Little business means big trouble

"As if contract bundling, poor oversight and lack of accountability weren't big enough obstacles, now small businesses are losing out on even more contracts intended for them because they are going to large businesses instead. ... Not only is it wrong and unfair, it inflates the government's [results]." ? Rep. Nydia Velazquez, D-N.Y., ranking minority member of the House Small Business Committee

Lawmakers vow changes to keep large companies from small-firm work

A House committee has promised ongoing scrutiny of federal small-business programs after receiving evidence that large companies frequently are awarded contracts intended for small firms.

A General Accounting Office investigation has identified major flaws in the federal government's small-business contracting practices that have led to the inappropriate awards.

Testifying May 7 before the House Small Business Committee, David Cooper, GAO's director of acquisition and sourcing management, said an examination of contracts awarded to five large companies revealed that more than 40 percent of their contracts in fiscal 2001 -- $460 million out of more than $1.1 billion -- had been reported as small-business awards.

Cooper did not identify the five companies, but said they had been selected for closer examination from more than 5,300 companies that received awards as both large and small businesses that year.

Compounding the problem, one of the government's widely used procurement databases, the Federal Procurement Data System, or FPDS, is so flawed that Felipe Mendoza, associate administrator for small business utilization at the General Services Administration, told lawmakers it was "not a reliable source for determining a contractor's size."

Based on information provided by Mendoza, Cooper and others who testified, committee members said they would keep an eye on how agencies identify small companies and track their contract awards. Chairman Rep. Donald Manzullo, R-Ill., said the committee would revisit the issue in the fall.

"We're going to monitor the situation very closely. We're going to have some more discussions with GAO regarding what they're seeing," said Rich Carter, committee communications director. "We weren't happy with what came out of the hearing in terms of large companies being certified as small companies."

Craig Orfield, spokesman for the Senate Committee on Small Business and Entrepreneurship, said the Senate committee is considering holding its own hearing on the issue.

"We are devoting a significant amount of staff time to try to get to the bottom of reports that large businesses are abusing the system," Orfield said. "It's a problem that hits small businesses squarely in the pocketbook. It's not good for the federal government, either, if big business are walking away with most of the contracts."

The issue first came to light when Lloyd Chapman, president of the Novato, Calif.-based Microcomputer Industry Suppliers Association, brought it to the attention of the Small Business Administration, GAO and several legislators last year.

In January, both the House and Senate small business committees asked GAO to investigate complaints that large businesses were unfairly taking contracts away from small firms.

So far, SBA has removed more than 600 companies from PRO-Net, its self-enrolling, self-certifying database of small businesses, because they do not meet the agency's criteria. SBA is taking other steps as well to address the issue of large companies being misidentified as small ones.

During the hearing, Fred Armendariz, SBA associate deputy administrator for government contracting and business development, said the agency is not responsible for verifying that companies on the PRO-Net are small. Rather, companies are responsible for self-certifying their size on PRO-Net.

In fact, the only way a contracting officer can question a company's size designation is if another bidder files a protest, or other information surfaces that questions the size designation, he told lawmakers.

After the hearing, Armendariz told Washington Technology that SBA has under development a system to conduct an automated check of a company's PRO-Net size information.

The agency also sent a letter May 9, after the hearing, to 140 senior procurement executives and small and disadvantaged utilization officers outlining the proper use of PRO-Net.

In the letter, the agency said it declined to publish a list of businesses removed from PRO-Net because "[we] do not believe this is an appropriate action, because the review that resulted in their removal from PRO-Net was an informal one. These businesses have the right to request a formal size determination from SBA or to re-register on PRO-Net with current information if it shows they are small."

Chapman of the suppliers association dismissed SBA's efforts, saying the agency shied away from enforcement actions.

"SBA has not notified any agencies [which] companies were removed from PRO-Net," Chapman said. "At the hearing, Fred Armendariz said it was not their job, but they've got a whole department down there whose responsibility it is."

Large companies pass as small ones in one of several ways, Cooper said. For instance, small companies that win contracts are allowed to keep that status over the life of the contract, including option years, even if they have outgrown the definition of a small business through growth, merging with another business or being acquired by a large company.

SBA has proposed a rule that would help close this loophole by requiring a small business that receives a multiple-award contract to recertify annually its status as a small business.

GSA already has taken steps to close the loophole regarding small-business status over the life of a contract. The agency implemented a policy March 1 that requires companies to re-present their business status before options on GSA contracts are exercised.

And sometimes companies knowingly misrepresent themselves as small businesses, Armendariz said. This is a felony, and there are mechanisms in place to address it. But Armendariz said because of the "burden of proof required by law, a relatively few number of cases have been referred" to the SBA Inspector General's office.

"SBA does not keep records of OIG referrals on the basis of misrepresentation of small-business status," Armendariz told Washington Technology.

David Gray, counsel to the inspector general, said the office tracks cases based on the criminal statute that has been violated.

Businesses also can continue being identified as small companies because federal databases contain conflicting, incorrect information about their sizes. This is where the shortcomings of the FPDS are most notable.

GSA's Mendoza told the committee that business size status is usually self-represented by vendors, and GSA contracting officers are not required to verify it. But FPDS only records a company's size at the time of a specific contract award; months or years later, the database can be completely outdated regarding the company's size classification.

Chapman, whose association represents small companies in the information technology industry, said the GAO should further investigate how large companies are benefiting from small-business opportunities.

"We know it's happening. How much is intentional misrepresentation and fraud, how much is mistaken bookkeeping?" he said.

A serious consequence of misidentifying companies is that agencies cannot say with confidence that they are meeting the government's goal of awarding 23 percent of prime contract dollars to small businesses.

"For the last two years, the government has failed to meet its small business goals," said Rep. Nydia Velazquez, D-N.Y., ranking minority member of the committee. "To make matters worse, today we find another reason why federal agencies are not able to meet their small business goals. As if contract bundling, poor oversight and lack of accountability weren't big enough obstacles, now small businesses are losing out on even more contracts intended for them because they are going to large businesses instead. ... Not only is it wrong and unfair, it inflates the government's [results]."

Staff Writer Patience Wait can be reached at Staff Writer Gail Repsher Emery contributed to this story.

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