New regulations level field for small-firm contracts
By Andrew Johnson
The Arizona Republic
April 19, 2007
The U.S. Small Business Administration is introducing new rules this summer that will change when and how often firms must verify their status as a small business.
The new regulations, which go into effect June 30, are designed to level the playing field for small firms by closing loopholes that enable large companies to get contracts under the guise of being small.
Although there are no definitive numbers on how often large firms obtain contracts under the small status, investigations by the SBA Office of the Inspector General have found widespread errors in how contracts are awarded.
Small-business owners who rely on government contracts welcome the upcoming changes.
"I think it's a good thing, even though the requirements might burden the small businesses a little bit more," said Arthur Harrell, co-owner of Venture Enterprises LLC, an office furniture supply company in Chandler. "I think it keeps everybody honest and it keeps a level playing field for small-business (owners) like myself."
Still, not everyone is happy about the new rules, because they don't believe the rules do enough to prevent potential contracting fraud.
"My opinion is that when a large business buys a small business, it ceases legally to be a small business," said Lloyd Chapman, president of the American Small Business League in Petaluma, Calif.
Current rules allow certified small businesses holding long-term contracts, which are defined as those five years or longer, to keep their small status for the length of the contract regardless of whether the size of the company changes.
But many small-business owners say that rule is unfair, because too often, companies will merge, or be bought out by a larger corporation.
When that happens, it allows a large firm to get - and keep - a contract that could go to a small company.
Under the new certification rules:
• A small business fulfilling a long-term contract must recertify as small after the fifth year of the contract and every year thereafter. Currently, firms can fulfill long-term contracts without having to recertify.
• A small business must recertify any time it buys another firm, merges with another firm or is acquired by another firm. Current rules do not require firms to recertify when such events occur.
The new rules still allow small contractors that experience a change in their size to fulfill their contracts.
The hiring federal agencies, however, will no longer be able to count them as a small business.
All federal agencies aim to award 23 percent of prime contracts to certified small firms each year under goals set by the Small Business Reauthorization Act of 1997.
There are different size thresholds for "small" businesses, based on either revenue or the number of employees, and most agencies rely on a specific coding system to determine whether a business qualifies.
For example, a commercial screen-printing firm can have as many as 500 employees and be classified as a small business, but a furniture wholesaler can only have up to 100 employees.
The new rules are partly in response to claims that large firms are awarded contracts set aside for small businesses under preference programs.
The SBA Office of the Inspector General issued a report in 2005 highlighting many of the inconsistencies in the system.
And in an analysis of six of the 20 largest contracts that were reported as going to small businesses in fiscal 2001 and 2002, the office found that four of the contracts actually went to companies that were large at the time of procurement.
Charles Collins, a small-business specialist at Fort Huachuca Army Base near Sierra Vista, said he believes the new rules could help agencies actually reach small firms.
But, he worries the changes will create more work, too, particularly if a contractor outgrows the small status.
Many small businesses say the federal contracts are their lifeblood, which is why it is so important to create a fair playing field.
For example, Venture Enterprises, the Chandler office furniture supply firm, boasted about $3.5 million in revenue in 2006, said Harrell, who owns the business with his wife, Ren'e.
About $3 million of that came from a contract with the General Services Administration and other contracts the company obtained through the SBA's 8(a) program, which helps socially and economically disadvantaged firms.
In fiscal 2005, small businesses nationwide received $79.6 billion in direct prime contracts from federal agencies, according to the SBA's Office of Advocacy.
That represents 25.4 percent of the $314 billion available for federal contracting.
More to be done?
Despite the changes, critics argue that the new rules still allow large businesses to get contracts.
Chapman said that annual recertification for all small-business contractors is necessary to prevent large firms from unfairly getting contracts simply by purchasing smaller firms. But the SBA believes that's not necessary.
One reason why large firms show up on contract lists as small businesses is because they grow between the time they win a contract and when the contract is completed, said Mike Stamler, spokesman for the SBA in Washington, D.C.
Accusing the SBA of diverting contracts to large businesses is "a deliberate mischaracterization of this issue," said Stamler, noting that the new recertification rules apply to all current and past contracts.
Joan Koerber-Walker, CEO of the Arizona Small Business Association, said the rule changes represent a move in the right direction.
"Can (the system) be better? Of course," she said. "You can always make it better. But is this an improvement? Yeah, it's an improvement."
Reach the reporter at (602) 444-8280. Read his blog at innovation.azcentral.com.