A federal judge has ordered SBA to release a consultant's draft report that allegedly shows evidence of fraud in small-business contracting.

The American Small Business League of Novato, CA, sued for release of the report. The League's president, Lloyd Chapman, says he believes it contains evidence that some large businesses deliberately masqueraded as small ones to win federal contracts.

On April 29 Judge Susan Illston of U.S. District Court in San Francisco rejected SBA's claim that the report was exempt from public disclosure because it was an internal document used in decision-making deliberations.

SBA's Office of Advocacy released the final version of the report by Eagle Eye Publishers in February. It showed that at least $2 billion in contract awards credited to small firms in fiscal 2002 actually went to large businesses or other entities such as nonprofits and universities. That version mentioned no evidence of fraud.

SBA Administrator Hector Barreto later told Congress that there is no "wholesale" fraud in contracting. He said large businesses were misreported as small ones primarily because the companies had outgrown size standards during the life of a contract or had been acquired by a bigger firm. (SAA, 2/18)

A federal court judge ordered the U.S. Small Business Administration to turn over an original version of a report detailing how lucrative government contracts designated as going to small businesses sometimes end up in the hands of big ones instead.

The report is being sought by the American Small Business League, an advocacy group in Petaluma, Calif., which believes the earlier version contains information suggesting some companies may have "intentionally misrepresented" themselves as small businesses to receive small business contracts, says the group's president, Lloyd Chapman.

The final report, released last year by the SBA's Office of Advocacy, says that in fiscal 2002, roughly $2 billion in federal contracting money believed to have gone to small businesses primarily went to large firms. That version didn't allege any wrongdoing by the big companies, instead blaming regulation loopholes and computer coding systems, among other things.

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. There are no legal consequences to missing, but there is substantial political and public pressure to meet the goals, and agencies are encouraged to set aside some contracts for bidding only by small firms. One question is whether big businesses are knowingly misrepresenting their size to obtain these set-asides. In the mid-1990s, for instance, the SBA's Office of Inspector General noted several instances of what it deemed "a particular fraudulent practice" in which companies claimed eligibility with various agencies even after the SBA had prohibited them from doing so.

Friday's court order originated from a complaint filed by the ASBL in the U.S. District Court for Northern California on Oct. 6, after the SBA had denied the organization's request for the report under the Freedom of Information Act. The agency had received the report -- compiled by Eagle Eye Publishers Inc., a Fairfax, Va.-based research group -- 11 months earlier, but hadn't released it. It did eventually release the report to the public in December; according to the lawsuit, that was the fourth draft.

KITTERY, Maine - Many small businesses depend on government contracts from Portsmouth Naval Shipyard to complement the work they do in the private sector.

Recent reports suggest these contracts are more often being given to larger companies because of government loopholes.

Lloyd Chapman, founder of the American Small Business League, claims large corporations are outbidding small, independent contractors by taking advantage of recent pro-corporation rulings. He hopes by putting pressure on Sen. Olympia Snowe, R-Maine, and chair of the Senate Small Business Committee, he can persuade her to change the laws in favor of small companies.

"This is the largest problem facing small businesses today," Chapman said. "Its especially important for towns around military installations."

Federal law stipulates 23 percent of federal contracts must go to small businesses. What Chapman and the independent Government Accountability Office (GAO) have found, however, is that many of these small-business contracts are going to large companies that have bought smaller businesses in order to keep their contracts.

The law then allows these companies to keep the small-business contract for 20 years, giving them the ability to bid against smaller, less competitive companies.

Chapman also disagrees with the governments definition of a small business, which is any non-manufacturing company with fewer than 500 employees. Because 98 percent of all companies in America have fewer than 100 employees, Chapman feels this limit needs to be lowered.

"When you set a limit that high, it makes it very difficult to start a small business," he said.

Because the majority of government contracts last year were through the U.S. Department of Defense, Chapman said small businesses that work with military bases are disproportionately affected.

According to small businesses that contracted work through the shipyard, however, the situation Chapman is portraying is not that dire.

Dan Corcoran, owner of Jackson Hardware in Kittery who occasionally places bids with the shipyard, said contract work is a small but vital part of his revenues.

"I dont always make a whole lot of money off of them," Corcoran said. "It pays for building maintenance and the lights. Its a government bid and theyre trying to get the best price."

Even though he does not make a significant amount of money on shipyard contracts, others who have contracts buy supplies from his store, increasing his profits indirectly.

Another contractor, Patten Tools in Kittery, is one of the few local companies that make machine parts for Portsmouth Naval Shipyard. Owner Charlie Patten says it makes up only a small part of his companys total business.

"About 10 percent of our business is with the shipyard," Patten said. "I would like it to be a lot more."

Peter Spampinato, owner of Capital Machine in Salem, N.H., has done contract work for the shipyard for 25 years. He also said the work does not generate the bulk of his companys income.

Spampinato does not feel competition with larger companies is the reason for the small number of contracts, but a result of the lack of demand for his product.

"Im pretty established there," Spampinato said. "I have a particular niche that big businesses wouldnt even touch."

According to the Portsmouth Naval Shipyard Public Relations Office, "(contract) opportunities under $100,000 are reserved for participation by small businesses." These opportunities vary from one-time-only requests to long-term jobs.

None of the contractors said they felt discriminated against or looked over, but some did wish the work was more plentiful.

Corcoran agreed the shipyard tries to spread the wealth when it comes to handing out contracts and is, in his experience, fair.

Rob Yunich, communications director for the National Small Business Association, said his organization has identified the employment limits as a problem, but its not one of its key issues.

He attributes the differing reports on the state of contracting to location. In Maine and New Hampshire, the majority of businesses are small; hence, they get most of the work. In a state with many large corporations, such as California or Illinois, the climate for small businesses could be much different.

Chapman said he is looking at resolving the problem nationally. Although Snowe has sponsored numerous laws to help small business and has spoken out on the issue in Congress, Chapman would like to see the loopholes closed as soon as possible.

"There have been five studies documenting this (problem) and no congressional committee has sat down to address this," Chapman said. "As chair of the Small Business Committee, Sen. Snowe has an obligation not just to Maine, but the entire country."

INSIDE THE NUMBERS:

According to the American Small Business Association:

• The United States spends more than $200 billion annually on goods and services.
• Nearly 98 percent of American companies have fewer than 100 employees.
• Nearly 98 percent of Maine non-manufacturing companies are small businesses.
• Small businesses employ 51 percent of all private-sector workers.
• Seventy-five percent of net new jobs are created by small businesses.
• Small businesses make up 97 percent of U.S. exporters and 29 percent of all export value.

Jeanne Jones says she is thrilled that the U.S. Small Business Administration is taking steps to weed out companies falsely claiming to be small or disadvantaged businesses. As a certified disadvantaged business owner, the Las Vegan doesn't have much sympathy for pretenders.

The entrepreneur predicts the legitimately disadvantaged firms will benefit from recent SBA moves to correct the problem. Those measures are designed to stop the so-called "self-certifying." While never legally certifying themselves, some businesses were simply marking off all the disadvantaged business categories on a federal database. Those companies could then market themselves to federal contractors as being certified disadvantaged. It would then be up to the contractors to cross reference with the SBA's database.

"We had one check off every single block," recalls SBA Procurement Analyst Diane Heal. "We were getting complaints from contractors saying, 'How come the ... data doesn't match?'"

Another problem was that once-small businesses continued with lucrative federal contracts after they no longer qualified as such. Some had already been acquired by large firms with the contract included, explains SBA Nevada District Director John Scott.

To remedy that, last month the SBA merged its Pro-Net data base with that of the Department of Defense (DOD). The move made the DOD's Central Contractor Registration (CCR) data base the central site for all small businesses to register on, while the SBA's old Pro-Net site becomes the contractor's search source. Renamed the Dynamic Small Business Search, the old Pro-Net now functions to determine the business size and status. It compares that listing to other North American businesses in its classification.

All must register with the CCR. The SBA evaluates the data. Businesses already in the database will have to update their information annually, Scott adds.

Plenty is at stake. For fiscal year 2003, small businesses nationwide received $65.5 billion in federal contract dollars, according to the federal government's General Services Administration (GSA), with $19.5 billion going to Small Disadvantaged Businesses (SDBs) and $8.3 billion to Women-Owned Small Businesses. Another $549 million was received by Service-Disabled Veteran-Owned Businesses and small businesses certified under the section 8(a) program (those classified as socially- and economically-disadvantaged) received $10.1 billion.

Nevada small businesses received $346.1 million in government contracts in fiscal year 2003, compared to $1 billion for large business in the state, according to the Federal Procurement Data System. The Procurement Outreach Program (POP), run by the Nevada Commission on Economic Development, reported $1.35 billion in federal contracts for the approximately 800 companies in its programs. Its director, Rick Horn, says it's a voluntary reporting system for companies, lowering the figure.

"I guarantee you, that is just a drop in the bucket," he says of the $1.35 billion. "I think I only had 15 percent of my clients reporting their data." The POP is funded by both the state and the DOD.

Nevada Congressman Jon Porter says the changes will help small businesses. The Republican offered workshops on winning federal contracts and more are planned for this July or August.

"The problem was that it was very confusing and didn't include all the information," Porter says of the multiple database system used before. "There were questions as to what category the businesses actually belonged in."

SBA officials concur.

"Under the CCR, a company could indicate that they were an 8(a), even if they hadn't received that designation from the SBA," explains SBA Assistant Administrator for Size Standards Gary Jackson. "I don't know if it was a problem, but it was getting out of hand."

Whether by accident or intentionally, companies mislabeled themselves. Did that result in any federal contract awards to unqualified companies? "That's hard to say," Jackson admits.

Small businesswoman Jones is just happy that won't happen again. Firms that used to just point and click instead of submitting their company data to the SBA will be in for a rude awakening, she says.

"When people would self-certify, they would put in information that was not accurate," she says. "Now, the SBA will have to be held accountable for the information on the 8(a), SDB and HUBZone (Historically Underutilized Business Zone) certification."

Businesses can still self-certify as simply a small business, or as one of the subcategories that include veteran- , women-, disabled- or minority-owned, according to the local SBA. The test is at least 51 percent ownership by a member of one of those groups.

The founder of Alpha Services knows a little bit about the process. Jones' firm is certified as a HUBZone, as well as being recognized as a minority- and women-owned business. She was also previously certified 8(a) business. Since starting Alpha in 1993, those certifications has been the source of contracts for her technology services with agencies like the Department of Defense. Contracts like that have helped Alpha grow to a tri-state firm with about 90 employees.

Jones' Alpha is among the 95 HUBZone businesses in the state. The certification is given to qualified business located in an economically disadvantaged areas that employs residents of that area. There are 44 8(a) certified small businesses in Nevada and 72 SBDs in the state. The maximum net worth allowed for a business ownerin the 8(a) program is $250,000, while the SDB caps the net worth at $750,000.

Robert Gomez can attest that the agency holds companies to those caps. He bought into his father-in-law's janitorial service in 1993 and become sole owner in 1996. His father-in-law's net worth stood in the way of getting the firm 8(a) certification. After three tries, and buying out his in-law, Gomez was finally successful.

Las Vegas-based Magic Brite Janitorial is certified as minority-owned, HUBZone and 8(a) certified. Its prime government contracts include providing cleaning services for Hoover Dam. Last year, it reported revenues of $3.5 million.

Gomez says he's happy to see the SBA do a little of its own housekeeping. "This should clean it up the misrepresentation," he says of the reforms.

vmiller@lvpress.com | 702-871-6780 x331

CONTRACT LAW

WHAT: Applying for SBA certification as an 8(a), HUBZone, or Small Disadvantaged Business to potentially secure government contracts

HOW: Apply online. Go to "www.sba.gov" and click on "Hot items."

REQUIREMENTS: Listed on site, but generally include demonstrating a social and economic disadvantage. Applicants may be asked to supply financial information.