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Contract debate swirls

Some say reinforce small-business rules; some say drop them

By Victor Godinez
April 11, 2006

When government agencies go shopping for supplies, they're supposed to make sure that small companies get a specific share of the contracts.

Critics have complained that the government isn't living up to that standard, but there is growing disagreement over the best fix.

Some say stronger enforcement of the current law is the best approach, while others say it's time to dump the small-business contracting requirements altogether and let large and small firms compete equally for Uncle Sam's business.

In 2004, federal small-business contracting totaled almost $70 billion, and the Small Business Administration said that small businesses in Texas got the fourth-biggest portion, behind Virginia, California and Maryland.

A lot of people outside the SBA and even some inside have little faith in the official numbers.

They say large companies use a variety of methods to infiltrate the small-business contracting program, and now the question is what to do about it.

Here are the cases for and against keeping the rules that require government to contract with small business.


The SBA, which oversees the contracting guidelines, says the best course is to police its current programs better and to punish large companies that try to sneak into the small-business contracting program.

Last month, for example, the SBA said that an Arizona firm had agreed to pay $1 million to settle allegations that it had inappropriately applied for small-business contracts from the federal government.

"We believe this settlement sends a strong message to the contracting community about the need for accuracy in making small business certifications," Peter McClintock, the acting inspector general for the SBA, said in a statement.

Chuck Waldrop, director of the center for government contracting at the Small Business Development Center in Dallas, which is affiliated with the Small Business Administration, said the federal small-business contracting goals were instituted roughly 50 years ago to ensure that the innovations coming out of small firms didn't disappear.

"These larger companies had undue influence at times on government, and working to help small businesses, they just viewed it as good business," he said. "There's a social agenda to some degree."

He said there's also a sound business case to be made for nurturing small firms.

"In the federal arena, most innovation comes from small companies," Mr. Waldrop said. "The small business will a lot of times come up with new bells and whistles before the big guy."

Lloyd Chapman, president of the American Small Business League, has been perhaps the most vocal critic of the small-business contracting program, complaining that large firms have infiltrated the program far more extensively than the SBA acknowledges.

He doesn't want to scrap the program but strengthen it.

He said that if small businesses represent more than 99 percent of employers, as the Small Business Administration says, then they should be guaranteed a portion of all federal contracts.

"Without these programs, you could see 100 percent of all government contracting going to 1 percent of the companies in America," Mr. Chapman said. "It can't be good for America. It can't be good for the economy."

There are certainly some success stories.

Federal small-business contracts have reinvigorated Ewing Electronics Inc. in Allen, allowing the wholesale electronics distributor to regain the ground it lost after the recession in 2001.

Phil Hawley, president and chief executive, said his 12-person company could hit $7 million in revenue this year, up from $2.5 million last year, and he plans to do some hiring. He credits the small-business contracting requirements for the revival.

"In my opinion, it is one of the few programs that the government has actually succeeded on," he said.


Some economists say that, in the long run, taxpayers get a better deal when neither small nor large companies get preferential treatment.

In late 2004, the Small Business Administration's Office of Advocacy which works to promote the interests of small businesses among all federal agencies said that, in fiscal 2002, $2 billion in federal contracts went to large companies that had been inappropriately labeled as small companies.

Veronique de Rugy, a tax and budget analyst with the conservative American Enterprise Institute, said that federal small business contracting data can't be trusted.

"There's no doubt that there are a lot of contracts that go to big companies," she said. "There's a lot of fraud, basically."

But cleaning up the fraud isn't the answer, she said.

Instead, the government should repeal the law requiring federal agencies to spend a certain portion of their budgets on small businesses.

Don Hicks, a professor of political economy at the University of Texas at Dallas, agreed.

He said using federal contracts to prop up small firms doesn't result in the economic payoff most people assume.

"There has been in the last 15 years just a whole culture enthralled with the idea of small businesses, and in many respects that is a very important part of any economy," Mr. Hicks said. But "a small business is generally there to stay small, because the organizing unit tends to be the family."

Mr. Hicks said there's clearly an economic benefit to helping grow a company such as Ewing, which is adding staff and revenue.

But rewarding high-potential firms such as Ewing is a lot different than just guaranteeing all small businesses both the dynamos and the plodders a slice of the federal pie, he said.

"If we had programs that did an equally good job encouraging people to start new businesses, and encouraging new and emerging companies the way we do in keeping lifelines to small existing businesses, I think we all would be better off," he said.



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