Smoke and mirrors at SBA

The Small Business Administration, claiming a major victory for its constituents, recently announced that small companies won $79.6 billion in federal prime contracts in fiscal 2005.

Former SBA Administrator Hector Barreto, in one of his last official acts before stepping down April 25, called the agency's year-end contract data excellent news, and said that small businesses won 25.4 percent of the $314 billion total federal prime contracts awarded in fiscal 2005.

The federal government has a congressionally mandated goal of awarding 23 percent of federal prime contracts to small companies, and Barreto said that 2005 marked the third straight year it has met that goal.

But Barreto's assertions that the government surpassed its goal have come under sharp attack from congressional leaders, as well as the SBA's inspector general and Government Accountability Office.

Critics there have complained repeatedly of problems in how the data is compiled and how the agency oversees federal small-business contracting.

One complaint is that companies self-certify as small businesses in a government database that rarely is reviewed for accuracy.

Another is that large government contractors are winning small-business prime contracts.

Research company Eagle Eye Publishers Inc., Fairfax, Va., in June released its own fiscal 2005 small-business contracting report using data produced by the General Services Administration and Defense Department. Eagle Eye's report identified $377 billion in federal prime contracts, $63 billion more than SBA's report.
Of that higher total, Eagle Eye found that small businesses won $65 billion in prime federal contracts, just 17 percent of the total, said company President and CEO Paul Murphy.
"Administrator Barreto is either comparing apples to oranges or else he has access to numbers that the general public does not," Murphy said. "They're manipulating the appearance of success."

But neither SBA nor GSA generates the report, Karen Hontz, SBA associate administrator for government contracting told Washington Technology. That job was outsourced in 2003 to Global Computer Enterprises Inc., Reston, Va. GSA hired Global Computer to run the Federal Procurement Data System-Next Generation, the database that tracks government contracting including small-business contracts.

Hontz said she was comfortable with the accuracy of data that SBA was touting. SBA officials declined to comment on Eagle Eye's report.

Appearance of deception

When Eagle Eye compiled a list of the top 100 companies that won small-business contracts, both IT and non-IT work, in fiscal 2005, it found several familiar large-company names.
Among the IT contractors on its list was Science Applications International Corp. of San Diego, which ranked third with more than $360 million in small-business contracts.

Other large companies included GTSI Corp., Chantilly, Va., which was fourth with $290 million in small-business contracts, General Dynamics Corp., which ranked twelfth with $232 million, and Lockheed Martin Corp., which came in at No. 19, with $175.3 million in small-business awards.

SBA officials declined to provide a list of the top 100 contract winners from its own data.
Asked how General Dynamics, a company with more than $21 billion in fiscal 2005 revenue and more than 72,000 employees, could make a list of the top small-business award winners, company spokesman Rob Doolittle said the answer lies in the company's recent acquisition history.

"General Dynamics has acquired several small businesses over the last several years that were likely awardees of small-business contracts," Doolittle said. "They can't compete [for new contracts] as small businesses any longer, but the contracts continue to exist as they were awarded."

Hontz also said that large companies appeared on Eagle Eye's list because of their acquisitions of small companies that held small-business contracts.

It's unlikely that large companies are intentionally masquerading as small businesses, Eagle Eye's Murphy said.

"Deception is a rather small part of the explanation for this problem," he said.
Until late 2004, a large company could acquire a small business and roll it into its own corporate structure without ever changing the acquired company's size status, said Richard Vacura, a partner with law firm Morrison and Foerster LLP, McLean, Va.
"You ended up with what amounts to a large business performing the contract, and the agency still getting credit for a small-business contract," Vacura said.
To close this loophole, a new regulation was adopted in December 2004. It requires that any small company that is bought by a larger one and either changes its name or is rolled into the larger company's corporate structure, must notify the contracting officer overseeing the company's contracts of the change. The company would be allowed to complete the term of the contracts, including option years, but the work would cease to count toward the contracting agency's small-business goals, Vacura said.
The rule change, however, did not eliminate all loopholes in the regulations. Acquisitions made before December 2004 are exempt.
And if the larger company buys 100 percent of the smaller company's stock, leaves it as a subsidiary and does not change its name, the small company, even though it would be part of a much larger entity, would continue to be counted as a small business on its contracts, Vacura said.
The smaller company would not, however, be allowed to compete for new contracts as a small business.

Self-policing
A fundamental problem remains: SBA's system requires companies to accurately update their own information ? at all times, not only when a company is acquired ? but it has no oversight of the process.
During the course of a year, a company could outgrow its small-business size designations set by the North American Industrial Classification System codes. It would be up to the company to update its information in the Central Contractor Registry, a list of all federal contractors and their NAICS codes. The Defense Department operates the CCR, but contracting officers governmentwide use it.

There is no step in the process where a Defense Department or SBA official ever cross-checks information listed by a company on CCR with information on the company's own Web site, SBA's Hontz said. There is just too much activity to allow any oversight, she said.
"To have somebody check the thousands of companies coming and going all the time is just not possible," Hontz said. "There are too many companies."

The federal government relies on companies to police themselves. If a small business loses a contract to a company it thinks is not small, it may file a protest with the government.

Because companies often partner on contracts, and because they don't want to risk being labeled a complainer and thus lose potential business, there is little incentive to report questionable awards, Morrison and Foerster's Vacura said.

"There's also a fear that everything they do from then on will get size protested" as retribution, Vacura said. "And that's disruptive."

Business is good

Although Eagle Eye's Murphy didn't have data on IT contracting alone, he said that despite SBA's contracting foibles, small IT companies are doing well.

"IT tends to be a sector where small businesses perform strongly," he said. Two examples, he noted, are GSA governmentwide acquisition contracts: the $5 billion Veteran Technology Services contract for businesses owned by service-disabled veterans, and the $15 billion Alliant Small Business set-aside contract.

"Agencies are consciously trying to address the small-business market with their own special contract vehicles," he said. Ironically, such efforts "wouldn't be necessary if they were just meeting their goals in the first place," Murphy said.

Staff Writer Ethan Butterfield can be reached at ebutterfield@postnewsweektech.com.