Small Business – When Government Stacks the Deck Against You

We expect a fair degree of corruption, arrogance and drooling self-interest from our elected officials. After all, in the last 206 years, we have fallen a great distance from the days of the “virtuous republic” that existed-or was thought to exist-in that first decade after the Revolution. Yes, we expect it, but I would have more respect for the operatives, the party-men and the politicos themselves if they could be just a little intelligent about it. The current issue with the Bush Administration, Congress, the SBA and the awarding of a great deal of money earmarked for small business, is a case in point.

When Big Business Seems Small

It is illegal, a felony that comes with fines and a prison term, to try to pass your big business off as a small business to get one of the 23% of Federal contracts reserved for small businesses. Yet, it happens all the time. According to the American Small Business League, a non-partisan watchdog group, some $60 billion in Federal contracts go to major corporations each year. How it happens brings us to the question of how you decide that a business is truly small.

Counting Heads

What is a small business? How do you measure it? Is it revenue? Sales? Staff size? Any one of these could be a viable measure, but for the most part the matter is decided with staff size. Depending on the industry, you can have a maximum of 1,500 employees and still be considered a small business! (Federal Regulations Title 13, Part 121, Section 201)

These larger “small businesses,” with 1,000 to 1,500 employees, deal in oil, aerospace, rail transportation, textiles, and chemical and rubber products. Wholesalers, regardless of their products, are capped at 100; information technology value-added resellers are capped at 150 (a very recent change) while the rest are capped at either 500 or 750. In 2005 (the most recent data available), there were 5,966,069 firms in the U.S. with 500 or fewer employees and they employed 58,644,585 people out of a total employment of 116,373,003. That is 50.3% of the working population working in what could easily be described as legitimately small businesses. If you add up the firms with larger numbers of employees, you find that there are 11,546 of them and that they employ 9,475,180 people, 8.14% of the workforce.

Call me crazy, but a firm with 1,000 employees doesn’t seem to be very small to me! It may be small when compared to the giants in its industry, but it is a giant compared with the vast majority of small businesses. In 2004, there was an effort to bring the number of employees down from 500 to 100 for a business to be classified as small. In spite of a great deal of support for the measure-including U.S. Representative Lynn Woolsey (D-CA), who said: “By working to change the definition of a small business for government contracts from 500 to 100 employees, federal contracts specifically designed to ensure the success of American small business would go where they belong – to support Americans, not big companies dressed in sheep’s clothing.”-the effort was killed by the SBA itself. That, however, is only the beginning. Another has to do with how small businesses are certified.

Finding a Certified Small Business

The question of how many employees a small business can have is complicated even further when we see that the government has been rather lax in enforcing the contract award rules for small business. In fact, in 2005, some $49 billion in Federal contracts that were set aside for small business were actually awarded to the 13 largest government contractors. This lax enforcement has led to cases where the small business in question is actually a subsidiary of a much larger company, where businesses have outgrown their small business status, where big business misrepresents itself as a small business and where government procurement offices, such as with the military, simply disregard the rules and do business with who they like.

The Small Business Front

Two of the most prevalent ways that large companies can maintain a small business front are through the legal loopholes that allow a small business to retain its status throughout the life of its original contract-and bid on new business as a small business-no matter how large it grows and even after it is bought out by a large company.

In either case, what the company in question is doing is, in fact, legal. Their actions are also limited by the fact that the loophole is based on the length of the small business’ initial contract. For example, if a small business wins a 10-year contract to provide computer hardware, it maintains its small business status for the full 10 years of the contract regardless of how large it grows or if some huge conglomerate buys it. This has been an issue for some time. Consider the following:

According to a 2006 report on the U.S. Government Accountability Office: Commerce Information Technology Solutions (COMMITS) Next Generation Governmentwide Acquisition Contract, “We found 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. We also found that a significant portion of the task orders intended for the smallest contractors were issued to larger, incumbent contractors.”

Incumbent contractors tend to get the lion’s share of the government’s business. A 2004 SBA Office of Advocacy: Eagle Eye Publishers’ Report said that: “Of the top 1,000 small business contractors in FY 2002, Eagle Eye Publishers’ analysis found 44 parent companies it identified as either large firms or ‘other’. Contracts to these two groups taken together had a total value of $2 billion.” The report continued, saying that: “The Department of Defense and the General Services Administration accounted for 79 percent of the contract awards found to have gone to large businesses.” One of the conclusions drawn from the report was: “As a result of this lack of transparency, many awards that should be reserved for small firms go to large firms unchallenged.”

Disregarding the Rules

Rules can be broken either directly, by a willful disregard on the part of those the rules were intended to regulate, such as a company that purposefully misidentifies itself as a small business in order to get a contract; or they can be broken indirectly by a lack of oversight and enforcement that creates an atmosphere in which the rules can be ignored. One of the problems sited against the SBA is oversight. “SBA did not review the majority of reported bundled contracts that we identified, though procuring activities must provide, and SBA must review proposed bundled acquisitions. As a result, 192 contracts identified by procuring agencies as bundled were awarded without SBA’s review. If all of these are actually bundled contracts, a minimum of $384 million would be potentially lost to eligible small businesses, based on minimum dollar reporting requirements of $2 million.” (SBA Office of Inspector General: Audit of the Contract Bundling Process, May 2005) And consider this from the SBA Office of Inspector General: Audit of Monitoring Compliance with 8(a) Business Development Contract Performance, March 2006:

“Though SBA delegated 8(a) BD contract execution authority to 26 procuring agencies, SBA did not ensure that procuring agencies monitored whether companies complied with 8(a) BD regulations when completing 8(a) BD contracts . . . SBA has ultimate responsibility for ensuring that companies comply with 8(a) BD regulations”

The SBA is the final oversight authority for these contract awards and yet through their lack of enforcement efforts, it is easy for large businesses to slip through. Why is this? There are two likely reasons. The first is that the Bush Administration, when it came into office, cut funding for the SBA. At the end of the Clinton Administration, the budget for the SBA was about $1.1 billion. By 2006 it was down to $456.5 million. Funding has increased since the 2006 low; for 2009, that number has increased to $657 million, mostly due to funding for disaster relief loans; but the agency has nowhere near the budget it used to have. Generally speaking, if you cut funds to an agency, certain things start to slip and that is not a message that the SBA, or the Bush Administration for that matter, want going public.

However, it already has.

An audit by the American Small Business League (ASBL) and two independent experts showed that even while the SBA was saying that it is a “myth that large companies, including large, multi-national corporations are taking away federal contracts specifically intended for small businesses,” it was discovered that the Bush Administration had in fact included billions of dollars in awards to Fortune 500 corporations and other large businesses in the United States and Europe in its small business contracting statistics. Also, the Bush Administration failed to comply with the congressionally mandated 23% small business contracting goal by including such corporate giants as:

  • Dyncorp
  • Battelle Memorial Institute
  • Hewlett Packard
  • Government Technology Services Inc (GTSI),
  • Bechtel
  • Lockheed Martin
  • General Dynamics
  • General Electric
  • Northstar Aerospace
  • Booz Allen Hamilton Inc.
  • Raytheon.
  • British Aerospace Engineering Systems
  • Buhrmann NV (Dutch)
  • Thales (French)

More than that, ASBL’s research also found that the government was forced to systematically increase the volume of contracts awarded to small businesses in order to balance out those that were going to inappropriately large companies. In addition, awards to legitimate small businesses were systematically inflated to equalize the reduction of small business contract dollars awarded to Fortune 500 corporations. The ASBL found that according to SBA numbers, Circle B Enterprises Inc. received $887.5 million during 2005. However, the government’s own figures indicate that Circle B Enterprises Inc. received $287.5 million during 2005, which represents a discrepancy of $600 million. The ASBL audit found several other instances where the contracting numbers of legitimate small businesses were also significantly inflated.

The Bottom Line

The government decided to play fast and loose with small business contract money and they got caught siphoning it off to some of the largest companies on Earth. There are those that will only see the damage that this will do to McCain in the fall, yet another Bush Administration failure/debacle/betrayal-whatever you like best. That, however, is not the point. The point is why was the SBA hamstrung and placed in the position it has been in by the Bush Administration? More than that, why has this abuse been allowed to go on for so long? Call me a political cynic-I am from Chicago so I come by it honestly-but the only thing that makes sense to me is that government officials are paying back the people with deep pockets who helped to get them elected and they are doing it at the expense of, well, YOU. True, paybacks are a time-honored political tradition, but by stealing the money from small business, the U.S. Government as a whole turned its back on the overwhelming number of U.S. employers and employees in favor of a handful of major corporations. I urge you, as a small business owner; and you as an employee of a small business, to write your senators and congressmen, and to write to each of the presidential candidates, McCain and Obama, and their respective party chairmen-Republican and Democrat alike, and tell them that you want this to stop. Remember, small business contract set-asides are for YOU, not major corporations. It is time to remind Washington of that.