Government Contracting and Small Businesses

Carol D. Leonnig
Washington Post Government Accountability Reporter
Wednesday, October 22, 2008 2:00 PM

Washington Post government accountability reporter Carol D. Leonnig was online Wednesday, Oct. 22 at 2 p.m. ET to discuss problems with the government's measurements of its contracting work with small businesses.

The transcript follows.


Bethesda, Md.: I recall that the Small Business Administration hired a new administrator who was supposed to help clean up some of the mess there, but that he has now moved on to Housing and Urban Development. He seemed to be more of a technocrat than a loyal Bushie, but are things any better as a result of his efforts, or is it same old/same old?

Carol D. Leonnig: Welcome everyone, and good afternoon. I'm Carol Leonnig, and I work on The Washington Post's National desk doing enterprise and investigative work looking at federal agencies. I'm interested to hear your questions on small-business contracting by the federal government, so let's get started.

This first question is about Steve Preston, who used to lead SBA, and was asked by the president to lead HUD earlier this year when a somewhat disgraced HUD secretary was pressured to resign his post amid a criminal investigation and contracting scandal at HUD.

Preston got high marks from his staff at SBA, and from the White House. Some small businesses had mixed reviews on his ability to clean up the errors in agencies' reports of how much work they did with small firms.


Marriottsville, Md.: Hello Ms. Leonnig. I am looking to start an engineering consulting company in the next 12 months. I will be sole proprietor and initially it will be just me, but as I look at work to be bid, I may need to bring temporary help on board. How will the SBA loans work for someone like me needing money for start-up materials, printer, computer, paper for cards, brochures, etc.?

Carol D. Leonnig: This is really outside my expertise, so I would recommend that you tap into the Small Business Administration's office of advocacy. They have a very good Web site on the loans, as well as shared information and advice on starting up.


Washington: The Defense Industrial Initiatives Group at CSIS has been looking at some of these issues from the service-contracting side for about four years. Given the range of errors we've seen in the FPDS, your findings seem quite sound and add a lot to the discussion. I'm curious whether you looked at the issue of small-business set-asides. We're adding some information on that to the next version of our free report, and the issue becomes much more serious if large companies are not just being called small businesses but are getting contracts specifically set aside for small businesses. Thanks again, and good work.

Carol D. Leonnig: Great question. For this specific article, The Post focused on the prime contracts and whether agencies really were meeting the goal or overstating. Obviously, we only skimmed the surface, and found a surprising amount of glaring errors -- some of which an average taxpayer without any small business knowledge could spot as a mistake. However, what I heard over and over again in my reporting was that many parts of the contracting stats were skewed and overstated -- and that small businesses feel very much cast aside and outmuscled -- in both prime contracts and subcontracting. We will do more reporting on set-asides, but again, what we hear from critics of that system is that there are two problems: First, firms with connections get the work, and second, some firms assert they are small or disadvantaged, but no one really is checking.


Denver: Does an 80-person woman-owned company qualify for different treatment?

Carol D. Leonnig: This is one of those fascinating things about our federal government. There is no one-size-fits-all definition for a small business. It all depends on the category of work you are competing to perform.

An 80-employee women-owned business could have an advantage in competing for some work, and could get preferences in bidding on work that is explicitly tailored for small, minority and disadvantaged businesses. These programs provide some chance for small firms -- including those owned by women, African Americans, veterans and the disabled -- to compete with each other for work, rather than with megacorporations.


Anonymous: Given the bleeding and misuse of money in the Iraq and Afghanistan wars and Katrina aftermath, why do you think nothing has been done to track government spending? Do you feel it is incompetence, or outright corruption?

Carol D. Leonnig: I hear you on federal spendingm, and maybe that's what has small-business owners so up in arms -- federal expenditures and contracting are going through the roof in the last four years, but the piece of the pie provided to small businesses actually is falling as a percentage.

As for whether this is incompetence or fraud, as a reporter I stick with what I know from documents and sources who clearly know. At this point, all I can say is that every federal agency we scrutinized is making multimillion-dollar errors in crediting themselves with doing work with small businesses. Some of the errors are so obvious that it raises questions about how those agencies could make such a clear-cut mistake.

Electric Boat is one of my favorite examples. How can the Pentagon and the Navy not know that this company, a submarine builder for a century and now a division of General Dynamics, is not a small business? Yet that's what they claimed.


Kansas City, Mo.: The article notes that the SBA lacks the staff and the clout to effectively monitor awards to small businesses. The current acting SBA Administrator is the wrong person for the job. He previously headed the Commerce Department's Economic Development Administration, has no record advocating for or working with small businesses, and spent time at the agency reducing agency staff, refusing badly needed additional financial and human capital resources, failing to standardize agency operations, and failing to formulate a strategic plan to efficiently and effectively lead the agency.

Carol D. Leonnig: SBA's staff has been one of the hardest hit in budgets during this administration. The Government Accountability Office just reported that the SBA staff has dropped roughly 26 percent since President Bush's first term.

Today, acting SBA administration said he was committed to making sure errors in small-business contracting were fixed, but said he hadn't had time in his short tenure to assess whether more staff need to be put on that particular task.


Tucson, Ariz.: These small business errors seem to be an ongoing theme of incompetence, poor work performance and no accountability on the part of government agencies/employees. Anyone working in the private sector with these job performances would be fired. What can the ordinary citizen do to shape up the government? Are there citizen oversight committees or organizations in existence to join? Is there an Internet site(s) for improving the transparency of these agencies?

Carol D. Leonnig: One element of this reporting that I found pretty fascinating was that there are no penalties for making these enormous errors. Today at a press conference, another reporter asked the acting SBA administrator why the SBA couldn't find these problems if a House subcommittee staff could (a few years ago) and if a Washington Post reporter did now. The question was never really answered.

But what my sources in government tell me is that SBA has very little clout, and that the only people who can make this a priority are the White House and the Office of Management and Budget. OMB issued an order last year that agencies had to ensure their data for Fiscal Year 2007 was correct. Yet the agencies missed the governmentwide goal again this year, and there appears to be no penalty.

As for citizens getting involved, there are both House and Senate subcommittees on small business that are very active on this issue, chaired by Nydia Velazquez and John Kerry, respectively.


Seattle: I initially started my career working for a defense contractor in Northern Virginia. It was considered a small business under some of the agencies. At the time it was getting close to a line with employees, so it spun off one division as a stand-alone company. The company was in essence a subsidiary of SAIC, when you consider that it owned at the time about 25 percent of the internal company stock.

What I noticed with contracting -- and you really didn't address this specifically for a layman in the article -- is that some small businesses are fronts for large businesses. For example a contract is awarded to a small business under the definition, they retain 51 percent of the contract, but then subcontract the other 49 percent of the contract to the larger companies.

At the company I was working for, a contract was awarded to my company but then the subcontractors on the contract consisted of people from Raytheon, SAIC, Johns Hopkins and a few other large companies. I can understand the problem with the government if they do not have an up-to-date list of what companies are really owned by what companies -- many defense contractors are partly or entirely owned by large parent companies such as SAIC or Lockheed. I am also willing to bet that the government employees trying to verify the company status will call the company to ask them, trying to trust them.

Carol D. Leonnig: Great comment. I have heard this often in my reporting, and find it an area very much worth pursuing. Some fronts are very easy to prove; others are more complicated because they involve corporate insiders. I'd be happy to talk to you in person or on the phone about your ideas.


Washington: What steps, specifically, are being taken by the SBA to rectify the problem and to renew integrity? Is there any hope that this issue will go away?

Carol D. Leonnig: Honestly, let's be practical -- nobody at SBA is going to say this at a press conference, but we are in the final hours of the Bush administration. The only way this will be resolved is if the next administration, whichever that may be, makes fixing this a priority.

Small business owners argue to me that nobody is fixing this problem because the big corporations are happy getting the bulk of the work, and the political appointees are just happy that the big corporations (also big donors) are happy.

The small businesses certainly have less power in this Washington power grid. Some have banded together to make their case.

And as the economy continues to falter into recession, small businesses may have a better argument that doing work with them will help restore and grow jobs.


Washington: Carol, thank you so much for your article on the government not doing as much business with small businesses. I am a certified woman-owned small-business on the GSA schedule, specializing in temporary placement of contract attorneys, paralegals, law clerks, technology and executive management people in law firms, legal departments in corporations and legal departments within the government.

The process of getting on the GSA schedule is a lengthy one (three years). After we were approved, we tried numerous times to do business with the Anti-Trust Division of the Department of Justice and other divisions of Justice, only to see CACI get the business. This happened with Lockheed Martin as well. We would love to get more of the contracts directly with Justice without subcontracting with CACI or Lockheed. We also would like to directly contract with other legal departments within the government. How can this be done?

Carol D. Leonnig: I don't know the answer, in all candor. It sounds like you've run the traps you were supposed to. Without knowing more about the specific contracts of work or the bidding details, it's hard to know whether there was something inappropriate about other large contractors being chosen to win the work.

If you think there's something fishy, you could head to the SBA's Inspector General for their take. If you just want to better-position yourself, I would recommend the SBA's small-biz advocacy office.


Alexandria, Va.: Carol, I work with a number of small businesses and was happy to see your article today. I know this issue has been growing for the past several years and am glad you are on top of it. I wanted to let you know that this is only the tip of the iceberg, because large corporations already have found another loophole. Large businesses basically are partnering with small businesses -- and I use that word very loosely.

The small business bids on the contract and wins it, but it's the large corporation that does all the work, including writing the proposal. Some don't even hide it. For example, on a small-business Web site they may say that if you want to order from commercial accounts click on their logo, but if you are a government customer click on the logo of the large corporation. I would love to talk with you about this issue as well as it plays into the same issue you wrote about today -- large businesses are taking more and more contracts from legitimate small businesses.

Carol D. Leonnig: Another great area of inquiry, and one I've heard mentioned before. I'd like to hear your thoughts.

Please feel free to call me at the National Desk, 202-334-7410, and ask them to connect you to Carol Leonnig.


Washington: Hello Carol -- thanks for your expertise on this. In a related subject, what are your thoughts about efforts in Congress to loosen the criteria for qualifying as a small business? Specifically I'm referring to allowing small firms that are owned up to 99 percent by two or more venture capital firms to meet small-business eligibility requirements.

Carol D. Leonnig: A very interesting issue, and one being scrutinized by SBA and several agencies' inspectors general. I contacted a venture capital firm about a few dozen firms it owned that were listed as small businesses by agencies, when the owner was enormous, raising questions about whether its subs could compete properly for work as small businesses. I still don't have a firm answer.


Washington: In the article you mention the American Small Business League ... how representative is this organization of small businesses in the U.S., and why is its voice not heard more often -- and more loudly -- on the issues you raise?

Carol D. Leonnig: I'd like to give a tip of the hat to The American Small Business League, which definitely has shone a light on this problem for years and which is like a junkyard dog on the subject. It, and leader Lloyd Chapman, will not give up.

That said, I think at times the organization has been viewed as so strident in its arguments that it has turned off some of its adversaries, and even some of its potential allies. That's not my field of expertise, but I've picked up on that vibe in reporting on this relatively small community of folks who work in small business contracting.

Still, at the core, despite the strong language and the as-yet unproven allegations of widespread government fraud, the league's complaints about the U.S. government overstating small businesses' share of federal work have been validated time and again by independent reporting.


Virginia: Why did the SBA removed the Handicapped Loan Program in the 1980s? There is nothing now for people with disabilities. Thanks.

Carol D. Leonnig: I'm so sorry -- I know nothing about this loan program. I wish I could help you, but I can recommend you call SBA directly with that question. SBA Answer Desk: 1-800-U-ASK-SBA ( 1-800-827-5722 ).


Chantilly, Va.: How does one go about requesting price considerations on contracts/requests for proposals that a SDB/Hub-zone company is entitled to? I know that if a hub-zone business is competing with another small or large business, the contracting officer has to give some price considerations to Hub-Zone company, up to 8 percent, but how does one request that without upsetting the contracting officer/evaluator of the bid?

Carol D. Leonnig: This is a good question for one of the many associations that advocate for small, disadvantaged businesses and Hub-zone firms. It seems like a delicate dance, so someone in that field would be much better at giving advice.


Washington: Any thoughts on who would be appointed SBA administrator under an Obama or McCain administration?

Carol D. Leonnig: We've been doing some reporting here at The Post about the transition teams for Obama and McCain camps, and their first priority is naming top-flight economics advisers for this enormous bailout of Wall Street firms, banks and mortgage institutions. Possible SBA names are being bandied around, but I have no confirmed intelligence for you at this point.

Also, one of the operating theories is that a McCain administration would keep on deck some of those political appointees who worked in the Bush administration, so there would be less changeover.


Washington: Thanks for a great article, Carol. I'm on your side on this issue, but looking solely at the numbers ($5 billion out of $89 billion in contracts erroneously reported) seems to put things in proportion; I mean, $5 billion is a lot of money, but it's still only about 6 percent of the total contracts. Shouldn't government agencies get a 6 percent margin of error?

Carol D. Leonnig: Point taken. And that's word for word the point that acting administrator Sandy Baruah made today in a press conference about the errors. In the best case scenario, that makes sense.

But what small businesses argue is that The Post identified $5 billion in errors while only looking at a small sample ($13 billion of the $89 billion) of contracts that agencies claimed went to small firms. So we really don't know what the true error rate is yet.


Carol D. Leonnig: Well, thanks everyone. Back to writing for the next day's paper. Your questions were great, and feel free to stay in touch when you have suggestions about contracting and small business reporting and how our federal agencies are doing in hiring firms for government services.


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