Reporting of Small Business Contract Awards Does Not Reflect	 
Current Business Size (07-MAY-03, GAO-03-776R). 		 
                                                                 
We have prepared this report in response to concerns about	 
whether large companies are receiving federal contracts intended 
for small businesses. We reviewed awards to five large companies 
to determine (1) how contracts awarded to the companies were	 
reported in Federal Procurement Data System (FPDS), (2) why	 
federal contract officials reported the contracts as small	 
business awards, and (3) what actions are being taken to address 
any identified problems.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-776R					        
    ACCNO:   A06846						        
  TITLE:     Reporting of Small Business Contract Awards Does Not     
Reflect Current Business Size					 
     DATE:   05/07/2003 
  SUBJECT:   Contract administration				 
	     Contract extensions				 
	     Contract oversight 				 
	     Federal procurement				 
	     Small business					 
	     Small business contracts				 
	     Strategic planning 				 
	     GSA Federal Procurement Data System		 

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GAO-03-776R

GAO- 03- 776R Small Business Certification

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 Page 2 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)

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

GAO- 03- 704T

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.

Large Companies* Contracts Reported as Small Business Awards

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. 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.
Highlights of GAO- 03- 704T, testimony

before the Committee on Small Business, House of Representatives May 7,
2003

CONTRACT MANAGEMENT

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

Page 1 GAO- 03- 704T

Mr. Chairman and Members of the Committee: Thank you for inviting me to
participate in today*s hearing on whether large companies 1 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 2 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
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. Background

Page 3 GAO- 03- 704T

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 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. Reporting of Small

Business Contract Awards in FPDS Does Not Reflect Current Business Size

Page 4 GAO- 03- 704T

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.) Reasons Why

Information In FPDS Does Not Reflect Current Business Size

Page 5 GAO- 03- 704T

Figure 2: An Example of How FPDS Small Business Information Is Affected by
Federal Regulations

Page 6 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 7 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 8 GAO- 03- 704T

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. 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. Proposals to Address

Reporting of Small Business Size

Conclusion

Page 9 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.
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. Contact and Acknowledgments

Page 10 GAO- 03- 704T

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.
Appendix I: Scope and Methodology

(120246)

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