The Small Business Administration, claiming a major victory for its constituents, recently announced that small companies won $79.6 billion in federal prime contracts in fiscal 2005.

Former SBA Administrator Hector Barreto, in one of his last official acts before stepping down April 25, called the agency's year-end contract data excellent news, and said that small businesses won 25.4 percent of the $314 billion total federal prime contracts awarded in fiscal 2005.

The federal government has a congressionally mandated goal of awarding 23 percent of federal prime contracts to small companies, and Barreto said that 2005 marked the third straight year it has met that goal.

But Barreto's assertions that the government surpassed its goal have come under sharp attack from congressional leaders, as well as the SBA's inspector general and Government Accountability Office.

Critics there have complained repeatedly of problems in how the data is compiled and how the agency oversees federal small-business contracting.

One complaint is that companies self-certify as small businesses in a government database that rarely is reviewed for accuracy.

Another is that large government contractors are winning small-business prime contracts.

Research company Eagle Eye Publishers Inc., Fairfax, Va., in June released its own fiscal 2005 small-business contracting report using data produced by the General Services Administration and Defense Department. Eagle Eye's report identified $377 billion in federal prime contracts, $63 billion more than SBA's report. Of that higher total, Eagle Eye found that small businesses won $65 billion in prime federal contracts, just 17 percent of the total, said company President and CEO Paul Murphy. "Administrator Barreto is either comparing apples to oranges or else he has access to numbers that the general public does not," Murphy said. "They're manipulating the appearance of success."

But neither SBA nor GSA generates the report, Karen Hontz, SBA associate administrator for government contracting told Washington Technology. That job was outsourced in 2003 to Global Computer Enterprises Inc., Reston, Va. GSA hired Global Computer to run the Federal Procurement Data System-Next Generation, the database that tracks government contracting including small-business contracts.

Hontz said she was comfortable with the accuracy of data that SBA was touting. SBA officials declined to comment on Eagle Eye's report.

Appearance of deception
When Eagle Eye compiled a list of the top 100 companies that won small-business contracts, both IT and non-IT work, in fiscal 2005, it found several familiar large-company names. Among the IT contractors on its list was Science Applications International Corp. of San Diego, which ranked third with more than $360 million in small-business contracts.

Other large companies included GTSI Corp., Chantilly, Va., which was fourth with $290 million in small-business contracts, General Dynamics Corp., which ranked twelfth with $232 million, and Lockheed Martin Corp., which came in at No. 19, with $175.3 million in small-business awards.

SBA officials declined to provide a list of the top 100 contract winners from its own data. Asked how General Dynamics, a company with more than $21 billion in fiscal 2005 revenue and more than 72,000 employees, could make a list of the top small-business award winners, company spokesman Rob Doolittle said the answer lies in the company's recent acquisition history.

"General Dynamics has acquired several small businesses over the last several years that were likely awardees of small-business contracts," Doolittle said. "They can't compete [for new contracts] as small businesses any longer, but the contracts continue to exist as they were awarded."

Hontz also said that large companies appeared on Eagle Eye's list because of their acquisitions of small companies that held small-business contracts.

It's unlikely that large companies are intentionally masquerading as small businesses, Eagle Eye's Murphy said.

"Deception is a rather small part of the explanation for this problem," he said. Until late 2004, a large company could acquire a small business and roll it into its own corporate structure without ever changing the acquired company's size status, said Richard Vacura, a partner with law firm Morrison and Foerster LLP, McLean, Va. "You ended up with what amounts to a large business performing the contract, and the agency still getting credit for a small-business contract," Vacura said. To close this loophole, a new regulation was adopted in December 2004. It requires that any small company that is bought by a larger one and either changes its name or is rolled into the larger company's corporate structure, must notify the contracting officer overseeing the company's contracts of the change. The company would be allowed to complete the term of the contracts, including option years, but the work would cease to count toward the contracting agency's small-business goals, Vacura said. The rule change, however, did not eliminate all loopholes in the regulations. Acquisitions made before December 2004 are exempt. And if the larger company buys 100 percent of the smaller company's stock, leaves it as a subsidiary and does not change its name, the small company, even though it would be part of a much larger entity, would continue to be counted as a small business on its contracts, Vacura said. The smaller company would not, however, be allowed to compete for new contracts as a small business.

Self-policing A fundamental problem remains: SBA's system requires companies to accurately update their own information – at all times, not only when a company is acquired – but it has no oversight of the process. During the course of a year, a company could outgrow its small-business size designations set by the North American Industrial Classification System codes. It would be up to the company to update its information in the Central Contractor Registry, a list of all federal contractors and their NAICS codes. The Defense Department operates the CCR, but contracting officers governmentwide use it.

There is no step in the process where a Defense Department or SBA official ever cross-checks information listed by a company on CCR with information on the company's own Web site, SBA's Hontz said. There is just too much activity to allow any oversight, she said. "To have somebody check the thousands of companies coming and going all the time is just not possible," Hontz said. "There are too many companies."

The federal government relies on companies to police themselves. If a small business loses a contract to a company it thinks is not small, it may file a protest with the government.

Because companies often partner on contracts, and because they don't want to risk being labeled a complainer and thus lose potential business, there is little incentive to report questionable awards, Morrison and Foerster's Vacura said.

"There's also a fear that everything they do from then on will get size protested" as retribution, Vacura said. "And that's disruptive."

Business is good
Although Eagle Eye's Murphy didn't have data on IT contracting alone, he said that despite SBA's contracting foibles, small IT companies are doing well.

"IT tends to be a sector where small businesses perform strongly," he said. Two examples, he noted, are GSA governmentwide acquisition contracts: the $5 billion Veteran Technology Services contract for businesses owned by service-disabled veterans, and the $15 billion Alliant Small Business set-aside contract.

"Agencies are consciously trying to address the small-business market with their own special contract vehicles," he said. Ironically, such efforts "wouldn't be necessary if they were just meeting their goals in the first place," Murphy said.

A familiar regulation of the Small Business Administration allows a contractor that qualified as a small business at the time it won a contract to be considered small for the life of the contract. More than three years after SBA proposed to amend it, that regulation remains in force.

But certain changes in procurement policy and developments in case law have limited the regulation's effect on Federal Supply Schedule contracts and other multiple award contracts.

Government contracting officers now have broad discretion, and sometimes the responsibility, to request updated size certifications when they exercise contract options or compete task orders under these types of contracts. A Court of Federal Claims decision late last year on LB&B vs. United States illustrates the point.

The Air Force in 2001 awarded LB&B one of 11 indefinite-delivery, indefinite-quantity contracts for flight simulation and training services. At the time of award, LB&B qualified as a small business.

Four years later, when the Air Force competed the task order at issue among the small-business IDIQ contractors, LB&B had grown and no longer could certify that it was small. When the contracting officer asked for new size certifications, LB&B relied on its original certification for the IDIQ contract.

The Air Force refused to accept LB&B's position and asked SBA for a formal size determination. LB&B argued that it properly relied on its original certification, and that the contracting officer violated SBA regulations by requesting an updated certification at the time of task order award.

SBA disagreed, concluding that the contracting officer had discretion to request such a certification. The Court of Federal Claims agreed with the agency. LB&B, because it no longer could certify as small, was ineligible for the task order.

Cases such as LB&B should concern small businesses positioning themselves to compete for the increasing number of multiple-award contracts let by federal agencies. These contracts can have terms of up to as much as 20 years, while the time for which a contractor can certify as small for the task orders awarded under those contracts, as demonstrated by the LB&B case, can be far less.

Small businesses, therefore, must consider the possibility that they'll get less than they expect from these long-term, multiple-award contracts. As their businesses grow, they could find themselves at the mercy of a contracting officer, and ineligible after a few years for orders that they once received regularly.

The same issue can affect the calculus when a large business considers buying a small business that is a multiple-award contract holder. Though the law does not require a contracting officer to terminate small-business set-aside contracts or task orders held by companies that are acquired by large businesses, such an acquisition will immediately prevent the acquired firm from competing for new set-aside task orders that require an updated size certification.

The result is that neither the buyer nor the seller may be able to rely comfortably on pre-acquisition order volume as a predictor of future order volume.

Much of this uncertainty will disappear if SBA finalizes a rule first proposed three years ago. But certainty is not always better; the rule as proposed would require all multiple-award contract holders to certify annually their size status. Such a requirement would convert what is now only a risk into an annual reality.

Whether or not SBA finalizes the rule as proposed, small businesses must compete for multiple-award contracts with full knowledge of the risks of future size-certification requirements.

In a new report, the government's administrative watchdog says that small businesses are uniformly the last to get paid when they do work for the Defense Department.

In many cases, this causes a financial hardship for small contractors, interrupting their day-to-day operations and often forcing them to seek credit to cover their costs while awaiting payment, according to the Government Accountability Office (GAO).

To read the barrage of press releases from the American Small Business League, you'™d think the SBA can'™t do anything right The association alleges that the SBA, among other things, has devised loophole-ridden contract granting protocols that would allow venture capital firms with a controlling interest of 51 percent in a small R&D company to be eligible for small business status It would also allegedly allow franchisers to use their franchisees fronts to illegally receive federal small business contracts

The ASBL raises the specter of Fortune 1000 companies setting up divisions as franchises to receive the federal funding The ASBL also blasts the Bush administration for allegedly stalling implementation of a procurement process for woman-owned businesses

ASBL has filed a series of lawsuits against the SBA to make the agency provide names of companies that have been coded as small businesses for the purpose of federal contracting ASBL charges that corporate giants such as Northrop Grumman, Raytheon and Titan are on that list

SBA Administrator Hector Barreto stepped down this month, replaced by Steven Preston, former executive vice president of ServiceMaster But the ASBL raises questions about Preston'™s qualifications for the job, because Preston has never run a small business ASBL also voices concern about the franchisee issue

Lloyd Chapman, the president of ASBL, is claiming that the current administration is gearing up get rid of the SBA all together He cites, in a January interview with BusinessWeek, that the Bush administration has not only cut the SBA budget in half but has also tried to adjust policy so that some of the biggest companies in the country could be considered small businesses

But ASBL isn'™t the only entity that'™s waxing the SBA'™s tail In 2003, the Government Accounting Office conducted an investigation finding that Barreto had allowed the reporting of billions of dollars in contracts to large companies as small-business awards, and the SBA was subsequently forced to remove the names of 600 large businesses from its PRO-NET database, the SBA'™s main directory for small business contracts And a 2005 AP story reported that the 9/11 Disaster Recovery loan program had granted less than 11 percent of its proceeds to firms based in New York

Preston was sworn in earlier this month as Barreto'™s successor