Why are so many big corporations winning federal contracts designated for small firms?
General Dynamics (NYSE:GD) is hardly the only conglomerate that receives small-business contracts. Other top recipients in 2005 included Lockheed Martin (NYSE:LMT), which received $221 million in contracts, and L-3 Communications (NYSE:LLL), the number one "small business," with federal awards worth $638 million.
In 2005, the SBA reported that almost $80 billion, or 25.4 percent of total federal contracting, went to small businesses. Yet a series of investigations, conducted by organizations within and outside the government, make it clear that the true share of primary federal contracts going to small businesses is much lower than the SBA claims.
The Center for Public Integrity concluded that at least 20 percent of small-business contract dollars disbursed between 1998 and 2003 by the Defense Department -- which spends 70 percent of all federal procurement dollars -- went to the nation's largest defense contractors. For 2005, according to the Democratic staff of the House Small Business Committee, nearly 15 percent of the $80 billion calculated as small business contracts were "miscoded," dropping the percentage of contract dollars for small companies to 21.6 percent.
Why do so many "small business" dollars end up in big business' coffers? Often, as in the case of the three defense contractors, large corporations buy up smaller competitors during of the life of a federal contract -- which can last up to 20 years -- or firms expand beyond the official definition of small. Either way, the contractor still gets counted as small. That will change some under new, stricter rules. Companies now have to seek re-certification of their small status immediately when they change hands. However, other firms can keep their small business certification for five years, regardless of their growth in that time -- and federal agencies can continue to claim credit for doing business with small companies. This is an improvement over previous rules, to be sure, but small business advocates are pushing for annual re-certification.
Meanwhile, the true figure for small-business contracts could be even lower than what the Democrats contend. Paul Murphy, the principal at procurement consultant Eagle Eye, notes that the SBA doesn't even count many government agencies that it believes are unlikely to work with small firms, nor contracts that small companies aren't likely to win, including work done overseas. But Murphy points out that "small businesses win contracts in these categories all the time." When he runs the data without these exclusions, the percentage of disbursements nominally to small business drops to 21.2 percent, even before accounting for the miscoding uncovered by the House Democrats. If the House Democrats are right in their assumptions about the amount of contracts being miscoded, then the total small business dollars drops to just 18.4 percent -- well below the 23 percent goal.