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Bigger isn't better for federal contracts

March 28, 2007|Cyndia Zwahlen | Special to The Times

The Small Business Administration is cracking down on the not-so-small.

Starting this summer, small businesses with federal contracts will -- for the first time -- have to alert the government whenever they are acquired, merged or buy a company if they want a share of the $80 billion in annual federal procurement money awarded to small firms.

It's a big issue across the nation including Southern California, where local small-business executives sometimes find themselves seething when they learn that small-business-oriented contracts are going to large companies.

The SBA came under attack last summer in a report by Democrats on the House Small Business Committee. It showed that hundreds of 2005 contracts tagged as being held by small companies were actually in the hands of some of the country's biggest corporations, including AT&T Inc., Home Depot Inc. and Northrop Grumman Corp.

The report partially blamed laws that allowed big companies to qualify if they had acquired small government contractors. It also cited contract coding errors that gave false impressions of a company's size.

Said SBA critic Lloyd Chapman: "How many more years do Fortune 100 companies get to be considered small businesses?" Chapman is founder and president of the Petaluma, Calif.-based American Small Business League, which aims to expose and end fraud and abuse in the federal small-business procurement system.

Joan Smay, owner of WEP Construction Inc. in Bell Gardens, knows the problem well. Her construction security firm has done work for the Federal Aviation Administration, among other government agencies.

When major Southland engineering and contraction firms team with small businesses, she said, "they can seriously keep me out of bidding."

Smay salutes the new SBA rule, but is skeptical about whether there will be any real enforcement efforts. The SBA, she said, is "taking small steps against great odds."

Ted Davis, president of IsComp Systems Inc. in Los Angeles, is just as dubious about the rules. "None of those rules have any teeth in them unless you have an [SBA] administrator who is willing to push to make sure the intent is there to do what the rule is put in place to do," the small-business executive said. "Very seldom is that what happens."

The local SBA chief is sympathetic to such concerns. "We know that there is some concern out there and we believe this is a way of addressing that issue," said Alberto G. Alvarado, district director of the SBA's Los Angeles District Office, which oversees Los Angeles, Ventura and Santa Barbara counties.

To ensure public confidence in the integrity of the procurement program, "it's incumbent on all of us in this field to make sure that these are not just hollow principles, that at the end of the day they are enforced," Alvarado said.

The new SBA rule, which kicks in June 30, is meant to prevent large firms from securing small-business contracts. It also is supposed to ensure that federal agencies, which must award 23% of their procurement dollars to small businesses, will not receive credit toward that goal for contracts held by big companies.

"We think it's a pretty tight rule," said Steven C. Preston, new head of the Small Business Administration. The SBA oversees small-business procurement in the federal marketplace, which totaled about $300 billion last year.

The SBA also plans this summer to roll out a small-business report card that will score federal agencies on how well they are achieving their small-business procurement goals.

Agencies' own data, which they have been asked to review for accuracy, will be used to rate them semiannually. Ratings will be partially based on how well each agency did in reaching out to groups within the small-business community, such as disabled veterans and women business owners, Preston said.

The SBA also is laying the groundwork to make federal procurement information more readily available to the public in a useful format.

"Every federal agency is responsible for their data but to make it public -- transparency -- is a strong motivator for accuracy and that's what we would like to do," Preston said.

The complaints are not new. "Our main concern is that small businesses get a fair shake in the government marketplace," said Colleen Preston, senior vice president of public policy for Contract Services Assn., a trade group based in Arlington, Va., that represents small and large government contractors.

Starting in July, a small business will have to recertify its size if it is acquired, merges with another company or buys another firm. Companies also would have to recertify at least every five years into a contract and whenever an option to continue the contract is exercised, which typically is yearly for a period of time after the original contract expires.

But a business would not have to recertify during the first five years of a contract if it grows beyond its small-size standard.

Agencies are not required to terminate contracts with small businesses if size standards are exceeded at recertification, but they could no longer count the contracts toward their small-business goals. For more information, visit the SBA's website at and click on "What's New."

Contracting practices are the focus of hearings by the House Small Business Committee this spring. The committee, led by Rep. Nydia M. Velazquez (D-N.Y.), expects to introduce legislation soon that will restructure contracting practices in the federal marketplace.

It's been a tough market for small-business owners to crack, said Ruben Guerra, chief executive of the Los Angeles-based Latin Business Assn. and owner of RG Packaging & Design, a retail packaging distributor in City of Commerce. He also owns RG Design & Construction, a Rosemead-based general contractor.

The new rule "will give them a little more motivation to be part of the process," he said.

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