From the May 2007 issue of Entrepreneur

Not since the Small Business Act in 1953 has small business gotten so much attention in Washington, DC. This time, focus is on the government's legal obligation to direct 23 percent of procurement dollars to small businesses. The scrutiny reveals a state of affairs that, like it or not, is changing profoundly.

The SBA says procurement meets its obligation to small business, and then some. Anthony Martoccia, the SBA's associate administrator for government contracting, points to SBA figures showing that in 2005 (the latest year for which data is available), small contractors received 25.4 percent, or $80 billion, of federal procurement. Plus, Martoccia says, prime contractors gave small businesses approximately $50 billion in subcontracts.

"The overall state of small-business government contracting is good," he says, "and we're working to make it better." Targets for improvement include contracts to HUBZone, women-owned, and service-disabled veteran-owned businesses. Although these programs miss statutory goals, Martoccia says, they are improving--women-owned businesses are up to 3.3 percent from 2.2 percent, HUBZones to nearly 2 percent from 0.75 percent, and veteran-owned businesses to 0.61 percent from 0.25 percent.

Some small-business advocates paint a much different picture. Congresswoman Nydia Velázquez, Democratic chair of the House Small Business Committee, said last summer that small businesses got only 21.9 percent of 2005 government procurements because contracts worth nearly $12 billion went to large companies masquerading as small ones. She called for a raft of changes, including eliminating both sides from a contract if they wrongfully obtained it.

Similar calls come from the likes of Raul Espinosa, president and CEO of FitNet, a small-business purchasing and consulting alliance in St. Augustine, Florida, and organizer of the Fairness in Set-Aside Procurement Coalition, a group of small-business procurement advocacy organizations. Espinosa blames intentional misconduct and misinterpretation by procurement officials and government end-users. He'd like repeat offenders to lose funding. "If you make end-users accountable," he says, "you will stop that practice." Espinosa also wants rules changed so that small businesses are awarded contracts given wrongly to big bidders.

Some observers in the controversy place blame on both sides. Small companies often fail to appreciate the complexities of government contracting, says Judy Bradt, an Alexandria, Virginia, consultant who helps businesses get government work. She encourages entrepreneurs to devote themselves to the task and focus on working within the regulations rather than assuming they should win contracts by virtue of being small. "You must invest the time [to] understand the government procedures," she says.

It's certain that more change is coming. The SBA has a plan emphasizing education for procurement officials, who don't know enough about newer programs such as those for veteran-owned businesses. And a new rule will go into effect in July that requires small contract winners to recertify the size of their firms after the fifth year of their contracts. "You're not going to see large companies in our database any longer," Martoccia promises. But he doubts decertifying will change the SBA's 25.4 percent claim by more than 1 percent or so.

There may be bad news, too. Martoccia says the SBA is considering new size definitions, so companies in some fields where small once meant $2.5 million to $20 million in sales will now be ruled small at up to $40 million in sales. A decision should be reached later this year.

Meanwhile, competition grows ever stiffer, Bradt says. In some areas such as IT, small bidders win fewer contracts than a few years ago. The war in Iraq also hurts, as the Department of Defense--which accounts for 60 percent of federal spending--emphasizes ever-larger procurements, many requiring a scale that rules out small suppliers.

Whether you like the state of the government's dealings with small business or deplore it, the changes already planned by the SBA mean a new world of procurement. Says Martoccia, "It's a culture change."