SBA regs ruffle feathers

New rules go too far, or not far enough, depending on whom you ask

Rose Wang, co-founder and CEO of Binary Group Inc.

Rick Steele

A fair shake in federal contracting is what small IT companies are after. But what constitutes "fair" is a matter for debate, one that is raging around new regulations released by the Small Business Administration in November.

"It's fair to want to protect the small businesses, but you don't want to do that at the expense of truly independent small businesses that are still growing," said Rose Wang, co-founder and CEO of Binary Group Inc., a small business in Bethesda, Md.

The proposed regulations, which go into effect June 30, are an attempt to bring order to federal small-business contracting, where small businesses regularly win 20-year deals, then are bought by large corporations and get to keep these contracts despite their change in size.

Federal agencies also continue counting the work as going to small business, despite a change in ownership that makes the small company part of a larger organization.

What emerges is a muddied picture of how close the federal government is to its goal of awarding 23 percent of all prime contracts to small companies.

Some industry officials, including SBA's own inspector general, believe that many of the contracts counted as going to small businesses go to companies that are no longer small because they've outgrown such designations or were bought by larger companies.

When such changes in status occur, the new regulations will force companies to recertify their sizes on long-term contracts, those with five-year or longer base periods and options, at the end of the first five years of a deal.

Small-company contract holders also will have to recertify their status as small businesses at each option or if they are bought.

Businesses that hold contracts that have gone on longer than five years will need to recertify immediately, and no contracts will be grandfathered into the regulations.
When a designated "small" company is bought, it must recertify within 30 days, said Karen Hontz, counselor to SBA Administrator Steven Preston.

"This is a first sign that the regulations are keeping up with what the marketplace has done," Hontz said of the new requirement.

Changing times

In the last 10 to 15 years, the structure of government contracts has evolved from a standard deal of one year with four, one-year options, to one for five or 10 years with additional five or 10-year options, Hontz said.

The new regulations would not take a contract from a company if it outgrows its small-business designation. But it would dictate that the agency stop counting the award toward its small-business goal.

Some business owners fear that should they recertify and lose their small designation, future options on a contract would not be picked up. Others worry that agencies will stop setting aside large contracts for such businesses for fear of losing credit for those contracts as the companies grow.

Government procurement officers also would see their jobs grow more difficult, business owners said. They would have to recompete contracts to find small businesses to replace those that have grown, or constantly create new small-business contracts to replace those awarded to businesses that have since outgrown their size designations.

SBA's new regulations give no advice to procurement officers on how to proceed when small businesses no longer meet the size standards.

"We are [giving less incentive to] the U.S. government program offices across the military, civilian and intelligence communities from making any meaningful small-business contract award," said Mary Ann Elliot, chairman of the board of Arrowhead Global Solutions Inc., Falls Church, Va.

Some small-business advocates and owners believe SBA has not done enough in this arena. They pushed the agency to require annual recertifications to ensure all contracts counted as going to small businesses went to companies that were still small.

SBA considered annual recertifications, and 553 of the 636 comments it received on proposed regulations supported such a move. But officials dismissed most of these comments, because they were copies of a form letter.

"It is not a popularity contest," Hontz said. "You get associations and individuals that send in postcard comments, and you get a thousand of them, but they're the same."

SBA also said that annual recertifications would be too onerous on contracting agencies that "do not have the resources to request, receive and process the expected influx of size certifications every year."

Keep your focus

SBA's focus is in the wrong place, and it is not doing its job, according to some small-business advocates.

"The purpose of the Small Business Act is not to make it convenient for agencies; it's to try and direct a fair portion of the total value of prime and subcontracts to small businesses," said Lloyd Chapman, president and founder of small-business advocacy group American Small Business League, Petaluma, Calif.

"It's ridiculous for us to even be discussing whether Fortune 500 companies should be allowed to keep small-business contracts," Chapman said. "Do you think Donald Trump should get welfare?"

Far from protecting them, the new regulations are a burden and a potential hindrance to growth, some small-business owners said.

Elliot said this isn't because it's burdensome to recertify ? though they claim it would be ? but because the new regulations hurt a small company's value by making it less attractive to large companies looking to acquire it and its valuable small-business contracts.

Arrowhead Global, which recently won a small-business contract under the Homeland Security Department's $45 billion Enterprise Acquisition Gateway for Leading Edge IT support services vehicle, has roughly $100 million in annual revenue and about 150 employees.

Any company that wins a small-business contract should have access to that contract, and its small-business status, for the contract's lifetime, Elliot said. Any change to the system that causes an agency to lose small-business credit for contracts will reduce the value of companies that hold those contracts, she said.

With her company on the verge of selling to a larger company or finding capital to try and grow further on its own, Elliot is worried that the new regulations could keep her from cashing out or finding that financial backing, she said.

"Either way, my value is impacted," she said. "This legislation affects the value of any successful small business."

But with the acquisition market as hot as it is, some protection is needed for companies that remain independent, said the Binary Group's Wang. Binary Group is a professional IT services firm with 75 employees and roughly $20 million in fiscal 2006 revenue.

Wang said she empathizes with Elliot. Companies that are no longer small, but are not yet large, are stuck in a no-man's land, she said. They have none of the benefits and protections of being small, but they are not yet large enough to compete against the industry's biggest players.

Small companies do need protections, she said. SBA should consider updating the North American Industry Classification System codes, which government agencies use to set aside work for small companies, she said. Adding codes that allowed for set asides for midmarket companies could solve the problem, Wang said.

But such a move seems unlikely. SBA looked at changing the NAICS codes as part of its new regulations, Hontz said in an e-mail, but chose not to.

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

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