Big Companies Get Small Business Contracts Thirty percent of Defense Department contract dollars reported as going to small businesses in the past six years ended up in the pockets of large contractors, the Center for Public Integrity reported. That usually happens because the larger company acquired the small one or because the small firm outgrew its size standard; under current regulations, if a business is awarded a contract while it is classified as small, the business is considered small for the life of the contract. Although a General Accounting Office report highlighted the same issues last year, this study is the first to document the dramatic impact of such loopholes in exaggerating the small business share of the defense market. Officials of the Defense Department, the Small Business Administration and the General Services Administration say they are moving to plug some of the loopholes. The Center for Public Integrity, a nonpartisan Washington watchdog group, examined 2.2 million DOD contract actions from 1998 through 2003 in one of the largest studies of defense contracting ever. In its Sept. 29 report, the Center said more than half of the top 100 defense contractors — 55 of them — received at least $10 million each in contracts with small business designations over the past six years. The small business contracts won by the largest defense firms totaled $9.3 billion. The Center said 189 companies were classified as small although they each won at least $100 million in Pentagon contracts over the six years. That total includes Native American and Alaska Native businesses; Congress has granted them eligibility for small-business preferences regardless of their size. Among the findings: •Titan Corp., the 34th largest defense contractor, has received more than half a billion dollars by acquiring smaller companies and continuing to win awards on their small business contracts. That is nearly one-fourth of Titan’s revenue from defense contracts during the six-year period. Since Titan acquired SenCom Corp. in 2000, it has received $176 million through awards on SenCom’s small business set-aside contracts. •L-3 Communications, which the Center found received $5.15 billion in contracts during 1998-2003, collected $582 million – 11% of its total – under small business classifications. The biggest reason was L-3’s 2001 acquisition of EER Systems, a small management and technical services company. •Engineered Support Systems Inc. won $1.57 billion in contracts over the six years; one-third of that came from contracts classified as going to small business, primarily through the company’s acquisition of the small firms Keco Industries and Radian Inc. Such acquisitions should trigger a review of the company’s status, said Deidre Lee, director of defense procurement and acquisition policy. She told the Center, “If it is truly a buy … we should novate the contract, which would change the name, which would change the status. That is what should happen.” New SBA regulations, set to go into effect in December, would require companies to re-certify themselves as small businesses after they have been acquired by another company, said Gary Jackson, SBA assistant administrator for size standards. “The problem came up that a company may grow or be bought out but still gets recorded as small for the purposes of that contract,” Jackson told the Center. “In December we will look at situations when the contract is bought. The company would have to certify if the company is still a small business.” GSA requires companies to re-certify their small business eligibility every time an option is exercised on a schedule or other multiple-award contract, generally every five years. In April 2003 SBA proposed requiring annual re-certification for small firms on multiple-award contracts, but the proposal ran into widespread opposition from inside and outside the government. Several business owners and advocates said the rule would penalize a company for growing. No final rule has been issued. (SAA, 5/2/03, 7/11/03) The Center also found that only 40% of Pentagon contracts were awarded under full and open competition. Most of the contracts going to the 10 largest defense contractors were awarded without full and open competition. Company officials said that is not surprising, since a contractor that wins a competition to build a particular aircraft or weapons system then receives all future orders for the item on a sole-source basis. Another advantage for large companies: One-third of the dollars awarded to the top 737 contractors came in cost-plus contracts – three times the proportion awarded to smaller contractors. Among other findings of the Center’s study: •80% of all defense contracting dollars were won by 1% of defense contractors (737 out of nearly 100,000 contractors). •The 50 biggest contractors got more than half of all the money; the top ten got 38%. •Lockheed Martin topped the list at $94 billion over six years; Boeing was second with $81 billion; Raytheon was third (just under $40 billion); then Northrop Grumman and General Dynamics with nearly $34 billion each. Those totals do not include money award to these companies collected as partners in joint ventures. •Nearly 100 of the top 737 contractors are foreign entities. •The 10 biggest defense contractors were all big campaign contributors, giving a combined $35.7 million. They reported spending $414.6 million on lobbying. “But the return on their investment was staggering: $340 billion in contracts,” the Center said. However, nearly a quarter of the top Pentagon contractors made no political contributions during the six-year period. •The Defense Department now spends more money on services than products, a dramatic turnaround from 20 years ago, when almost two-thirds of the Pentagon’s contracting budget went for products. By 2003, some 56% of DOD contracts paid for services rather than goods, the Center found. •Defense Department contracting records are not always accurate: the ultimate corporate parent was misidentified in more than $35 billion worth of contracts that the Center examined. The report, “Outsourcing the Pentagon,” is available at http://publicintegrity.org.