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.