Small Businesses Struggle Against Government Contract Fraud

More than two years ago, the African American owner of a southwestern engineering and construction services firm thought he’d finally hit pay dirt. After years spent seeking contracting opportunities with a major corporation–and a good word from an influential House committee chairman–he was chosen to serve as the subcontractor on a winning $1 billion bid for a project in Afghanistan. But the thrill was short-lived, he said, speaking on the condition of anonymity for fear of retribution.

“As of yet I haven’t received a lick of work. These corporations always promise they’re going to provide so much work to small businesses and at the end of the day we never get what we’re supposed to.”

Fraud and abuse of the federal contracting system is not news. Nor is the fact that small business set aside contracts don’t always go to small businesses. In fact, some experts estimate that although federal guidelines mandate that 23% of all government contracts be awarded to small businesses each year, $100 billion or more in small business contracts go to Fortune 500 and other large companies, including the one that reneged on the Afghanistan deal. The impact can be devastating for minority entrepreneurs, particularly those struggling to build businesses that will become self-sustaining.

“Fraud and abuse in government contracting undermines the objective of these important programs and weakens public confidence and support for them,” says David Hinson, director of the Department of Commerce’s Minority Business Development Agency (MBDA). “Quality minority firms are being stifled and their long-term longevity is threatened.”

For Anthony Robinson, president of the Minority Business Enterprise Legal Defense and Educational Fund, the solution is simple: Enforcement. “Companies misrepresenting themselves as small businesses are committing fraud; they

should be prosecuted for it and be made to pay,” Robinson says. “Only when it hits their pocketbooks will it get their attention and as long as they only get a slap on the wrist, this fraudulent activity will continue.”

At one point, he adds, the SBA purged its contractor lists of many of the firms that were misrepresenting themselves as small businesses, but they soon reappeared on the small and disadvantaged businesses list.

“So, we’ve not even been able to rely on the government agency that’s charged with the responsibility of monitoring this program. The problem is also not having the appropriate and necessary government personnel in place to handle the procurement process and execute enforcement,” Robinson says.

But Hank Wilfong, CEO of the National Association of Small Disadvantaged Businesses, says that the bigger issue is that too many minority businesses aren’t prepared to handle those lost contracting opportunities, and that’s the biggest problem of all.

The 8(a) program, for example, which Wilfong ran in the ’80s, must be overhauled to reflect its original mission to create competitively viable companies that can compete in the marketplace on their own.

“The desire was to build firms that could handle larger contracts and that hasn’t happened,” he says. “People don’t understand that small has to be a lot larger than it used to be.” And the ones that are ready to compete are hindered by the government’s industry size standards, which prohibit them from going after bigger contracts.

Robinson agrees that the size standards unfairly and unnecessarily restrict the path to competitive viability for minorities who must already deal with such issues as larger corporations’ market dominance and, in some cases, outright discrimination.

New York Rep. Edolphous Towns, chair of the House Oversight and Government Reform Committee

, suggests that the government needs to build a bridge between the 8(a) and other small business assistance programs and big corporations.

“We have companies graduate that are too big to stay in the program but not big enough to compete with the big guys. Without a bridge, once they come out, they won’t be able to make it,” he says. “If we don’t have a hearing we will have our staff looking into it and making suggestions.”

Hinson says the MBDA is focused on creating a new generation of $100 million minority-owned firms. “To achieve this growth–moving from startup and small companies–we need to change the way minority entrepreneurs think about growth. It’s not just organic growth, but being prepared to enter into strategic alliances, joint ventures, and making acquisitions.”