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Big Firms Get SBA's Small Business

Report Concludes Agency Awarded Some Contracts Without Current Size Data

By Gwendolyn Bounds
Wall Street Journal
April 5, 2005

A new report details how the U.S. Small Business Administration -- the agency charged with advancing the nation's 25 million small businesses -- in several instances, has awarded high-dollar contracts to large companies, but reported them as going to small businesses instead.

The finding comes from the SBA's own Office of Inspector General and is the latest salvo in a heated debate over why and how federal contract dollars designated for small businesses are sometimes going to bigger ones instead. The SBA says its purchases were consistent with regulations or procedures. "There may be problems and issues that we have to address with respect to rules, and we are working toward those," says Gary Jackson, the SBA's assistant administrator for size standards.

While the OIG agrees the SBA was not obligated to ensure the companies at issue were small at the time of the awards, the report says the agency could have done so, and suggests the SBA should set itself to a higher standard in federal contracting. "As the protector of small-business interests, SBA should be taking the lead in ensuring that businesses that are legitimately small are receiving government contracts," the report says." In the cases cited in the report, the OIG says it "found no evidence that SBA attempted to obtain current size information."

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The findings are part of a growing body of evidence outlining problems with small-business federal-contract awards. Last fall, the Center for Public Integrity, a nonprofit, nonpartisan research group in Washington, said that 30% of all defense-contract money reported as going to small companies and special minority-owned businesses ended up with top defense companies from 1998 to 2003. Meantime, a review completed in 2003 by what was then Congress's General Accounting Office found similar problems.

The tallies matter because Congress has established small-business buying goals for most federal agencies, and for the government as a whole, to help smaller firms get a slice of the lucrative federal-contracting market. The overall goal is 23% of all prime-contract dollars, and while there are no legal ramifications if goals aren't met, there is substantial pressure for agencies to try.

Privately, some contracting officials express concern that the 23% small-business benchmark set by Congress is too high for agencies to meet given the competitive dynamics of the marketplace, but most are reluctant to speak out because it's not popular politics. Small firms make up almost half the private payroll, and politicians generally go out of their way to portray themselves as friendly to small business. Last year, the SBA itself announced that the Bush administration had met the 23% goal and called it a "victory for America."

But growing scrutiny of contracting regulations has cast doubt on how meaningful the reported tally is. Of particular concern have been long-term government contracts called "multiple award schedules." Essentially, these are big umbrella contracts that preapprove companies to provide goods and services to agencies. The goal is to help agencies make faster, more streamlined purchases.

The concern has been that schedule contracts can be extended up to 20 years, typically in five-year increments, during which a small firm may grow into a big one, or be acquired by a larger company. But loopholes in regulations have let agencies continue to classify these bigger businesses as "small" through the life of a contract when it comes to meeting their annual award goal totals. Critics say this artificially inflates the government's overall performance and deprives truly small businesses of contract dollars.

In the SBA contracts at issue in the OIG's recent report, the inspector general studied six of the highest-dollar awards made by SBA during fiscal 2001 and fiscal 2002. The dollar amounts totaled more than $36 million and ranged from $844,000 to over $28 million.

Of the six awards, the SBA gave four to companies that were large at the time of procurement but still reported them as "small business awards" and received credit as such, according to the OIG report. The awards were for items and services such as computers, IT maintenance and software systems modernization services. In each case, the OIG report says, updated size information about the companies was readily available on the Internet or in one of the SBA's own databases and that it would have taken only a "short amount of time" to find it.

"For our own procurements, we should make sure we are doing business with small business," says the agency's acting inspector general, Peter L. McClintock.

Since these awards were made in 2001 and 2002, some changes in regulations have been made. If a small business with a federal contract is purchased by a larger business, that contract can no longer be counted toward an agency's small-business award goals. Meantime, companies must now recertify their size for long-term awards every time the contract is extended, although that can still allow companies who outgrow their "small" status to be counted as "small" for as many as five years in some cases.

Under pressure from some business corners to further tighten the rules, the SBA last year proposed that companies with these long-term contracts recertify their size annually. That proposal, which the OIG supports, has met with some resistance from government contracting officials. Notably, annual recertification would make it tougher for agencies to meet their award goals. The SBA says a final version of the rule is being cleared by the agency but declined to say whether it would propose annual recertification, or another time frame.

This recent report is not the first time the OIG has pushed the SBA to do more. In fiscal 1995, the OIG in a report suggested the SBA periodically generate a list of companies found ineligible to certify as small for contracts and circulate it to all federal agencies. That came after the OIG noted several instances of what it deemed "a particular fraudulent practice" of companies continuing to falsely claim eligibility for small-business set-aside contracts with various agencies -- even after the SBA had prohibited them from doing so.

The SBA rejected creating such a list, saying it might lead agencies to accidentally rule out firms that were eligible, since the businesses' sizes can fluctuate. The SBA has since posted a list of ineligible companies on its Web site; however, Mr. Jackson of the SBA says, "it's something we need to publicize more widely."



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