Senate inquiry finds big companies taking small business contracts

July 26, 2011
Senate inquiry finds big companies taking small business contracts
By David Goldstein | McClatchy Newspapers

WASHINGTON — Federal contracts intended for small business are being awarded to large corporations, according to a Senate inquiry.

They are being counted toward the congressionally mandated goal of ensuring that 23 percent of all federal contracts go to small businesses, the inquiry found.

"A system that should be helping small business is in fact doing little more than helping the government play a numbers game," said Sen. Claire McCaskill, D-Mo., chairman of the Homeland Security and Governmental Affairs contracting oversight subcommittee, which looked into the issue.

At a hearing Tuesday, McCaskill took note of the looming possibility that Washington could default next week on its bills and said, "This is a time for all of us to take a hard look at the way the government does business."

The subcommittee's investigation found that some contracts meant for small businesses go to large corporations because of a complex system of rules, loopholes and lax oversight.

The inquiry also suggested that possibly willful ignorance of regulations occurred, including those that require subsidiaries of large corporations to be counted as part of the parent operation and not as separate businesses.

Among the top 100 small business federal contractors last fiscal year, 61 were large firms — including major defense contractors such as Lockheed, Raytheon and General Electric — according to an analysis by the American Small Business League, a marketing group for small businesses around the country. The analysis is based on information from the Federal Procurement Data System.

The league has been critical of the government's efforts to attract small business contractors.

The subcommittee cited a situation involving the VSE Corp., a Virginia-based engineering company and defense contractor that had been a small business but has since grown into a $364 million operation with four subsidiaries, nearly 3,000 employees and $165 million in federal small business contracts last year.

The subcommittee's findings reflect a similar conclusion by the Office of Inspector General of the Small Business Administration. It has raised concerns about large businesses receiving contracts meant for smaller operations since 2006.

The SBA oversees efforts to spread federal contracts to the entire business sector. The program is similar to outreach attempts to businesses operated by women, veterans and other disadvantaged groups.

SBA regulations generally define a "small business" as one with no more than 500 employees and average annual earnings of $7 million for most non-manufacturing industries. But there are exceptions that have to do with certain industry categories and wholesale vs. retail operations.

Sen. Rob Portman, R-Ohio, the panel's ranking member, said the system had more than 1,000 different industrial codes, making it "incredibly complex to be certified as a small business."

Joseph Jordan, an SBA assistant administrator and contracting official, said businesses that were awarded contracts when they met the rules for being "small" can keep the jobs for the life of the contract, but are then no longer eligible.

"There are many legitimate reasons for a small business contract to look like it was awarded to a business that is other than small," Jordan said.

He defended SBA's oversight of the system and noted that the government was just shy of reaching the goal of 23 percent small business participation last year.

"Unless you're trying to pigeonhole these folks to boost your own numbers, I think it's as plain as the nose on your face that it doesn't make sense," McCaskill said. "This winds up actually harming small businesses, and people are getting fat and happy thinking their goals are being met."

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