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Federal Market Intelligence for Small Business |
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Big problem or small? The largest Fortune 500 companies designated as small in fiscal 2013Almost every year, there are headlines about Fortune 500 businesses allegedly winning small business federal contracts, and Set-Aside Alert often is asked: How is this possible? How large of a problem is this? And: why is it happening and why is it not stopped? These are difficult questions. Seeking answers takes you into some complicated areas of small business federal contracting. Set-Aside Alert recently followed the money trail, using federal data to identify 29 of the largest Fortune 500 companies designated as small businesses by federal contracting officers in recent federal contract actions. We looked in detail at the 50 largest Fortune 500 companies and found that 29 of them were designated as small in 663 federal contract actions in fiscal 2013, based on data from the Federal Procurement Data System (FPDS). Set-Aside Alert found that those 29 companies received $56 million in those contract actions, and we reviewed a number of those actions in detail. The three largest single contract actions alone totaled $32 million. But before we assess those findings in more depth, let’s look at how the Small Business Administration’s Office of Inspector General (OIG) recently tackled the issue of ineligible businesses winning small business contracts and came up with limited results. The SBA OIG previously had examined the issue of large vendors winning small business contracts in 2005, and every year since then has named the problem a top management priority for the SBA. However, the OIG performed no new research on it until recently. The latest study targeted “ineligible” businesses and did not hone in on large businesses per se. In the latest report, the OIG examined about $4 billion worth of contract actions for 8(a) and HUBZone set-aside contracts and found $428 million worth of errors indicating that ineglible contractors had won small business awards. The ineligible vendors generally had left the programs, not joined the programs yet, or their registrations or certifications were missing from key databases. OIG officials said the findings did not measure the full extent of the problem for 8(a) and HUBZone contracts because it was not a statistical sample and could not be extrapolated to the whole. Also, OIG officials acknowledged that the study did not identify whether the problems were due to fraud, abuse, negligence, data errors or system errors. Looking for causes would require more research, the IG sources said. Yet without knowing the causes, it’s difficult to stop the problem. Set-Aside Alert faced similar limitations in evaluating the 29 of the largest Fortune 500 companies designated as small businesses in $56 million worth of federal contract actions in fiscal 2013. Set-Aside Alert also did not assess fraud or negligence, which would have required detailed research into each contract action. John Shoraka, SBA’s associate administrator for government contracting and business development, recently addressed the issue of large businesses winning small business contracts in GovExec magazine: “This occurs for a variety of reasons, including the growth of a business, mergers and acquisitions, or human data entry error. SBA has no tolerance for fraud, waste and abuse, and takes corrective steps when actionable information comes to light,” Shoraka told GovExec. Shoraka said SBA has initiated more suspension and debarment actions against contractors than in the previous 10 years.
In our study, Set-Aside Alert did see at least one apparent pattern. Of the 663 contract actions we reviewed for the 29 large Fortune 500 companies designated as small, 487 contract actions involved subsidiaries. That was about 73% of the total. That suggests that recordkeeping for small businesses that are acquired by large businesses mid-contract may be a source of errors. Prior to 2007, federal regulations permitted contractors designated as small to continue performing on a pre-existing contract until its completion with no change in its size status, even if they were acquired by a larger company. A few of those contracts may have been seven years or longer in duration, and still may be in effect with the pre-2007 terms. Under new rules instituted by the SBA in 2007, the large firm must notify the government and the small firm must recertify its size shortly after the acquisition. The contracting officer then is supposed to change the status of the company to “other than small” to reflect the new ownership. Errors may occur when a company does not notify the government, or when the contracting officers do not input the changes in size status into FPDS, SBA officials said on background: “Each case is different. You would have to look at the contract files to see what happened.” Presumably, a Fortune 500 company that misrepresented its size as small would be protested, so the SBA officials suggested those incidents may be infrequent. Also, a company’s size may be mistakenly input as small. There are nuances to evaluating company size, which varies by industry. A company that is small under one industry code may be listed as “other than small” in another code. There also are special exemptions in regulations for certain types of 8(a) small firms. And with more than 2 million contract actions annually, and more than 30,000 federal contracting officers, random errors occur. Are the problems of large firms designated as small in federal contracts overstating the government’s 23% goal achievement? The OIG suggested it might be, but also acknowledged that further research would be needed. Set-Aside Alert also noted the three largest contract actions totaling $32 million, including a $21 million contract award to National Government Services Inc., a subsidiary of WellPoint Inc. for services to the Centers for Medicare and Medicaid Services; a $5.1 million contract award to Chevron USA Inc.; and a $5 million contract to CDM Technologies Inc., a subsidiary of Boeing Co, for services to the Defense Department. The companies did not respond to requests for more details. Large companies winning small business contracts is a hot button issue. The American Small Business League, headed by Lloyd Chapman, has compiled several lists of Fortune 500 companies designated as small in federal contract actions that it claims are engaged in fraud and illegal activity. The group has presented no evidence of fraud or illegal activity beyond what can be inferred from being a large company designated as small in federal contract actions.
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