Policy

When Government Contractors Battle Over the Meaning of Small Business


Construction workers at the Caltrans Bridge expansion project in San Diego County, California

Photograph by Sam Hodgson/Bloomberg

Construction workers at the Caltrans Bridge expansion project in San Diego County, California

What makes a business small? The U.S. government knows (PDF). Businesses seeking loans backed by the Small Business Administration, or vying for federal contracts reserved for small outfits, must meet specific head count or revenue (or other) size requirements. For instance, a company that builds bridges can have as much as $33.5 million in annual revenue and qualify as a small business. A company that makes prefabricated wood buildings can have as many as 500 employees.

What happens when businesses mischaracterize themselves as small to take advantage of government programs? It depends. The penalties for government contractors that made false claim to small status used to be relatively mild, so long as the business fulfilled its contract. The Small Business Jobs Act of 2010 was supposed to up the ante, letting the government seek larger damages from contractors that lie about their size. But penalizing culprits may not be as easy as it sounds, as a recent decision by the U.S. Government Accountability Office shows.

In May 2012 the federal government issued a request-for-proposals to supply communications equipment for up to 40 Coast Guard cutters. Six companies bid on the $7 million contract, which was set aside for a small business, with Leesburg (Va.)-based MTN Government Services winning the bid. Just one catch: Another bidder on the contract, TrustComm of Stafford, Va., filed a protest, arguing that MTNGS didn’t qualify as a small business.

Actually, there was a second catch. Due to backlogs at the SBA, it took nine months for the agency to determine MTNGS wasn’t “small.” By that time, the Coast Guard was already testing MTNGS’s communications systems. Awarding the contract to another company would cost millions and leave ships without important equipment, the Coast Guard said. TrustComm filed a second protest, this time asking the GAO to intercede. In a decision not made public until last week, the GAO ruled that saving costs by letting MTNGS keep the contract outweighed the importance of steering the job to a small business.

Companies that make wireless communications equipment can have as many as 750 employees and still be considered small, according to an SBA document. MTNGS “did not mischaracterize their standing as a small business,” company spokeswoman Alyce Menton wrote in an e-mail. The company, which has about 25 employees, is run separately from its larger, related entity, MTN Satellite Communications, according to Menton. Both are owned by private equity investors, including Ignition Capital. The SBA used the head counts at all portfolio companies held by MTNGS’s investors to rule that it didn’t qualify as small, says Menton. She adds that “we had no reason to move forward with an appeal” once the Coast Guard opted to stick with the company.

That doesn’t make the GAO’s decision any less of a “disappointment for legitimate small businesses who comply with the SBA contracting regulations,” Albert Krachman, a partner in the public-contracts practice at law firm Blank Rome, wrote in an e-mail. “A size protest can be an empty remedy if the SBA does not have the resources to timely rule on them, and agencies can essentially ignore the issue.”

The GAO’s ruling doesn’t mean the case is closed, Krachman continues. The government could still sue MTN for falsely claiming to be a small business, allowing the Coast Guard to recoup its costs. That would signal that the federal government cares about helping small businesses win federal contracts. Then again, Washington’s track record when it comes to missing small business contracting goals indicates that awarding contracts to small businesses isn’t its highest priority.

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

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