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Squeezed Out?

Is there any room left for small businesses in federal contracting?

With the Bush administration opening 850,000 government jobs to private bidding and the Department of Homeland Security getting off the ground, it's the best of times to be a federal contractor. Technology, engineering and outsourcing companies are expected to benefit from new government projects coming down the pike. "It's a good time for small businesses to get on award schedules," says Bruce Shirk, a government contracts attorney with law firm Powell, Goldstein, Frazer & Murphy LLP in Washington, DC.

Or is it the worst of times for small businesses? A recent report commissioned by the SBA's Office of Advocacy found that 51 percent of federal contracts awarded in 2001 were "bundled," meaning many individual contracts were grouped into one large contract. For the government, bundling increases efficiency and decreases administrative costs.

For small firms, however, bundling resulted in the loss of $13 billion in contracts in 2001, according to Eagle Eye Publishers Inc., the Fairfax, Virginia, research firm that conducted the study. And for the past two years, the government has failed to meet a Congressional mandate that requires it award 23 percent of contracts to small businesses (defined as those with fewer than 500 employees).

It doesn't help that behemoths in many industries--from IBM to Staples--are looking to federal contracts to boost sales in a soft economy. For large companies, there's "the great sucking sound of re-discovering the government," says John J. Pavlick, co-chair of the Homeland Security Practice at Venable LLP in Washington, DC.

It's hard for small businesses to compete, says Lloyd Chapman, an advocate for federal contracting reform and head of the Micro Computer Industry Suppliers Association, a group working to create more federal contracting opportunities for small businesses. One problem is that government agencies are allowing huge companies to remain listed as small firms, and subsidiaries of industry giants are bidding on contracts as if they're independent small companies. "When an international or Fortune 1000 company misrepresents their status as a small business to land multimillion-dollar government contracts, that's not a loophole," Chapman says. "That's [federal] contracting fraud."

Small businesses "don't have a voice right now" in the lobbyist-heavy atmosphere that is federal contracting, says Sean Burke, 29, co-founder and president of Govplace, a 26-employee security and storage solution provider in Goleta, California. Burke estimates his company, which has annual sales of $14 million, loses at least one contract per quarter to large competitors--not a good trend given that his business is 100 percent government-based. Large companies compete with Govplace for $100,000 contracts that they never used to bid on, and he says government small-business liaison offices don't return his phone calls.

But not all entrepreneurs are feeling disenfranchised. "My experience has been positive," says Laura McCann, 39, founder and president of Zweave Inc., a seven-person New York City application service provider to the fashion industry. Zweave started in 2002 after receiving two Small Business Innovation Research (SBIR) contracts from the Department of Defense. The contracts are worth $1.5 million and come with funds worth another $1.5 million. The firm is working with the Army and the Air Force to research a 3-D method of obtaining accurate body sizing for military clothing.

McCann says the federal contracting process has always been difficult. But, she adds, "if you have an innovative approach to solving a problem, and [agencies] want to solve that problem, then you have as good a chance as anyone."

Shirk advises getting on the General Services Administration's contract lists and searching for subcontracting opportunities with large companies. Pay attention on the state and local levels, too, for homeland security projects.

The federal government is pursuing the bundling issue. The Bush administration has ordered federal procurement officers to decrease the number of bundled contracts, and the Office of Management and Budget is requiring government agencies to review acquisitions of $2 million to $7 million for "unnecessary and unjustified" bundling. Congress is investigating, and agencies will be publishing quarterly reports about their efforts to decrease bundling.

Will these changes make a difference for small businesses? "It's going to be better," Chapman says. For now, entrepreneurs "need to know the truth."

Chris Penttila is a Washington, DC-based freelance journalist who covers workplace issues on her blog, Workplacediva.blogspot.com.

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This article was originally published in the April 2003 print edition of Entrepreneur with the headline: Squeezed Out?.

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