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

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

Or is it the worst of times for small businesses? A recentreport commissioned by the SBA's Office of Advocacy found that51 percent of federal contracts awarded in 2001 were"bundled," meaning many individual contracts were groupedinto one large contract. For the government, bundling increasesefficiency and decreases administrative costs.

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

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

It's hard for small businesses to compete, says LloydChapman, an advocate for federal contracting reform and head of theMicro Computer Industry Suppliers Association, a group working tocreate more federal contracting opportunities for small businesses.One problem is that government agencies are allowing huge companiesto remain listed as small firms, and subsidiaries of industrygiants are bidding on contracts as if they're independent smallcompanies. "When an international or Fortune 1000 companymisrepresents their status as a small business to landmultimillion-dollar government contracts, that's not aloophole," Chapman says. "That's [federal]contracting fraud."

Small businesses "don't have a voice right now" inthe lobbyist-heavy atmosphere that is federal contracting, saysSean Burke, 29, co-founder and president of Govplace, a26-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 largecompetitors--not a good trend given that his business is 100percent government-based. Large companies compete with Govplace for$100,000 contracts that they never used to bid on, and he saysgovernment small-business liaison offices don't return hisphone calls.

But not all entrepreneurs are feeling disenfranchised. "Myexperience has been positive," says Laura McCann, 39, founderand president of Zweave Inc., a seven-person New York Cityapplication service provider to the fashion industry. Zweavestarted in 2002 after receiving two Small Business InnovationResearch (SBIR) contracts from the Department of Defense. Thecontracts are worth $1.5 million and come with funds worth another$1.5 million. The firm is working with the Army and the Air Forceto research a 3-D method of obtaining accurate body sizing formilitary clothing.

McCann says the federal contracting process has always beendifficult. But, she adds, "if you have an innovative approachto 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 ServicesAdministration's contract lists and searching forsubcontracting opportunities with large companies. Pay attention onthe state and local levels, too, for homeland securityprojects.

The federal government is pursuing the bundling issue. The Bushadministration has ordered federal procurement officers to decreasethe number of bundled contracts, and the Office of Management andBudget is requiring government agencies to review acquisitions of$2 million to $7 million for "unnecessary andunjustified" bundling. Congress is investigating, and agencieswill be publishing quarterly reports about their efforts todecrease 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."