Getting Into The Game

They're fenced out of competition by bundled contracts and gobbled up by goliaths, but small businesses still find their way into the federal market- and now, things might get easier.

Depending on your source of information, now is either the best time ever to be a small business contractor or the absolute worst.

Recent reports by the Small Business Administration and by Democrats on the House Small Business Committee offer strikingly different views of the opportunities for small firms in today's federal marketplace. One says technology and consulting firms are securing lucrative deals and finally closing the gap with larger industry giants; the other reports that an unprecedented number are languishing. Agencies are awarding more contracts than ever to small businesses, according to one. They are failing miserably in reaching their small-business contracting goals, according to the other.

What's behind the contradictory reports? Are the positive findings the result of numerical gerrymandering by the Bush administration? Or can you chalk up the harsh criticism to political theater by the Democrats? The truth about small business contracting is somewhere in between.

Ramon Rivas can hardly bear to discuss what has become of his federal contracting business. The owner of Marketing Dynamics Inc., a small Damascus, Md., vendor of plaques and awards, remembers how nearly two decades ago, when he was breaking into the federal sector, procurement officers would call him and a few competitors, obtain a handful of price quotes and quickly award a contract. The firm signed a healthy assortment of federal contracts, and Rivas began to build relationships and develop industry contacts.

In the past seven years, Marketing Dynamics has lost roughly 60 percent of its federal business due to a confluence of circumstances he attributes to the Bush administration's lack of interest in small business and a growing reliance on governmentwide vehicles, such as the General Services Administration's Multiple Award Schedules. "Things are absolutely dismal right now," says Rivas, his voice cracking with disgust and melancholy.

"In the past 19 years, I've seen things go from mediocre to just terrible."

While small businesses employ the majority of the country's workforce, they have struggled for decades in a federal market dominated by goliaths. Simple procurements within reach of small businesses routinely are bundled together and let under a single megacontract to behemoth vendors. Contracts set aside for small businesses represent just a fraction of the overall market. And for companies that do break through, success often means being gobbled up by firms like Lockheed Martin Corp., Boeing Co. or L-3 Communications.

Small businesses have seen marginal improvements, particularly in information technology. But, despite a promise by President Bush more than five years ago to open more contracts to smaller firms and to reduce the use of bundling, they still lag woefully behind, critics contend.

"Overall, it's never been harder to be a small business and to break into the federal marketplace, set-asides notwithstanding," says Paul Murphy, president of Eagle Eye Inc., a Fairfax, Va., research firm that focuses on government. "Agencies are in a 'get the work done' mode. That leads to more bundling and consolidating of contracts."

In fiscal 2006, $82 billion-about 20 percent of all prime contracts-went to small businesses, well short of the government's 23 percent goal. But even though House Democrats complain the government has yet to meet the 23 percent target, agencies soon might be shooting for an even larger bull's eye.

The Small Business Fairness in Contracting Act, which passed the House in May, would increase the goal to 30 percent and make it more difficult for agencies to bundle contracts. "These are doable goals," says Rep. Bruce Braley, D-Iowa, the bill's sponsor. "If we all do what we are supposed to do, there will be significant improvement."

Critics say the bill fails to tackle the cause of most contract bundling-an overburdened acquisition workforce-and the goals are meaningless because the bill lacks an enforcement mechanism. The Senate Committee on Small Business and Entrepreneurship plans to introduce its own bill later this year, likely with a less ambitious goal.

The Small Business Administration opposes Braley's bill, arguing that the 30 percent goal is unrealistic. Yet, in a 2005 report, SBA found that federal agencies not only met their small business requirements, but exceeded them, awarding more than 25 percent of all prime contracts to small firms. Despite the statistical discrepancies, numbers alone fail to tell the true story about the successes and failures of the Bush administration's Small Business Agenda.

Numbers Game

Contracting experts generally dismiss SBA's annual report as insignificant, in part because it fails to count all federal contracts. For example, contracts performed outside the United States, including those related to Iraq reconstruction, are excluded. Ditto for those funded predominantly by agency-generated, not congressionally appropriated funds, including procurement by the CIA, Federal Aviation Administration and U.S. Postal Service.

The data itself also is highly suspect. SBA's numbers are extracted from the Federal Procurement Data System-Next Generation, which is rife with errors because the figures are entered manually. Meanwhile, the definition of "small business" varies. Acquisition officers routinely select contracting codes that allow companies otherwise considered too large to qualify to win small business deals.

In fact, a closer look at the companies winning small business contracts suggests that the 20 percent figure might be overly generous. Through a well-documented loophole, agencies are allowed to count contracts originally awarded to small firms that were subsequently purchased by larger companies. Consequently, large companies such as SAIC and General Dynamics pepper the list of small business contractors.

Lloyd Chapman, president of the American Small Business League, has been warring with SBA for more than four years to prevent agencies from artificially inflating their small business figures. "The government is essentially trying to repeal the Small Business Act by instituting policies that treat small businesses and Fortune 500 companies the same," he says.

SBA says it has addressed the problem through a new regulation that requires small businesses that merge or are acquired to recertify their size immediately. Firms also would have to recertify their small business status at the completion of the first five years of a contract and prior to the execution of options thereafter. "I think by this time next year, we'll see a very different database," says Arthur Collins Jr., SBA's director of government contracting. "We won't be seeing the Lockheeds or the Rolls-Royces on the list anymore."

Nonetheless, Chapman is planning to file suit against SBA late this summer. "Asking the SBA to clean up contracting data," he says, "is like asking al Qaeda to clean up terrorism."

Finding a Niche

The news is not all negative. In February, the Homeland Security Department chose 11 small vendors to help consolidate its purchase of IT-related commodities through its $3 billion First Source program. Meanwhile, another 28 small firms were tapped last September to compete for contracts in the DHS Enterprise Acquisition Gateway for the Leading Edge Solutions program. Known as EAGLE, the program has a $45 billion ceiling over the next decade and will serve as a department- wide platform for acquiring IT services.

Socioeconomic set-aside contracts long have opened a way into the federal market for small firms. For example, the General Services Administration's Veterans Technology Services Governmentwide Acquisition contract, rolled out in February, is a set-aside for service-disabled veteran-owned businesses. The 10-year contract has a potential value of $5 billion. Robert Walker, president of Advanced Systems Inc. of Fairfax, one of 43 companies to win spots on VETS, says, "Right now, the mood is extremely good. There's been a tremendous amount of attention recently paid to service disabled veteran-owned companies, and [this] is another important vehicle."

While veteran-owned companies are seeing an upswing in federal business, prospects for women-owned firms seems to be stagnating. The government's 5 percent goal for those businesses never has been met. Last year's 3.34 percent was the high-water mark. Linda Berdine, president of G&B Solutions, a woman-owned IT firm in McLean, Va., says, "We are not seeing much improvement for women-owned businesses. There's not much conversation or legislation out there. It's just not on the radar." SBA has been working on a contracting program exclusively for women-owned businesses for the past seven years, but it has languished because of concerns that lawsuits could freeze the gender-based program. SBA says it plans to kick it off later this year.

Critics suggest that set-asides might not be good for small businesses and might even foster complacency. Steve Charles, co-founder of immixGroup, a McLean IT firm with more than $114 million in small-business contracts last year, says companies can become so reliant on set-aside designations that they lose focus on core missions. He suggests that firms "need to figure out their niche. The challenge is to find out what are you good at and then go do it. All companies are not created equal."

While equality may be out of reach, opportunity remains. "Right now, small businesses have better solutions to complex problems than large companies," says Craig Roberts, president of Vista International, a Davenport, Iowa, small business that provides IT services to the Army. "Since there are no public shareholders, we can turn on a dime and take more risk. And, that flexibility allows small businesses to develop better solution sets."