Small businesses criticize recertification

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

A proposed rule intended to ensure that small-business set-aside contracts go only to legitimate small businesses could force many firms into a competitive world they are not ready for, critics say.

The proposed rule, which the Small Business Administration published late last month, would require small businesses on governmentwide acquisition contracts to recertify their small-business status annually. Small businesses get some advantages, including certain contracts that are set aside just for them. And because the government urges larger companies to hire small businesses as subcontractors, they can use their size as a selling point.

Under current rules, small businesses do not have to recertify their size throughout the life of the contract.

"The current plans would force small businesses out of the nest prematurely. It takes away some growth strategies," said Mike Mullen, vice president of business development at Indus Corp. in Vienna, Va. "Whether you're growing rapidly over a five-year period or more slowly over a 10-year period, there's a certain infrastructure you need. Those infrastructures take time to put into place."

The reality of the concern is reflected in a recent General Accounting Office report. GAO analyzed the records of five large companies and found that of the $1.1 billion those companies brought in through federal contracts in 2001, $460 million were small-business awards.

"The predominant cause for misreporting of small-business achievements is that federal regulations generally permit a company to be considered...a small business over the life of the contract — even if they have grown into a large business, merged with another company or been acquired by a large business," the report states.

But some small-business owners say the dividing line between small and not small — which varies depending on the type of business — is not a line of demarcation between a fledgling enterprise and one ready to compete against large corporations, such as Computer Sciences Corp. and Science Applications International Corp.

RS Information Systems (RSIS) Inc., for example, which won a $409 million contract from the Energy Department earlier this year, has grown rapidly. According to Rodney Hunt, the company's president and chief executive officer, the company grew from $15 million in revenue in 1998 to $192 million in 2002. Its small-business status is determined by its staff size and will end when the company averages 1,500 employees for a year. The current count is about 1,380, he said.

The growing revenues don't put RSIS in the big leagues, though, Hunt said.

"Even right now, at $192 million last year, we have difficulty competing against the Northrop Grummans [Corp.] and the CSCs, corporations that have the financial wherewithal and strength to out-hustle and out-propose," he said. "We don't have the resources available to go after multiple jobs like the big boys do. We have to pick our shots. We're bidding on two or three projects at a time when they're bidding on 10 or 12 at a time."

"If a small company has to compete with the large companies on the GWAC, it's almost a given that they won't be able to win any more work on the contract," Mullen said. "It goes against the whole grain of how the small-business set-aside program was set up."

"It's hard for you to get on a team at that point," said Pam Mazza, a partner in the law firm of Piliero, Mazza and Pargament LLC and a procurement specialist. "The big boys don't necessarily want you because they no longer get points. It's a tough progression as it is. With this new rule, not only can you not compete for follow-on work, you may not get to keep what you have."

RSIS graduated from the 8(a) program this year, which allows a nine-year period for a business to grow. Small-business set-asides should work the same way, Hunt said. "No one's really thinking it through," he said of the officials pushing for the change. "I think this is a knee-jerk reaction."

The measure might also encourage small-business owners to limit their growth. "Instead of reinvesting profits in the long-term growth of my company, I might take the profits and sell the company, or take the profits out of the company and not worry about funding the growth," Hunt said.

Fairness doesn't seem to be the aim of the proposed rule, just getting an accurate accounting of small companies, Mazza said. "I think they're genuinely trying to do the right things, but it needs a lot of thought," she said. "It could have unintended negative consequences."

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How small is small?

The definition of a small business varies depending on the type of business, based on the North American Industry Classification System. Some are measured by number of employees, others by annual revenue. Some businesses may be considered small in some of their activities and not in others.

A few common technology business types and their thresholds for being considered a small business are:

* Software publishers: $21 million.

* Internet publishing: 500 employees.

* Wireless telecommunications: 1,500 employees.

* Data processing services: $21 million.

* Web search portals: $6 million.