U.S. Is Examining Government Contracts Meant for Small Firms

Responding to a request from Sen. Barbara Boxer (D-Calif.), the Justice Department is examining whether large companies are improperly obtaining government contracts that are supposed to be set aside for small businesses.

After receiving a letter in late September from Boxer, the U.S. attorney’s office in Washington assigned a lawyer to determine whether a formal investigation is warranted.

“In some matters, we decide right off the bat that this is not something that falls into our purview,” said Channing Phillips, a spokesman for the U.S. attorney’s office. “The fact that it’s been assigned should suggest that it’s more than just a cursory review.”

Boxer sent her letter after hearing concerns raised by a small-business advocate who heads a computer resellers group.

“With small businesses in California facing a difficult business environment, it is important that government contracts set aside for small businesses be made available to small businesses,” said Boxer in the letter. She asked the U.S. attorney’s office to determine whether “certain companies have falsely claimed to qualify as small businesses and won government contracts in violation of law.”

Under federal law, a firm can face “severe criminal penalties for knowingly misrepresenting” small-business status in connection with procurement programs, an SBA attorney said.

Small businesses have long complained that loopholes in federal law, sloppy government record keeping and, in some cases, outright fraud result in large corporations getting millions of dollars in federal contracts that Congress meant to go to small businesses.

Updating the Small Business Act, Congress in 1997 decided that federal agencies should strive to spend at least 23% of all federal procurement dollars with small businesses. But large firms often find ways to qualify for those set-asides.

By most any yardstick, Buhrmann Co. would count as a large company. One of the world’s leading suppliers of office products, the Amsterdam-based corporation employs 26,000 people in 28 countries and had 2001 revenue of about $10 billion.

Yet in the eyes of the U.S. government, Buhrmann subsidiary ASAP Software can declare itself a small business and win federal contracts accordingly.

“Our employee count is what qualifies us” as a small business, said Harry Zoberman, senior vice president of operations and marketing ASAP Software. The Buffalo Grove, Ill., unit of Buhrmann has 300 employees in the U.S. and an additional 200 workers around the world.

Though the rules can vary, many government contracts consider a company with 500 or fewer employees to be small.

Another company, GovConnection Inc., is listed on a federal database of small companies even though it is a subsidiary of Merrimack, N.H.-based PC Connection Inc.

GovConnection has about 180 employees. But its parent is a holding company with more than 1,300 employees and $1.18 billion in 2001 sales. Nearly $170 million came from federal contracts to GovConnection, the company said.

The Small Business Administration, which determines whether a business is small, sent a letter in July 2001 to PC Connection, saying the company and its wholly owned subsidiary, GovConnection, were too big to be included in the agency’s database of small businesses seeking federal contracts.

But as of last week, GovConnection still was listed in the SBA database as a small firm. Gary Sorkin, president of GovConnection, said he did not know why the SBA listing was still there.

The firm also retains its “small” status with the federal General Services Administration, which acts as a centralized government purchasing organization.

Under GSA rules, a firm awarded a government contract when it is small can retain that status for the life of the accord, no matter how large the company grows in the meantime.

Lloyd Chapman, who heads the Micro Computer Industry Suppliers Assn., the trade group that alerted Boxer to the issue, says the situation is absurd.

“I can’t think of anything that’s more unfair than forcing legitimate small business to compete with some of the largest companies in the world,” said Chapman, who added that his employer, a Novato, Calif.-based computer reseller, recently lost a $50,000-contract to GovConnection. “You’re cheating the legitimate small businesses out of the opportunity that Congress meant for them to have.”

In response to critics, the GSA plans to require firms to recertify that they are still small when their contracts come up for renewal, which at the most is every five years. Failure to do so could lead to exclusion from federal contracting, according to Boyd Rutherford, the GSA’s associate administrator for the office of enterprise development.

Rutherford said the Office of Management and Budget is looking at enacting similar changes for all federal agencies.

“When a lot of these programs were set up, they did not envision some of the long-term contracts that we have now,” he said.

Even with the increased government scrutiny of the problem, Chapman is skeptical that any substantive change will come soon. He has been trying to prompt reforms, he said, for 17 years.

“It’s heartbreaking to watch a legitimate small business go down the tubes trying to compete against these international companies and these Fortune 500 companies,” Chapman said. “This is not sour grapes. This is a system that needs to be changed.”