Making Sense of Small Business Set-Asides in Government Contracting

From the Viewpoint of a Contract Specialist with the Department of Veterans Affairs

As a new contract specialist in the federal government, one of the first concepts we learn is full and open competition. Full and open competition is one of the fundamental principles of federal contracting. Healthy competition is the lifeblood of commerce. It promotes innovation, quality and savings. Contracting officers (COs) are required by law to procure supplies and services on a competitive basis. In 1984, the Competition in Contracting Act (CICA) was passed and introduced the phrase full and open competition into the world of government contracting (Nash, Schooner, O’Brien-DeBakey, Edwards 111). CICA requires that contracts be competed as full and open so as to allow any qualified company to submit an offer ((Blogger). This principle is echoed in section 13.104 of the Federal Acquisition Regulation (FAR). It states that the CO must promote competition to the maximum extent practicable to obtain supplies and services from the source whose offer is the most advantageous to the Government (Federal Acquisition Regulation “FAR” 322).

While FAR part 6 implements CICA and addresses competition requirements it must be noted that there are three levels: full and open competition; full and open competition after exclusion of sources and other than full and open competition (FAR 157). Full and open competition means that all responsible sources may compete for a contract while full and open after exclusion of sources is most commonly used when a procurement is set-aside in order to meet socio-economic goals (Foreign Affairs Manual Volume 14 Handbook 2 p2). Other than full and open competition is the least competitive, least desirable and must be approved at a level according to the dollar value of the acquisition (Foreign Affairs Manual Volume 14 Handbook 2 p3).

Even though the CO is charged with promoting competition, he must also follow the policies and procedures regarding small business set-aside programs which are addressed in FAR part 19. Set–asides are procurements which are restricted to small business concerns in accordance with the Small Business Act, 15 U.S.C. §644 (Nash, et al. 518). Set-asides may be total or partial. Even though CICA requires full and open competition, set-asides are authorized and agencies must by law seek to contract with small businesses (Federal contract opportunities for your business). It is important for a contract specialist to understand the basis for socio-economic programs and his role in implementing these programs.

As the world’s largest purchaser of goods and services, the U.S Government can leverage its economic power to advance certain socio-economic goals through the procurement process (SBA’s Role in Government Contracting). Congress has the authority to act on these goals and put policies in place that contracting activities must help execute. One such socio-economic policy that the Government implemented was the Small Business Act of 1953. This Act created the Small Business Administration (SBA) which is an independent federal agency of the executive branch.

SBA’s mission is to “aid, counsel, assist and protect the interests of small businesses to preserve free enterprise and to maintain and strengthen the economy.” One way the SBA fulfills its mission is by offering assistance with government contracts. Within SBA is the office of government contracting which advocates on behalf of small business in the federal procurement world (Small Business Administration).

There are currently five set-aside programs which are the 8(a) Minority Small Business and Capital Ownership Development Program (8a), Historically Underutilized Business Zone (HUBZone) small businesses (SB), women-owned small businesses (WOSB), service-disabled veteran-owned small businesses (SDVOSB) and small businesses not belonging to any of the prior categories (Manuel, Lunder 3).

To be considered a small business, certain criteria must be met. The size of the business will be measured based on the North American Industry Classification System (NAICS) (Federal contract opportunities for your business). In general, if a business has fewer than 500 employees for manufacturing or revenues less than 7 million for non-manufacturing, it is considered small (Small Business Administration).

Participants in the various set-aside programs must meet the above conditions as well as specific criteria which are based on the program in which they are enrolled. 8(a) participants must be at least 51% owned and operated by a person or persons deemed socially and economically disadvantaged. The SBA defines socially and economically disadvantaged persons as those belonging to any of the following groups: Black American, Hispanic American, Native American or Asian Pacific (Small Business Administration). They must have been in business at least two years before entering into the program and may in general not participate in the program for more than nine years (Manuel, Lunder 3). The SBA must certify an 8(a) business as eligible for a set-aside program (Small Business Administration).

HUBZone businesses are businesses located in areas where either the average household incomes are lower than average or areas where there is higher than average unemployment rates. These areas also include Indian reservations and base closure areas. To participate in this program, a business must be at least 51% owned and operated by a U.S. citizen, be located in a HUBZone area and at least 35% of the employees must reside in a HUBZone. Similar to the 8(a) program, participants must be certified by the SBA as to their eligibility in the set-aside program (Small Business Administration).

A WOSB must comply with the criteria for small business and be at least 51% owned and operated by one or more women. A WOSB may either self-certify, or be certified by an agency approved by the SBA (Manual, Lunder 4). To be considered an SDVOSB, the business must be at least 51% owned and operated by a veteran with a service connected disability who was discharged under conditions other than dishonorable. Interestingly, there is no minimum percentage of disability that a veteran must have in order to participate in the SDVOSB set-aside program (SDVOSB Small Businesses: Getting Started). A veteran interested in the SDVOSB set-aside program may self-certify for purposes of competing for federal contracts (Small Business Administration).

As mentioned previously, the U.S. government has socio-economic goals and policies that contracting must by law comply with. Formal goals are established to ensure agencies do their best to ensure small businesses will participate to the maximum extent possible in federal contracts. Currently, the overall goal for small businesses is 23% of all prime contracts that the U.S. government awards. 5% of prime contracts is the goal for both 8(a) and WOSB. The goal for SDVOSB and HUBZone is 3% each of prime contracts (Goaling). Not all acquisitions though are subject to a set-aside preference. FAR subsection 19.502-1 provides guidance on set-aside requirements. Purchases of $3,000 or less are exempt from the set-aside requirement. It is also important to remember that when working in FAR part 8 “Required Sources of Supplies and Services,” that the set-aside requirement does not apply (FAR 529). However, a CO may at his discretion choose to set-aside a procurement when purchasing from the Federal Supply Schedule contracts.

FAR subsection 19.502-2 states that acquisitions between $3,000 and $150,000 should be automatically set-aside for small business as long as the CO determines that there is a reasonable expectation of receiving at least two offers that are competitive in terms of price, quality and delivery (FAR 529). This set-aside requirement also holds true for acquisitions over $150,000 as long as the same expectations can be met. In most agencies, it is up to the CO to determine which subcategory of small business to compete the set-aside. In some instances by the authority of the Small Business Act, the CO may award a sole source contract to an 8(a), HUBZone or SDVOSB. In certain circumstances, the dollar threshold may be up to 5 million (Manuel, Lunder 1).

As mentioned previously, the CO has the discretion to decide which subcategory of small business to consider for a set-aside. This was not always the case though. Until a few years ago, HUBZone businesses received preference in the set-aside program. According to the September 27, 2010 article in Government Executive, Obama signed legislation that restored equality to the various subcategories of small business (Brodsky np).

The Small Business act not only created the Small Business Administration, but also the Office of Small and Disadvantaged Business Utilization (OSDBU). Every Federal agency is required to have an OSDBU, which reports directly to the head of the agency. The primary responsibility of the OSDBU is to ensure that small businesses, small disadvantaged businesses and women-owned businesses are “treated fairly and that they have an opportunity to compete and be selected for a fair amount of the agency's contract dollars” (About the Office of Small and Disadvantaged Business Utilization).

At the Department of Veterans Affairs (VA), the CO’s discretionary ability is clouded by OSDBU and VA’s hierarchy of small business program preferences. Established by section 8127(i) of Title 38, United States Code, The Veterans Benefits, Health Care, and Information Technology Act of 2006 (P.L. 109-461) requires VA to consider preferences for Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) first, then preferences for Veteran-Owned Small Businesses (VOSBs), followed by HUBZone Certified firms, 8(a) certified firms, Woman-Owned Small Businesses (WOSB). This legislation authorizes a unique "Veterans First" approach specific to VA Contracting (Department of Veterans Affairs OSDBU).

Even though PL 109-461 establishes a contracting order of priority, it is silent on FAR part 8. This lack of clarity has been at the heart of some recent court cases; namely with Aldevra and Kingdomware Technologies. The question is whether or not the Veterans Benefits, Health Care and Information Technology Act of 2006 applies to acquisitions under Federal Supply Schedule (Koprince np).

In 2011, the Department of Veterans Affairs faced protests from Kingdomware Technologies and Aldevra. Both companies are SDVOSB and they had similar issues with the manner in which the VA conducted procurements involving Federal Supply Schedules. Aldevra and Kingdomware asserted that the VA failed to conduct proper market research to determine if those procurements should be set-aside for SDVOSB concerns (United States Government Accountability Office “GAO”).

In both cases, the GAO sustained the protests. They concluded that the VA improperly used non-mandatory Federal Supply Schedules (FSS) and were in violation of the 2006 VA Act (P.L. 109-461). GAO also stated that the VA should first determine if the solicitations could be set-aside without regard to whether or not the SDVOSB holds a Federal Supply Schedule contract (GAO).

In both cases, the GAO recommended to VA that they cancel the solicitations, conduct market research to determine if two or more SDVOSB could perform and if so, re-solicit the requirements as SDVOSVB set-asides. The VA argued that FAR section 8.404 (a) provides that the requirements stated in FAR part 19 are inapplicable to FSS procurements. The GAO went on to argue that even though agencies may award orders under the FSS without heading socio-economic concerns and set-asides, that it does not apply to the SDVOSB set-aside program created by the Veterans Benefits, Health Care and Information Technology Act of 2006 (GAO).

Even though the GAO sustained both protests and recommended that the VA cancel and re-solicit, VA did not fully implement GAO’s decision. In fact after the Kingdomware bid protest, the VA informed GAO and Kingdomware that they would not follow GAO’s recommendation. Kingdomware later took the case to the U.S. Court of Federal Claims. Judge Nancy Firestone held that the VA reasonably interpreted the 2006 ACT “as not requiring consideration of a SDVOSB set-aside before procuring goods and service under the Federal Supply Schedule” (Koprince 1). On December 13, 2012 the Government Accountability Office announced that it will no longer hear protests from veteran owned small businesses who claim the Department of Veterans Affairs is violating the law (VetLikeMe 13). This decision has left SDVOSBs question if the VA is truly following the spirit of the VetFirst program (P.L. 109-461) (Stone 1). Many SDVOSBs who feel that the very agency who is supposed to serve them has instead forsaken them and are left scratching their heads, wondering “what about me?”

Keeping abreast of changes in FAR, public law, GAO and U.S Court of Federal Claims’ decisions, Presidential mandates, and agency decisions is a challenging task for any contract officer. Even when one has read all of the legislation and decisions, there are occasional discrepancies and areas where interpretation of the law are debatable or an agency may implement a temporary policy change to meet its small business goals.

In the 4th quarter of fiscal year 2012, the former Chief of Staff for the Department of Veteran Affairs demanded that all contracts that were not set-aside for small businesses be re-solicited only to small businesses; specifically SDVOSB, 8(a)and HUBZone because the Department was short of meeting its annual goals. Needless to say, this left many contracts that were ready to be awarded to competent large businesses unawarded. Those that were cancelled and re-procured as set-asides left many customers unhappy with the result. They did not feel that a SDVOSB, 8(a) or HUBZone should have been awarded contracts solely based on their socio-economic standing.

Even with CICA, the FAR, the Small Business Act, Public Law 109-461, agency direction, GAO and U.S. Court of Federal Claims decisions, many COs in VA are still left without proper guidance regarding small business parity and proper procedure for complying with small business goals.

Works Cited

Blogger, MAS. "The Competition in Contracting Act." GSA Interact. N.P., 11 0012 2012. Web. 21 Oct 2013. .

Brodsky, Robert. "Congress Restores Small Business Parity." Government Executive. Government Executive, 27 0009 2010. Web. 11 Oct 2013.

Federal Acquisition Regulation. Wolters Klower, 2012. Print

"Federal Contract Opportunities for your Business." GovernmentBids.com. SBA.gov. Web. 17 Oct 2013. .

Koprince, Steven. "SDVOSBs Lose Aldevra Battle with VA, Says Federal Court." SMALLGOVCON. N.P., 29 0011 2012. Web. 20 Oct 2013. .

Manuel, Kate M., and Erika K. Lunder. "Small Business Set-Aside Programs: An Overview and Recent Developments in the Law." Congressional Research Service. Congressional Research Service, 15 0006 2012. Web. 12 Oct 2013.

Nash, Jr, Ralph C., Steve L. Schooner, Karen R. O'Brien-DeBakey, and Vernon J. Edwards. The Government Contracts Reference Book. 3rd. Riverwoods: Wolters Kluwer, 2007. Print.

"SBA's Role in Government Contracting." Small Business Administration. U.S. Small Business Administration. Web. 19 Oct 2013. .

Stone, Hardy. "VetLikeMe, ed 3.1." VetLikeMe. Veterans Today, 01 0031 2012. Web. 18 Oct 2013. .

"Office of Small and Disadvantaged Business Utilization." About OSDBU. Department of Veterans Affairs. Web. 16 Oct 2013. .

United States. Department of State. Foreign Affairs Manual Volume 14 Handbook 2. 2011. Web.

United States. Government Accountability Office. Decision: Matter of Aldevra. 2011. Web.

United States. Government Accountability Office. Decision: Matter of Kingdomware Technologies. 2011. Web.