Public Citizen Report: Federal Data on Small Business Share of Procurement Is Inflated

Claims in recent years by the U.S. Small Business Administration (SBA) that the government has met or nearly met a requirement to make 23 percent of its purchases from small businesses are misleading and rely on methodologies that conflict with federal law and regulations, according to a new Public Citizen report.

For example, in 2013, seven of the 10 largest federal contractors received at least one contract that the SBA counted toward fulfillment of small business goals, according to the report "Sleighted: 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." The release of the report coincides with National Small Business Week, which President Barack Obama proclaimed is designed to celebrate America's small businesses, which he called the backbone of the economy.

In the report, Public Citizen notes several political factors that could motivating a bias toward large businesses in contracting and inhibiting outcry from members of Congress. These include the vast number of jobs that large defense contractors provide to members' constituents; defense contractors' lucrative employment opportunities to former military officials; contractors' significant political campaign contributions and lobbying expenditures; and, potentially, influence garnered through undisclosed contributions contractors make to nonprofit groups that engage in electioneering activities.

Public Citizen and others are encouraging Obama to issue an executive order requiring government contractors to disclose political spending made via third-party groups. "This report shows that the deck is already stacked in favor of large contractors," said Lisa Gilbert. "At a minimum, we should know if contractors are using secret purse strings to line up even more advantages."

SBA administrator Maria Contreras-Sweet said in congressional testimony in 2014 that contracts held by very large businesses could permissibly count toward small business goals because of a rule allowing small businesses that are acquired by large business to have their small business status "grandfathered in" for up to five years.

In response to questions from Public Citizen that cited applicable federal regulations, a spokeswoman for the SBA acknowledged to Public Citizen last week that "in the case of a merger or acquisition, the agency should be notified within 30 days and the small business credit should be discontinued."

Aside from counting contracts with large businesses toward small business goals, the SBA's data create an inflated impression of the government's percentage of purchases from small businesses by excluding whole categories of procurement from its calculations. This methodology conflicts with the Small Business Act's stipulation that procurement from small businesses shall be "not less than 23 percent of the total value of all prime contracts" issued by the federal government.

"This program is vital because small businesses are better job creators and more engaged in their local economies," said David Levine, CEO of the American Sustainable Business Council. "More effective implementation and oversight will deliver many times over the return on investment in job growth as well as community revitalization."

Many observers have leveled allegations over the years that the government has failed to adequately police its small business contracting programs:

• Every year since fiscal year 2006, the SBA's office of inspector general has listed procurement flaws that "allow large firms to obtain small business awards" as the first item in its annual enumeration of challenges facing the SBA.
• Large businesses received $13.8 billion out of $50 billion (or nearly 28 percent) in procurement that was categorized as going to small businesses in 2001, the U.S. General Accounting Office (now called the Government Accountability Office) reported.
• Of the 100 contractors receiving the most federal dollars counted toward small business goals in 2012, 71 did not meet the government's standard to qualify as small businesses, according to the American Small Business League, a Petaluma-Calif.-based watchdog group. The ASBL report concluded that these 71 businesses received 56 percent of procurement payments to the top 100 purported small business contractors.

The government also sets goals and requirements regarding subcontracting (as opposed to prime contracting) to small businesses. Public Citizen's report describes numerous oddities relating to supposedly experimental program begun in 1990 that exempted some particularly large defense contractors from requirements to report on subcontracting efforts on a contract-by-contract basis. Congress billed the program as a method to expand small businesses' subcontracting opportunities. But in the quarter century since, the Pentagon never has issued results on the program, despite numerous requirements that it do so.