It is a situation that has raised some eyebrows: the Coast Guard commandant last weekend honored a contractor accused of fraud by the Justice Department.

But several experts say the apparent disconnect between agencies is fairly common and reflects the complex realities of federal contracting. It is not unusual for an agency to continue work with a contractor who is being investigated or sued by another arm of the government, at least until the case is resolved, the experts said.

“It actually is business as usual and does happen on a fairly regular basis,” said Gary Therkildsen, federal fiscal policy analyst for OMB Watch watchdog group.

“It isn't unheard of for Justice, Congress, or the public to have a negative view of contractor operations and performance while the government continues doing business with that entity,” agreed Scott Amey, general counsel for the Project on Government Oversight, a watchdog group.

On March 2, Coast Guard Commandant Admiral Robert Papp praised contractor Bollinger Shipyards at a ceremony attended by about 500 people in Lockport, La. The event was held by the Coast Guard to accept delivery of the latest cutter built by Bollinger.

Meanwhile, the Justice Department in August 2011 went to court to accuse Bollinger of making false statements to the Coast Guard on a related contract. The DOJ’s unresolved False Claims Act lawsuit against Bollinger seeks unspecified damages expected to be in the millions of dollars from the company.

The U.S. attorney general claimed Bollinger made false statements about the eight patrol boats it was lengthening for the Coast Guard. The completed boats were rejected as unsound.

Nonetheless, the Coast Guard has continued to award contracts to Bollinger. The agency signed a $180 million contract with Bollinger for the production of four more fast-response cutters in September 2011.

“When DOJ brings a suit like that, it is kind of a big deal, but contractors are accused, and in process of working out claims, all the time,” Therkildsen said. Because of the “innocent until proven guilty” presumption, work generally continues until, and unless, the contractor is suspended or debarred.

The competitiveness of the market for the particular service or product is a major factor in how the situations are handled, he added.

“With a lot of these large contractors, they are ‘too big to debar,’” he said. “The government ends up relying on their services and no one else can provide the services that they can. The government is caught in a Catch 22 situation where, sure, they’d like to go after the contractor, but they cannot be too harsh because in the end they end up needing their services.”

“The fact that there is a False Claims Act case does not mean the company is guilty. In contracting, there is still a principle of ‘innocent until proven guilty,’” said Alan Chvotkin, executive vice president of the Professional Services Council.

Furthermore, for specialty work in fields with few alternatives, federal agencies often continue to work with accused contractors, Chvotkin added.

In Bollinger’s case, “I suspect there is not a lot of competition, so it would not be unusual to continue to do business unless they are suspended or debarred for future work,” Chvotkin added.

Furthermore, since False Claims Act cases often take several years to resolve, activities can continue as normal for quite a while under the cloud of an accusation, he said. For example, the ceremony that Papp attended to accept delivery of the cutter that Bollinger built is a standard ceremony performed upon delivery of such vessels, and it would be typical to hold such a milestone ceremony.

The DOJ typically gets involved in only about a dozen large False Claims Act cases a year, Therkildsen said. Even so, work continues for the contractor until the case is resolved.

Watching a federal official honor a company accused of fraud can be off-putting. “When you see these things, it is jarring,” Therkildsen said. “As far as the question of ‘When is it going over the line?’ It’s subjective.”

And other factors may be in play, said Amey, of the project on government oversight group, which maintains an online database of federal contractor misconduct.

For example, the agency may be satisfied with previous work by the contractor, or may not want to jeopardize the timing of a program by starting over, Amey said. Also, a key lawmaker may wield influence over agency funding while also striving to support an important employer in a particular district, he suggested.

Despite all those factors, in the best case scenario the government agencies should consider misconduct allegations when awarding contracts, said Amey.

“When it comes to contract-related fraud or misrepresentations, the government should think twice about providing any new taxpayer dollars to those abusing the public trust,” Amey said.

Monday - 2/27/2012, 6:20pm  ET

In the last fiscal year, 72 of the federal government’s top 100 small business contractors were some of the world’s largest companies. Research by both the American Small Business League and the SBA’s Inspector General found that Apple, Chevron, Shell, General Motors, General Electric, Coca Cola, Bank of America and 65 other giant companies got these contracts despite President Obama’s pledge to end this practice.

This practice has gone unchecked for years despite many government reports documenting the problem. In its most recent report, the SBA’s Inspector General said the agency’s top challenge is getting rid of  flaws that let large firms obtain small business awards and agencies to count contracts performed by large firms towards their small business goals. Under federal guidelines 23 percent of all government contracts are supposed to go to small businesses.

Large businesses have been able to get around this thanks to a combination of deceptive practices and government incompetence.

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.

One of the problems is a loophole in how the government awards contracts that contain multiple industrial codes. As it now stands, a company can identify itself as small on individual task orders for a contract even though it doesn’t meet the correct size criteria. That's because small businesses bought by large companies can qualify as “small” for contracting purposes for years after being purchased.

According to the Inspector General’s report, the SBA has made only “limited progress” toward

• Making sure contracting officers get “adequate” basic training on small business contracting procedures
• Coming up with regulations requiring firms to meet the size standard for each specific order they receive and showing that these regulations are being followed.

The IG has also called on the agency to overhaul its surveillance review process to make sure these are done “in a thorough and consistent manner.”

Constantine von Hoffman is a writer and sometime standup comedian. His work has appeared in Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, and Boston Magazine. @CurseYouKhan

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.”