The Small Business Bait and Switch

Few at the SBA have ever had to experience what Jerry McGuire calls "an up-at-dawn, pride-swallowing siege," of trying to win a customer's business.

Few at the SBA have ever had this experience, so they haven't a clue how demoralizing it is to small business entrepreneurs each time the SBA allows yet another large business to perform the small business "bait-and-switch."

There is no large government contractor that has not performed the "bait and switch" at one point in its government contracting career.

None.

After starting a small business and running it for 15 years, I have seen and experienced the bait and switch many times. As the Administrator of GSA, I worked with the Chief Acquisition Officer to try to end the "bait and switch" at the General Services Administration (GSA).

Let me tell you how bait-and-switch works.

Small businesses are the source of much of the innovation in the United States. They are more agile because of their size and more willing to take risks. Large businesses, when bidding on mammoth federal contracts, seek out the best small businesses, with the best credentials, the best technologies, processes, or skilled employees. In exchange for a place on the team, and the promise of future revenue, the small business often writes large portions of the proposal that fall within their area of expertise.

Bid and Proposal (B&P) for a small business is enormously costly because, often, it means diverting an employee away from an existing billable hour task, or asking the employee or one's self to work longer hours than usual. The small business is willing to forego current revenue in expectation of future gains.

The "bait and switch" usually occurs after contract award.

The haggling begins, first over hourly rates. Large government contractors often "put the squeeze" on the small business to reduce its hourly rates. During BAFO (Best and Final Offer) the large business may have bid ridiculously low rates in order to be perceived as both the technical winner and the best cost. So, the large business forces the small business to reduce its rates, so that the large business can continue to put a 20% load on top of the subcontractors costs.

Small businesses are often threatened with replacement if they don't play ball -- and they're the lucky ones.

Oftentimes, the large business never calls after the contract is awarded. Already, they have identified and switched to a cheaper small business. The fact that the replacement may not have the same stellar credentials is rarely considered. After all, the large government contractor knows that the subcontract agreements and the small business set-aside requirements are rarely enforced.

Sadly, many small businesses have never secured a "teaming agreement" before helping out with the bid. But, even those businesses with teaming agreement in hand may have to threaten legal action to ensure the subcontract is put in place. Since the subcontract agreement is usually negotiated after the large business is awarded the contract, the squeeze for rates is the usual result.

Contracting Officers, the SBA and agency OSDBUs each have enormous clout and could prevent the "bait and switch" from ever happening. But often, they look the other way and choose, instead to believe the fabrications of a big business which might claim that the small business decided it couldn't perform the work, or the small business changed its mind. Few government officials ever check with the small businesses listed in the winning proposal to determine why the small business is no longer on the winning team. This may also explain why almost no federal agencies met their small business goals for 2008.

And so, year after year, decade after decade, the same old bait and switch, for many of the same large businesses continues.

There is only one way to remedy this deficiency. Large businesses must perform the work promised, with the team proposed, or forefit payment until such time as the large business can fulfill its promises.

When I was Administrator of GSA, we had experimented with a new kind of invoicing to be required of all large business contracts, in which the identities of all subcontractors were to be listed on the monthly invoice, with an indication of what percentage of the current invoice was being paid to each subcontractor and the total percentage, year-to-date, of the contract billing performed by each small business.

A contracting officer, at a glance, could ensure a large business was hitting its targets and could immediately demand remediation. Any switch of subs would result in a call to the subcontractor to verify the reason for the change.

Enforcing small business set asides is the law. No new legislation is required. But enforcing this law requires toughness and fearlessness in the face of enormous pressures. Few are willing to risk their professional futures.

When the SBA also turns a blind eye, and when the Inspectors General, who have the statutory responsibility to audit contracts, turn a blind eye, the bait-and-switch continues, and small businesses gets screwed.

Small businesses are getting shut out of the stimulus spending. The recent GAO report makes that clear. But the statistic is actually worse since many small businesses are victims of the bait-and-switch and are shut out of the subcontracting opportunities as well.

Eliminating the bait and switch abuses of small businesses is easy.

But, nothing happens until you commit yourself to it. Small businesses are still waiting to see if the federal government will commit to following the law. It's been about forty years since the legislation was first enacted. So far, it's not looking very likely.