No one would consider Science Applications International Corp. (SAIC) a small business.

The San Diego-based science, technology and intelligence giant earned $7.8 billion last year, has more than 44,000 employees worldwide and ranks as the ninth-largest U.S. defense contractor. It is a Fortune 500 company.

Yet SAIC was one of the top recipients of U.S. government-awarded small-business contracts last year — totaling $512 million — according to federal procurement data, as analyzed by the market research firm Eagle Eye Publishers of Fairfax, Va.

Other top small-business contractors from last year: General Dynamics ranked at number 17; L-3 Communications Holdings at number 20; and Lockheed Martin at 22.

Each year, the U.S. government awards these and other large companies billions of dollars in contracts intended for small businesses.

The total amount of small business contracts the government misdirected last year has not yet been tallied, but the figure is almost certainly in the billions of dollars. In 2005, the figure was almost $12 billion.

These misdirected contracts and task orders typically fall into four categories. Many end up going to companies that had once been small businesses but which grew into large businesses or that were acquired by large corporations. Some aren’t given to companies at all, but rather to state or local governments or nonprofit groups. And in some cases, agency contracting officials simply miscode contract awards by mistake as being small-business awards.

There is no single definition for what the U.S. Small Business Association (SBA) considers a small business. SBA has a 42-page guide outlining the different definitions for each industry sector. Size definitions in some cases are measured by average number of employees, in other cases, by average revenues over three years.

For example, the size standards for most manufacturing, engineering and research work range from 500 to 1,000 employees. However, for administrative and educational services, companies are considered small if they earn average revenues of between $3.5 million and $32.5 million annually.

Agencies have considerable incentive to play loose with the rules governing the award of small-business contracts: By law, they must award 23 percent of their contract dollars to small businesses.

The problem is that when $12 billion in small-business contracts is misdirected to non-small businesses, that money does not contribute to the development of small businesses as the law intended.

Now, the Small Business Administration aims to crack down on the problem.

On July 1, after a four-year effort, the agency put into effect new rules intended to close loopholes that permit large companies to win and keep small-business contracts.

Two days later, SBA Administrator Steven Preston wrote to the chief executive officers of the top 800 contractors, asking them to voluntarily identify small-business contracts they hold with the government and to recertify them as “other than small.”

“With your cooperation, we can correct remaining discrepancies so that all large firms are removed from the small-business database within the year,” Preston told the CEOs in the letter.

Arthur Collins, the SBA’s director of government contracting, said he thinks the new rules and Preston’s appeal to the corporate community will fix the problem of misdirected small-business contracts within the next year or so.

Small-business advocates say the measures don’t go far enough and are fraught with loopholes.

The Problem

Many contracts were awarded properly to small businesses, either as procurements specifically set aside for small businesses or through traditional procurements. But many of those contracts were for long terms — 10 or 20 years, in some cases.

During the course of those contracts, those small companies either grew into large companies or were bought by large companies. However, the contracts continued being counted by the government as small-business contracts. That means when a federal agency would issue a task order on an existing small-business contract or would renew an option to extend that contract, it counted as a small-business procurement — even if that company no longer qualified for the designation.

“Long-term contracts” include multiple-award contracts, governmentwide acquisition contracts and General Services Administration schedules, all of which allow agencies to place multiple orders with a vendor without having to start new procurements, SBA’s Collins said. Last year, the U.S. federal government spent 52 percent of its contracting dollars through long-term contracts, according to the Office of Management and Budget.

An example of the problem is ViaSat, a military communications contractor based in Carlsbad, Calif., which sits at number 74 on the top small-business contractors list. It received $96 million in small-business contract revenues last year, according to Eagle Eye Publisher’s list. But the company is hardly small — it has more than 1,000 employees, offices in six countries and annual revenues of more than $430 million.

The company no longer advertises itself as a small business, but it is ranked as such in the government’s contracting database because it was a small business seven years ago, when it won a $12 million Pentagon contract for a battlefield data collection system. At the time, it had 400 employees and revenues of $75 million.

ViaSat is a small firm that grew, a classic Small Business Administration success story. But it also represents what the SBA inspector general has called the top procurement challenge in federal government: large businesses getting small-business awards and agencies getting small-business contracting credit for it.

In his letter to corporate CEOs this month, Preston acknowledged the problem.

“For many years, regulations have allowed government agencies to count contracts as ‘small’ for the life of the contract, even if the small business was subsequently purchased by a larger firm,” Preston’s letter said. “This policy was appropriate when typical contracts had a short life, from one to five years. But today, major small-business contracts run for up to 20 years, leading some to question the classification of almost $12 billion in federal small-business contracts.”

Preston said “the vast majority” of those contracts in question belong to small companies that were subsequently purchased by large corporations, or were miscoding errors when contracts were awarded to a small division or subsidiary of a large corporation.

For their part, large corporations that receive small-business contract revenues say the problem of misdirected and miscoded small-business revenues lies with the government, not them.

“We’re not competing as a small business; we’re obviously not a small business,” said Rob Doolittle, a spokesman for General Dynamics. “I’m confident that we’re in compliance with regulations as they’re written.”

Doolittle said GD is included on the list because companies it has acquired are classified as small businesses and in the midst of contracts.

Lockheed Martin spokesman Scott Lusk responded similarly: “We don’t compete as a small business, but we have acquired companies that had small business contracts.”

Babak Nouri, the assistant vice president and director of small business at SAIC, said the company is reviewing Preston’s letter and considering whether to comply. He added there is a large administrative burden in complying with the request.

The Fix

In the past, businesses that won a contract when they were small could keep their size status for the life of the contract, even if the business was bought by a larger firm or became a bigger firm itself.

Under the new rules, small businesses holding government contracts must recertify their size after the first five years of a contract and every time the government exercises a contract option after year five. The new rules also require companies to recertify their standing within 30 days of any acquisition or merger with another company.

“We want to ensure good, genuine opportunities are available for small firms,” Collins said.

The new recertification rules apply to the long-term contracts already in existence, meaning it won’t be long before the government scrubs its database of large businesses representing themselves as small, Collins said.

“We feel over the next 12 to 15 months, we’ll purge the database of contracts that have fallen into this category,” he said.

Loopholes Remain

Small business advocates contend the new rules will do little to achieve the results Collins promises.

The rules will let large firms already benefiting from their small-business acquisitions to continue to do so for at least the next five years, said Lloyd Chapman, president of the American Small Business League. Without mandating recertification for small companies already merged into large firms, big businesses will rob small businesses of $300 billion in business over the next five years, Chapman said.

“They’re already reporting awards to Fortune 1000 corporations as small businesses and adopted polices to continue to allow the diverting of billions meant for small businesses to the largest companies in the world,” Chapman said. “The policy will bankrupt thousands of small businesses.”

Two small business advocates in Congress agree.

“This recertification rule fails to address 80 percent of the problem with miscoded contracts,” said Nydia Velazquez, D-N.Y., chairwoman of the House Small Business Committee.

Sen. John Kerry, D-Mass., chairman of the Senate Small Business Committee, has scheduled a hearing Wednesday on small-business recertification.

“Five years still leaves a pretty big hole,” Kerry said in a statement. He said he would like to see alternate recertification periods that are fewer than five years, but not as potentially burdensome on small business as annual recertification could be.

Exceptions

Despite the new rules, some large firms — firms with more than 500 employees — can still be counted as legitimate small businesses because they have partial certifications as small businesses, said Ray Bjorklund, senior vice president of FedSources, a federal market research and consulting firm in McLean, Va.

These partial certifications are allowed because each industry sector has its own definition of what constitutes a small business. This occurs mostly in large industrial areas such as telecommunications, aircraft manufacturing and scientific research, Bjorklund said.

“The government is doing some gaming with codes because it wants a class of companies, but it also wants to get credit for small business,” he said.

For example, Honeywell International, a 118,000-employee technology and manufacturing conglomerate that generated $31 billion in sales last year, is considered a small business for several products, including communication equipment and aircraft parts. Last year, Honeywell brought in $162 million that otherwise would have gone to small firms, according to FedSources data.

The government could do more to reach its small-business goals by pursuing more set-aside awards for small and disadvantaged businesses, Bjorklund said.

By the way, if you’re wondering which is the top company on the small business contractors’ list, it’s Chugach Alaska Corp. of Anchorage, Alaska. The company, which provides everything from base operating services to telecommunications and educational services, has more than 6,300 employees worldwide and received $658 million in small business contract revenues last year. In all, the company boasted total revenues of more than $890 million last year. •

Amy Doolittle contributed to this report.