Programs for Small and Disadvantaged Businesses

Enhance Programs for Small Business and Small Disadvantaged Business
Concerns

Background

The federal government has a policy to place a fair proportion of its
contracts with small business and small disadvantaged business concerns.
It also has a policy to grant small business and small disadvantaged
business concerns the maximum practicable opportunity to participate in
performance of federal contracts as subcontractors.1 To implement these
policies, the Small Business Act requires federal agencies to obtain
small business subcontracting plans from prime contractors when the
value of the procurement exceeds $500,000 ($1 million for construction)
and offers subcontracting possibilities.2 This requirement also applies
when contracting with state and local governments or with entities that
are controlled or regulated by state and local governmental bodies
(e.g., public utilities).

The Small Business Act requires the President to establish annual
governmentwide goals for procurement contracts awarded to small business
and small disadvantaged business concerns. The governmentwide goal for
participation by small business concerns must be established at not less
than 20 percent of the total value of all prime contract awards for each
fiscal year. As part of this, a goal for participation by small
disadvantaged business concerns must also be established at not less
than 5 percent of the total value of all prime contracts and subcontract
awards for each fiscal year.3

The Small Business SetAside Program. A number of programs have been
established to implement the policies and facilitate agency achievement
of the abovecited goals. The most commonly used programs are the small
business setaside program, the 8(a) program, and the program for
subcontracting with small business and small disadvantaged business
concerns.4

The small business setaside program authorizes agencies to reserve
individual procurements exclusively for participation by small business
concerns. The 8(a) program is a business development program
administered by the Small Business Administration (SBA) for small
businesses owned and controlled by socially and economically
disadvantaged U.S. citizens. To participate, firms must apply and meet
eligibility criteria.  Program participation is limited to nine years.
Participants may receive a variety of business development services
including management and technical assistance, direct SBA loans, surety
bond waivers, the transfer of government surplus property, and
government contracts awarded under special procedures. SBA's
subcontractors are referred to as "8(a) contractors." Federal agencies
award contracts to SBA, which in turn subcontracts with eligible 8(a)
firms either on a solesource or competitive basis for performance of the
agencies' work.

Small businesses awarded contracts under the small business setaside and
8(a) programs are limited in the amount of subcontracting during the
contract's term. For service and supply contracts, the small business
concern must perform at least 50 percent of the cost of contract
performance incurred for personnel with its own employees. For
construction, small business general contractors must perform at least
15 percent of the contract cost, not including cost of materials, with
their own employees. Small business special trade contractors must
perform at least 25 percent of the contract with their own employees.5
In addition, small businesses must supply the product of another small
business under the small business setaside and 8(a) programs.

Other small business programs. In addition to the small business
setaside and 8(a) programs, which apply governmentwide, the Department
of Defense (DOD) has special statutory authority to conduct small
disadvantaged business setasides.6 Under the setaside program, DOD has
the authority to limit competition on a specific procurement exclusively
to small disadvantaged businesses. The program requires a
selfcertification that the offeror is a small disadvantaged business as
defined in the Small Business Act. This certification may be challenged,
but SBA precertification is not required.

Need for Change

The administrative burden imposed on small business by the limitation on
subcontracting is enormous. Every quotation a small business obtains
from a prospective supplier or subcontractor must be evaluated not only
from a "make or buy" standpoint prior to contract award, but also from a
large or small business supplier perspective. The small business must
compare costs from each source and consider the expertise of the small
business supplier to meet the requirements of the solicitation as a
subcontractor, even if the large business supplier is a known acceptable
source. The small business submitting an offer to the government must
expend extra time locating sources in order to comply with the
limitation on subcontracting, instead of selecting a supplier or service
provider based on price or other factors important to that small
business. This limitation is prejudicial to small businesses, as large
businesses do not have to comply with such requirements.

Civilian agencies need authority to conduct small disadvantaged business
setasides because the 8(a) program does not encompass all small
disadvantaged businesses. Some firms have graduated from the 8(a)
program but still qualify as small businesses under the applicable size
standard, while others have never applied to the 8(a) program. To the
extent that these firms are not included in competitions for 8(a)
awards, the procuring agency's options for cost and capability are
limited. Procuring agencies need the flexibility to use either the 8(a)
program or small disadvantaged business setasides as means to achieve
the statutory goals.

Federal agencies have difficulty getting subcontracting plans when
contracting with state and local governments or entities they regulate.
The problem is most prevalent in the monopolistic public utilities
industry, where the federal government has few options to enforce the
requirements for subcontracting plans.  Currently, thousands of staff
hours and dollars are expended annually debating the issue, trying to
persuade utilities of the merits of the federal government's position,
or otherwise litigating conflicts. For all the effort, few benefits
accrue to the small business community.

Attempts to resolve the problem have been unsuccessful. Public utilities
refuse to enter into contracts, insisting that the federal government
can procure service under tariffs like every other customer. When the
federal government does procure service under tariffs, many utilities
insist they are not subject to the requirement for a subcontracting plan
because they do not have a contract with the federal government. Some
utilities maintain this position notwithstanding written opinions from
the General Accounting Office and the Department of Justice that the
subcontracting plan requirements apply even in the absence of a written
contract.

Additionally, utilities and state and local governments complain that
the federal subcontracting plan requirements overlap with state or local
laws requiring similar plans providing contracting opportunities for
small and small disadvantaged business concerns.7 Utilities and state
and local governments add that the overlap creates an unnecessary
intrusion by the federal government on state and local affairs and a
duplication of effort, paperwork, and reporting.

Resolution of these issues will help federal managers by allowing them
to use their resources in more productive endeavors.

Cross References to Other NPR Accompanying Reports

Small Business Administration, SBA02: Improve Assistance to Minority
Small Businesses.

Endnotes

1. Section 19.201 of the Federal Acquisition Regulation (48 CFR 19.201).

2. Section 8 (d) of the Small Business Act (16 U.S.C. 737(d)).

3. Section 15(g) of the Small Business Act (15 U.S.C. 644(g)).

4. Subparts 19.5, 19.7 and 19.8 of the Federal Acquisition Regulation
(48 CFR 19.5, 19.7 and 19.8).

5. Section 921(c)(2) of the Defense Authorization Act of 1987, P.L.
99661.

6. Section 1207(e)(3) of the National Defense Authorization Act for
Fiscal Year 1987 (10 U.S.C. 2301 note).

7. U.S. General Accounting Office, Public Utilities Plans for Small and
Disadvantaged Subcontractors, GGD9344 (Washington, D.C.: U.S. General
Accounting Office, April 1993), p. 22.