The New York Times today broke a story that I first learned about nearly two years ago – that the federal government’s annual accounting of federal contracts going to “small businesses” is routinely overstated, with much of that money actually going to large corporations.
I stumbled onto the story while analyzing six years of Pentagon contracts for the Center for Public Integrity. I’d been tipped off to the practice by a Defense Department analyst who’d been working with the contract data for years. He told me – and I subsequently documented it in the records – that under the contracting rules, if a small business is bought by a larger one, the contract is still counted as going to small business.
In fact, the analyst told me, some large corporations intentionally seek out small businesses to acquire – after they’ve won Pentagon contracts thanks in part to their preferential status as a small business.
While I looked only at defense contractors, the Times report says – and I’m not at all surprised – to see that the practice also affects other federal departments.
Last year, at least $4.9 billion worth of contracts, coded as small business, went to 13 of the largest government contractors, according to a review by The New York Times of contracting data provided by Eagle Eye, a research firm based in Virginia.
"The S.B.A.’s handling of small business contracting is a mess," said Harry C. Alford, president and chief executive of the National Black Chamber of Commerce. "They know about this problem and yet it continues to happen. The agency is either unwilling or unable to deal with it."
Here’s how it works: for years, as a way of boosting small business, Congress has set informal quotas that a proportion of the federal government’s contracts – at least 23 percent – should be set aside for small businesses. Sounds like a good idea, and one very popular with small business constituents back home.
Because Congress is sensitive to the issue, every agency, from the Defense Department to the Small Business Administration itself, tries mightily to meet that quota and keep Congress off their back. To put it mildly, there’s little incentive for the agencies to make sure those small business set-asides are actually going to small businesses.
You might be surprised, by the way, to find out how the Small Business Administration defines “small.” The definition is based either on annual revenues or the number of employees, and it varies widely depending on the industry. (You can find the entire list on the SBA website.)
Farmers, for instance, qualify as small business if their annual revenue is less than $750,000. But a local trucking company could make as much as $23.5 million and still be defined as small. As for the number of employees, the standards range from under 100 employees (for wholesalers, for example), to as many as 1,500 employees for such businesses as phone companies and airlines.
Yet even by those standards – far higher than what most people would think of as “small businesses” – contractors have learned to game the system.
The poster child for the big-business vs. small-business problem is GTSI, a Northern Virginia firm that qualified as a “small” business with under 500 employees when it won a 10-year contract in 1996. It has since grown substantially larger, but under federal rules that contract will continue to be classified as going to small business for the entire 10 years. (Between 1996 and 2003 GTSI won $1.6 billion in defense contracts alone. Not bad for a “small business.”)
A GTSI spokesman, quoted by the Times, responded that “We don’t make the rules, we just follow them.”
Over the next few months we’ll be seeing a lot more light shined on the business of government contracting. The non-profit research group OMB Watch is currently preparing a new online database of government contracts that will be searchable by anyone. A Sunlight Foundation grant is providing the money and OMB Watch is adding the expertise and database design. Watch for it this fall.