Mom and Pop and Uncle Sam

The federal government goes to great lengths to support small businesses. But for many firms, a deal with the GSA could be the last they ever make.

Randy Fitzgerald | From the January 1982 issue

Like small fish they are lured unsuspecting into a pool of sharks. Rarely if ever will you read about them, if only because the bureaucracy is conditioned to conceal its mistakes and the press doesn't publish an obituary column for the victims of government. They are small business entrepreneurs who learn the hard way that doing business with federal agencies can be a bad deal.

Why do business with the government in the first place? Because it is one of the biggest purchasers of goods and services there is—imagine a corporate conglomerate the size of the federal government. And under the Small Business Act of 1971, agencies are frequently required to reserve their business for small firms and to make special efforts to involve enterprises owned by women and minorities. It's "help" that some small businesses are learning they'd do better without.

Elizabeth Gobla knows. She was a modestly successful small-business woman when the General Services Administration entered her life a few years back. GSA, general purchasing agent and housekeeper for the federal government, has been raked over the coals again and again for improprieties in carrying out its work. But the case history of Liz Gobla shows that the saddest scandal of all may be GSA's dealings with small contractors.

Gobla's business was a security guard service, operated out of her home near Wilkes-Barre, Pennsylvania. A 38-year-old mother of two teenagers and married to a state trooper, Liz Gobla had taught high school English before going into business for herself. Her firm, United Security, employed 40 to 100 persons, depending on the number of contracts she was able to secure. Her regular clients included two hospitals and the Pocono Downs Race Track.

That was before GSA came into the picture, in December 1978. From among 17 security guard firms listed in the Wilkes-Barre yellow pages, a GSA employee in the Contract Services Branch in Washington selected at random four—one of them Gobla's—to bid on an "emergency" contract to provide guard services for a federal building in Wilkes-Barre. Gobla remembers being surprised and puzzled when the GSA employee, Deborah Young, called on December 21, 1978: "All my business was commercial. I'd never done a government job before. I didn't know why they were calling me. I didn't even know what GSA meant."

She was told that one armed guard was needed round-the-clock for 10 days. Gobla decided that yes, United would be able to provide the service. She phoned in her bid within the hour, and the next afternoon Young called back with the news that United was low bidder and that Gobla should begin providing service at 6:00 P.M. that same day, which she did.

On December 28 Gobla received another call from Deborah Young, this time to bid on a six-month contract for 24-hour guard service at the same location and at another federal building nearby. Gobla would be required to provide armed guards, to pay her employees at least $4.14 an hour plus 21 cents an hour for health benefits, and to provide them with 10 radios. When Gobla asked Young to be more specific about the type of radios required, because United already had six walkie-talkies, she was assured that it didn't matter—GSA just wanted the guards to be able to communicate from one floor to another.

At $5.63 an hour, Gobla once again was low bidder. Based on a verbal agreement with GSA, United began providing security for the two buildings on January 2. She did not receive a written contract from GSA until eight days later, and it was for three months, not the agreed-upon six. Thinking a mistake had been made, Gobla called Young at GSA, who reassured her that it really was a six-month contract, only for technical reasons it had to be divided up into two three-month periods. Renewal would only be a formality, promised Young. But, Gobla was soon to discover, this was just one of many "mix-ups" in her dealings with GSA.

On the same day she had finally received the written contract in the mail, she met with GSA officials and people from the federal buildings involved for a "preperformance" meeting that is ordinarily held before the contracted-for service is commenced. At this meeting, there was some discussion of "technical specifications" for the job, but after the meeting when she sat down to study the contract and the specifications, she realized that some items of discussion weren't to be found in the paperwork she'd received. She put in another call to Deborah Young, and the papers were sent out.

Gobla received the contract's 40 pages of technical specifications just hours before she was to drive to Washington to submit her signed contract to GSA. On reading them, she realized to her horror that she was obligated to purchase 10 FM radios with special crystals—it would cost her over $13,000—and that United would have to purchase sidearms costing another $1,200, instead of relying on employee-owned weapons. During the contract-signing session, Gobla asked that the contract be extended from six months to a year so that her company could absorb these unanticipated costs. That would be impossible, she was told.

Had she been familiar with federal procurement policy, she would have known that at this point she had grounds for withdrawal from the contract. GSA officials present at the meeting have testified on the witness stand that Gobla was so advised, but they admit to having failed to inform her that she could be compensated for money she had already expended. Gobla, on the other hand, insists that these officials never even told her she could back out.

"I felt that I had a legal obligation to finish. I had already been on the job for two weeks. Even with the added expense of radios and weapons, I figured I could still break even or make a small profit on a six-month contract. I was confident I could get other government contracts. So I thought I would use this six-month contract to learn a little bit more about doing business with the government." She didn't know how much there was to learn.

Now there enters the story of Elizabeth Gobla and GSA the possibility of some shady goings on. Sometime in early January, one of the GSA officials administering her contract, Kevin Kampschroer, acting assistant chief of Support Services, received a phone call from Robert Kulick, an administrative aide to then-Pennsylvania Rep. Daniel Flood, suggesting that invitations to bid on future security guard contracts in the Wilkes-Barre area be handled through Flood's office "since the Congressman's office would be familiar with businesses in that district."

Richard Lewis, a GSA contract monitor at the time, says he was standing in Kampschroer's office when Flood's aide called. He remembers it as happening during the first week in January, before Gobla was informed that her six-month contract was actually for three months with an option to renew.

"The call caught Kevin by surprise," recalls Lewis, whose oversight role included the United contract. "He was somewhat angry about the political interference. But I detected that he had been intimidated."

Lewis claims that only after this phone call did Kampschroer decide to limit Gobla's contract to three months. "On the forms, if you held them up to the light, you could see where the six had been whited out and a three put in its place," Lewis says. Kampschroer would later testify that he was unaffected by the call from Flood's office. The term of the contract was changed, he said, because "one of the officials who was required to sign [the findings and determinations] before the contract was awarded preferred a three-month period."

No one at GSA seems to have thought it peculiar at the time that a member of Flood's staff would be making such overtures. Yet Flood was at that very time under indictment, accused of influencing nine federal agencies on behalf of his business friends. On January 17 Flood went to trial on these charges. Kulick, Flood's aide, contends that he called Kampschroer at GSA only because a security guard service in Wilkes-Barre had complained about not having had the opportunity to bid on contracts in the area.

Independently of all this, United Security began experiencing difficulties in performing the contract. United's order for the 10 required radios from Motorola went unfulfilled because, according to a Motorola sales manager, the company was obligated to meet the need of federal officials for radio equipment during the nuclear emergency at Three Mile Island near Harrisburg. When Gobla informed GSA officials of the delay, "I was told that was my problem."

Gobla had repeatedly reminded GSA of United's need for prompt payments. Her contract had specified that "payment will be made once each month…for services authorized for the preceding month." But the $31,694 in payments for January services was not released by GSA until March 21, 1979, causing United severe cash-flow problems. For services United had provided under the 10-day emergency contract in December, Gobla did not receive payment until May 24.

Motorola delivered the radios on April 21, but by then it was too late, for Kampschroer had already acted to terminate United by refusing to extend the contract for another three months. GSA contract monitor Jean Hacken, who along with Richard Lewis shared oversight responsibility for the United contract, had reported early in April that United was in violation of Department of Labor (DOL) wage standards that required payment of certain fringe benefits. GSA forwarded this information over Kampschroer's signature to DOL without complying with a requirement that Gobla be confronted with allegations of inadequate service.

A Kampschroer memo dated April 9 notes that he "had originally requested a three month extension" of Gobla's contract but now wanted it extended only until the end of April because of "serious problems with the contract performance." Even if Gobla had been immediately informed of her termination, there would have been a violation of a GSA policy that 30 days' notice be given. In fact, different GSA officials testified that she was advised of the termination only on April 16 or 19. "Incredibly," notes Gobla's former attorney, Daniel Guttman, "although GSA officials were in touch with her at least once by letter, once by phone, and once in a meeting during that interval, no one thought to tell her, as she struggled to perfect her performance of the contract, that the contract was being terminated in two weeks regardless."

Even before refusing to renew United's contract, Kampschroer had told contract monitor Hacken to contact Congressman Flood's office for a list of preferred security guard agencies to bid on service for the two buildings in Wilkes-Barre. Flood assistant Tom Jones provided the names of four firms—one of them, Del-Cap, co-owned by a relative by marriage of Flood aide Kulick, who had, back in January, placed the call to GSA. The last paragraph of Kampschroer's April 9 memo to the Contract Services Branch read: "After the award of the last contract, we received information on guard firms from Congressman Flood's office. The names are attached for your reference."

In a bizarre twist, GSA also invited United to bid on the extension of its own contract. "I couldn't figure it out," Gobla shakes her head. "Why would they ask me to bid if they really thought I had been performing poorly?" Del-Cap, which had been underbid by United on the original contract, won this round of bidding and replaced United on the job.

A former employee of United later alleged, in interviews with investigators for GSA's inspector general's office, that Jean Hacken had attempted to recruit him to work for Del-Cap, apparently because that firm was short of qualified personnel. Hacken denies it.

As for Liz Gobla, her problems had only begun to surface. A chain reaction of government agency intervention had been set in motion. On May 4 the Department of Labor ordered GSA to withhold $37,000 in payments due United based on the alleged violations of wage standards. Payments from GSA had already been so late in coming that Gobla had delayed payment of certain obligations. Now, she was unable to pay her employees for the last two weeks on the GSA job.

Pennsylvania's Labor Department got into the act, filing criminal charges against Gobla for not paying these two weeks of wages. Alerted to this financial bloodletting, the Internal Revenue Service swooped in to file levies against her three remaining commercial contracts seeking immediate payment of withholding taxes for the first quarter, as well as interest and penalties. Now, United found itself unable to meet the payroll for the commercial hospital accounts, and on May 10 these contracts were lost as well.

"The IRS and Labor Department came at me like vultures," Gobla says bitterly. "I was wiped out overnight. Men were banging at my door wanting their paychecks. Auditors were at my house every day. And I was on the verge of a nervous breakdown."

She didn't have money to take GSA to court. She'd already spent over $2,000 on long-distance phone calls attempting to resolve the matter with GSA herself. "They'd just put me on hold and forget about me." After months of searching, she finally found an attorney willing to handle her case on contingency—Daniel Guttman, with the firm of Spiegel and McDiarmid in Washington.

By this time, DOL had filed a complaint against Gobla. Guttman met with DOL attorneys in an attempt to defuse the suit against United. He was told that once DOL filed a complaint, the agency would not settle for anything less than an admission of guilt. Since DOL sought to prevent United from obtaining any future government contracts, Guttman prepared for trial.

During pretrial research, he discovered that in August, nearly three months earlier, DOL had informed GSA that the $37,000 withheld had been estimated too high, and $7,000 should be released to Gobla; GSA had neither informed Gobla of this development nor released the money. Gobla had not even been provided with a written itemization of DOL charges against her.

For two days in November 1979, Guttman and a DOL attorney interrogated witnesses before an administrative law judge. GSA officials conceded contract violations, mismanagement, and having misinformed Gobla about the length of the contract. When Guttman attempted to question them about possible influence by Congressman Flood's staff over the contract, the judge ruled that line of questioning out of order.

During a recess, as Guttman pored over the wage determination sheet that GSA had included in its belated technical specifications for Gobla's contract, he made a startling discovery. The wage standards that Gobla was charged with violating related to western Pennsylvania, not Wilkes-Barre, in the northeastern portion of the state. Guttman rushed to a phone, called DOL, and got confirmation—not only was Gobla being prosecuted under the wrong wage determination; she had actually paid her men even more than what DOL wage standards for that area required. This revelation completely changed the complexion of the hearing, prompting the judge to rule that DOL had no case against United Security.

Despite this ruling, DOL refused to acknowledge in writing that Gobla had not violated any law, demanding instead that she promise "to obey the law in the future." Gobla resisted any agreement that implied she was guilty of wrongdoing. So a compromise was reached in which Gobla promised to "continue" obeying the law.

On April 16, 1980, Guttman filed a series of claims with GSA for recovery of $10,000 in profits Gobla lost when GSA reneged on promises of a six-month contract, for the $14,228 she had needlessly expended on radios and weapons, and for $18,129 relating to legal and other expenses incurred in trying to settle her GSA problems and defending herself against baseless charges in the DOL suit. GSA's Contract Services Branch, while apologizing for "GSA procedural delays that apparently took place during the period of the contract," denied in its entirety each of the claims, except to refund to United $851.25 for payment deductions GSA could not adequately substantiate.

Responding to inquiries from the GSA inspector general's office, GSA Regional Administrator Walter Kallaur listed a number of "administrative changes" he said the agency had implemented to "prevent a similar situation from occurring in the future." These changes included a training program for all contracting personnel, counseling sessions for GSA personnel on conformance to GSA standards of conduct, new procedures to "insure that all prospective bidders are given accurate and complete information when invited to submit bids," and counseling for the GSA employees involved in the Gobla contract concerning "the administrative errors that occurred."

A special agent with the inspector general's office concluded, based on interviews with Kampschroer and Kulick, that there was no evidence of "improper influence by members of Congressman Flood's staff on the awarding of this contract." Neither could the investigator sustain allegations "that GSA employees had unfairly treated United Security."

Of course, Gobla argues that fairness should be judged on the basis of net effect rather than intent. By that standard, even the GSA must concede that United, in the words of former contract monitor Richard Lewis, "got screwed."

"It's clear that a small businesswoman was lured in like a fly in a flytrap," observes Gobla's attorney, Guttman. "Then they hit her over the head with all these regulations, and stood by and watched her get devoured."

Adds Lewis, who has since left GSA: "Government is supposed to be bending over backwards to help women-owned and minority businesses. But Liz Gobla's case makes that folly. There is an insensitivity to small business. Our mission in support services at GSA was to ensure performance, not to throw contractors out into the street."

Liz Gobla's ordeal is far from over. Soon after GSA rejected her damage claims, Daniel Guttman left Spiegel and McDiarmid and the firm dropped her case. A law student at George Washington University Legal Clinic briefly handled her case before the GSA Board of Appeals, and officials at the Small Business Administration have provided advice and encouragement. But the process may take years.

"I was a victim of all the rotten things that happen in government," Gobla says bitterly. "My business is gone. My business reputation is gone. You are always taught that government exists to support you. But that's garbage. The bureaucracy and all that goes with it makes it impossible for intelligent people to make reasonable decisions. It's as if they took away all the things that I believed in."

The bankrupting of United Security raises numerous questions about the ability of small businesses to provide goods and services to federal agencies. Even as the evidence mounts that the healthy competition of the marketplace makes contracting far more cost-effective than direct provision of services by government employees, the technical specifications for contracts become more lengthy and complex. Increasingly, only those firms with sufficient legal resources or prior experience with government contracting can afford even to bid.

Bureaucratic procedure in and of itself often assures cash-flow problems for those businesses least able to absorb delays in payment. Often the mere appearance of political interference can have such an intimidating effect on bureaucrats that the shock waves are felt at every level of the decision-making structure. And when federal employees foul up, as they admittedly did with United Security, it is the small or inexperienced firms that suffer the most dire consequences. The United case demonstrates as well that even when a government agency admits its mistakes, that admission comes at the government's convenience and the victim's expense.

Since United's demise, says former GSA official Lewis, at least three other security guard firms in the Washington, D.C., region have been bankrupted by GSA mismanagement and red tape. Similar casualty reports from the other nine GSA regions demonstrate that the mortality rate for contractors is such that if it were a contagious sickness, the Centers for Disease Control would brand GSA a threat to the public health.

"United Security was just one instance of a small business no longer being able to provide guard services to GSA because of the complexity of government specifications and the level of capital needed to perform," says Lewis. "It will be a continuing trend. Only the big contractors can survive."

Bigness is better no matter what the cost has long been the bureaucratic motto in Washington, and GSA ranks right up there with the Pentagon as a primary culprit in making that doctrine both fashionable and profitable. The agency rationale is that bigness usually means stability. One can detect a more pragmatic ulterior motive for condoning and encouraging the growth of tax-fed monopolies: under what is known as the revolving door, many bureaucrats will eventually seek employment from the firms they once regulated or dealt with in the contracting process; only large businesses can afford to pay the salaries that bureaucrats seem to think they deserve.

One of the lessons to be learned from Liz Gobla's experience is that Uncle Sam and the entrepreneur are more often than not working at cross purposes. Where the entrepreneur seeks to compete, providing goods and services at lower cost, government agencies are seeking "stable" sources of supply. The resulting bureaucratic fastidiousness smothers far more than just the spirit of competition. Mixing government and small business is like the old parable of guarding chickens with foxes; one doesn't need a playbill to know which character is going to get eaten.