Are small businesses actually getting all the government contracts they should? No, according to a recent report by the Small Business Administration Office of Advocacy, which is raising hackles in the small-business community and on Capitol Hill.

Required by law to dedicate up to 23 percent of their procurement spending to small businesses, federal agencies specifically set aside many contracts just for that purpose, and say they fulfilled these contracts as proof of meeting their goals, or at least coming close. These claims, in turn, allow politicians to brag about their commitment to American entrepreneurs, among the most coveted segments of the electorate.

But the report, released in December, found numerous instances of data "miscoding" during fiscal 2002 whereby divisions, affiliates and subsidiaries of a number of large companies - including Raytheon and Titan - were listed as small. That allowed them to obtain more than $2 billion in federal awards that were supposed to have gone to small businesses, and to be mistakenly included in federal small-business procurement statistics.

For years, small-business owners have complained of such doings, which have been documented before but with different data. In 2003, for example, the General Accounting Office released a report detailing thousands of instances where large businesses received small-business contracts. Another study, published last year by the nonprofit Center for Public Integrity, found that 30 percent of defense contract dollars supposedly awarded to small and minority-owned businesses had gone to giant defense contractors during a recent five-year period.

How could this have happened?

"Big business runs the government, and they get what they want," said Lloyd Chapman, the founder of an advocacy group called the American Small Business League, who thinks that "blatant fraud" underlies the awarding of small-business contracts to large companies.

Members of Congress have also weighed in, including Congresswoman Nydia Velázquez, the ranking Democratic member of the House Small Business Committee, who said that the Bush administration was "cooking the books" with small-business statistics. For his part, Senator John Kerry, her Senate counterpart, accused the Small Business Administration last month of lax enforcement and called for an investigation of fraud.

Of course, not everyone contends that the mistakes are necessarily deliberate or a result of fraud. Paul Murphy, president of Eagle Eye Publishers in Fairfax, Va., which prepared the report for the Office of Advocacy, blamed the problem mostly on confusing rules and procedures. The system is so complicated that it invites mistakes, he said.

When a business wants government contracts, it generally must register with a central database, the Central Contract Registration, which is maintained by the Department of Defense. The General Services Administration also maintains schedules of approved vendors that include data on size.

In each case, businesses provide information about their size, information that is verified only under certain circumstances. They also indicate what the business does by using a Census Bureau coding system. Since the definition of "small" - set by the Small Business Administration on the basis of employee size or annual revenues or both - varies by code, many businesses that have more than one code can be labeled small or large, depending upon which code is used in a bid.

The confusion is compounded by the fact that small businesses can grow, affiliate with larger companies or be acquired by them. In practice, many companies have kept their small-business designation after they could no longer be considered small for one of these reasons, even if the contract continued, by virtue of renewals, for 15 or even 20 years. That is apparently what happened in 80 percent of the instances uncovered by Mr. Murphy.

To try to end these kinds of mistakes, the Small Business Administration recently enacted a rule requiring companies to recertify as "small" if they are sold and their contracts are transferred to a new entity. According to Gary Jackson, the assistant administrator for size standards at the agency, the S.B.A. is also considering requiring periodic recertification for long-term or renewal contracts. That is something the General Services Administration demands already, said David A. Drabkin, its deputy chief acquisition officer, who also downplayed the idea of widespread fraud.

But size reporting mistakes can be devastating to small businesses, which do not have much recourse under the present system.

Take the case of Stanley Pond, the owner of a two-person company in Berthoud, Colo., that manufactures calibration instruments. He lost an Air Force contract in 2003 to a business that he thought was too big to qualify. Mr. Pond filed a protest with the local S.B.A. office overseeing the contract. He lost, and appealed to the agency's Office of Hearings and Appeals in Washington.

He took a step that many other small businesses do not. Despite millions of annual government contract actions, only a trickle of size appeals ever get to the Office of Hearings and Appeals, according to its assistant administrator, Delorice P. Ford, who said that fewer than 90 cases reached her office in fiscal year 2004.

Even fewer succeed. Many are dismissed on procedural grounds, like Mr. Pond's appeal, which was thrown out before it could be determined on its merits.

In his case, the government official who had awarded the contract to his competitor made it known that she intended to leave it in place, regardless of any possible size mistakes. Since the Office of Hearings and Appeals has no power to stop a contract officer's actions, that technically made the appeal moot - even though a subsequent investigation by the S.B.A.'s inspector general found that the company awarded the contract was indeed too big, and never should have received it, a result that left Mr. Pond angry.

"They seem to have no interest in finding out what is really going on," he said of the S.B.A., denouncing the appeals process as meaningless.

SBA Administrator Hector Barreto said there is no widespread fraud by large businesses claiming to be small in order to receive set-aside contracts.

A study for SBA's Office of Advocacy found that at least $2 billion in contract awards credited to small businesses in 2002 actually went to large businesses or other entities such as nonprofits and universities. (SAA, 1/7)

Under questioning before the House Small Business Committee Feb. 10, Barreto cited two primary reasons for the erroneous reporting: a company was small when it received a contract, but outgrew its size standard during the life of the contract; or the small company was acquired by a large one.

"Those are the reasons, not that there are large businesses on a wholesale basis that are misrepresenting their size and taking contracts away from small business," he said.

"You are being dishonest," retorted the committee's ranking Democrat, Rep. Nydia Velazquez (NY).

Chairman Donald Manzullo (R-IL) cut her off, banging his gavel and saying, "You don't call the administrator dishonest."

The Advocacy study followed a larger one released last fall by the Center for Public Integrity, a watchdog group. It found that more than half of the top 100 defense contractors received contracts with small-business designations over the last six years. (SAA, 10/8/04) The Government Accountability Office reported similar findings in 2003.

The mistaken reporting of contract awards artificially inflates small businesses' share of the federal market. According to the Advocacy study, the contracts awarded to large firms but credited to small ones accounted for 4% of all small-business awards in 2002.

The ranking Democrat on the Senate Small Business Committee, Sen. John Kerry (D-MA), has called for an audit of small-business procurement records for other years.

Federal acquisition officials have blamed the errors on loopholes like those cited by Barreto and on data-entry errors in the Federal Procurement Data System, the official source of procurement statistics.

But Lloyd Chapman, president of the American Small Business League in Petaluma, CA, insists that some large companies are fraudulently claiming small-business status. Chapman has asked a San Francisco federal court to order the Office of Advocacy to release the original draft of its study, which he says contains allegations of fraud that were dropped from the final version.

SBA says it has already moved to close one of the loopholes by requiring a company to recertify its small-business eligibility on all its contracts if it merges or is acquired. The recertification does not affect the status of the contract, but allows the agency to determine whether the contract should still be counted toward small business goals.

Small-business groups are taking aim at the SBA for failing to ensure procurement opportunities. Two lawsuits were filed late last year arguing that the SBA has refused to implement a congressionally dictated women's procurement set-aside program and to release an internal study showing widespread fraud in procurement programs.

The U.S. Women's Chamber of Commerce filed a complaint in the U.S. District Court to force the SBA to implement the Women's Procurement Program. It was included in the SBA's 2000 reauthorization passed by Congress and told the SBA to set aside contracts for businesses in industries underrepresented by women-owned businesses. "We have heard from thousands of members that their ability to gain access to contracts has been harmed by the delay in implementing this mandate," says Margot Dorfman, CEO for the Women's Chamber.

The SBA's Raul Cisneros points to an agency press release stating that women-owned businesses received $1.5 billion more in federal prime contracts in fiscal 2003 than in 2002. That came to 2.98 percent of all federal contract dollars. But Dorfman says that Congress set a goal 10 years ago of 5 percent, which has never been reached. That failure prompted Congress to pass the 2000 amendment.

It's not just women who are complaining, though. The American Small Business League (ASBL) says the SBA is illegally withholding an internal report that shows the lib set-aside program is rife with fraud. "We believe that the SBA covering up the problem by keeping the report under wraps," says ASBL president Lloyd Chapman. The ASBL law-suit attempts to overturn the SBA's rejection of a Freedom of Information Act request on details of the study.

Cisneros argues the report sought by ASBL is only a draft. It has not been finalized, he says, so it can't be released.

STEPHEN BARLAS is a freelance business reporter who covers the Washington beat for 15 magazines.