Big Firms Winning Small Business Contracts


Big Firms Winning Small Business Contracts

By Bennett J. Loudon
Democrat & Chronicle
October 21, 2013

CarestreamHealth has annual revenues of more than $2 billion and 7,300 employees. Harris Corp. does about $800 million and hasabout 1,700 workers. And ITT Space Systemshas almost $8 billion with more than 39,000 employees.

That information, from a database of federal contracts,depicts three large enterprises, by most standards. Yet a Democrat andChronicle examination of that data also shows those companies won nearly$2.9 million in federal contracts for the Rochester area over the past fiveyears while being designated as small businesses.

Officials at those businesses had no explanation for the smallbusiness designation, but said they did not seek it.

Small Business Administrationofficials offered several possible explanations for a seemingly large companybeing classified as a small business, while not addressing any specificcontracts. But they also have acknowledged problems with several programsdesigned to help small businesses.

In Rochester and elsewhere, small businesses are the economicengines that fuel job growth and cushion job losses from larger firms. About 97percent of the 23,500 businesses in the greater Rochester area have 50 or fewerworkers, according to the U.S. Census Bureau.

"Federal contracting with small businesses remains awin-win," John Shoraka, SBA's associate administrator for government contractingand business development, wrote in a July blog post. "Small businesses getthe revenue they need to grow their revenues and create jobs. Meanwhile, thefederal government gets the chance to work with some of the most responsive,innovative and nimble companies in the U.S."

About 600 companies with Rochester addresses have been awardedabout $5.8 billion in federal contracts over the past five years, the Federal Procurement Data System (FPDS)online database shows.

That total includes about $292 million awarded to about 460vendors classified as small businesses.

Some, like T&TMaterials, a metals dealer at 1225 Ridgeway Ave., clearly qualify.

T&T has four full-time employees and annual revenue ofabout $2.5 million. Over the past five years, the company has been awardedalmost $9 million in federal contracts as a small business and about $27,000not as a small business. Most of its work is for the Defense Department.

But many of the Rochester companies doing work for the federalgovernment over the past five years with — and without — the small businessesdesignation don't fit as easily into both categories.

Harris tops the list with about $4.8 billion, a total thatincludes about $2.4 million in contracts as a small business.

ITT Space Systems was second with about $153 million incontracts, including about $53,000 in small business contracts.

The $18.4 million total for EastmanKodak Co. includes about $311,475 as a small business.

Ben Rand, a spokesman for Harris, said in an email that hiscompany submitted information to the government that "accurately reflectsour status as a large business."

ITT spokesperson Irene Lockwood wrote in an email that hercompany "does not want to comment on a government form that was completedby a contracting officer."

Carestream spokesman Robert Salmon said he was puzzled by thesmall business classification.

"It is widely known and reported that we are a $2.4billion company that operates in more than 170 countries around theworld," Salmon wrote in an email. "If our status has beenmisidentified in a government managed database, we will look into this."

James F. Mossgraber, T&T's vice president and generalmanager, said he doesn't feel his company ever unfairly lost a bid to a largecompany improperly classified as a small business, but "it certainly israther disconcerting. ... We would certainly expect everyone to play by thesame rules."

If a government agency is getting credit for a small businesscontract, "it ought to be going to a small business," said MollyBrogan Day, spokeswoman for the National SmallBusiness Association in Washington, D.C.

"We think that there are folks out there who do this onpurpose, either to bump up their contracting numbers or to get the contract,whether it's the (government) contracting officer, or the company who ismiscoding what their company should be," she said.

Judging from their local advocates, small businesses have notbeen vocal about the process.

Dan Smith, spokesman for the Rochester Business Alliance,said small business owners who are members have not raised the issue to them.He said president and CEO Sandra A. Parker "respectfully passes on aninterview on the subject."

Tim Mason, president and CEO of the Small Business Council of Rochester, anaffiliate of the SBA, wrote in an email: "I'm not at all comfortablecommenting on this topic and my members have not raised it as an issue."

How big is small?

The SBA defines a small business "as one that isindependently owned and operated, is organized for profit, and is not dominantin its field." It sets a general standard of 500 employees for mostmanufacturing and mining industries, and a maximum of $7 million in averageannual receipts for most non-manufacturing industries.

Depending on the industry, the specific definition can includecriteria based on annual sales and the number of employees. But governmentstandards put the maximum number of employees at 1,500 for manufacturers. Forservice companies, the maximum sales volume is $35.5 million.

The federal government has set a goal of awarding 23 percentof contracts to small businesses to help support small companies, butgovernment agencies usually fall short. In 2012, only 22.25percent of contracts worth $89.9 billion went to small businesses,according to the SBA. The shortfall amounts to about $2 billion in contracts.

For 2008 through 2012, an average of 21.99 percent of federalcontracts worth $93.9 billion went to firms classified as small companies.

Lloyd Chapman, founder of the AmericanSmall Business League, claims the real number is closer to 2 percent or 3percent. He said the figures released by the SBA are tainted by billions ofdollars in contracts that go to large companies, but which are counted as smallbusinesses.

"This is not miscoding, it's not simple human error, it'snot companies outgrowing their size status. It's not large companies buyingsmall businesses. It's fraud," Chapman said. The fraud, he claims is notcommitted by the companies, but by government officials.

Problems not new

According to information on the Federal Procurement Data Systemwebsite, the business size information used in the contract database comes fromthe federal government's Systemfor Award Management (SAM), a registry of federal contractors. Theinformation in SAM includes a section on "representations andcertifications" submitted by contractors regarding their status in variouscategories, such as whether they are a small business, minority owned,tax-exempt, or women owned.

But in many cases, companies that have not claimed smallbusiness status in the SAM registry nonetheless are classified as smallbusinesses in the procurement database. Harris, ITT, Ortho-Clinical Diagnosticsand Carestream — four of the five largest recipients of federal contracts inthe Rochester area — all reported that they did not qualify as smallbusinesses. (The fifth, the University of Rochester, got no small businesscontracts.)

Chapman said he analyzed the database of federal contracts for2012 and found that, of the top 100 companies receiving the highest dollaramount in federal small business contracts, 71 were large companies thatsignificantly exceeded the SBA's small business size standards. He said thosecompanies got about $9.5 billion in contracts.

In a spring reportto Congress, SBA acknowledged "procurement flaws that allow largefirms to obtain small business awards."

In an emailed statement, the SBA's Shoraka said the agency"has no tolerance for waste, fraud or abuse in any small businesscontracting program."

SBA officials listed several possible reasons why a largecompany may be labeled as a small business. A company may have fit the sizecriteria when a contract was originally awarded, but subsequently grew beyondthe limits.

Some companies that seem very large may actually qualify as asmall business within a narrow industry sector.

If a small company is acquired by another firm and is nolonger considered small, it is the responsibility of the firm to notify thegovernment within 30 days to update its status. An error would occur if thecompany failed to notify the government.

"Human error may occur when a contracting officer inputsprocurement data ... indicating that a firm is small when indeed it isnot," SBA officials wrote in an email.

About 5 million annual contract actions are handled by more than30,000 federal workers, SBA officials said. If an error was made, SBA officialssaid information cannot be changed after it is entered in the procurementdatabase.

For several years, the SBA's Office of InspectorGeneral has reported problems with small business contracts going to largefirms.

During testimony to a congressional committee in April, SBA Inspector GeneralPeggyE. Gustafson said: "Oversight of the government contracting andbusiness development programs, including investigating allegations thatineligible companies are fraudulently benefiting from these programs, remains akey priority."

Gustafson said that as of Sept. 30, 2012, her agency wasinvestigating 62 government contracting cases worth more than $1.5 billion.

She also said in her testimony that, during the past year,there was a significant increase in the number of lawsuits filed alleging fraudin SBA government contracting programs.

"The OIG will continue to assess whether the SBA istaking adequate steps to ensure the integrity of small business contracting,with an emphasis on issues such as the accuracy of reporting small businesscontract activity, large businesses being classified as small businesses,adherence to regulations to protect small businesses, training of governmentcontracting personnel, deterring fraudulent acquisition of governmentcontracts, and bundling of contracts," Gustafson said.

Seeking solutions

Congress has taken action on the problem, according to U.S.Rep. Chris Collins, R-Clarence, a member of the House Small Business Committee.In an emailed statement, Collins said: "We continue to look at this issueand advance legislative fixes to ensure that large corporations are not beingunfairly awarded federal contacts meant to support America's small businesseconomy."

The Small Business Committee developed a contracting reforminitiative that was signed into law in January as part of the National DefenseAuthorization Act of 2013.

The legislation will enforce existing small businesscontracting goals by making them part of the annual reviews and bonusdiscussion for senior agency employees. It will make it easier to suspendcompanies intentionally defrauding the government. And the law requires the SBAto develop size standards that more accurately define a small business.

"I'm not suggesting that what the small businesscommittee did solved the problem entirely, but it acknowledges that the problemexists and they put parameters in place that would hopefully take steps to curbthe problem," said Grant Loomis, a spokesman for Collins.



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