The federal government does not have strong enough deterrents to fight small business contracting fraud, said two inspectors general before a House committee hearing.

The biggest problem is the government prosecutes based on the financial loss to the government. But in cases of preferential contracting programs, the fraud arises from who performed the work — not the work itself.

The inspectors general at the General Services Administration and the Small Business Administration propose the government prosecute small business contract fraud based on the contract amount instead.

"If you say in law, if you are a dishonest actor who should not have gotten this 8(a) contract and this is a $20 million contract, that is now a $20 million loss to the government because the government has lost the benefit of awarding that contract to somebody they were meaning to help," said SBA IG Peggy Gustafson before a Oct. 27 hearing of the House Committee on Small Business's Subcommittee on Investigations, Oversight and Regulations.

She added, "If that's the loss, then they're facing jail time, serious time. And that's what gets the prosecutors interested."

Under current guidelines, contractors convicted of small business-related fraud receive probation or at most a six month sentence, according to a 2008 white paper by the National Procurement Fraud Task Force. The IGs' recommendations were based on proposed legislative changes in the white paper.

The Small Business Act mandates 23 percent of all federal contract dollars go to small businesses. Agencies also have to meet specific goals for small disadvantaged businesses, women-owned businesses, HUBZone businesses and veteran-owned and service-disabled veteran-owned small businesses.

Last year, the federal government spent $535 billion on contracts for goods and services, according to the Government Accountability Office. In 2010, agencies awarded small businesses $98 billion in contracts, but fell short of the goal by 0.03 percent, and missed on every other category as well.

The small contracting process is "wrought with fraud," said GSA IG Brian Miller at the hearing.

Large companies can win small business contracts by using an eligible company as a "pass-through. An analysis by the American Small Business League found 60 of the top 100 small business contractors were actually large companies.

"It is unbelievable that rampant fraud and abuse in federal contracting has gone on for this long," said ASBL President Lloyd Chapman in a release. "The SBA needs to listen to their inspector general and end the diversion of federal small business contracts to large businesses immediately."

Contractors also falsify information to be eligible for small business contracts. With false information, Miller said it's difficult for IGs to identify fraud because often agencies rely on self-certification.

These dishonest contractors "know that they may not be detected, that the federal government may not be able to make the case against them easily and they may get away with it," Miller said.

Another challenge in oversight is the lack of clarity in who should make sure small business contractors are who they say they are.

"I think the government needs to engage in a very robust discussion of where that responsibility lies," Gustafson said.