Small businesses are called the engine that drives the American economy—they provide more than half of the nation’s workforce. Billions of your tax dollars are set aside to help small businesses survive. But the NBC Bay Area Investigative Unit discovered hundreds of millions of dollars set aside for small businesses, instead go to huge corporations. Dozens of those companies are here in Silicon Valley.
Nationally, $422 billion worth of federal contracts in 2011 were meant to give small business a shot at servicing one of the largest clients in the world—the federal government. The government’s goal is to give at least 23 percent of all federal contracts to small businesses. Instead, year after year, the NBC Bay Area investigation found the government falling short of that goal.
Mining the General Services Administration’s Federal Procurement Data System—a government database that lists all federal contracts—the investigation revealed at least 24 companies since 2009 either based or with major offices in the Bay Area received at least 299 contracts labeled “small business” totaling $77 million.
Some examples include: a $4.8 million Department of Energy contract awarded to Technology and Management Services, Inc., a Maryland-based business whose parent corporation is IBM; a $1.1 million Internal Revenue Service contract given to Virginia-based Softlaw Corporation North America, whose parent company is Oracle; and a $549,972 Forest Service contract given to directly to Microsoft Corporation.
Under the Small Business Administration’s size standards, none of those companies qualify as a small business.
“It’s been happening for a decade,” said Lloyd Chapman, president of the Petaluma-based American Small Business League.
Chapman founded the ASBL in 2003 in part because he says far too often, large government contracts go to big businesses rather than small ones.
“It’s not random occurrences when every day for a decade, millions of dollars a day in federal contracts that should by law be going to small businesses, are not only ending up in the hands of the largest corporations in America, but also Europe and Asia,” he said.
Donato Polignone, owner of Emeryville-based NuGenTec, a specialty chemical solution manufacturer, has struggled to land federal contracts. After founding the company in 1997, Polignone now employs 42 workers and earns just under $15 million a year. According to the Small Business Administration, his company meets the definition of a small business.
“It can be far, far easier to sell even into a General Motors than it is to the federal government,” he said. “Most of the small business owners that I know won’t even bother selling to the federal government.”
After years of trying and failing, NuGenTec finally landed several million dollar contracts with the U.S. government. But to Polignone and his business partner Fred Pourmirzaie, who heads up a division of NuGenTec called FloDynamix, navigating the federal bureaucracy was like running a gauntlet.
“It is frustrating,” Pourmirzaie said. “Again, we feel that they are under sourced and understaffed and they don’t have resources to allocate to quality small businesses like us.”
Raul Espinosa, another staunch advocate of transparency in the procurement process, believes the public must speak up about the issue of small business contracts landing in the halls of big corporations. He started the Fairness in Procurement Alliance in Jacksonville, Fla. in 2005 to get the government’s attention, and to ensure that qualified small and disadvantaged businesses receive the proper number of federal contracts.
“Government and elected officials are not allowing small businesses to take a fair share of the contracts that they themselves promise for them to have opportunities,” he said. “Not that they’re giveaways. They’re opportunities that they can use to overcome their economic position.”
The Small Business Administration admits that this is a problem. In July, the SBA reported it fell short of its goal of giving 23 percent of all federal contracts to small businesses. According to government data, the 2011 achievement rate was 21.65 percent, which translates into $91.5 billion. That means the small businesses did not receive $3.8 billion meant for them.
As far back as 2005, the SBA has acknowledged that small business contracts go to companies that are “other than small.” Report 5-15 by the Government Accountability Office’s Office of Inspector General states: “One of the most important challenges facing the Small Business Administration and the entire federal government today is that large businesses are receiving small business procurement awards and agencies are receiving credit for these awards.”
The SBA said the reasons for these mistakes, which they call anomalies, range from data entry and coding errors, acquisitions of small companies by big companies which are then grandfathered in, growth of a company over the life or a contract and human error.
Chapman’s organization, the ASBL, found that nationally in 2011, of the 100 top companies to receive $421 billion dollars in federal small business contracts, 72 were actually large companies.
“So in reality, I would say small businesses are getting about a tenth of what they are supposed to get,” Chapman said. “And that’s just appalling considering the state of our national economy and the California economy.”
The NBC Bay Area Investigative Unit has found no evidence that any of the companies are intentionally breaking the rules. Reporters also contacted the companies mentioned in this report, and most refused to comment. IBM, however, said it does everything it can to make sure the parent company and its subsidiaries do not receive federal contracts set aside for small businesses.
The SBA Inspector General recently came out with a report that implies some companies are able to exploit the system. The report also mentions reform in only four areas. Seventeen other areas either showed little or no progress.
In a statement emailed to NBC Bay Area, John Shoraka, Associate Administrator for Government Contracting and Business Development wrote, in part: “SBA has no tolerance for fraud, waste and abuse and takes corrective steps when actionable information comes to light. Over the past three years, the SBA has initiated more government-wide suspension and debarment actions than in the previous 10 years.”
Shoraka also said that the SBA’s 68 local offices conduct matchmaking events to make sure small businesses get direct access to federal buyers, and that the agency created a virtual tool called GC Classroom to train small businesses on how to win government contracts.
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