By Joe Mont
September 28, 2010
BOSTON (TheStreet) -- Don't count Lloyd Chapman of the American Small Business League among those applauding the Small Business Jobs and Credit Act of 2010.
"What Obama calls a jobs bill is two things. It is tax cuts and lending," he says. "Every study I've seen shows that small businesses don't need loans right now, they need an increase in demand for their goods and services."
Undercutting that demand, he says, is the longstanding -- and very likely worsening -- problem of government contracts being awarded to large corporations, some foreign-based but with domestic locations.
Among the recipients he and others cite as gaining from government work intended for smaller shops are General Dynamics(GD), Xerox(XRX), Boeing(BA), Lockheed Martin(LMT), British Aerospace, Dell Computer(DELL), Rolls Royce, Raytheon(RTN), French firm Thales Communications and Ssangyong, which is based in Seoul, South Korea.
For example, Textron(TXT), a Fortune 500 firm, got more than $775 million in federal small-business contracts in a single year, 2008. That contract was awarded to AAI, a subsidiary that itself has more than 40,000 employees and annual revenues of more than $11.6 billion.
The problem is hardly a new one and critics -- elected officials and private citizens -- have hammered away at it for the better part of the past decade. Since 2003, more than a dozen federal investigations have found cases where large corporations from around the world were recipients of billions of dollars in federal small-business contracts.
In 2006, a Congressional report by the House Small Business Committee called miscoding, errors in vendor applications that misidentify a firm's size, as "an escalating problem."
"In 2004, the Small Business Administration's own Office of Advocacy released a report showing that $2 billion had been miscoded as small-business contracts, when, in reality, these contracts had been awarded to large firms, nonprofits and state and local government agencies in FY 2003," it reads. "In the latest data, there were six times the amount of miscoding that was documented in 2004 ... with nearly $12 billion in miscoding."
That report called the Department of Defense one of the "worst offenders."
"While DoD dominates the federal marketplace, representing 69 percent of it, the agency also accounted for nearly three-fourths of the total miscoding found -- $8.3 billion dollars," it read. The Department of Treasury miscoded 40% of small-business contracts. The Department of Transportation followed with 25%.
That investigation found such examples as Microsoft(MSFT) earning $1.5 million in small-business contracts. Rolls-Royce got $2.2 million in contracts, most from the U.S. Navy. Google(GOOG), ExxonMobile(XOM) and Wal-Mart(WMT) all profited, despite their size. In 2008, an investigation by the inspector general for the Department of the Interior found that intended contracts for small business were still going to such Fortune 500 companies as Xerox, Sherwin Williams(SHW) and John Deere(DE).
Some may be mistakes, but government-drafted reports have called others "false certifications" and "vendor deception." Miscoding, critics say, is far too common to dismiss as incidental or accidental.
Paperwork has shown data given for the number of employees as sometimes being for just a particular unit, division or subsidiary, as opposed to the entire company. Companies may also be awarded small-business contracts before they expanded beyond the category or were acquired by a larger parent. In more egregious cases, no immediate "excuse" can be found other than lackadaisical oversight or vendor malfeasance.
Though Chapman doesn't think their efforts go far enough, officials in Washington have at least taken initial steps to bring small contract awards back in line. A recently launched Small Business Dashboard tracks contracts awarded to small businesses and tallies how close to spending "goals" those departments hew.
For example, the Department of Defense spends 18.83% of its current budget through small-business contracts ($35.5 billion), falling 3.45% short of its targeted goal. The Department of Housing and Urban Development has a 57% target, but only spends 28.4% ($15 million) of its budget through small businesses. Other government agencies, such as Veterans' Affairs, the Department of Agriculture and the Social Security Administration, exceed their goals.
Government officials say they take the matter seriously.
On Sept. 15, Karen Mills, administrator of the Small Business Administration, wrote on the White House blog about the Task Force on Federal Contracting Opportunities for Small Businesses that was formed in April.
"The federal government is the largest purchaser of goods and services in the world," she said. "Of those purchases, small businesses get nearly $100 billion each year, so these programs are very powerful, particularly for small firms owned by women, veterans, minorities and economically disadvantaged individuals. Overall, our goal is to make sure that 23 percent of contracts or more go to small business. When we come up short by just 1%, as we did in Fiscal Year 2009, about $5 billion less goes to small businesses. We can do better."
To that end, the task force has made a variety of recommendations intended to streamline the procurement of government contracts by small businesses and announced new online tools such as the dashboard.
Chapman was an outspoken critic of the Bush administration over the issue and went on to endorse the candidacy of Barack Obama for his stated goal of improving transparency regarding government contracts for small businesses.
But as he sees it, little has changed since the election.
Poring over federal contract databases and suing to get data (including a current lawsuit against NASA) when his efforts are blocked, Chapman says the big guys are still snatching business away from the small guys.
The new Small Business Act may actually make it easier to get away with fraudulent contracts, he says. It contains a provision that could protect large businesses intentionally misrepresenting themselves as small. It may provide a safety net under which large prime contractors could be absolved of fraudulent misrepresentation under the guise of new liability protections for "unintentional errors, technical malfunctions and other similar situations."
Chapman worries that language could undermine existing, though perhaps not much-enforced, penalties of up to $500,000 and up to 10 years in prison for firms that misrepresent themselves to win government contracts.
In the meantime, proud of his status as a litigious gadfly, Chapman says he will continue to scrutinize contracts and demand a fair shake for the nation's small businesses.
"What's the most powerful small-business program that exists in America today," he asks rhetorically. "It is the small-business act of 1953. It says a minimum of 23% of all government contracts have to go to small businesses. That would be great, because that would be about $230 billion dollars a year. But nothing has happened. Ending the diversion of small-business contracts to large businesses would put more money into the hands of small businesses, which is where most Americans work and jobs are created. It would do more than anything President Obama or anyone else in Washington has ever spoken of."