We've been hearing about it a lot recently--large companies receiving contracts from the federal government that were designated for small businesses. In fact, many studies have shown that hundreds of government contracts meant for small business have gone to large corporations. According to this NYTimes.com article, one small business owner, Joseph Cooper, saw this practice first-hand when he received a contract from the SBA back in 1995. Today, Cooper has been left bankrupt and out of work after years of legal battles with the government.

His contract, worth over $8 million, allowed him to do public relations for the Immigration and Naturalization Service. But shortly after he began working for them, his deal was rescinded and instead awarded to three multimillion dollar companies. The companies were listed as disadvantaged in contract documents, but after Cooper filed a false-claims lawsuit against the companies, the court ruled that the companies didn't qualify as small businesses. Sounds good for Cooper, right? Not exactly. The court said that fraud had not been committed, because the INS knew that they weren't small businesses when they awarded them the work. With that, the case was dismissed.

Other small businesses in this situation have had the same outcome: Even if they prove that federal agencies are handing out small business contracts to large companies, most of the time, the corporations get to keep the contracts, with no penalties or questions asked.

But two critics of these practices will be entering into leadership positions and say they're ready to make some changes. When Congress reconvenes January 4, Senator John Kerry (D-MA) will become the chairman of the Committee on Small Business and Entrepreneurship, and Congresswoman Nydia Velázquez (D-NY) will step in as chairwoman of the House Small Business Committee. Both say they want to make the protest process more honest, by creating and enforcing penalties on large corporations receiving contracts meant for small business.

As for Cooper, he says his personal and professional life have suffered from this experience, and regrets ever receiving the contract in the first place, "I wish I'd never done business with the federal government."

The percent of federal IT prime contract dollars going to large companies increased by 15 percent from 2003 to 2005, sharply cutting into the share held by small and mid-sized firms, according to Input Inc.



In specific numbers, the large companies’ share of federal IT dollars for prime contracts increased from 50 percent in 2003 to 65 percent in 2005, said the Reston, Va., market research firm. For the purposes of its study, Input considered large companies as those with earnings of more than $250 million.



“We have seen a dramatic shift in the way the U.S. federal government acquires technology in favor of the GSA multiple award schedule and major task order contracts,” said Kevin Plexico, Input’s executive vice president.


“These tools give the government more flexibility than ever in selecting their prime vendor of choice and the trend suggests a strong preference for larger businesses,” he said.

During the course of its study, Input found that the number of companies participating in the market has increased at all levels. Those earning less than $10 million in spending on prime contracts has increased from 11,000 in 2003 to 18,000 in 2005.

“While the percent of federal IT spending with small companies has decreased, the number of companies participating has increased by 63 percent. The money spent by the federal government is getting spread over a significantly larger number of companies, which demonstrates that the barriers to entering the market have decreased,” Plexico said.

Several large defense contractors either based in San Diego or with significant operations here garnered more than $1.3 billion in federal money last year that was earmarked for small businesses, according to a new analysis of government contracts.

Since 2002, the companies – Science Applications International Corp., General Dynamics, L-3 Communications, General Atomics, ViaSat and Cubic Corp. – have reaped nearly $3 billion in small-business contracts, according to the analysis by the American Small Business League, a Bay Area-based advocacy group.

Nationwide, dozens of Fortune 500 corporations like these, including household names Lockheed Martin, Microsoft and Wal-Mart, have received tens of billions of dollars in small-business awards in recent years, the analysis shows.

There have been instances of fraud – 24 federal convictions in the past five years – but the vast majority of cases involve shoddy record keeping and a system that favors large corporations that regularly acquire small businesses and small companies that grow large over the life of a contract, which can be as long as 20 years.

General Dynamics, for example, has acquired 43 companies in the past decade. Since 2000, ViaSat has grown from 375 to 1,400 employees.

The Small Business Administration last month announced a new regulation aimed at fixing the problems, but members of Congress and small-business advocates say the rule postpones true reform and does not address the primary reasons why small businesses so often lose out in government contracting.

“Nearly five years ago, the president released a small-business agenda that aimed to make the federal marketplace more accessible to small firms,” said Rep. Nydia Velazquez, D-N.Y., the incoming chairwoman of the House Small Business Committee. “Yet we continue to see large businesses receiving small-business awards.”

The Small Business Act requires federal agencies to consider small businesses when awarding contracts. In 1997, Congress began mandating that 23 percent of all prime contract dollars go to businesses defined as small when based on annual revenue and number of employees.

The SBA reported 25.4 percent of federal prime contracting dollars went to small businesses in 2005. However, Valazquez and other House Democrats say $12 billion in small-business contracts actually went to to large firms last year.

SBA officials acknowledge problems with the federal procurement data system – the database that keeps track of all federal contracts – and say they are investigating the Democrats' accusation.

“We are going to the federal agencies that had questionable data and asking them to review their contracts to see if there was inaccurate reporting,” said SBA spokesman Calvin Jenkins.

Advocates and government watchdogs, including the SBA's inspector general, say such problems have persisted for years. A 2003 report by the General Accounting Office – now called the Government Accountability Office – showed five large companies had received small-business awards totaling $460 million.

Earlier this year, SBA Inspector General Eric M. Thorson testified before the Senate about “several regulatory loopholes” that allow large companies to perform small-business contracts. “Legitimate small businesses lose out as agencies have little incentive to identify other small-business contracting opportunities,” he said.

Officials from Cubic, General Dynamics and General Atomics said they do not identify themselves, or any of their subsidiaries, as small businesses when vying for government contracts.

SAIC, ViaSat and L-3, which owns Titan Corp., refused to comment for this story.

Those who spoke to The San Diego Union-Tribune said many of their contracts require them to use small businesses as subcontractors.

“We fully support the government's small-business policy because it is an important part of our overall business strategy,” said Jae Lande, a spokeswoman for Cubic.

A new SBA rule, set last month and effective starting in June, requires small businesses receiving government contracts to recertify their size when they merge or are purchased by another company or at the end of the first five years of a contract.

Current SBA regulations allow a company's size certification to stay the same throughout the contract.

“This regulation will go a long way toward ensuring that small-business contract awards are fairly and accurately reported,” said SBA Administrator Steven C. Preston in a statement.

But it doesn't go far enough, said Congresswoman Velazquez and other small-business advocates.

“The issue of miscoding has become increasingly worse over the past several years,” Velazquez said. “Eighty percent of the contracts miscoded were due to other factors than small businesses simply growing too large, which is all this regulation focuses on.”

And, small-business advocates say, allowing companies five years to recertify their size will ensure that the problem will persist until 2012.

“We have all these companies that bought small businesses over the past decade that will keep their small-biz status for five more years,” said Lloyd Chapman, founder of the Small Business League, the group that did the analysis of government contracts.

Chapman said public comment on the new rule overwhelmingly favored an annual recertification. He added that the rule's June start allows seven more months in which the government could award small-business contracts to large companies.

SBA spokesman Jenkins said many of the coding errors Valazquez refers to are the result of trouble in implementing upgrades to the government's procurement data system. He said the number of errors should drop substantially as agencies become familiar with the new system.

Regarding recertification, Jenkins said the SBA proposed it be annual but changed the time frame after small employers said it would limit the growth of their businesses, and federal officials expressed fears of being inundated with paperwork.

“Contracting officers told us that if they have to go through the hassle of an annual recertification, there could be a disincentive for agencies to seek out small businesses,” Jenkins said.

Federal contracting watchdogs say the Small Business Administration's decision this week to delete key company data from a public website has stymied their efforts to try to catch large firms soaking up billions in contracts earmarked for small businesses.

At issue is the Central Contractor Registry website where companies that want to do business with the government are required to post profiles, including employee size and annual revenue.

On Tuesday the SBA pulled the size data, citing privacy concerns.

Federal agencies and prime contractors use the website, known as CCR, to identify small businesses that qualify for contracts. But advocacy groups and small-business competitors use CCR to double-check contracts and challenge deals if they suspect the winner is actually a large company.

''How does the government expect small companies to file size protests if the information on the database has been deleted?'' asked Lloyd Chapman, president of the American Small Business League, a California nonprofit that focuses on contracting fraud.

A team of ASBL researchers were combing through the CCR Tuesday, compiling information for a network television exposé on small-business fraud when the size information disappeared and was replaced with a message reading: ``A firm's actual revenues and number of employees are not releasable under the Freedom Of Information Act.''

In a written statment, the SBA said it had pulled the information after receiving ''a number of complaints'' from businesses that balked at having ''proprietary and confidential'' information posted on the Web.

''In response to these objections SBA removed this information from the website while it considers the legal and procurement issues involved,'' the agency said. ``This doesn't mean SBA will cease using this information for verification purposes; it will simply not be publicly available.''

But the SBA has a poor track record of policing itself. Earlier this year House Democrats released a report saying that $12 billion that the SBA had reported as going to small businesses last year actually went to some 2,500 large or otherwise ineligible companies.

That report is just one of about a dozen private and public studies that have found large corporations, including IBM, ExxonMobile and Nikon, have soaked up small-business contracts.

BIG BUSINESS

A 2005 Miami Herald investigation, which relied heavily on size data from the CCR, found that more than half of the top-20 small-business contractors in Florida exceeded the SBA's basic definition of small: a business with 500 or fewer employees. Four of the companies had more than 1,000 workers and three had more than $1 billion in annual sales.

In most cases, the firms were using legal loopholes to win the contracts.

Raul Espinosa is a St. Augustine small-business owner and the founder of the Fairness in Set Aside Procurement Coalition, which is lobbying the government to close those loopholes and punish large companies caught cheating the system.

While he admits that omitting the size information on CCR will make cheaters harder to catch, he also said he could understand how the disclosures might put small businesses at risk.

Low employee or revenue figures might give the perception to government agencies that a small business is not ready to compete, he said.

FULL DISCLOSURE

But full disclosure should simply be the cost of doing business with the government, said Paul Murphy, president of Eagle Eye Publishers of Washington. ''If you work for the taxpayer, then they have the right to know as much about you as they can,'' he said. ``Any tendency toward less transparency is a mistake at this point.''