New

Small Business Administration (SBA) chief Linda McMahon soon will be facing a

question that goes to the heart of the agency's mission: Are smaller federal

contractors getting their fair share of contract awards?

The SBA

in recent years has touted the successes of its "goaling reports" and

"scorecards" — measures by which it monitors whether federal agencies have met

their obligations to dole out at least 23 percent of prime contract awards to

small businesses. The federal government in 2015 reached its small-business

contracting goals for the third consecutive year, according to a

2016 SBA report.

However,

the SBA faces a wide range of skeptics who claim that the methodologies the

agency uses allow it to fudge the percentage of contracts small businesses win

from the federal government.

McMahon,

the former CEO of World Wrestling Entertainment, will be addressing the issue

on a number of fronts over the next few months.

Congress

is set to hear from McMahon directly at an oversight hearing slated for next

week, and may raise the issue in new legislation.

The SBA

is preparing to release its next small-business goaling report so the public

can see whether government agencies are reporting that they're meeting their

small-business targets. At the same time, agency leaders will be working to

address the chronic concerns from the SBA Inspector General's office, which has

taken the agency to task on the topic in each of the past 10

years.

And

none of this is to mention the ongoing lawsuit filed by the American Small

Business League (ASBL), a persistent SBA critic, which is demanding that the

courts issue an injunction to revise how the agency counts which contracting

businesses are actually "small" and which aren't. The case was dismissed in

federal district court on jurisdiction grounds, but ASBL officials said they're

confident their appeal will succeed.

It's

unclear whether the change in presidential administrations will result in a

rethinking of small-business contracting policy, Charles Tiefer, a University

of Baltimore School of Law professor helping the ASBL with its case, told

Bloomberg BNA.

"Nobody

knows what the new head of the SBA is going to do," Tiefer said. "Maybe she'll

decide to wrestle with the Lockheed Martin types. We just don't know."

Defending

Small Contractors

An SBA

spokeswoman declined to shed light on McMahon's plans, including whether she

plans to tinker with the agency's goaling methodologies. SBA watchers likewise

said McMahon's contractor-related aims remain unclear.

During

her Jan. 24 Senate confirmation hearing, McMahon said she looked forward to

serving as an advocate for small contracting businesses, so that they "really

have that fair shot" at winning contracts over larger competitors. But she

provided few details as to how she might accomplish that goal.

That

may soon change. The House Small Business Committee will be holding its first

oversight hearing with McMahon on April 5, Kelley McNabb, the committee's

communications director, told Bloomberg BNA.

Small

contractor goaling has been a persistent issue in previous hearings and will

likely be raised again next week, a committee source said.

The

panel also is likely to pursue legislation to address the issue, at least

around the edges. A bill co-sponsored by Committee Chairman Rep. Steve Chabot

(R-Ohio) and the panel's ranking member, Nydia Velazquez (D-N.Y.), last session

would have revised the Small Business Act to increase prime federal contracting

opportunities for small-business concerns.

The

bill died in committee, but certain sections were rolled into the 2017 National

Defense Authorization Act. There's a strong chance that the parts of the

previous bill that didn't find another vehicle may again be put forth this

year, the committee source said.

The

reason for the renewed effort is clear, Chabot told Bloomberg BNA in a written

statement. "Federal dollars are a limited resource," he said. "Awarding

ineligible firms federal contract awards means eligible small businesses do not

get those contracts."

'Widespread

Misreporting.'

There

is no evidence of "substantial intentional misrepresentation" among federal

agencies, an SBA spokeswoman told Bloomberg BNA in a written statement.

Anomalies are more likely caused by human error, she said — an understandable

occurrence, given that thousands of contracting officers enter data about

contracts, including contractor size, millions of times per year.

Yet,

reports from various agencies "have shown widespread misreporting by procuring

agencies, since many contract awards that were reported as having gone to small

firms have actually been substantially performed by larger companies," said the

SBA IG's annual report, issued

last October, on the most serious "SBA management challenges."

The IG

has used similar language in management challenges reports since at least 2007.

The watchdog, over the past decade, requested that SBA make several changes to

improve the accuracy of its goaling and scorecard reports, many of which the

agency has made.

The SBA

should focus on modernizing its information systems and improving data

integrity, acting SBA IG Hannibal "Mike" Ware told Bloomberg BNA in a written

statement. That would "greatly enhance the ability of both SBA and contracting

officers to perform their respective responsibilities," he said.

'Deceptive

Practice.'

An ASBL

injunction request filed last year is the most direct ongoing attack on the

SBA's goaling process. Although a judge with the U.S. District Court for the

Northern District of California dismissed the request in October on

jurisdictional grounds, the ASBL has appealed the case to the U.S. Court of

Appeals for the Ninth Circuit.

The

ASBL is asking the court to issue an injunction that bars the SBA from

excluding any prime contract when calculating the value of contract awards. The

injunction would also prevent the agency from including contracts that were

awarded to businesses that aren't "small" as defined by law and regulation,

when calculating the value of prime contracts awarded to small businesses.

The SBA

asserted in a press announcement last April that small-business contracts

awarded in fiscal 2015 accounted for 25.75 percent of the total for all prime

contract awards. However, in that fiscal year, SBA characterized 151 Fortune

500 companies as "small businesses," according to the ASBL

suit.

The

suit contends that the SBA excludes the small-business prime contracting award

numbers from 27 agencies, including the CIA, the Federal Aviation

Administration and the Supreme Court, as well as contracts that are performed

outside the U.S. These excluded contracts make up a significant portion of

federal spending, the suit contends, meaning that the figures SBA releases

aren't accurate and reflect a form of "creative accounting."

"Using

this deceptive practice, the SBA has, for years, been able to boast that the government

has attained or exceeded the 23 percent minimum goal," the suit says.

Judge

Vince Chhabria didn't address the substance of ASBL's claims in his three-page

opinion Oct. 18. The judge found that Congress, but not the courts, could

mandate the types of changes the ASBL seeks.

"If the

Small Business Administration is giving Congress bad information, then Congress

can do something about it, either in an oversight or legislative capacity,"

Chhabria wrote.

The

baseline facts illustrate that their case has merit, Tiefer and ASBL President

Lloyd Chapman told Bloomberg BNA.

There

are gray areas of the law, Chapman said, "but my lawsuit is about policies that

are clearly illegal."

Priority

Attention

The SBA

was created to enforce the Small Business Act of 1953, which was designed in

part to ensure that a reasonable percentage of federal procurement contracts

were awarded to small businesses, as well as small enterprises owned by women,

minorities, veterans and others through set-aside programs.

The

Government Accountability Office (GAO) has urged the SBA for more than a decade

to address flaws it has recognized in the system.

The GAO

in a May 2003 report

studied five large companies that received $1.1 billion in federal contracts,

including $460 million designated as "small business awards."

A

significant cause for the misreporting is that federal regulations generally

permit companies to be considered small businesses over the life of the contract

— even if they grow, merge with another company or are acquired by a large

business, the GAO found.

'There

Was Confusion.'

Small-business

government contracting is one of the most important functions of the SBA, the

agency spokeswoman said.

There

is "no evidence" that substantial intentional misrepresentation is occurring,

she said. "Instead, the anomalies are more likely human error (thousands of

contracting officers entering millions of actions each year) or

recertification, i.e., a small business may legitimately win the competition,

but may subsequently be acquired during performance," she said in her

statement.

The

agency could not comment on the ASBL suit because it's ongoing, the spokeswoman

said.

She

declined to comment on whether SBA anticipates any changes in how it tabulates

its small-business goaling reports under McMahon — or whether the agency may

alter its mission as it pertains to federal contractors more generally.

"I

never thought during my time at SBA that there was any conspiracy," A. John

Shoraka, a former SBA associate administrator for government contracting and

business development, told Bloomberg BNA. "There was confusion."

Shoraka,

who left the SBA in January after a five-year stint, said the rules aren't as

clear as they could be on when companies need to recertify as larger

businesses. Contractors don't follow them "100 percent of the time," he said.

But the

goaling reports are more reliable now than they've ever been, said Shoraka, now

managing director for PilieroMazza Advisory Services. Referring to the reports

issued during his tenure at the SBA, "I think these were the cleanest numbers

in the history of these goaling reports," he said. "We worked very hard to get

these numbers clean."

'The

Fundamental Question.'

The SBA

has no "sticks" at its disposal — no legal or regulatory remedies — when

agencies admit they've failed to meet their small-business contracting targets,

Shoraka said — as happened in 2015, when the Department of Energy said that

just 5.4 percent of its contracts were awarded to small businesses.

Instead,

"when you get a bad report card, we're going to drag you before Congress and

call you out," Shoraka said.

Longtime

government contracting attorney Steve Koprince told Bloomberg BNA he isn't

convinced that data reporting irregularities, even chronic problems, can be

attributed to "book-cooking."

However,

SBA needs to do a better job pressuring agencies to take their small-business

contracting responsibilities more seriously, he said.

"It's

definitely a challenge for the SBA," Koprince said. "Are they holding agencies'

feet to the fire when they report these numbers? That's the fundamental

question."

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