oversight

Reporting of Small Business Contract Awards Does Not Reflect Current Business Size

Published by the Government Accountability Office on 2003-05-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States General Accounting Office
Washington, DC 20548




          May 7, 2003

          The Honorable Olympia J. Snowe
          Chair, Committee on Small Business
             and Entrepreneurship
          United States Senate

          Subject: Reporting of Small Business Contract Awards Does Not Reflect Current
          Business Size

          Dear Madam Chair:

          We have prepared this report in response to your concerns about whether large
          companies are receiving federal contracts intended for small businesses. As agreed
          with your staff, we reviewed awards to five large companies to determine

          •   how contracts awarded to the companies were reported in Federal Procurement
              Data System (FPDS), 1
          •   why federal contract officials reported the contracts as small business awards,
              and
          •   what actions are being taken to address any identified problems.

          This report transmits information provided to your staff in earlier briefings and in our
          testimony given today before the Small Business Committee of the House of
          Representatives, which we have enclosed. We conducted our review between
          November 2002 and May 2003 in accordance with generally accepted auditing
          standards. A description of our scope and methodology is included in the enclosure.

          The five large companies that we reviewed received contracts totaling $1.1 billion in
          fiscal year 2001, including $460 million reported as small business awards. To
          understand why awards to these large companies were listed in FPDS as small
          business awards, we focused our review on 131 individual contract actions awarded
          to these companies by four federal buying activities.


          1
           FPDS is the government’s central repository of statistical information on federal contracting. The
          system contains detailed information on contract actions over $25,000 and summary data on
          procurements of less than $25,000.


                                                           GAO-03-776R Small Business Certification
           The predominant reason why these contract actions were reported as small business
           awards is because federal regulations generally permit a company to be considered
           as a small business over the life of the contract—even if they have grown into a large
           business, merged with another company, or been acquired by a large business. In
           today’s federal contracting environment, contracts can extend up to 20 years.
           Additionally, agencies’ reliance on various databases containing inaccurate
           information on current business size has led to misreporting of small business
           achievements.

           The General Services Administration, the Office of Federal Procurement Policy, and
           the Small Business Administration have each taken or proposed a number of actions
           aimed at requiring small businesses to re-certify and not retain their small business
           status for the life of the contract. While these proposed actions do not directly
           address the database problems we identified at the four federal buying activities,
           there are a number of initiatives under way designed to improve federal contract
           databases.

           We have not made recommendations; however, we have noted the need for accurate
           and consistent data on companies’ business size in order to reliably report small
           business contract awards. We believe a coordinated effort between agencies is
           necessary to ensure that accurate and reliable small business data are reported.

           If you have any further questions concerning this report, please contact me on
           (617) 788-0500. Individuals making key contributions to this report include Robert
           Ackley, Penny Berrier, Chris Galvin, Julia Kennon, Judy Lasley, John Needham, Russ
           Reiter, Sylvia Schatz, and Karen Sloan.


           Sincerely yours,




           David E. Cooper
           Director
           Acquisition and Sourcing Management


           Enclosure




(120192)
           Page 2                                   GAO-03-776R Small Business Certification
                            United States General Accounting Office

GAO                         Testimony
                            Before the Committee on Small Business,
                            House of Representatives


For Release on Delivery
Expected at 2:00 p.m. EDT
Wednesday, May 7, 2003      CONTRACT
                            MANAGEMENT
                            Reporting of Small
                            Business Contract Awards
                            Does Not Reflect Current
                            Business Size
                            Statement of David E. Cooper
                            Director
                            Acquisition and Sourcing Management




GAO-03-704T
                                               May 7, 2003


                                               CONTRACT MANAGEMENT

                                               Reporting of Small Business
Highlights of GAO-03-704T, testimony
before the Committee on Small Business,        Contract Awards Does Not Reflect
House of Representatives
                                               Current Business Size


According to information in the                According to FPDS, five large companies that we reviewed received
Federal Procurement Data System                contracts totaling $1.1 billion in fiscal year 2001, including $460 million as
(FPDS), in fiscal year 2001, small             small business awards. To understand why awards to these large companies
businesses received approximately              were listed in FPDS as small business awards, we focused our review on 131
23 percent of federal contract                 individual contract actions awarded to these companies by four federal
dollars awarded. However,
concerns have been raised that
                                               buying activities.
large companies are receiving
federal contracts intended for small           The predominant cause for the misreporting of small business achievements
businesses.                                    is that federal regulations generally permit a company to be considered as a
                                               small business over the life of the contract—even if they have grown into a
                                               large business, merged with another company, or been acquired by a large
                                               business. In today’s federal contracting environment, contracts can extend
We have not made                               up to 20 years. In addition, agencies relied on various databases containing
recommendations in this
                                               inaccurate information on current business size.
testimony. However, we note the
need for accurate and consistent
data on companies’ business size               The General Services Administration, the Office of Federal Procurement
in order to reliably report small              Policy, and the Small Business Administration have taken or proposed a
business contract awards.                      number of actions aimed at requiring small businesses to re-certify and not
Accordingly, we believe a                      retain their small business status for the life of the contract. While these
coordinated effort between                     proposals do not directly address the database problems we identified at the
agencies is necessary to ensure                four federal buying activities, there are a number of initiatives under way
that accurate and reliable small               designed to improve federal contract databases.
business data is reported.
                                               Large Companies’ Contracts Reported as Small Business Awards




www.gao.gov/cgi-bin/getrpt?GAO-03-704T.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact David Cooper
at (617) 788-0555 or cooperd@gao.gov.
Mr. Chairman and Members of the Committee:

Thank you for inviting me to participate in today’s hearing on whether
large companies1 are receiving federal contracts intended for small
businesses. According to the Federal Procurement Data System (FPDS),2
small businesses received approximately $50 billion, or almost 23 percent
of federal prime contract dollars awarded in fiscal year 2001. In response
to your request, we reviewed awards to five large companies to determine

•   how contracts awarded to the companies were reported in FPDS,
•   why federal contract officials reported the contracts as small business
    awards, and
•   what actions are being taken to address any identified problems.

A detailed discussion of our scope and methodology can be found in
appendix I.

According to FPDS, the five large companies received contracts totaling
over $1.1 billion in fiscal year 2001, including $460 million reported as
small business awards. To understand why awards to these large
companies were listed in FPDS as small business awards, we focused our
review on 131 individual contract actions awarded to these companies by
four federal buying activities.

The primary reason these contract actions were reported as small business
awards is because federal regulations generally permit companies to be
considered small over the life of a contract—even if the company grows
into a large business, merges with another company, or is acquired by a
large business. We also found that contracting officials reported some
contract actions as small business awards because they relied on
databases containing conflicting and incorrect information about the
current size of some of the companies we reviewed. While these results
cannot be projected to all contract actions reported, they raise serious
questions about relying on FPDS data to measure federal agencies’ efforts
to meet the government’s 23 percent small business goal.


1
 The Small Business Administration (SBA) uses the terms small and other than small to
define those concerns that meet their size standards and those that do not. For purposes of
this statement, we use the term large to identify those concerns that are other than small.
2
 FPDS is the government’s central repository of statistical information on federal
contracting. The system contains detailed information on contract actions over $25,000 and
summary data on procurements of less than $25,000.



Page 1                                                                       GAO-03-704T
             The Office of Federal Procurement Policy (OFPP), the General Services
             Administration (GSA), and the Small Business Administration (SBA) have
             all recognized the need to address issues regarding changes in the size of
             businesses, particularly in the context of today’s long-term federal
             contracts. Each has proposed actions designed to protect small business
             interests and ensure small business achievements are reported accurately.


             The Small Business Act defines a “small business concern” as one that is
Background   independently owned and operated and that is not dominant in its field of
             operation. The act allows SBA to further define a small business. In its
             regulations, SBA has established size standards for different types of
             economic activities, or industries, generally under North American
             Industry Classification System (NAICS) codes. Size standards define the
             maximum size that a business, including all of its affiliates, can be to be
             eligible as a small business for all SBA and federal programs that require
             small business status. Most size standards are based on either number of
             employees or average gross revenues.

             The Federal Acquisition Streamlining Act of 1994 (FASA) codified the
             authority of agencies to enter into task or delivery order contracts with
             multiple firms for the same or similar products, known as multiple award
             contracts (MAC). Also, the Clinger-Cohen Act of 1996 provided for the use
             of multiagency contracts and what have become known as
             governmentwide acquisition contracts (GWAC). Agencies have
             increasingly used these types of contracts, which can extend up to 20
             years, to quickly meet their acquisition needs rather than issuing new
             contracts. For these types of contracts, the size of a business is
             determined as of the date the business submits a self-certification in its
             initial offer. If a business is small as of that date, agencies may place
             orders pursuant to the original contract and consider these orders as
             awards to a “small business” for the length of the contract, even if the
             company outgrows the original contract’s size standard.




             Page 2                                                          GAO-03-704T
                      Our work at the four federal buying activities showed that contracting
Reporting of Small    officials reported 131 contract actions made to the five large companies in
Business Contract     fiscal year 2001 as small business awards. (See fig. 1.)
Awards in FPDS Does
                      Figure 1: Large Companies’ Contracts Reported as Small Business Awards
Not Reflect Current
Business Size




                      SBA conducted an analysis of FPDS data concerning four companies in
                      fiscal years 2000 and 2001 under GSA’s Multiple Award Schedules Program
                      and concluded that the small business award information in FPDS is
                      misleading. According to SBA, the four companies were initially certified
                      as small businesses and awards to these companies continued to be
                      reported as small business contracts even though they became large
                      businesses. In fiscal year 2000, the four companies received 1,313 contract
                      actions valued at over $190 million that were reported as small business
                      awards. In fiscal year 2001, these companies received 1,271 contract
                      actions amounting to over $200 million reported as going to small
                      businesses.




                      Page 3                                                            GAO-03-704T
                        The primary reason why contracts awarded to large companies are
Reasons Why             reported in FPDS as small business awards is that federal regulations
Information In FPDS     permit companies to be considered small over the life of a contract—even
                        if they have grown into a large business, merged with another company, or
Does Not Reflect        been acquired by a large business. Given that the term of a contract can
Current Business Size   extend for up to 20 years in the current federal acquisition environment,
                        there is often ample time for a company’s size to change. We found this to
                        be the case in several of the companies we reviewed. For example, one
                        company was initially certified as a small business but subsequently grew
                        in size and no longer qualified as a “small business” for federal contracting
                        purposes. However, the company continued to receive awards that were
                        reported in FPDS as small business awards in accordance with current
                        regulations. In fiscal year 2001, this company received small business
                        contract awards totaling nearly $330 million. (See fig. 2.)




                        Page 4                                                           GAO-03-704T
Figure 2: An Example of How FPDS Small Business Information Is Affected by
Federal Regulations




Page 5                                                             GAO-03-704T
We also found several cases where contracting officials relied on
conflicting and inaccurate information in federal databases to report
business size information. Specifically, at the four federal buying activities
we visited, contracting officials were using databases that contained
outdated and inaccurate information about the size of the companies we
reviewed. For example, a company certified it was a large business under
a GWAC, but contracting officials placing an order off of this GWAC relied
on outdated information contained in databases and reported these orders
as going to a small business. (See fig. 3.)




Page 6                                                            GAO-03-704T
Figure 3: An Example of How FPDS Small Business Information Is Affected
by Contracting Officials Using Databases That Contain Outdated or Inaccurate
Information




Page 7                                                              GAO-03-704T
                       GSA, OFPP, and SBA have taken or proposed a number of actions to
Proposals to Address   improve the accuracy of reporting small business size. All of the proposed
Reporting of Small     actions are aimed at requiring small businesses to re-certify and not retain
                       their small business status for the life of the contract. For example:
Business Size
                       •   In October 2002, GSA changed its policy to require companies receiving
                           Federal Supply Service (FSS) Multiple Award Schedule Program
                           contracts and all other multiple award-type contracts to re-certify their
                           business size when the government exercises options to extend such
                           contracts—which for the FSS contracts generally occurs at 5-year
                           intervals.

                       •   In February 2003, OFPP required agencies with GWACs to have their
                           contractors annually re-certify their status as small businesses.

                       •   In April 2003, SBA proposed several changes to its regulations
                           governing small business size. Specifically, SBA proposed that
                           companies receiving Multiple Award Schedule Program contracts and
                           other multiple award contracts must re-certify their small business
                           status annually. SBA’s proposed changes also included procedures for
                           publishing a list of re-certifications and allowing interested parties to
                           challenge the re-certifications. SBA also reserved the right to review or
                           request a formal size determination of any re-certification. Public
                           comments on SBA’s proposed regulatory changes are due by June 24,
                           2003.


                       While these proposals address the primary cause of large companies being
                       reported as receiving small business awards, they do not directly address
                       the database problems we identified at the four federal buying activities. It
                       is imperative that federal contracting officials have accurate and
                       consistent data on companies’ business size in order to reliably report
                       small business contract awards. There are a number of initiatives
                       underway designed to improve federal contract databases. Accordingly,
                       we believe a coordinated effort between agencies is necessary to ensure
                       that accurate and reliable small business data is reported.


                       A purpose of the Small Business Act is to ensure that a fair proportion of
Conclusion             all federal contracts be placed with small business concerns. Implicit in
                       this is the notion that the work under the contract will actually be
                       performed by a small business.



                       Page 8                                                           GAO-03-704T
                  Small business contracting information reported in FPDS is misleading
                  because regulations permit companies to retain their small business status
                  over the life of contracts—which in today’s federal contracting
                  environment could last as many as 20 years. Federal databases containing
                  outdated and incorrect information add to the problem.

                  Considering the duration of current federal contracts, it is reasonable to
                  require contractors to update their small business status more frequently
                  to reflect their actual size. We believe the proposals by GSA, OFPP, and
                  SBA are preliminary steps to achieve this purpose.


                  Mr. Chairman, this completes my prepared statement. I would be happy to
                  respond to any questions you or other Members of the Committee may
                  have at this time.


                  For further information regarding this testimony, please contact David E.
Contact and       Cooper at (617) 788-0500. Individuals making key contributions to this
Acknowledgments   testimony include Robert Ackley, Penny Berrier, Chris Galvin, Julia
                  Kennon, Judy Lasley, John Needham, Russ Reiter, Sylvia Schatz, and
                  Karen Sloan.




                  Page 9                                                          GAO-03-704T
Appendix I: Scope and Methodology


             Using FPDS, we identified 49,366 companies receiving contract awards
             reported as going to small businesses in fiscal year 2001. Of these
             companies, 5,341 also received contract awards as a large business. These
             companies were reported receiving over $13.8 billion as a small business
             and almost $60.6 billion as a large business. To conduct our work, we
             reviewed a judgmental sample of contract actions awarded by four federal
             buying activities to five large companies.

             To ensure that we had a good selection of contract actions and federal
             buying activities to review, we identified companies that received at least
             50 contract actions that were recorded as going to a small business and at
             least 50 contract actions recorded as going to a large business. Nineteen
             companies met these parameters. We selected five of these companies
             based on a number of factors including the type, value, and number of
             contract actions, and location of the buying activity. The five large
             companies in our sample received both large and small business contracts
             totaling about $645 million and $460 million, respectively, in fiscal year
             2001. We then selected contract actions awarded to determine how the
             companies had, in these cases, been classified as a small business. We
             reviewed 131 contract actions totaling $17.4 million. Our work was
             performed at the Office of Personnel Management, GSA’s Federal Systems
             and Integration Management Center, the Department of Air Force’s
             Hanscom Air Force Base, and the Department of Army’s Defense
             Contracting Command-Washington.

             In addition, we reviewed the contracts awarded by GSA’s Federal Supply
             Service, National Institutes of Health’s Information Technology
             Acquisition and Assessment Center, National Aeronautic Space
             Administration’s Scientific and Engineering Workstation Procurement, and
             the Department of Army’s Small Army Computer Program.

             Finally, we held discussions with officials at GSA, OFPP, and SBA. To
             obtain the small business perspective, we spoke with small business
             association representatives. We conducted our review between November
             2002 and May 2003 in accordance with generally accepted auditing
             standards.




(120246)     Page 10                                                        GAO-03-704T
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