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Why Do Corporate Giants Land Federal Contracts Meant for Small Businesses?

By Rob Kuznia
Hispanic Business Magazine
April 8, 2010

Few would disagree that federal contracts set aside for small businesses should go to small businesses -- not corporate behemoths.

And yet it seems to happen again and again. Take one recent example: in late December, an IT company named QSS, a subsidiary of Dell Inc., landed a small-business contract for nearly $21 million from the U.S. Coast Guard.

What's more, QSS -- which in 2006 was purchased by Ross Perot's "Perot Systems" before Perot was gobbled up by Dell last year -- is listed in a federal database as a "self-certified small disadvantaged business."

How can this be? After all, Dell employs some 76,000 people, and the government's definition of a small business is one that, in this particular industry, employs no more than 1,000.

The answer depends on whom you ask. The most vocal small business activists insist that the government is acting negligently, even nefariously. Regulators in the federal Small Business Administration counter that the issue is mostly the byproduct of coding mistakes and mergers -- human errors that the agency purports to be addressing aggressively under the Obama administration.

Whatever the case, the example with QSS -- which HispanicBusiness Magazine found through a simple search in the federal contracting database FedMine.Us -- isn't an isolated event.

Other companies that have landed small-business contracts include General Dynamics -- the fifth largest defense contractor in the world -- Xerox, Office Depot, John Deere and McGraw Hill, according to a 2008 report from the Department of Interior's Office of Inspector General. As for QSS, in 2008 it was the nation's 28th largest recipient of small business federal contracts, according to FedMine.Us.

The 2008 report found that large corporations received $5.7 million in awards that should have gone to small businesses. But that was just within the Department of Interior. The total amount of small business contracts getting diverted to large corporations every year is difficult to ascertain, given the inherent murkiness of the issue. Some activists say it is well into the billions.

In October, the government organization in charge of watching over the SBA -- that is, the SBA's Office of Inspector General -- said this issue is among the SBA's most serious problems.

"Audits and other governmental studies have shown widespread misreporting by procuring agencies," the report said. "Many contract awards recorded as going to small firms have actually been performed by larger companies."

The issue is drawing more and more attention as politicians, economists and pundits talk about boosting small businesses in an effort to create jobs, reduce the unemployment rate and stimulate the lagging economy.

At least two bills are working their way through Congress to address this issue. One is co-authored by a duo of Senate moderates, Democrat Mary Landrieu of Louisiana and Republican Olympia Snowe of Maine; the other, by the lesser-known Congressman Henry Johnson, a Georgia Democrat.

By law, the federal government must strive to spend 23 percent of its entire purchasing budget for goods and services on small businesses. That's a lot of money, seeing how the federal government spends more than half a trillion dollars every year. But by the government's own admission, it hasn't been meeting that mark.

It claims to come close. The federal government says it hit 21.5 percent in 2008. (The official report for 2009 hasn't come out.)

But the American Small Business League, perhaps the nation's most vocal critic on this issue, scoffs at this contention. Chris Gunn, ASBL's communications director, insists the true amount is somewhere between 5 and 10 percent.

"The numbers speak to a very different reality," he told HispanicBusiness Magazine.

For starters, he said, the government exempts about a fifth of its purchasing budget from the goal, with the explanation that some contracts are too large for small businesses to handle. This alone, Mr. Gunn said, brings the true percentage down to 17.5 percent.

But Mr. Gunn says the bigger problem is that examples like the case of QSS are happening all the time. And those contracts, like QSS's $20 million job with the U.S. Coast Guard for homeland security, count towards that 23 percent goal, he said.

In October, the ASBL ran a report, and found that eight of the top 10 small business contract awardees in 2008 were large businesses coded "small." The ASBL further estimates that at least half of the $93 billion the government says is going to small businesses is actually being diverted to large businesses.

Officials with the federal Small Business Administration, which helps regulate federal contracting to small businesses, say the ASBL's claims are exaggerated.

"We're not going to stand for any large business that masquerades as a small business and tries to engage in any malfeasance," Joe Jordan, the SBA's associate administrator for government contracting, told HispanicBusiness Magazine.

The problem, he said, has more to do with human error. For instance, he said, oftentimes a small business working on a small business contract gets consumed by a corporate giant, and the contracting officer forgets to go back into the database and re-code the business as "other than small."

Also, after 2012, the problem should abate at least somewhat. That's because, in July of 2007, a law passed forbidding large corporations from keeping the small business contracts of the small companies swallowed up in acquisitions. But the law grandfathered in, for five years, merger deals made prior to that date. This is what happened with QSS group, which, despite what the federal database says, no longer even exists as a company. (It is really just "Dell.") That company's five-year contract with the Coast Guard -- which has been renewed every year -- expires in late May, said Frank Islam, QSS's founder and former owner, speaking to HispanicBusiness Magazine.

Nonetheless, the phenomenon is a widely recognized problem, and reform efforts have thus far failed to catch hold. This owes in no small part to how the reform advocates themselves are divided. In short, the most vocal and visible activists -- such as the ASBL -- are out of synch with the most powerful and influential lawmakers putting forth their proposed solutions, such as Senators Landrieu and Snowe.

Ms. Landrieu and Ms. Snowe are the chair and ranking member of the Senate Committee on Small Business and Entrepreneurship.

When introducing their Small Business Contracting Improvements Act in February, Ms. Landrieu said it would create at least 163,000 jobs.

"In this past year, small businesses accounted for more than 85 percent of job losses," she said on the floor. "When large businesses get new work they typically spread the work among existing employees. When small businesses get these contracts they must staff up to meet the increased demand."

But where ASBL is often knocked for being too extreme, Sen. Landrieu's effort is being criticized by some for being too mild.

Most notably, although the bill includes strong language about the illegality of large companies landing small-business contracts through misrepresentation, it exempts the Department of Defense, which by many accounts has the worst record on this matter.

"DOD is seriously challenged in its contracting to minority and small enterprises," David Ferreira, vice president of government affairs for the U.S. Hispanic Chamber of Commerce, told HispanicBusiness Magazine. "They often rely on very large businesses and award them small-business contracts because of loopholes in the law."

However, Mr. Ferreira said the U.S. Hispanic Chamber is pleased with some aspects of the bill, such as its focus on reducing a phenomenon known as contract bundling. This is when the federal government, for the sake of efficiency, will consolidate several contracts into one super-contract. This often precludes small businesses from competing because they lack the resources for such large jobs.

One particularly unsavory practice related to this is known as "bait and switch" sub-contracting. The term refers to when large corporations, under mandate from the feds, promise to hire, on bundled contracts, sub-contractors that are small businesses or minority-owned, and then renege after winning the job.

It's a tactic with which Bill Miera, owner of a Hispanic-owned engineering and IT firm in New Mexico with 50 employees, is all too familiar.

For years, Mr. Miera's Fiore Industries had been winning bids and working on two separate contracts with the U.S. Air Force, worth between $5 million and $10 million a year each.

About 10 years ago, the Air Force bundled one of the contracts into a mega-contract worth around $50 million -- far too big for Miera's firm to handle.

A Fortune 500 company put in for the bid, and in its proposal told the federal government it would be hiring a minority-owned small business -- Fiore Industries -- as a sub-contractor. (Mr. Miera declined to name the company, citing a reluctance to burn bridges in what is a relatively small industry.)

When the large company got the job, it dropped Fiore Industries and went with another firm, which was Caucasian-owned.

Mr. Miera, a former board member on the U.S. Hispanic Chamber, was forced to lay off five employees. A few years later, it happened again, with another Fortune 500 company, which went even further.

"They started hiring our people to work for them," he told HispanicBusiness Magazine. "They said, 'If you want to keep your job, you've got to work for us.'"

As a result of these two bait-and-switch examples, Fiore Industries's annual revenues dropped to about $5 million from $8.4 million. It lost about 10 of 50 employees.

Thanks in part to a contract with NASA, Fiore's revenues have since climbed back to $6.5 million. But the company's original plan was to be earning $50 million annually by now.

"That hurts, especially when you've done good work, and then lose your contract, but not because you've done a bad job or your prices are too high," he told HispanicBusiness Magazine.

Mr. Miera said the problem is that the law, as written, has no teeth to punish those who engage in such tactics.

"The large businesses know that," he said.

For the entirety of the Bush administration, the ASBL, headed up by its colorful leader, Lloyd Chapman -- a frequent pundit on cable news networks such as Fox, MSNBC and CNN -- carped on the federal government on these issues. It also filed -- and won -- several lawsuits.

Mr. Chapman claims the Obama administration has been no better.

"I say it's getting worse, because Obama has refused to close the existing loopholes that all Fortune 500 firms use to get small business contracts," he told HispanicBusiness Magazine.

Mr. Chapman is advocating the federal contracting bill sponsored by Rep. Johnson of Georgia. Mr. Chapman says he helped write the bill, and typically refers to it as his own.

"My bill has 20 co-sponsors," he told HispanicBusiness Magazine. (They are mostly House Democrats, but the list does include two Republicans: Ralph Hall of Texas and Ileana Ros-Lehtinen of Florida.) "It will solve a 10-year-old contracting scandal, won't increase the deficit and it's permanent."

Mr. Chapman and the ASBL are also highly critical of almost every other advocate on this issue. Senator Landrieu's bill, they say, while well intentioned, gives recalcitrant corporate giants "a pass." The U.S. Hispanic Chamber of Commerce is "backed by Fortune 500 companies." But Mr. Chapman is particularly critical of U.S. Rep. Nydia Velazquez, (D-NY) -- chair of the House Small Business Committee, whom he believes has done nothing to address the issue.

"She has chaired the small business committee for three or four years," he said. "How come she hasn't proposed legislation to address it?"

He added that Boeing, the world's largest global aircraft manufacturer, is a major campaign donor to Velazquez and other small business committee members.

"My bill will take $100 million a year in federal small business contracts away from Boeing," he said.

(Ms. Velazquez's office did not provide a comment for this story, despite repeated requests from HispanicBusiness Magazine.)

For its part, the federal SBA insists that it is working aggressively to fix the problems. By March, of the eight top awardees of small-business contracts that ASBL had highlighted in October, most had been re-coded as "small."

Also, President Obama has proposed doubling the budget of the SBA, bringing it back to about $1 billion -- which is where it was at the start of the Bush administration.

But despite their contention that the problem is most attributable to human error, SBA officials don't deny that fraud is a factor.

"The U.S. Small Business Administration is making a tremendous effort to combat abuses in the federal contracting program," SBA spokeswoman Hayley Matz told HispanicBusiness Magazine in an email. "SBA recognizes the significant benefits of the program, but also acknowledges that instances of errors and potential abuse have occurred and resulted in negative consequences."




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