The General Accounting Office has been investigating whether large corporations are unlawfully posing as small ones to get federal contracts.

GAO will present its findings to the House Small Business Committee at a hearing scheduled for May 7, according to a committee staff member.

The investigation grew out of complaints by Lloyd Chapman, president of the Microcomputer Industry Suppliers Association in Novato, CA. Chapman says he has found evidence that large companies are claiming to be small to qualify for set-aside contracts.

Based on his own investigation over several months, Chapman said he believes some companies have committed "blatant fraud". But he acknowledged in an interview that some firms have benefited from loopholes in the regulations.

Chapman said he has been invited to testify at the House hearing along with Bush administration officials and GAO investigators.

SBA said it has documented widespread impact of the current regulatory loopholes. It found four large companies that where counted as small when receiving GSA schedule orders worth $190 million in fiscal 2001. In each year, those unidentified companies were awarded more than 1000 task orders.

In a recent case, the SBA inspector general began a criminal investigation of one company listed on PRO-NET. The IG said the company, which was not named, had its small-business status revoked as a result of a bid protest.

Later it registered on PRO-NET under another name.

The company was kicked off the database again and the case was referred to the U.S. Attorney for the District of Colombia, but that office declined to prosecute "in light of the administrative remedies being considered by" SBA, the IG said.

At last there will be some answers to the questions of whether and on what scale companies are falsely claiming they are small to get preference in federal procurement.

The House Small Business Committee sets a May 7 hearing date for General Accounting Office officials to report on their study of the matter.

Other witnesses will include Angela Styles, administrator of the Office of Federal Procurement Policy; Fred Armendariz, associate deputy administrator for the Office of Government Contracting & Business Development in the Small Business Admin.; and Lloyd Chapman, president of the Microcomputer Industry Suppliers Assn., the person who raised the issue of size fraud.

Meanwhile, the Office of Inspector General in the Small Business Administration conducts a criminal investigation that already has resulted in a memo recommending changes to guard against fraud. GC/BD tells MBI it is getting ready to implement virtually all the recommendations.

In addition, the SBA, OFPP and the General Services Administration are working to develop a consistent policy for requiring firms on government-wide acquisition contracts set aside for small businesses to recertify annually.

GSA is requiring companies on the Federal Supply Schedules to recertify at the start of each five-year option period (MBI, 11/27/02p1). The comment period has ended on regulations proposed by SBA to require certification for follow-on contracts but not for the exercise of options. The majority of commenters favored the GSA system (MBI, 3/12p4).

SBA's OIG recommends annual recertification in a Program-Vulnerability Memorandum to the government contracting office. The PVM notes OIG discovered in the course of an ongoing criminal investigation there are systemic problems with oversight of whether companies claiming to be small really are.

The criminal investigation was started last year when Chapman brought allegations of fraud to OIG, GC/BD and the U.S. Attorney's Office for the District of Columbia (MBI, 11/13p3). Eventually, the U.S. Attorney's Office sent the information to OIG, which opened the criminal investigation.

The PVM recommends:

• A certification statement be on the agency's PRO-Net website.
• Procedures must address the problems caused by the recent integration of PRO-Net and the Central Contracting Register (MBI, 12/24/02p5). The consolidation requires firms to register with CCR and the names are automatically placed into PRO-Net, creating an additional layer between PRO-Net registrants and SBA. One possibility, suggests OIG, is to have the entry of each new PRO-Net registrant trigger an e-mail outlining the criminal statutes, regulations and penalties.
• Similar information should be incorporated in the certification.
• PRO-Net should include guidance to federal contracting officials on the proper use of PRO-Net and requirements for independent certifications relative to size.
• Annual recertification should be implemented by sending an email to firms on PRO-Net requiring them to state their size qualifications and warning them of the penalties for falsifying information.
• The changes should be coordinated with the CCR.

GC/BD tells MBI it is making changes in PRO-Net "that essentially adopts OIG's recommendations."

The contradiction between information in a letter to Chapman and a statement given to MBI about practices GC/BD plans to follow when it removes firms from PRONet have been resolved in favor of the letter (MBI, 4/9p3), reports SBA.

SBA methodology

Those companies determined to be other than small via a formal protest will be posted on SBA's website separately from PRO-Net. SBA reports there were 383 size protests in FY 2002. The agency dismissed 110, found 85 firms to be other than small and determined 165 were small. Another 27 complaints were still being processed at year end.

Outside the size-protest process, SBA has found 540 firms to be other than small and notified them they were removed from PRO-Net. The agency plans no further action.

In addition, SBA says another 100,000 companies were removed from PRO-Net when it was integrated with CCR MBI, 1/16p2). In most cases the action was taken because companies had not updated their information for more than 18 months.

If GC/BD suspects fraud, the case is referred to OIG. None of the FY 2002 cases was forwarded to OIG.

Size Standards, Net Worth Under Review

The Small Business Admin. is considering raising size and net-worth standards, Fred Armendariz, associate deputy administrator for government contracting and business development, tells a Senate Small Business & Entrepreneurship roundtable.

Currently, an entrepreneur can qualify as an 8(a) company or a small disadvantaged business if his/her net worth is no greater than $250,000, not counting equity in the business or a home.

With the Bush administration opening 850,000 government jobs to private bidding and the Department of Homeland Security getting off the ground, it's the best of times to be a federal contractor. Technology, engineering and outsourcing companies are expected to benefit from new government projects coming down the pike. "It's a good time for small businesses to get on award schedules," says Bruce Shirk, a government contracts attorney with law firm Powell, Goldstein, Frazer & Murphy LLP in Washington, DC.

Or is it the worst of times for small businesses? A recent report commissioned by the SBA's Office of Advocacy found that 51 percent of federal contracts awarded in 2001 were "bundled," meaning many individual contracts were grouped into one large contract. For the government, bundling increases efficiency and decreases administrative costs.

For small firms, however, bundling resulted in the loss of $13 billion in contracts in 2001, according to Eagle Eye Publishers Inc., the Fairfax, Virginia, research firm that conducted the study. And for the past two years, the government has failed to meet a Congressional mandate that requires it award 23 percent of contracts to small businesses (defined as those with fewer than 500 employees).

It doesn't help that behemoths in many industries--from IBM to Staples--are looking to federal contracts to boost sales in a soft economy. For large companies, there's "the great sucking sound of re-discovering the government," says John J. Pavlick, co-chair of the Homeland Security Practice at Venable LLP in Washington, DC.

It's hard for small businesses to compete, says Lloyd Chapman, an advocate for federal contracting reform and head of the Micro Computer Industry Suppliers Association, a group working to create more federal contracting opportunities for small businesses. One problem is that government agencies are allowing huge companies to remain listed as small firms, and subsidiaries of industry giants are bidding on contracts as if they're independent small companies. "When an international or Fortune 1000 company misrepresents their status as a small business to land multimillion-dollar government contracts, that's not a loophole," Chapman says. "That's [federal] contracting fraud."

Small businesses "don't have a voice right now" in the lobbyist-heavy atmosphere that is federal contracting, says Sean Burke, 29, co-founder and president of Govplace, a 26-employee security and storage solution provider in Goleta, California. Burke estimates his company, which has annual sales of $14 million, loses at least one contract per quarter to large competitors--not a good trend given that his business is 100 percent government-based. Large companies compete with Govplace for $100,000 contracts that they never used to bid on, and he says government small-business liaison offices don't return his phone calls.

But not all entrepreneurs are feeling disenfranchised. "My experience has been positive," says Laura McCann, 39, founder and president of Zweave Inc., a seven-person New York City application service provider to the fashion industry. Zweave started in 2002 after receiving two Small Business Innovation Research (SBIR) contracts from the Department of Defense. The contracts are worth $1.5 million and come with funds worth another $1.5 million. The firm is working with the Army and the Air Force to research a 3-D method of obtaining accurate body sizing for military clothing.

McCann says the federal contracting process has always been difficult. But, she adds, "if you have an innovative approach to solving a problem, and [agencies] want to solve that problem, then you have as good a chance as anyone."

Shirk advises getting on the General Services Administration's contract lists and searching for subcontracting opportunities with large companies. Pay attention on the state and local levels, too, for homeland security projects.

The federal government is pursuing the bundling issue. The Bush administration has ordered federal procurement officers to decrease the number of bundled contracts, and the Office of Management and Budget is requiring government agencies to review acquisitions of $2 million to $7 million for "unnecessary and unjustified" bundling. Congress is investigating, and agencies will be publishing quarterly reports about their efforts to decrease bundling.

The U.S. Attorney's Office in Washington and the General Accounting Office are investigating whether large businesses are fraudulently pursuing -- and winning -- government contracts set aside for small businesses.
If the allegations are true, the amount of contracts going unfairly to large businesses could represent billions of dollars, said Wendy Belzer, spokeswoman for Rep. Nydia Velazquez, D-N.Y., ranking member of the House Small Business Committee.

Leaders of the House and Senate committees on small business requested the GAO investigation in January. The federal government each year buys approximately $200 billion in goods and services from the private sector, according to the House committee.

The House committee will hold hearings when the GAO report is released, Belzer said. The report is expected in March or April, sources said.
Sen. Barbara Boxer, D-Calif., requested the U.S. Attorney's Office investigation last fall following complaints that large companies were winning contracts intended for small business.

The investigations have been spurred on by Lloyd Chapman, president of the Novato, Calif.-based Microcomputer Industry Suppliers Association. Chapman started the association about nine months ago to lobby for small IT resellers. The group now has about 1,000 members, he said.

Chapman is also general manager of GC Micro Corp. in Novato, a software and computer reseller with 2001 sales of $34 million.

"One of the things that prompted me to get involved was the fact that I saw a lot of resellers, such as GC Micro, competing on a daily basis with some of the biggest computer suppliers in the world," he said.

GC Micro is a woman-owned, small disadvantaged business employing about 26 people. Five years ago, sales to federal agencies as a prime and subcontractor constituted most of its business. Now those sales are about 20 percent of the firm's business, Chapman said.

Chapman has amassed eight four-drawer file cabinets and numerous boxes of government and private-sector documents that he said show large businesses are indeed winning work that is meant to go to small businesses. He said some of the largest IT suppliers to the federal government are representing themselves as small businesses and winning contracts meant for small businesses.

Chapman has met with congressional staffers and made repeated phone calls to government agencies to rally officials to his side. So far, his efforts have helped instigate the two investigations and prompted the Small Business Administration inspector general to look into the matter.

In addition, SBA officials have removed hundreds of companies from the agency's PRO-Net database, which federal contracting officers use to identify small businesses.

One of the companies removed, according to Chapman, is IT reseller GTSI Corp. of Chantilly, Va., which has about 600 employees and 2002 revenue of nearly $935 million. Others removed include CDW Government Inc. and ASAP Software, Chapman said. Both are subsidiaries of large firms. CDW-G is a division of CDW Computers Inc. of Vernon Hills, Ill.; ASAP is a unit of Buhrmann NV of Amsterdam. Buhrmann employs more than 25,000 people in 30 countries and logged revenue of $10.7 billion in 2002. CDW employs about 2,800 people and had revenue of nearly $4.3 billion in 2002.

Jack Littley, senior vice president of program and information services at GTSI, said the company has not won any contracts as a small business since 2001, but continues to qualify as a small business under a GSA schedule contract that it won years ago.

Procurement rules allow companies who have won multiple-award contracts,such as a GSA schedule, to remain small through the life of the contract, including option years that could be up to two decades. But the White House this month took steps to change this policy.

Chapman said some government employees initially were hostile to his complaints, but now congressional staffers are calling him to see how they can help.

"I am converting people every day," Chapman said. "I'm like the Baptist preacher. When I first talk to people, they are fighting me. They are the typical, cynical government employees. By the time I get off the phone with them, they say, 'I guess we do need to take a look at this ... this needs to change.' "

After Chapman complained to Boxer, the California senator wrote a letter Sept. 24, 2002, to the U.S. Attorney's Office in Washington asking for an investigation.

"With small businesses in California facing a difficult business environment, it is important that government contracts set aside for small businesses be made available to small businesses," Boxer wrote.

Channing Phillips, spokesman for the attorney's office, said its probe is ongoing. He said he could not comment on what companies the office is investigating.

Pete McClintock, SBA acting inspector general, said, "We're looking at complaints that were provided to both Sen. Boxer and us."

In December, the General Accounting Office began its own investigation based on information Chapman provided, said David Cooper, director of GAO's Acquisition and Sourcing management office.

" We are looking into the issue of whether large businesses are receiving contracts intended for small businesses," Cooper said. "We are seeing there is a problem. What we are trying to do is validate what the problem is, what the factors are that caused the problem to occur and whatever corrective actions might be needed to address the issue."

And in January, leaders of the House and Senate small business committees followed, officially asking GAO to investigate on their behalf.
Sen. Olympia Snowe, R-Maine, chairwoman of the Senate Committee on Small Business and Entrepreneurship, wrote Jan. 13 to GAO chief David Walker, requesting "a full investigation into whether large companies are indeed obtaining government contracts set aside for small businesses."

Twenty-three percent of federal prime contract dollars are supposed to go to small businesses each year. But a Senate Small Business Committee staff member said, "It looks like what [agencies] have told us is going to small business isn't ... It looks like a fraction of what is being reported is going to small businesses. We are going to be looking at this closely."

On Jan. 17, Velazquez and Rep. Donald Manzullo, R-Ill., chairman of the House Committee on Small Business, also wrote to Walker, saying, "We ask your immediate assistance in assessing whether large businesses are unfairly receiving contracts that should be legitimately awarded to small businesses. If so, we ask GAO to identify actions that are necessary to correct this very serious problem."

Manzullo and Velazquez asked the GAO to include in its investigation large businesses that have received GSA Federal Supply Service schedule contracts; what actions have been taken by the SBA to address the problem, including reviewing PRO-Net for inaccuracies; and small-business protests to the SBA on size standard issues for the last five years.

Chapman, who regularly logs 14-hour days trying to advance his cause, said he hopes his efforts will pay off with policy changes to ensure multinational conglomerates and billion-dollar companies don't get small-business contracts.

"I feel extremely driven, really compelled," he said. "It's hard to describe. A lot of people that were supposed to be helped by these [small-business contracting] programs are being hurt by these programs."

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The office of Management and Budget will require contractors to re-certify their small-business status annually on GSA Schedules and government-wide acquisition contracts, to weed out those that have outgrown size standards or been acquired by large businesses.

OMB has told agencies to begin requiring re-certification on government-wide acquisition contracts April 1. Currently there are 14 GWACs run by four agencies: GSA, NIH, Commerce and NASA.

Amendments to the Federal Acquisition Regulation and Small Business Administration regulations will be published to require annual re-certificati0on of GSA schedule contractors and those on all other multiple award contracts, OMB said. That will supersede a recent GSA rule requiring re-certification every five years.

"Good deal," said Lloyd Chapman, president of the Micro-computer Industry Suppliers Association in Novato, CA, who has been crusading for action on this front.

After Chapman took his campaign to members of Congress, both the U.S. Attorney's office for the District of Columbia and the General Accounting Office confirmed they have begun inquiries into whether large firms are posing as small ones in bidding on federal contracts.

GAO's early findings indicate that "billions of dollars" have been awarded improperly, said Wendy Belzer, spokeswoman for the Rep. Nydia Velazquez (D-NY). The inquiry is still in progress.

Chapman said GAO is uncovering evidence of "blatant federal contract fraud on the part of some companies."

A company that fraudulently claims small-business status as a federal contract can face criminal and civil penalties as well as debarment from contracting.

The move to more frequent recertification "was inevitable," said Larry Allen, executive director of the Coalition for Government Procurement, an organization of GSA schedule contractors. "I don't think it's a bad thing necessarily. I wonder, however, if one year isn't a little too frequent."

GAO has ruled that an angency may require a contractor to re-certify its eleigibility as a small business every time it bids on a task order under the schedules, but that rarely happens, according to industry sources. (SAA, 9/20/02)

SBA is not considering requiring re-certification when options on individual contracts are exercised, Gary Jackson, assistant administrator for size standards, said in an interview. A company that is small when it is awarded a contract will continue to be counted as small through option periods lasting up to five years.

Nor does the agency intend to require periodic updates of listings on its PRO-NET database of small firms, Jackson said.

He said 90,000 companies were dropped from PRO-NET when the database was merged with the Defense Department's Central COntractor Registration late last year. Most of those had not updated their listings in more than 18 months, but some were dropped because they exceeded size standards.

More than 160,000 companies are registered on the fcombined PRO-NET/CCR, the government's official registry of small businesses.

Chapman said he has given SBA the names of some large businesses listed on PRO-NET.

He said SBA executives recently told him they had removed 19 companies from the registry as a result of his complaint. But he said SBA did not notify other agencies that the companies no longer qualified for small-business preferences: "The flow of contracts (to those firms) has been unaffected."