Top defense contracting companies reap the benefits meant for small businesses
By Elizabeth Brown
WASHINGTON, September 29, 2004 — When defense contracting giant The Titan
Corporation bought SenCom Corp. for $35 million in 2000, it also received a nice
secondary bonus—some $176 million worth of contracts designated for small
businesses.
Titan is not alone. Thirty percent of all defense contract money reported as going
to small businesses and special minority-owned businesses has ended up in the
hands of the top defense companies, the Center for Public Integrity has found.
Between 1998 and 2003, the Pentagon awarded more than $47 billion in contracts
designated for small businesses to companies that have each earned more than
$100 million from Defense Department contracts alone during that six year period.
More than half of the top 100 defense contractors—55 of them in all—received at
least $10 million in contracts with small business designations over the past six
years. All told, the small business contracts won by the largest defense firms
amounted to $9.3 billion, the Center found.
Titan, the 34th largest defense contractor, has received more than half a billion
dollars in preferential small business contracts by absorbing smaller companies and
continuing to win awards on their small business contracts. This large amount
accounted for 23 percent of the $2.39 billion in defense contracts the company
received from 1998 to 2003.
Nearly 45 percent of Titan's small business awards came in the form of small
business set asides, which not only carry a preferential classification for
government contracting, but are exclusively reserved for small companies. Nearly
80 percent of the $176 million Titan received from 2000 to 2003 through awards
on contracts SenCom Corp. won were recorded as funds set-aside to go to small
businesses.
"We have no problem with the government procurement systems and how they
handle these things," Titan spokesperson Ralph 'Wil' Williams told the Center.
According to current regulations, if a business is awarded a contract while it is
classified as small, the business is considered small for the life of the contract. This
allows millions of small business dollars to go to big companies when a small firm
outgrows the classification or is acquired, as noted in a General Accounting Office
investigation last year.
"In fact there is a lot of change going on with the small business awards" said
Deidre Lee the Director of Defense Procurement and Acquisition Policy at the
Department of Defense. "If it is truly a buy … we should novate the contract, which
would change the name, which would change the status. That is what should
happen."
Contracting expert Charles Tiefer called the percent of contracts classified as going
to small business that actually go to top companies "disheartening." He said
government agencies have an incentive to award contracts to small businesses.
"Whether by goals or quotas departments are obliged to make sure that small
businesses are taking contracts," said Tiefer, a professor of government
contracting at the University of Baltimore law school.
According to government-wide goals set by Congress, 23 percent of prime
contract dollars are supposed to be awarded to small businesses annually. The
Small Business Administration reported that the Defense Department exceeded
that goal by 2.4 percent in 2003.
L-3 Communications, which the Center found received $5.15 billion in contracts
during 1998-2003, collected 11 percent–or $582 million–of its total contracts as
those classified as going to small businesses. More than $219 million of those
contracts come from the management and technical services company EER
Systems, which L-3 Communications acquired in 2001 to become part of its
Government Services division.
Other top contractors receiving small business dollars include the military
equipment support services company, Engineered Support Systems Inc.. More
than one third of the company's $1.57 billion in contracts during 1998 to 2003
came from contracts classified as going to small business.
Engineered Support Systems received $188 million in small business dollars
through Keco Industries, which it acquired in 1998. Radian Inc. also brought in
$162 million in small business dollars since Engineered Support Systems acquired
the company in 2002.
'Get it right'
The Small Business Administration recently made changes to its regulations, set to
go into effect December 2004, that would require companies to re-certify
themselves as small businesses after they have been acquired by another
company, said Gary Jackson, the assistant administrator for size standards at the
SBA.
"The problem came up that a company may grow or be bought out but still gets
recorded as small for the purposes of that contract," Jackson said. "In December
we will look at situations when the contract is bought. The company would have to
certify if the company is still a small business."
Jackson noted that the new regulations would not deny a company work on a
contract previously won, but would remove the preferential classification for
government reporting. He said the acquisition problem arose over the past five
years after the government developed contracts that can last up to 20 years —
plenty of time to grow out of a small business or be acquired by a larger company.
Tiefer said he was cautious about the Small Business Administration's introduction
of certification regulations.
"[The regulation] sounds like a great idea, but many more promises are made
about protecting the small business community, especially before an election,"
Tiefer said.
The GSA has already been requiring recertification of small businesses that win
contracts through its schedules said David Drabkin, the deputy chief acquisition
officer at the General Services Administration. "Under current regulations if you are
small you remain small for the life of the contract, there is no requirement in
regulation or law to investigate the size because of the SBA rule," Drabkin said.
But beginning in 2002, Drabkin said, General Services Administration contract
officers were required to ask for recertification of small business size after the base
period of the contract had ended, which is usually five years, to "keep in the spirit
of what we are trying to do" with the small business program.
Drabkin said the General Services Administration's new "Get It Right" campaign,
launched to re-educate federal contracting employees about proper contracting
methods, will include a review to see if contracting officers have been making the
inquiry into business size.
