Seventy percent of the federal contracts allotted for small businesses were given to large companies last year, prompting the government to try to close loopholes by next year.

Government agencies say a majority of small businesses winning profitable federal contracts have outgrown the size standards set by the Small Business Administration, the office that oversees small businesses, or have become subsidiaries of larger companies, making them ineligible to be a small business.

A major issue is that companies keep their small-business status as long as they have a designated small-business contract, no matter how big it grows. Government contracts can last as long as 20 years.

The General Accounting Office, Congress' investigative arm, is conducting a review, particularly of federal agencies' use of waivers that allow larger companies to bid for contracts if no small businesses are available.

The investigation comes after the GAO and other offices received thousands of protests from small businesses and advocacy groups in the last three months.

Karen Zuckerstein, an assistant director at the GAO, said the agency plans to publish results by mid-January.

The General Services Administration, the purchasing agent for the federal government, will eliminate the loophole and enact a mandate next month that requires all businesses handling contracts with the government to recertify their status with the SBA every five years.

The SBA will review and clarify the definition of a small business, which varies by industry, said Gary Jackson, assistant director in SBA's office of size standards. However, Mr. Jackson would not say when the SBA would have a more detailed definition.

While most small businesses have fewer than 500 employees and accrue up to $6 million in sales, certain industries like manufacturing and professional services allow up to 1,500 employees and revenue hitting $29 million annually.

The SBA determines a company's status by the number of employees and its total revenue. Affiliates or branches to the company are added in the calculation.

More of the problem comes from businesses abusing the self-certification system with the SBA, said Boyd Rutherford, associate administrator for GSA's small business utilization office.

"Businesses that are small business usually have an edge in securing a bid because more agencies are doing business with smaller companies," Mr. Rutherford said. "However, businesses can't misrepresent themselves and lie to federal agencies and the American taxpayers."

Mr. Rutherford said 70 percent of small businesses procuring loans in 2001 had already outgrown the SBA's size standards. In 2001, the federal government awarded a total of 11.4 million contracts worth $234.9 billion, with 18 percent going to smaller companies.

Companies face disbarment from federal contracts, loss of business, high fees and jail time for fraudulently using the small-business status with federal procurement programs, Mr. Jackson said, adding that few companies face the severe penalties.

Mr. Jackson acknowledged the SBA has failed to accurately update its small-business systems like Pro-Net, an online search engine of about 195,000 small businesses nationwide.

While the SBA updates company profiles every 18 months, companies such as GovConnection Inc. and ASAP Software, both subsidiaries of larger corporations that would not be considered small businesses, were still active as of yesterday on the search engine as small businesses.

"We are looking into those companies, but normally they would not be considered small business when we calculate a company's size," Mr. Jackson said.

In the information technology segment, small businesses must have fewer than 500 employees or annual revenue of less than $25 million.

ASAP Software, a Buffalo Grove, Ill., software licensing services company, has 300 employees in the United States and about 200 in international offices. It has been a unit of Buhrmann Co., an Amsterdam office products supplier that employs 26,000 workers and had 2001 revenue of $10 billion since 2000.

ASAP spokeswoman Sally Folkes said in a statement that the company was unaware of any SBA or GSA questions concerning its small-business status, but would work to be in compliance with the federal government.
GovConnection Inc., a Rockville information technology company that caters to the federal and state governments, is listed on the database as having 180 employees, but the company was acquired in 1999 by PC Connection Inc., a computer services and products company headquartered in Merrimack, N.H., with more than 1,300 employees and $1.18 billion in 2001 sales.

Gary Sorkin, GovConnection president, did not return repeated calls.
Lloyd Chapman, president and founder of Micro Computer Industry Suppliers Association, the trade group for some 1,000 small businesses that have sent protests to the SBA, said the new re-certification process would still be too long to help smaller companies.

"Five years is too long a time for a business to have the monopoly on a contract or agency," Mr. Chapman said.

"A lot of companies think this action we're taking is to penalize them for growing and being successful, but it's not," Mr. Rutherford said. "Some companies simply are not telling the truth about their size and classification, and now they need to be held accountable for it."