At least $2 billion worth of government contracts slated for small businesses went instead to large corporations -- including Hewlett-Packard Co. and Oracle Corp. -- in fiscal 2002, charged a report released Tuesday by the Small Business Administration's Office of Advocacy.

By federal law, the government aims to award nearly a quarter of direct contracts to small businesses every year.

Thomas Sullivan, the head of the advocacy office, said the study reveals problems with the federal procurement system, which small business groups and government watchdogs have been criticizing for some time. Critics say large firms are getting contracts intended for small businesses.

"We now have hard data, and not just anecdotes, from across federal agencies that shows contracts meant for small businesses were going to larger firms," Sullivan said in a statement.

Bay Area technology giants Oracle and Hewlett-Packard were among the corporations the report mentions as receiving purported small business contracts in 2002. Hewlett-Packard received more than $12 million in such awards and Oracle about $11.6 million.

Neither company responded to requests for comment Tuesday.

The Office of Advocacy tapped Virginia-based Eagle Eye Publishers Inc. to examine contracts awarded to 1,000 top small business contractors in fiscal year 2002. The analysis found that among the sample, 39 were actually large companies and five were other sizable entities, totaling more than $2 billion in "miscoded" contracts.

"We're not saying that anyone did anything wrong necessarily," said Chad Moutray, chief economist for the Office of Advocacy. "It could be perfectly legitimate that you're a small business and you received your small business set-aside and after the fact you were acquired by a large business."

The report said other causes of the discrepancy could be small firms growing after receiving a government contract or simple human error.

David A. Drabkin, the deputy chief acquisition officer for the General Services Administration, said that such misidentified contracts do not necessarily translate to losses for small firms. He said that at the time most contracts are awarded, they are properly going to small businesses.

"No contracts set aside for small business competition were awarded to large businesses," Drabkin said in a statement sent to the Times.

The report showed that the vast majority of the suspect contracts were awarded by the General Services Administration and the Department of Defense. Officials at the Pentagon's Office of Small and Disadvantaged Business Utilization had not seen the report Tuesday and therefore declined to comment, said Lt. Col. Sandra Burr, a spokeswoman for the office.

The Washington, D.C.-based non-profit Center for Public Integrity issued a report several months ago showing that some of the nation's largest defense firms received billions of dollars in small business contracts in recent years. The Government Accountability Office has also documented the problem in reports to Congress.

The American Small Business League, a Petaluma-based entrepreneurs' advocacy organization, sued the Small Business Administration in federal court in October seeking a copy of the Eagle Eye report. The league has charged that what the SBA dismisses as "miscoding" could actually point to fraud or abuse.

Lloyd Chapman, president of the American Small Business League, could not be reached for comment Tuesday.

SBA spokesman Raul Cisneros said that if fraud is discovered it will be dealt with. However, he said the problems in the report most likely have innocent explanations and that the SBA has recently taken steps, like making certification for small contractors stricter, that will correct the errors.

About $2 billion in federal contract money intended for small businesses went instead to large companies in 2002, according to a government report released Tuesday.

Of the top 1,000 contractors, 44 were not small businesses, according to the report commissioned by the U.S. Small Business Administration's Office of Advocacy.

The money primarily went to 39 large companies and five other contractors that were listed as "other," including nonprofit organizations and government entities.

SBA officials did not return a call for comment Tuesday.

In all, about 4 percent of the $50.8 billion reported as going to small businesses went to large companies, according to the Office of Advocacy, a small-business watchdog within the federal government.

"This report clearly shows that there are problems with the federal procurement system," said Thomas M. Sullivan, chief counsel for advocacy, in a news release Tuesday. "We now have hard data, and not just anecdotes, from across federal agencies that shows contracts meant for small businesses were going to larger firms."

The research, performed by Eagle Eye Publishers Inc., states that coding problems led to counting contracts with large businesses. A week before the study's conclusions were released, the SBA moved to end one practice that allowed some large companies to be counted as small ones.

When large companies acquired small businesses, the agency had allowed the buyers to keep their new additions' small-business status for the life of the contract with the federal government.

Such companies now have to be recertified to determine whether they are still small businesses, SBA officials told The Bee last week.

For years, the SBA has included contracts with these businesses when determining whether the federal government is meeting the goal of awarding 23 percent of contracts to small businesses.

If these awards had been coded as going to large businesses or "other," the small-business share would have been lowered in 2002 to 19.7 percent from 20.5 percent, according to Eagle Eye Publishers, a market research firm in Fairfax, Va.

Together, the Department of Defense and the General Services Administration awarded about 79 percent of the $2 billion in federal contracts found to have gone to large businesses.

SBA Office of Advocacy officials said that because of the inconsistent type-of-business coding found in the study, federal policy-makers needed to "review and streamline agency policies on designating vendors as small businesses."

The report offered several suggestions, including that the database for the Central Contract Registry be kept current and accurate and that contract officers be given clear and consistent guidelines for identifying small vendors as they fill out contract reports.

Sullivan said more openness is needed in the contracting system, and "timely public access to user-friendly" procurement data is needed so that mistakes and problems can be corrected.

But that is not enough for Lloyd Chapman, president and founder of the Petaluma-based American Small Business League.

In October, he filed a lawsuit against the Small Business Administration, asking for the original draft of the study, which was done about a year ago.

Chapman said he was surprised the agency did not notify him that part of the study was being released since he's in federal court suing the agency.
The SBA attributed the widespread mistakes to miscoding, but Chapman said it's "blatant fraud."

He said the federal government has sugarcoated the problems.

"Their spin is that there were no laws broken, no fraud and mistakes were made because of bad data," he said.

A broad new government report, expected to be released today, raises fresh
concerns about why lucrative federal contracts designated as going to small
businesses sometimes end up in the hands of large ones instead.

The report, commissioned by the U.S. Small Business Administration's Office of Advocacy, says that roughly $2 billion in federal contracting money
believed to have gone to small businesses primarily went to large firms
instead in fiscal 2002. The Department of Defense and the General Services
Administration are the agencies accounting for the bulk of the awards at
issue. However, even the SBA itself is cited as granting $1.2 million in
contracts that were recorded as small-business awards, but went mainly to large companies instead.

The $2 billion accounts for roughly 4% of the total $50.8 billion in government small-business spending in fiscal 2002. However, the report
focuses on only the top 1,000 companies receiving small-business awards, and it suggests that "significant problems exist" with other small-business
awards as well.

" This could be the tip of the iceberg," says Thomas Sullivan, chief counsel
of the SBA's Office of Advocacy. The office was created in 1976 as an
independent body within the SBA and is charged with advancing policies to
protect the nation's small businesses.

Each year, Congress establishes small-business buying goals for most federal agencies and for the government as a whole, and an annual tally is made of how close each body comes to meeting its target. The overall goal for the federal government is 23% of all prime-contract dollars. Although there are no legal ramifications if goals aren't met, there is substantial political and public pressure to try, and agencies are even encouraged to set aside some contracts for small-business bidders only.

The $2 billion cited in the report went primarily to 39 large companies,
according to the SBA Office of Advocacy study. Among them are familiar names such as Titan Corp., Raytheon Co. General Dynamics Corp., and
Hewlett-Packard Co.; those companies did not return calls seeking comment.

The study, commissioned two years ago, was conducted by Eagle Eye Publishers Inc., a Fairfax, Va.-based research group specializing in federal
procurement data.

Honor System

The report doesn't allege any wrongdoing by the 39 companies, although
businesses work on an honor system that lets them "self-certify" their size
for federal contracting purposes. Instead, those commissioning the report
say that many of the bigger companies acquired small ones holding government contracts, which federal contracting officials continued to count toward their small-business goal tallies. They were allowed to do so through
regulation loopholes that allowed the contracted firm to be considered small
over the life of a contract.

Under pressure to mitigate some of these problems, the SBA last week
implemented a new rule requiring small companies with federal contracts to
recertify their size if acquired by a bigger one.

But Mr. Sullivan says that in order for the new rule to have real teeth,
greater transparency is needed with the entire bidding-and-award process.

" The whole contracting system is designed for self-policing," he says. "To
make the analogy, if someone recertifies in the woods and no one is around,
does it really happen?" Companies can protest small-business contracts they think have been awarded unfairly to other bidders.

His office is calling for easily accessible information about who is bidding
on and winning contracts to be made available to the general public on a
timely basis. Mr. Sullivan says this will encourage challenges against
suspect awards and make government-contracting officials more careful with
how they report their award totals each year. "There has to be an emphasis
that this 23% goal be legitimate," he says.

The new report's findings are the latest in a growing body of evidence
outlining problems with small-business federal-contract awards. This fall,
the Center for Public Integrity, a nonprofit, nonpartisan research group in
Washington, said that 30% of all defense-contract money reported as going to small businesses and special minority-owned businesses ended up with top defense companies from 1998 to 2003. Meantime, a review completed last year by the U.S. General Accountability Office found similar problems.

This latest accounting by the SBA's Office of Advocacy, however, is
particularly notable in both its scope across government agencies and that
it comes from an entity connected to the very government body tasked with
looking out for the interests of the nation's 25 million small businesses.

While the government missed its 23% total small-business award goal for
several years running, the SBA announced earlier this year that the Bush
administration had met the 2003 target and called it a "victory for
America."

This latest report from the Office of Advocacy casts renewed doubt on the
accuracy of such tallies. For 2002 at least, the report puts small-businesses' share of procurement at closer to 19.7% compared with the
previously reported 20.5%. While the difference is less than 1%, Mr.
Sullivan cautions the lost opportunities for small businesses are
substantial.

" This is just one sweep of the data, and it uncovered amounts of $2
billion," Mr. Sullivan says. "The majority of jobs created in this country
come from small businesses. And small businesses need equal access to
contracts to be the job-creation machine."

Other Problems

The report highlights other problematic contracting issues, including
businesses sometimes being allowed to keep their small status after
outgrowing that designation through long-term government contracts called
" schedules." Schedules are like big umbrella contracts that preapprove
companies to provide goods and services to agencies. Companies that outgrow their small-business size standard in many cases are permitted to continue receiving new small business awards under these broad contracts until they expire, typically every five years.

Meantime, the government's size-coding system is also problematic, the
report says. Size standards for "small" currently differ widely by industry
and are usually based on employee count or in some cases, revenue. The
report notes that coding problems in some cases occurred because companies had incorrectly been assigned parent company affiliations -- a result of unreliable or out-of-date information supplied to contract officials, either through commercial table look-ups or companies themselves.

Notably, the SBA has proposed requiring companies to recertify their
small-business status annually. It also is currently seeking public comment
about ways to streamline and more consistently define businesses as "small."

Says Raul Cisneros, SBA spokesman: "We are working with different agencies to make sure that we have systems in place to make sure that small businesses get the contracts."

Dec. 27 AGENCY TO REQUIRE MERGED COMPANIES PROVE THEY'RE SMALL: The Small Business Administration has adopted a new policy requiring small firms with federal contracts to recertify themselves as small businesses if they are acquired or merge with another company.

The SBA faced criticism for continuing to count contracts as small-business awards even after a small firm was acquired by a large one.

"This rule is a step in the right direction in effect reversing egregious government polices that have allowed federal contracts meant for small businesses to go to large, often multinational, companies," Lloyd Chapman, president of the American Small Business League, said in a news release. Chapman's group focuses on small-business contracting issues.

Once a firm is acquired, the business owner now must reaffirm the company's small-business status by submitting a "self-certification statement" to the government. If the merged company doesn't qualify as a small firm, the contract award would no longer be counted toward the government's small-business contracting goal.

CITY LAGS OTHERS' BUSINESS GROWTH: Chicago ranks near the bottom of the 100 largest metropolitan areas in small-business growth, according to a recent report.

In placing the Chicago area 94th, the report looked at the growth in the number of small businesses between 1998 and 2003. Chicago started that period with 313,210 firms and ended with 340,795 firms, posting a 8.8 percent growth rate. The average growth rate was 18.6 percent, according to the State of Small Business Report by Sales Genie, a unit of InfoUSA, which maintains databases on companies.

Cities in Florida, California, Texas and the Carolinas made up 30 of the top 50 cities.

Las Vegas had the largest growth rate over the six-year period, growing 58.5 percent. It was followed by Riverside, Calif., and then seven Florida cities, including Ft. Lauderdale, Daytona Beach and Melbourne.

Buffalo had the slowest growth rate, at 0.5 percent, followed by Nassau, N.Y., Providence, R.I., and Honolulu.

The number of small firms nationwide declined from 2002 to 2003 by nearly 46,000 companies after increasing in each of the prior four years.

SURVEY SUGGESTS LIMITED PRICE HIKES: Inflation should not accelerate soon, according to a recent survey by the National Federation of Independent Business.

Twenty-seven percent of businesses raised prices in November, while 11 percent cut them, which is similar to October's numbers, the federation found.

The Small Business Administration has adopted a new policy requiring small firms with federal contracts to recertify themselves as small businesses if they are acquired or merge with another company.

The SBA faced criticism for continuing to count contracts as small-business awards even after a small firm was acquired by a large one.

"This rule is a step in the right direction--in effect reversing egregious government polices that have allowed federal contracts meant for small businesses to go to large, often multinational, companies," Lloyd Chapman, president of the American Small Business League, said in a news release. Chapman's group focuses on small-business contracting issues.