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Accounting Tricks Create False Impression That Small Businesses Are Getting Their Share of Federal Procurement Money, and the Political Factors That Might Be at Play

By Taylor Lincoln

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The United States, with a procurement budget of about $460 billion in 2013, is the world’s biggest customer.

The massive amount of U.S. purchasing provides enormous opportunities for small businesses. These opportunities are bolstered by a longstanding U.S. policy calling for a certain share of federal procurement dollars (23 percent for prime contracts and 36 percent for subcontracts, at present) to go to small businesses.

In 2013, the government reported meeting its goal on prime contracts to small businesses (referring to those issued directly from the government to a business) for the first time in eight years. But the government’s purported success in 2013 (and near misses in previous years) relies on methodologies that present a false impression of the percentage of procurement that small businesses actually receive.

For example, the list of contracts the government counted toward meeting its small business contracting goals in 2013 included some held by the largest companies with which the government does business. In fact, the government counted at least one contract held by seven of the ten largest federal contractors toward meeting its small business goals in 2013.

Small Business Administration (SBA) Administrator Maria Contreras-Sweet in 2014 told lawmakers that some contracts held by large businesses were counted toward small business procurement goals because of a rule permitting small businesses acquired by large business to retain their small business status for up to five years. But this claim appears to be inaccurate. A federal regulation that took effect in 2007 requires contractors that are acquired to recertify their size almost immediately. Subsequent orders relating to contracts held by acquired businesses that no longer qualify as “small” may not be counted toward the government’s fulfillment of its small business goals.

There is an additional reason that calculations used by the SBA exaggerate the true share of procurement that small businesses receive: the calculations exclude whole swaths of procurement that the agency deems not to be small business “eligible.” This methodology does not appear to begrounded in law. As a report commissioned by the SBA’s Office of Advocacy observed in 2014, federal law includes an “unequivocal” mandate that 23 percent of all federal procurement go to small businesses.

Small businesses’ share of procurement also may be suffering due to a program that exempts some particularly large defense contractors from filing subcontracting reports for each contract they hold. This program, which permits contractors to submit company-wide goals and results, was begun in 1990 as a temporary experiment to see if it would help small businesses obtain subcontracts. A quarter of a century later, the Pentagon still categorizes this program as a “test.”The department never has released an analysis of the program’s results despite multiple demands –and even a statutory requirement – to do so. Still, Congress in 2014 reauthorized the program for two more years.

Elements of these anomalies and oddities have previously been reported in the media and by oversight agencies within government. Yet, with rare exceptions, there has been little outcry from lawmakers. This relative quiet is somewhat surprising because, in their rhetoric, members of Congress tend to afford exalted status to small businesses.

This paper will briefly put forth five political factors that might be tipping the contracting scales in favor of large businesses and inhibiting members of Congress from objecting more loudly to policies and practices that appear to be shortchanging small businesses.

These factors include the massive number of jobs that large contractors control; contractors’ prodigious rate of hiring former military officials; contractors’ significant lobbying activities; contractors’ significant campaign contributions; and, potentially, influence garnered through undisclosed, unregulated contributions that are made by contractors to third-party entities that engage in electioneering activities.