Efforts by Washington, D.C., to include local, minority-owned and small businesses in city contracts have led to a system in which goods manufactured by major companies, including sensitive medical equipment, are routed regularly through residences where self-professed entrepreneurs — whose only client is the government — mark up and resell them.
Since 2010, the D.C. government has paid $64 million to companies with no traditional office space, many of which operate merely as pass-throughs for larger businesses outside the city, according to an analysis The Washington Times conducted of city financial and real estate records.
In all, one in seven local, minority-owned and small businesses receiving city contracts under preferential status, known as Certified Business Enterprises (CBEs), is in a home. After visiting dozens of such entities, The Times found that lax oversight of the city's 1,200 CBEs — a third of which have received D.C. contracts — is a poorly kept secret.
The findings echo a rare point of agreement among D.C. politicians: The way officials regulate these local companies and limit the pool of eligible bidders on city contracts is in need of reform.
Last month, two months after praising his performance, Mayor Vincent C. Gray accepted Harold Pettigrew's resignation as director of the Department of Small and Local Business Development. But to clean house thoroughly, the city must determine which of the small companies that have received D.C. contracts are located in the District and, when they are, whether they provide meaningful services in exchange for their profits.
How it works
Take Premier Suppliers on 49th Street Northeast, in the home of Johnny Johnson. On a recent visit to his three-bedroom, 3½-bath house, a sign on the front door read, "Deliveries in the back!" There, next to a pile of garden tools, a pack of Pall Malls sat atop a large box from Humanscale, an office furniture and equipment company in Piscataway, N.J.
Inside the rear entrance, an assistant said Mr. Johnson was upstairs getting dressed, and invited reporters to sit in his living room, adorned with family pictures and a big-screen TV.
Mr. Johnson was unabashed in describing the firm's business model: Premier Suppliers has Humanscale ship goods to the house, where he marks up the price and resells them to the District.
"We don't manufacture anything. That's just the setup. We're a pass-through," he said. "This stuff is blatant."
D.C. regulations state that companies' locations are verified by random inspection. But Mr. Johnson described being in business with a Maryland-based partner who, after dividing the company, went on to win a D.C. contract as a CBE. "He utilized my address to get the contract to go through until he bought an investment property in the District."
The D.C. Fire Department has been buying medical equipment from a house on East Capitol Street, records show. On a recent afternoon, trash, liquor bottles and a tire mingled with signs supporting Mayor Gray and President Obama. Duct tape fastened the front gate shut; tarps and furniture barricaded the windows and doors.
The "welcome" mat for All N 1 Medical Supplies and Treasures is misleading. "Do not be a fool!" a sign read. "Cameras inside takes your picture. The police will find you! Oh yes!"
Nevertheless, the District bought $100,000 of medical devices through 2012 from All N 1, whose owner, Evie Washington, listed this vacant home as her place of business as of July, according to city records.
Fire department officials did not return calls for comment.
Other CBEs get by through the establishment of multiple business locations, with one in the District. C&E Services Inc., a construction and maintenance company, has headquarters in Vienna, Va., according to the firm's website. But a company with the same name is based in a house in Southeast. Jim Biggs, brother of the company's president, splits time between the offices.
"We have our office here for our preference points," Mr. Biggs said one afternoon, after morning visits found the office vacant. "I'd someday like to do a real building."
C&E does construction work, he said, but the District contracts with too many CBEs to buy goods when the city's white-collar economy means those goods come from elsewhere.
"The D.C. Council should be [running] this program for services rather than goods," Mr. Biggs said. "Purchasing something — that could come from California. But if I need 20 men, they're not going to come from California."
Yet many CBEs with service contracts, such as construction, don't do the work either, he said.
"We're a real business, so we have secretaries, offices, administrative costs. But sham companies get certified and put their name on a joint venture. They'll take 1 percent because they don't have any costs, and they didn't put money in. But it doesn't help the companies grow."
In March, the D.C. Council approved legislation introduced by Vincent B. Orange, at-large Democrat, to reform CBE policies and practices.
Mr. Gray vetoed the bill and later named 17 business leaders to develop a list of necessary reforms. Many of those business leaders come from the construction industry, which critics say are frequent abusers of the system.
In a letter this month to D.C. Council Chairman Phil Mendelson, at-large Democrat, Mr. Gray said a major goal of the reform effort "is to ensure that CBEs participate meaningfully in the program and to prevent subversion by non-CBE businesses." He wrote that while additional enforcement powers are needed, "more important are reforms to how CBE businesses and joint ventures are certified, reviewed and monitored, which will eliminate incentives to 'game' the system."
That is all well and good, Mr. Johnson said, but local, small and minority-owned businesses are not the only ones profiting at taxpayer expense from a flawed system. He told the story of Lifepak, which manufactures defibrillators preferred by the fire department.
"We went through our international supplier, who got it from Lifepak. So it gets marked up twice and we still won the contract."
That wasn't the surprising part, though: His competition in that bidding war included Lifepak directly, which was giving one price to the company in New Jersey and a much higher one to the District.
"Lifepak must have had the contract for so long that sometimes the big guy gets greedy," Mr. Johnson said.
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