If allegations were true, penalty is light, observers said
Complaints that large companies steal government work from small businesses may no longer be falling on deaf ears. In what is believed to be the first-ever False Claims Act settlement between a company allegedly posed as a small business and the U.S. government, Insight Public Sector Inc. has agreed to pay $1 million for misrepresenting itself as a small business.

The alleged improper activity began in 1996 when the company, then known as Comark Government and Education Services Inc., won a General Services Administration multiple-award schedule contract as a small business.

In 2002, Insight Enterprise Inc., a Fortune 1000 company with 2005 revenue of $3.3 billion, acquired Comark, which continued to operate as a small business until 2005.

The settlement was the result of a two-year investigation by GSA, the Justice Department and the Small Business Administration that concluded Comark was not a small business when it won the contract and, therefore, was given preferential treatment and contracts it should not have received.

Insight of Tempe, Ariz., declined to be interviewed for this story.

Glenn Harris, an attorney in SBA's inspector general's office who worked on the investigation, said between 1996 and 2005, the company won roughly 250 small-business set asides worth about $4.2 million.

Harris could specify neither the total number of task orders nor their value, but, he said, there were "many other contracts."

Allegations of fraud
Lloyd Chapman, president and founder of the small-business advocacy group American Small Business League, began looking into Insight in 2002 after hearing repeated complaints from small companies that were losing contracts to Insight.

Later that year, he turned Insight and two other companies over to SBA for misrepresenting themselves as small businesses. Chapman claims Insight won more than $50 million worth of small-business contracts, and called the $1 million settlement inappropriate.

"It is a joke and an insult to the American people and to small businesses, and it serves to encourage fraud and abuse," he said. "That's like having the fine for bank robbery be that you have to pay a percentage of what you stole."

Under the Small Business Act, companies found guilty of misrepresenting themselves as small businesses face punishment of up to 10 years in prison, a fine of $500,000 per infraction and debarment from government contracting.

Harris, while not acknowledging whether criminal prosecution was ever recommended against Insight, said the government considered all its options, but that the final settlement was the result of extensive negotiations with the company's legal team. He called it a "good settlement for the government."

In a statement announcing the agreement, SBA Administrator Hector Barreto went even further.

"This should act as a deterrent to such activity," he said.

But the agreement lets Insight stay on the 20-year GSA schedule contract and does not include any admission of wrongdoing on the company's behalf. Taken in combination with a fine that is a fraction of what the company won in awards, small-business advocates fail to see the deterrent.

Guy Timberlake, CEO and chief visionary officer for the American Small Business Coalition, lauded the government for taking action, but disagreed with the severity of the punishment.

"Fraud is what it is, and it should be treated as harshly as fraud, as a federal offense," he said.

Lack of oversight
The problem of large companies winning small-business contracts is an institutional one and is not limited to one company under one contract, SBA and industry officials said.

In a report from Feb. 24, 2005, then SBA IG Harold Damelin called the issue one of the most important challenges facing SBA and federal government.

"Large businesses are receiving small-business procurement awards, and agencies are receiving credit for these awards," he wrote.

Among the bones of contention is the way government contracting officers search for vendors. Using the Central Contractor Registry's (CCR) search function, contracting officers access a complete list of companies that have been certified by SBA as members of its 8(a) Business Development, HUBZone Empowerment Contracting and Small Disadvantaged Business programs.

However, the registry lists any businesses that claim to qualify as small, not solely those certified by SBA. The registry is largely an honor system; companies enter their own information with no oversight and are expected to update it regularly and accurately, SBA's Harris said.

"There are a lot of problems with that in terms of data accuracy," he said.

In a series of reports over the last two years, the SBA IG has urged the agency to make changes to the registry. As of yet, no changes have been made, although SBA officials claim to be working with the Defense Department on a solution.

Skirting requirements
The IG also has taken issue with the practice, on governmentwide acquisition contracts, of vendors maintaining their small-business status for the life of the contract – 20 years in some cases – even if the company outgrows its designation or is purchased by a large corporation.

The IG wants this practice stopped, but SBA has declined to do so.

A rule enacted in 2004 forced recertification of companies on multiple-award schedule contracts every five years as options are picked up. But companies are allowed to grow out of the small-business category during those five years.

SBA in April 2003 issued a proposed rule change that would require annual recertifications, but the rule has yet to be adopted.

That may not be enough, Harris said. To ensure that the contract winner is a small business, the certification should be done before each task order award, he said.

Yet another problem exists in government agencies themselves; some contracting officers selectively pick North American Industrial Classification System codes for procurements to let companies win small-business contracts, Timberlake said. Procure- ments often are tagged with NAICS codes, each of which has its own size standard.

Some NAICS codes are revenue-based; others are based on number of employees. Contracts often have several NAICS codes, which lets companies that do not qualify under one code qualify as small under another code. NAICS codes each company qualifies for are listed on the CCR, and are entered by the company.

In the case of Insight winning awards under the 1996 GSA contract, it is likely that each contract awarded to the company, set-aside or not, was counted by the awarding government agency toward its small-business contracting goal, Harris said.

"They try to do everything they can to take as much credit as possible, so I would think it quite likely that they did," he said.