"Over the past few years, the Investigations Division has noted several instances of a particular fraudulent practice: companies that SBA, after sustaining protests against them, had prohibited from representing themselves as small businesses, under a particular SIC code, were continuing to falsely certify themselves as eligible for small business set-aside contracts."

"The Inspector General issued a program vulnerability memo suggesting…that the agency periodically generate a list of companies found ineligible to self-certify as small for contracts…and circulate it to all Federal agencies of their use."

WASHINGTON, September 29, 2004 – When defense contracting giant The Titan Corporation bought SenCom Corp. for $35 million in 2000, it also received a nice secondary bonus–some $176 million worth of contracts designated for small businesses.

Titan is not alone. Thirty percent of all defense contract money reported as going to small businesses and special minority-owned businesses has ended up in the hands of the top defense companies, the Center for Public Integrity has found.

Between 1998 and 2003, the Pentagon awarded more than $47 billion in contracts designated for small businesses to companies that have each earned more than $100 million from Defense Department contracts alone during that six year period.

More than half of the top 100 defense contractors–55 of them in all–received at least $10 million in contracts with small business designations over the past six years. All told, the small business contracts won by the largest defense firms amounted to $9.3 billion, the Center found.
Titan, the 34th largest defense contractor, has received more than half a billion dollars in preferential small business contracts by absorbing smaller companies and continuing to win awards on their small business contracts.

This large amount accounted for 23 percent of the $2.39 billion in defense contracts the company received from 1998 to 2003.

Nearly 45 percent of Titan's small business awards came in the form of small business set asides, which not only carry a preferential classification for government contracting, but are exclusively reserved for small companies. Nearly 80 percent of the $176 million Titan received from 2000 to 2003 through awards on contracts SenCom Corp. won were recorded as funds set-aside to go to small businesses.

"We have no problem with the government procurement systems and how they handle these things," Titan spokesperson Ralph 'Wil' Williams told the Center.

According to current regulations, if a business is awarded a contract while it is classified as small, the business is considered small for the life of the contract. This allows millions of small business dollars to go to big companies when a small firm outgrows the classification or is acquired, as noted in a General Accounting Office investigation last year.

"In fact there is a lot of change going on with the small business awards" said Deidre Lee the Director of Defense Procurement and Acquisition Policy at the Department of Defense. "If it is truly a buy … we should novate the contract, which would change the name, which would change the status. That is what should happen."

Contracting expert Charles Tiefer called the percent of contracts classified as going to small business that actually go to top companies "disheartening." He said government agencies have an incentive to award contracts to small businesses.

"Whether by goals or quotas departments are obliged to make sure that small businesses are taking contracts," said Tiefer, a professor of government contracting at the University of Baltimore law school.

According to government-wide goals set by Congress, 23 percent of prime contract dollars are supposed to be awarded to small businesses annually. The Small Business Administration reported that the Defense Department exceeded that goal by 2.4 percent in 2003.

L-3 Communications, which the Center found received $5.15 billion in contracts during 1998-2003, collected 11 percent–or $582 million–of its total contracts as those classified as going to small businesses. More than $219 million of those contracts come from the management and technical services company EER Systems, which L-3 Communications acquired in 2001 to become part of its Government Services division.

Other top contractors receiving small business dollars include the military equipment support services company, Engineered Support Systems Inc.. More than one third of the company's $1.57 billion in contracts during 1998 to 2003 came from contracts classified as going to small business.

Engineered Support Systems received $188 million in small business dollars through Keco Industries, which it acquired in 1998. Radian Inc. also brought in $162 million in small business dollars since Engineered Support Systems acquired the company in 2002.

'Get it right'

The Small Business Administration recently made changes to its regulations, set to go into effect December 2004, that would require companies to re-certify themselves as small businesses after they have been acquired by another company, said Gary Jackson, the assistant administrator for size standards at the SBA.

"The problem came up that a company may grow or be bought out but still gets recorded as small for the purposes of that contract," Jackson said. "In December we will look at situations when the contract is bought. The company would have to certify if the company is still a small business."
Jackson noted that the new regulations would not deny a company work on a contract previously won, but would remove the preferential classification for government reporting. He said the acquisition problem arose over the past five years after the government developed contracts that can last up to 20 years – plenty of time to grow out of a small business or be acquired by a larger company.

Tiefer said he was cautious about the Small Business Administration's introduction of certification regulations.

"[The regulation] sounds like a great idea, but many more promises are made about protecting the small business community, especially before an election," Tiefer said.

The GSA has already been requiring recertification of small businesses that win contracts through its schedules said David Drabkin, the deputy chief acquisition officer at the General Services Administration. "Under current regulations if you are small you remain small for the life of the contract, there is no requirement in regulation or law to investigate the size because of the SBA rule," Drabkin said.

But beginning in 2002, Drabkin said, General Services Administration contract officers were required to ask for recertification of small business size after the base period of the contract had ended, which is usually five years, to "keep in the spirit of what we are trying to do" with the small business program.

One of the government's most important policies is to provide as many opportunities as possible to small businesses and allot a fair portion of contracts to them. Government officials foster this goal by promoting various programs and setting aside certain contracts for participation only by businesses that fit the Small Business Administration's size standards.
For some time, SBA officials and the courts have been grappling with a loophole in the agency's regulations that allows a small business that has grown large to continue to receive small-business contracts after it has outgrown its size status. SBA officials, under pressure from Congress to meet small-business contracting goals, have contributed to this problem by looking the other way and awarding the contracts to firms that are now indisputably large.

SBA officials missed an opportunity to close this loophole during recent changes to size regulations. The new regulations do not substantially alter the prior rule that a contractor's size is determined by the date when the contractor submits a self- certification of the business' size status as part of its contract proposal. This presents a particular concern with governmentwide acquisition contracts (GWACs) and General Services Administration schedule contracts, given their extended terms. Under these contracts, a large business can continue to compete for small-business task orders or blanket purchase agreements (BPAs) based on a small-business size certification that may have been granted years ago.

Officials at GSA and the Office of Federal Procurement Policy (OFPP) have taken steps to address this problem. GSA officials implemented a Federal Acquisition Regulation requiring small-business owners to recertify their companies' size status every five years, at the time of option renewal under the GSA schedule. OFPP officials went a step further and required annual recertification of vendors on GWACs. SBA's new rule, however, did not adopt the annual recertification requirement OFPP instituted.

Some observers have suggested that annual recertification would make it difficult for small businesses to transition to a larger status and create an administrative burden. Although these concerns may be legitimate, they are not the point.

To allow a large business to masquerade as a small business deprives real small businesses of contract opportunities to which they are entitled. Similarly, allowing government agencies to claim small-business credit for contracts awarded to firms that are actually large misleads Congress and compromises the government's ability to meet small-business contracting goals.

SBA's failure to require annual recertification has left the door open to conflicting interpretations of the recertification requirement for GWACs and permits further mischief on GSA's schedule contracts.

Under the new rule, a large business could continue to receive small-business orders or BPAs under the GSA schedule contract program for up to five years before it has to recertify its size. Because the government's goal is to award 23 percent of its contract revenue to small businesses and the GSA schedule contract program accounts for approximately $13 billion of the federal information technology budget, a significant amount of potential small-business revenue is at stake.

The Small Business Administration got a lesson this year about size -- specifically, the size of sacred cows.

Last spring, the agency announced a proposal that seemed simple enough: streamline the standards it uses to determine whether a business qualifies as small enough for government assistance.

The agency's officials perceived the change as relatively neutral, and estimated that of the 23.7 million businesses now covered, 34,100 would lose the small-business designation while 35,200 would gain it.

But the reaction was anything but neutral. Many business owners and industry groups, fearing a loss of status, deluged the agency with negative comments. Legislators from both sides of the aisle weighed in, including Senator John Kerry as the ranking Democratic member of the Senate Small Business Committee, asking that the new standards be withdrawn and reconsidered.

In July, the S.B.A did just that, scuttling any chance for changing the standards for now. And it seems unlikely that anything new will be proposed until public hearings can be held, sometime after the November election, according to Gary M. Jackson, assistant administrator for the agency's Office of Size Standards. He acknowledged that he had been ''a little surprised'' by the vehement reaction to the plan.

Perhaps he shouldn't have been. The stakes, after all, are enormous.

In fiscal 2003, for example, the S.B.A. provided more than 140,000 loans, venture-capital financings and loan guarantees worth more than $28 billion.

Small businesses also received more than $90 billion in prime contracts from federal agencies, which are required by law to award up to 23 percent of these contracts to them, and lesser percentages to small businesses owned by service-disabled veterans, women and other disadvantaged or disabled small-business owners.

There are also rules that require large companies to subcontract to small companies under certain circumstances, and similar state and local rules. Eligibility, in nearly all instances, is contingent upon compliance with size standards.

A rule of thumb about small businesses has been that they generally have fewer than 500 employees, but it's much more complicated than that at the S.B.A.

The agency currently uses 37 size standards, based on annual revenues in some cases and employee size in others, depending on the industry code assigned to a company under a Census Bureau classification system. The proposal would have changed all that, offering only 10 standards, most based on employee size only, and most capped at 50 or 100 workers.

This would have hurt businesses that need many employees to generate revenue. Take the plight of restaurant owners, who often seek loans and loan guarantees from the S.B.A. Now they qualify if their annual sales do not exceed $6 million. But under the new rules, which would have abandoned the revenue figure and imposed a 50-employee cap, including part-time workers, some of them would have been shut out.

How many?

''Our analysis showed that 16,000 restaurant businesses would have lost their small-business status under the new standards,'' said Robert J. Green, the associate vice president of federal relations for the National Restaurant Association.

The change would have been similarly dire for many government contractors.

''It would have cost us millions of dollars,'' said Wilt Ashby of the proposal. He is a project analyst for Spectrum Chemicals and Laboratory Products of Gardena, Calif. Spectrum has nearly 300 employees and sells to the government directly as well as to other companies that contract with the government. It is also owned by a woman, thus qualifying for additional set-asides, or contracts reserved for small businesses. But it would have lost its small-business designation under the new standards.

Ditto for Trailboss Enterprises in Anchorage. Trailboss maintains aircraft that pass through government bases. It is considered small because its revenues are less than $6 million annually. But with more than 100 employees, full and part time, it would no longer qualify under the new rules, said Mike Taylor, a vice president for business development. And that would hurt. ''We obtain something like 40 percent of our total revenue through small-business set-asides on government contracts,'' said Mr. Taylor, who, with Mr. Ashby, wrote to the agency protesting the changes.

Not everyone, of course, was unhappy at the prospect of change in the size standards.

The proposal ''would have put federal contracts and subcontracts in the hands of legitimate small businesses, which is what Congress intended,'' said Lloyd Chapman, formerly a general manager for GC Micro, a computer hardware and software vendor in Petaluma, Calif., with about 30 employees.

The company would have been subject to a 100-employee cap under the new rules, as opposed to a 500-employee limit that currently applies for government procurement.

''It's hard for really small companies to compete with 500,'' said Mr. Chapman, who founded a group called the Microcomputer Industry Suppliers Association that supported the new standards. ''That's just way too big.''

Much of the drive for change came from the Pentagon, whose huge procurement budget -- nearly $200 billion in fiscal 2003 -- makes it the 500-pound gorilla among federal agencies. The Defense Department has been especially irked by rules that do not always allow it to count as ''small'' the small subcontractors who may be hired by its larger prime contractors, according to Tim Foreman, assistant director for prime contracting for the Office of Small and Disadvantaged Business Utilization at the Defense Department. The prohibition can lead to ''game playing'' with data and industry codes when contracts are given out, he said.

Moreover, contract officers, he said, are ''resistant to set-asides based on revenue caps,'' making it ''easier to work with employee caps.''

The Defense Department proposed its own legislation to revamp the rules last year. But then it offered to withdraw the legislation if the S.B.A. would revise the size standards on its own.

That, in turn, acted as a catalyst for the proposed new size standards, Mr. Foreman said, and a ''win-win'' for the S.B.A.

''We dropped what they wanted us to drop,'' Mr. Foreman said, referring to the proposed legislation, ''and they also got to simplify, which they wanted to do.''

For his part, Mr. Jackson of theSmall Business Administration acknowledged that the Defense Department had provided an impetus for its attempt to revise the standards. But he denied tailoring the proposed new rules to the needs of that department or any other government agency.

''We looked at the issue objectively,'' he said. ''We wanted to see if we could make the standards simple and easy to use.''
That argument holds little sway among those who would have been hurt by the changes.

''The current rules have evolved as small business has become more complex,'' said Giovanni Coratolo, the director of small-business policy for the United States Chamber of Commerce, which opposed the size standard revisions.

Small businesses take their size seriously.

So when the U.S. Small Business Administration proposed redefining what constitutes a small business earlier this year, the plan set off a wave of protest. Even when the agency announced in July that it was halting those plans, that drew protests, too. The reactions underscored just how coveted the status of small business can be.

The debate revved up Monday, when the American Small Business League, a 2-year-old group in suburban San Francisco, accused the SBA of being an advocate for large corporations. The group has taken aim at the SBA's decision not to drop the employee cap for a nonmanufacturing small-business designation to 100 employees from 500, where it has stood for years. Other caps vary according to industry.

" To keep the size standard at 500 benefits a very small number of super small businesses," said the group's president, Lloyd Chapman. "It's damaging to the 23 million small businesses with less than 100 employees."

An SBA spokesman said the agency decided against the changes because of overwhelming opposition to them. Spokesman Michael Stamler stressed that the SBA "is still working on the size standard."

At stake are the billions of dollars in goods and services the federal government buys from those it has certified as small businesses. The government sets aside 23 percent of such contracts for small enterprises.
The SBA currently uses 37 categories to determine if a business is small. It wanted to slash that number to 10, using the number of employees as an indicator of a company's size rather than a combination of head counts and receipts as the current system does.

In its proposal, published in the Federal Register in March, the agency maintained that the number of employees is a more stable indicator of a company's size than receipts.

Rep. Nydia Velazquez (D-Brooklyn), the ranking member of the House Small Business Committee, opposed the changes.

" If SBA went ahead and adopted the new regulations, we would have shrunk the number of small businesses eligible to participate in government assistance programs in terms of federal contracts and business loans," she said.

Under the proposed changes, any restaurant with more than 50 employees would have been designated a big business, she said. "That covers most [restaurants] in New York City," she said.

Local business owners, however, are split on the SBA's decision to abandon the changes.

Edward Fred, president of CPI Aerostructures in Edgewood, said dropping the employee cap to 100 could be devastating for his business, a manufacturer of replacement parts for military aircraft. His company employs 66 employees and has $30 million in revenue, all from government contracts.

If we grew to 101 employees, "we couldn't compete in a small arena," he said, "and all of a sudden we're competing against Lockheed."
On the other hand, Lina Gottesman, president of Altus Metal and Marble Services, which restores the fronts of buildings and has offices in St. James and Manhattan, wants the classification changed.

" I think it would take some of the big guys out that are getting an advantage that shouldn't be getting the advantage," she said.