Here are just a few of the companies that were considered a small business in the past year: Apple, Chevron, Verizon, Bank of America and Disney. At least, that’s what one advocacy group found when it perused the Federal Procurement Data Systems for government contracts the past year.

Each year, the government attempts to award at least 23 percent of all federal contracts to small businesses. But new research from the American Small Business League (ASBL) shows that 72 large companies received $16.4 billion in federal small-business contracts, which the group attributes to a combination of policy loopholes, human error and mis-categorization.

“It’s really hard for a small company to compete with a company that has 5,000 employees,” said Brian Reeder, communications director for the ASBL. “When bigger companies are actually receiving the contracts, there’s nothing left for small businesses.”

The Small Business Administration did not respond to phone calls and e-mails seeking comment on the report.

Holes in the system

The report, released Thursday morning, found that of the top 100 companies receiving federal small business contracts, 72 were large companies that exceeded the SBA’s small-business size standards, which vary depending on the sector.

It’s difficult to identify just one reason why the contracts are awarded as they are, but experts say there are countless small leakages in the government procurement process that can cause large businesses, either purposefully or indirectly, to occasionally win out over small ones.

Ray Bjorklund, chief knowledge officer with the government-contractor software company Deltek, said it can be hard for the SBA to pick the “right” size for a company to be considered a small business under the North American Industry Classification System (NAICS) codes, the government’s business classification system.

“When SBA is looking at one class of establishment, such as a corn farmer, there are a lot of small-business corn growers, but also large corporate growers,” Bjorklund said. “It’s not an easy thing to maintain size standards in a way that keeps up with growth in the economy and changing relationships between sectors.”

Beyond that, when agencies begin feeling the pressure to meet their 23 percent goal, Bjorklund said they sometimes choose NAICS codes that have larger-sized caps if they want a large company to fit into a small-business contract.

“If the agency is anxious to meet its socioeconomic goals, they say, ‘I can make this a small-business set aside if I can justify it this way,’” he said.  “All of this is legal, but they should have been more judicious in their acquisition strategy.”

Not close enough for government work

Reeder said human error is another problem in how contracts are coded. For example, Apple was likely never registered as a small business, but Reeder speculates an agency simply needed something only Apple could provide — iPads, for example — and then neglected to change the code from “small” to “not small” before the transaction was completed. That contract would ultimately be counted toward an agency’s small-business goal.

“There are a lot of those examples, and they really add up,” he said.

The errors may stem from a larger problem in the contracting world — the thin ranks of the acquisition workforce and the paucity of the available funds to train them.

“The acquisition workforce is not as big as it should be, and they’re not as qualified, because years ago, their funding was slashed,” Bjorklund said. “These people have inboxes stacked very high, and they want to do the very best possible job, but sometimes mistakes get made.”

The SBA drew a similar conclusion in a report it issued on the same topic last October, saying, “While some contractors may misrepresent or erroneously calculate their size, most of the incorrect reporting results from errors made by government contracting personnel.”

Small, then big, but still small

There is also a loophole that allows small businesses that are bought by large companies to continue to count as “small” for the purposes of contracting for years after they’re purchased. For example, the report says that CapRock Government Solutions, which ASBL asserts received more than $200 million in small business contracts last year, is a subsidiary of Harris Corporation, a multi-billion dollar company.

“We’re not arguing the companies should lose those contracts, but it seems silly to count them as small when they’re not small,” Reeder said.

Many of these contracts were awarded to small businesses that are actually subsidiaries of large companies, Reeder said, and they, therefore, don’t face the same odds that independent small companies do.

Bjorklund said he believes there are not quite as many large companies receiving small-business contracts as the ASBL has found. Still, he said, “the problem still exists, there’s no denying that.”

Last year, the ASBL found that there were 60 large companies included among the top 100 federal small business contractors, so they say the problem has “at best, stayed the same, if not gotten worse.”

Reeder called for better enforcement of contracting standards by the SBA, but Bjorklund explained that the SBA is largely “hands-off,” and that the ultimate responsibility falls on the agency issuing the contract.

In the October report, the SBA’s Office of the Inspector General said it had made “mixed progress” on the issue of small-business contracts going to large businesses. The agency has developed a program to ensure that contracting personnel review contractor sizes, but it has made “limited progress” in developing regulations to correct the misapplication of industry codes.

So how big of a problem is this for small contractors? Medium, according to Bjorklund. Contractors of every size are losing business as the Department of Defense and other agencies cut back. Small firms don’t have quite the same lobbying clout that larger ones do, he explained, so the impacts for them might be greater — especially if they aren’t getting all the contracts they should be. Then again, at least the government is doing something for small firms.

“At least there are small-business goals that the government is trying to meet,” he said. “That makes it a little better than it would be in the commercial marketplace — where everyone is fending for themselves.”

The American Small Business League (ASBL) has more distressing news about federal small business contracting. ASBL reviewed the federal government's fiscal year 2011 contracting data and found that the number of large businesses winning small business contracts has increased, and that many of these awardees are some of the largest companies in the world.

The federal government has a statutory goal of awarding 23 percent of all federal contract dollars to small businesses. According to the latest Small Business Goaling Report, the government fell slightly under that goal in FY 2010 (22.7 percent). However, as ASBL has repeatedly documented, government agencies fudge the numbers by reporting contracts awarded to large businesses as small business contracts.

Sure enough, ASBL found that 72 of the top 100 federal “small” business contractors in FY 2011 were actually large companies, a 20 percent increase over the previous fiscal year. These 72 large businesses received $16.4 billion, or 77.6 percent, of the total awarded to the top 100, which includes several companies in POGO’s Federal Contractor Misconduct Database:

#4 – Atlantic Diving Supply, Inc. ($1.1 billion)
    • 425 employees, $968 million annual revenue

#5 – Mission Essential Personnel, LLC ($689.2 million)
    • 1,900 employees, $350 million annual revenue

#6 – Sierra Nevada Corporation ($396.8 million)
    • 1,800 employees, $938 million annual revenue

As well as subsidiaries of FCMD companies:

#14 – Metro Machine Corporation ($237.5 million), a subsidiary of General Dynamics

    • Metro Machine: 4,000 employees, $125 million annual revenue
    • General Dynamics: 81,000 employees, $2 billion annual revenue

#16 – Precious A-Mark Metals, Inc. ($231.9 million), a subsidiary of Spectrum Group International, Inc.  
    • Precious A-Mark Metals: 22 employees, $2 billion annual revenue
    • Spectrum Group International: $6 billion annual revenue

#19 – Petro Star, Inc. ($218 million), a subsidiary of Arctic Slope Regional Corporation
    • Petro Star: 319 employees, $777 million annual revenue
    • Arctic Slope: 6,600 employees, $974 million annual revenue

Among the small business contractors below the top 100 (meaning they received less than $86 million that year), ASBL found a “who’s who” of large federal contractors, including Lockheed Martin, BAE Systems,  L-3 Communications, Finmeccanica, IBM, and SAIC.

The Small Business Administration Office of Inspector General (SBA OIG) recently warned that the SBA’s most serious management and performance challenges are procurement flaws that allow large companies to obtain small business awards and agencies counting contracts performed by large companies towards their small business goals:

OIG audits and other governmental studies have shown widespread misreporting by procuring agencies since many contract awards that were reported as going to small firms have actually been performed by larger companies. While some contractors may misrepresent or erroneously calculate their size, most of the incorrect reporting results from errors made by government contracting personnel, including misapplication of small business contracting rules.

POGO has been pointing out the problems in federal small business contracting for a long time and will continue to do so. With a new SBA rule increasing some small business size standards, we expect these problems to get worse.

Small business is frequently touted as the “backbone” of the economy. What happens to that backbone if billions of dollars in small business contracts end up in the hands of Fortune 500 companies?

Neil Gordon is a POGO investigator.