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Small-Firm Funds Go Astray

Federal agency allows $2 billion to go to large companies, a report says.

By Thuy-Doan Le
Sacramento Bee
December 29, 2004

About $2 billion in federal contract money intended for small businesses went instead to large companies in 2002, according to a government report released Tuesday.

Of the top 1,000 contractors, 44 were not small businesses, according to the report commissioned by the U.S. Small Business Administration's Office of Advocacy.

The money primarily went to 39 large companies and five other contractors that were listed as "other," including nonprofit organizations and government entities.

SBA officials did not return a call for comment Tuesday.

In all, about 4 percent of the $50.8 billion reported as going to small businesses went to large companies, according to the Office of Advocacy, a small-business watchdog within the federal government.

"This report clearly shows that there are problems with the federal procurement system," said Thomas M. Sullivan, chief counsel for advocacy, in a news release Tuesday. "We now have hard data, and not just anecdotes, from across federal agencies that shows contracts meant for small businesses were going to larger firms."

The research, performed by Eagle Eye Publishers Inc., states that coding problems led to counting contracts with large businesses. A week before the study's conclusions were released, the SBA moved to end one practice that allowed some large companies to be counted as small ones.

When large companies acquired small businesses, the agency had allowed the buyers to keep their new additions' small-business status for the life of the contract with the federal government.

Such companies now have to be recertified to determine whether they are still small businesses, SBA officials told The Bee last week.

For years, the SBA has included contracts with these businesses when determining whether the federal government is meeting the goal of awarding 23 percent of contracts to small businesses.

If these awards had been coded as going to large businesses or "other," the small-business share would have been lowered in 2002 to 19.7 percent from 20.5 percent, according to Eagle Eye Publishers, a market research firm in Fairfax, Va.

Together, the Department of Defense and the General Services Administration awarded about 79 percent of the $2 billion in federal contracts found to have gone to large businesses.

SBA Office of Advocacy officials said that because of the inconsistent type-of-business coding found in the study, federal policy-makers needed to "review and streamline agency policies on designating vendors as small businesses."

The report offered several suggestions, including that the database for the Central Contract Registry be kept current and accurate and that contract officers be given clear and consistent guidelines for identifying small vendors as they fill out contract reports.

Sullivan said more openness is needed in the contracting system, and "timely public access to user-friendly" procurement data is needed so that mistakes and problems can be corrected.

But that is not enough for Lloyd Chapman, president and founder of the Petaluma-based American Small Business League.

In October, he filed a lawsuit against the Small Business Administration, asking for the original draft of the study, which was done about a year ago.

Chapman said he was surprised the agency did not notify him that part of the study was being released since he's in federal court suing the agency.
The SBA attributed the widespread mistakes to miscoding, but Chapman said it's "blatant fraud."

He said the federal government has sugarcoated the problems.

"Their spin is that there were no laws broken, no fraud and mistakes were made because of bad data," he said.

"But there are billions and billions of dollars' worth of contracts going to big businesses."



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