Scandal: Small Businesses Not Getting Fair Share of Gov. Contracts

By Bizbox

We are proud to say that it is our corporate brother, The Washington Post, that has broken a very important, front-page story: of the $89 billion worth of contracts that U.S. government agencies reported giving to small businesses last year--an amount dictated by a legal mandate that a little under one quarter of all federal contracts go to small businesses--at least $5 billion was awarded to Lockheed Martin, Dell, Northrup Grumman, and other companies and subsidiaries of companies that are absolutely no one's definition of "small". The federal government is not giving small businesses the share of contracts that Congress has required it to.

No wonder the American Small Business League and other interest groups are furious that this problem went unaddressed (and indeed may have been exacerbated) during the crafting and passage of the $700 billion big bank bailout. The Post nicely sums up the central problem with this huge, chronic misreporting (besides the fact that it's against the law, of course): "Advocates for small businesses contend that the mistaken agency claims are more than a numbers game," the Post says. "When agencies take credit for awarding contracts to companies that are not small, they penalize legitimate enterprises that need government help." In other words: the mandated quota is there for a reason; misreporting cheats small businesses out of their rightful and legally required share.

The Post examined the government's own information, kept in the General Services Administration's Federal Procurement Data System. Contracts that are awarded to small businesses are reported as such, and have been at least since 1997, when Congress mandated that 23% of all federal contracts go to small businesses--the companies that (as Sen. John McCain has been only too happy to remind us over the past week or so) employ over half of all U.S. workers.

For the record, the fault at least appears to lie with the goverment agencies themselves. The Small Business Administration, whose ostensible job it would be to catch misreporting, is understaffed and has little power to sanction agencies who report contracts that go to big corporations as having been awarded to small businesses. "It is clear that more needs to be done and that contracting offices need to be held accountable for accurate reporting," the Post quotes the SBA's "frustrated" acting inspector as complaining.

In fact, the SBA is expected to issue a report, likely today, revising its earlier $89 billion estimate down to $83.2 billion. In other words: nearly $6 billion misreported. And, at the end of the day, well under 23% of federal contracts awarded to small businesses.

For their part, the companies all at least claim, and not un-credibly, that they never advertise as small.

In case you were wondering, the biggest misreporters, together responsible for over two-thirds of the misreportings, are the Departments of Defense and Homeland Security as well as the General Services Administration--yes, the federal government's own acquisition arm, charged with keeping these very stats!

(To digress quickly, please don't get us started on the lack of sufficient procurement from woman-owned small businesses, either.)

What makes this all the more remarkable is that typical definitions of what constitutes a "small business" for federal procurement reporting purposes actually include plenty of companies that most people would consider big: usually, and depending on the industry, companies with up to 500 employees and $17 million in annual revenue count.

Some of our "favorite" misreportings (with the reminder that the companies tend to assert, believably, that they never represent themselves to the government as small; that, in other words, this is likely the government's fault, not theirs):
-The winner is Science Applications International Corp. (SAIC), a San Diego-based IT firm, which received $258 million in small business contracts, nearly all from the Pentagon. It is estimating 2008 revenues of $9 billion.
-Prototypical defense contractor Lockheed Martin and its subsidiaries (which would not qualify even if they happened to be themselves "small") got $143 million in small business contracts.
-Dell, the old-line Silicon Valley powerhouse that may make the computer you're currently reading this on, received $89 million in small business government contracts.
-$62 million in such contracts went to a subsidiary of L-3 Communications, a $12 billion company.

2008 is probably a lost cause: we can only hope that the inevitable revelations of how many "small business" contracts awarded this year went to immense multinationals are not quite as huge as the 2007 numbers.

However, we will be watching the new administration. They must take quick and decisive action to insure that small business procurement is reported honestly and accurately by all U.S. agencies (though it might pay to start with the Defense and Homeland Security Departments).

Not only that: the inevitably smaller numbers of small business contracts awarded to actual small businesses mean that agencies must be made to make extra efforts to up their small business awards so that they can meet their legally required quotas. Frankly, given how small businesses have been cheated out of their rightful share over the past several years, giving them a little more than the law requires would be far from out of order.

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October 21, 2008 11:42 PM