By Robb Mandelbaum
March 15, 2012
Perhaps for as long as the federal government has reported which of its contracts have been awarded to small businesses, critics have charged that many of those contracts have actually gone to large companies — often very large companies.
Recently, the American Small Business League, perhaps the loudest of those critics, tried to outline the scope of diversion. The association issued a report that studied the 100 companies that won the most federal small-business contract dollars in 2011 and found that at least 72 of them either had too many employees or too much revenue to be eligible for government assistance to small business. (S.B.A. size standards vary by industry and sector, but generally a company must have fewer than 500 employees or less than $7 million to be considered small.)
The federal government, the world’s largest buyer of goods and service, is obliged by law to try to direct 23 percent of its purchases to small businesses, though there are no penalties for failure. The government hasn’t reached that goal in years, and while recording a deal with a bigger business as a small-business contract — whether by mistake or by fraud — does not necessarily mean that a small company has been denied an opportunity, it does exaggerate the government’s contracting achievement. In the view of Elliott Rosenfeld, of the league, said that in turn undermined the case for stronger enforcement of contracting rules. And by inflating an agency’s sense of achievement, it could weaken the agency’s drive to award more contracts to small businesses.
S.B.A. officials, for their part, insist the league’s analysis is premature. This summer, the S.B.A. will release its own report on the government’s contracting efforts in 2011, said a spokeswoman, Hayley Meadvin, after spending months reviewing the records. “By the time we release our fiscal year report, we have corrected these mistakes,” she said. “We spend a lot time making sure our data is as clean as can be.”
Moreover, the league has been prone to sweeping accusations. The group called this latest report, for instance, “strong evidence that large companies are the fraudulent recipients of the majority of federal small-business contracts every year.” But even if improperly coded contracts are as pervasive as the association claims, is it necessarily the result of fraud?
The Agenda decided to look at one large company, mentioned incidentally in the report, that won small business contracts in 2011, to try to find out: The New York Times Company. The Times was not among the league’s list of 100; it was identified as one of 55 well-known corporations that received small-business contracts last year when it sold $56,821 worth of newspapers to the United States Military Academy at West Point, N.Y. — 500 daily subscriptions for the 28 weeks school is in session, according to Carol D’Andrea, The Times’s circulation manager for sales to schools and colleges.
In the government’s record of the West Point transaction, known as a contact action report, The Times is described as having $3 billion in revenue — and 10 employees. (Both figures were wrong: in 2011, the company’s revenue was $2.3 billion and the work force totaled 7,273 employees, according to the most recent annual report.) In a field labeled “Contracting Officer’s Business Size Selection,” the document describes The Times as a “small business.” Under government size standards, newspaper publishers must have fewer than 500 employees to be considered small.
Our inquiry began with a call to West Point. The contracting officer who approved the deal, Kathleen Judson, said in a brief interview that she had not designated The New York Times as a small business. “The only way that could have happened is that it must have been prepopulated,” she said. “Sometimes the fields come through on the contract action report prepropulated. I know The New York Times is a large company.”
Here’s where it starts to get complicated — and government officials contacted by The Agenda offered little help in clearing up the confusion. S.B.A. officials spoke authoritatively about the agency’s efforts to correct contracting records, but referred our questions about how those records are created to the General Services Administration, which oversees the procurement infrastructure used across the government. The G.S.A.’s deputy press secretary, Adam Elkington, initially sent us to the Army for answers, then later promised to find us a colleague who could answer basic contracting questions. (He never did.) A spokesman for West Point, Frank DeMaro, wrote down our questions but did not answer them. Eventually, Daniel Elkins, a spokesman for the Army’s Mission and Installation Contracting Command at Fort Sam Houston, in Texas, fielded some of our queries.
This is what we know: every entity selling to the government must sign up with the G.S.A.’s Central Contractor Registration with a unique identification number, known as a DUNS number, from Dun & Bradstreet. The vendor supplies its annual revenue and employee headcount for the entire organization, which the S.B.A. uses to determine whether the entity is a small business. What complicates things is that companies must register each legal division, or any office with a separate location or address separately. The New York Times currently has at least three active contractor registrations. One of these was set up by Ms. D’Andrea and her colleagues in The Times’s Education Sales department in order, she said, to sell the subscriptions to West Point.
The Times is not identified as a small business in the Education Sales department’s registration. It turns out, though, that West Point did not use this registration to pay The Times. Instead, the contract refers to the DUNS number used by another registered Times Company entity, this one made by the TimesCenter, an event hall at the company’s headquarters on Eighth Avenue. In that registration, The Times did identify itself as a small business.
A Times Company spokeswoman, Eileen Murphy, said by e-mail that the employees who initially registered the TimesCenter were no longer employed there. But, she said, when the TimesCenter first opened, “it was operated as an independent business, separate from The New York Times Company. It is possible that the small-business designation was one that fit at the time, but again, we do not know for sure.” Ms. Murphy said she did not know whether the TimesCenter was independently owned at the time or just operated as if it were. Today, she said, it is operated as part of The New York Times. Nor could she say whether, or why, a Times employee entered the inaccurate revenue and headcount figures.
At West Point, neither Ms. Judson or Mr. DeMaro have explained why Ms. Judson used the registration from the TimesCenter rather than the one from the Education Sales department. (In an e-mail, the Army’s Mr. Elkins said “multiple actions between the N.Y. Times registration of DUNS numbers and contracting officer actions makes it difficult to identify the exact sequence of events.”) But Ms. Meadvin of the S.B.A. disputed the claim that the business size field was automatically filled in, saying, “to our knowledge” it is “the only field that is manually entered.” Mr. Elkington of the G.S.A. did not respond to our request seeking clarification.
In any event, government contracting officers like Ms. Judson are not supposed to rely on information from the Central Contractor Registration to determine whether a business is small — the registration record says as much at the very top. Instead, they are obligated to verify size, or any other claims a company makes, with a separate database known as the Online Representations and Certifications Application, or ORCA — which imports size information from the Central Contractor Registration. (Filling out this form, Ms. D’Andrea said, “is worse than filling out your taxes. Just the password is 16 digits and you can’t have repeating letters and numbers.”)
However, while the Education Sales department submitted an ORCA form — and did not claim small-business status — the TimesCenter, the entity on the contract, never did complete the form. According to Mr. Elkins of the Army, “Before the contracts were awarded, the contracting officer observed that there were no Online Representations and Certifications Application records for The New York Times.” The officer then tried to verify The Times’s size, Mr. Elkins said, by turning to yet another database, the Dynamic Small Business Search maintained by the S.B.A., “using the DUNS that was initially provided by The N.Y. Times.” But, said Mr. Elkins, “this procedure was improper and led to the miscoded award; the Army should have asked for this information from the N.Y. Times, rather than relying upon the D.S.B. search engine.”
But if a record for a Times entity existed in the Dynamic Small Business database last year, it is gone now, and this explanation raises additional questions. Which DUNS number did The Times provide to the Army — the one that ended up on the contract, from the TimesCenter, or one from the education sales department? Moreover, if Ms. Judson knew The Times was in fact a large business, why would she conduct a Dynamic Small Business search in the first place? Finally, the actions described here suggest Ms. Judson did in fact have to manually enter the vendor’s business size in the contract, as the S.B.A. has maintained. (Mr. Elkins has not responded to requests for further explanation.)
As it happens, three other federal agencies have used the TimesCenter registration as the basis for contracts in recent years — apparently erroneously, since these agencies were buying newspaper ads, not renting out an event space — and in most of those contract action reports, The Times is described as “other than small.” And yet, for one contract with the Securities and Exchange Commission, The Times was again deemed a small business. The contract officer in that instance referred the Agenda to the S.E.C. press office to set up an interview, which a spokesman has thus far declined to do.
And that’s as far as we have been able to get. We still can’t say with certainty how The Times ended up with a small-business contract. What we did find was a record-keeping system so complex that it invites confusion and error from all parties. “We hear from our small-business members that navigating the federal marketplace is extremely confusing and complex,” said Molly Brogan, a spokeswoman for the National Small Business Association, an advocacy group based in Washington. “Perhaps some level of simplification — along with enhanced oversight and repercussions for those that knowingly miscode a large business as small — would alleviate some of these issues.”
Things may improve this year, when the G.S.A. is to merge the two separate contractor databases into one as part of a bigger move to consolidate all of the different systems — nine of them! — that constitute the government’s “Integrated Acquisition Environment.” According to Ms. Meadvin, the S.B.A. believes that eventually the system will operate the way the people at West Point seem to believe it already does: business size representations from ORCA will be among the data automatically entered into the contract action report.
But for now, small-business advocates bemoan a system that allows everyone involved to evade responsibility for their actions. “The ‘pass the blame’ game you’ve seen from the S.B.A. and the Army is highly indicative of a lack of accountability by the federal employees whose duty it is to ensure that the contracting process is handled professionally and fairly,” said Mr. Rosenfeld of the league. “The erroneous entry into C.C.R. by The Times is also an example of how a large company’s negligence can contribute to the problem.
“Contract error and mismanagement amounts to tens of billions of dollars’ worth of contracts a year being diverted away from small business,” he added. “With such faulty standards of oversight, accountability and transparency, we wonder how easy it must be to hide fraud in the federal contracting process.”