The government needs to fix its system of defining and providing contracting opportunities to small businesses, according to advocacy groups, industry analysts and many small businesses.

The current system, which the Small Business Administration has been trying to update for years, allows a sizable chunk of revenue earmarked for small firms to instead go to large companies. Regulatory loopholes, reporting errors and possibly fraud are to blame, experts say.

But some observers add that misplaced money isn’t the only issue. They believe SBA’s classification system is outmoded.

Although many agree on the diagnosis, there’s no consensus on the appropriate cure. Some advocates believe the system is too restrictive, while others argue it is not strict enough.

The challenge of defining small businesses has been around for years, and SBA has revised the system from time to time. In 2000, the agency revamped the classification scheme, replacing Standard Industry Classification codes with the more technology-specific North American Industry Classification System codes.

In May 2004, SBA published a final rule requiring firms with small-business contracts that were transferred from other companies — via acquisition, for example — to recertify their size status. The goal is to prevent companies from continuing to receive small-business money after a larger firm has acquired and absorbed them.

Top 100 small federal vendors in fiscal 2006
Click here to enlarge chart (.pdf).

A new round of modification may be afoot. Congress’ SBA reauthorization bill includes measures intended to address small-business concerns, and the agency is expected to issue a new rule on size recertification, while industry groups and small businesses continue to suggest additional changes.

Meanwhile, everyone is looking to new SBA Administrator Steven Preston for a sense of direction.

“I think a lot of us are waiting to see what he is going to be able to affect and what his agenda will be,” said Guy Timberlake, chief executive officer of the American Small Business Coalition.

Shifting dollars
Small businesses have contended for years that dollars intended for them sometimes go to large firms. Studies released in recent years, some of which SBA conducted, have confirmed those allegations.

Eric Thorson, SBA’s inspector general, recently identified widespread flaws in the procurement system that let large businesses reap small-business awards.

He added that studies have shown that agencies continue to count contracts toward their small-business objectives even after the holders have outgrown their size standards or been acquired by large companies.