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Critics: SBA hiding truth on small-business contracts

By Elise Castelli
Federal Times
December 12, 2007

Critics are accusing the Small Business Administration of trying to hide the fact that large companies are getting billions of federal contracting dollars meant for small businesses.

The agency released a list of its top 100 small-business contractors. Not on the list were numerous behemoths that typically dominate similar lists: SAIC, Lockheed Martin, General Dynamics and DRS Technologies, among others.

In 2006, for instance, SAIC ranked third among companies receiving the most federal contracting dollars targeted for small businesses, according to Eagle Eye Publishing, a private market research firm. General Dynamics was 13th; Lockheed Martin, 26th.

None of them are on SBA’s list, which covers the same year.

An advocacy group representing more than 100,000 small businesses says that’s because the agency is trying to deceive the public.

“This is an attempt by the SBA to do what they have always done: to cover up the fact that Fortune 500 corporations are actually the recipients of most small business contracts,” Lloyd Chapman, president of the American Small Business League, said in a Dec. 3 statement. His group, which represents companies with 100 or fewer employees, says it will sue the agency for denying its Freedom of Information Act request to obtain the data used to compile the agency’s top 100 list.

SBA says it’s not hiding anything.

 “Releasing this list is part of SBA’s ongoing effort to increase the transparency, accuracy and integrity of government small business contracting data,” said SBA Administrator Steve Preston in a statement.

The agency wanted to “refute the claims of people that said we had something to hide” by creating the list, said Joel Szabat, SBA chief of staff.

SBA can’t comment on the differences between its list and Eagle Eye’s list or any other firms’ lists because “we don’t always know what standards the other firms use,” Szabat said.

Eagle Eye is widely considered one of the top research firms tracking small-business contracting data. Congress and SBA’s own Office of Advocacy have hired the firm in the past to compile and analyze data on where small business dollars go.

Paul Murphy, president of Eagle Eye Publishing, thinks that despite what the SBA list says, large firms still get most of the government’s small-business contracting dollars. But SBA’s methodology doesn’t show that.

“They’re trying to create a list that has only small businesses on it when they’re owned by large businesses,” Murphy said.

To achieve this, SBA listed the firms by the industry equivalent of a Social Security number — which is known as a DUNS code. DUNS stands for Data Universal Numbering System, which is a unique nine-digit number assigned to divisions and branches of companies by the financial data firm Dun & Bradstreet. Divisions of the same company have different codes, just like members of a family have different Social Security numbers. As a result, what SBA compiled is a list of the top DUNS numbers that won small-business contracts.

By not totaling the small-business dollars spent through the subsidiaries, as Eagle Eye’s list does, it appears that fewer dollars are going to large firms than actually are, Murphy said.

“If you are not rolling up the subsidiaries and divisions to a single parent, then you are not getting an accurate picture of what the market share of each small business is,” Murphy said.

A case in point: SBA’s No. 1 recipient of small business contracting dollars is ProcureNet Inc., of Fairfield, N.J. But that company was bought two years before by SAIC, one of the largest government contractors. That means SAIC should top SBA’s small business list, Murphy said.

Many companies on the SBA list started as small firms but were acquired by large firms. Examples:

Digital System Resources Inc., which ranks 79th on the SBA list, has been owned by General Dynamics since 2004.

Technical and Management Services, which has a division that ranks second on the SBA list, was bought in 2006 by DRS Technologies, which had $1.7 billion in revenues in 2006.

Galaxy Scientific Corp., which has divisions that rank 65th and 100th on SBA’s list, was purchased in 2005 by SRA International, which had revenues exceeding $1.2 billion in 2006.

It’s not improper that that these companies won small-business contracting dollars even after they were acquired by large companies — federal contracting rules permitted that until this past June. As a result of the new rules, however, 26 of the 100 companies on the SBA list are no longer considered small businesses.

Critics contend the SBA list — by focusing strictly on subsidiaries and divisions of larger companies — fails to properly acknowledge the large role giant contractors play in the small-business contracting arena.

SBA didn’t total the numbers by parent company because officials thought that calculating the dollars by individual DUNS number was more accurate, said Arthur Collins, SBA director for contracting.

“The decision could have gone either way,” Collins said. “We thought this would be a clearer display than rolling it up into one. Our objective was [to list] the largest 100 contract holders that were characterized to be small business.”

As for ProcureNet, under new rules that went into effect in June, the company will no longer be counted toward agency small-business goals and therefore both ProcureNet and SAIC should drop off the list over time, SBA’s Szabat said.

SBA is flagging companies like ProcureNet and Digital Systems Resources on its list by noting when they outgrew their size standards, so in the coming years they can be removed from agencies’ small business calculations, he said.

In addition, the agency just completed a 14-month cleansing of 11 million transactions recorded in the Federal Procurement Data System. That data scrubbing removed $4.6 billion in contracts because the companies holding them were incorrectly coded as small businesses.

Senate Small Business Committee Chairman John Kerry, D-Mass., and other small business advocates applaud SBA’s effort to account for where small-business dollars are going, but they say they want more detail on how SBA compiled the list.

“I want to examine these contracts more closely to ensure all the numbers the SBA presents as small business goal achievements are accurate and without caveats,” Kerry told Federal Times in a Dec. 6 statement.

Max Kidalov, vice president of Centech Group, the No. 22 firm on the SBA list, said that while he is pleased with the attempt at transparency, SBA needs to enforce the rules better that determine which companies are small and which aren’t.

“Until SBA enforces the law and tells billionaire conglomerates that it means business on certifications … unfair competition will continue,” Kidalov said.

SBA’s Preston sent a letter in July to the biggest 800 government contractors, asking that they stop certifying their recently acquired subsidiaries as small businesses. Szabat said the results have been mixed, but the largest of the large firms have complied.

Of the 26 firms on the SBA list that have either grown large or been bought by large firms, all but one have ended their small-business status, according to Central Contractor Registry’s Dynamic Small Business Search. Multimax Inc., which was purchased by Harris Corp. in June, shortly before the rules changed, still appears in the database as a small business.