A House committee has promised ongoing scrutiny of federal small-business programs after receiving evidence that large companies frequently are awarded contracts intended for small firms.

A General Accounting Office investigation has identified major flaws in the federal government's small-business contracting practices that have led to the inappropriate awards.

Testifying May 7 before the House Small Business Committee, David Cooper, GAO's director of acquisition and sourcing management, said an examination of contracts awarded to five large companies revealed that more than 40 percent of their contracts in fiscal 2001 -- $460 million out of more than $1.1 billion -- had been reported as small-business awards.

Cooper did not identify the five companies, but said they had been selected for closer examination from more than 5,300 companies that received awards as both large and small businesses that year.

Compounding the problem, one of the government's widely used procurement databases, the Federal Procurement Data System, or FPDS, is so flawed that Felipe Mendoza, associate administrator for small business utilization at the General Services Administration, told lawmakers it was "not a reliable source for determining a contractor's size."
Based on information provided by Mendoza, Cooper and others who testified, committee members said they would keep an eye on how agencies identify small companies and track their contract awards. Chairman Rep. Donald Manzullo, R-Ill., said the committee would revisit the issue in the fall.

" We're going to monitor the situation very closely. We're going to have some more discussions with GAO regarding what they're seeing," said Rich Carter, committee communications director. "We weren't happy with what came out of the hearing in terms of large companies being certified as small companies."

Craig Orfield, spokesman for the Senate Committee on Small Business and Entrepreneurship, said the Senate committee is considering holding its own hearing on the issue.

" We are devoting a significant amount of staff time to try to get to the bottom of reports that large businesses are abusing the system," Orfield said. "It's a problem that hits small businesses squarely in the pocketbook. It's not good for the federal government, either, if big business are walking away with most of the contracts."

The issue first came to light when Lloyd Chapman, president of the Novato, Calif.-based Microcomputer Industry Suppliers Association, brought it to the attention of the Small Business Administration, GAO and several legislators last year.

In January, both the House and Senate small business committees asked GAO to investigate complaints that large businesses were unfairly taking contracts away from small firms.

So far, SBA has removed more than 600 companies from PRO-Net, its self-enrolling, self-certifying database of small businesses, because they do not meet the agency's criteria. SBA is taking other steps as well to address the issue of large companies being misidentified as small ones.

During the hearing, Fred Armendariz, SBA associate deputy administrator for government contracting and business development, said the agency is not responsible for verifying that companies on the PRO-Net are small. Rather, companies are responsible for self-certifying their size on PRO-Net.
In fact, the only way a contracting officer can question a company's size designation is if another bidder files a protest, or other information surfaces that questions the size designation, he told lawmakers.

After the hearing, Armendariz told Washington Technology that SBA has under development a system to conduct an automated check of a company's PRO-Net size information.

The agency also sent a letter May 9, after the hearing, to 140 senior procurement executives and small and disadvantaged utilization officers outlining the proper use of PRO-Net.

In the letter, the agency said it declined to publish a list of businesses removed from PRO-Net because "[we] do not believe this is an appropriate action, because the review that resulted in their removal from PRO-Net was an informal one. These businesses have the right to request a formal size determination from SBA or to re-register on PRO-Net with current information if it shows they are small."

Chapman of the suppliers association dismissed SBA's efforts, saying the agency shied away from enforcement actions.

" SBA has not notified any agencies [which] companies were removed from PRO-Net," Chapman said. "At the hearing, Fred Armendariz said it was not their job, but they've got a whole department down there whose responsibility it is."

Large companies pass as small ones in one of several ways, Cooper said. For instance, small companies that win contracts are allowed to keep that status over the life of the contract, including option years, even if they have outgrown the definition of a small business through growth, merging with another business or being acquired by a large company.

SBA has proposed a rule that would help close this loophole by requiring a small business that receives a multiple-award contract to recertify annually its status as a small business.

GSA already has taken steps to close the loophole regarding small-business status over the life of a contract. The agency implemented a policy March 1 that requires companies to re-present their business status before options on GSA contracts are exercised.

And sometimes companies knowingly misrepresent themselves as small businesses, Armendariz said. This is a felony, and there are mechanisms in place to address it. But Armendariz said because of the "burden of proof required by law, a relatively few number of cases have been referred" to the SBA Inspector General's office.

" SBA does not keep records of OIG referrals on the basis of misrepresentation of small-business status," Armendariz told Washington Technology.

David Gray, counsel to the inspector general, said the office tracks cases based on the criminal statute that has been violated.

Businesses also can continue being identified as small companies because federal databases contain conflicting, incorrect information about their sizes. This is where the shortcomings of the FPDS are most notable.

GSA's Mendoza told the committee that business size status is usually self-represented by vendors, and GSA contracting officers are not required to verify it. But FPDS only records a company's size at the time of a specific contract award; months or years later, the database can be completely outdated regarding the company's size classification.

Chapman, whose association represents small companies in the informationtechnology industry, said the GAO should further investigate how large companies are benefiting from small-business opportunities.
" We know it's happening. How much is intentional misrepresentation and fraud, how much is mistaken bookkeeping?" he said.

A serious consequence of misidentifying companies is that agencies cannot say with confidence that they are meeting the government's goal of awarding 23 percent of prime contract dollars to small businesses.

NEW YORK (CBS.MW) -- For small business advocates, an explosive new report by the General Accounting Office merely confirms what they've long known: The government process for awarding contracts to small businesses is hugely flawed.

What the report doesn't answer is whether bureaucratic indifference and sloth, or outright fraud, have caused the breakdown.

Lloyd Chapman, president and founder of the Microcomputer Industry Suppliers Association, thinks plenty of evidence exists to suggest both. His group, which focuses on issues affecting small information-technology businesses, has been investigating government contracting and what it's discovered is not a pretty picture.

" An alarming percentage of government small business contracts and subcontracts is awarded to large businesses in the United States and several large firms in Europe," Chapman told the House Committee on Small Business last week.

" When a large business is discovered misrepresenting itself as a small business, the blame is always placed on out-of-date information, not on the large business," he said. "No company, no individual and no agency is ever responsible for these failings."

The federal government has long had policies in place to encourage small businesses to compete for federal contracts. To level the playing field with large, multi-national companies, the government adopted an elaborate set of rules and regulations.

Chief among them, at least 23 percent of all federal contracts must be set aside for small businesses.

To aid in that goal, the Small Business Administration maintains a computer database of small businesses known as the Procurement Marketing and Access Network or PRO-Net for short. PRO-Net is supposed to be a resource for other government agencies seeking small contractors, but it's riddled with errors, small business advocates claim.

SBA's culpability

Although the SBA is charged with assisting small businesses in the contracting process, Chapman and others say it's clearly part of the problem.

" The SBA's small business database is littered with the names of many of the largest firms in the world," he said. "One Dutch firm with 26,000 employees received over $60 million dollars in small business contracts in 2001."

The new GAO report seems to confirm the association's misgivings.
Of the 49,366 firms listed in the Federal Procurement Data System as receiving small business contracts in fiscal 2001, more than 5,000 - just about 10% -- failed to meet the definition of a small business.

That error alone calls into question about $13.8 billion in federal contracts, which may have been incorrectly reported as benefiting small businesses, according to the committee.

The GAO found that federal bureaucrats awarded hundreds of contracts based on erroneous data in the SBA's PRO-Net system and the Defense Department's Central Contractor Registration (CCR) system.

Chapman maintains that favoritism toward large companies is far from an accident. To the contrary, he said the trend is the direct result of a "very well-orchestrated pattern of policies, regulations and legal interpretations" over the past 15 years.

" I have to wonder why some of the most successful companies in the world with some of the best lawyers always seem to misunderstand federal contracting law in a manner that allows them to receive millions of dollars in federal funding," he told the committee.

Last August, his group began providing information on possible small business misrepresentation to the GAO, the SBA's Inspector General and the U.S. Attorney's office in Washington, he says. The SBA removed 19 companies from its database as a result of the association's findings, and more recently claimed that 540 other firms also had been excised.

Getting off easy

The federal Small Business Act makes such misrepresentation a serious crime that includes as punishment cancellation of contracts, debarment from federal work, fines of up to $500,000 and up to 10 years in prison.

Yet no firm has ever been penalized. What's more, in letters from its attorneys the SBA acknowledged that it had refused to notify agencies and prime contractors that the firms have been removed, Chapman said.

In all likelihood they are still doing business with the government, he added.
Another problem is a huge amount of confusion over the way the SBA defines a small business. In 1986, the government increased the definition from 100 employees to 500 employees.

The five-fold increase failed to take into account that what constitutes a small business may vary from industry to industry.

In the information technology industry, for example, the average firm has 15 employees. Yet the SBA standard forces them to compete with firms that are 3,300% larger, Chapman noted.

While the SBA's employee threshold varies from industry to industry based on NAIC codes, that's both a blessing and a curse. When a firm exceeds the employee number in one business, it merely reclassifies itself in an industry with a higher threshold.

Federal procurement law is also riddled with exemptions, exceptions and broad interpretations that also tilt the playing field in favor of large businesses, critics claim.

No friend in the White House

What's ironic, of course, is the fact that succeeding administrations right up to the present one have always claimed to champion small business.

Last year, President Bush unveiled his own agenda for small business that made several proposals to increase the access to federal contracting.

The Office of Management and Budget is currently developing a strategy to unbundle federal contracts, which should help small businesses.

In February, the OMB also announced its intention to require government agencies to obtain annual certifications from contractors regarding their small business status. The SBA also has proposed a requiring annual certification.

More rules, however, may not address the real problem: dishonest businesses and slothful bureaucrats.

'Federal agencies can fill their information technology needs and get credit toward their small business contracting goals by ordering through ASAP Software, a Buffalo Grove, Ill.-based company that posted $83 million in sales to the U.S. government in 2001.

ASAP Software is designated as a small business on the General Services Administration schedule, a streamlined contracting vehicle that enables agencies to purchase goods and services from listed companies without having to seek bids.

But ASAP Software is not what Congress had in mind when it directed the federal government to award 23 percent of its contracting dollars to small businesses. The company is owned by office products giant Buhrmann NV, a Dutch corporation with 26,000 employees and more than $10 billion in annual sales.

A new General Accounting Office study found that many large businesses besides ASAP Software are receiving federal contracts designated for small businesses. More than 5,000 companies who received nearly $14 billion in contracts reported as going to small businesses in fiscal 2001 also received $60 billion in contracts as large businesses, GAO found.

To find out why this occurred, GAO took a close look at five large companies that received a total of $1.1 billion in contracts -- $460 million of which were counted as small business contracts.

The primary reason why these deals were deemed to be small business contracts is because federal regulations allow a company that is certified as small when it is first awarded a contract to keep that designation for the life of a contract -- up to 20 years in the case of GSA schedule contracts and other increasingly popular multiple-award contracting programs.

As far as federal agencies are concerned, the company remains a small business even if it outgrows that status or is acquired by a giant corporation like Buhrmann.

GAO also found cases where agencies erroneously reported that contracts went to small businesses because the companies' size was incorrectly listed in contracting databases.

The GAO report confirmed what members of Congress' small business committees had suspected: The federal government's claim that 22.8 percent of its contracts went to small businesses in fiscal 2001 is grossly inflated, and hundreds of large businesses are receiving contracts that should be going to small businesses.

"This is yet another example of how the federal procurement system is fraught with inequities," says Rep. Nydia Velazquez of New York, the ranking Democrat on the House Small Business Committee. "As if contract bundling, poor oversight and lack of accountability weren't big enough obstacles, now small businesses are losing out on even more contracts intended for them because they are going to large businesses instead."

Annual size certification proposed

The Bush administration is taking steps to address the problem.
The GSA in March began requiring companies who receive multiple-award contracts to recertify their size before the government exercises options to extend their contracts, which typically occurs every five years.

"I personally think that's too long to wait," says Angela Styles, administrator of the Office of Federal Procurement Policy.

Styles' office in February directed GSA, the Department of Commerce, NASA and the National Institutes of Health to develop a timetable for small businesses with government-wide acquisition contracts -- another popular vehicle for obtaining sizable work orders over many years -- to begin recertifying their size status every year.

In addition, the Small Business Administration issued a proposed regulation April 25 that would require annual size recertifications from small businesses who receive multiple-award contracts. Agencies would publish lists of these recertification requests, which would be subject to challenges by interested parties.

Styles, however, says her office has heard from many small contractors who fear a one-year certification period is not long enough to take into account fluctuations in business size. The SBA is accepting comments on its proposed regulation through June 24.

Bad data, lax enforcement cited

Critics, however, fear these regulatory actions will not be sufficient to ensure that small businesses receive their fair share of federal contracts.
Sen. Olympia Snowe, R-Maine, chair of the Senate Small Business and Entrepreneurship Committee, is particularly concerned about faulty government contracting data.

"If we cannot rely on the Federal Procurement Data System, we have little hope of enforcing or achieving the 23 percent contracting goal Congress has promised the small business community," Snowe says.

Lloyd Chapman, president of the Novato, Calif.-based Microcomputer Industry Suppliers Association, says dozens of large companies "blatantly misrepresented" their size on the SBA's Pro-Net database of small federal contractors, but no company has been penalized in the past 15 years for these misrepresentations.

The SBA says it delisted more than 600 companies from Pro-Net over the past six months because they did not qualify as small businesses.
Kenneth Robinson, owner and CEO of Leesburg, Va.-based Kenrob and Associates, says new regulations will not be effective unless the administration takes "much stronger measures" to force both procurement officers and large businesses to comply with contracting laws.

Robinson's opinion is based on 20 years of experience running an information technology business serving the federal market.

The federal government is grossly exaggerating the amount of contract dollars awarded to small businesses, primarily because of regulatory loopholes that allow large companies to be counted as small, according to a report by the General Accounting Office.

The report, presented to the House Small Business Committee May 7, did not allege that large businesses are Illegally posing as small ones, but one small business advocate said he has found widespread evidence of deliberate misrepresentation.

"Companies that are household names, that any 10-year-old would know, are on PRO-Net," the Small Business Administration's database of small firms, said Lloyd Chapman, president of the Microcomputer Industry Suppliers Association. His complaints sparked the GAO investigation and the congressional hearing.

In fiscal 2001, GAO said, 49,366 companies received contract awards that were reported as going to small businesses; 5,341 of those -- more than one out of 10 -- received other contracts in which they were classified as large businesses. The companies were not identified.

A spot-check of five of those companies found that they received $645 million In contracts as large businesses and an additional $460 million that was reported as going to small firms, GAO said.

"The primary reason these contract actions were reported as small business awards is because federal regulations generally permit companies to be considered small over the life of a contract -- even if the company grows into a large business, merges with another company, or is acquired by a large business." David Cooper, GAO's director of acquisition and sourcing management, testified at the hearing.

Bush administration officials said they are moving to close some of those loopholes.

GAO said other misclassifications were the result of "conflicting and Incorrect information" in various federal databases.

But Chapman said his examination of PRO-Net listings "found dozens of examples where firms had blatantly misrepresented their number of employees, NAICS codes and their affiliation with large businesses.

"Subsidiaries of Fortune 1000 companies and international firms were common. Some of the firms had up to 44,000 employees and annual revenues of up to $12 billion."

For example, he said, AT&T Wireless was listed on the small business database in early May.

That, too, is an error, said Fred Armendariz, SBA associate deputy administrator for government contracting and business development.

When PRO-Net was merged with the Defense Department's Central Contractor Registration last year. he said, 'there were several large companies that leaked on...I can guarantee you that nobody at AT&T put their name on PRO-Net."

GAO gathered information about contract awards from the General Services Administration's Federal Procurement Data System, the official source of contracting statistics, but the investigators said the statistics are not reliable.

"We have serious concerns in relying on that data on small business participation (in contracting)," Cooper testified. "Based on the reporting we have done and the numbers we have seen, It's not right"

The Federal Procurement Data System reported that small firms received 22.8% of federal contract dollars In fiscal 2001, the latest full-year figures available. Cooper said he could not estimate how accurate those numbers are.

GSA recently awarded a contract to upgrade the FPDS database. (See separate story, below.)

Regardless of what government databases say, a contractor is required to certify whether it is large or small every time it submits a bid, said David Drabkin, GSA's senior procurement executive, in an interview. The only exceptions are the Defense and Transportation departments; they rely on DOD's Central Contractor Registration to determine a company's size status.

Federal regulators have proposed a rule requiring all contractors to register with the CCR by Sept. 30, making it the governmentwide database.

It is a felony for a company to misrepresent itself as a small business in order to receive a federal contract. But no company has been prosecuted in the past 15 years, Chapman said.

SBA's Armendariz said prosecution is difficult because the law requires proof that misrepresentation was intentional.

Bush administration officials outlined proposals that would require contractors to re-certify their small-business status annually on GSA schedules, governmentwide acquisition contracts and in their PRO-Net listings. (SAA, 5/2) Under current regulations, if a company is small when it receives a GSA schedule contract, it may continue to claim small-business status through contract renewals lasting up to 20 years.

Angela Styles, administrator of the Office of Federal Procurement Policy, acknowledged that some businesses object to annual re-certification because their revenues or workforce might fluctuate, pushing them above the small-business size standard one year and dropping below it the next. She said she is willing to consider whether re-certification every two or three years is sufficient.

Others have suggested that a business be required to re-certify only when its status changes because its revenues or workforce rise above the size standard.

Styles urged business owners to comment on SEA's proposed rule regarding GSA schedules. The rule, published in the April 25 Federal Register, is open for public comment until June 24.

Styles has ordered agencies that operate governmentwide acquisition contracts to begin requiring annual re-certification, but she said details are still being worked out.

SEA's inspector general recommended requiring annual re-certification of PRO-Net listings and warning listed companies of the penalties for misrepresentation. Armendariz said those recommendations are being implemented.

(AP) Despite a goal of giving small businesses 23 percent of government contracting dollars, the federal contracting system works in favor of larger companies, congressional investigators have found.

Small firms obtaining government contracts are considered "small" for the life of a contract, which could last 20 years, the General Accounting Office found. However, some of those companies become large firms through growth, mergers or takeovers.

The continuous orders to these firms leave less money for new contracts to small businesses, the GAO told the House Small Business Committee in testimony prepared for release Wednesday.

Congress' investigative agency also told lawmakers that federal databases that are supposed to list small businesses are inaccurate and include many major national companies. Federal agencies relying on these lists can think they're meeting the 23 percent goal when they are not.

David Cooper, the GAO's director of acquisition and sourcing management, said investigators studied five large companies that received contracts totaling more than $1.1 billion in the financial year ending Sept. 30, 2001.

Without naming the firms, he said $460 million of the total was reported as small business awards and counted incorrectly toward meeting the 23 percent standard.

"This initial report from the General Accounting Office is troubling," said Rep. Donald Manzullo, R-Ill., the committee's chairman. "We must do a better job of certifying our small businesses to ensure they are getting the federal contracts set aside for them."

The Small Business Administration has proposed a regulation that would require small businesses to certify their status annually. If they no longer qualify as a small business, agencies would have the option of diverting future contracting dollars toward small firms rather than ordering goods and services under existing contracts, officials said.

"We welcome the GAO's findings because we are already taking action to ensure small businesses continue to receive their fair share of federal procurement dollars," SBA spokeswoman Sue Hensley said.

The SBA generally considers firms small businesses if they are independently owned and operated and not dominant in their fields. Depending on the business category, additional requirements are imposed based on number of employees and revenues.

Lloyd Chapman, president of the Microcomputer Industry Suppliers Association, will tell the committee that favoritism toward large companies is not an accident.

He said the move away from small businesses was "the direct result of over 15 years of a very well-orchestrated pattern of policies, regulations and legal interpretations."

Chapman said subsidiaries of major companies were receiving contracts, including firms with up to 44,000 employees and annual revenues of up to $12 billion.

"Any and all obstacles to the achievement of the federal government's contracting goals for small disadvantaged business and woman-owned firms need to be removed immediately," Chapman said.