Sizing Things Up Under fire for giving too many contracts to big business, the SBA fights back.

Depending on whom you talk to, Texas-born small-businessadvocate Lloyd Chapman is either a modern-day Cesar Chavez or aconspiracy theorist with a grudge. Either way, as the SBA haslearned, he's become hard to ignore.

In late 2004, Chapman and his organization, the American Small BusinessLeague, spearheaded an investigation into a series of flaws inthe SBA's contract procurement process, culminating in alawsuit. Since the end of 2004, at least five reports from threedifferent government agencies--the Government AccountabilityOffice, the SBA Office of Advocacy and the SBA Office of theInspector General--have noted irregularities in the SBA'ssystem of awarding small-business contracts, prompted in part byChapman's incessant lobbying. The agencies' findings allegecomplacency at best, borderline fraud at worst.

The ASBL complaint focused on the SBA's refusal to offer upa draft of a 2003 report that highlights serious discrepancies inthe awarding of federal contracts. Chapman sued for the data,claiming the agency was hiding blatant contracting fraud byreleasing only an edited version of the original document. The SBAinitially appealed a judge's order to release the paper, buteventually acquiesced in June. The draft report, conducted byresearch firm Eagle Eye Inc., shows that in 2002, "$2 billionin contracts coded as small-business awards went to 39 firmsdesignated as large businesses," and lists possible vendorfraud as one of the causes.

The SBA Office of Advocacy's John McDowell is quick todefend his department's actions. "There is nothingsensational about the draft as compared to the final product,"McDowell says. "All our edits were designed to eliminatespeculation and produce a quality report grounded in sounddata."

Chapman points out, however, that none of the companies has everbeen prosecuted for falsifying their claims, despite a provision inthe Small Business Act that lists intentional misrepresentation asan offense punishable by up to 10 years in prison.

According to the SBA, no action has been taken against thesecompanies because the mistakes were simple company coding errors,not unusual for a database containing thousands of names. Thecomplexity of the SBA's Central Contractor Registrationdatabase system--which, until April of this year, relied onself-reporting--only serves to exacerbate the problem.

Furthermore, enforcement of size standards occurs only when acompany's size classification is protested by a contractingofficer, another bidder or the SBA itself. In 2002, the SBAprocessed 383 of these protests, of which 29 percent were dismissedon procedural grounds. Of the remaining cases, 85 firms were foundto be misclassified.

Earlier this year, the Department of Energy was singled outafter a GAO report showed it had vastly overestimated the number ofcontracts it was awarding to small businesses. Prompted by thefindings, Sen. Olympia Snowe (R-Maine), chair of the SenateCommittee on Small Business and BIZ Experiencesship, urged the DOE towork on fixing the problem. In response to pressure from thecommittee, the DOE agreed to better police itself.

For its part, the SBA is eager to assuage critics and spent thesummer struggling to repair its image in the U.S. small-businesscommunity. It held a series of hearings to gauge sentiment onissues, the most important of which was its proposed size-standardchanges. The SBA wants to switch to a standard based strictly onnumber of employees, abandoning the current mix of size- andrevenue-based indicators.

But changing the standards may not be the answer. Paul Murphy,author of the original Eagle Eye report, says of the proposal,"Our analysis concludes that on average, the proposedrevisions will harm the truly small and emerging businesses byreclassifying a group of larger contractors that exceed revenuestandards but not the proposed new labor standards."

After holding a hearing in her home state of Maine, Snowe, too,urged caution: "Any reform of this system must be fair tobusinesses of every size, help them grow to become competitive innational and global markets, and give due regard to the uniquecircumstances of the industries in which they compete," Snowesaid in a statement.

It's likely the discussions will carry on into 2006 before acompromise is reached.