WHILE THE FEDERAL GOVERNMENT RESCUES Wall Street, small business owners on Main Street are crying foul, charging that federal contracts intended for them continue to get awarded to large corporations. Over the past six years, more than a dozen federal investigations have found large corporations to be the actual recipients of the lion's share of federal small business contracts, according to the American Small Business League (ASBL), a Petaluma, California-based policy advocate group. Lax regulation in Washington has contributed to this ongoing problem much like deregulation on Wall Street led to the current financial crisis.

In July, the U.S. Department of the Interior Office of Inspector General released a study uncovering $5.7 million in awards to large firms credited as small businesses in fiscal years 2006 and 2007. Among those identified were large, publicly traded corporations including Home Depot, Dell, John Deere, Xerox, and Sherwin-Williams.

But ASBL says that figure is only a small slice of a larger pie, claiming the DOI had actually awarded more than $430 million to corporate giants and their subsidiaries. "We believe that between 50% and 86% of all federal small business contracts are actually awarded to some of the largest corporations in the United States and Europe," says ASBL President Lloyd Chapman. "That means small businesses are losing in total $65 billion to $100 billion per year to firms like Hewlett-Packard, General Electric, and Raytheon."

The ASBL accuses the George W Bush administration and federal agencies, including the General Services Administration and Small Business Administration, of willingly diverting billions of dollars in small business contracts to large corporations. In its defense, the DOI report states that large businesses have been incorrectly coded as small businesses due to data entry mistakes, reliance on incorrect data, and not contacting officials to verify business size reported in the Central Contractor Registration.

For Richard Copeland and other small business owners, there is simply no justification for what is happening. "Contracts are a small fraction of the work issued by the government that goes to small businesses," says Copeland, CEO of Thor Construction (No. 66 on the BE INDUSTRIAL/SERVICE 100 list with $63.6 million in sales) and president of the National Minority Contractors Association, an advocacy and member trade group. "For that small fraction to be eroded by lack of diligence and system errors only compounds the problems that minority contractors and small businesses face. Without equal access we continue to lose ground in the effort to be on parity in the mainstream economy."

Karen Hontz, director for government contracting for the SBA, is quick to point out that incorrect size classification in the federal procurement data system-next generation database can be partly attributed to mergers. She explains that when a company such as Home Depot acquires a small business that may have already won a contract with the government, that contract's classification may remain as is. A small business is defined by the SBA as one that contains between 50 and 500 employees, or has revenues between $750,000 and $31 million. "The recertification rule went into effect on June 30, 2007, that said if there was a merger of two small companies, and that acquisition made the company big then they could no longer classify themselves as a small business," says Hontz. This rule is also valid if a large company were to buy a smaller company. However, if a company merged prior to June 30, then it would be shown as a small business until corrected in the register. "It will eventually take care of itself," Hontz adds. "When you've got 12 million contracting actions going on daily, people make mistakes and check the wrong box."

Small business advocates argue that it has taken six years for such mistakes to be corrected, with no solid solution in sight. The issue of small businesses losing out on federal contracts dates back to September 2002, when the SBKs Office of the Inspector General first received numerous complaints. Since 2003, 13 federal investigations and two private studies have all found widespread abuse, fraud, loopholes, and a lack of oversight in federal small business contracting programs, says Chapman, an outspoken critic of the SBA.

Thomas Boston, professor of economics at Georgia Tech, CEO of EuQuant, and member of the BLACK ENTERPRISE Board of Economists, conducted the study Increasing the Capacity of the Nation's Small and Disadvantaged Businesses, examining government small vendors. The 2007 report, commissioned by the Congressional Black Caucus, found 442 large companies listed under the federal government registry as small businesses. The average revenue of small businesses that are federal government vendors was $3 million, Boston notes, whereas the average revenue of the large firms was $172 million.

"Fraudulently registered large businesses have a particular advantage over legitimate small businesses and minority businesses," he says. "The way the program is currently structured and the continued unwillingness to severely penalize large businesses that fraudulently register as small businesses is taking away business opportunities from minority and small businesses. This issue should be addressed as a No. 1 priority."

ASBL has been pushing for Congress to pass legislation to stop the abuse. The Small Business Contracting Revitalization Act of 2007 (S. 2300), drafted by Senators John Kerry (D-Mass.) and Olympia J. Snowe (B-Maine), seeks to close the loopholes in small business contracts that have allowed large companies to prosper. The bill aims to reduce contract bundling; prevent misrepresentations in subcontracting by prime contractors; extend the 8(a) contracting program through 2012; and expand opportunities for minority, women, and service-disabled entrepreneurs

Kerry, chairman of the Senate Small Business and Entrepreneurship Committee, notes that by law, 23% of federal contracting dollars are supposed to go to small business, a benchmark not being met.

"Sadly, businesses lose billions of dollars in lost opportunities because of loopholes in our contracting system," says Kerry. "I've fought to close these loopholes and add accountability and oversight. We need to strengthen programs to level the playing field for small business firms."

Rep. Benny G. Thompson (D-Miss.) acknowledges that there is a problem. "Unfortunately, we do not know how big this problem may be because there's been no effort to systematically review the database entries. The SBA's Office of Inspector General has found these potential data errors could be easily corrected. To date, those corrections have not been made." Thompson says government-wide procurement reform has not occurred but there have been limitations placed on practices that undermine the ability of small businesses to prosper as subcontractors.

Thompson adds that small and minority businesses have been marginalized in several ways: lead integrator contracts that misuse small and minority businesses, no opportunities to compete due to contract bundling, and large businesses posing as small to get contracts.

According to the SBA Office of Inspector General's Oct. 16, 2007, financial report, the agency has made substantial progress in implementing a program that promotes accurate contractor certification. It further states that the SBA is ensuring federal agencies accurately report the number of contracts they award to small businesses. However, in his statement for the report, former Inspector General Eric M. Thorson admits there has been limited progress in regard to issuing regulations that require firms to meet size standards, and providing adequate educational training on small business contracting procedures.

At press time, the SBA had refused to release its goaling report for fiscal year 2007, which outlines whether the agency met its 23% procurement goal for the past yeas In September, the agency suspended taking applications for the small disadvantaged business program, Chapman says. He adds the SBA's funding cut and the firing of employees within the SBA that ensured minority-owned businesses got their fair share of contracts, is "astonishing" and "disappointing."

SBA officials declined to respond to Chapman's allegations and declined a request for an interview on this matter.

"Small businesses and minority business owners are not getting anywhere near the volume of federal contracts they're supposed to by federal law," Chapman says. "If Congress does not pass legislation to stop this, it's going to threaten the futures of business owners, and opportunities for people to start new businesses will be severely limited as money is diverted to large corporations."

Source:  http://www.entrepreneur.com/tradejournals/article/190747797.html