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Sizing Things Up

Under fire for giving too many contracts to big business, the SBA fights back.
October 1, 2005
URL: http://www.entrepreneur.com/article/79806

Depending on whom you talk to, Texas-born small-business advocate Lloyd Chapman is either a modern-day Cesar Chavez or a conspiracy theorist with a grudge. Either way, as the SBA has learned, he's become hard to ignore.

In late 2004, Chapman and his organization, the American Small Business League, spearheaded an investigation into a series of flaws in the SBA's contract procurement process, culminating in a lawsuit. Since the end of 2004, at least five reports from three different government agencies--the Government Accountability Office, the SBA Office of Advocacy and the SBA Office of the Inspector General--have noted irregularities in the SBA's system of awarding small-business contracts, prompted in part by Chapman's incessant lobbying. The agencies' findings allege complacency at best, borderline fraud at worst.

The ASBL complaint focused on the SBA's refusal to offer up a draft of a 2003 report that highlights serious discrepancies in the awarding of federal contracts. Chapman sued for the data, claiming the agency was hiding blatant contracting fraud by releasing only an edited version of the original document. The SBA initially appealed a judge's order to release the paper, but eventually acquiesced in June. The draft report, conducted by research firm Eagle Eye Inc., shows that in 2002, "$2 billion in contracts coded as small-business awards went to 39 firms designated as large businesses," and lists possible vendor fraud as one of the causes.

The SBA Office of Advocacy's John McDowell is quick to defend his department's actions. "There is nothing sensational about the draft as compared to the final product," McDowell says. "All our edits were designed to eliminate speculation and produce a quality report grounded in sound data."

Chapman points out, however, that none of the companies has ever been prosecuted for falsifying their claims, despite a provision in the Small Business Act that lists intentional misrepresentation as an offense punishable by up to 10 years in prison.

According to the SBA, no action has been taken against these companies because the mistakes were simple company coding errors, not unusual for a database containing thousands of names. The complexity of the SBA's Central Contractor Registration database system--which, until April of this year, relied on self-reporting--only serves to exacerbate the problem.

Furthermore, enforcement of size standards occurs only when a company's size classification is protested by a contracting officer, another bidder or the SBA itself. In 2002, the SBA processed 383 of these protests, of which 29 percent were dismissed on procedural grounds. Of the remaining cases, 85 firms were found to be misclassified.

Earlier this year, the Department of Energy was singled out after a GAO report showed it had vastly overestimated the number of contracts it was awarding to small businesses. Prompted by the findings, Sen. Olympia Snowe (R-Maine), chair of the Senate Committee on Small Business and Entrepreneurship, urged the DOE to work on fixing the problem. In response to pressure from the committee, the DOE agreed to better police itself.

For its part, the SBA is eager to assuage critics and spent the summer struggling to repair its image in the U.S. small-business community. It held a series of hearings to gauge sentiment on issues, the most important of which was its proposed size-standard changes. The SBA wants to switch to a standard based strictly on number of employees, abandoning the current mix of size- and revenue-based indicators.

But changing the standards may not be the answer. Paul Murphy, author of the original Eagle Eye report, says of the proposal, "Our analysis concludes that on average, the proposed revisions will harm the truly small and emerging businesses by reclassifying a group of larger contractors that exceed revenue standards but not the proposed new labor standards."

After holding a hearing in her home state of Maine, Snowe, too, urged caution: "Any reform of this system must be fair to businesses of every size, help them grow to become competitive in national and global markets, and give due regard to the unique circumstances of the industries in which they compete," Snowe said in a statement.

It's likely the discussions will carry on into 2006 before a compromise is reached.