By Editorial Staff HartfordBusiness.com October 9, 6400
The Obama Administration deserves credit for its recent pledge to make it easier for borrowers to apply for Small Business Administration loans and for lenders to supply the cash.
The administration has said it will spend up to $15.4 billion on the effort, most of it spent on buying securities backed by SBA loans sold by financial institutions.
But when it comes to oversight of how federal agencies adhere to rules on providing contracts to small businesses, the administration needs to act swiftly.
Since 2003, a number of federal investigations have concluded that the federal government has provided billions in contracts intended for small businesses to Fortune 500 companies and other large businesses.
Last year, the Washington Post reported billions of dollars in such have been diverted to Fortune 500 firms and thousands of other large businesses around the world.
The Post used a sampling of the $89 billion in contracts to show that companies such as Lockheed Martin and Dell Computer were awarded more than $230 million worth because of their status as “small businesses.”
The newspaper found that up to 38.5 percent of all small business contracts were awarded to Fortune 500 companies.
The American Small Business League estimates that ending the diversion of contracts to large businesses would re-direct $100 billion a year in existing federal infrastructure spending directly to small firms, “creating more jobs and stimulating the economy more than anything else he has proposed so far.”
It’s not like Obama hasn’t been aware of the problem. In February of 2008, the business league points out, he released a statement declaring, “It is time to end the diversion of federal small business contracts to corporate giants.”
Candidate Obama was correct then. Now, President Obama needs to make the effort to hold federal agencies responsible for how they dole out contracts intended for small businesses. And he needs to hold the Small Business Administration accountable for policing its programs.
The Treasury says small companies will have a shot at Emergency Economic Stabilization Act fulfillment contracts, but history suggests big businesses will be the big winners.
By Emily Maltby CNNMoney.com October 9, 6400
(CNNMoney.com) -- Lucrative government contracts are up for grabs as the Treasury Department scrambles for vendors to fulfill the provisions of the bailout bill passed earlier this month. Will small businesses get a piece of the action?
So far, the signs aren't good. While the Treasury put out a set of guidelines for small businesses that want to pursue procurement deals for the Emergency Economic Stabilization Act's implementation, early contracts have gone to large companies, and Treasury representatives aren't sure what bailout-related opportunities will actually be available for smaller firms.
"Though they may not be able to vie for the contracts that manage billions of dollars in assets, there are other duties that need to be fulfilled," said Treasury spokeswoman Jennifer Zuccarelli. "We are looking at opportunities that are specific to small businesses." When asked what those opportunities are, Zuccarelli was unable to name any specific openings.
Two early winners in bailout contracting are Ernst & Young and PricewaterhouseCoopers, which landed deals worth $492,007 and $191,470, respectively, for accounting services for the Troubled Asset Relief Program (TARP). When large vendors win government contracts, they typically subcontract pieces of the project to smaller companies to help fulfill government quotas for small business procurement. Zuccarelli said those expectations remain in place for bailout-related deals.
"We have specific requirements laid out for our big contractors that they must show us how they plan to use small/minority/women-owned business contractors. If they don't have a satisfactory plan for including small businesses, then we don't hire them," Zuccarelli said. "We are taking this requirement very seriously as we talk to applicants for the large contracts."
Representatives of Ernst & Young and PricewaterhouseCoopers declined to comment on whether the companies will work with small businesses on their TARP contracts. A spokesman at PwC said that historically the company "has partnered with small businesses in a number of contracts with the federal government, and has found those partnership arrangements to be mutually beneficial."
Under a 1997 law, the government is required to give 23% of its federal contracts to small businesses. The Treasury's goal for the 2009 fiscal year is to award 29.4% of its prime contracts and 44.7% of subcontracts to small companies. But historically, the government falls short of its targets, although the Treasury has been one of the more compliant departments: 28.8% of its contracts went to small businesses in the 2007 fiscal year, according to government reports. (The accuracy of those reports is debatable. A recent Washington Post analysis found that 6% of a sample $89 billion in contracts were given to large companies incorrectly listed as small ones.)
Sudden crises, like the financial meltdown that prompted the passage of the bailout bill, bring both opportunity and obstacles for small companies.
Disasters spark a surge of new procurement opportunities as the government marshals its resources to attack the problem. But they also demand urgent action, allowing the government to suspend its usual procurement policies and quotas. In announcing its solicitations for TARP contracts, the Treasury warned that the "unusual and compelling urgency" of the situation meant that a number of contracts would be awarded without full, open competition.
"Treasury is trying to make those opportunities available to small businesses to the extent it can, but it also has to be practical," said Richard Vacura, a government contract expert and attorney at Morrison & Foerster in McLean, Va. "Like after Katrina or in the Iraq war, the government shortcuts the processes and limits competition because it is in a great hurry to get those services."
Filling urgent needs
Vacura specializes in guiding companies through the government-contracting process, and his business surges in the wake of disasters as numerous vendors chase after the sudden flood of procurement opportunities. But crisis situations can actually be the worst time to try to get a foot in the door: When the government is overwhelmed with an urgent need, it tends to turn first to vendors it already knows.
That's what happened after Hurricane Katrina devastated New Orleans. Jim Barr, chief of the contracting division for the U.S. Army Corps of Engineers' New Orleans District, says he had no time to vet new applicants.
"After Katrina, we were basically inundated with calls from businesses large and small wanting to contribute to recovery effort," he said. "We realized we could award a couple of large contracts or hundreds or thousands of smaller contracts."
Some small companies squeezed in, like Bertucci Contracting, a New Orleans construction business that landed a $5 million contract to dump stone on breached levees. But Bertucci Contracting has been contracting with the government for five decades, a track record that helped it bid and land the deal amid the chaos of an emergency situation.
"Knowing how to get paid, how to track costs, what is reimbursable - all that helped us a lot going in as small business," said Tony Zelenka, Bertucci Contracting's president. "A lot of businesses would be uncomfortable with that. For us, regulations are clear and our business is geared to working with those regulations, so we felt comfortable."
Contracting experts say such advance preparation is the best way to land deals when a crisis generates a rash of them. Being already listed in the government's Central Contractor Registration database, familiar with bid procedures, and knowledgeable about likely areas of opportunity gives companies an advantage over rivals.
For the bailout, small business proponents back the Treasury's recommendation to look for subcontracting opportunities with companies like Ernst & Young that have landed prime contracts. Even when it's not required, big companies will often seek small business partnerships to earn brownie points from the government, said Lynn de Seve, president of GSA Schedules Inc., a firm that guides businesses through the contracting process.
But other small business advocates are skeptical that any of the promised small business opportunities around the bailout will materialize.
"I've seen situations where small business agencies say there are opportunities and want them to compete, but then they have to compete with the large businesses," said Christopher Gunn, spokesman for the American Small Business League.
He's unimpressed by the government's long history of coming up short on small business contracting, and the SBA's lax oversight and enforcement. "The Treasury's inviting them may show they might be looking more towards working with small businesses," he said. "But I question if in time they can do this better than before unless authorities' feet are held to the fire."
Senate Small Business Committee Chair Olympia Snowe is urging SBA to consider tiered size standards "to enable competition among firms of similar size."
In a statement, she pointed to a tiering proposal backed by several industry organizations that would open federal small business programs to much larger companies.
The most detailed plan, submitted to SBA by the Association of Small Businesses in Technology, is called "5-10-5." It envisions five tiers, with the top tier based on 10% of the average revenue of the five largest corporations in an industry. If the largest corporations averaged $1 billion in annual revenue, a small business would be defined as one with up to $100 million in revenue. Under current rules, the largest revenue-based standard is $28.5 million for several heavy construction categories. (SAA, 4/15)
In supporting the tiered approach, the Minority Business Summit Committee said it would allow growing businesses to continue to qualify for set-aside contracts until they are big enough to compete with large corporations.
Other advocates, including Lloyd Chapman, president of the American Small Business League, argue that larger companies would take contracts away from those firms that are currently classified as small.
Snowe (R-ME) said creation of tiered standards would "better account for industry-specific circumstances and the needs of small firms in various stages of development."
SBA has said it would need congressional authorization to use tiered standards.
SBA is winding up a month-long nationwide series of public hearings on its planned revision of size standards, with the last meetings set for June 28 and 29 in San Francisco and Los Angeles, respectively. Several of the hearings have revealed deep divisions over whether size standards should be larger or smaller and whether businesses currently classified as small should be grandfathered in under the new standards. Both the National Federation of Independent Business and the American Small Business League oppose a grandfather clause.
Following a June 7 hearing in Portland, ME, Sen. Snowe said, "Today, we heard from many small business owners that the SBA's size standards system must not leave behind small or emerging firms. Any reform of this system must be fair to businesses of every size, must help them grow to become competitive in national and global markets, and give due regard to the unique circumstances of the industries in which they compete." SBA officials have said it is likely to be several more months before they publish a proposed rule.
Last year SBA proposed basing size standards on employment, with an additional revenue cap in most service industries. The proposal was withdrawn in the face of widespread opposition, and the agency issued a new request for comments in December.
In that notice, the agency said it is still committed to simplifying size standards because it believes the current 37 separate standards are too complicated. But some groups, including the Contract Services Association of America, disagreed and have urged SBA to leave the standards alone.
The information was requested under the Freedom of Information Act (FOIA),and the ASBL eventually filed suit against the Pentagon. An opposition toASBL's motion was filed by the Department of Defense (DoD) on October 17, whichstated that the document shouldn't be released because it contained "tradesecrets." The ASBL, however, opposed the cross-motion and replied that it is"entitled to an order compelling DoD to provide a legally adequate response toits FOIA request."
Although the 25-year-old CSPTP was created in hopes of helping smallbusinesses obtain subcontracts, it is believed to have actually opened a"loophole in federal contracting law" by which many contractors have been ableto bypass federal mandates on contracting.
The WashingtonPost reported about several oddities associated with the CSPTP,one of which was that the program was created in 1989 as a "test," but hasremained in "test mode" ever since and "has yet to be evaluated," though it wasinitially supposed to be approved for only two years.
The program was reported on back in 2004 by the Government AccountabilityOffice (GAO), and in the report, it was concluded that the DoD had not yetagreed upon metrics by which to evaluate the program. In 2010, lawmakersrequested that the GAO follow up and investigate the program, but no furtherreports were produced.
However, the House 2015 National Defense Authorization Bill has actuallyrecommended renewing the CSPTP, despite language in the bill that acknowledgeda lack of evidence to prove that the program meets the original goals the programwas created to meet.
One of the world's largest defense contractors — the Bethesda, Md.-based Lockheed Martin Corp. — agreed on Friday to pay $15.8 million to the U.S. government to settle allegations that it mischarged perishable tools used on numerous contracts, the Justice Department said.
The settlement, announced by Assistant Attorney General Stuart F. Delery, who heads the department's Civil Division, resolves allegations arising from a pricing scheme by Tools & Metals Inc. (TMI), a subcontractor that sold perishable tools to Lockheed Martin for use on military aircraft, including the F-22 and the F-35 fighter jets.
Specifically, Mr. Delery said, the allegations were based on TMI's inflating of the costs of the tools between 1998 and 2005, which were then passed by Lockheed Martin on to the United States under its various contracts with the government.
In March 2006, Todd B. Loftis, a former TMI president, was sentenced in federal court in Fort Worth, Texas, to 87 months in prison and ordered to pay $20 million in restitution following his December 2005 guilty plea in connection with his role in the scheme.
Loftis had waived an indictment and pled guilty to a one-count Information, charging conspiracy to defraud the government with false and fraudulent claims. He admitted that from 1998 through 2004, as president and chief operating officer at TMI, he, along with others, conspired to defraud the Defense Department and Lockheed Martin Aeronautics by obtaining payments from both through false and fraudulent billings.
In 1998, TMI, acting through Loftis, obtained a sole source integrated supply contract with Lockheed Martin Aeronautics to supply all of Lockheed's perishable tools for the manufacture of airplanes including the Defense Department's F-16, F-22, and other military needs in Fort Worth, Marietta, Ga., and San Diego.
Perishable tools are the drill bits, router bits and other small tools that are consumed in the manufacturing process.
In order to cover up this activity, the government said Loftis and others under his direction created false invoices using a computer scanner to remove actual pricing data and substitute fictitious data to give the appearance of legitimate pricing. Loftis was able to control the audit sample of invoices as well so as to limit the possibility that a fraudulently priced part would be found. After the audits Loftis ordered the fraudulently created documents and computer files to be destroyed.
TMI and Loftis realized approximately $20 million in profits on these fraudulent sales to the government, prosecutors said.
"It is troubling that a large defense contractor with long-established contractual ties with the United States failed to undertake appropriate measures to ensure the integrity and validity of the costs it submitted to the United States," said Mr. Delery of Lockheed Martin.
The federal government brought civil claims against Lockheed Martin under the False Claims Act, alleging that it contributed to the inflated amounts paid by the United States in connection with TMI's pricing scheme. The government alleged that Lockheed Martin acted recklessly by failing to adequately oversee TMI's charging practices and by mishandling information revealing these practices.
The case was jointly handled by the Defense Criminal Investigative Service, the Air Force Office of Special Investigations, the Defense Contract Audit Agency, the Contract Integrity Offices of the Departments of the Air Force and the Navy, the Defense Contract Management Agency, the Justice Department Civil Division and the U.S. Attorney's Office for the Northern District of Texas.
