Twenty-three minority-owned companies, 10 of them in the Washington area, are about to lose the advantage of being disadvantaged.
The companies, members of a Small Business Administration program designed to help disadvantaged businesses, have become successful. They will graduate from the SBA on Feb. 15, whereupon they will have the chance to fail--or to succeed on their own.
It is a disquieting opportunity for many of the affected companies, whose progress largely stemmed from their access to noncompetitive federal contracts awarded under the SBA's $1.9 billion 8a Contracting and Business Development Program.
"It certainly means that I'll lose contracts next year," said Jerry Davis, president of Washington-based Unified Services Inc. "This graduation will slow my progress."
Davis' janitorial contracting firm is one of 342 8a companies in the Washington area handling a total of $306.6 million in federal contracts. Davis said his company is picking up "$5 million to $8 million" in annual revenues. That means the company collects $500,000 to $3.5 million too much to qualify as a small business under the SBA's size standards for janitorial enterprises.
That is one reason the SBA wants Unified Services and the other companies to graduate. A second is that the SBA believes too many of the companies have been, so to speak, living at home too long.
Unified Services, for example, has been on the 8a program rolls for at least nine years. Other companies, including some that have long surpassed their small-business size standards, have been on the program almost since its beginning in 1968.
Until the Reagan administration, there was little governmental pressure on 8a companies to break away. But President Reagan's fiscally austere approach has changed that. The problem, according to the affected companies, is that the change has been too fast and erratic.
"There aren't many firms I know of that want to, or expect to, stay on this program forever," said Raymond A. Mott, president of Washington-based Raven Systems & Research Inc., another member of the SBA Class of February 1983. But Mott said the government had promised to stick with the 8a companies "until they became viable."
"This program wasn't set up to say: 'You'll be gone in two or three years,' " Mott said. "The 8a program was set up to help you become a viable firm. But all of a sudden, they're changing the rules," said Mott, whose data-processing company of 11 years was born, and continues to be reared, on the 8a program.
SBA officials deny ever making any commitment to shelter 8a companies until they become "viable" -- which means "capable of working, functioning, or developing adequately," according to Webster's New Collegiate Dictionary.
"You can't go on forever supporting these companies, especially when you have a lot of firms on the outside waiting to get into the program," said Joseph Zellner, SBA spokesman for the 8a program. "We understand that it is certainly beneficial for some of these companies to stay on the program as long as possible. But there is no law that says you have to guarantee them success," he said.
Congress agreed with that thinking and, in October 1980, approved a law restricting the amount of time a company could spend on the 8a program. Nearly a year later, the SBA issued regulations setting a "fixed participation term" of a maximum of five years for new 8a companies. The same companies also would be eligible for a one-year extension of their terms under certain circumstances.
Companies already in the program were supposed to renegotiate their 8a standing with the SBA, setting a date for their departure from the program. Davis and Mott said they did that. But on May 1, 1981, then-SBA administrator Michael Cardenas announced that the agency immediately was kicking out all 8a companies that had income and staff levels exceeding SBA standards for small businesses, or that had performed too poorly to warrant further support.
Davis and Mott were in the successful category, dubbed "other-than-small" by the SBA. But they said the effect of the Cardenas announcement was devastating.
"I lost about $2 million worth of work," Davis said. "I let three management people and 150 workers go. I would have had about a year and a half to go with the SBA under the fixed-term agreement. But when Cardenas came out with his announcement, a lot of contractors canceled because they thought they could no longer do business with us."
Davis said he now has two 8a contracts, one with the Kennedy Center and another with the Federal Aviation Administration's air traffic control center in Leesburg, Va. He said his staff is down to about 800 people and that he has deferred plans to implement a middle-management development program.
Delays in developing strong middle management "will make it a little harder for us to compete with the big boys" who do hundreds of millions of dollars in annual sales in the janitorial services industry, Davis said.
Mott's company has grown from a five-member shop in 1971 to an organization with 385 employes in five cities. The company, which does data and word processing for the Environmental Protection Agency and other government and private clients, had $24.1 million in federal contracts and about $8 million in operating revenues last year.
Mott said his company lost "a considerable amount" of income since Cardenas' move. But he declined to say exactly how much. What bothers him, he said, echoing a complaint by other 8a presidents, is that Cardenas' announcement "came out of the blue."
"We had no idea that they were not going to keep the agreement on the fixed-participation term," which also would have given Raven at least another year to break from the 8a program, Mott said. He said the company could have used that time to beef up its diversification program, which includes an ambitious plan to provide data processing and computer maintenance services to foreign companies and governments.
Cardenas resigned his SBA post last February under charges of conflict of interest in the awarding of SBA contracts. But the volume of protest over his 8a graduation policy, which was based on a recommendation by the General Accounting Office, continued at high pitch.
Officials at the affected companies joined forces to lobby Congress, the SBA, and the White House. Some, such as Baltimore-based Atlantic Personnel Services, hired public relations firms to plead their case.
APS hired Washington-based Gray & Co., whose president, Robert Gray, was co-chairman of President Reagan's inaugural ceremonies. Gray officials downplayed the value of their Reagan link in representing APS, with one Gray official saying, "Our representation of APS has nothing to do with that."
APS was "being phased out of the SBA program, which was okay with them," said the Gray official, who declined to be identified. "But then, the SBA abruptly canceled" APS' contracts in apparent violation of the gradual phase-out agreement, he said. Gray is trying to "make contacts" and is doing other "routine work" in an effort to restore APS' phase-out plan, the public relations official said.
The administration last August offered the disgruntled graduates-to-be a compromise. It would permit the affected companies to delay their ouster from the program six months, a period ending Feb. 15. "It is not fair for any firm to participate in 8a for too many years," James C. Sanders, the new SBA administrator said in announcing the extension. "At the same time, fairness necessitates that there be an orderly transition from program participation into private competition."
Sanders said the extra six months would give targeted 8a companies time to complete the transition with minimal job losses. "It is not my decision that your employes be thrown to the unemployment rolls by an abrupt decision," he said. But he said some type of movement is necessary to make room in the 8a program for waiting companies. And SBA officials last week said they expect the graduation to take place on schedule.
According to SBA records, some 2,500 companies now participate in the 8a program. Nearly 10,000 others are either eligible or waiting to get in. But turnover is small.
For example, 167 companies left the 8a program in the first year, 1968. But since 1977, only 94 of the companies brought into the program left (65 in 1977, 26 in 1978, and three in 1979). No 8a company has left the program since 1980, according to SBA records.
Still, even within the SBA, 8a advocates argue that there is enough money around to bring in additional companies without dropping current program participants. "8a is a drop in the bucket, compared to what the government is doing for companies like Lockheed," one of these SBA officials said.
But, like some other federal programs, 8a has grown dramatically. The program awarded eight federal contracts valued at $10.5 million in 1968, compared with 4,538 contracts valued at $1.8 billion in 1981. More than $6 billion in 8a contracts have been awarded to minority-owned firms since the program began.
"The 8a program is the best thing that ever happened to minority business. . . . It would be a crime if the government ever destroyed it," said Mott, adding that his company plans "to thrive and survive, no matter what."
"I am in business today because of the 8a program," said Davis, who added that he is "not bitter" because his company soon will have to leave the program.
He said he had derived a certain amount of comfort from the program, "knowing that the government would give me a chance to handle a good contract if I did a good job."
Many private contractors and banks probably would not have given him that chance "because a lot of white people just aren't used to the idea of black people in business," Davis said. "Well, we've proved that we're capable and can do the work. Now, it's a matter of getting other people in private business to see that we have that capability."