AllBusiness.com Business Intelligence column

Jul 10, 2008 (AllBusiness.com - McClatchy-Tribune Information Services via COMTEX) -- SBCO | Quote | Chart | News | PowerRating -- SBA NEEDS TO CLEAN UP ACT ON SMALL BUSINESS CONTRACTING: A new study has found that small business contracts are still a cookie jar for Fortune 500 companies. In this struggling economy, the Small Business Administration needs to clean up its act once and for all.

Of all the problems facing the Small Business Administration, one of its largest responsibilities -- overseeing the award of $100 billion in government contracts every year -- has been its most persistent and controversial.

Outgoing SBA Administrator Steven Preston has said repeatedly that the problem is under control. He's even gone so far as to call it a myth. But another new government report has discovered just the opposite. It found that some of the nation's top Fortune 500 companies, from Home Depot and John Deere to Weyerhaeuser and Waste Management, raked in millions of dollars in government small business contracts over the past two years.

The just-released report was surprising in two respects. First, its conclusions were unequivocal; it placed a large part of the blame on contracting officers who "consistently" failed to verify business size. Second, the investigation was conducted, not by the SBA, but by the Department of the Interior's Office of Inspector General. "This is just a small agency. Can you imagine what is going on at the defense department?" said Lloyd Chapman, the founder and president of the American Small Business League (ASBL) in an interview with Allbusiness.com. Chapman is well known at the SBA. He's been waging a five-year campaign to bring attention to the misdirection of as much as $100 billion a year by his estimates from Main Street businesses to Wall Street behemoths.

"Of the approximately $1.6 billion Interior reported as awarded to small businesses in fiscal year 2007, approximately $1.03 million, or 0.06 percent, was actually awarded to large businesses. The discrepancy appears to have been the result of incorrect coding, data-entry mistakes, or insufficient verification of the business size. We are working to correct these issues," said Deputy Secretary of the Interior Lynn Scarlett.

The SBA said in a statement that the amount was "miniscule." The ongoing contracting scandal is just one more example of "cookie jar capitalism" at the SBA. While well-known corporations provided the most glaring examples of abuse, small business contracts are a virtual gravy train of government funding for federal, state, and local government agencies and major universities, the report found. The General Accountability Office first uncovered the diversion of federal small business contracts to Fortune 500 corporations in 2002. Since then, a dozen federal investigations have found that Fortune 500 firms and other large corporations were dipping their hands into the cookie jar. Despite the series of federal investigations and more than 400 stories in the news media since 2002, says Chapman, no legislation has been passed to address the problem.

During that time, his organization has sued the SBA five times to uncover the names of corporations receiving small business contracts. The SBA has consistently refused to provide them, even though taxpayer funds are at issue. Needless to say, the ASBL has won every case. Shortly after taking office, Preston removed all information from the government's Central Contractor Registration (CCR) database that could be used to determine a firm's size. By law, a business must have fewer than 500 employees to be considered small. Private organizations, such as Eagle Eye Publishers, used the data to make independent assessments to determine whether the SBA is meeting its congressionally mandated goal; 23 percent of all government contracts must be awarded to small businesses.

Not surprisingly, the agency has repeatedly failed to hit that target. And on the occasions that it claimed it did, it was later discovered that billions of dollars in contracts actually ended up in the hands of large companies. In 2004, for example, Eagle Eye was hired to examine small business contract awards in FY2002. It found that 44 major corporations had received more than $2 billion from the government under the contracting program.

Over the past five years, the SBA, the Interior Department, the GAO, and the federal Office of Management and Budget have conducted 11 separate investigations into small business contracting, and all have concluded the same thing: The program is riddled with problems that allow large corporations and other entities to take advantage of the system. Chapman says he has found reports identifying the same problems going back as far as 1995.

The question is why hasn't the government done more to correct the problems? Even Chapman has no ready answer. He believes it could require an investigation by the FBI to get to the real answer. But one thing is certain: The problems have grown worse during the Bush administration, says Chapman. As a lifelong Republican, that's a hard thing for him to say. For the first time in his life, he has endorsed a Democrat, Barack Obama, for president.

"We contacted all three campaigns to make them aware of it," he says. "The Clinton and McCain campaigns blew us off. Obama called us back and issued a press release, saying it's time to stop the diversion of small business contracts to large businesses. He may be the best president for small businesses in 20 or 30 years. In fact, he may be the first pro-small business president in my lifetime."

When Congress passed the Small Business Act in the 1950s, it clearly laid out its goals. The mandate included aiding, counseling, and protecting the interest of small businesses and ensuring that "a fair portion of the total purchases and contracts or subcontracts for property and services for the government ... be placed with small businesses."

When the economy is struggling, the nation's 23 million small businesses have traditionally been the catalyst that creates jobs and reignites growth. One of the best ways for the new administration to make sure they play that role again is to reinvigorate the SBA and refocus it on its original mission: aiding and assisting small businesses -- real ones, that is.

Visit AllBusiness.com to read more of Keith Girard's Business Intelligence columns. AllBusiness.com provides practical information and services for business professionals and growing businesses.

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