A new report from a public interest group shows that 30 percent of defense contract money that agency officials said had been awarded to small businesses actually went to large firms.

The Center for Public Integrity documented the figures, highlighting an issue that has long been a sticking point for small companies and the Small Business Administration – loopholes in the rules that allow larger companies to take small-business dollars.

According to the CPI report, Defense Department officials awarded more than $47 billion in contracts designated for small businesses to companies that have each earned more than $100 million during the six-year period studied – 1998 to 2003.

There are a number of ways that large companies can get the small-business contracts, often without technically violating any rules. The CPI study, for example, refers to Titan Corp.'s acquisition of SenCom Corp. in 2000. Titan officials acquired the small company and its $176 million in contracts that had been meant for small business.

A new SBA rule set to go into effect in December would require companies to recertify their size status after an acquisition.

Companies that win contracts while small have long been able to retain the small status for the duration of the contract, which can be 20 years for General Services Administration schedules and some other vehicles. In recent months, SBA officials and others have wrangled about possibly requiring small businesses to recertify their size as often as one a year.
GSA and Office of Federal Procurement Policy officials have taken some steps that SBA officials have not followed so far, said Dave Nadler, a procurement attorney with Dickstein Shapiro Morin & Oshinsky LLP. GSA officials require business owners to recertify their company size every five years. OFPP officials require annual recertification of vendors on governmentwide acquisition contracts.

This week, a small-business advocacy group, called the American Small Business League, filed a lawsuit demanding that SBA officials release a report that ASBL founder and president Lloyd Chapman believes will reveal extensive fraud among government contractors.

" The Center for Public Integrity's study on contract abuse is just the tip of the iceberg," he said.

President George W. Bush will be a shoo-in for the November election if the largest federal IT companies and their employees get their way.

As a group, these contractors in overwhelming numbers are supporting President Bush and other Republican candidates with their campaign contributions, with 62 percent of their total donations going to the GOP and 38 percent to the Democrats, according to an analysis prepared for Washington Technology by the Center for Responsive Politics, a nonpartisan Washington group that tracks campaign contributions.

The center tracked contributions of Washington Technology's Top 100 federal IT contractors as reported to the Federal Election Commission, including contributions of company employees, spouses, and political action committees. The Top 100 list, published annually in May, ranks the largest contractors based on their federal prime contracting IT revenue.

As of Sept. 13, the Top 100 contractors had given Republicans $13.8 million and Democrats $8.4 million for the contribution cycle that began Jan. 1, 2003.

"It's typical of corporate donations, because ideologically they prefer Republican policies, and Republicans have a majority" in Congress, said Anthony Corrado, a visiting fellow and campaign finance expert at the Brookings Institution, a liberal think tank in Washington.

The chief executives of these companies are even more emphatic in their support for Republican candidates, giving 79 percent to Republicans and just 21 percent to the Democrats. This includes donations by CEO spouses.

So far, the Top 100 CEOs have contributed $818,043 to the political parties and their candidates in the 2004 campaign, with $643,877 directed to Republicans. They have given $71,775 to President Bush and only $9,000 to Sen. John Kerry (D-Mass.)

Michael Dell, chief executive of Dell Inc., topped the list, giving $119,750 to Republican candidates and $5,000 to Democrats. Dell gave $6,000 to Bush, but nothing to Kerry.

Among the Top 100 companies, Verizon Communications Inc. was the No. 1 contributor to 2004 political campaigns. So far this contribution cycle, the New York company has given more than $1.6 million – almost $1 million to Republicans and $618,000 to Democrats.

"We believe in good public policy," said Kevin McLernon, Verizon's director of government relations. When making political contributions, Verizon considers politicians' stands on issues, such as health care, broadband policy and Internet taxation, of importance to the company and business in general.

"We use the PAC to support the elected officials who support our public policy agenda," McLernon said.

Following Verizon on the list of top contributors are defense giants Northrop Grumman Corp. ($1.6 million), Lockheed Martin Corp. ($1.5 million), Boeing Co. ($1.4 million) and General Dynamics Corp. ($1.3 million).

Although companies and their employees might give purely for ideological reasons, they also want to win support on policies and legislation that affect their businesses. And government contractors want to court the good will of lawmakers who control spending on their projects.

"As a general rule, most of these companies and executives give because they think they're going to get something in return, such as a seat next to a congressman at a dinner or a golf outing with a committee chairman.

Often contributions are solicited with that in mind," said Larry Noble, executive director and general counsel at the Center for Responsive Politics. "People give to buy access. They give to influence legislation," Noble said. "Lawmakers have a limited amount of time they can spend with people, and they are more likely to spend it with contributors." Many, but not all, companies on the list have political action committees, or PACs, which can legally give up to $5,000 per candidate per election in primary and general elections.

Corporate PACs tend to make contributions to both Republicans and Democrats, especially to congressional committee members who have jurisdiction over areas of interest to the companies, such as defense appropriations, the Brookings Institution's Corrado said.

"They have good relations with both sides," he said. "It's more practical giving than ideological."

The Giving Season
It comes as no surprise to campaign finance experts that a telecommunications company was the lead giver among Top 100 contractors. In 2000, AT&T Corp. was the top corporate donor, giving nearly $5.3 million dollars, $3.1 million of which went to Republicans. Congress and the administration regularly deal with a host of policies and regulations – such as spectrum allocation – that affect the telecom industry.

"Companies that are subject to being regulated to death will give [contributions] because the government tries to exercise too much control," said Todd Gaziano, director of the Center for Legal and Judicial Studies at the Heritage Foundation, a conservative think tank in Washington. "So naturally, they're going to give money if they think it will stop them from being regulated." Corrado also pointed out that many telecom companies provide in-kind communications services as contributions to the parties.

Not surprisingly, the next four largest contributors are defense companies.

Northrop Grumman, the second largest overall contributor, "supports those who support strong national defense," said Thomas Henson, the company's manager of media relations.

Lockheed Martin, the third largest donor, looks at five criteria when determining whether to give money to the Democrats or Republicans, said Steve Chaudet, the company's vice president of state and local government affairs. The company considers a candidate's position on national defense, high tech issues and broad-based business issues.

In addition, the company considers whether a lawmaker represents a district in which the company has a facility or in which employees reside, and whether incumbent candidates sit on oversight committees that have jurisdiction over areas of interest to the company, Chaudet said. Boeing spokesman Douglas Kennett said his company's concerns include free and open trade worldwide and issues relating to major federal clients such as the military services and NASA. The company supports elected officials that create an even playing field with Airbus S.A.S., Boeing's major commercial aircraft competitor.

Boeing also advocates a "just solution" to the Foreign Sales Corporations Program and its successor, the Extraterritorial Income Exclusion (FSC/ETI) tax provision to eliminate retaliatory tariffs on U.S. products by the European Union, and it supports a healthy domestic Export-Import Bank to help finance the export of U.S. goods and services to international markets, Kennett said.

"Boeing supports candidates at all levels who support broad issues of concern to our company, regardless of their political affiliation," he said.

John Kerry landed an easy punch in his debate Friday night with President Bush when he decried Halliburton Corp.'s abuse of bidding rules for federal Small Business Administration-controlled contracts.

If he's looking to open a major wound, Kerry should keep picking away at this issue. All signs point to a major scandal in how big corporations game the federal SBA contract rules to their advantage.

According to the San Francisco-based American Small Business League, SBA officials are sitting on a report that details widespread abuse of federal bidding rules. Lloyd Chapman, president of the Small Business League, called me on Friday (before the debate) to alert me to the fact that companies such as Dutch conglomerate Buhrmann are getting over on the SBA.

Buhrmann, located in Amsterdam, employs 26,000 people in 28 countries. But last year, the company received $50 million in small-business contracts.

``They are one example of hundreds of companies in the U.S. and elsewhere doing this,'' Chapman told me in a follow-up e-mail. ``This means that small businesses in Massachusetts are being cheated and losing millions of dollars in contracts meant for them.''

Others playing this game: The Titan Corp., a top defense contractor, and Level 3 Communications. Those and other large companies have benefited from Pentagon contracts set aside for small businesses under SBA guidelines. Indeed, the Center for Public Integrity says between 1998 and 2003, the Pentagon awarded more than $47 billion in contracts designated for small businesses to large-scale defense contractors.

Was Chapman's Friday phone call part of a coordinated campaign designed to get the most bounce out of Kerry's debate comments? Possibly.

He also noted a Dow Jones story from last week about the ASBL's effort to get the SBA fraud report - authored by the research firm Eagle Eye Publishers - released to the public. The SBA says the report isn't completed.

Still, the General Accounting Office has found similar abuses.

Either way, it appears the system is in dire need of reform.

{Other unrelated column stories not reprinted)

Novato resident Lloyd Chapman's ongoing battle with the U.S. Small Business Administration has taken another turn, with the small business advocate and former GC Micro executive filing a lawsuit against the federal agency and threatening to file another.

Chapman's American Small Business League, formerly the Microcomputer Industry Suppliers Organization, filed the lawsuit Wednesday in U.S. District Court in San Francisco in an attempt to force the agency to publicly release the results of a government study on small-business contract fraud. Chapman said he has exhausted other recourses under the Freedom of Information Act, and claims he knows the report shows rampant abuse of federal contracting regulations.

In a related and long-standing battle, Chapman said he will likely file another lawsuit against the agency to force it to release public comments about a proposal to change the size limits for companies classified as small businesses.

Chapman has been a staunch advocate of lowering the limit from 500 to 150 employees, saying small businesses shouldn't be forced to compete with big businesses in vying for government contracts. The agency has so far resisted lowering the limit, citing lack of public support for the change.

" The Small Business Administration is the worst enemy to small business this country has ever had," he said. "The SBA has essentially repealed the Small Business Act of 1951 for most people because they have enacted a series of policies that force small businesses to compete with some of the biggest companies in the world."

Eric Benderson, an associate general counsel for litigation for the agency, called Chapman's claims ridiculous.

" It would be totally contrary to the point of doing the report for us to not make it public - it is simply not finished and we will release it publicly when it is finished," Benderson said. "I can't be any more emphatic - it's going to be made public when it is finished.

" It is just going through a vetting process. The whole point of it is to make it public."

But Chapman says he spoke to the author of the report, Paul Murphy of Fairfax-based research firm Eagle Eye Publishers, which was hired by the SBA to conduct the report. Chapman said Murphy told him the report is indeed finished and does indicate fraud.

Murphy could not be reached for comment.

" All the research shows that this is rampant and widespread, and they're not prosecuting it," said Chapman, who also cited recent reports from the Government Accountability Office and the Center for Public Integrity that indicated fraud within the system.

" If it's true that the SBA is covering up fraud and is helping it to occur, that's a pretty serious federal crime," Chapman said.

Government officials have said the agency hasn't sought to punish big firms that are listed as small ones for the purpose of winning federal contracts, primarily because it hasn't had to. Companies found to be too large to qualify are simply taken off the list and are no longer in the running for small-business set-asides.

Chapman said the agency doesn't go far enough. He said fraud is a felony and should be prosecuted as such.

U.S. Rep. Lynn Woosley, D-Petaluma, is supporting Chapman in his fight on both fronts, according to her spokeswoman, Susannah Cernojevich. Woolsey could not be reached for comment.

Federal law requires the federal government to award 23 percent of the total value of its contracts to small businesses. The government issues several hundred billion dollars' worth of contracts each year.

Chapman said the government small business contract system is essentially riddled with three types of fraud: companies claiming to have fewer employees than they do to qualify; companies that lie about their specific line of business because of different small business size limits for different industries; and the federal government giving small business contracts to businesses it knows are larger than the size limits.

Benderson said Chapman's quest is misguided because the report would only focus on mistakes in the government's system to award contracts. "This study doesn't deal with fraud, it deals with how government agencies are counting their contracts," he said.

Big companies are able to qualify for small business contracts under the system. If a business is awarded a contract while it is classified as small, the business is considered small for the life of the contract.

The Center for Public Integrity found that the small business contracts won by the largest defense firms in the country from the U.S. Department of Defense amounted to $9.3 billion.

Chapman has spent the past 15 years in a fight with the government over what constitutes a small business, dating back to 30-employee GC Micro's struggles to win government contracts.