When Lloyd Chapman was a teenager, his father used to talk over dinner about the government contracts he'd put out for bid as a contracting officer in the U.S. Air Force. Chapman wanted to work in retail sales and never dreamed that someday his life would revolve around government contracts.

But today Chapman eats, sleeps and breathes government contracts -- in particular, small-business contracts with the federal government.

For the past three years, Chapman has been on a one-man crusade to expose abuses through which large companies have won billions of dollars' worth of government contracts that were supposed to go to small business. One recent government report concluded that in 2002 alone, $1.7 billion worth of contracts that were listed as going to small business actually went to big corporations like Oracle and Raytheon.

Chapman, a Petaluma resident who still speaks with the twang of his native Texas, has been accused of overdramatizing the problem. He acknowledges that critics view him as a "conspiracy nut." And he remains outside the collegial circle of other Washington-based small business advocacy groups.

Yet his single-minded pursuit of this issue helped lead to a recent series of small-business procurement reforms, and to several government reports that corroborated the charges Chapman had been making for years. Even his opponents grudgingly admit that Chapman and the organization he started, the American Small Business League, have had an impact.

"They have certainly been helpful in identifying these issues and raising awareness of these issues," said Gary Jackson, assistant administrator for size standards at the U.S. Small Business Administration. "You can't say they're the only ones raising them, but they certainly made it more visible."

The stakes in the debate over small-business contracting are high, and the roots of the debate go back half a century.

The U.S. government spends more than $300 billion each year on goods and services, from high-tech military equipment to low-tech janitorial services.

When the federal government first became an economic powerhouse during World War II, small companies started protesting that big defense contractors were getting all the work. In 1953, Congress passed the Small Business Act, which promised a "fair proportion" of all government business to small companies. For years, the government set a goal of giving 20 percent of all contracts to small firms. That goal was increased to 23 percent in 1997.

But small business promotion ran into a conflicting set of policy goals in the 1980s and '90s -- streamlining government. As part of an effort to make its purchasing more cost-effective, the government began issuing large multi-agency contracts that were sometimes harder for small firms to win. Contracts often lasted five years and could be extended several times, for a total of up to 20 years. This created problems in keeping track of small business contracts: A small firm would win a bid, then be acquired by a giant corporation, but might still be listed as a small company for as long as 20 years.

Chapman entered the contracting world himself in the early 1980s, when he moved from Texas to Petaluma and began working at a computer reselling firm. Much of the firm's business came from government contracts.

Chapman's curiosity was initially piqued when he looked at a huge contract for the F-22 Stealth fighter and saw that only 16/100 of 1 percent of the contracting work went to small businesses. Chapman contacted Congress, and ended up winning about $500 million in additional Stealth work for small businesses.

"I thought, 'This is easy, I'll do it some more,' " he said.

It wasn't until 2002, though, that he became deeply embroiled in the contracting issue. One day, a saleswoman came to Chapman in tears: After working for weeks on a bid that was supposedly set aside for a small business, she had lost it to a company named ASAP Software. Chapman looked up ASAP on the Internet, and quickly found it was not a small business at all, but a subsidiary of an Amsterdam firm that had 18,000 employees in 18 different companies.

"I then began to look through the government's database of small businesses," he recalled. "Within one hour, I found dozens of the biggest companies in the world."

That started Chapman on his crusade. He began calling and writing the SBA, Congress and the media. Congress held a hearing on the misclassification of large businesses as small, and in 2003, the Small Business Administration removed 600 large companies like Office Depot and Barnes & Noble from its database of supposedly small businesses. Government officials said the problem was mostly one of miscoding and had been fixed, but Chapman pressed on.

He left the computer business, created the American Small Business League in the same nondescript office building as his old computer firm and began working as a full-time volunteer on the contracting issue.

Then last December, the SBA's Office of Advocacy released a study that concluded that $1.7 billion in contracts labeled as going to small business in 2002 in fact went to big companies. Of the top 1,000 small-business contractors listed in the government's database, 39 were actually large companies including such well-known names as Raytheon, Northrop Grumman, Hewlett-Packard, Oracle and the Carlyle Group.

Federal officials had previously announced that 20.5 percent of government business went to small firms in 2002. If these $1.7 billion worth of contracts had been listed correctly, the SBA report said, the tally of contracts going to small business would have fallen to 19.7 percent.

"This report clearly shows that there are problems with the federal procurement system," said SBA chief counsel for advocacy Thomas Sullivan in a statement accompanying the report.

The December 2004 report was followed by another SBA study released in February that looked at a sample of six major contracts and found that four had gone to companies that were not small. Chapman felt vindicated.

"I'd been saying this for 15 years, and people would treat me like a conspiracy nut," Chapman said. "The sad thing is, in that 15-year time frame, small businesses have been cheated out of billions of dollars."

The SBA reports cited several reasons why large firms were being included in the small business roster. One was the issue of those long, extended contracts, where small firms got bought up but were never reclassified as large firms.

Other problems were that the government relied on companies to self- certify that they were small, and federal contracting officers sometimes didn't have correct information about the parent companies of "small" contractors.

During the past few months, the SBA has taken a number of steps to solve what it calls data errors. In December, the SBA started requiring companies to recertify their size as soon as they are bought by another firm. Recently, it started doing automated reviews of all firms listed in its small-company database to ensure they really meet the size criteria.

"We agree there are concerns, and we have taken steps to adopt or consider new policies," the SBA's Jackson said.

Other prominent small-business advocates have praised the SBA's actions.

"Admitting the system isn't working is a pretty big step," said Molly Brogan, a lobbyist for of the National Small Business Association, which has more than 150,000 members around the country. "As critical as we are, we need to applaud them for acknowledging this."

But Chapman claims that the agency's moves are just window-dressing, and that the abuses go even further than what has been publicly revealed. Chapman is suing the SBA to release the original draft of the December 2004 report, which he predicts will document intentional fraud rather than inadvertent data errors.

"I would bet my life that at least $50 billion a year of federal small business contracts are going to some very, very big companies," Chapman said.

The SBA's Jackson denied Chapman's accusations of fraud and accused Chapman of overdramatizing and skewing the findings of the recent reports.

"Public debate is healthy, but let's make sure the information is accurate and presented in a professional way," Jackson said.

Meanwhile, Chapman's criticisms extend beyond the government to long- established business advocacy groups like the NSBA, the National Federation of Independent Business, and the U.S. Chamber of Commerce. Chapman has sometimes ended up opposing these groups on contracting-related questions, such as how the government should define what constitutes a small business.

"NFIB, NSBA, the Chamber -- how come these guys never call me? How come they never offer to help me out with legal fees?" Chapman said. "I don't think any of these groups represent small business. If any organization were effectively representing small business, this (abuse) wouldn't have happened. I don't want to sound egotistical, but I feel like the only true representative for small business in this country, a kind of Lone Ranger."

A spokesman for the National Federation of Independent Business, which, unlike Chapman's group, monitors a wide range of issues, such as tax policy and health insurance, said Chapman's claim to be the only true representative of small business was "kind of funny."

"We react the way our 600,000 small-business members want us to react," NFIB spokesman Mike Diegel said. "In our last poll of small business' critical problems, the top priorities cited by our members were the cost of health insurance, the cost and availability of liability insurance, and workers' comp costs. Winning government contracts for federal, state, and local government was No. 69 out of 75."

How small is a small business?

No, that is not a Zen riddle. It's a question being asked by the federal government, a multibillion-dollar question whose answer could mean life or death for some small businesses that depend on government contracts.

The U.S. Small Business Administration is holding hearings around the country this month, including one in San Francisco on Tuesday, on how it should define a small business.

The agency's size standards determine eligibility for billions of dollars' worth of government contracts that have been earmarked for small business, as well as eligibility for government-backed loans. The size standards have traditionally varied by industry, with 37 different standards that cover more than 1,000 different industries, from soybean farming to frozen-cake manufacturing.

Most of the current standards are based on companies' revenues, but some are based on the size of their workforce. For instance, to be considered a small business:

-- General construction contractors must have average annual revenue of $28.5 million or less.

-- Most retailers must have revenue of $6 million or less.

-- Computer programming firms must have revenue of $21 million or less.

-- New car dealers must have revenue of $24.5 million or less, while used-car dealers must have revenue of $19.5 million or less.

-- Most manufacturers must have 500 or fewer employees, although some kinds can have up to 1,500 employees.

The agency proposed a new set of size standards in March 2004 that would have reduced the number of categories to 10 and switched to a workforce-based definition of 500 employees or fewer for most industries.

Agency officials said they were trying to simplify the size standards and make them more useful for today's era of larger, long-term contracts.

But the proposal sparked a storm of criticism from small business groups -- some of it contradictory.

Lloyd Chapman, founder of the American Small Business League, praised the idea of moving to a workforce-based standard, but said the cutoff should be at 100 employees rather than 500.

"As I travel around the country and talk to people, I ask them what they think a small business is," Chapman said.

"I've never had a normal person tell me a small business is more than 50 employees."

On the other hand, the National Small Business Association said the agency should stick with the revenue-based criteria.

Switching to an employee tally would create more paperwork for small businesses, the association said. And because the new proposal would have counted all employees regardless of hours worked, the association added, it might eliminate some small firms with large part-time workforces.

"Many small businesses, particularly those in the services/retail industries, would be harmed due to the large staffs of seasonal and part-time employees," it wrote in a letter.

Faced with the controversy, the agency withdrew its proposal in July.

In December, it went back to the drawing board and started seeking public comment on how to improve the size standard rules.

As part of that, the agency is holding hearings in 11 cities, including the San Francisco hearing Tuesday.

More than $2 billion in federal contracts supposedly awarded to small businesses actually went to much larger outfits, according to a new government report released Dec. 28. Issued by the Small Business Administration's Office of Advocacy, the report shows that at least 44 large companies that won the contracts were miscoded as small concerns in fiscal year 2002, the most recent year for which data was available, skewing federal procurement statistics.

The deals lost to big outfits would have lowered the small-business share of total procurement to 19.7%, from 20.5%. Congress now mandates that 23% of all federal contracts go to small businesses because they generally lack the resources and political muscle to go head-to-head with larger concerns. However, the actual proportion of contract funds going to smaller players consistently falls short of the goal that lawmakers have set. The report's findings represent a further blow to small businesses, especially manufacturers, which have long struggled to compete for federal dollars.

HONOR SYSTEM.

The Office of Advocacy's chief counsel called for needed reform, noting that the findings are evidence of a loophole, not illegal activity on the part of the government or the larger corporations involved. "This report clearly shows there are problems with the federal procurement system," said the chief counsel, Thomas M. Sullivan, in a statement. "What's needed is more transparency in the contracting system and timely public access to user-friendly procurement data so that mistakes and other problems can quickly be corrected."

The problem the report revealed stems from the classification system. Small businesses are classified depending on their number of employees and annual revenue or market share. Currently, a self-reporting policy is in place where businesses simply state their size when they bid for a government contract. In an honor system of sorts, companies are not required to reclassify themselves if or when they experience rapid growth beyond small-business size standards -- 500 employees for a manufacturer -- or if the outfit is purchased by a larger concern. Competing contractors can contest a supplier's status as a small business, but because of the confusing coding system, supporting information has traditionally been hard to find.

While the issue has long been of concern to small-business owners, Sullivan noted that this analysis, compiled by Fairfax (Va.)-based Eagle Eye Publishers for the SBA, provides the first official documentation of the activity. "We finally have hard data," he said.

" NOT SURPRISING."

The SBA document, which tracks federal procurement issues, examined 1,000 of the largest contractors (in dollar volume) coded as small businesses in the fiscal year of 2002 when receiving small-business contracts. The 44 that were found in fact to be large companies or classified as "other" such as nonprofits or government agencies include San Diego-based Titan Corp. (TTN ) and the Waltham (Mass.) aerospace giant Raytheon (RTN ).

According to the report, $539.9 million of Titan's total $1.1 billion in government contracts were earmarked for small business, and $126.5 million of Raytheon's $7.4 billion in deals was misclassified. Organizations categorized as "other" in the report include the state of Texas and the national YWCA, which received a combined total of $59 million in small-business contracts.

"Errors are regrettable but not surprising," says Alan Chvotkin, senior vice-president of the Professional Services Council, an Arlington (Va.)-based trade association representing roughly 170 government service providers, large and small, including Titan and Raytheon. "We're highly dependent on individuals to make the coding input."

FIGURING OUT SIZE STANDARDS.

Critics accuse large contractors of exploiting the classification loophole and contend that the SBA has simply turned a blind eye to the ongoing problem.

"These companies acknowledge to shareholders that they aren't small companies, and yet, they make no effort to notify the government of [their non-]small-business status," says Lloyd Chapman, founder and president of the American Small Business League.

The group has been a longtime whistleblower on the issue of small-business government contracts and has organized over 2,000 citizens and owners of small outfits in an e-mail letter-writing campaign, prompting House and Senate small-business committee hearings on the issue. "They intentionally misrepresented their status," says Chapman.

The Defense Dept. was responsible for handing out nearly 80% of the $2 billion in misclassified funds, followed by the General Services Administration and the Health and Human Services Dept. In total, 31 federal agencies awarded small-business contracts to big corporations, including the Small Business Administration itself, which had over $1 million in misallocated funds, according to the Office of Advocacy report.

As more details about wasteful spending and outright fraudulent practices at the General Services Administration are emerging, it becomes clearer every day that there is a far deeper, government-wide contracting problem plaguing the nation.

News of the scandal broke two weeks ago, when GSA Administrator Martha Johnson resigned following the agency inspector general’s report claiming that more than $800,000 of federal spending on a GSA employee conference held in Las Vegas in 2010 was “excessive, wasteful, and in some cases, impermissible.”

Of particular concern to small-business advocates, the IG’s report found that the GSA allegedly awarded “a $58,000 contract to a large business in violation of small-business set-asides.”

This problem of large companies receiving federal contracts that are reserved by law for small businesses is a decades-old scandal of corrupt federal spending and undue corporate influence over politics.

Overall, waste, fraud and abuse in federal small-business contracting programs (across all federal agencies) results in tens of billions of taxpayer dollars a year being illegally diverted to large companies, often some of the largest companies in the world.

Research we finished last month using the federal procurement data system even suggested that companies such as Apple, the New York Times Co., Lockheed Martin and General Motors received hundreds of millions of dollars worth of federal contracts reserved for small businesses in fiscal year 2011 alone.

The New York Times was prompted by our report to investigate how the New York Times Co. — which has more than 7,000 employees and more than $2 billion in annual revenue — could possibly be counted as a “small business” in federal spending reports.

This shows how completely unwilling the federal government is to clean up its contracting programs, especially small-business contracting programs — but it’s certainly not the first proof of federal contracting malfeasance.

Since 2003, a series of federal investigations have discovered hundreds of billions of dollars in federal small-business contracts actually being awarded to Fortune 500 firms and other corporations.

In Report 5-15 the Small Business Administration Office of Inspector General described the abuse of federal small business contracts as “one of the most important challenges facing the Small Business Administration and the entire federal government today.”

SBA Inspector General Peggy Gustafson even testified before Congress in October 2011 and named the abuse of federal small-business programs as a top management challenge facing the SBA for the seventh consecutive year.

While this blatant federal contracting abuse has been well documented for more than a decade, true reform has not been accomplished — recent measures approved by the House and Senate to supposedly address small-business contracting issues merely skirt the main problem and will do nothing to protect the waste of taxpayer money through scandals like we have seen at the GSA.

Elliott Rosenfeld is public relations director of the American Small Business League in Petaluma, Calif.

The Small Business Administration plans to issue a regulation to revise the rules regarding contractor reporting and certification of small-business size status.

The Federal Procurement Data System (FPDS) will be modified accordingly, SBA said in a memorandum issued by Administrator Steven Preston.

Preston said SBA reported in June that the federal government had awarded more than 25 percent of contracting dollars, or $79.6 billion, to small businesses in fiscal 2005. He called that an important and unprecedented achievement but added that recent reports have questioned the accuracy of this achievement.

The American Small Business League is among those organizations that have questioned the numbers. Last month, the league said it wrote to Preston in July, asking that the names of those small-business contractors be made public. The league said it had received no reply as of mid-August.

Preston's memo made no mention of the league. He said critics have charged that several reported small-business contracts and related contract actions actually went to midsize or large contractors. He said SBA used data submitted to FPDS by departments and agencies, which are responsible for verifying their accuracy.

"There may be several reasons for possible data inaccuracies or reporting discrepancies," Preston said. "For example, small businesses can grow larger during performance of federal contracts. Such examples illustrate the success of our policies that foster federal contracting with small businesses. However, even in these cases, agencies need to accurately report the status, and sometimes the changing status, of their contractors."

He added that other reasons for data inaccuracies or reporting discrepancies include acquisitions of small-business contractors by large businesses, inaccurate contractor reporting and incorrect data entry by federal acquisition employees.

"Transparency and accurate data are critical to ensuring the integrity of the acquisition system, and we are taking steps to increase transparency and the accuracy of federal procurement and small-business data," Preston said.

He called on agency and department heads to direct their chief acquisition officers "to work closely with SBA to correct or reconcile these apparent data inaccuracies and reporting discrepancies."