A comparison of last year’s small business contracting numbers with (right) and without (left) the exclusions used by the federal government in its annual reports. (Source: Fedmine)

The federal government is required by law to try to direct nearly a quarter of all contracting dollars to small businesses, and every year since 2005, officials have reported missing the goal by the slimmest of margins.

But is it really that close?

A number of contractors and advocacy groups say the government has repeatedly inflated the share of contracting dollars awarded annually to small firms, masking serious problems in the procurement process that prevent small businesses from securing more government work.

In 1958, when Congress created the Small Business Administration, it tasked the agency with establishing an annual small-business contracting goal of “not less than 23 percent of the total value of all prime contract awards.”

This month, for the seventh year in a row, SBA officials reported that the government narrowly missed the goal, reporting that small firms received 22.25 percent (or $89.9 billion) of contracting dollars in fiscal year 2012 — better than 21.65 percent last year, but down from 22.7 percent in 2010.

In a blog post announcing the report, John Shoraka the agency’s associate administrator for government contracting, called the achievement “real progress” toward the goal.

However, the SBA’s calculations come with several caveats, in large part because the agency excludes certain contracts and entire agencies from its measure.

Officials do not take into consideration, for instance, any contract work for the Federal Aviation Administration, the Transportation Security Administration or the Central Intelligence Agency, nor do they account for any contracts for goods sold overseas or any work performed outside the United States.

In all, SBA officials have determined that about one-fifth of all federal contract spending is not “small-business eligible,” and so it excludes that portion from its calculations.

The portion includes spending by agencies that are not subject to certain federal acquisition regulations, and those that do not report into the Federal Procurement Data System, from which the SBA pulls its data, Skoraka said. Other exclusions have been made on the basis that those contracts do not lend themselves to competition by small firms.

Shoraka noted that the current list of exclusions was finalized during the second term of former president George W. Bush. The Obama administration elected to leave them in place in order to “compare apples to apples,” he said.

Critics argue that is not what Congress mandated.

“They are simply not following the letter of the law,” said Charles Tiefer, a professor of government contracting at the University of Baltimore Law School. “It states 23 percent of all contracts, and there is no reason to think Congress wanted some of these exclusions.”

Contracts out of reach for small businesses, he said, should be considered as part of the 77 percent of government spending available to large and international companies, rather than removed from the equation altogether. He pointed out that some of the excluded contracts, including intelligence gathering and work overseas, are areas in which government spending has surged in recent years.

The SBA’s Office of Inspector General has also urged the agency to discontinue some of its exclusions, particularly for contracts performed overseas. In an advisory memorandum from December 2011, the office cited a 2008 legal opinion issued by the SBA Office of General Counsel, which states it would be “a reasonable interpretation” of the law to assume the targets include contracts performed outside the country.

Congress has recently taken issue with the exclusions, too. In the 2013 National Defense Authorization Act, lawmakers ordered the SBA administrator to review the goal guidelines to ensure that the process “does not exclude categories of contracts” based on the types of goods or services solicited or, in some cases, whether the agency is subject to federal acquisition regulations.

The nuances of the government’s measurements can sometimes get lost in public discussions about contracting.

In Shoraka’s blog post announcing the government’s performance, he wrote that 22.25 percent represented the small business share of “all” federal contracting dollars last year.

After On Small Business asked about the language, given the exclusions to the calculations, officials updated the blog to read 22.25 percent “of all small business eligible contracts.”

Two studies show small-biz getting 19% of contracts

To get a sense of what effect the exclusions have on the numbers reported, On Small Business asked Fedmine, the data analysis firm that conducts the contracting calculations for the SBA, to crunch the numbers based on total federal contract spending reported into the FPDS, without any exclusions.

The revised calculations show that small businesses received less than 19 percent of all prime contracting dollars in 2012. In contrast to the progress cited by the SBA, that was actually down from the year before (20 percent).

The House Small Business Committee conducted its own analysis of last year’s federal data, eliminating many of the SBA’s exclusions. The committee also found that the small-business share of total federal contracting was around 19 percent.

“The administration shouldn’t be allowed to cook the books,” Committee Chairman Sam Graves (R-Mo.) said in a statement earlier this month.

Small-business advocates say the agency’s exclusions are not the only source of padding in the small-business contracting numbers. Of greater concern, they say, is the number of contracts labeled by the government as “small business” awards that actually go to large companies — a problem that has long plagued the federal government.

During his run for the presidency in 2008, then-Sen. Barack Obama emphasized small business, at one point saying that “it is time to end the diversion of federal small-business contracts to corporate giants.”

Nearly five years later, in her most recent management report, SBA Inspector General Peggy Gustafson said the agency’s top challenge is still that “procurement flaws allow large firms to obtain small-business awards and agencies to count contracts performed by large firms towards their small-business goals.”

Inspector general “audits and other governmental studies have shown widespread misreporting by procuring agencies since many contract awards that were reported as having gone to small firms have actually been performed by larger companies,” Gustafson wrote. “Most of the incorrect reporting results from errors made by government contracting personnel, including misapplication of small-business contracting rules.”

Shoraka says the agency has taken steps to stop the errant reporting. A few years ago, for example, officials began running a computerized “anomaly” process to identify red flags in the federal data system.

The program searches for conflicting reports, missing fields of information, and the names of Fortune 100 firms that were awarded small-business contracts. When potential errors are flagged, contracting agencies are asked to take a second look at their reports and fix any mistakes.

Some say the process does not appear to be working.

The American Small Business League, an advocacy group, combed through the Fedmine data following the SBA’s report earlier this month. In its analysis, the group found that more than half (57) of Fortune 100 companies or their subsidiaries won awards that were labeled in the federal data system as small-business contracts, including industry giants such as General Electric, Apple and Citigroup (the latter two declined to comment).

In one instance, General Dynamics, a defense contractor with roughly 80,000 employees based in Falls Church, received more than $230 million in small-business contracts in 2012 and roughly $2 billion in the five years prior, according to data from Fedmine.

In total, the largest 100 corporations in the country received nearly half a billion dollars in small-business contracts last year, according to ASBL.

General Dynamics spokesman Rob Doolittle directed attention to the SBA OIG report, which suggested most size-classification errors are the result of mistakes by federal contracting officials. He also noted that small firms acquired by a large company during the life of a contract are permitted to keep those contracts. However, the business is not required to ensure that the contract categorization is updated in the federal data system.

Sebastien Duchamp, a spokesman for General Electric, said the federal database sometimes erroneously shows the company as a small business, adding that the firm regularly reviews the data for errors and alerts contracting officers when necessary.

While Inspector General Gustafson suggests most of the problem stems from those types of reporting errors, some of it boils down to fraud.

In March, the chief executive of Arlington-based security contractor PSI pleaded guilty to major government fraud for allegedly operating a shell company, SAC, that shuffled more than $31 million in small-business set-asides to his much-larger company. Keith Hedman, the executive, was sentenced to six years in prison, and last month, the employee he tapped to run the front company was sentenced to four years.

One of the small-business set-aside contracts Hedman’s shell company won was for security services at Walter Reed Medical Center, edging out a competing bid by Davis-Paige Management Systems, a small service-disabled veteran-owned business in Annandale. Micheal Davis, the company’s chief executive, said his company spent around $100,000 chasing the contract and stood to gain around $11 million in revenue by winning.

When his firm lost to SAC, Davis said he was forced to let several employees go and move several others to part time.

“It takes work away from companies like ours that took the time to get the proper certifications to compete for these contracts,” Davis said in an interview, adding that the SAC case makes him wonder how many other “small” contractors are actually small.

An SBA OIG report to Congress last year documented several other examples of large firms that have been prosecuted for masquerading as small businesses to win contracts.

“It isn’t miscoding, it isn’t computer errors, it isn’t anomalies,” American Small Business League President Lloyd Chapman said. “These numbers are being inflated and misrepresented.”

Rules aren’t being followed

The elevated small-business contracting numbers help conceal a number of systemic problems in the federal procurement process, according to a former head of small-business contracting at the Defense Department.

“The real problems meeting these goals are tactical ones, down at the operations level, where contracts are being written and awarded,” said Daniel Gill, who headed the agency’s Office of Small Business Development under President Bill Clinton.

Gill, who now consults with government services firms and recently taught courses at the Defense Department’s acquisition training school for contracting officers, argued that the government does not need new regulations to meet its small-business contracting mandate. Instead, he said the goal would be “a piece of cake” if contracting officials in each agency simply adhered to existing procurement protocols.

“A lot of contracts are going to large business that should be going to small businesses, and it’s not just a matter of large businesses miscategorizing themselves,” Gill said. “It’s often that the proper set-aside determinations are not being made to reserve small contracts for small businesses.”

The most common example, he said, concerns long-standing regulations that require agencies to reserve all contracts worth between $3,000 and $150,000 for certified small businesses, unless the agency cannot identify two small businesses that can provide the product or service at a fair market price.

In the past few years, the Government Accountability Office has identified numerous instances in which federal officials either never did the market research to determine if small businesses were available to meet a contract’s requirements, or conducted the research, but failed to set aside those contracts for small businesses.

Phoenix Environmental Design, a small service-disabled veteran-owned firm in Plankinton, S.D., that provides pesticides and herbicides to the federal government, has filed more than 30 protests to the GAO in the past two years against agencies for faulty contracting practices. About half of them concerned contracts intended for small businesses that went to large corporations.

In every instance, the government has pulled back the award and solicited bids from small firms, according to the company’s owner, Chad Gill. What’s more, government documents show that the small firms that won the contacts the second time around routinely did so with a lower bid than the initial award to the large company.

“When we got them to do it right, and there is competition and accountability, it ends up costing the federal agency less money,” Gill said.

The problem, he said, is that many of the contracting officers he works with in various agencies do not understand the small-business set-aside process. He is not the only one who has made that observation.

In one of the GAO’s rulings last fall, General Counsel Lynn H. Gibson noted that the Veterans Administration, for instance, has repeatedly failed to set aside contracts reserved for small firms, later suggesting that contracting officers have demonstrated “a fundamental misunderstanding of the agency’s obligations” under contracting laws.

Charles Baker, who owns an electrical company that services the Defense Department, said his firm has suffered from similar contract classification errors. In many cases, he said, contracts that fall into the $3,000-to-$150,000 range are offered for general solicitation rather than reserved for small firms.

“The system is fundamentally broken, and it can destroy a small company like mine,” Baker, who owns MCB Lighting & Electric in Owings, Md., said. “There is no compliance with the laws, no enforcement.”

Maureen Schumann, a spokeswoman for the Defense Department, said Baker’s comment “clearly illustrates some of the frustrations felt by our industrial base” and that the agency is taking measures to “ensure that the right policies, procedures and programs are in place to increase contracting opportunities for small businesses.”

“We are constantly analyzing data and the [department] is using every available regulation to identify specific contracts that can be set aside for small businesses” Schumann said.

She noted that the department contracted with small businesses on 68 percent of contracts in the $3,000-to-$150,000 range last year, an increase from 2011.

An earlier version of this story misspelled John Shoraka’s name; it has been updated.

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