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GOVERNMENT CONTRACTING

Big Business Wolves Pose in Small Biz Clothes

As federal agencies count every penny, big firms scoop up contracts meant for entrepreneurs.

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Is Medtronic a small business? How about General Dynamics? The federal government seems to think so. Both companies are among the corporate giants that have been awarded federal contracts specifically set aside for small businesses. 

Federal regulations mandate that most contracts valued between $3,000 and $150,000 should be reserved for small businesses, generally defined as companies with fewer than 500 employees and less than $7 million in annual revenues. But of the nearly $11 billion in contracts that fell within that range in fiscal 2011, nearly $5 billion, or 45%, went to large companies, Bloomberg reports. That's up from 38% in 2006. 

Most small businesses apply for contracts below $150,000, experts say.

Large companies have found several ways to get around those regulations. In some cases, they use small businesses they've acquired to bid on contracts. And federal agencies can exempt themselves for the rules by claiming they were unable to find small businesses capable of supplying the products or services needed.

What’s more, certain agencies, including the General Services Administration, are entirely exempt from set-aside rules, says Brian Reeder, a spokesman for the American Small Business League. The GSA accounts for about $40 billion of all federal contracts, according to Reeder. 

"Simply removing that exemption and putting a set-aside rule in place for all government contract vehicles would significantly increase the pool of contracts available to small businesses," Reeder says. 

But with Congress staring down the fiscal cliff and budgets facing intense scrutiny, agencies are looking to cut costs wherever they can, government contractors say. 

"There is major uncertainty in the market and federal agencies are not sure until the budget is passed and sequestration is resolved that they will continue, and they have really reduced the scale of work," says Zia Islam, founder of Zantech IT Services, a McLean, Virginia-based company that has worked for NASA, the U.S. Department of Housing and Urban Development, and other federal agencies. (Zantech was number 225 on the 2012 Inc. 500.) 

Zantech has seen its work from HUD fall some 20 percent and that with NASA disappear completely. Islam speculates that contracts for which Zantech once competed are flowing to large firms, which have greater name recognition and economies of scale and can do the work for less money. 

The Small Business Administration sets goals for the total percentage of federal contract funds that agencies should award to small business, which includes for disadvantaged and women-owned firms. But there is little oversight, particularly when it comes to smaller contracts, experts say.

In 2011, 21.7% of contract money went to small businesses, slightly short of the SBA's goal of having 23% of contracts go to entrepreneurs. Women-owned businesses received less than 4% of all federal contracts, less than the SBA's goal of 5%.

In a survey conducted by the U.S. Women’s Chamber of Commerce in the first half of fiscal 2012, which began October 1, 2011, 71 contracts worth $3 million were awarded to women-owned firms, says Margot Dorfman, the group’s chief executive. "There is a great disconnect here, and women-owned firms are not getting their fair share," Dorfman says.

IMAGE: Texas Governor Rick Perry/Flickr
Last updated: Nov 19, 2012

JEREMY QUITTNER is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.
@JeremyQuittner




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