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On The Shoulders Of Giant Corporations

How Fortune 500 companies are helping the government reach its small business contracting goals.

Every year, the government sets aside a portion of federal contracting dollars for small businesses as a way of encouraging job growth. Many MHEDA members rely on these small business contracts to level the playing field for federal contracts. To qualify for these dollars, a business must qualify as small under the procurement guidelines. The Small Business Act defines a small business as one that is “independently owned and operated, not dominant in its field, and whose size falls within the size standards established by the Small Business Administration.” So why, then, would Lockheed Martin, General Electric, AT&T and other Fortune 500 companies appear among those receiving small business dollars?

Two Sides to Every Story

The Small Business Administration (SBA) recently reported that $97.95 billion in federal contracts went to small businesses in Fiscal Year 2010. According to the SBA, this represents a 22.7 percent share of eligible government contracting dollars, just shy of its 23 percent goal, but up significantly over the 21.9 percent mark set in 2009.

However, if you ask the American Small Business League, the real number is closer to 5 percent. “The ASBL maintains the Obama Administration has dramatically inflated the percentage of contracts awarded to small businesses by under-reporting the actual federal acquisition budget, and by including billions of dollars in contracts awarded to large businesses,” says an ASBL press release. “The ASBL maintains, the actual federal acquisition budget for foreign, domestic, classified and unclassified projects is roughly $1 trillion.” This is a far cry from the roughly $432 billion claimed by the SBA.

ASBL’s data analysis concludes that 61 of the top 100 recipients of federal small business contracts for Fiscal Year 2010 were large firms, accounting for $8.8 billion in contracts. “The SBA’s most recent claims are just more misleading smoke and mirrors,” says ASBL President Lloyd Chapman.

This is not an isolated incident, nor is it a recent phenomenon. For six consecutive years, the SBA office of the Inspector General has indicated that the diversion of small business contracts to large corporations is one of the greatest challenges facing the SBA. Before that, the General Accounting Office (GAO) released an investigation of 2001 contracting numbers, which identified 5,341 firms receiving government contracts as small businesses and as large businesses. Those firms received $13.8 billion in small business dollars, almost 28 percent of the $50 billion awarded to small businesses in 2001.

Even after all this, the SBA stated in a release, “Large businesses taking contracts that have been set aside for small business isn’t a real factor.”

How Is This Happening?

The SBA explains that the misreporting of contracting goals is a result of businesses growing from small to large over the life of a contract. “Small companies that get long-term contracts are profiting by those contracts and growing into large businesses,” states the SBA release. “Also, large companies are acquiring small companies that hold long-term federal contracts, which can last for up to 20 years. In fact, many large, multinational corporations have acquisition strategies based on acquiring small companies with long-term federal contracts.”

The GAO report of 2001 contracting transgressions offers the same explanation as the SBA, but admits that “In addition, agencies relied on various databases containing inaccurate information on current business size.”

A distributor in Baltimore, MD, who has extensive experience with small business contracts, has another explanation: “The rules are largely self-enforced,” the distributor explains. “A procurement officer does not need to investigate whether the successful awardee on a small business set-aside is actually small unless he has a reason to suspect that it’s not. It is up to contractors to know the regulations and point out any possible violations.” Protesting a competing bidder’s size status can require additional time and resources that small businesses do not have.

Whatever the reason, it is clear that actions taken thus far to avoid miscoding and misrepresentation of government contracts have not prevented large businesses from continuing to divert small business dollars.

What do you think: Should large businesses be allowed to win small business contracts so long as it’s within the procurement guidelines? What should be done to protect small businesses?

Material Handling Equipment Distributors Association