Small Firms Shortchanged On Federal Contracts


Small Firms Shortchanged On Federal Contracts

Report Says Big Companies Getting Government Work Are Misclassified as Small

By Gwendolyn Bounds
The Wall Street Journal
December 28, 2004

A broad new government report, expected to be released today, raises fresh
concerns about why lucrative federal contracts designated as going to small
businesses sometimes end up in the hands of large ones instead.

The report, commissioned by the U.S. Small Business Administration's Office of Advocacy, says that roughly $2 billion in federal contracting money
believed to have gone to small businesses primarily went to large firms
instead in fiscal 2002. The Department of Defense and the General Services
Administration are the agencies accounting for the bulk of the awards at
issue. However, even the SBA itself is cited as granting $1.2 million in
contracts that were recorded as small-business awards, but went mainly to large companies instead.

The $2 billion accounts for roughly 4% of the total $50.8 billion in government small-business spending in fiscal 2002. However, the report
focuses on only the top 1,000 companies receiving small-business awards, and it suggests that "significant problems exist" with other small-business
awards as well.

" This could be the tip of the iceberg," says Thomas Sullivan, chief counsel
of the SBA's Office of Advocacy. The office was created in 1976 as an
independent body within the SBA and is charged with advancing policies to
protect the nation's small businesses.

Each year, Congress establishes small-business buying goals for most federal agencies and for the government as a whole, and an annual tally is made of how close each body comes to meeting its target. The overall goal for the federal government is 23% of all prime-contract dollars. Although there are no legal ramifications if goals aren't met, there is substantial political and public pressure to try, and agencies are even encouraged to set aside some contracts for small-business bidders only.

The $2 billion cited in the report went primarily to 39 large companies,
according to the SBA Office of Advocacy study. Among them are familiar names such as Titan Corp., Raytheon Co. General Dynamics Corp., and
Hewlett-Packard Co.; those companies did not return calls seeking comment.

The study, commissioned two years ago, was conducted by Eagle Eye Publishers Inc., a Fairfax, Va.-based research group specializing in federal
procurement data.

Honor System

The report doesn't allege any wrongdoing by the 39 companies, although
businesses work on an honor system that lets them "self-certify" their size
for federal contracting purposes. Instead, those commissioning the report
say that many of the bigger companies acquired small ones holding government contracts, which federal contracting officials continued to count toward their small-business goal tallies. They were allowed to do so through
regulation loopholes that allowed the contracted firm to be considered small
over the life of a contract.

Under pressure to mitigate some of these problems, the SBA last week
implemented a new rule requiring small companies with federal contracts to
recertify their size if acquired by a bigger one.

But Mr. Sullivan says that in order for the new rule to have real teeth,
greater transparency is needed with the entire bidding-and-award process.

" The whole contracting system is designed for self-policing," he says. "To
make the analogy, if someone recertifies in the woods and no one is around,
does it really happen?" Companies can protest small-business contracts they think have been awarded unfairly to other bidders.

His office is calling for easily accessible information about who is bidding
on and winning contracts to be made available to the general public on a
timely basis. Mr. Sullivan says this will encourage challenges against
suspect awards and make government-contracting officials more careful with
how they report their award totals each year. "There has to be an emphasis
that this 23% goal be legitimate," he says.

The new report's findings are the latest in a growing body of evidence
outlining problems with small-business federal-contract awards. This fall,
the Center for Public Integrity, a nonprofit, nonpartisan research group in
Washington, said that 30% of all defense-contract money reported as going to small businesses and special minority-owned businesses ended up with top defense companies from 1998 to 2003. Meantime, a review completed last year by the U.S. General Accountability Office found similar problems.

This latest accounting by the SBA's Office of Advocacy, however, is
particularly notable in both its scope across government agencies and that
it comes from an entity connected to the very government body tasked with
looking out for the interests of the nation's 25 million small businesses.

While the government missed its 23% total small-business award goal for
several years running, the SBA announced earlier this year that the Bush
administration had met the 2003 target and called it a "victory for

This latest report from the Office of Advocacy casts renewed doubt on the
accuracy of such tallies. For 2002 at least, the report puts small-businesses' share of procurement at closer to 19.7% compared with the
previously reported 20.5%. While the difference is less than 1%, Mr.
Sullivan cautions the lost opportunities for small businesses are

" This is just one sweep of the data, and it uncovered amounts of $2
billion," Mr. Sullivan says. "The majority of jobs created in this country
come from small businesses. And small businesses need equal access to
contracts to be the job-creation machine."

Other Problems

The report highlights other problematic contracting issues, including
businesses sometimes being allowed to keep their small status after
outgrowing that designation through long-term government contracts called
" schedules." Schedules are like big umbrella contracts that preapprove
companies to provide goods and services to agencies. Companies that outgrow their small-business size standard in many cases are permitted to continue receiving new small business awards under these broad contracts until they expire, typically every five years.

Meantime, the government's size-coding system is also problematic, the
report says. Size standards for "small" currently differ widely by industry
and are usually based on employee count or in some cases, revenue. The
report notes that coding problems in some cases occurred because companies had incorrectly been assigned parent company affiliations -- a result of unreliable or out-of-date information supplied to contract officials, either through commercial table look-ups or companies themselves.

Notably, the SBA has proposed requiring companies to recertify their
small-business status annually. It also is currently seeking public comment
about ways to streamline and more consistently define businesses as "small."

Says Raul Cisneros, SBA spokesman: "We are working with different agencies to make sure that we have systems in place to make sure that small businesses get the contracts."

The release of today's report from the Office of Advocacy has been
controversial in itself. In October, the American Small Business League, a
trade group in Petaluma, Calif., filed a complaint against the SBA asking
for immediate release of a report draft. Mr. Sullivan says: "We've denied
access to drafts because the drafts don't meet the type of objectivity
needed for a government office to release them."



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