Murphy: Fixing procurement counts

As I sat through the Small Business Administration’s budget presentation to the House Small Business Committee Feb. 10, I cringed when a member accused SBA Administrator Hector Barreto of being dishonest with procurement statistics that came to light in a recently published, SBA-funded report on miscoded small businesses.

As author of the study, I have to ask, “Why shoot the messenger?” With the release of the study through SBA’s Office of Advocacy, agency officials have formally acknowledged a long-standing data issue and initiated a long-overdue discussion about government data reporting and small-business procurement policy.

In the study, which was published in late December 2004, my company, Eagle Eye Publishers, documented about $2 billion in fiscal 2002 prime contracts that were reported to have been received by 44 large and “other” firms appearing on a list of the top 1,000 small businesses.

After SBA published the study, charges of fraud and coverups began to appear. Agencies must punish procurement abuse in order to maintain the integrity of the procurement process. If the data supporting my company’s study points investigators in this direction, then these leads need to be followed to their conclusion.

For its part, Eagle Eye has already shared the raw data it collected for the SBA study with several government and company officials pursuing the causes of the miscoding.

But determining fraud was outside the scope of this statistical review, which focused primarily on how small-business procurement information is interpreted, entered, processed and disseminated.

For example, we found that a company can be classified as both small and large under the North American Industrial Classification System (NAICS) code, depending on the type of contract under which an award is made.

The General Services Administration allows contracting officers to code contract transactions as being awarded to a small firm for the entire five-year term of a GSA schedule contract, providing the vendor was legitimately small when it initially received the schedule contract. This means that a large firm that purchases a small business with an active GSA schedule contract could potentially see its awards listed as going to a small business in GSA’s procurement database — without violating current laws and regulations.

The study found that more than 80 percent of the money in question was awarded as part of GSA schedule contracts; indefinite-delivery, indefinite-quantity contract vehicles; contract modifications; and other multiple-award contracts.

At the same time, SBA sets clear employment and revenue thresholds for small and large firms for each NAICS code classification but offers no time frame for their implementation. So, when contract officers draw up award details, should they abide by GSA’s or SBA’s policy? If they use GSA’s policy, how long should they do so — through the end of the fiscal or calendar year, for the contract’s base period or through the first renewal period?

Without clear guidance, some firms could remain classified as small for nearly 20 years after a large company buys them. Whether this is sound small-business policy is a debate worth having.

Here’s another source of confusion: The same company can be considered small under one NAICS code and large under another. This widely recognized problem results from revenue and workforce size thresholds that differ from code to code. But when contract officers issue transactions under multiple NAICS codes on a complex contract originally issued to a small firm, what happens if a firm exceeds the size standard under one or more of these multiple codes? Agencies lack a clear standard.

Furthermore, some firms believe they have legal justification to represent themselves as small for all of their company’s awards no matter which NAICS code they fall under as long as they qualify as a small business under one.

If companies are allowed to remain classified as small in these situations, should the government be allowed to classify their procurement dollars as small, allowing agencies to achieve small-business contracting goals more easily? Should small-business contracting goals be more strictly enforced or simply raised to accommodate mergers?

Officials have procrastinated on this issue for years. The potential award of billions of procurement dollars to truly small firms awaits the outcome of this debate and SBA’s upcoming discussion about small-business size standards.

Here’s another administrative headache: An official from one of the 44 firms listed in the study called Eagle Eye to question how his company got on the list and ranked high. A review of the raw data showed that GSA reported $305 million as going to this firm’s subsidiary on two fiscal 2002 contract transactions.

We recognized this as a possible “triple zero” problem. A GSA data processor improperly converted $305,000 into $305 million as agencies shifted to reporting contract transactions from thousands to real dollars between fiscal 2002 and 2003. We reported this immediately to GSA and SBA, and GSA’s Federal Procurement Data System-Next Generation online database now reflects the correct totals. This change reduces the questionably coded fiscal 2002 top 1,000 small-business dollar total to $1.7 billion, a 15 percent decline.

Mistakes are inevitable in such a large database, but agency officials can take some simple steps to improve procurement data consistency.

For instance, agencies’ proposal and contract writing programs could be enhanced to automatically validate a vendor’s size status for any NAICS small-business size standard by using real-time links to bidder-maintained revenue or employment data in the Central Contractor Registration database.

To address these and other policy-related issues, lawmakers should sponsor a bipartisan forum to discuss procurement data collection and reporting. They should develop a common understanding of data-reporting assumptions and procedures, and recommendations for resolving reporting problems dealing with small businesses. Everyone needs reliable data — policy-makers and officials at large and small businesses so they can make important strategic and tactical marketing decisions.

But for now, let’s give credit where it is due. SBA and its Office of Advocacy should be applauded for bringing an important discussion about small-business procurement data to the forefront. With a debate about reforming small-business size standards imminent, the timing couldn’t be better.

Murphy is president of Eagle Eye Publishers, a Fairfax, Va., market research firm.