Contract Management
Reporting of Small Business Contract Awards Does Not Reflect Current Business Size Gao ID: GAO-03-704T May 7, 2003According to information in the Federal Procurement Data System (FPDS), in fiscal year 2001, small businesses received approximately 23 percent of federal contract dollars awarded. However, concerns have been raised that large companies are receiving federal contracts intended for small businesses.
According to FPDS, five large companies that we reviewed received contracts totaling $1.1 billion in fiscal year 2001, including $460 million 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 predominant cause for the misreporting of small business achievements 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 up to 20 years. In addition, agencies relied on various databases containing inaccurate information on current business size. The General Services Administration, the Office of Federal Procurement Policy, and the Small Business Administration have 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 proposals 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.
GAO-03-704T, Contract Management: Reporting of Small Business Contract Awards Does Not Reflect Current Business Size
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Testimony:
Before the Committee on Small Business, House of Representatives:
United States General Accounting Office:
GAO:
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:
Contract Management:
GAO-03-704T:
GAO Highlights:
Highlights of GAO-03-704T, testimony before the Committee on Small
Business, House of Representatives
Why GAO Did This Study:
According to information in the Federal Procurement Data System (FPDS),
in fiscal year 2001, small businesses received approximately 23 percent
of federal contract dollars awarded. However, concerns have been raised
that large companies are receiving federal contracts intended for small
businesses.
What GAO Found:
According to FPDS, five large companies that we reviewed received
contracts totaling $1.1 billion in fiscal year 2001, including $460
million 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 predominant cause for the misreporting of small business
achievements 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 up to 20 years. In addition, agencies
relied on various databases containing inaccurate information on
current business size.
The General Services Administration, the Office of Federal Procurement
Policy, and the Small Business Administration have 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 proposals 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.
What GAO Recommends:
We have not made recommendations in this testimony. However, we note
the need for accurate and consistent data on companies‘ business size
in order to reliably report small business contract awards.
Accordingly, we believe a coordinated effort between agencies is
necessary to ensure that accurate and reliable small business data is
reported.
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.
[End of section]
Mr. Chairman and Members of the Committee:
Thank you for inviting me to participate in today's hearing on whether
large companies[Footnote 1] are receiving federal contracts intended
for small businesses. According to the Federal Procurement Data System
(FPDS),[Footnote 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.
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.
Background:
The Small Business Act defines a "small business concern" as one that
is 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.
Reporting of Small Business Contract Awards in FPDS Does Not Reflect
Current Business Size:
Our work at the four federal buying activities showed that contracting
officials reported 131 contract actions made to the five large
companies in fiscal year 2001 as small business awards. (See fig. 1.):
Figure 1: Large Companies' Contracts Reported as Small Business Awards:
[See PDF for image]
[End of figure]
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.
Reasons Why Information In FPDS Does Not Reflect Current Business Size:
The primary reason why contracts awarded to large companies are
reported in FPDS as small business awards is that federal regulations
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 been acquired by a large business. Given that the term of a
contract can 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.):
Figure 2: An Example of How FPDS Small Business Information Is Affected
by Federal Regulations:
[See PDF for image]
[End of figure]
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.):
Figure 3: An Example of How FPDS Small Business Information Is Affected
by Contracting Officials Using Databases That Contain Outdated or
Inaccurate Information:
[See PDF for image]
[End of figure]
Proposals to Address Reporting of Small Business Size:
GSA, OFPP, and SBA have taken or proposed a number of actions to
improve the accuracy of reporting small business size. All of the
proposed 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:
* 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.
Conclusion:
A purpose of the Small Business Act is to ensure that a fair proportion
of 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.
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.
Contact and Acknowledgments:
For further information regarding this testimony, please contact David
E. Cooper at (617) 788-0500. Individuals making key contributions to
this testimony include Robert Ackley, Penny Berrier, Chris Galvin,
Julia Kennon, Judy Lasley, John Needham, Russ Reiter, Sylvia Schatz,
and Karen Sloan.
[End of section]
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.
FOOTNOTES
[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.
