A small mistake

Study shows that large companies have taken money meant for small firms

Report: Analysis of Type of Business Coding for the Top 1,000 Contractors Receiving Small Business Awards in FY 2002

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Small-business advocates have suspected for awhile that some contracting dollars intended for small firms go to large companies. Now, they have the evidence to prove it.

Small Business Administration officials have released a 2004 report showing that $2 billion of the $50.8 billion earmarked for small businesses in fiscal 2002 did not get to them.

The study, conducted by Eagle Eye Publishers, found that of the top 1,000 small businesses receiving federal contracts in 2002, 44 were actually not small businesses. Thirty-nine were large businesses, while five were nonprofit organizations, government entities or other organizations.

The SBA study comes on the heels of an earlier report from the Center for Public Integrity that showed about 30 percent of the contracting money that supposedly went to small firms through Defense Department contracts during a six-year period ended up in the coffers of large companies. The SBA study has caught the attention of agency officials and members of Congress.

"We now have hard data and not just anecdotes from across federal agencies," said Thomas Sullivan, chief counsel at SBA's Office of Advocacy. "What's needed is more transparency in the contracting system and timely public access to user-friendly procurement data so that mistakes and other problems can quickly be corrected."

The report's authors refrain from suggesting that large companies are intentionally defrauding the government by taking small-business contracts. However, they discuss loopholes in the small-business rules — some of which have since been closed or tightened — that allowed companies to continue operating as small firms for some time after larger companies acquired them or they outgrew their small status.

"We were very careful not to point any fingers," said Chad Moutray, chief economist at the Office of Advocacy. "That's not the job of this office. As far as we're concerned, no one did anything wrong."

Rep. Nydia Velazquez (D-N.Y.), ranking Democrat on the Small Business Committee, said the SBA report shows that small businesses are not getting the full benefit of programs designed to aid them.

"The [Office of] Advocacy report only confirms what Democrats on the Small Business Committee have been saying," she said. "Federal agencies are taking credit for awarding small businesses with contracts when, in fact, they were going to large businesses. Opportunities [for small businesses] are dropping, and the federal government has no credible ability to monitor the level of federal contracting dollars going to small businesses."

The need for accurate small-business data goes beyond simply ensuring that the small firms get a fair deal, said procurement lawyer David Nadler, a partner at Dickstein Shapiro Morin & Oshinsky. "It also misleads Congress," he said. "Congress makes appropriations based on that information."

Small businesses suffer

Although the $2 billion figure that Eagle Eye analysts reported may not seem like much when compared to the total of $50 billion, it could mean a lot to small companies, said some small-business owners.

"In real dollars, that's a lot of jobs and a lot of opportunity that's being missed," said John Moliere, president of a small business called Standard Communications.

Simple miscoding is not the worst problem that small businesses face, he added. Too often, agency officials choosing prime contractors or primes looking for subcontractors see the government's small-business goals as a nuisance.

"They use our capability, they check off the box, and they go forward and ignore small business in general," Moliere said. Although situations such as that do not qualify as miscoded expenditures, they still limit chances for small businesses to succeed, he said.

Lloyd Chapman, president of the American Small Business League, said he believes many large companies are guilty of fraud, and the report SBA officials released ignores the issue. Chapman's group has filed a lawsuit demanding that SBA officials release more information.

The results shown in the report were not surprising, he said. "I've always known this," he said. "I've been telling people this for a decade. Now, there's irrefutable proof that we've been right. It's going to help convince Congress and the media."

SBA officials are wrong to assume that cases of sidetracked small-business contracting funds are honest mistakes, Chapman said. "It's ridiculous for the SBA to stick their head in the sand and try to pretend," he said. "I think that's irresponsible and not policing the situation. In fact, I would say they're encouraging it."

He said no new laws are needed, but officials must enforce existing laws, including the elements of the Small Business Act that set penalties for companies misrepresenting themselves as small businesses.

"The law is dependent on the integrity of the administration," he said. "Small business should not have to look at legal remedies, but we're having to do that."

Study limited in scope

Paul Murphy, president of Eagle Eye, said his analysts were not always able to determine how a particular transaction was coded incorrectly. In many cases, former small businesses acquired by larger firms carry the name of the larger firm.

In such cases, "we couldn't tell if it was a company they bought and renamed, or if it got miscoded from the start," he said. "The data doesn't reveal that level of insight."

He also emphasized that the report did not try to be exhaustive. Because the analysis reviewed only the top 1,000 small firms, "there are so many companies below the threshold that were not examined that I've got to think the problem we documented is just the tip of the iceberg."

***

Follow the money

Key findings of the Small Business Administration/Eagle Eye Publishers report on miscoded small-business contracts:

The top 1,000 "small business" contractors in fiscal 2002 included 39 large businesses and five other organizations.

Those 44 entities took $2 billion of the $50.8 billion total for the 1,000 companies.

The Defense Department and the General Services Administration accounted for 79 percent of the contracts awarded to the 44 mischaracterized entities.

80 percent of the miscoded awards were issued on indefinite-delivery, indefinite-quantity contracts.

Some loopholes closed

Some of the loopholes in small-business rules that allowed funds intended for small businesses to flow into larger companies' coffers — as shown in a survey of fiscal 2002 data — have since been closed. Small-business advocates say the job isn't done, however.

"In many instances, large companies are getting business earmarked for small businesses but are doing so within the bounds of the regulations that were then in place," said David Nadler, a procurement attorney and partner at Dickstein Shapiro Morin & Oshinsky.

One such rule allowed small businesses to keep their small status for the duration of a contract. For companies on General Services Administration supply schedule contracts, that meant they could often keep the designation for 20 years or more. Now GSA schedule holders have to recertify their status every five years, when the contract reaches its option point.

"The not-so-good news is that you still have the same problem within a five-year window," Nadler said. "Lots and lots of things can change in the procurement landscape within a five-year window."

Small businesses on governmentwide acquisition contracts must re-certify their size status once a year under an Office of Federal Procurement Policy rule. However, those rules are specific to

GSA and OFPP, he said, and may not apply in

all cases.

Nadler supports requiring small firms to recertify each year, an idea others have opposed on the grounds that it would be a burden for the companies. "This issue has been kicking around for some time, and the efforts at recertification [rule changes] have occurred for some time," he said. "The value of this report is it provides

some good empirical data, which validates the concerns."

Small Business Administration officials enacted a rule last year intended to prevent large companies from getting small-business revenues when they acquire a small business. Under the new rule, if the small business remains small, it must recertify its status.

If the contracts are passed to a large business, the rule requires that they no longer count as small-business contracts.

Another perennial controversy is the question of how small businesses should be defined. SBA officials have adjusted the system that governs that delineation, but Lloyd Chapman, president of the American Small Business League, said there should be a simple, one-size-fits-all definition.

Small businesses, he said, should be those that have fewer than 100 employees, period.

— Michael Hardy

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