Officials: SBA may be on its last legs


Officials: SBA may be on its last legs

Not so, says spokesman for the federal agency

By Kevin J. Shay
February 3, 2006

Since 2001, the Bush administration and Congress have chopped about half of the general budget of the Small Business Administration, a federal agency that many Maryland companies have counted on to provide loans and other assistance since 1953.

Could there be a plan afoot to abolish the SBA entirely?

Some think so.

''I've heard something about that," said Morris A. ''Mike" Little, president and CEO of B&W Solutions, an Oxon Hill company that has benefited from SBA programs, as it provides federal human resources management and training services, along with general business and community relations services.

''Some recent events and reports lead me to believe there could be some credibility to that," said Little, who is also board chairman of the National Black Chamber of Commerce in Washington, D.C.

The budget cuts, reports by government agencies, think tanks and industry publications, and statements by government officials are cause for concern, said Lloyd Chapman, founder and president of the American Small Business League. The Petaluma, Calif., organization formed in 2002 in response to what Chapman said were loopholes that allowed large companies to obtain government contracts that should have gone to small businesses.

''I think the Bush administration will try to close the SBA this year," Chapman said. ''I base that not just on the reports I've read, but on what people in the SBA and the Bush administration have privately told me ... One government lawyer said Bush will starve the SBA to death. Another said he wants to roll it into the Commerce Department."

Closing the SBA is a ''fantasy," said Mike Stamler, an agency spokesman. A local think tank that recently published a report calling for the SBA's abolition regularly puts out such reports, he said.

''They're entitled to their opinion," said Raul Cisneros, another SBA spokesman. ''But we're here today. We have a budget for next year."

In some ways, the SBA has been doing more with less money – its general budget this fiscal year is $456.5 million, down from $900 million in 2001, according to the U.S. Office of Management and Budget. But supplemental money added to provide disaster assistance in the areas hit by hurricanes raise this fiscal year's total to $987 million, Cisneros said.

However, a recent news release reported that the SBA backed about 98,000 loans worth $18.9 billion for small companies in fiscal 2005 through the agency's 7(a) and 504 loan programs, more than double the number in 2000. Another statement said small companies won a record $69.2 billion in federal contracts in fiscal 2004, including $8.4 billion in contracts garnered by companies participating in the SBA's 8(a) business development program.

''We're very pleased with the results our two main loan programs showed," SBA Administrator Hector V. Barreto said in a statement. ''In fiscal year 2004, it cost $100 million in government dollars to operate the 7(a) program. In fiscal year 2005, modest fees paid by the lenders and borrowers have allowed us to meet the extraordinary demand for these loans and dollars without taxpayer expense."

Attempts to abolishSBA not new

There have already been attempts by mostly Republican politicians to close down the SBA, which was created under Republican Dwight D. Eisenhower. In his 1986 budget proposal, President Reagan recommended abolishing the agency and moving what was left of its functions to the Commerce Department.

In the mid-1990s, Rep. David Dreier, R-Calif., who is still in Congress and chairs the House Committee on Rules, introduced a bill to terminate the SBA and roll it into the Treasury Department.

The SBA is not a part of any Cabinet-level department.

In a December study published by the Washington, D.C., think tank American Enterprise Institute, research fellow Véronique du Rugy advocated ending all ''subsidies" for small businesses. She called the ''great majority" of SBA programs ''wasteful and unnecessary."

''Market economies generate faster growth because resources are allocated on the basis of profit-maximization rather than political considerations," du Rugy wrote. ''Instead of preferential policies, policymakers should establish a tax and policy environment that encourages small, mid-sized firms with strong growth potential to evolve into successful large enterprises. And they should establish an environment where firms of all size could thrive. This means low tax rates, low levels of regulation, and a stable legal structure that protects property rights."

In a December interview in Business Week magazine, du Rugy also advocated abolishing the SBA, saying it ''hinders economic growth" and lends money to ''non-creditworthy firms."

American Enterprise papers such as du Rugy's carry weight with many in the Bush administration and in Congress, Chapman said.

While the SBA programs could use some fine-tuning, it doesn't make sense to abolish the agency entirely, or slice its budget in half, Little said.

''The SBA budget should be increased, not decreased," he said. ''The SBA has helped my company attract many contracts and grow. We've grown to 100 employees in nine years after starting with only two employees."

Closing the SBA would be a huge disservice, said Payal Tak, president and CEO of Telesis Corp., a Rockville information technology company and government contractor that ranked 28th last year on Inc. magazine's list of the fastest growing businesses, with 2004 revenue of $14.7 million. Last year, Tak was named the SBA's Business Person of the Year for the Washington, D.C., region and the company is in the SBA's 8(a) program.

''Small businesses are creating more jobs than large businesses," Tak said. ''The agency is doing an outstanding job."

The SBA is "the key tool" for small companies that want to work with the federal government, said Kimberly Scott, founder and CEO of The Great Gourmet of Federalsburg, which was recognized by the SBA last year as Small Business Exporter of the Year in Maryland.

"Every small business that contacts us for advice, we always send straight to [the SBA's Internet site]. It is a very easy portal to work within, and the information is invaluable," Scott said. "Without them, we would be lost in a maze of big business."

Small businesses employ about half of the private workforce and account for more than half of the net new jobs, according to the SBA.

There is no question the SBA needs to do a better job in areas such as ensuring contracts go to small companies, Chapman said. Studies by the federal Government Accountability Office and the SBA's Office of Inspector General have found that large companies have won contracts that should have gone to small businesses.

Other reportsraise concerns

A recent report by the U.S. Civil Rights Commission that called for the SBA to consider ''race-neutral alternatives" in procurement programs also concerns some business people.

''If you have always played on a level playing field, then that argument has some validity," Little said. ''But there is still some appropriateness in having programs that facilitate some catch-up."

Late last year, the U.S. Women's Chamber of Commerce in Washington won a court ruling that forces the SBA to implement the federal women's procurement program. The program has been delayed for about five years, chamber CEO Margot Dorfman said in a statement.

''The SBA was established to assist small-business owners," Dorfman said. ''Instead, after five long years, they still require an additional six months to simply write the procedures necessary to implement this program."

Washington business publisher Kiplinger also recently reported that President Bush plans to call for additional cuts to the SBA's budget, likely slicing the MicroLoan and Small Business Innovation Research programs, in his fiscal 2007 proposal due out later this month.

In a recent remarks on the Gulf Coast, Bush referred to the SBA as a ''small agency" that was ''overwhelmed" by Hurricane Katrina.

''The SBA was already ridiculously small when Bush began cutting its budget," Chapman said.

The Incredible Shrinking Company


The Incredible Shrinking Company

Corporate giants snag federal small business set-aside contracts.

By Christopher Moraff
Dollars & Sense
February 1, 2006

Between 2002 and 2005, St. Augustine, Fla., exercise equipment vendor Raul Espinosa watched mystified as, one after another, a series of Air Force contracts he had placed bids on were given to other companies. Of the 14 bids that Espinosa has documented, his company, FitNet International, did not win one. To his surprise, Espinosa learned that some of the competitors he was losing contracts to had never even bothered to bid on them.

Espinosa was no stranger to adversity. At 14 he came to the United States alone from Cuba and managed to work his way through college and graduate school. He formed FitNet in 1995 to sell exercise equipment to the U.S. military. A certified minority-owned small business, FitNet describes itself as a purchasing alliance that represents over 400 equipment suppliers. The company has three employees and grosses under $1 million a year.

Now, Espinosa was getting a first-class lesson in corporate pandering that he'd never bargained for; it would take him three years to uncover the full story.

In June 2005, the Air Force came under scrutiny for its dealings with a company called The Corps Group (TCG), which Espinosa alleged had stolen his contracts for fitness equipment. In fact, TCG was a unit of the much larger Precor, Inc., and therefore ineligible for the small business set-asides it had received.

In a brief filed in June 2005 by the Small Business Administration's (SBA) Office of Hearings and Appeals, Administrative Judge Christopher Holleman summed up: "The Administrative Judge finds this case profoundly disturbing. The Air Force has filed two contradictory documents with this office, identifying different awardees for this contract. Other documentation the Air Force submitted to the Area Office appears to treat TCG and Precor as one entity. The Air Force is now candid that it awarded a contract designated as a small business set-aside to a large firm."

Holleman continued: "The Air Force has thus filed at least one false and misleading document with this office. This is inexcusable. The Air Force's actions here are negligent at best, at worst deliberate attempts to mislead SBA and this Office."

But Espinosa admits his is a victory in name only. "You might win the size protest, but you can't claim the contract because the agency allowed delivery to take place and what's worse, the penalties for the violations aren't enforced."

Dreaming of a Small Business
Espinosa's situation is not unusual. In June 2002, the ranking Democrat on the Senate Small Business Committee, John Kerry, acknowledged that "the federal government today is not keeping faith with America's small businesses."

Small business has been called the cornerstone of the American dream--and in the nation's early years, small enterprises predominated. Small business became largely disengaged from the gold rush of 20th century industrial capitalism. But even in an economy increasingly at the mercy of superstores and megalith corporations, many Americans still hold fiercely to the myth of the mom-and-pop establishment and what it means to our culture. Politicians recognize--and don't hesitate to play on--the special place small business holds in the ideology of U.S. capitalism. In the name of freeing small businesses from burdensome taxes and regulations, conservatives champion work-ethic individualism as a rationale for dismantling everything from welfare to environmental protections to Social Security. But their rhetoric invokes small business much more than their policies actually benefit it.

George W. Bush is no exception. Bush unveiled his small business agenda in March 2002. Among other steps, he pledged to improve the access of small businesses to federal contracting opportunities. The Bush administration has in fact modified one common practice used to disqualify small firms from federal contracts--"bundling," or consolidating several smaller contracts into one large "mega-contract" designed to exceed small business contracting requirements. But large corporations and their friends among federal procurement officials still have a range of tactics for squeezing out small businesses. For example, critics charge that the size-vetting process that certifies businesses as "small" itself serves as a vast loophole for big contractors.

At the same time, the administration has slashed the SBA's budget. The SBA is charged with ensuring that small businesses get their mandated share of federal contracts. But time and again, the agency has complained that it simply doesn't have the resources to do the job. The 2006 budget earmarks just $456.5 million for the agency--nearly 5% less than last year, and a 60% drop from the $1.1 billion the Clinton administration provided for 2001. Commenting on the 2006 budget proposal, Sen. Kerry recently remarked, "Over the last four years, President Bush has cut the SBA's budget by more than one-third, leaving our entrepreneurs struggling for access to credit, federal contracts, and adequate training."

Today, a weakened SBA that lacks the capacity for monitoring and enforcement means a culture ripe for procurement exploitation. Under current law, 23% of the estimated $270 billion in federal contracts must go to firms certified as small by the SBA. But in reality, large corporations like Raytheon, Carlyle Group, Titan, and Boeing are taking advantage of an overtaxed system, using deception, collusion, and influence to garner set-aside contracts intended to fulfill the federal government's pledge to support small business.

Serving the War Effort
Today's SBA evolved out of several older agencies originally created to help businesses of all sizes recover from the Great Depression and then to maximize the U.S. war effort in World War II and Korea.

In 1932, President Hoover formed the Reconstruction Finance Corporation (RFC), a government-assisted loan program for guiding both large and small enterprises through the post-depression years. The RFC grew significantly under Franklin Roosevelt's New Deal, and by 1939 had been merged into the Federal Loan Agency.

As the country geared up for war in 1942, the Smaller War Plants Corporation was formed which made direct loans, encouraged financial institutions to make credit available to small enterprises, and advocated small business interests to federal procurement agencies and large firms.

The SWPC was dissolved after the war, but was followed up during the Korean conflict with the Small Defense Plants Administration. The SDPA was charged with vetting small businesses for the RFC. By the 1950s, however, critics of the RFC, led by Senator J. William Fulbright, leveled charges of influence peddling--among other ethical and legal lapses--at the agency, and a subsequent investigation resulted in its dissolution.

Soon thereafter, President Eisenhower proposed the creation of a new small business agency. The Small Business Act of July 30, 1953, created the SBA to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns" and ensure small businesses a "fair proportion" of government contracts and sales of surplus property.

Since the 1950s, the SBA boasts, it has helped supply over 20 million loans, guarantees, contracts, and counseling sessions to America's small business community. But how many of these firms are truly small is a matter for debate.

Who Defines "Small"?
A widely accepted statistic says that somewhere around 98% of all businesses in the United States employ fewer than 100 workers, yet under most SBA guidelines, any business with fewer than 500 may qualify as small.

Given the payoff in contract set-asides, what defines a company as small is a matter of no little consequence and one that has been contested and rethought for years. The government's Central Contractor Registration database has historically relied on a hodgepodge of staff-size and revenue-based indicators, creating a process that many argue is both complex and unreliable.

Until last April, companies themselves--on the honor system--supplied the information on which these classifications were made. Now, procurement offices, woefully understaffed for the job, will research and determine firms' classifications.

As far back as 1998, the SBA's own Office of Advocacy was aware that the federal contract award system was seriously flawed. That year, the agency found, small firms received just 18.3%, or $33.2 billion, of the $181.7 billion spent by the federal government in prime contracts over $25,000. But officials did little until 2002, when the SBA commissioned a landmark study from Virginia-based research firm Eagle Eye.

According to that study, at least 44 large companies erroneously received small business contracts in 2002. Meanwhile, the 44 admittedly miscoded businesses--heavy-hitters like Raytheon, Hewlett-Packard and the Carlyle Group--represented over $2 billion worth of federal contract money that year. But the SBA refused to make Eagle Eye's report public, offering an edited version instead.

A California-based small business advocacy group, the American Small Business League, cried foul. The group sued the SBA for the original document, and the administration dug in for a fight. The ASBL, led by Lloyd Chapman, charged that the SBA was attempting to whitewash the study's results.

Last spring, things began to heat up. With the ASBL lawsuit receiving increasing media attention, a federal court finally ordered the SBA to comply with the Freedom of Information Act and release the unedited report to the ASBL. A threatened SBA appeal never materialized, and on June 21, the SBA handed over the full report to Chapman's organization.

In FY2002, according to the report, the 1,000 largest "small" contractors accounted for 53% of the approximately $53 billion in total contract dollars allotted for small businesses. Among these top 1,000, $1.6 billion in contracts went to 32 firms the analysts designated as large businesses, while another $275 million went to eight firms categorized as "other." The report concluded that $4.5 billion in contracts went to a total of 167 firms "exhibiting inconsistent small business coding."

The researchers listed eight possible reasons for the errors, ranging from the innocuous (firms outgrowing their size class during the year) to the illegal ("vendor deception").

The SBA's edited version of the report omits the reference to vendor deception. Still, SBA spokesperson John McDowell defended the SBA's decision to release an edited version. "There is nothing sensational about the draft as compared to the final product," McDowell said. "All of our edits were designed to eliminate speculation and produce a quality report that was grounded in sound data."

But ASBL's Chapman says he believes the SBA still isn't coming clean and asserts that the real number is closer to 400 miscoded companies and $40 billion in lost contracts.

"I suspect if I can get a full list of those companies that were coded as small businesses that year, I'll be able to prove that the SBA deliberately withheld information," Chapman told me. But the SBA isn't budging.

In the meantime, if it can't get the full list of small business names, the ASBL hopes to at least get access to documents detailing protests filed against the large firms that falsely claimed to be small businesses. He says the SBA is refusing to provide those reports too, and so just before Thanksgiving the ASBL filed another Freedom of Information Act suit against the SBA. The ASBL hopes the documents will be the first step in the process of eventually bringing the culprits to justice.

Currently, size standards are only enforced if a contracting officer, another bidder, or the SBA itself protests a company's classification. Successful protests are rare. In 2002, for example, the SBA processed 383 of these protests, 29% of which were dismissed on procedural grounds. Of the remainder, 85 firms were found to be misclassified.

Nonetheless, no company has ever been prosecuted for intentionally falsifying its status, an offense punishable under the Small Business Act by up to 10 years in prison. Despite court findings to the contrary, the SBA argues that it has been unable to prove any fraud took place--a primary component of any action.

"It's time for the Attorney General to stop helping the SBA withhold information on contracting abuse and begin investigating which federal officials have been involved in allowing federal small business contracts to be awarded illegally to large corporations," Chapman said in a statement announcing the latest ASBL suit.

It's All Politics
Olympia Snowe (R-Maine), who chairs the Senate Committee on Small Business and Entrepreneurship, toes a fine line between praising and openly criticizing the SBA and its efforts. One of her first actions as incoming chair in 2003 was to ask the Government Accounting Office to investigate irregularities in the Department of Energy's contract awarding process.

The GAO found that between 2001 and 2004, the Energy Department vastly overestimated the number of contracts it was awarding to small businesses, leading to accusations of a cover-up. The findings showed that 13 large contractors overstated their subcontracts to small businesses, in violation of SBA guidelines. Twelve of the 13 reported meeting or exceeding their small business subcontracting goals, while only four actually did.

Commenting on the report, Snowe said, "The combination of misleading reporting by large contractors and lax oversight by Energy Department officials is unacceptable. The integrity of the subcontracting process must be restored immediately." She went on to say that small business owners have little assurance that the department complies with the Small Business Act.

In response, the department agreed to better police itself, prompting Snowe to declare a victory--even though, according to the Eagle Eye report, the department accounted for less than half of one percent of miscoded contracts government-wide.

On October 20, Democrats on the House Small Business Committee released their sixth annual scorecard on small business contracting. The scorecard, which measures how well 22 federal agencies are meeting small business contracting goals, found that while the federal marketplace grew by 3% to nearly $295 billion in FY2004, contracts to small businesses declined by 31%--costing small firms an estimated $1.6 billion in contracting opportunities.

The scorecard singled out contracts for post-Katrina rebuilding efforts in the Gulf Coast as especially worrisome. It seems things are not getting better. Commenting on the report, Rep. Nydia M. Velazquez (D-N.Y.), ranking Democrat on the committee, remarked, "It makes absolutely no sense that small business opportunity is declining while this nation's federal marketplace is simply flourishing."

Last May, the top procurement official in the Bush administration since 2003, David Safavian, speaking at a National Small Business Association conference, admitted that there are agencies that "aren't even trying" to achieve their mandated small-business procurement levels, and that the government's data on the matter are flawed. Safavian pledged to do better.

Now he will not get the chance. On September 19, federal authorities arrested Safavian on charges of making false statements and obstructing justice, related to his role in the Indian gaming scandal centered on Jack Abramoff. The charges against Safavian stem from actions taken before he became chief of the Office of Federal Procurement Policy. Still, as details of his story dribble out, they are not likely to bolster small business's confidence that this administration is committed to tackling their problems. For example, Safavian came to know Abramoff when they were both associates at the Washington, D.C., law firm Preston, Gates and Ellis--which happens to be the paid lobbying firm for at least two of the large corporations that received no-bid contracts for post-Katrina services, Shaw Group and Fluor Corp.

Nine days after Safavian's arrest, Rep. Chris Van Hollen (D-Md.) joined Democratic members of Congress in drafting a letter to the U.S. Comptroller, asking him to investigate any possible misconduct in the federal contracting process. In the letter, Van Hollen asserts: "It cannot go unnoticed that perhaps the key government official dealing with federal procurement and the management of $300 billion worth of federal contracts has been arrested in connection with his past role in the procurement process."

Meanwhile, the "Small Business Index" released in November by House Democrats indicates that small business confidence hit an eight-year low in the third quarter of 2005, compounded by high energy prices, dwindling access to capital, and the devastation wrought by Hurricanes Katrina and Rita.

Still, small business ownership remains an aspiration for plenty of Americans, and politicians from across the ideological spectrum continue to pay lip service to the sector's importance. But the federal government is failing to fulfill its pledge that small businesses will receive a fair share of government contract spending. Until some deeply embedded institutional practices are overturned, small businesses are not likely to reap the benefits the political system has promised them.

Christopher Moraff is a Philadelphia-based writer and reporter. He last covered SBA contracting misappropriations for Entrepreneur.

For the People


For the People

Landing government contracts is tough--but it can be done. Learn from these entrepreneurs and Uncle Sam could become your biggest client.

By Joshua Kurlantzick
Entrepreneur magazine
February 1, 2006

For Liz Lasater, founder of Red Arrow Consulting, a supply-chain management and logistics company in Issaquah, Washington, the federal government is in some ways her ideal customer. Her small firm probably wouldn't survive without contracts from government agencies, she says, and as the defense budget rises, Uncle Sam offers a seemingly inexhaustible supply of new deals. If Lasater, 42, performs well, government agencies will be more loyal, less demanding clients than their private-sector counterparts. "Government can deliver enormous volume," Lasater says. "Almost no one in the private sector [can] match it."

At the same time, the government is Lasater's most difficult client. "You have to have a lot of capital to wait out the process of getting approved to fill a contract," Lasater says. "Then you have to figure out which contracts you can really compete for, and which are already reserved for large companies." She sighs. "It can be very frustrating."

Lasater's problems wouldn't shock most small businesses trying to win federal contracts. Despite promises over the past five years by government agencies to make the contracting process more accessible and more transparent to small businesses, recent reports show that only limited progress has been made. To many small businesses, accessing contracts still doesn't seem worth the effort and cost required to play the game. And in the wake of Hurricane Katrina, which devastated many small companies along the Gulf Coast, small-business advocates argue that few reconstruction opportunities have gone to entrepreneurs. Still, as Lasater knows, entrepreneurs willing to brave a contracting system that seems tilted in the big boys' favor can prosper.

The World's Most Powerful Customer
The size of U.S. government contracting is staggering: In 2004, the federal contracting marketplace was nearly $300 billion--and growing. Following the national trend toward outsourcing business functions, the Bush administration has prodded the government to outsource more work. The rising defense budget, the creation of the massive new Department of Homeland Security, the extensive rebuilding in the Gulf Coast, and the reconstruction efforts in Afghanistan and Iraq also add to contracting opportunities.

For decades, entrepreneurs were often shut out of these marketplaces. Government agencies favored large contractors, many of which were led by executives who had previously worked in government. In recent years, however, congresspeople and small-business advocates have forced the federal government to focus more on small companies. In 2000, Congress passed the Equity in Contracting for Women Act, which increased the number of federal contracts set aside for women-owned companies. Congress had already created broader set-asides under which small companies are supposed to receive 23 percent of all federal contracts. (This is not a huge number, considering companies with less than 100 employees account for more than 95 percent of U.S. businesses.)

The government also took on contract "bundling," where government agencies consolidate several individual contracts into one larger, more complex deal. Bundled contracts are ideal for giant companies that can provide a range of services. In 2002, President Bush vowed, "Whenever possible, we are going to insist that we break down large federal contracts so small-business owners have a fair shot." Backing the president, SBA head Hector Barreto added that "the consequences of bundling are serious"--a 2000 report by the SBA's advocacy office suggested that, for every 100 bundled contracts, small companies lost out on 106 individual contracts they might otherwise have received.

Yet the truth is, the contracting door has only opened a crack. The high cost and complicated red tape of obtaining certification dissuades small companies. Meanwhile, federal agencies often prefer companies with extensive contracting experience. And many of today's consolidated contracts are longer term than in the past, or they're automatically renewed, so large companies that win them are locked in for years.

"This is directly related to the decline in the size of the [government's] acquisition work force," says Paul Murphy, president of Eagle Eye Publishers Inc., which researches contracting trends. With fewer government procurement specialists due to federal cuts, says Murphy, overworked contracting officers prefer to hand out bundled mega-deals to big corporations rather than sift through hundreds of small-business proposals.

In fact, Murphy believes the number of bundled contracts is now reaching record levels. Eagle Eye's research suggests that between 1992 and 2001, the number of bundled contracts rose by 19 percent. Though more recent numbers seem rosier (according to Murphy, an official estimate puts bundled contract expenditures at less than 1 percent of total procurement in 2004), many believe inaccurate measures of bundling are masking the true gravity of the problem. Indeed, a May 2005 report from the SBA's Office of Inspector General estimates that, between 2001 and 2004, a minimum of $384 million was potentially lost to eligible small businesses due to bundling.

Noncompetitive bidding also remains common. According to a report by research organization The Center for Public Integrity, 40 percent of Pentagon contracts awarded between 1998 and 2003 were given without taking bids from numerous potential competitors--a lack of competition that favors entrenched defense firms. This sometimes happens because large corporations take advantage of loopholes, such as rules allowing them to buy small firms and inherit those firms' small-business set-asides.

Many small-business advocates say the set-aside rules themselves are problematic. "One of the most obvious flaws in the current size-standards methodology is the arbitrary nature of size measures," says Nydia Velázquez, ranking Democrat on the House of Representatives' Committee on Small Business. An SBA study released in December 2004 suggests that, in one year, some $2 billion in federal contracts targeted for small businesses actually went to corporate giants. Similarly, The Center for Public Integrity's report reveals that, between 1998 and 2003, the Pentagon gave over $47 billion in small-business set-asides to large companies. And a recent study by Eagle Eye found that 39 of the leading contractors listed as small businesses were actually large companies.

"There is just no prosecution of anyone who gets federal contracts in this way," says Lloyd Chapman of the American Small Business League, an advocacy group that fights to expand access to contracts.

The SBA says it recognizes the problem. There are concerns about the size standards used to judge whether companies should qualify as small businesses, admits Gary Jackson, an SBA assistant administrator responsible for size standards. Jackson says the SBA has held a range of meetings across the country with entrepreneurs to solicit feedback about appropriate size standards for small-business contracts. The SBA, he says, is using this public feedback to craft workable new size standards, though he's still not sure when those will be released.

On a micro level, all these barriers add to entrepreneurs' costs and frustration. "When we survey our membership, the vast majority want to get federal contracts, yet 80 percent say they wouldn't try" because they think the system is still rigged, says Barbara Kasoff, co-founder and president of Women Impacting Public Policy, a nonprofit, bipartisan public-policy advocacy organization. "They just don't have the energy to go through the complex maze [of contracting]."

Alan Castillo understands the feeling. "When you're researching contracting, you may start to get the details of it and see the risk is too high," says Castillo, 37, founder and president of Phoenix-based Castillo Technologies, a provider of IT services to public-sector and business clients.

"So many things stack up against [the] little guy," agrees Abe Abraham, founder and president of CMI Management Inc., an Alexandria, Virginia, company that provides maintenance and operations support for private-sector and government clients. Abraham found that, even after he got approved as a potential government contractor, he was constantly aced out by larger firms.