By Michael Beller and Alice Truong
Medill News Service
May 21, 2010
WASHINGTON—During his presidential campaign, then-candidate Barack Obama repeated a familiar refrain on small businesses, calling them, “the engine of our economy.” He was right. According to a 2009 Small Business Administration report, small businesses created 64 percent of net new jobs in the last 15 years.
On Wednesday, the House Financial Services Committee passed the Small Business Lending Fund Act. President Obama said the act “provides incentives for smaller banks to make new loans” and creates an initiative that “would spur over $20 billion in new lending through innovative state-based programs.”
But legislation like this might not be all the help small businesses need. The American Small Business League, a nonpartisan advocacy group based in Petaluma, Calif., argues small businesses are not getting their fair share of the federal contract pie.
Baltimore-based Pevco Systems Inc., which provides computerized pneumatic tube delivery systems to hospitals, has had moderate success contracting with the government. President Fred Valerino, Jr., estimates the company was awarded a dozen contracts worth an average of $100,000 in the last year.
Still, Valerino said, their size keeps them from being a major player in federal contracting.
“We don’t get a call on every job because being small, we don’t have the presence or the contacts that we need,” Valerino said.
The scope of projects detailed in federal contracts can often be far too great for a small business to complete. One way they can get involved is through partnerships with larger companies, according to Bill Rys, tax counsel for the National Federation of Independent Businesses, a Nashville-based nonprofit organization that serves the interests of small firms.
“When you’re talking about a smaller firm, you might have a very specific task on a larger project,” Rys said.
The Pevcos of the world led Lloyd Chapman, president and founder of the ASBL, to write a piece of legislation called the Fairness and Transparency in Contracting Act., which was introduced by Rep. Hank Johnson, D-Ga., last year.
“It would redirect a minimum of $75 billion a year back into the middle class economy,” Chapman said.
Contracts often elusive
Small business access to federal contracts has always been problematic. In 1953, Congress passed the Small Business Act, which required federal agencies to set a goal of awarding 23 percent of contracts to small firms. Mike Stamler, director for the Washington SBA field office, pointed out that small businesses received 22 percent of federal contracts in 2007 and 21 percent in 2008, the last year with available data. That 21 percent amounted to $93 billion in contract procurements for small firms.
But the ASBL alleges a portion of those contracts actually went to Fortune 500 companies masquerading as small businesses. One feature of Chapman’s bill would prohibit the federal government to classify awarded contracts to publicly traded companies as small business awards. That is an aspect Chapman takes issue with and a detail the SBA admits could be improved.
The SBA recently conducted a study of contracts awarded to small businesses. Inspector General Peggy Gustafson released the report in February, which showed 11 of the 36 contracts it randomly sampled were in fact procured by large companies.
Stamler said the main reason this occurs is because of simple human error. Most often, the business in question gets miscoded as small, either by an SBA contracting officer or by the business itself. Mergers and acquisitions also pose a problem, as sometimes a small firm that has procured a contract is taken over by a large firm and is not recoded.
“Those are the primary reasons for errors in the contracting database which tend to inflate the performance of the government in awarding contracts to small businesses,” Stamler said.
Stamler stressed the SBA is addressing these problems head on.
“We’ve developed what we call an anomaly report,” Stamler said. “The report shows the agencies where we have found apparent discrepancies in coding. We’ve also put in some new technologies that allow us to share anomalies more quickly with agencies.”
The SBA has not been able to increase its staff to the level it was before the administration of President George W. Bush. At the end of fiscal year 2001, the SBA boasted a staff of 3,315 employees. By 2006, that number had plunged 26.6 percent to 2,434.
The staff totals include temporary disaster staff. Excluding temporary employees, the SBA experienced a 5 percent bump in staffing during the first year of the Obama Administration, to 2,457 from 2,340.
Another factor that comes into play is the sheer size of small firms versus large ones. Big companies have mass amounts of capital and manpower, and can overwhelm small businesses. Even with groups such as the SBA, American Small Business League and National Federation of Independent Businesses helping in various ways, small firms must fend for themselves against larger foes in the hyper-competitive world of federal contracting.
Chapman of the ASBL is not standing idly by. He filed a Freedom of Information lawsuit against NASA last month.
“I’ve requested information from the government that proves Fortune 500 companies are getting small-business contracts, and in virtually every case they’re refusing to release it,” Chapman said.
Administration reaching out
Diversion of federal contracts meant for small businesses to major companies spurred Obama to establish two task forces to give small businesses greater access to federal contracts, as well as monitor the 23 percent goal.
Chapman fears those task forces will widen the definition of a small business to include firms owned by venture capitalists, and predicts the Obama Administration will attempt to adopt legislation to exempt those businesses from the capital gains tax.
But Stamler says the SBA does all it can to help small businesses compete.
“SBA’s commitment is to expand opportunities for small business to compete for and win federal contracts,” Stamler said. “[We want] to make sure they get their fair share and don’t get crowded out by big businesses.”
And the SBA has helped some small businesses succeed in the cutthroat world of federal contracting. Washington-based Federated Information Technologies Inc., provides services to federal agencies that administer the national information infrastructure. Founded in 2002, Federated IT has won contracts with the Department of Homeland Security, the Department of Defense and the FBI, among others. The company recently won a $26 million contract to provide threat assessments to the Transportation Security Administration.
Federated IT employs 73 people and is “growing like a weed,” said president Matthew Bucholz. The company’s membership in the SBA’s 8(a) program, which aims to help smaller companies such as Federated IT access business development opportunities, allows it to receive sole-source contracts, meaning there is no competition. It also makes them eligible for procurements competed only by 8(a) companies. Bucholz said the company’s ability to change with the market is at the root of its success.
“There are a couple things we have done to adapt to this very dynamic environment to make sure that we’re going to be a company that’s going to stick around for awhile,” Bucholz began. “There has been a lot of money pumped into the federal government these days. You need to look at the procurement dollars, look at the forecasted budgets and figure out if that money is going to be allocated to the types of products and services that you sell.”
But small businesses like Baltimore’s Pevco seem to be more the rule than the exception, and more contracts for those companies could mean more jobs across the country.
“[Additional contracts] could have a snowball effect,” Pevco’s Valerino said. “As we generate more business we need more installers and service people. Then we need the infrastructure in our headquarters to support that extra work, and those jobs wouldn’t just be in this one location, they would be spread out in different areas.”