Lawmakers focus on fairness to small businesses

The Senate bill to reauthorize the Small Business Administration includes measures intended to make smaller firms more competitive and prevent small-business dollars from flowing to the coffers of larger firms.

The legislation would let SBA create tiers within small-business categories, subdividing them into smaller and larger small businesses. The Commerce Department used a similar strategy with its Commerce Information Technology Solutions-Next Generation contract.

COMMITS NexGen, which is set aside exclusively for small businesses, allows companies in the smallest tier to compete against larger companies if they choose to, but larger firms cannot compete in tiers reserved for smaller companies.

The Senate legislation also requires companies to recertify their size and small-business status every year. Such annual certification has been a topic of debate among government officials and businesses for years. Some argue that requiring annual certification is a drain on a company’s resources and that agencies should only require the recertification when awarding or extending a contract. Others, however, say that less frequent certifications allow companies to get funds intended for small firms even after they no longer qualify.

“Annual recertification goes over like a ton of bricks,” said Larry Allen, executive vice president of the Coalition for Government Procurement. “Most people in industry and government perceive that to be an overreaction.” Contracting officers already have the power to require businesses to certify their size status when awarding or extending contracts.

“There are fluctuations in the marketplace from year to year, so that a business may not be a small business in one year and be one again the next,” Allen said. “If they lose that small-business designation, they may lose set-aside business, and that puts them right back into the small category.”

Annual recertification can pose a problem for larger businesses, too, said Shiv Krishnan, president and chief executive officer at Indus.

“If you have smaller businesses that are part of your [subcontractor] team and you are in the middle of a major implementation, if one of your subcontractors is no longer treated as a small business and the government says you can’t use the company, it puts everyone in a bind,” he said.

Several recent studies prove that large companies occasionally take small-business contracts, and they have identified several causes. In some cases, a company outgrows the status but does not have to relinquish its small-business contracts until they expire or come up for optional extensions.

In other cases, larger companies acquire small firms, or contracting officers enter information incorrectly, resulting in errors. The studies’ sponsors have been reluctant to level accusations of deliberate fraud, but many small-business advocates say that also contributes to the problem.

When agencies incorrectly designate funds for small businesses, the error throws off the government’s efforts to measure whether it is meeting goals for awarding contracts to small businesses.

Agencies are trying to curb the problem. In December 2004, for example, SBA created a policy that a business getting small-business contracts transferred from other companies — which often happens in acquisitions or mergers — must recertify its small-business status. The process, called novation, means that if a new organization created through a merger isn’t a small business, the contract no longer counts toward the government’s small-business performance goals, according to SBA.

Some SBA critics say the Senate legislation is a way for larger companies to muscle in on small-business contracts. Lloyd Chapman, president of the American Small Business League, said allowing tiers within small-business categories “gives the [SBA] administrator the ability to create tiers any way he wants to.”