Snippets of the topic are everywhere--from the "CBS Evening News" to The New York Times. One would think it's a tired story. But, alas, the small-business procurement debacle marches on as money earmarked for small integrators is getting misplaced along the way. The issues can be explained away at best by flawed procedures and human error, at worst by mismanagement and all-out fraud--depending on whom you ask.

"Everywhere you look in federal small-business contracting, you find fraud, you find abuses, you find loopholes," says Lloyd Chapman, president of the American Small Business League (ASBL). "What you don't find is anyone doing anything about it."

Part of what makes the topic such a lightning rod for debate are the many sides to the procurement story. There's the mom-and- pop integrator that regards "small-business procurement" as something of a misnomer. There's the top-tier integrators that qualify as small by law but endure finger-pointing just the same. Then there's the government agencies that are pressured to allocate dollars to small businesses, but obligated to use contract vehicles that eliminate many from the running. And there's the federal regulatory offices that are charged with overseeing the program, but have little authority to enforce procurement goals. When all of these varying perspectives are considered, what's left is a big mess and, oftentimes, misspent tech dollars.

"We need to exert more effort toward being small-business-friendly," says Roscoe Bartlett, congressman for Maryland's Sixth District and former small-business owner. "It's a formidable array of regulations that is just bewildering. There needs to be someone there to hold their hands and reward our government buyers that actually make an effort to reach out--since many are just not doing it."

What Has To Be Done?

While the standards (see "The Law In a Nutshell") seem pretty straightforward, implementation of the program has proved anything but easy. First off, what constitutes "small" is up for debate by many--and under scrutiny right now. The window of time available for lending comment to the Small Business Administration (SBA) was extended from February to April.

"Generally speaking, two things have to happen," says Rich Carter, spokesman for the House of Representatives Small Business Committee. "First, the size standard has to change to a point where small business actually means small business. That means getting rid of the loopholes that allow large businesses to win small-business contracts. And second, there needs to be more frequent size certifications."

Much has been made about companies growing out of their small-business statuses during the duration of the contract--they're certified as small businesses at the start, grow to large during, but maintain the small-business status throughout. The General Services Administration (GSA) dealt with that issue somewhat by requiring small businesses to recertify their size at the option period on multiple award contracts. But a few issues remain: First, option periods often last for years; second, the requirement doesn't apply to all small-business contracts; and third, many companies manage to maintain small-business status despite significant growth.

"Too often, we go for a small-business set-aside, only to see our much larger competitors in manufacturing bid and get it," says Bobby Rose, president of Bar Code Equipment Service, a Service Disabled Veteran Owned Business (SDVOB) government VAR based in Jacksonville Beach, Fla.

Generally speaking, the definition of small according to the program's guidelines depends on the industry category that a company falls under, defined by the North American Industry Classification System (NAICS).

For example, the maximum number of employees a VAR can have to be considered small is 150. Most manufacturing industries can have 500, though in some cases, that number can be as high as 1,500. Still, other industry categories determine size by revenue rather than employee numbers.

"It can be a little bit deceiving when a $23 million company is listed as small," says Megan Gamse, senior analyst at Input, a Chantilly, Va.-based research firm. "But important to keep in mind is that a $23 million systems integrator is actually a pretty small company."

According to the U.S. Census Bureau, which helped develop the NAICS, classification codes are usually derived from information that the businesses provide on administrative, survey or census reports.

"Nothing frustrates me more as a large business than to see an opportunity become a set-aside and get awarded to what I call an ersatz small business," says Kevin Adams, vice president of program management for Vernon Hills, Ill.-based CDW Government. The company's Small Business Partner Consortium was established in 2003 to help small businesses win IT contracts with government agencies. "These are the companies that because of loopholes can masquerade as a small business and get awards."

Many point to Chantilly, Va.-based GTSI, which had 850 employees by the end of 2004--too large to be considered a small-business VAR. But NAICS codes cited in GTSI's January 2005 Central Contractor Administration (CCR) listing identify the company as a manufacturer and a wired communications carrier--the former of which, as stated, carries a small-business standard of 500 employees or more, the latter up to 1,500. Similarly, Software House International (SHI), which lists more than 700 employees, claims to be a top reseller for Adobe, Citrix, Corel, Crystal Decisions, Macromedia, Microsoft, Network Associates/McAfee, Novell and Symantec. Yet, the company lists NAICS codes of manufacturing.

But, in fairness, it's the agencies that determine who can bid on a given small-business opportunity by specifying a particular NAICS code.

"A NAICS code is assigned to the contract by the contracting officer," says Gary Jackson, assistant administrator for size standards at the SBA. "The size standard that the SBA established for that code then applies to that contract. What NAICS code the contractor operates under is an irrelevant point."

NAICS codes simply allow companies to qualify and capture various categories, says Paul Liberty, area vice president for corporate affairs and investor relations at GTSI. "When government is looking to do business with satellite communications, for example, they're going to look to companies in the telecommunications industry. [GTSI] does a lot of satellite communications in Iraq, in Afghanistan, and in this country with first-responders," Liberty says, and, therefore, is coded accordingly.

CDW's Adams, too, concedes that nothing illegal is going on. GTSI, for one, was awarded a contract as a small business in 1996. The company recertified twice since then, extending the small-business contract until 2007. "The way the rules are written enable that to happen," Adams says. "Such companies are not doing anything [unlawful], but every time they win a small business set-aside, a legitimate company struggling out there doesn't have the opportunity."

Bundling Elbows Out the Little Guy

Also throwing roadblocks in front of small companies is the habit of government agencies to bundle contracts. The theory behind contract bundling--through such things as blanket purchase agreements, indefinite delivery/indefinite quantity (IDIQ) contracts and Government Wide Acquisition Contracts (GWACs)--is that the agency gets the benefit of volume pricing and consistent technology upgrades. "All agencies go to bundling for the same reason--they just can't keep current because procurement cycles are too darn long," Congressman Bartlett says. Oftentimes, one contract vehicle provides integrated hardware, software and related supplies from contractors that are selected through a "best-value" approach.

The problem for small companies, however, is that they often find themselves out of the running because of the contract's size, dollar value, geographical dispersion or all of the above.

"If you consider the fact that most of the GWAC contracts are given to large businesses, and in many cases are mandatory, you tie the hands of agencies that are trying to be more proactive in their small-business program," says Mark Martinez, president of San Antonio-based M2 Technologies. The government VAR is a small, veteran minority-owned business. AFWay, for example, is a Web-based purchasing system for desktop and notebook computers. Mandatory for the Air Force, it offers prenegotiated contracts with leading IT manufacturers and resellers. "How does a company like mine, that is in San Antonio providing a high level of service to an agency here in my area, compete? Give agencies the latitude to buy locally from small businesses in their region that might be providing a high level of service."

The government, in response, often writes subcontracting requirements into opportunities--passing the burden of meeting small-business percentages to the prime contractor. That works sometimes, Martinez says, but it's not the resellers that typically benefit. "If you're in the services business, it's a little more palatable to use subcontractors to supplement your team in contract services for an agency. When you're in the product business, on the other hand, subcontracting piles on a substantial amount of overhead and markup on a commodity-type product. It's not as attractive."

And even if the prime contractor does seek out VARs to fill small-business subcontracting requirements, the aforementioned issues of size once again rear their ugly heads.

Dan Bowens, president of Fredericksburg, Va.-based Async-Nu Microsystems, lost two contracts with government agencies that moved to a mandated IDIQ--despite being the incumbent. The contracts were awarded as set-asides to larger minority companies that outgrew or graduated from the program the very month the contracts were signed. "If contract bundling is easier, fine," Bowens says. "But if a company is not an 8(a) anymore, then the agency shouldn't get the credit. That sort of unchecked corruption, cronyism and plain old incompetence within the federal government are causing me to shut my doors for good. It's almost like we're blacklisted."

Reporting Practices Paint A Misleading Picture

Such questionable reporting of contributions to small-business procurement goals leaves many laying the most blame with the agencies. A recent report conducted by Eagle Eye Publishers for the SBA found that in 2002, $2 billion that was coded as going to small businesses actually went to large firms and a couple of nonprofit organizations or government entities--44 of the top 1,000 contracts. Plano, Texas-based EDS was among the large companies that was miscoded as small in the Federal Procurement Data System (FPDS)--the central repository of federal contracting statistical information that was analyzed in the study. With more than 130,000 employees, the company never claimed to be small, says Gwen Johnson, the EDS small-business liaison officer; nor did it jump through the required hoops to be categorized as such.

According to the report, such coding errors may have been the result of "erroneously assigned type-of-business codes, a large firm's acquisition of a smaller firm during the fiscal year, or of a small firm's growing out of its size classification." Some, however, support explanations that are far less scrupulous. "If they found out there were companies that had falsely received small-business contracts, why did they continue to report those contracts to the White House, Congress and the public as contracts to small business?" the ASBL's Chapman asks. "The story just doesn't hold water."

Bowens agrees. "The agencies are the worst culprits. They know exactly what they're doing, and they know it's shady business."

Regardless of how the errors occurred, miscoded contracts do more than give credit where credit isn't due--they also stand to reduce the number of contracts that agencies must award to meet small-businesses procurement goals. "No one wants to take the contracts away from the businesses," the SBA's Jackson says. "It's more a question of reporting and whether agencies are actually meeting their goals." The SBA is currently examining that issue, he says.

Furthermore, agencies still aren't meeting goals for most of the set-aside categories--even with coding errors that work in their favor. According to Input, the federal government reportedly exceeded its overall small-business-contracting goal of 23 percent in 2003, but fell short for most subcategories--setting aside only about 3 percent of procurement dollars to women-owned businesses, 1 percent to HUBZones, and two-tenths of a percent to SDVOBs. "Word has been sent down and has been thrown in the trash," Bar Code Equipment's Rose says. "Contracts are awarded according to the good old buddy system, not set-asides."

Agencies often rely on previous relationships with contractors, he says, causing a catch-22 for small businesses trying to break in--they can't get the contracts without substantial experience, and they can't get the experience without the contracts. "These shouldn't be hard goals to attain," Congressman Bartlett says. "We need to be more vigorous and yell a little louder when they don't meet them. There needs to be more than, 'Oh gee. I didn't meet my goals this year. I'll try again next year.' That just doesn't cut it, and agencies should know better."

Wrist Slaps Don't Motivate Agencies

Whether issues with small-business procurement are fed by deceptive practices or simply human error, two factors make the situation difficult to rectify: no repercussions and a lack of any single watchdog organization. The program relies on a system of checks and balances, Input's Gamse says, leaving it up to the competitive market to monitor what's going on and protest when appropriate. But when actions are within the boundaries of the program or purportedly unintentional, as is often the case, there's little to report. And when not, Async-Nu Microsystems' Bowens says, it can be hard to know where to turn. He lodged complaints with the SBA and the Office of Inspector General (OIG) when the companies he lost set-aside contracts to graduated from the program. "The OIG said, 'We're just here to take your statement and make recommendations.' Nothing came of it. Who are people like me supposed to go to?"

Various government offices bear the burden of overseeing the project in varying degrees--GSA, OIG, Office of Management and Budget (OMB), SBA--but none truly has the authority to hand down penalties. "If an agency doesn't meet their requirements, they should do something," Bowens says. "When the government wanted everyone to get their networks tested, they said, 'If you don't get your networks certified, Congress will hold up your budget money.' Boy, all the federal agencies were bending over backward to make sure networks were accredited."

To keep information more up to date, the GSA has deployed the Federal Procurement Data System--Next Generation (FPDS-NG). The newer system allows data to be entered and maintained directly from the Web. Previously, contracting officers manually loaded award data into FPDS at the time the award was made; the captured information could change over time as small businesses graduated from the program, but the system did not allow for such changes to be noted. The new system, which was developed by Reston, Va.-based integrator Global Computer Enterprises, provides more accurate and timely information on contract awards. "On the old system, if a company was entered as a small business, it was forever a small business under that contract," Gamse says. "The new Web interface will allow us to track the status of a company through the course of a contract."

A step in the right direction for disseminating accurate information perhaps, but agencies will continue to report their small-business spending as usual--meaning contracts will contribute to procurement goals regardless of miscoding or a company's change in status after signing a contract on the dotted line, so to speak. And without penalties, Rose says, procurement goals will remain on the back burner.

"It might take an act of Congress, or it might take punitive action against the people placing orders," he adds. "But as it stands now, lobbyists in D.C. are going to get agencies to buy from Microsoft, and the small businesses don't have a snowball's chance."

The Law In A Nutshell

The Small Business Act aims to help small businesses by increasing their ability to compete in international markets. Sections within the bill further assist subcategories of small businesses that face greater challenges than size alone--small businesses that are owned by women, minorities or service-disabled veterans (known as SDVOBs), as well as those in distressed areas known as HUBZones.

To accomplish the objective of the Small Business Act, the Small Business Administration (SBA) sets annual procurement preference goals for the federal government to follow. Specifically, 23 percent of the IT budget is to be set aside for small businesses overall, with 5 percent to minority-owned small businesses (known as 8(a) or small disadvantaged businesses), 5 percent for women-owned small businesses, 3 percent for HUBZones and 3 percent for SDVOBs.

"The goals are statutorily mandated," says Dean Koppel of the Office of Policy and Research at the SBA. "When all is said and done and the numbers are crunched, the federal goal is 23 percent, with different goals for agencies based on their mix of contracts."

Kerry Slams Procurement Policy

All of the noise is bringing about some change. In January, Sen. John Kerry sent letters to the SBA on behalf of the Small Business and Entrepreneurship Committee, demanding a comprehensive audit of the 2003 small-business federal contracting numbers.

"There must be a significant increase in the enforcement of the small-business laws and implementation of accompanying penalties," Kerry wrote. "Without effective oversight and strict enforcement, fraud and abuse will remain a significant detrimental part of the federal procurement system."