Big businesses winning contracts meant for small ones, groups charge

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By V. Dion Haynes
Washington Post Staff Writer
Monday, April 12, 2010

A new skirmish is emerging in an ugly, ongoing dispute between small business advocates and the federal government over its past -- and perhaps continuing -- practice of awarding small business contracts to Fortune 500 companies.

The American Small Business League in a lawsuit is accusing the General Services Administration of destroying information in a database that could help advocates trace the violations, and the league has asked a federal court in Northern California to force the government to restore the data, which spans 10 years, and to make the information public. A federal judge is set to decide on the request for a preliminary injunction by the end of April.

For years, the Petaluma, Calif.-based organization, which represents 100,000 businesses seeking federal contracts, has tried to hold the government accountable for federal regulations that require 23 percent of its contracts to be set aside for small businesses. The government has never met that goal, small business advocates say. Instead, many contracts have been awarded to companies such as Falls Church-based General Dynamics, Xerox and General Electric, advocates say, withholding billions of dollars annually from small businesses.

"I believe $10 billion a month in federal contracts that by law should be going to small businesses are actually going to Fortune 500 firms and to some of the biggest companies around the world," said Lloyd Chapman, president of the ASBL.

"It's devastating to small businesses," Chapman said, adding that he's talked with several that have closed because they couldn't get contracts.

A spokeswoman for the GSA said her agency could not comment on the lawsuit.

At issue is whether large businesses deliberately defrauded the government and should be punished, as the advocates argue. The Small Business Administration denied that the contracts went to large companies intentionally. A spokesman said the awards resulted from a number of problems: companies mistakenly applying for contracts because they were unaware of the complex guidelines of what constitutes a small business; data entry errors; and agencies failing to update records after large companies, including General Dynamics, bought small businesses that earlier had received contracts.

"In nearly all the cases, it's a data integrity issue, not awarding the contract falsely," said SBA spokesman Jonathan Swain. "The integrity of this data is a top priority" for SBA Administrator Karen Mills.

The dispute centers on the government's move last month to drop a field from its database that captured companies that identified themselves as small businesses. Advocates say they used that field to determine whether large companies had illegally misidentified themselves as small businesses to get the contracts. Companies that falsely represent themselves are subject to fines of up to $500,000 or a prison term of up to 10 years, though the government has rarely if ever imposed the penalties, advocates say.

A study issued by the SBA's inspector general in February said 11 of 36 contracts it sampled were awarded to businesses reported "as small, but the contract file reflected that they were other than small."

"We really don't know how much business we're looking at" that was lost, said Fred Valerino Sr., director and founder of Pevco, a 70-employee Baltimore company that sells pneumatic tubes, similar to the devices used in drive-through bank windows, that allow government hospitals to send items from one end of their building to another.

Valerino said government audits show that his competitor, a Swiss multinational corporation, received 147 sole-source contracts from the government that were destined for small businesses. "All we're looking for is a fair share of the industry," he added.

Last year, the SBA reported that the government had set a record in 2008 awarding federal contracts to small businesses. However, it said only 21.5 percent of the contracts went to these firms, still below the 23 percent requirement. Advocacy groups such as the National Association of Small Business Contractors said the shortfall represented $30 billion in lost revenue to the firms.

Swain of the SBA in part faulted an overwhelming crush of contracting transactions -- 8 million -- that government officials oversee each year. He said the government is training contracting officers to look for errors and increase quality control.

"We are periodically running anomaly reports to identify any contracts that are coded as having gone to a small business that might look questionable," Swain said. "We're sending those reports to the procurement officer in the agency that specifically awarded the contract to reconfirm the data."


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