As an entrepreneur and weekend tri-athlete, cindra Stolk thrives on competition. All she wants is a fair shot. That is not what she got last May when Federal Edge, her eight-employee technology services company in Riverside, Calif., was a leading candidate for a $600,000 Air Force contract designated for a small business. Instead, the contract went to GTSI of Chantilly, Va., which posted nearly $1 billion in revenues last year and employs about 700. "It took 18 months and a lot of our blood, sweat, and tears to put that bid together, only to have it picked off by a big business," Stolk says angrily.

At a time when federal contracting is at a record high, Stolk's experience is increasingly common. According to goals set by Congress, 23% of federal contracts are supposed to be set aside for small firms. While the SBA reported recently that the Defense Department exceeded that goal by nearly two percentage points in 2003, Larry Makinson of the Center for Public Integrity, a nonpartisan Washington think tank, says those numbers "just don't add up." Makinson is the editor of a recent CPI report that found that in the past six years more than $47 billion of the Pentagon's small-business contracts has actually gone to large companies. Among the heavyweights singled out in the report is Stolk's rival, GTSI, which won nearly $1.2 billion in small-business contracts.

How are large companies getting away with it? A well-financed lobbying effort helps. So does an unsupervised bureaucratic system with loopholes so large that a billion-dollar defense company can, for instance, classify itself as small. Despite the rhetorical embrace entrepreneurs receive for being the country's leading source of jobs, official Washington shows little interest in fixing a system that is getting worse for small business. "We can't monitor each and every contract," says Emily Murphy, the SBA's senior advisor for government contracting and business development. "Changes do need to be made, but the regulatory process can take six months to a couple of years." Until then, big business is reaping the rewards. Consider, for example, the aptly named San Diego firm Titan, which employs 12,000 and had $2 billion in revenues last year. It has grown in part by acquiring smaller firms that hold lucrative, long-term contracts that were originally set aside for small businesses. A curious regulation permits those acquired contracts to retain their small-business status even after they are swallowed by giants. That means a big payment for the happy owner of the acquired company. But each acquisition depletes the pool of set-asides for companies that remain small and independent. According to Murphy, the SBA is considering a rule that would require firms to recertify their size after an acquisition.

In the meantime, under pressure to streamline their balance sheets, federal agencies are "bundling" small contracts into a single, consolidated contract. Only the largest prime contractors apply, leaving small firms out of the running or forced to bid for subcontracts from the same companies they compete against. That is exactly what happened last summer to John Pless's translation services company, REM Holding Group of Wilmington, Del., when the Army bundled its translation needs into one, massive $2.5 billion contract. Just as the Army was set to anoint Titan as its exclusive supplier, Pless protested to the General Accounting Office that the Army's bundling was unnecessary. But his claim was dismissed, and Titan remains the Army's favorite, leaving Pless in the awkward position of asking his mammoth rival for work.

Its critics blame ordeals such as Pless's on the SBA's standard procedures. The agency relies on a kind of corporate honor system, allowing businesses seeking federal contracts to self-certify as small or large on their applications. Since few federal agencies have time to scour applications for miscoding, or possibly even fraud, policing of the system is left up to small-business owners willing to file a complaint. "It's a system that's just begging to be abused," says Michael Watkins, a former Harvard Business School professor who consults on corporate and government relations. Catching that abuse can end up feeling like a full-time job, says Monty Mauldin of Coats, N.C. Mauldin and his wife, Lilian, run Tiger Enterprises, which leases laundry equipment to nearby Army and Air Force bases. The Mauldins have filed ten complaints with the SBA since 2000. "I don't mind losing in a head-to-head with another, truly small business," says Monty Mauldin. "But we were losing small-business set-aside contracts to big companies." Lloyd Chapman, president of the American Small Business League, a 3,500-member national trade group based in Petaluma, Calif., says the SBA is concealing the extent of the system's disrepair. In October the ASBL sued the SBA in hopes of getting the agency to release a report it completed in January 2003 that Chapman says "confirms widespread fraud in federal contracting." The SBA denies any coverup and is "vetting the report," says Murphy.

With annual sales approaching $1 billion and a worldwide head count upward of 700, one would think it would be next to impossible to consider GTSI a "small business." After all, the company's shares are traded publicly on the Nasdaq, and the organization is considered one of the largest suppliers of IT goods and services to federal and state governments.

Yet, in the crazy world of government procurement, GTSI of Chantilly, Va., is a small business when it comes to certain contracts–and that has many small VARs hopping mad. That's because they are losing business to the likes of GTSI that the government had intended for true small business all along.

Consider Cindra Stolk, president of Federal Edge, a small IT goods and services supplier based in Riverside, Calif. Stolk and her husband and business partner, Ron, and their two sons run Federal Edge. They cannot believe how many contracts that should go to companies of their size wind up going to big outfits like GTSI. But rather than sit silent while the practice continues, they are speaking out.

Recently, for example, Stolk challenged an award from Hill Air Force Base north of Salt Lake City that was given to GTSI. The contract was supposed to be a government "set-aside," which are special deals that federal, state and, sometimes, local governments put together for small entrepreneurs like Stolk. Congress has said it would like to see as much as one-quarter of prime contract dollars awarded go to small businesses. But there are many reasons why some deals don't wind up in the hands of the people they are supposed to. In some cases, bigger IT goods and service suppliers are working back channels and lining up what are essentially surrogates to help win awards intended to go to small businesses. Other times, government procurement officers don't follow their own guidelines when it comes to awarding deals to third-party suppliers. Then there's GTSI.

It's a small business because, under the convoluted rules that govern these things, the government says so. In this case, GTSI qualifies as a small business because it once was when it won a contract years ago. That contract was later extended, giving GTSI a way to position itself as a small business, in one instance at least, as a small business through 2007.

Sound unfair? Stolk and others, including Lloyd Chapman, president of the American Small Business League, think so. Chapman, you may recall, has tirelessly pursued underdog issues on behalf of solution providers for years. This time, he thinks he has found the mother of all battles to wage and is trying to line up a major law firm to file a class-action suit against those that unfairly malign resellers who he believes are getting screwed.

"It's a dreadful situation that needs to be addressed," he says. "I get so mad when I think about it that I sometimes wake up in the wee hours of the morning and start rolling calls in my pajamas."

While Chapman successfully draws media attention to the plight of small businesses, Stolk and others wage their war directly with the government. When she, for example, protested the Hill Air Force Base award, Hill reversed course and then gave the award to her, explaining the GTSI had made a paperwork mistake.

Many solution providers say the practice of giving the award to the company that complains the loudest is common whenever smaller suppliers muster the guts to challenge awards. But the squeaky-wheel strategy is hardly a practice she can rely on. Besides, Stolk and others hate that practice because it almost always comes at the expense of other small businesses that could have ultimately won awards outright.

Others believe it's done by inept contracting agents hoping to placate third parties and prevent them from raising a ruckus. But a ruckus they raise. Since appearing in The Wall Street Journal, Stolk has been contacted by CBS News, The New York Times, Fortune Magazine and other media outlets. She's also been contacted by California Governor Arnold Schwarzenegger's office. The governor is interested, she was told, because Californian companies may not be getting their fair share of government awards.

For her part, she wants to make sure that others understand how widespread the problem is. Her company, for example, is the only Sun-authorized Certified Small Business in what California calls an "enterprise zone." Theoretically, a government agency could achieve two contracting goals by engaging her company. But to this day, she has never been awarded any Sun government set-aside business. Ever. That suggests to her that the problem runs deep.

Other VARs confirm that it does. San Antonio, Texas-based M2 Technology, for example, is wrestling with third parties coming into its territory and stealing its government business. Companies such as EDS, GTSI and others use contracts awarded in one part of the country as a springboard to serve similar government customers in another part of the country. The practice, known as "bundling" in gov-speak, is killing legitimate small businesses trying to win government awards intended for smaller suppliers, says M2 Technology president Mark Martinez. "Something needs to be done," he says.

Chapman, for one, says he's close to making things happen. And even the likes of GTSI, which steadfastly denies doing anything below board, sees the tide turning against it. In its own 2003 10-K, the company acknowledges that it may not be able to count on its small business status for much longer. "new legislation or regulations may require GTSI to recertify its size status on its GSA schedule sooner than 2007. GTSI cannot predict whether it would continue to qualify as a small business at the time of recertification," the company concedes in the document filed with the SEC.

Cindra Stolk was on the telephone one day in May when her son walked into the office, slapped a fax on her desk, and walked out without saying a word.

Ms. Stolk, chief executive officer of Federal Edge Inc., a small family-run computer reseller in Riverside, Calif., looked at the piece of paper and says she felt "the hair stand up on the back of my neck."

It was a note from the Hill Air Force Base in Utah informing Ms. Stolk that a federal-government contract of more than $600,000 to provide computer equipment was not going to her company, but rather to GTSI Corp., Chantilly, Va.

As part of the government's efforts to help entrepreneurs get a slice of the lucrative federal contract market, this contract had been set aside for bidding by small businesses only. The size standard for "small" differs by industry and contract; for instance, a firm bidding on a telecommunications award can sometimes have up to 1,500 employees while a computer reseller such as Federal Edge or GTSI typically needs 500 or fewer workers to qualify.

With eight employees and $6 million in sales last year, Ms. Stolk's company was allowed to apply. But so was GTSI, which had sales of $954 million in 2003 and employed 685 people as of March 1. "This is small?" asks 49-year-old Ms. Stolk, who opened Federal Edge in 2000 and works alongside her husband and two sons.

That question cuts to the heart of a growing debate over how the federal government awards, counts and monitors its small-business contracts. Each year, Congress establishes small-business buying goals for most federal agencies and for the government as a whole. Contracts get reported into a central database, and the government makes an annual tally of how close it comes to meeting its small-business target. The overall goal is 23% of all prime-contract dollars.

Although there are no legal ramifications if goals aren't met, there is substantial pressure to try, and agencies are encouraged to set aside some contracts for bidding only by small firms. The nation's 25 million small-businesses are the country's economic backbone, paying almost half the private payroll, and have generated the majority of new jobs in the past decade. While the government missed the 23% goal for several years running, the U.S. Small Business Administration announced earlier this year that the Bush administration had met the 2003 target and called it a "victory for America."

Two separate studies, however, have noted that some contract awards reported as going to small businesses have actually been in the hands of large companies. Several weeks ago, the Center for Public Integrity, a nonprofit, nonpartisan research group in Washington, released a report saying that 30% of all defense-contract money reported as going to small businesses and special minority-owned businesses ended up with top defense companies in 1998 to 2003. One business singled out was GTSI for having been the biggest nonminority small-business contractor, collecting $1.2 billion in small-business contracts over the six-year period.

Those findings echo a review completed last year by the U.S. Government Accountability Office, which also found awards to big companies getting recorded as small-business contracts. The GAO said its findings raise "serious questions" about relying on current data to measure federal agencies' efforts to meet the government's overall 23% small-business goal. "Everyone wants to be seen as the good guys to small businesses," says Larry Makinson, the senior fellow at CPI who led its research. "Looking through the data it seems they are cutting every corner they can to get to that 23%."

Controversy surrounding contracting set-asides is nothing new. A Civil Rights Commission draft report in 1986 said 20% to 25% of federal set-aside contracts were going to bogus minority fronts. And there have long been questions as to whether there should be set-asides at all.

Congress didn't set contracting goals for small businesses until 1988. Scrutiny over the parity of award distribution has picked up momentum in recent years as more companies have begun taking advantage of the government's preferential set-asides for small-business bidders. As a result, the SBA has been under increasing pressure to monitor the awards, and last year proposed regulation changes that would strengthen size-certifying policies. Those are still under review.

One of the main issues cited in both studies has to do with federal regulations that have allowed companies to be considered small over the life of a contract -- even if the company grows into a large business or is acquired by a big business.

Of particular concern were long-term government contracts called "multiple award schedules." Essentially, these are big umbrella contracts that preapprove companies to provide goods and services to agencies. The goal is to help agencies make faster, more streamlined purchases. Schedule contracts are maintained through the U.S. General Services Administration and can be extended up to 20 years.

Notably, both studies reported that if a business was certified as "small" when its original multiple award contract was signed, then it was often treated as a small business for years after it outgrew the contract's size standard. In addition to affecting the government's annual award goal totals, this can have implications on the bidding process because larger companies often benefit from economies of scale that smaller rivals don't.

In GTSI's case, the company landed one of these broad multiple-award-schedule contracts to provide information-technology computer products in March 1996. GTSI says it qualified as a small business at the time. But an acquisition in February 1998 expanded the company's ranks; and in its 1997 annual report (filed in March 1998), the company disclosed that it would no longer qualify as a small business for future new contract awards.

However, in 1999 and again in 2002, the government extended GTSI's old IT schedule contract and didn't require the company to update its size standard. Because of that, GTSI still uses this contract to apply for some new awards reserved for small businesses -- such as the Air Force's computer order this May. Today, GTSI is one of the nation's largest resellers of computer equipment to the government.

To mitigate this type of situation, the government has since changed its rules and now requires that size standards be updated when a schedule contract is extended. Meantime, the SBA has proposed requiring companies with these schedule contracts to recertify their small-business status annually. Unless that happens, GTSI spokesman Paul Liberty says the company anticipates recertifying in 2007 "as a large business" but will continue to qualify as a small business for awards until then. Mr. Liberty says GTSI is "fully compliant with government regulations regarding our small business status."

Privately, many small-business owners express frustration with this practice but are reluctant to speak out for fear of jeopardizing future contracting opportunities both on their own, and also as subcontractors to bigger companies. "People tell me this happens all the time, but they're terrified of the repercussions of protesting," says Lloyd Chapman , president of the American Small Business League, a trade group in Petaluma, Calif.

Ms. Stolk was different. After learning GTSI had won the Air Force contract, she immediately faxed a letter back to the contract officer at Hill Air Force Base challenging the award based on GTSI's current size. The next day she received another fax acknowledging her challenge and telling her that GTSI's order had been canceled and would be awarded to the next lowest offer -- which eventually was determined to be Federal Edge's.

GTSI and a spokeswoman for Hill say the GTSI order was canceled because the company made a mistake on its original quote. Ms. Stolk says she intends to continue protesting such awards to bring attention to the matter and is encouraging other small businesses to do the same. "There's too much to lose otherwise," she says.

Meantime, there remain concerns about the general policing of companies' size in other key areas. For instance, the Small Business Administration maintains a list of "small" businesses wishing to do business with the government. It serves as a marketing tool, with government agencies sometimes using it to find small-business bidders.

However, the SBA says it doesn't routinely check to see whether companies on its list are truly "small." Part of the problem is manpower: More than 180,000 companies are on the list and the SBA has only two employees helping maintain it. "Unless there's an obvious error or someone brings our attention to it, it's hard to challenge the information," says Gary Jackson, the SBA's assistant administrator for size standards.

That being the case, it is often left up to business owners themselves to protest to individual agencies if they think another company is competing unfairly. The SBA says it has received 1,408 size protests since 2002; about a quarter of the protests' targets were found to be unqualified as small businesses.

Under the Small Business Act, a penalty of $500,000 or up to 10 years in prison can be imposed on any company that knowingly misrepresents its status as a small-business concern to obtain a contract. But the SBA doesn't readily seek such penalties. For instance, in late 2002 the agency had to remove some 600 names from its list of small businesses, in large part because they didn't meet the size criteria.

No action has been taken against them, Mr. Jackson says, because the SBA believes the erroneous listings came through "computer glitches" or from low-level company employees accidentally checking incorrect boxes that would classify them as small businesses. "It's not as nefarious as it sounds," he says.

This motion seeks a court order compelling the SBA to provide a detailed description of the contents of a controversial report concerning fraud and abuse in government contracting. The ASBL also requests the SBA provide specific justification for previous claims that the report is exempt from the Freedom of Information Act (FOIA).

The SBA has referred to the widespread abuses as "miscoding," but the ASBL believes the report holds statistical data that will uncover blatant fraud and abuse in the SBA's mishandling of more than $67 billion annually in government small business contracts.

"I find it curious that the SBA has gone to court to avoid disclosing a document that they have consistently characterized as a routine report," said Robert Belshaw of Gutierrez-Ruiz, the firm who represents ASBL. "The justifications offered by the SBA for withholding this document are inapplicable and not supported by law."

"SBA's handling of this matter has been suspicious," said Lloyd Chapman, president and founder of the ASBL. "When I first requested this report, the SBA denied its existence. Once they admitted it existed, they claimed it was privileged communication between agency executives and was, therefore, exempt from the Freedom of Information Act. Next, they claimed it was a 'trade secret,' and now, they are telling the media it's just a routine report. If this is just a routine report, why has the SBA tried to keep it secret for nine months, and why are they willing to go to federal court during an election to withhold it?"

Case History

The motion follows a complaint filed October 6 (Case No.C044250SI) demanding the disclosure and release of the aforementioned documents. The original lawsuit was filed after the SBA twice refused requests made by ASBL for copies of "the original draft" of the report by Eagle Eye Publishing on abuses in small business contracting and submitted to the SBA in January 2004. The SBA is withholding the entire report based on specific exemptions in the FOIA; the ASBL's lawsuit counters that there is no legal basis for the denial of access to the original report.

The SBA's most recent refusal to release the report on small business contracting abuse comes just days after the Center for Public Integrity released its own report, which found the Defense Department had awarded more than $47 billion of small business contracts to some of the largest firms in the United States and Europe with the full knowledge and approval of the SBA.

Please see attached backgrounder for more information on the ASBL, its founder Lloyd Chapman, and the history of this case.

Contract Abuse Uncovered by Multiple Reports, Sources

"I believe the original report the SBA received back in January contains statistical and factual information that is in no way exempt from the Freedom of Information Act," said Lloyd Chapman, President and Founder of the ASBL. "The SBA is attempting to whitewash this report before it's released to the public because it will shed light on the SBA's role in allowing the staggering level of fraud and abuse in small business contracting uncovered by the Center for Public Integrity. This is in addition to the General Accounting Office (GAO) report published in 2003 that identified abuse within the SBA contracting program."

The SBA Had to Know

A new small business advocacy group has filed suit seeking to compel SBA to release a report that it says documents fraud and abuse in federal contracting.

The California-based American Small Business League, headed by longtime SBA critic Lloyd Chapman, sued in San Francisco federal court under the Freedom of Information Act for access to a report that it says was prepared by a contractor for SBA's Office of Advocacy. "We believe (the) report confirms wide-spread fraud in federal contracts, and that the SBA is covering up the problem by keeping the report under wraps," Chapman said.

An SBA spokesman said he could not comment on the suit or the report.

Chapman contends that many large companies are fraudulently posing as small to qualify for set-aside contracts. His complaints sparked a General Accounting Office investigation last year that found many large companies were classified as small on some contracts, but GAO blamed loopholes in laws and regulations rather than fraud. (SAA, 5/16/03)

This month a private watchdog group, the Center for Public Integrity, found that 30% of Defense Department contract dollars reported as going to small businesses actually went to large ones. The Center examined all DOD contracts over the past six years. (SAA, 10/ 8)

Federal procurement officials point to loopholes, such as one provision that counts a small business as small throughout the life of any contract, even if the company outgrows size standards.

But Chapman says he has found many instances where large corporations deliberately misrepresented themselves or their subsidiaries as small businesses. He says the SBA report he is seeking will show that.

In testimony last year before the House Small Business Committee, he said his examination of SBA's Pro-Net database of small companies had found "dozens of examples where firms had blatantly misrepresented their number of employees, NAICS codes and their affiliation with large businesses."

At that same hearing, SBA said it had removed more than 600 companies from the Pro-Net listings.

Chapman said SBA had refused his request to make public the names of companies that were removed, so contracting officers would know the firms no longer qualified as small. The SBA inspector general made the same recommendation in a 1995 report, but the agency never complied.

The lawsuit, filed by Gutierrez-Ruiz LLP, alleges that SBA's report "contains statistical and other factual information about the allocation of contracts which is not subject to any exemption under the Freedom of Information Act, and must be disclosed."