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SBA Draws Flak Over Big Contractors’ Share of Awards

By Sam Skolnik
March 30, 2017

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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