As the Northern Virginia firm MicroTechnologies soared to the top tier of the nation’s small federal contractors, competitors and others in the contracting world asked the same question: How could such a firm still be eligible for deals reserved for small businesses?
In fiscal 2005, the year after its launch, MicroTech had $1.5 million worth of contracts. The next year it had $60 million, then $109 million in 2008 and $311 million in 2011 — a third of it through programs for small and disadvantaged firms, federal records show.
But in 2011, MicroTech certified that it was still qualified for technology contracts reserved for companies with $25 million or less in average revenue over three years. Federal law imposes criminal and civil penalties for false statements about such matters.
A Washington Post investigation found that MicroTech worked with the Department of Veterans Affairs to use a little-known contracting method on deals worth hundreds of millions of dollars.
The arrangement benefited them both. MicroTech got millions in orders, and VA got credit for directing business to a small firm owned by a service-disabled veteran, even though more than 90 percent of the money went to large firms, documents and interviews show.
In a response to inquiries from The Post, the Small Business Administration questioned VA’s position on the arrangements with MicroTech, saying VA statements “appear to be inconsistent under the size and affiliation rules that apply to small businesses.”
MicroTech owner Anthony R. Jimenez said the firm has followed all federal rules and always accurately represented its size on small-business contracts.
“None of these activities or representations are illegal, unusual or unethical,” the company said in a statement.
Jimenez founded MicroTech in March 2004, several months after retiring as a lieutenant colonel following 24 years in the Army, many of them as a contracting specialist. The company aimed to sell technology, software and services to the government.
Around that time, Congress and the White House were imposing new goals for agencies to direct at least 3 percent of their spending to small firms owned by service-disabled veterans. Jimenez received a letter from VA certifying his service-disabled status in December 2004.
Small-business contracting is a collective effort across the government. The SBA sets policy and rules and runs development programs for small and disadvantaged business. It also manages contracting protests, including those involving the size of firms. Each federal agency is responsible for awarding and monitoring its own small-business contracts.
VA was expected to set an example for the rest of the government in its own contracts, and it was charged with maintaining a master list of eligible small, veteran-owned firms.
In fulfilling its mandate for the service-disabled vets, VA used a contracting approach called a “contractor team arrangement.” Set up at the General Services Administration, which handles procurement for agencies across the government, such arrangements allow firms to team up to fulfill contracting demands.
VA officials told The Post that MicroTech introduced them to the approach.
On May 25, 2006, MicroTech, with a team arrangement, beat out three other firms to win a six-year deal worth up to $394 million to provide Microsoft software and services to the giant VA system, federal records show. The same day, MicroTech received a work order worth $56 million. (MicroTech said the $394 million VA deal was not reserved for small firms; federal records list it as a set-aside contract for small, disabled-veteran businesses.)
The contract made MicroTech one of the fastest-growing small federal contractors. In congressional testimony, Jimenez later called it “the largest contract of its kind ever awarded to a service-disabled-veteran-owned small business.”
Records show the money going to MicroTech, even though the small firm had a large teammate on the deal, Software Spectrum, a “large account reseller” that specialized in sales of Microsoft software to federal agencies.
VA took credit for the money in the MicroTech deal as going to a small business owned by a service-disabled veteran, records and interviews show.
But then how could MicroTech still claim to be small? The firm declined to provide details about its annual revenue.
MicroTech lawyer Kristopher Parker told The Post in a statement that “more than 90% of the total contract value” went to Software Spectrum. Both firms declined to discuss the deal, citing a confidentiality agreement.
In part because of the contractor team arrangement, Parker said, MicroTech’s true total revenue from all federal agencies over nine years was not $1.4 billion, as reported in the federal government’s contracting database, but “only $445,383,259.” That total “has been verified by our external auditing firm,” Parker said.
The SBA said that is not how revenue is generally counted. In a statement, the agency said it typically includes “all of the revenues received from any source,” including “passive or investment income as well as funds passed on to subcontractors.”
On small-business contracts, a federal agency generally requires the small firm to do at least 50 percent of the work and receive 50 percent of the revenue. But in this case, VA did not track how much work MicroTech did or how much revenue it received.
The department said the contractor team arrangement allowed VA to dispense with such obligations.
“VA had no visibility into the proportion of the work MicroTech performed in relation to the other team member,” the department said in a statement. “VA had no visibility into the amounts of the disbursements among the team members.”
The agency defended the arrangement, saying in a statement that it was permitted under federal acquisition rules.
“The Department of Veterans Affairs socio-economic goals are aggressive and aimed at maximum utilization of small business programs,” the statement said. “All contracts awarded to small businesses are considered as successful.”
VA said the contractor team arrangement was “developed in accordance with GSA’s published policies.”
After learning from the The Post how VA was accounting for the spending, the GSA announced that agencies will now be required to identify how much money goes to small businesses under team arrangements. The GSA also said that it was working with the SBA and the White House Office of Federal Procurement Policy to “provide further clarity around the use of” contractor team arrangements.
Touting its success, MicroTech promoted itself as a rising small-business force that could provide a wide array of services to agencies across the government.
In 2009, Washington Technology magazine named MicroTech the year’s top SBA-certified small, disadvantaged contractor, with $108 million in federal technology revenue. That same year, a competitor, Freeport Technologies, filed a confidential protest with the SBA claiming that MicroTech was too large to continue qualifying as a small business with revenue of less than $25 million, according to documents obtained by The Post.
The protest cited MicroTech’s promotional material describing the firm as one of the fastest-growing small federal contractors in the country. Freeport also noted the gap between MicroTech’s size claims and federal contracting records, which showed the value of MicroTech’s contracts as $253 million over the three-year period ending in 2009, or more than $84 million a year.
In response to the protest, MicroTech submitted tax returns, financial statements and other documents to an SBA reviewer to support its contention that its average annual revenue was just $14 million for the previous three years, according to documents obtained by The Post. The SBA reviewer ruled in MicroTech’s favor. “Based on the financial information provided, [MicroTech] is a small business concern,” the reviewer wrote.
In a statement to The Post, the company said, “MicroTech is still a small business on the applicable long term contracts, and was a small business when those contracts were awarded.”
“MicroTech qualified as a small business when it won several long-term and multiple award contracts,” the company added. “Under the [Federal Acquisition Regulation], MicroTech is entitled to continue to receive orders and to complete those contracts until such time as a representation is required.”
“The Small Business Administration (SBA), on multiple occasions has examined MicroTech for both size and affiliation issues and has on every occasion found that MicroTech operated within the appropriate and applicable laws,” the company said.
In mid-2010, MicroTech received an award for companies with revenue of $50 million to $250 million from an industry magazine called CRN. In applying for the award, MicroTech’s chief financial officer submitted a notarized letter claiming gross revenue of $185 million in the previous year, the magazine told The Post.
But in 2010, MicroTech certified to the government that it still qualified for contracts reserved for firms earning $25 million or less.
The disparity between MicroTech’s public and private claims is puzzling to some contracting experts.
“The government’s own contracting data show that MicroTech’s annual revenues far exceeded that small-business size standard,” said Paul Murphy, a senior data analyst at Bloomberg Government, which provides industry analysis for businesses.
In a statement, MicroTech explained the disparity this way: The company said that it was allowed to take credit for awards and in news releases for all of the revenue from the VA deals, even the money that went to its teammate company. But the firm said it had to report to the government only what it kept from the deals. The company also said federal procurement data do not accurately reflect contractor team arrangements.
Later in 2010, the national office of the SBA “became aware of issues related to MicroTech’s substantial economic success,” a spokeswoman said. The agency began an inquiry into MicroTech’s eligibility for the SBA’s development program for small, disadvantaged firms. MicroTech ended up leaving the program early, on June 30, 2012, according to an SBA statement. MicroTech said the move had nothing to do with the firm’s size and contends that the company was still eligible to participate in the program and qualified to receive small-business contracts.
VA maintains a list of “verified” small firms owned by service-
disabled veterans. Contracting officers in other agencies rely on that list as the “gold standard” when awarding set-aside contracts, according to Thomas J. Leney, director of small and veteran business programs at VA.
But The Post found that VA officials do not examine the size of the firms receiving the agency’s endorsement. Instead, the officials generally accept company claims.
“We’re believing people are operating in good faith,” Leney said.
He said VA and other federal agencies do not have sufficient numbers of contracting workers to check companies closely. “I’m not sure every contracting officer spends a great deal on due diligence,” he said.
Leney acknowledged that the large MicroTech deals — and those with several other small firms owned by service-disabled veterans — limited the money that could have gone to other small disabled-veteran firms. But he said VA had to balance the need for efficiencies through large contracts against the need to spread the money around. “It is a conscious trade-off the government decided to make,” he said.
John Shoraka, SBA associate administrator for government contracting and business development, said that agencies generally are allowed to rely on contractors’ reports but that in this case VA should have verified MicroTech’s size.
“Where one agency has awarded a particular firm several hundred million dollars in contracts over two or three years, that agency should realize that the firm may not qualify as small under a $25.0 million size standard and should protest the firm’s size in connection with a new contract,” Shoraka said in a statement.
Dan Keating, Andras Petho and Alice Crites contributed to this report. Petho is an investigative journalist from Hungary who is reporting under the Hubert H. Humphrey Fellowship Program.