Government contracting: Business size and the implications of cheating

Acquiring government contracts is hard work. So, when some businesses hear that there are set-aside federal contracts that are awarded specifically to small businesses, is it any wonder that some businesses try to misrepresent their size to try and win a bid? Especially since small businesses were awarded around $96 billion dollars in federal contracts for 2011.

Business size

In order to be considered a small business, a company must have a certain amount of employees (depending on the industry) and make under a certain income bracket annually (also dependent on industry). So, for example, a company in the tech industry would have a larger maximum income bracket than a cleaning service.

Size protests

Since the competition for bids is increasing, there have been more and more protests. A protest is an action taken by a company that feels it lost a contract to a business that does not meet business size regulations. In May of 2012, according to Bloomberg BusinessWeek, there was a $7 million contract for an order of Coast Guard cutters (type of boat).

The company MTN Government Services won the bid. However, the company TrustComm filed a protest stating that MTN Government Services didn’t meet the size qualifications of a small business. TrustComm was right to file a protest, because after nine months of investigation by the Small Business Administration, they determined that MTNGS was indeed not a small business.

The SBA is so backed up with paperwork that any protest takes an exorbitant amount of time to investigate. So long, in fact, that by the time the SBA figured out the MTNGS wasn’t a small business, the Coast Guard was already testing the cutters and if the contract were pulled from MTN the costs would outweigh the benefit of awarding the contract to a small business.

This is unfortunate for small businesses who take the time and energy to comply with SBA regulations in order to take part in the set-aside government contracts for small businesses. The SBA, in order to help regulate non-small business from competing with small businesses, did make size protests a viable option for small businesses to help with the situation, but with such a massive backlog, a protest – as exemplified by MTNGS – does little if businesses that take advantage of regulations don’t get penalized.

Cheating

While the dealings with MTNGS and TrustComm seem like a simple business misunderstanding, cheating on government contracts goes much deeper. Besides the normal amount of set-aside for small businesses, there are set-aside contracts for small businesses that are owned by underrepresented populations. So, there are contracts specifically available for women-owned, veteran-owned, service-disable veteran-owned, and minority-owned small businesses.

There are also advantages to winning contracts if your business is located in a certified Historically Underutilized Business Zone (HUBZone). A business has to self-certify itself in order to qualify for these labels. As you could probably guess, big businesses have also tried taking advantage of these self-certifications. The SBA does screen these self-certifications, but again the backlogs make it impossible for the SBA to keep the businesses honest until another business files a protest.

Conclusion

These are the type of loopholes that business owners are taking advantage of. This is harmful to small businesses who are attempting to play fair, but get the help they need to stay competitive. The responsibility neither lies solely on the government or businesses, but both need to take steps to fix the problem. There’s no point in trying to keep disadvantaged businesses competitive if it only enables other businesses to take what they didn’t earn.

Luckily, there are some solutions that are being discussed and will soon be implemented. From stricter guidelines to “open-book” clauses, the government is working to keep government contracting honest.