Small businesses face greater scrutiny

Reporting of Small Business Contract Awards Does Not Reflect Current Business Size

The government is scrutinizing small-business designations for errors and fraud in an effort to ensure that small-business benefits go only to companies that deserve them.

Agencies came close to meeting their small-business goals last year, awarding 22.62 percent of their contracting dollars to small businesses, just shy of the 23 percent goal, according to a recent report issued by the Democratic minority of the Senate Small Business and Entrepreneurship Committee. Although agencies failed to come close to the goals for some set-asides, their overall results were good.

The success is misleading, however, because the data that identifies small businesses is confusing, contradictory and often wrong. Officials don't know how wrong, said David Drabkin, deputy associate administrator of the General Services Administration's Office of Acquisition Policy. GSA launched an effort last week to find out how many large businesses are miscategorized and why the errors happen.

A General Accounting Office report released in May found that two issues lead to an overcounting of small-business contracts. One is inaccurate information in the computer systems officials rely on to identify small businesses. The other is a policy that allows small businesses on governmentwide acquisition contracts (GWACs) to retain that status for the life of the contract, no matter how large they become during that time.

Those factors can erroneously count some contracts as meeting small-business goals, the GAO report stated.

"When we finish this effort, we should be able to tell folks what the impact is," Drabkin said. "My sense is it is a minor one, but I need to be able to prove that empirically."

"If you can't have true measurement, why have a measurement at all?" said Fred Armendariz, associate deputy administrator for government contracting and business development at the Small Business Administration. "Knowing where you are allows you to draw a map to address your shortcomings."

An SBA task force is working to simplify the definition of small business. The agency uses the North American Industry Classification System to identify an industry. It then applies one of 32 measures, most based on a maximum number of employees or maximum revenue level, to determine if a business qualifies as small.

The task force should deliver a recommendation by the end of the year, Armendariz said. The size issue is so complicated that often companies don't know what size they are, he said. Companies can be small in some lines of work and not in others.

SBA's Procurement Marketing and Access Network contractor database, meant to list only small businesses, isn't always accurate, said David Gray, counsel to the inspector general at SBA. The agency generally relies on companies to report if they are small or a member of a special set-aside class. Some companies may be confused by the complicated rules for determining size status, and others may need a stern warning about the potential criminal penalties for filing false information, according to an IG report.

The IG's office is reviewing several companies at the request of the Senate Small Business and Entrepreneurship Committee to see if they have lied about their status to win business, Gray said.

At GSA, the Federal Procurement Data System is about to be scrapped and replaced, because it is notoriously inaccurate. Drabkin attributes much of FPDS' inaccuracy to human error, because agency employees have to key in all the data that the system tracks.

FPDS logged 35.9 million transactions in 2001 and more than 34 million in 2002, he said. "Human error happens. It's a lot of data; 34 million transactions is not a small number."

Officials are also addressing the policy that allows small businesses to keep that designation for as long as 20 years without further examination.

Under the policy that has been in place, "you are what you are as you represent yourself to the government for the life of that contract," said Linda Williams, SBA's associate administrator for government contracting.

SBA is developing a rule that would require small businesses to recertify their size annually. But the measure is controversial. Some critics say the process is sufficiently expensive and time-consuming to justify requiring recertification only once every three to five years. SBA has published a preliminary rule, however, and is now reviewing public comments. The Office of Federal Procurement Policy instructed agencies earlier this year to build the annual recertification into new GWACs.

Some critics believe the problem is neither minor nor the result of benign error. "There is widespread fraud and abuse in federal contracting," said Lloyd Chapman, president of the Microcomputer Industry Suppliers Association, a trade group based in Petaluma, Calif. "You have hundreds of companies that are not small business receiving small-business contracts. It's harmful to the economy."