SBA Administrator Maria Contreras-Sweet. Public Citizen accused SBA of using accounting tricks and misapplying the law.

SBA Administrator Maria Contreras-Sweet. Public Citizen accused SBA of using accounting tricks and misapplying the law. Paul Morigi/Invision for JPMorgan Chase & Co./AP

Advocacy Group Accuses SBA of Misapplying Law on Small Business Set-Asides

Public Citizen joins debate over large corporations taking small-entity contracts.

As it celebrates National Small Business Week, the Small Business Administration is facing renewed accusations that its efforts to reserve work for small contractors have been distorted by accounting tricks and misapplication of the law that permits large companies to win the awards.

Public Citizen, the nonprofit that pushes an anti-corporate view of trade, the environment, campaign finance and product regulation issues, released a report on Wednesday saying SBA “may be flouting the law,” perhaps for political reasons.

The study of controversies over the SBA-coordinated program to help federal agencies meet the goal of 23 percent of purchases from small businesses draws on the work of the Petaluma, Calif.,-based American Small Business League, which has long battled SBA and the Defense Department over the definition of a small business. But the league, Government Executive has learned, does not think Public Citizen’s conclusions go far enough.

The SBA’s claims “that the government has met or nearly met a requirement to make 23 percent of its purchases from small businesses are misleading and rely on methodologies that conflict with federal law and regulations,” argued the report by Taylor Lincoln, research director for Public Citizen’s Congress Watch division.

In 2013, seven of the 10 largest federal contractors received at least one contract that SBA counted toward fulfillment of small business goals, the report said. Of the 100 contractors receiving the most federal dollars counted toward small business goals in 2012, 71 did not meet the government’s standards to qualify as small businesses, the report said, citing the American Small Business League.

An “exception to the law’s requirements on subcontracting plans exists for particularly large defense contractors,” Public Citizen said in the report. A recently renewed 25-year-old Pentagon research project called the Comprehensive Subcontracting Plan Test Program authorizes participating companies to engage in the “negotiation, administration, and reporting of subcontracting plans on a plant, division or company-wide basis as appropriate,” the report noted.

Public Citizen then described 2014 congressional testimony from SBA Administrator Maria Contreras-Sweet in which she said contracts held by very large businesses could count toward small business goals because of a rule allowing small businesses that are acquired by large businesses to have their small business status “grandfathered in” for up to five years, as the report put it.

Public Citizen argued that statement is “inaccurate,” noting that SBA’s inspector general for a nearly a decade has reported procurement flaws that “allow large firms to obtain small business awards” in an annual list of agency challenges. “A federal regulation that took effect in 2007 requires contractors that are acquired to recertify their size almost immediately,” Public Citizen said. “Subsequent orders relating to contracts held by acquired businesses that no longer qualify as 'small' may not be counted toward the government’s fulfillment of its small business goals.

Lawmakers have also been on the case. The House Small Business Committee in March approved a proposal from Rep. Janice Hahn, D-Calif., for a Government Accountability Office study on the issue.

Asked by Government Executive about the Public Citizen report and whether the administrator misspoke, an SBA spokeswoman said in an emailed statement: “The rules of contracting are complex. The administrator was asked a general question, to which she provided a general explanation. To give a more complete answer, SBA would need to see the specific award that was being asked about and then, SBA could provide the best answer. In general, when a firm grows organically, the agency can continue receiving small business credit for up to five years. … [But] in the case of a merger or acquisition, the agency should be notified within 30 days and the small business credit should be discontinued.”

Public Citizen concluded that “U.S. programs intended to level the field for small businesses and other historically disadvantaged businesses are riddled with errors, anomalies and exceptions. These generally seem harmful to small businesses’ ability to realize the contracting goals laid out in laws and regulations.”

Though it is tricky to explain the problem through a single political factor, the report continued, “it seems reasonable to assume that they would not exist to such a large degree if small businesses, for instance, furnished the majority of post-retirement jobs for military officials, performed the lion’s share of contractor lobbying or gave the majority of campaign contributions from contractors.”

Lloyd Chapman, the founder of the business league that fed material to Public Citizen researchers, told Government Executive the report “reads like it was written by the SBA press office.” He said he thinks someone from the agency should be brought before Congress the same way Internal Revenue Service official Lois Lerner was called to testify after the surfacing of the 2013 controversy over political targeting by the tax agency.

 “No one in the SBA is held accountable,” Chapman said. “It’s typical Washington softpedaling of hundreds of millions of dollars in felony federal contracting fraud.” 

Public Citizen said it views the report as part of its bid to encourage President Obama to issue an executive order requiring government contractors to disclose political spending by third-party groups. “This report shows that the deck is already stacked in favor of large contractors,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division. “At a minimum, we should know if contractors are using secret purse strings to line up even more advantages.”