Lloyd Chapman, pleased his efforts helped persuade the General Accounting Office to open an investigation into whether some companies are falsely claiming to be small to get federal contracts, tells MBI his goal is to work to get cheaters prosecuted and make them pay huge fines.
Chapman says the Microcomputer Industry Supplier Assn. he heads is considering a class-action lawsuit against any cheating companies and perhaps even government agencies that took no action against cheating firms.

Were finding cheating on such a scale there is just no way people in the federal government didnt know about it, asserts Chapman.

GAO is in the preliminary stage of an investigation sparked by information Chapman gave to the congressional watchdogs Office of Special Investigations. That unit passed the material along to the Acquisition & Sourcing Management Team, which is handling the investigation.
GAO seeks definitive answer

Asked if they expect to answer the question of whether there are cheaters, John Needham and Russ Reider, the principal investigators, answer yes. They add their work will take several months.

MBI incorrectly reported the investigation would be out next month, based on a statement by a GAO spokeswoman who had a different study in mind (MBI, 12/12p1).

One firm challenged by Chapman, GovConnection, has been taken off PRO-Net, the Small Business Admin.s online list of small firms. GovConnection, based in Rockville, MD, was listed as a small company with 50 employees. In fact, it is wholly owned by PC Connection of Merrimack, NH, which has more than 1,300 employees and 2001 sales of more than $1.2 billion.
GC Micro, the Novato, CA, information-technology company for which Chapman is general manager, lost a $50,000 federal contract to GovConnnection in September.

PC Connection has referred press calls to GovConnection, whose officials have not returned calls from MBI and other news media.

The General Accounting Office is planning to release next month a report on the extent of fraud by large companies getting federal contracts by claiming to be small businesses.

A GAO spokeswoman confirms the investigation is under way.
The Microcomputer Industry Supplier Assn. continues to do its own research on the extent of the problem.

We keep searching the Internet and are finding large companies that appear to be getting federal contracts on the basis of claims they are small, says Lloyd Chapman, MISA president.

Many of MISAs approximately 1,000 members flooded GAO, the Small Business Admin and the General Services Admin. with complaints they are losing business to large companies falsely claiming to be small.

Fred Armendariz, associate deputy SBA administrator for government contracting & business development, writes Chapman assuring him the agency is reviewing the information sent by MISA and we will take appropriate action to remove those firms from PRO-Net if they are not small businesses.

Armendariz tells Chapman SBA received 273 size protests in FY 2002 and 85 firms were determined not to be small.

He notes that even if a firm is listed on PRO-Net, SBAs Internet database for small companies, it must self-certify as a small business when it submits a bid on a government contract.

Meanwhile, Boyd Rutherford, associate GSA administrator in charge of the Office of Enterprise Development, denies in a letter to the editor of The Washington Times he said there is widespread fraud by firms abusing the self-certification system.

Contrary to the impression left in the article, GSA does not believe that its business partners are intentionally misrepresenting their status in order to qualify as small businesses when they have outgrown this status, writes Rutherford, who provided MBI with a copy of the letter.

Marguerite Higgins, the reporter who wrote the Dec. 6 story, tells MBI she stands by the quotes.

If the GAO study supports the claims of Chapman and the MISA members there is widespread fraud, it could have drastic consequences.

Any companies falsely claiming to be small would face criminal penalties and fines. Moreover, such a finding would bring into question the effectiveness of the federal governments quarter-century effort to do more procurement from small businesses.

The statutory goal is to send 23% of procurement dollars to small businesses. The federal government missed that target in FY 2000 and 2001 (MBI, 4/25p4; 5/10/01p3). The report for FY 2002 by the Federal Procurement Data Center will be out in the spring.

Recertification in the works

Rutherford notes in his letter to the Times GSA, SBA and the Office of Management & Budget are taking steps to remedy any problems.

Many derive from the fact companies grow to exceed size standards, often because they got a government contract. The practice has been to treat them as small for the duration of the contract.

GSA expects to place in effect next month a requirement for firms to recertify as small businesses at the start of each five-year option period.

SBA has proposed a rule requiring recertification for follow-on contracts but not for the exercise of options. It further says it is considering a regulation to set a five-year limit on the period a firm can be considered small unless it continues to meet the size standards (MBI, 11/27p1).

While satisfied his efforts have moved federal agencies to action, Chapman remains critical they allowed the problem to grow.

To say SBA and GSA were unaware of this problem is jut not believable, he tells MBI. The information weve collected makes it look like the agencies have known about this problem for some time.

Seventy percent of the federal contracts allotted for small businesses were given to large companies last year, prompting the government to try to close loopholes by next year.

Government agencies say a majority of small businesses winning profitable federal contracts have outgrown the size standards set by the Small Business Administration, the office that oversees small businesses, or have become subsidiaries of larger companies, making them ineligible to be a small business.

A major issue is that companies keep their small-business status as long as they have a designated small-business contract, no matter how big it grows. Government contracts can last as long as 20 years.

The General Accounting Office, Congress' investigative arm, is conducting a review, particularly of federal agencies' use of waivers that allow larger companies to bid for contracts if no small businesses are available.

The investigation comes after the GAO and other offices received thousands of protests from small businesses and advocacy groups in the last three months.

Karen Zuckerstein, an assistant director at the GAO, said the agency plans to publish results by mid-January.

The General Services Administration, the purchasing agent for the federal government, will eliminate the loophole and enact a mandate next month that requires all businesses handling contracts with the government to recertify their status with the SBA every five years.

The SBA will review and clarify the definition of a small business, which varies by industry, said Gary Jackson, assistant director in SBA's office of size standards. However, Mr. Jackson would not say when the SBA would have a more detailed definition.

While most small businesses have fewer than 500 employees and accrue up to $6 million in sales, certain industries like manufacturing and professional services allow up to 1,500 employees and revenue hitting $29 million annually.

The SBA determines a company's status by the number of employees and its total revenue. Affiliates or branches to the company are added in the calculation.

More of the problem comes from businesses abusing the self-certification system with the SBA, said Boyd Rutherford, associate administrator for GSA's small business utilization office.

"Businesses that are small business usually have an edge in securing a bid because more agencies are doing business with smaller companies," Mr. Rutherford said. "However, businesses can't misrepresent themselves and lie to federal agencies and the American taxpayers."

Mr. Rutherford said 70 percent of small businesses procuring loans in 2001 had already outgrown the SBA's size standards. In 2001, the federal government awarded a total of 11.4 million contracts worth $234.9 billion, with 18 percent going to smaller companies.

Companies face disbarment from federal contracts, loss of business, high fees and jail time for fraudulently using the small-business status with federal procurement programs, Mr. Jackson said, adding that few companies face the severe penalties.

Mr. Jackson acknowledged the SBA has failed to accurately update its small-business systems like Pro-Net, an online search engine of about 195,000 small businesses nationwide.

While the SBA updates company profiles every 18 months, companies such as GovConnection Inc. and ASAP Software, both subsidiaries of larger corporations that would not be considered small businesses, were still active as of yesterday on the search engine as small businesses.

"We are looking into those companies, but normally they would not be considered small business when we calculate a company's size," Mr. Jackson said.

In the information technology segment, small businesses must have fewer than 500 employees or annual revenue of less than $25 million.

ASAP Software, a Buffalo Grove, Ill., software licensing services company, has 300 employees in the United States and about 200 in international offices. It has been a unit of Buhrmann Co., an Amsterdam office products supplier that employs 26,000 workers and had 2001 revenue of $10 billion since 2000.

ASAP spokeswoman Sally Folkes said in a statement that the company was unaware of any SBA or GSA questions concerning its small-business status, but would work to be in compliance with the federal government.
GovConnection Inc., a Rockville information technology company that caters to the federal and state governments, is listed on the database as having 180 employees, but the company was acquired in 1999 by PC Connection Inc., a computer services and products company headquartered in Merrimack, N.H., with more than 1,300 employees and $1.18 billion in 2001 sales.

Gary Sorkin, GovConnection president, did not return repeated calls.
Lloyd Chapman, president and founder of Micro Computer Industry Suppliers Association, the trade group for some 1,000 small businesses that have sent protests to the SBA, said the new re-certification process would still be too long to help smaller companies.

"Five years is too long a time for a business to have the monopoly on a contract or agency," Mr. Chapman said.

"A lot of companies think this action we're taking is to penalize them for growing and being successful, but it's not," Mr. Rutherford said. "Some companies simply are not telling the truth about their size and classification, and now they need to be held accountable for it."

Responding to complaints from small business executives, two federal agencies are working to close a loophole in the General Services Administration's multiple-award contracts, including GSA schedules, that has allowed some large contractors to win contracts set aside for small businesses.

The Small Business Administration is pursuing a change to the Federal Acquisition Regulation to correct the problem and plans to publish a proposed rule in the Federal Register soon, said Linda Williams, associate administrator for government contracting at SBA.

But as a temporary fix until a new rule takes effect, GSA has issued a class deviation to the FAR stating that it will require small businesses to recertify their small-business status after each five-year contract period, said Boyd Rutherford, associate administrator for the Office of Enterprise Development at GSA.

"GSA does not believe that the small business community can afford to wait a year or more for us to correct this obvious oversight," Rutherford said. He said he expects the FAR deviation to be in effect by Dec. 31.

A group of small businesses, mostly veteran-owned, complained to GSA about large businesses still winning work through GSA schedules as small businesses, prompting the agency's action, Rutherford said.

Historically, SBA has maintained a policy that small businesses retain their status through the length of their federal contracts.

"If you have a [GSA Federal Supply Service] contract as a small business, you would be small throughout the life of the contract," Williams said.

Until now, GSA and SBA interpreted that language to mean that contractors retained their status as small businesses for the initial five-year term of a GSA schedules contract, as well as the three additional five-year option periods, Rutherford said. But in response to the complaints, GSA and SBA have been working to change the policy.

One of those pushing for the change is Lloyd Chapman, general manager of GC Micro Corp. in Novato, Calif., a computer and software reseller that last year had sales of $34 million.

"When Congress passed the Small Business Act, I can promise you they did not want large companies to get [small-business] contracts. I can assure you they didn't make provisions that would allow companies to stay small for 20 years," said Chapman, who also heads a Novato-based trade group, the Microcomputer Industry Suppliers Association.

The General Accounting Office took up the recertification issue in August when it denied a protest by CMS Information Services Inc. of Vienna, Va. That company had argued that because a Missile Defense Agency request for quotation for automated information systems support services required recertification when the firm submitted its quote, the company was improperly excluded from competition because it could no longer represent itself as a small business.

CMS argued that its small-size status, established in 1997, should remain for the duration of the contract.

In its ruling, the GAO said that, absent any statutory or regulatory prohibition, agencies may require firms to certify their status as of the time they submit their quotations "instead of relying on the original [Federal Supply Schedule] self-certification, which may not reflect a vendor's current small business status."

The SBA's proposed FAR rule will clarify when businesses are required to recertify their small-business status, Williams said. The final rule probably will propose three options: recertification at renewal of contracts, annual recertification and recertification at the time of order, Rutherford said.

In issuing the FAR class deviation, GSA officials decided not to wait before a final rule is published before taking action. Agency officials are developing guidance that will instruct contracting officers and program managers on implementing the policy change, Rutherford said.

"We need to make the system as honest as it can be," Rutherford said. If the GSA is allowing large businesses to win small-business work, "it needs to be corrected. [The GSA schedules program] wasn't designed to allow someone to stay small for 20 years when they are not small," he said.

GSA is also taking steps to require recertification of small-business status at renewal of governmentwide acquisition contracts with the Federal Technology Service and similar contracts issued through GSA's Public Building Service, he said.

Steve Charles said he welcomes clarification of the small-business status issue. The executive vice president of immixGroup Inc., a McLean, Va., consulting firm, Charles advises both large and small vendors about government contracting.

"There are clients of mine that are still considered small. The idea that they would still be considered small under a 20-year contract is not consistent with the intent [of the Small Business Act]," he said.

Charles said one large company still considered small under the GSA schedules is GTSI Corp. of Chantilly, Va., even though it now has more than 500 employees, surpassing its small-business size standard.

GTSI, a reseller of IT products to the government, had 608 employees and revenue of $783.5 million in 2001, according to its 2001 annual report. Company officials said they want to wait for official policy change before commenting on the SBA and GSA actions.

Many small IT companies became very big during their first five years with a GSA schedule, yet were still classified as small, said Hope Lane, director of the GSA schedules consulting practice at Aronson & Co., a Rockville, Md., consulting and accounting firm.

"That was a major loophole. It was a loophole we used to advise people to take advantage of," Lane said.

While Chapman rails against the practice of large companies bidding on contracts as small businesses, he said that if his small business had grown large yet could capitalize on the loophole, "I would probably take advantage of that."

Another small-business owner said: "The way the rule sits today is probably unfair, [but] I don't think there is any malice in pursuing that [loophole]."

"If I were a big business, I'd be fighting [the change]," he added. *

GC Micro Corp. makes dramatic progress in its 10-year battle to get meaningful oversight of companies claims they are small businesses and eligible for special treatment in federal procurement.

Led by Lloyd Chapman, general manager of the Novato, CA, information-technology company, the effort has led to:

• An investigation by the U.S. Attorneys Office in Washington.
• An investigation by the Special Investigations Division of the General Accounting Office.
• A reexamination of the Small Business Admin. regulation that permits companies to retain federal contracts they won when they were small even though they grow to exceed small-business size standards.

Chapman has already attracted about 1,000 members to the newly formed Microcomputer Industry Supplier Assn. and it is in his role as president he recently completed a whirlwind campaign among federal agencies, elected officials and congressional staff to present his thesis.

Im concerned that individuals at the Small Business Admin, the Defense Dept., the General Services Admin. are colluding with large businesses to allow them to receive contracts intended for small businesses, he tells MBI.
The companies and agencies have more benign explanations of why large companies have contracts intended for small businesses.

Nonetheless, his efforts produce a letter from Sen. Barbara Boxer (D-CA) to the U.S. Attorneys Office in Washington asking for a review of the situation.

A spokesman for that office confirms the case has been assigned to investigators, which should suggest that its more than just a cursory review.
In his trek through official Washington, Chapman visited the GAO, the SBA Office of Inspector General, the U.S. Attorneys Office and staff members of the congressional Small Business Committees. He talked, too, with Senate Small Business Chairman John Kerry (D-MA) when Kerry was visiting California.

Chapman says GAO called him to say the agency has begun an investigation. GAO does not respond to a query by MBI.

Under federal law, a company falsely claiming to be small faces fines and criminal penalties.

In the myriad letters to government officials, Chapman names three firms he says are large but still are listed on SBAs PRO-Net as small businesses. One firm has since taken its name off PRO-Net. Another tells MBI it no longer has any small business contracts and the third says Chapmans facts are incorrect but declines to explain.

Darryl Hairston, deputy to the SBA associate deputy administrator for government contracting and business development, says listing on PRO-Net is not proof a company is holding itself out as a small business and SBA does not accept responsibility for making sure only small businesses are listed.

Indeed, the Website contains a disclaimer asserting the information is the responsibility of the listing company and users of the site should communicate directly with the listed companies.

Hairston says the legal assertion a company is a small business is made on the bid form.

One explanation for large firms or their affiliates retaining contracts intended for small businesses after they become large firms is an SBA regulation requiring it. The rationale is that the company should be permitted to complete work on a contract even though it has become a large company ineligible for future small-business preferences.

That rule works with discrete contracts issued by agencies, but under GSA schedules contracts can go on for many years.

Boyd Rutherford, associate GSA administrator of the Office of Enterprise Development, tells the Los Angeles Times the agency is considering requiring companies to recertify as small businesses when the contracts come up for renewal, which at the most is every five years.