach: Yes. In all the contracting documents, the Defense Logistics Agency says that the entire program is covered by this waiver.

Tom Temin: And just clarify, if you would, the idea of buying these products from resellers versus buying them, this is on DLA’s part, directly from the manufacturers.

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Nick Schwellenbach: Yeah. So we really went down the rabbit hole in this investigation, and it’s an obscure corner of the federal government that not a lot of people look at. So Defense Logistics Agency, they’re seen within the military as sort of an agency that helps every other part of the military get the goods they need, whether it’s paper clips, or feel, or spare parts for fighter jets, the Defense Logistics Agency often plays a role in getting that gear for the rest of the military and sometimes even other agencies outside of the Defense Department. So what the Defense Logistics Agency has done with this program is, instead of government employees who work for DLA, sourcing the gear from the manufacturers, the DLA relies on a handful of small business middleman companies, companies like Atlantic diving supply, but there’s a few others as well. And so these middleman companies, they figure out who makes the gear and they source the needs of the military customers that purchase gear through the tailor logistic support program. And so as in other instances where you have middlemen, the middleman companies have to make their own profit, they have to pay their own bills. And then on top of that the Defense Logistics Agency also tacks on usually at 5.4% fee.

Tom Temin: Well, then how did some of this money end up in the hands of some of the really large contractors? I think you mentioned, Lockheed Martin, Boeing General Dynamics, because they don’t make backpacks and knives and that type of thing.

Nick Schwellenbach: So what happened here is because DLA has improperly used this waiver that SBA granted and asserted it applied to the entire program, companies like Atlantic Diving Supply don’t have to source gear from other small businesses anymore. They can source gear from Lockheed, or Boeing or Raytheon, or Northrop Grumman or General Dynamics, or L3Harris. And they have been to the tune of at least $339 million in the last year. And again, that’s just through this one program.

Tom Temin: So that means that Lockheed Martin is buying it from the manufacturers passing it to the resellers, and the resellers are selling it to the DLA?

Nick Schwellenbach: No, generally Lockheed Martin is the manufacturer. And then ADS is buying something from Lockheed Martin.

Tom Temin: I see.

Nick Schwellenbach: ADS is passing it along through DLA to a military customer.

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Tom Temin: What are some of the products?

Nick Schwellenbach: Yeah, the products really range the gamut. And we’ve done the best we can to try to figure out what some of these products are, because often the descriptions in publicly available contracting databases are very vague. But here’s one example. One example is a radar system to help people on boats detect radars that might detect them. It’s sort of an anti-radar detection system made by L3Harris. This isn’t something that you and I normally go to Walmart and buy. This is something that’s, generally has military applications. And a lot of the higher-dollar items that we’ve seen from the traditional defense contractors tend to be things along those lines, not necessarily fighter jets, not tanks, nothing along those lines, but often the systems that go inside of fighter jets or tanks, or armored personnel carriers or ships.

Tom Temin: Right, the DLA does not deal in weapons or ordinance, but everything besides that is needed. So therefore, it sounds like that part would be justified if there is no small business that makes that anti-radar or that counter radar system. But do we know about what happened in the case of the many tiny items that are done to this program?

Nick Schwellenbach: I’d like to get to your first point though. The problem here, or there’s two problems: There’s one, the impact on the small business community, but two is sort of the taxpayer perspective. If you’re Lockheed, you don’t need Atlantic Diving Supply to sell to the Pentagon. You have no trouble doing it directly. So why do we need a middleman company that’s tacking on its own charges, its own profit margin. And also DLA is 5.4% fee. There’s an argument that the Pentagon should just be buying the stuff directly from Lockheed, or Raytheon or General Dynamics or L3Harris, and just cutting out the middleman entirely and getting a better deal for taxpayers. So that’s one issue, but to your second issue, which is what’s the impact to the small business community, the genuine mom and pop shops and the real small businesses? Well, because DLA has been asserting that this waiver applies to everything purchased through the table of logistics support program, it’s not doing that market research on an item by item basis to guarantee that there isn’t a small business manufacturer for those goods. So they’re cutting corners. And as a result, small businesses might be getting the shaft.

Tom Temin: Alright, so now this has been brought to the attention of SBA and by the Republicans on the House Armed Services Committee. Now what?

Nick Schwellenbach: It’s a great question. So one thing I learned after my story was published a few weeks ago is that the House Small Business Committee has gotten the Government Accountability Office involved. And they’re going to start to examine the use of these waivers not only at the Defense Logistics Agency, but across the federal government. And the SBA data shows that agencies are increasingly asking for these waivers and SBA is increasingly granting them. So this is potentially a problem that’s much broader than the Defense Logistics Agency and much broader than this one program. These waivers are basically turning the federal government’s Small Business procurement program into Swiss cheese, because things look like these programs, make it appear that the dollars are going to small businesses. But in reality, a large proportion of the sub awards might be going to large, traditional federal contractors instead, totally undermines the intent of the program.

Tom Temin: Because resellers can be small and they are, therefore look as if they’re the primary recipients of the dollars, but they’re just passing them through plus a little fee to the large company, is what you’re asserting.

Nick Schwellenbach: Right, right. You don’t want these waivers to be a means of gaming the system basically, that’s sort of the central issue here. The other thing that needs to happen is the Defense Logistics Agency needs to come into compliance with the law. The Small Business Administration is the agency responsible for interpreting and administering the Small Business Act and that’s the legal authority under which these waivers are granted. And DLA is not After the authority in charge of the Small Business Act, the SBA and the SBA has asserted that DLA is in violation of the law. So that’s sort of an obvious point. But DLA is sort of sticking to its guns and saying, “Well, we’re using the waiver appropriately, but they don’t make the call here. SBA does.” That’s another thing that should happen. If the DLA is using middleman companies to contract with traditional defense companies, it should consider just entering into direct contractual relationships with those giant defense companies that have no trouble doing business with the Pentagon directly, to cut out the middleman and to get a better deal for the taxpayer. There should be better oversight of the waivers. So one problem that we saw in this case with the Defense Logistics Agency is SBA doesn’t really look to examine how these waivers are used once it grants them. And it took the Republicans on the House Small Business Committee to figure this out when it should have been the SBA that was watching.

Tom Temin: Nick Schwellenbach is senior investigator for the Project on Government Oversight. As always, thanks so much.

Nick Schwellenbach: Thanks, Tom. Appreciate it.

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