A new Small Business Administration rule that purports to secure more government contracts for small firms falls short, according to Sen. John Kerry and Rep. Nydia Velazquez, who will be heading the small business committees of their respective congressional houses next year.

"The agency's rule fails to address the vast majority of this problem," said Velazquez (D-New York). "Eighty percent of the contracts miscoded were due to other factors than small businesses simply growing too large, which is all this regulation focuses on." Kerry (D-Massachusetts) has similarly said the rule does not get to the heart of the matter.

For years, the problem has been that large companies are getting a piece of the 23 percent pie of contracts mandated to go to small businesses. In fact, according to a report put together by Velazquez's staff earlier this year, small businesses made up only 21.57 percent of federal government contracts in 2005.

Asserting that small firms lost out on a record $4.5 billion in contracting opportunities last year, the report's authors noted that those contracts were awarded to Fortune 500 companies, large universities, and government agencies.

Some of those larger entities and nonprofits have been "miscoded" as small businesses because of acquisitions or business growth hasn't been acknowledged over the life of a multi-year contract. The fix, according to the SBA, is to require small businesses to re-certify their status on long-term contracts. For contracts lasting longer than five years, the small-sized vendor will have to re-certify before the fifth year ends.

“This regulation will go a long way toward ensuring that contract awards get in the hands of small business owners, federal agencies get the proper credit toward their small business contracting goals, and small business contract awards are fairly and accurately reported,” said SBA Administrator Steven Preston.

Andrew Langer, manager of regulatory policy at the National Federation of Independent Business, told CFO.com that the rule is a good first step toward change. "It doesn't solve the problem entirely, but it certainly helps legitimate small businesses gain access to federal contracts," he says. The U.S. Chamber of Commerce also supports the rule.

But critics believe having small business recertify annually would be more effective. "Annual recertification would clean the government's [procurement] database immediately," Lloyd Chapman, president of the American Small Business League, told CFO.com.

In 2003, the SBA first asked for public comment on annual re-certification. Of 636 comments received--including those from contractors, trade groups, and federal agencies--some small-business representatives said they would need more time than once a year to re-certify and plan their transition from small-company status, according to the SBA. But Chapman says annual re-certification isn't hard and small businesses would be able to comply if an annual mandate was put in place.

To be sure, the topic isn't likely to go away any time soon, since there's plenty of money to be had for businesses wanting to provide services to the 24 federal agencies. According to Velazquez's report, $314 billion was spent on government contracts in 2005.

Along with the potential for profit for small enterprises, the deals could lead to expansion: government contracts often help small businesses with specialized services grow, Langer says. Still, it's not easy for small businesses to cut through the federal agencies' red tape, keep a handle on when contracts are up for bid, and gain personal access to the people who are making the procurement decisions, according to the report.

When Kerry was named chairman of the Senate Committee on Small Business and Entrepreneurship last month, he pledged to make Washington "a friend of small business once again," and noted that small firms aren't getting their share of government contract awards. "While 80 percent of America's businesses are small firms, they aren't even getting the 23 percent of federal contracts they're entitled to under the law—but somehow Washington has been so upside- down that big businesses have obtained nearly $2 billion in federal contracts that should have gone to small firms," he said.

The SBA has also announced that the federal agencies will have a procurement scorecard that will grade each agency on meeting its small-business goals. "The agency's initiative will only be effective if there are real measurements and criteria in place," said Velazquez, who is slated to chair the House Small Business Committee. "If not, it will be just one more attempt by this administration to hide a growing problem."