Disadvantaged-Business Certification Program Off to a Sluggish Start

Fraud by firms posing as minority-owned and an anti-affirmative action environment prompted the federal government a few years back to create a certification program for small disadvantaged businesses.

The program was expected to sign up more than 36,000 small-business owners nationwide. Trouble is, hardly anyone is climbing on board.

A January deadline was extended to July after fewer than 5,800 businesses were certified. By July, only 900 more signed up, so the deadline was extended again, to Oct. 1. Of the total, nearly 5,000 are from an existing Small Business Administration certification program.

Why such a meager showing?

Despite all the trumpeting about the benefits of Small Disadvantaged Business (SDB) certification, the process means tons of paperwork, fees as high as $2,000 and, in the end, no guarantee of new business.

Certification is only for the right to be listed as an SDB when small firms bid for government work or are used as subcontractors. An SDB listing can help boost a bid if certain criteria are met, but the listing alone typically won’t win the bid.

SDBs and women-owned businesses get a tiny slice of the billions spent on federal contracts. For fiscal year 1998, just 6.5% of all government contracting went to small disadvantaged firms and 2.2% to firms owned by women.

Given the small chances of reward for all the work, it’s no surprise that time- and cash-strapped small firms see no percentage in SDB certification.

“If you’re not getting a contract now, why would you do it?” asks Sharon Merino, owner of Pasadena-based Small Business Consulting Agency, which helps small firms with government red tape.

Small-business owners don’t know what certification is or the benefits, Merino said, adding: “All they had to do before was check a box. Now they’re being told they need to get certified, but nobody is explaining what it is.”

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Basically, SDB certification replaces self-certification, in which business owners who belonged to a racial or ethnic minority signed a form stating that they were a minority and ran the company. Under the so-called Rule of 2--if two or more such firms submitted a bid for federal work--that bid was closed to nonminority firms. The procedures were designed to meet affirmative action goals in government contracting.

But after a 1995 Supreme Court decision outlawed such practices, new methods were devised that were not gender- or race-based.

Now, business owners can be certified as an SDB only if they are in one of about 55 industries found to have a history of past discrimination. In addition, owners must submit all sorts of financial and historical documents about their company and themselves to prove the truthfulness of their declarations. Their personal net worth can’t exceed $750,000, excluding home and business equity.

For being an SDB, they, or the prime contractors for whom they are working, can receive upward adjustments in the bidding process. But gone are the days when the bids were reserved for minorities.

The only exception is the 8(a) business development program, which is similar in requirements and paperwork to the SDB program but preserves some government work for 8(a) contractors. SBA officials say the 8(a) program involves more paperwork than SDB, but Merino advises that small firms going through the hassle of SDB might as well apply for 8(a) too because it offers more benefits for the paperwork. In fact, she suggests that any qualifying business can benefit from both programs once they learn their way around the rules and regulations and paperwork.

Still, the SDB paperwork itself presents a barrier, one that was expected to be so big that the federal government decided to bring on outside consultants to handle the flow.

Instead of a flood of applicants with ready cash, the SDB certifiers have found a trickle of companies, with few willing to fork over the money to go through the application process. These certification companies, many of them also minority-owned, expected SDB certification to generate an added revenue stream. Some even added extra personnel in that expectation.

“It’s frustrating,” said Ellis Gordon, co-founder of Gordon/Barash Associates Inc., a certifier in West Los Angeles. “I’ve spent the bulk of my time answering inquiries. A lot of people have called up and shown interest, but it’s not translated into business.”

In addition, companies like Gordon’s that provide a wide range of business services are prohibited, under federal conflict-of-interest rules, from offering them to the companies that call for certification. Thus, they are nearly in the position of being unpaid government workers.

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But government officials say that small businesses will soon become aware of the program and, over time, certification will pick up. This month, more certifiers are expected to be added to the program and the SBA has plans to expand its outreach effort.

The slow start is typical for any new program, said SBA spokesman D.J. Caulfield, who adds that the government didn’t expect 36,000 sign-ups in the first year. But with more certifiers on board, a foundation is being laid for the program to reach its full expansion.

“It really isn’t a deadline,” he said of the date by which small businesses have to be on board with the SDB certification. “It’s not like income taxes; it’s like a driver’s license. You’ll get one when you need it.”

For information on SDB certification, go to https://www.sba.gov/sdb.

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Vicki Torres can be reached at (213) 237-6553 or at vicki.torres@latimes.com.