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GAO: small business contract dollars overstated.

Set-Aside Alert
May 16, 2003

The federal government is grossly exaggerating the amount of contract dollars awarded to small businesses, primarily because of regulatory loopholes that allow large companies to be counted as small, according to a report by the General Accounting Office.

The report, presented to the House Small Business Committee May 7, did not allege that large businesses are Illegally posing as small ones, but one small business advocate said he has found widespread evidence of deliberate misrepresentation.

"Companies that are household names, that any 10-year-old would know, are on PRO-Net," the Small Business Administration's database of small firms, said Lloyd Chapman, president of the Microcomputer Industry Suppliers Association. His complaints sparked the GAO investigation and the congressional hearing.

In fiscal 2001, GAO said, 49,366 companies received contract awards that were reported as going to small businesses; 5,341 of those -- more than one out of 10 -- received other contracts in which they were classified as large businesses. The companies were not identified.

A spot-check of five of those companies found that they received $645 million In contracts as large businesses and an additional $460 million that was reported as going to small firms, GAO said.

"The primary reason these contract actions were reported as small business awards is because federal regulations generally permit companies to be considered small over the life of a contract -- even if the company grows into a large business, merges with another company, or is acquired by a large business." David Cooper, GAO's director of acquisition and sourcing management, testified at the hearing.

Bush administration officials said they are moving to close some of those loopholes.

GAO said other misclassifications were the result of "conflicting and Incorrect information" in various federal databases.

But Chapman said his examination of PRO-Net listings "found dozens of examples where firms had blatantly misrepresented their number of employees, NAICS codes and their affiliation with large businesses.

"Subsidiaries of Fortune 1000 companies and international firms were common. Some of the firms had up to 44,000 employees and annual revenues of up to $12 billion."

For example, he said, AT&T Wireless was listed on the small business database in early May.

That, too, is an error, said Fred Armendariz, SBA associate deputy administrator for government contracting and business development.

When PRO-Net was merged with the Defense Department's Central Contractor Registration last year. he said, 'there were several large companies that leaked on...I can guarantee you that nobody at AT&T put their name on PRO-Net."

GAO gathered information about contract awards from the General Services Administration's Federal Procurement Data System, the official source of contracting statistics, but the investigators said the statistics are not reliable.

"We have serious concerns in relying on that data on small business participation (in contracting)," Cooper testified. "Based on the reporting we have done and the numbers we have seen, It's not right"

The Federal Procurement Data System reported that small firms received 22.8% of federal contract dollars In fiscal 2001, the latest full-year figures available. Cooper said he could not estimate how accurate those numbers are.

GSA recently awarded a contract to upgrade the FPDS database. (See separate story, below.)

Regardless of what government databases say, a contractor is required to certify whether it is large or small every time it submits a bid, said David Drabkin, GSA's senior procurement executive, in an interview. The only exceptions are the Defense and Transportation departments; they rely on DOD's Central Contractor Registration to determine a company's size status.

Federal regulators have proposed a rule requiring all contractors to register with the CCR by Sept. 30, making it the governmentwide database.

It is a felony for a company to misrepresent itself as a small business in order to receive a federal contract. But no company has been prosecuted in the past 15 years, Chapman said.

SBA's Armendariz said prosecution is difficult because the law requires proof that misrepresentation was intentional.

Bush administration officials outlined proposals that would require contractors to re-certify their small-business status annually on GSA schedules, governmentwide acquisition contracts and in their PRO-Net listings. (SAA, 5/2) Under current regulations, if a company is small when it receives a GSA schedule contract, it may continue to claim small-business status through contract renewals lasting up to 20 years.

Angela Styles, administrator of the Office of Federal Procurement Policy, acknowledged that some businesses object to annual re-certification because their revenues or workforce might fluctuate, pushing them above the small-business size standard one year and dropping below it the next. She said she is willing to consider whether re-certification every two or three years is sufficient.

Others have suggested that a business be required to re-certify only when its status changes because its revenues or workforce rise above the size standard.

Styles urged business owners to comment on SEA's proposed rule regarding GSA schedules. The rule, published in the April 25 Federal Register, is open for public comment until June 24.

Styles has ordered agencies that operate governmentwide acquisition contracts to begin requiring annual re-certification, but she said details are still being worked out.

SEA's inspector general recommended requiring annual re-certification of PRO-Net listings and warning listed companies of the penalties for misrepresentation. Armendariz said those recommendations are being implemented.

Armendariz said SBA has removed more than 600 companies from PRO-Net because they exceeded size standards. That most often happens because of a protest.



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