SBA critics ask: When is large small?

As Congress works to reauthorize the Small Business Administration’s financing and economic development programs, some critics say big business is winning contracting dollars intended for small firms.

The issue has been around for years, and industry and government policy-makers have debated potential remedies without results. A recent SBA news release said small businesses won a record $79.6 billion in contracts in fiscal 2005. The media and small-business advocacy groups greeted the announcement with sharp criticism.

“Flaws in the procurement process have allowed large companies to receive small-business awards and agencies to receive small-business credit for contracts performed by large businesses,” said Eric Thorson, SBA’s inspector general, in testimony this month at a Senate Small Business and Entrepreneurship Committee hearing. “We believe the problem to be widespread.”

Paul Murphy, president of Eagle Eye Publishers, said his analysis of government procurement data lists multibillion-dollar companies, such as Science Applications International Corp., Lockheed Martin and Northrop Grumman, among the top 100 small-business contractors in fiscal 2005.

“Regulatory loopholes are allowing large companies to perform small-business contracts,” Thorson told lawmakers at the hearing. “Studies have found that agencies count toward small-business goals contracts performed by companies that have either been acquired by large firms or outgrown small-business size standards.”

“The acquisitions of small companies by large companies may well be a factor in the reports of large companies receiving small-business awards,” said Northrop Grumman spokesman Gus Gulmert. “We are actively engaged with SBA to identify and correct any of our records that need to be updated. Once that is complete, we should have a better understanding of any problems with the existing process.”

The Commerce Department’s Commerce Information Technology Solutions Next Generation (COMMITS NexGen) contract vehicle, which is open only to small businesses, is a case in point. A Government Accountability Office briefing in June noted that “many of the 55 COMMITS NexGen contractors have grown significantly or have been acquired by larger businesses and may no longer meet small-business size standards.”

Despite questions about the data, SBA has touted the fiscal 2005 numbers as evidence of success in its government contracting programs.

“The most important thing is [that] the dollars have gone from $43 billion in [fiscal 1999] to almost $80 billion,” said Karen Hontz, SBA’s associate administrator for government contracting.

“That’s the big statistic. The increase to small business dollar-wise is a larger percentage than the increase in the overall contracting budget. That’s the good news.”

Root causes
Murphy said one reason small-business dollars go to large companies is no one has decided whether a small-business designation should follow the contract vehicle or follow the company. Small companies often merge with larger firms.

Another problem is that on some multiple-award contracts, agencies can obtain small-business credit for using a company classified as small even if it fails to meet all applicable size standards. Those explanations haven’t calmed SBA’s critics. “People are misrepresenting [their companies] as small businesses,” said Lloyd Chapman, president of the American Small Business League. “People are going to manipulate the system for their benefit,” said Guy Timberlake, chief executive officer of the American Small Business Coalition, which helps small firms do business with the government and prime contractors.

Timberlake said large businesses may claim a North American Industry Classification System code for which they don’t qualify. In other cases, “large businesses get behind small companies that are nothing more than fronts that don’t have the capability to do the work,” he added. Thorson said that in the past five years SBA has opened 69 cases involving government contracting fraud, but it has yet to obtain a criminal prosecution.

He blamed prosecutors’ reluctance to accept cases for which it is difficult to demonstrate a financial loss to the government.

One potential remedy is annual recertification of the size of a small business. SBA published a proposed rule requiring recertification in 2003 but has not released a final rule. Annual recertification “would provide a significant control over the accuracy and integrity of small-business contracting,” Thorson said.