Federal Contracting and Subcontracting with Small Businesses: Issues in the 112th Congress

Congressional research reportJan 24, 2013

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Federal Contracting and Subcontracting with

Small Businesses: Issues in the 112th Congress

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Legislative Attorney

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Legislative Attorney

January 24, 2013

Congressional Research Service

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www.crs.gov

R42390

CRS Report for Congress

Prepared for Members and Committees of Congress

Federal Contracting and Subcontracting with Small Businesses

Summary

Congress has generally broad authority to impose requirements upon the federal procurement

process, or the process whereby agencies obtain goods and services from the private sector. One

of the many ways in which Congress has exercised this authority is by enacting measures

intended to promote contracting and subcontracting with “small businesses” by federal agencies.

Among other things, these measures (1) declare a congressional policy of ensuring that a “fair

proportion” of federal contract and subcontract dollars are awarded to small businesses; (2)

establish government-wide and agency-specific goals for the percentage of contract and/or

subcontract dollars awarded to small businesses; (3) require or authorize agencies to conduct

competitions in which only small businesses may compete (i.e., set-asides), or make

noncompetitive awards to them in circumstances when such awards could not be made to other

businesses; and (4) task the Small Business Administration (SBA) and officers of the procuring

agencies with reviewing and helping to restructure proposed procurements so as to maximize

opportunities for small business participation. A companion report, CRS Report R42391, Legal

Authorities Governing Federal Contracting and Subcontracting with Small Businesses, by (name

redacted) and (name redacted), provides an overview of these statutes, the regulations

implementing them, and the various judicial and other tribunals that construe them.

This report describes and analyzes measures that Members of the 112th Congress enacted or

proposed in response to particular issues pertaining to small business contracting and

subcontracting. The majority of such measures addressed (1) the standards under which firms’

size is measured, including the establishment of size standards for “early stage” small businesses

and “mid-sized” firms; (2) government-wide or agency-specific goals for contracting and

subcontracting with small businesses; and (3) eligibility for the set-aside programs for particular

types of small businesses (e.g., HUBZone small businesses). Other measures addressed federal

contractors’ obligations vis-à-vis small business subcontractors; limitations on the amount of

work that may be subcontracted by small businesses to other firms; expedited payment of small

business contractors; increases to the maximum surety bond amount that SBA may guarantee;

bundling and consolidation of requirements into contracts unsuitable for award to small

businesses; and agency “insourcing” of functions performed by small businesses. Yet other

measures addressed the responsibilities of SBA Procurement Center Representatives and agency

Offices of Small and Disadvantaged Business Utilization; the circumstances in which agencies

may set aside contracts for small businesses or make non-competitive awards to them; the use of

small businesses when making “small purchases;” mentor-protégé programs wherein large

businesses provide financial and other assistance to small businesses; the deterrence and

punishment of fraud in small business contracting programs; and contracting or subcontracting

with small businesses by particular agencies.

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Federal Contracting and Subcontracting with Small Businesses

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Federal Contracting and Subcontracting with Small Businesses

Contents

Introduction...................................................................................................................................... 1

Size Standards .................................................................................................................................. 2

Government-Wide and Agency-Specific Goals ............................................................................... 5

Eligibility for Existing Set-Aside Programs .................................................................................... 9

8(a) Program .............................................................................................................................. 9

HUBZone Program.................................................................................................................. 13

Subcontracting Plans ..................................................................................................................... 15

Limitations on Subcontracting ....................................................................................................... 18

Payment ......................................................................................................................................... 20

Surety Bonds.................................................................................................................................. 21

Bundling and Consolidation .......................................................................................................... 22

Insourcing ...................................................................................................................................... 26

Procurement Center Representatives; Offices of Small and Disadvantaged Business

Utilization ................................................................................................................................... 28

Restricted Competitions and Non-Competitive Awards ................................................................ 29

Use of Small Businesses When Making “Small Purchases” ......................................................... 32

Mentor-Protégé Programs .............................................................................................................. 33

Deterrence of and Penalties for Fraud ........................................................................................... 35

Agency-Specific Programs ............................................................................................................ 38

Contacts

Author Contact Information........................................................................................................... 40

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Federal Contracting and Subcontracting with Small Businesses

Introduction

Congress has generally broad authority to impose requirements upon the federal procurement

process, or the process whereby agencies obtain goods and services from the private sector.1 One

of the many ways in which Congress has exercised this authority is by enacting measures

intended to promote contracting and subcontracting with “small businesses” by federal agencies.

Among other things, these measures (1) declare a congressional policy of ensuring that a “fair

proportion” of federal contract and subcontract dollars are awarded to small businesses;2 (2)

establish government-wide and agency-specific goals for the percentage of contract and/or

subcontract dollars awarded to small businesses;3 (3) require or authorize agencies to conduct

competitions in which only small businesses may compete (i.e., set-asides), or make

noncompetitive awards to them in circumstances when such awards could not be made to other

businesses;4 and (4) task the Small Business Administration (SBA) and officers of the procuring

agencies with reviewing and helping to restructure proposed procurements so as to maximize

opportunities for small business participation.5 A companion report, CRS Report R42391, Legal

Authorities Governing Federal Contracting and Subcontracting with Small Businesses, by (name

redacted) and (name redacted), provides an overview of these statutes, the regulations

implementing them, and the various judicial and other tribunals that construe them.

This report describes measures that Members of the 112th Congress enacted or proposed in

response to particular issues pertaining to small business contracting and subcontracting (e.g.,

See, e.g., Perkins v. Lukens Steel Co., 310 U.S. 113, 127 (1940) (“Like private individuals and businesses, the

Government enjoys the unrestricted power to produce its own supplies, to determine those with whom it will deal, and

to fix the terms and conditions upon which it will make needed purchases.”). The U.S. Constitution does, however,

impose a few limits upon Congress’s power in this regard, most notably by guaranteeing all persons equal protection of

the law. U.S. Const. amend. V (guaranteeing due process of law); Bolling v. Sharpe, 347 U.S. 497 (1954) (finding that

due process under the Fifth Amendment includes equal protection, or the constitutional assurance that the government

will apply the law equally to all people and not improperly prefer one class of people over another). Equal protection

issues arise most frequently with contracting preferences based on race or gender. Race and gender are “suspect

classifications,” which means that the government must demonstrate that any programs that classify individuals on this

basis are narrowly tailored to further a compelling government interest, in the case of race-conscious programs, or are

substantially related to important government objectives, in the case of gender-conscious programs. See, e.g., Adarand

Constructors, Inc. v. Peña, 515 U.S. 200 (1995) (“strict scrutiny” applied to program that classified individuals on the

basis of race); Craig v. Boren, 429 U.S. 190, 197 (1976) (“intermediate scrutiny” applied to program that classified

individuals on the basis of sex).

See 15 U.S.C. §631(a) (“It is the the declared policy of the Congress that the Government should aid, counsel, assist,

and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive

enterprise, to insure that a fair proportion of the total purchases and contracts for property and services for the

Government (including but not limited to contracts for maintenance, repair, and construction) be placed with smallbusiness enterprises, to insure that a fair proportion of the total sales of Government property be made to such

enterprises, and to maintain and strengthen the overall economy of the Nation.”).

See, e.g., 15 U.S.C. §644(g)(2) (requiring agencies, in consultation with the Small Business Administration (SBA) to

set goals for the percentage of federal contract and/or subcontract dollars awarded to small businesses that “realistically

reflect” the ability of small businesses to participate in such contracts or subcontracts).

See, e.g., 15 U.S.C. §637(a) (authorizing set-asides and sole-source awards to small businesses owned and controlled

by socially and economically disadvantaged individuals participating in SBA’s Minority Small Business and Capital

Ownership Development Program (commonly known as the 8(a) Program)).

See, e.g., 15 U.S.C. §634(b)(11) (requiring SBA to appoint Procurement Center Representatives (PCRs) to work with

the procuring agencies); 13 C.F.R. §125.2(b) (requiring PCRs to review all acquisitions not set aside for small

businesses to determine whether a set-aside is appropriate and to identify alternate strategies to maximize small

business participation as contractors or subcontractors, among other things).

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increasing SBA’s size standards, increasing government-wide or agency-specific goals for

contracting and/or subcontracting with small businesses). In particular, it analyzes changes to

existing law that were made, or that would have been made had certain measures been enacted,

and discusses legal issues potentially raised by certain types of measures. Although a number of

bills are included in this discussion, the report does not attempt to address all bills, nor does it

address all provisions of any bills that are included. Rather, these bills are presented as examples

of particular approaches to issues of interest to the Congress. In addition, this report’s discussion

of the legal questions potentially raised by various approaches to current issues (e.g., creation of

additional set-aside programs) should not be construed to mean that any specific bill cited in the

report would necessarily raise these questions. Much would depend upon the drafting and details

of particular bills, the analysis of which is outside the scope of this report.

The report will not be updated. A separate report will address issues pertaining to small business

contracting and subcontracting in the 113th Congress.

Size Standards

The Small Business Act currently gives the Administrator of Small Business considerable

discretion as to what firms qualify as small for purposes of the act, or for certain other purposes

of federal law. The act requires only that small businesses be “independently owned and

operated,” be “not dominant in their field of operations,” and meet any size standards established

by the Administrator.6 The Administrator first promulgated regulations specifying standards for

size in various industries in 1956 under the authority of the Small Business Act of 1953, which

established SBA on a temporary basis.7

Between the early 1980s and 2007, SBA conducted no comprehensive reviews of the size

standards, instead making only intermittent changes to the standards for particular industries.8 Its

failure to do so prompted some Members of Congress and commentators to question whether the

standards adequately reflected recent trends in industry or government procurement.9 Partly in

response to such concerns, the 111th Congress enacted legislation that requires SBA to conduct a

“detailed review” of at least one-third of the size standards every 18 months, and make

“appropriate adjustments” to them to reflect market conditions.10 The legislation also includes

certain provisions regarding “small business size and status integrity” intended to combat fraud in

15 U.S.C. §632(a)(1)-(2). But see Small Business Size Standard Flexibility Act of 2011, H.R. 585 (requiring the

SBA’s Chief Counsel for Advocacy, as opposed to the Administrator of Small Business, to specify definitions or

standards of size for purposes of any acts other than the Small Business Act or the Small Business Investment Act, and

to approve all size standards except those prescribed by the Administrator).

See, e.g., Small Bus. Admin., Small Business Size Standards, 21 Federal Register 79 (January 5, 1956). For more on

the history of the size standards, see generally CRS Report R40860, Small Business Size Standards: A Historical

Analysis of Contemporary Issues, by (name redacted).

See, e.g., SBA Proposes to Increase Small Business Size Standards for Three NAICS Sectors, Fed. Cont. Daily,

October 22, 2009.

Id.

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1344, 124 Stat. 2545-46 (September 27, 2010). The act

further specifies that each size standard shall be reviewed “not less frequently than once every five years.” Id. It is

important to note that the provisions of the Small Business Jobs Act authorizing SBA to promulgate “alternative” size

standards pertain only to loan programs. See P.L. 111-240, §1116, 124 Stat. 2509.

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Federal Contracting and Subcontracting with Small Businesses

the small business programs that are discussed below.11 Following the enactment of this

legislation, SBA completed its first “comprehensive” review of the size standards since the 1980s,

and has promulgated or proposed regulations that could reportedly result in thousands of

additional firms becoming eligible for small business programs.12 Some increases to the size

standards took effect in March 2012; other increases are pending.13

Concerns about the size standards and, in particular, SBA’s discretion in crafting them persisted,

however, notwithstanding the legislation enacted by the 111th Congress and the changes made or

proposed by SBA. Partly in response to these concerns, the 112th Congress enacted legislation

that requires SBA to consider and publicly address certain factors (e.g., the industry for which the

new size standard is proposed, and its competitive environment) when conducting any

rulemaking to “revise, modify or establish” size standards pursuant to Section 3 of the Small

Business Act.14 This legislation also prohibits SBA from limiting the number of size standards,

and from establishing or approving a single size standard for a grouping of 4-digit North

American Industry Classification System (NAICS) codes unless SBA justifies that such a

standard is appropriate for each industry classification included within the grouping.15

Members of the 112th Congress also introduced legislation that would have required SBA to

•

establish a new classification system to replace the current system based on

North American Industrial Classification System (NAICS) codes;16

•

repeal the “nonmanufacturer rule,” an SBA regulation that permits firms with

fewer than 500 employees which supply the products of small businesses (or

obtain a waiver from SBA) to qualify as small in certain procurements;17 and

See infra notes 231-233 and accompanying text.

See, e.g., Andrew Lapin, SBA Redefinition of Small Business Draws Mixed Reactions, Gov’t Exec., February 15,

2012, available at http://www.govexec.com/contracting/2012/02/sba-redefinition-small-business-draws-mixedreactions/41215.

See, e.g., Small Bus. Admin., Size Standards: Transportation and Warehousing: Final Rule, 77 Federal Register

10934 (February 24, 2012) (increasing the size standards for 22 industries, effective March 26, 2012); Small Bus.

Admin., Small Business Size Standards: Professional, Technical, and Scientific Services: Final Rule, 77 Federal

Bus. Admin., Small Business Size Standards: Utilities, 77 Federal Register 42441 (July 19, 2012) (requesting

comments on proposed size standards for 9 industries by September 17, 2012).

National Defense Authorization Act for FY2013, P.L. 112-239, §1661,—Stat.—(January 2, 2013).

Id.; Small Business Protection Act of 2012, H.R. 3987, §2. The limitations on SBA’s authority to establish single

size standards for multiple NAICS codes, in particular, are intended to address issues such as those raised in 2011 by

the SBA’s proposed grouping of architect and engineer services. Applying the same standards to architect and

engineering firms would reportedly have resulted in 97.8% of all architecture firms qualifying as small under the

SBA’s proposed size standard. See, e.g., Committee Members Introduce Additional Legislation to Reform Small

Business Contracting, February 8, 2012, available at http://smallbusiness.house.gov/News/DocumentSingle.aspx?

DocumentID=278695; Objections to Proposed Size Standard Change Raised at House Small Business Hearing, 95 Fed.

Cont. Rep. 484 (May 10, 2011).

Fairness for Small Businesses in Federal Contracting Act of 2011, S. 1590, §2. The new system would have (1)

consisted of not more than 20 industries; (2) included, as industries, manufacturing, construction, professional services,

wholesale, and retail; and (3) been “based on market conditions as identified by the most recent Economic Census of

the United States.” Id. SBA would also have been required to review the new classification system periodically, as

provided in the Small Business Jobs Act. According to its sponsor, this legislation was “aimed at keeping large firms

from winning contracts meant for small businesses” by “gaming” an “overly complex and flawed classification

system.” David Hansen, McCaskill Bill Would Replace NAICS System for Small Business Contracting, 96 Fed. Cont.

Rep. 308 (September 27, 2011) (quoting Senator McCaskill).

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Federal Contracting and Subcontracting with Small Businesses

•

exclude firms that are publicly traded, or more than 50% directly or indirectly

owned by “individuals” who are not U.S. citizens, from programs under the

Small Business Act.18

Other Members of the 112th Congress proposed the creation of set-aside programs for firms that

are very small and/or new,19 and for “mid-sized” firms.20 In both cases, the proposals reflected

concerns that particular firms may be included in, or excluded from, existing small business

programs because of the size standards. Proposals to create set-aside programs for mid-size firms

responded to concerns that such firms are too big to qualify as “small” under the size standards,

but too small to compete effectively with “large” government contractors.21 Conversely, proposals

to create set-asides specifically for “early stage small businesses”—or particularly small and/or

new businesses—addressed concerns that the current size standards can encompass firms of very

different sizes, and that the smallest such firms may be unable to compete effectively against

larger ones.

(...continued)

Fairness for Small Businesses in Federal Contracting Act of 2011, S. 1590, §2. In place of the nonmanufacturer rule,

SBA would have been required to promulgate regulations directing contracting officers to “use the size standards

established by the Administrator for retail and wholesale industries in procurements for products and services by the

Federal Government that are not manufactured by the offeror,” and to use only size standards established by the SBA

for manufacturing industries if the contract involves the purchase of goods or services manufactured by the offeror. Id.

By addressing “nonmanufacturer” dealers within the context of the size standards, S. 1590 differed from the legislation

enacted by the 112th Congress, which addresses dealers within the context of the limitations on subcontracting and

provides that regular dealers in supplies must supply the product of a small business manufacturer unless a waiver is

granted on the grounds that no small business manufacturer could reasonably be expected to offer the product, or no

small business manufacturer is available for the federal procurement market. See infra note 121.

Fairness and Transparency in Contracting Act of 2011, §4; Act for the 99%, H.R. 3638, §1304 (adding to the Small

Business Act a definition of “independently owned and operated” that excludes such entities). Among the statutory

criteria that firms have to meet to qualify as small is that they are independently owned and operated. 15 U.S.C.

§632(a)(1). It is unclear what effect the citizenship provisions, in particular, would have had since the owners of

disadvantaged, HUBZone, and women-owned small businesses must currently be citizens. 13 C.F.R. §124.1002 (small

disadvantaged businesses); 13 C.F.R. §126.103 (HUBZone small businesses); 13 C.F.R. §127.102 (women-owned

small businesses).

See, e.g., Early Stage Small Business Contracting Act of 2012, H.R. 4121 (requiring agencies to award contracts

whose value is between $3,000 and “less than half the upper threshold of Section 15(j)(1) of the Small Business Act” to

“early stage small business concerns,” or firms with fewer than 15 employees that have average annual receipts of not

more than $1 million (unless the concern is in an industry with an average annual revenue standard of less than $1

million)); National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1693a. Agencies

would seemingly have had discretion as to whether such contracts are awarded via a set-aside or on a sole-source basis,

although they would appear to have been required to award any contract identified as suitable for award to such entities

to them. SBA would have helped to determine what contracts are suitable for award to early stage businesses.

See, e.g., Small Business Growth Act, H.R. 1812, §2 (granting the General Services Administration temporary

authority to set aside contracts for firms that are not small businesses provided that the firms have fewer than 1,500

employees and participate, as mentors to small businesses, in GSA’s mentor-protégé program); Expanding

Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §§201-209 (establishing a set-aside program for

businesses “owned or controlled by historically disadvantaged individuals” to be administered by the Department of

Commerce’s Minority Business Development Agency (MBDA)); National Defense Authorization Act for FY2013,

H.R. 4310, as passed by the House, at §1611 (granting defense agencies temporary authority to set aside certain

contracts for firms that are independently owned and operated, not dominant in their fields of operations, and have

fewer than twice the number of employees (or fewer than three times the average annual receipts) permitted under the

SBA size standard for their industry).

See, e.g., Matthew Weigelt, Small-biz Definitions Put Hurt on Midsize Contractors, Wash. Tech., June 28, 2010,

available at http://washingtontechnology.com/articles/2010/07/05/policy-midsize-company-squeeze.aspx.

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Depending upon how eligibility for any new set-aside program is defined, certain programs could

potentially have been vulnerable to challenge upon equal protection or other grounds.22 The

current 8(a) Program, which incorporates a rebuttable presumption that members of certain racial

and ethnic groups are disadvantaged, has been challenged on the grounds that it deprives

individuals who are not members of these groups of equal protection of the law in violation of the

U.S. Constitution.23 Programs that include a similar presumption, or otherwise define eligibility in

a manner that could be found to constitute a de facto racial classification, could face similar

challenges.24

Government-Wide and Agency-Specific Goals

Congress amended the Small Business Act in 1978 to require that agency heads, in consultation

with the SBA, set goals for the percentage of federal contract and subcontract dollars awarded to

small businesses each year.25 Congress further amended the act in 1988 to require the President to

set government-wide goals for the percentage of federal contract and/or subcontract dollars

awarded annually to various categories of small businesses.26 These goals must be equal to or

exceed certain percentages specified in statute (i.e., 23% of federal contract dollars awarded to

small businesses; 5% of federal contract and subcontract dollars awarded to women-owned small

businesses; 5% to small disadvantaged businesses; 3% to HUBZone small businesses; and 3% to

service-disabled veteran-owned small businesses).27 Agency performance in meeting the small

business contracting and subcontracting goals is of perennial interest to Congress because it is

arguably the clearest indicator of whether the stated congressional “policy” of encouraging

contracting with small businesses is being implemented.28 In particular, commentators frequently

Hasidic Jews are among the groups currently recognized as disadvantaged by the MBDA, and set-asides for them

could potentially raise First Amendment issues if this were viewed as a religious, rather than a cultural, classification.

Cf. Bd. of Ed. of Kiryas Joel Village School Dist. v. Grumet, 512 U.S. 687, 741 (1994) (Scalia, J., dissenting)

(suggesting that the New York law in question, which resulted in a village that was a religious enclave being carved out

as a separate school district, could be seen as reflecting cultural, rather than religious, groupings).

See DynaLantic Corp. v. U.S. Dep’t of Defense, 2012 U.S. Dist. LEXIS 114807 (D.D.C. August 15, 2012) (finding

that the 8(a) Program is not unconstitutional on its face, but that it is unconstitutional as applied in the military training

and simulation industry); Rothe Dev., Inc. v. Dep’t of Defense, No. 1:12-cv-00744-EGS (D.D.C., filed May 9, 2012)

(challenging the constitutionality of the 8(a) Program). See also supra note 1.

In Rothe Development Corporation v. Department of Defense, the government did not contest whether the

presumption regarding race and disadvantage underlying the Department of Defense’s (DOD’s) small disadvantaged

business program constituted a racial classification. See 545 F.3d 1023 (Fed. Cir. 2008). However, some courts had

previously denied firms or individuals standing to challenge programs with racial presumptions like that underlying

DOD’s program on the grounds that the would-be plaintiffs were denied the contract because of inability to

demonstrate social and economic disadvantage, not because of race. See, e.g., Interstate Traffic Control v. Beverage,

101 F. Supp. 2d 445 (S.D. W.Va. 2000); Ellsworth Assocs. v. United States, 926 F. Supp. 207 (D.D.C. 1996). It is

unclear whether a court would apply similar logic at this date, in light of subsequent developments in the case law. See

generally CRS Report RL33284, Minority Contracting and Affirmative Action for Disadvantaged Small Businesses:

Legal Issues, by (name redacted).

An Act to Amend the Small Business Act and the Small Business Investment Act of 1958, P.L. 95-507, §221, 92

Stat. 1771 (October 24, 1978) (codified at 15 U.S.C. §644(g)(2)). These goals must “realistically reflect the potential”

of small businesses to perform federal prime contracts and subcontracts.

Business Opportunity Development Reform Act (BODRA), P.L. 100-656, §502, 102 Stat. 3853, 3881 (November

15, 1988) (codified, as amended, at 15 U.S.C. §644(g)(1)).

15 U.S.C. §644(g)(1).

See 15 U.S.C. §631(a) (“It is the declared policy of the Congress that the Government should aid, counsel, assist, and

protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise

(continued...)

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note the government’s failure to meet either government-wide or agency-specific goals,29 and

some have suggested that the current government-wide goals are too low and do not adequately

reflect the availability of minority-, women-, and service-disabled veteran-owned small

businesses in today’s marketplace.30

Partly in response to such concerns, the 111th Congress enacted legislation requiring that senior

procurement executives, senior program managers, and agency directors of Small and

Disadvantaged Business Utilization communicate to their subordinates “the importance of

achieving small business goals.”31 The 112th Congress enacted legislation which reiterates this

requirement,32 as well as makes a number of other changes to Section 15(g) of the Small Business

Act in the hopes of improving agencies’ performance vis-à-vis their contracting and

subcontracting goals. Among other things, this legislation directs SBA and the Administrator of

Federal Procurement Policy to “insure” that agencies’ annual prime contract goals “meet or

exceed” the annual government-wide goal.33 It also requires that agencies separately address

prime and subcontract awards for each category of small businesses (e.g., women-owned) in their

goals, and make a “consistent effort to annually expand participation” by small businesses in each

category.34 In addition, the legislation enacted by the 112th Congress directs SBA to review its

“Goaling Guidelines” to ensure that

•

agency subcontracting goals are established on the basis of “realistically

achievable improvements” in levels of subcontracting, rather than on the basis of

previous years’ performance;

•

agency goals are established in a manner that does not exclude certain categories

of contracts based on the type of goods or services acquired; or, in the case of

certain contracts subject to competitive procedures, based on whether the

contract is subject to the Federal Acquisition Regulation (FAR), or funding is

made directly available by an appropriation;35 and

(...continued)

[and] to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for

the Government ...be placed with small-business enterprises.”).

See, e.g., Jeff Kinney, SBA Notes Drop in Small Business Contract Awards for FY2011, 98 Fed. Cont. Rep. 27 (July

10, 2012).

See, e.g., Doing Business with the Government: The Record and Goals for Small, Minority, and Disadvantaged

Businesses: Hearing Before the Subcommittee on Economic Development, Public Buildings, and Emergency

Management of the Committee on Transportation and Infrastructure, House of Representatives, 110th Cong., 2d Sess.,

at 1 (March 6, 2008). The most recently established statutory goal is that for contracting with service-disabled veteranowned small businesses, which was created in 1999. The goals for contracting with other types of small businesses

were established at earlier dates.

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1333, 124 Stat. 2542 (codified at 15 U.S.C.

§644(g)(2)(F)(i)-(ii)).

P.L. 112-239, §1631(b),—Stat.—.

Id., at §(a).

Id., at §(b).

This provision originated with the Government Efficiency through Small Business Contracting Act of 2012, H.R.

3850, and the Small Business Contracting Opportunities Expansion Act of 2012, H.R. 6078, §2. SBA historically used

its discretion to exclude certain contracts from these calculations, such as contracts performed outside the United States

and contracts awarded through the Javits-Wagner-O’Day (JWOD) Program. See, e.g., Small Business Goaling Report:

Fiscal Year 2010, available at https://www.fpds.gov/downloads/top_requests/FPDSNG_SB_Goaling_FY_2010.pdf

(listing exclusions); Small Bus. Admin., Office of Inspector General, Small Business Administration’s Rationale for

Excluding Certain Types of Contracts from the Annual Small Business Procurement Calculations Needs to be

(continued...)

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•

agencies document the basis for any decision to establish a goal that is lower than

the government-wide goal for small businesses in that category.36

The legislation also calls for an independent assessment of the small business procurement

goals;37 increases agency and SBA reporting regarding the small business goals;38 and requires

that programs established for the training of senior executives under 5 U.S.C. §3396(a) address

contracting requirements under the Small Business Act.39

Some Members of the 112th Congress also introduced legislation that would have increased the

goals, or created greater incentives for agencies to meet their goals. The first category included

bills that would have (1) increased the statutorily set government-wide goals;40 (2) required a

specific agency to meet a goal;41 or (3) directed entities that may be exempt from the

requirements of the Small Business Act to establish goals for contracting with small businesses.42

Some bills also addressed the related issue of how to count contracts for purposes of determining

whether the goals have been met by expressly permitting certain contracts to be counted for

(...continued)

Documented, Advisory Memorandum Report No. 12-04, December 6, 2011 (copy on file with the authors).

P.L. 112-239, §1631(c),—Stat.—.

Id., at §(d). This assessment is to address certain topics, such as the industrial composition of companies receiving

federal prime contracts and subcontracts; the industrial composition of domestic small business concerns; barriers to

accurately capturing data on small business contracting and contracting; and recommendations for improving the

quality and availability of data regarding small business contracting. It is separate from, but to be “coordinated with,”

the assessment of the contracting performance of the Department of Defense required under Section 1613 of P.L. 112239.

P.L. 112-239, §1632,—Stat.—. See also Small Business Goaling Act of 2012, S. 3213, §3 (requiring certain reports

by the procuring agencies and SBA).

P.L. 112-239, §1633,—Stat.—. See also Government Efficiency through Small Business Contracting Act of 2012,

H.R. 3850, §§2, 4.

Government Efficiency through Small Business Contracting Act of 2012, H.R. 3850, §2 (increasing the overall goal

from 23% to 25% of all prime contracts and setting a goal of 40% of all subcontracts; establishing prime contracting

goals of 3% and subcontracting goals of 3% for service-disabled veteran-owned and HUBZone small businesses;

establishing prime contracting goals of 5% and subcontracting goals of 5% for small disadvantaged businesses and

women-owned small businesses); National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House,

at §1631 (same); Small Business Goaling Act of 2012, S. 3213, §2 (same); Expanding Opportunities for Main Street

Act of 2011, H.R. 2424; S. 1334, tit. I, §105 (increasing the overall goal from 23% to 25% and the 5% goals to 10%);

Expanding Opportunities for Small Businesses Act of 2011, H.R. 2921, §3 (increasing the goal for small disadvantaged

businesses from 5% to 8%); Small Business Opportunity Expansion Act of 2011, H.R. 2949, §2 (increasing the overall

goal from 23% to 24%, the 3% goals to 4%, and the 5% goals to 6%); Small Business Contracting Opportunities

Expansion Act of 2012, H.R. 6078, §§2, 4 (increasing the overall goal from 23% to 26% of prime contracts (27%,

effective in FY2017) and 40% of subcontracts, as well as increasing the goals for contracting and subcontracting with

various types of small businesses). The latter bill also called for a study of the feasibility of creating a government-wide

goal for contracting with small businesses owned by veterans who do not have a service-incurred or -aggravated

disability.

An Act to Require the Department of Defense to Meet the Annual Goal for Participation in Procurement Contracts

by Small Business Concerns Owned and Controlled by Veterans with Service-connected Disabilities, H.R. 3438, §1.

The bill did not specify what the consequences might be if the Department failed to meet this goal.

Prisoner Opportunity, Work, and Education Requirement (POWER) Act, S. 180, §5 (requiring Federal Prison

Industries (FPI), in consultation with SBA, to establish and strive to meet or exceed “realistic goals” for entering into

contracts with one or more small businesses). The Small Business Act has an arguably broader reach than the Federal

Acquisition Regulation (FAR) in that it applies to all “agencies,” as that term is defined in 5 U.S.C. §551(1), while the

FAR applies to all executive-branch agencies that are not expressly excluded from its coverage. See, e.g., 15 U.S.C.

§632(b). However, there are certain entities, such as FPI, who may not be agencies for purposes of the Small Business

Act.

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goaling purposes;43 limiting to two the number of categories in which one business could be

counted (e.g., HUBZone and women-owned);44 and specifying that certain types of businesses

(e.g., foreign-owned) not be included in the count.45

The second category included bills that sought to improve the government’s performance in

meeting existing contracting and subcontracting goals. These types of measures tended to focus

on increasing reporting by the agencies or SBA and publicizing the information,46 or requiring the

Government Accountability Office (GAO) to study the activities of federal agencies and provide

recommendations on how to improve goaling performance.47 Other provisions would have

penalized agencies that failed to meet their goals.48 However, the latter type of provisions could

potentially have raised constitutional issues to the degree that any penalties for failure to meet

goals for contracting and subcontracting with minority- or women-owned small businesses, in

particular, were seen as transforming these goals into quotas. To date, the courts have generally

upheld aspirational goals that reflect classifications among small businesses based on the race or

gender of their owners, among other factors, on the grounds that such goals are not mandatory

and, thus, do not constitute disparate treatment of small business owners by the federal

government.49 However, if legislation were to impose mandatory goals, or change the nature of

Small Business Fairness Act, S. 1110, §2; H.R. 5829, §2 (providing that, if an 8(a), HUBZone, woman-owned, or

service-disabled veteran-owned small business performed the obligations of a prime contractor under a “contractor

team arrangement,” then the agency could count the contract for purposes of its goals). See also An Act to Amend Title

38, United States Code, to Clarify the Contracting Goals and Preferences of the Department of Veterans Affairs with

Respect to Small Business Concerns Owned and Controlled by Veterans, H.R. 4048, §2 (directing the Secretary of

Veterans Affairs to include goods and services acquired through the Federal Supply Schedules “[f]or purposes of

meeting the goals” under the Veterans Benefits Act).

Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, tit. I, §105.

Fairness and Transparency in Contracting Act of 2011, H.R. 3184, §4; Act for the 99%, H.R. 3638, §1304 (amending

definitions in the Small Business Act so that no publicly-traded business or its subsidiary, or foreign-owned business or

its subsidiary, may be considered a small business for purposes of federal contracting, including procurement goals).

Fairness and Transparency in Contracting Act of 2011, H.R. 3184, §6; Act for the 99%, H.R. 3638, §1306 (requiring

that each federal agency list on its website all businesses that received contracts because they were identified as small

businesses); Honoring Promises to Service-Disabled Veterans Act of 2011, S. 1154, §3 (requiring agencies to report

quarterly to SBA on their contracting with service-disabled veteran-owned small businesses and requiring SBA to then

rank the agencies and publish the results on a publicly accessible website, as well as requiring SBA to report annually

to Congress on the progress of federal agencies in meeting their goals for contracting with service-disabled veteranowned small businesses and to include recommendations on whether any prime contractor should be recognized by

Congress for “outstanding progress” in contracting with such businesses).

Expanding Opportunities for Small Businesses Act of 2011, H.R. 2921, §3 (requiring GAO to report on the 5 most

and 5 least successful agencies with regards to meeting the goals and to provide recommendations on how to improve

the performance of the least successful ones); Small Business Contracting Opportunities Expansion Act of 2012, H.R.

6078, §3 (requiring GAO to report on improving internal processes of agencies engaged in contracting, and on outreach

to groups that are the subject of procurement goals).

Small Business Growth and Federal Accountability Act of 2012, H.R. 3779, §2 (prohibiting any federal agency that

fails to meet a goal from expending for the procurement of goods or services an amount greater than 90% of the

amount expended for the procurement of goods or services during the year for which it failed to meet the goal);

Government Efficiency through Small Business Contracting Act of 2012, H.R. 3850, §4 (providing that if an agency

failed to meet any goal, no senior executives within that agency could receive an incentive award or be granted a

sabbatical during the following year); National Defense Authorization Act for FY2013, H.R. 4310, as passed by the

House, at §1631 (prohibiting SBA from establishing or implementing any pilot program unless it issues certain

required reports regarding government performance vis-à-vis the small business contracting goals); Small Business

Contracting Opportunities Expansion Act of 2012, H.R. 6078, §2 (same).

See Adarand Constructors, 228 F.3d at 1181 (upholding the constitutionality of aspirational goals on the grounds that

such goals are not mandatory). However, the constitutionality of the federal government’s aspirational goals under 15

U.S.C. §644(g) has been challenged. See DynaLantic Corp., 503 F. Supp. 2d 262.

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Federal Contracting and Subcontracting with Small Businesses

the existing goals so that they were effectively mandatory, then questions could be raised as to

whether the goal was essentially a quota that required minority- or women-owned small

businesses to get fixed percentages of government contracts.50

Eligibility for Existing Set-Aside Programs

Ever since Congress established the first set-aside program in 1978,51 the criteria governing

eligibility for such programs have periodically been of interest to Members of Congress and the

public.52 During the 112th Congress, the primary concerns centered upon eligibility for the 8(a)

and HUBZone programs, for various reasons discussed below.

Proposals to create new set-aside programs for “early stage” small businesses or mid-sized firms

are discussed above, under the heading “Size Standards.”53 Legislation to grant agencies

additional authority to conduct competitions in which only women-owned small businesses may

compete, or to make sole-source awards to them, are discussed below, under the heading

“Restricted Competitions and Non-Competitive Awards.”54

8(a) Program

The Small Business Act requires SBA to establish a “small business and capital ownership

development program” to provide non-financial assistance to certain small businesses owned and

controlled by socially and economically disadvantaged individuals,55 and to enter into contracts

For example, in upholding the 8(a) Program against a facial challenge, the U.S. District Court for the District of

Columbia recently emphasized that federal goals for contracting with small disadvantaged businesses (including 8(a)

firms) are aspirational, not “rigid numerical quotas,” and that there are no “penalties” for failure to meet the goals.

DynaLantic Corp., 2012 U.S. Dist. LEXIS 114807, at *10. But see City of Richmond v. J.A. Croson Co., 488 U.S. 469

(1989) (holding that a municipal ordinance requiring the city’s prime contractors to award at least 30% of the value of

each contract to minority subcontractors was unconstitutional); Rothe Dev. Corp. 545 F.3d 1023 (striking down a

statute that established, as a goal, that the Department of Defense (DOD) award 5% of its contracts to small

disadvantaged businesses and other entities, and authorized DOD to apply a 10% price evaluation adjustment to the

bids or offers of such entities in order to reach this goal).

An Act to Amend the Small Business Act and the Small Business Investment Act of 1958, P.L. 95-507, §202, 92

Stat. 1761-63 (October 24, 1978) (codified, as amended, at 15 U.S.C. §637(a)). Prior to the 1978 amendments to the

Small Business Act, SBA had implemented a set-aside program for certain minority-owned businesses in the absence

of express statutory authority to do so. See generally CRS Report R40744, The “8(a) Program” for Small Businesses

Owned and Controlled by the Socially and Economically Disadvantaged: Legal Requirements and Issues, by (name re

dacted) and (name redacted).

See, e.g., Federal Contracting: Removing Hurdles for Minority-Owned Businesses: Hearing of the House Committee

on Oversight and Government Reform, Subcommittee on Government Management, Organization and Procurement,

110th Cong., 1st Sess. (2007) (discussing the 8(a) Program specifically); Are Government Purchasing Policies Failing

Small Businesses? Hearing of the Senate Committee on Small Business and Entrepreneurship, 107th Cong., 2d Sess.

(2002) (discussing various small business programs).

See supra notes 19-24 and accompanying text.

See infra notes 187-203.

15 U.S.C. §636(j)(10). This program shall be “exclusively” for such firms and shall, among other things,

assist small business concerns participating in the program (either through public or private organizations) to

develop and maintain comprehensive business plans which set forth the Program Participant’s business targets,

objectives, and goals … [and] provide for such other nonfinancial services as deemed necessary for the

establishment, preservation, and growth of small business concerns participating in the Program, including but not

limited to (I) loan packaging, (II) financial counseling, (III) accounting and bookkeeping assistance, (IV)

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with other government agencies that are subcontracted to such firms.56 Taken together, these

requirements form the basis for SBA’s 8(a) Program.57 In addition, the act defines socially

disadvantaged individuals as “those who have been subjected to racial or ethnic prejudice or

cultural bias because of their identity as a member of a group without regard to their individual

qualities,”58 and economically disadvantaged individuals as

those socially disadvantaged individuals whose ability to compete in the free enterprise

system has been impaired due to diminished capital and credit opportunities as compared to

others in the same business area who are not socially disadvantaged.59

However, outside of limiting participation in the 8(a) Program by firms and individual owners to

a maximum of nine years,60 and finding that members of certain groups are socially

disadvantaged,61 the Small Business Act generally gives SBA considerable discretion as to the

criteria for eligibility for the 8(a) Program.62 This is particularly true where economic

disadvantage is concerned. The current net worth standards—which preclude individuals from

having personal net worth of more than $250,000 at the time of entry into the 8(a) Program

($750,000 for continuing eligibility)63—are established by regulation, not statute.64

Recently, there has been particular concern about whether some persons who could benefit from

the 8(a) Program are excluded from it due to the net worth standards,65 which were set in 198966

and have not been adjusted for inflation since then.67 Relatedly, some have expressed concern that

(...continued)

marketing assistance, and (V) management assistance.

15 U.S.C. §637(a)(1)(A).

For more on the 8(a) Program, see generally CRS Report R40744, The “8(a) Program” for Small Businesses Owned

and Controlled by the Socially and Economically Disadvantaged: Legal Requirements and Issues, by (name redacted)

and (name redacted).

15 U.S.C. §637(a)(5).

15 U.S.C. §637(a)(6)(A).

15 U.S.C. §636(j)(10)(C)(i) (nine-year term); 15 U.S.C. §637(a)(9) (termination and early graduation); 13 C.F.R.

§124.301 (exiting the 8(a) Program); 13 C.F.R. §124.302 (early graduation); 13 C.F.R. §124.303 (termination from the

Program).

15 U.S.C. §631(f)(1)(C) (finding that such groups “include, but are not limited to, Black Americans, Hispanic

Americans, Native Americans, Indian tribes, Asian Pacific Americans, Native Hawaiian Organizations, and other

minorities”).

See, e.g., 13 C.F.R. §124.101 (limiting participation in the program to small businesses that are “unconditionally

owned and controlled by one or more socially and economically disadvantaged individuals [or groups] who are of good

character and citizens of the United States” that demonstrate “potential for success”).

13 C.F.R. §124.104(c). Individuals’ ownership interests in the small business and equity in their primary personal

residences are excluded when determining net worth.

It should also be noted that the Department of Transportation adjusted the net worth standards for its Disadvantaged

Business Enterprise program—which had previously corresponded to SBA’s standards—by regulation in 2011, without

being required to do so by statute. Dep’t of Transportation, Disadvantaged Business Enterprise Program: Program

Improvements, 76 Federal Register 5083, 5085-86 (January 28, 2011) (codified at 49 C.F.R. §26.27(a)(2)(i)

(increasing the net worth threshold from $750,000 to $1.32 million).

See, e.g., Not Too Small to Succeed in Business Act of 2011, H.R. 3754, §2 (finding that the 8(a) Program does not

adequately prepare firms for graduation, in part, because of the “reliance of the [SBA] on outdated measures of … net

worth in determining whether a company participating in the program continues to be economically disadvantaged”).

See Small Bus. Admin., Minority Small Business and Capital Ownership Development Program: Final Rule, 54

Federal Register 34692 (August 21, 1989) (amending the SBA regulations to adopt the current net worth standards).

The SBA’s net worth standards are not acquisition-related thresholds subject to periodic adjustment for inflation

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firms are not adequately prepared to compete for federal or other contracts upon leaving the

program,68 and that certain firms receive a disproportionately large share of all 8(a) contracts,

leaving other firms with diminished opportunities to grow and develop.69 Partly in response to

such concerns, the 111th Congress enacted legislation requiring GAO to study whether the 8(a)

mentor-protégé program and similar programs, discussed below, are “effectively supporting the

goal of increasing the participation of small business concerns in Government contracting.”70

Members of the 112th Congress also introduced measures specifically addressing eligibility for

the 8(a) Program, some seeking to expand eligibility, and others to restrict it, at least for certain

owners and firms. The former category included measures that would have allowed firms to

participate in the program for more than nine years and required SBA to provide technical

assistance to those who are no longer eligible to participate, as well as measures that would have

increased the net worth threshold.71 The second category—legislation intended to restrict the

participation of certain populations in the 8(a) Program—included measures that would have

subjected firms owned by Alaska Native Corporations (ANCs) to the same eligibility and other

requirements to which individually owned 8(a) firms are subject.72 This legislation, which

responded to the widely reported increase in federal contract dollars awarded to ANCs and their

(...continued)

under the Ronald W. Reagan National Defense Authorization Act for FY2005. See, e.g., Dep’t of Defense, Gen. Servs.

Admin., & Nat’l Aeronautics & Space Admin., Inflation Adjustment of Acquisition-Related Thresholds, 75 Federal

[here] are thresholds relating to claims, penalties, withholding, payments, required levels of insurance, small business

size standards, liquidated damages, etc.”). Congress could, however, enact legislation requiring periodic adjustment of

the net worth standards for inflation.

See, e.g., Not Too Small to Succeed in Business Act of 2011, H.R. 3754, §2 (finding that the 8(a) Program “has a

record of graduating companies that are not sufficiently prepared to compete for contracts with large and established

companies in the private sector, resulting in a large number of former participants in the program failing to remain in

business shortly after leaving the program”); Small Business Contracting Fraud Prevention Act of 2011, S. 633, §5

(requiring GAO to report periodically to Congress on the effectiveness of the 8(a) Program, including the percentage of

businesses that continue to operate during the three-year period after successfully completing the program); SUCCESS

Act of 2012, S. 3442, §525 (same). For more on this and other provisions of S. 633, see infra notes 240 to 242 and

accompanying text.

See, e.g., Gov’t Accountability Office, Federal Contracting: Monitoring and Oversight of Tribal 8(a) Firms Need

Attention, GAO-12-84, January 2012, available at http://www.gao.gov/assets/590/588101.pdf (reporting that while

tribal 8(a) firms comprised 6.2% of all 8(a) firms in FY2010, they received nearly 33% of all 8(a) obligations). Most

obligations to tribal-owned firms were to ANC-owned firms. Id.

Small Business Jobs Act of 2010, P.L. 111-240, tit. I, subtitle C, §1345, 124 Stat. 2546.

Expanding Opportunities for Small Businesses Act of 2011, H.R. 2921, §2 (extending the nine-year time limitation

on 8(a) Program participation to 12 years and requiring SBA to develop a program to provide technical assistance to

firms during the two-year post-eligibility period); Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S.

1334, tit. 1, §102 (providing that the nine-year time limitation on program participation would not apply to small

businesses that have not yet completed an 8(a) contract and providing that individuals with a net worth of up to $1.5

million may be considered economically disadvantaged); Not Too Small to Succeed in Business Act of 2011, H.R.

3754, §3 (extending the nine-year limitation to 11 years and providing that individuals with a net worth of up to

$750,000 ($2.25 million for continued eligibility) may qualify as economically disadvantaged).

An Act to Eliminate the Preferences and Special Rules for Alaska Native Corporations under the Program under

Section 8(a) of the Small Business Act, H.R. 598; S. 236. For further discussion of this legislation and the rules

currently governing contracting with ANC-owned firms participating in the 8(a) Program, see CRS Report R40855,

Contracting Programs for Alaska Native Corporations: Historical Development and Legal Authorities, by (name re

dacted), (name redacted), and (name redacted).

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subsidiaries over the past decade,73 would have removed the alleged “special … advantages”74

that ANC-owned firms enjoy in contracting under Section 8(a) of the Small Business Act by

•

amending the Alaska Native Claims Settlement Act so that ANCs would no

longer be deemed to be socially or economically disadvantaged for purposes of

Sections 7(j) and 8(a) of the Small Business Act;

•

redefining “Indian tribe” for purposes of the 8(a) Program to exclude ANCs;

•

prohibiting ANC-owned firms from receiving additional sole-source awards

when the total amount of competitive and sole-source awards they have received

in any year exceeds the total amount of competitive and sole-source awards that

individually owned firms may receive (approximately $100 million)75;

•

prohibiting SBA from exempting ANC-owned firms from any time limitations on

participation in the 8(a) Program to which individually owned 8(a) firms are

subject;

•

prohibiting ANCs from conferring eligibility to participate in the 8(a) Program on

more than one firm at a time; and

•

precluding ANC-owned 8(a) firms from acquiring ownership interests in other

8(a) firms that exceed the ownership interests that individually owned 8(a) firms

may acquire.

These changes would have effectively barred ANC-owned firms from receiving sole-source

awards valued in excess of $4 million ($6.5 million for manufacturing contracts) under the

authority of Section 8(a) in circumstances when individually owned 8(a) firms cannot.76 They

would also have resulted in all affiliations of ANC-owned firms being counted when the firms’

size is determined.77 Were all affiliations counted, certain ANC-owned firms firms could be less

likely to qualify as small and, thus, could potentially be excluded from the 8(a) Program.

See, e.g., Federal Contracting, supra note 69, at 12 (reporting that obligations to ANC-owned firms increased from

$1.9 billion in FY2005 to $4.7 billion in FY2010). Obligations to 8(a) firms overall increased during this period, from

$11.3 billion to $18.8 billion, with obligations to tribally-owned firms (including ANC-owned firms) representing a

160% increase. Obligations to non-tribal 8(a) firms, in contrast, increased only 45%.

Office of the Inspector General, Small Bus. Admin., Participation in the 8(a) Program by Firms Owned by Alaska

Native Corporations (July 10, 2009), at pg. 2, available at http://www.sba.gov/sites/default/files/oig_reptbydate_july915_0.pdf.

See 13 C.F.R. §124.519 (generally prohibiting 8(a) firms from receiving additional sole-source awards once they

have received a combined total of competitive and sole-source awards in excess of $100 million, in the case of firms

whose size is based on their number of employees, or in excess of an amount equivalent to the lesser of (1) $100

million or (2) five times the size standard for the industry, in the case of firms whose size is based on their revenues).

If such legislation were enacted, ANC-owned firms could still receive sole-source awards in the same circumstances

when individually owned 8(a) firms may receive such awards, or under other authority. For example, they could be

awarded sole-source contracts valued in excess of $4 million ($6.5 million for manufacturing contracts) under the

authority of Section 8(a) of the Small Business Act if the contracting officer did not reasonably expect offers from at

least two small businesses. See generally 15 U.S.C. §637(a)(1)(D)(i)(I). They could also be awarded sole-source

contracts in any of the seven circumstances in which sole-sources awards are permitted under CICA (e.g., urgent and

compelling circumstances, national security). 10 U.S.C. §2304(c)(1)-(7) (procurements of defense agencies) & 41

U.S.C. §3304(a)(1)-(7) (procurements of civilian agencies).

Currently, ANC-owned firms must qualify as small, under the SBA’s size standards, in order to participate in the 8(a)

Programs. However, certain affiliations are generally excluded when determining the size of some group-owned firms,

including ANC-owned firms. 13 C.F.R. §124.109(c)(2)(iii) (“In determining the size of a small business concern

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Other legislative proposals would have required disclosure of information about contracting with

ANCs, either by imposing additional reporting obligations on ANCs, or by requiring SBA to

include information regarding contracts with ANCs in certain reports to Congress.78

HUBZone Program

Eligibility for the Historically Underutilized Business Zone (HUBZone) program has also been of

interest to some Members of Congress and commentators recently because of reported fraud in

the program, as well as the completion of the 2010 Census.79 A series of GAO reports, published

between 2008 and 2010, found that the HUBZone program was vulnerable to fraud,80 prompting

interest among some Members in measures which would ensure that only eligible firms

participate in the program. Subsequently, the release of the results of the 2010 decennial census

prompted similar interest among some Members in measures that would allow firms that lose

their HUBZone status because of the 2010 census to continue participating in the HUBZone

program for a limited time. For many firms, eligibility for the HUBZone program is based upon

census results.81 The Small Business Act limits eligibility for the HUBZone program to firms

whose principal office is located in a HUBZone and at least 35% of whose employees reside in a

HUBZone, among other things.82 HUBZones include “qualified census tracts,” as that term is

(...continued)

owned by a socially and economically disadvantaged Indian tribe ... for either 8(a) … program entry or contract award,

the firm’s size shall be determined independently without regard to its affiliation with the tribe, any entity of the tribal

government, or any other business enterprise owned by the tribe, unless the Administrator determines that one or more

such tribally-owned business concerns have obtained, or are likely to obtain, a substantial unfair competitive advantage

within an industry category.”). As used here, “Indian tribe” includes Alaska Native Corporations.

An Act to Eliminate the Preferences and Special Rules for Alaska Native Corporations under the Program under

Section 8(a) of the Small Business Act, H.R. 598; S. 236, §7 (requiring ANCs to report annually to SBA on their total

revenue, the amount of this revenue attributable to the 8(a) Program, and the total amount of benefits paid to

shareholders); Government Efficiency through Small Business Contracting Act of 2012, H.R. 3850, §3 (requiring,

among other things, that SBA report annually to Congress information about contracting with ANCs by the federal

government and individual agencies in an annual report on the goaling program). SBA itself imposed certain reporting

requirements on ANC-owned firms by regulation in 2011. See Small Bus. Admin., Small Business Size Regulations;

8(a) Business Development/Small Disadvantaged Business Status Determinations: Final Rule, 76 Federal Register

8222 (February 11, 2011). However, implementation of this requirement was delayed so SBA could conduct tribal

consultations. See Small Bus. Admin., 60 Day Notice and Request for Comments, 76 Federal Register 63983 (October

14, 2011); Small Bus. Admin., Notice of Tribal Consultations, 76 Federal Register 27859 (May 13, 2011); Small Bus.

Admin., Notice of Tribal Consultations, 76 Federal Register 12273 (March 7, 2011).

For more on the HUBZone program, see generally CRS Report R41268, Small Business Administration HUBZone

Program, by (name redacted).

See Gov’t Accountability Office, Small Business Administration: Undercover Tests Show HUBZone Program

Remains Vulnerable to Fraud and Abuse, GAO-10-759 (July 28, 2010); Gov’t Accountability Office, HUBZone

Program: Fraud and Abuse Identified in Four Metropolitan Areas, GAO-09-440 (March 25, 2009); Gov’t

Accountability Office, Small Business Administration: Additional Actions Are Needed to Certify and Monitor

HUBZone Businesses and Assess Program Results, GAO-08-643 (July 16, 2008).

15 U.S.C. §632(p) (defining HUBZones and HUBZone small businesses, among other things). For a few firms,

eligibility for the HUBZone program is not tied to the census because these firms are located in “base closure areas,” or

lands within the external boundaries of a military installation that was closed through a privatization process under the

authority of various Base Realignment and Closure (BRAC) or similar laws. See 15 U.S.C. §632(p)(4)(D).

15 U.S.C. §632(p)(3) & (5). See also Mission Critical Solutions v. United States, 96 Fed. Cl. 657 (2011) (upholding

SBA’s interpretation of an SBA regulation as requiring that at least 35% of a firm’s employees must reside in a

HUBZone both at the time the firm is certified as a HUBZone firm and at the time the firm is awarded a contract

through the HUBZone program).

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defined in 26 U.S.C. Section 42(d)(5)(C)(ii),83 and qualified nonmetropolitan counties, or

counties in which

(i) the median household income is less than 80 percent of the nonmetropolitan State median

household income, based on the most recent data available from the Bureau of the Census of

the Department of Commerce, (ii) the unemployment rate is not less than 140 percent of the

average unemployment rate for the United States or for the State in which such county is

located, whichever is less, based on the most recent data available from the Secretary of

Labor, or (iii) there is located a difficult development area, as designated by the Secretary of

Housing and Urban Development in accordance with section 42(d)(5)(C)(iii) of title 26,

within Alaska, Hawaii, or any territory or possession of the United States outside the 48

contiguous States.84

Also included are “redesignated areas,” or areas that ceased to qualify as census tracts or

nonmetropolitan counties, but were allowed to remain HUBZones until the later of (1) the date on

which the Census Bureau publicly released the first results from the 2010 decennial census, or (2)

three years after the date on which the census tract or nonmetropolitan county ceased to qualify.85

SBA has stated that, for purposes of the HUBZone program, the Census Bureau released the first

results of the 2010 census on October 1, 2011.86

The 112th Congress enacted legislation that allows certain base closure areas to continue to be

treated as HUBZones for an additional period. Specifically this legislation permits areas that

were, on or before the date of the legislation’s enactment, treated as HUBZones pursuant to

Section 152(a)(2) of the Small Business Reauthorization and Manufacturing Assistance Act of

2004 to be treated as HUBZones for up to five years, provided that no area may be treated as a

HUBZone for more than five years under the authority of this legislation and/or the 2004 act.87

Section 152(a)(2), in turn, provided for “base closure areas” that had undergone final closure to

be treated as HUBZones for five years, and defined “base closure area” to include military

installations closed pursuant to the Defense Base Closure and Realignment Act of 1990 and other

authorities.88

The 112th Congress did not enact legislation that would address reported fraud in the HUBZone

program, or the loss of HUBZone status by certain firms due to the 2010 census, although some

Members introduced bills addressing these issues. Among the bills addressing reported fraud in

the program were measures that would have required SBA to (1) ensure the HUBZone map is

kept current; (2) implement policies to prevent unqualified businesses from participating in the

program; (3) ensure timely processing of HUBZone applications; and (4) report to Congress on

the efficacy of the program, or develop measures and implement plans to assess its

Section 42(d)(5)(C)(ii) of Title 26 of the United States Code defines a “qualified census tract” as “any census tract

which is designated by the Secretary of Housing and Urban Development and, for the most recent year for which

census data are available on household income in such tract, either in which 50 percent or more of the households have

an income which is less than 60 percent of the area median gross income for such year or which has a poverty rate of at

least 25 percent.”

15 U.S.C. §632(p)(4)(A)-(B).

15 U.S.C. §632(p)(4)(C).

Small Bus. Admin., HUBZone: Latest News and Articles, available at http://www.sba.gov/content/hubzone-latestnews-and-articles (“[A]ll Redesignated HUBZones due to expire on the date on which the census bureau publicly

releases the first results from the 2010 decennial census are expiring effective[] 10/1/2011.”).

P.L. 112-239, §1698,—Stat.—. See also HUBZone Expansion Act of 2012, S. 3675, §2.

Consolidated Appropriations Act, 2005, P.L. 108-447, §152, 118 Stat. 3456-57 (December 8, 2004).

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Federal Contracting and Subcontracting with Small Businesses

effectiveness.89 Among the bills addressing the loss of eligibility due to the 2010 census were

measures that would have extended the period during which redesignated areas continue to

qualify until the later of three years after the date on which the SBA publishes a HUBZone map

based on the 2010 census results, or three years after the date on which the area ceased to

qualify.90 Other legislative proposals would have required the Secretary of Housing and Urban

Development (HUD) to designate HUBZones based on the new census data within a specified

time frame,91 or would have designated a particular county as a HUBZone for a specified time

period.92 The latter types of provisions were particularly significant because, while SBA currently

has considerable discretion in how it implements the HUBZone program (e.g., how often the

HUBZone map is updated), it arguably does not have any discretion in which areas qualify as

HUBZones. The Small Business Act defines “HUBZones” by reference to other categories (e.g.,

qualified census tracts) whose composition is determined by other agencies.

Legislation was also introduced in the 112th Congress that would have amended the definition of

“HUBZone small business” given in Section 3 of the Small Business Act to include firms that are

wholly owned by one or more Native Hawaiian Organizations, or partially owned by such an

organization (or a corporation wholly owned by such an organization) if all other owners are U.S.

citizens or small businesses.93 The proposed provisions paralleled those that presently address

small businesses owned by Alaska Native Corporations, Indian tribal governments, and

Community Development Corporations.94 Small businesses owned by these various types of

entities have, at times, been subject to different treatment under the Small Business Act,95 and the

proposed legislation was apparently intended to remove one such difference.

Subcontracting Plans

The Small Business Act has long required agencies to take various steps to promote

subcontracting with small businesses. Among other things, they have been required since 1978 to

incorporate “subcontracting plans” in certain prime contracts, and to establish goals regarding the

percentage of agency subcontract dollars awarded to small businesses.96 Nonetheless, despite

Small Business Contracting Fraud Prevention Act of 2011, S. 633, §6; SUCCESS Act of 2012, S. 3442, §526 (same);

HUBZone Qualified Census Tract Act of 2011, S. 1874, §3 (requiring SBA to submit, within one year of the act’s

enactment, a report to Congress that describes the benefits and drawbacks of using qualified census tract data to

designate HUBZones, describes any problems encountered in using qualified census tract data to designate HUBZones,

and includes recommendations for ways to improve the process of designating HUBZones).

Protect HUBZones Act of 2011, H.R. 2131, §2; HUBZone Protection Act of 2011, S. 1756, §2; Small Business

Contracting Fraud Prevention Act of 2011, S. 633, §6; SUCCESS Act of 2012, S. 3442, §526.

HUBZone Qualified Census Tract Act of 2011, S. 1874, §2 (imposing deadlines on the HUD Secretary to identify

and publish the list of qualifying census tracts under 26 U.S.C. §42 and to designate a date within 3 months of the

publication of the list upon which the list becomes effective for areas that qualify as HUBZones).

Monroe County HUBZone Extension Act of 2011, H.R. 2416, §2 (designating Monroe County, Pennsylvania, as a

HUBZone until October 1, 2014); Monroe County HUBZone Act of 2011, S. 976, §2 (same); Shuttle Workforce

Revitalization Act of 2012, S. 2157, §3 (designating Brevard County, Florida, a HUBZone through at least January 1,

2020, due to the “significant economic hardship” caused by the termination of the Space Shuttle program).

Native Hawaiian HUBZone Opportunity Act of 2012, H.R. 5729, §2.

15 U.S.C. §632(p)(3)(B)-(D).

See CRS Report R40744, The “8(a) Program” for Small Businesses Owned and Controlled by the Socially and

Economically Disadvantaged: Legal Requirements and Issues, by (name redacted) and (name redacted), at Appendix.

An Act to Amend the Small Business Act and the Small Business Investment Act of 1958, P.L. 95-507, §§211 &

221, 92 Stat. 1768-69, 1770 (codified, as amended, at 15 U.S.C. §§637(d) & 644(g)(2)).

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Federal Contracting and Subcontracting with Small Businesses

these provisions, concerns about subcontracting have persisted, in part because the government

has historically failed to meet its goals for the percentage of federal contract and subcontract

dollars awarded to small businesses,97 and in part because of alleged mistreatment of small

business subcontractors by agency prime contractors.98 In response to such concerns, the 111th

Congress amended Section 8(d) of the Small Business Act to require that agencies incorporate in

their prime contracts terms obligating the contractor to (1) make a “good faith effort” to acquire

goods and services (including construction work) from the small businesses whom it “used” in

preparing and submitting the bid or proposal, “in the same amount and quantity used in preparing

and submitting the bid or proposal;”99 and (2) notify the contracting officer in writing if it pays a

reduced price to a subcontractor for completed work, or if payment to a subcontractor is more

than 90 days past due for goods or services for which the government has paid the contractor.100

Although SBA is still in the process of implementing the changes made by the 111th Congress, the

112th Congress enacted legislation which

•

requires agencies to collect and report data on the extent to which contractors meet the

goals and objectives in their subcontracting plans, and periodically review the data to

ensure that contractors are complying in good faith with plan requirements;

•

provides that failure to comply in good faith with a subcontracting plan may be

considered in any evaluation of contractors’ past performance;101

See, e.g., SBA Notes Drop in Small Business Contract Awards for FY2011, supra note 29.

See, e.g., Are Government Purchasing Policies Failing Small Businesses? A Roundtable before the Committee on

Small Business and Entrepreneurship, 107th Cong., 2d sess. (June 19, 2002) (discussing, inter alia, the problems faced

by small business subcontractors).

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1322, 124 Stat. 2540-41 (codified at 15 U.S.C.

§637(d)(6)(G)(i)). If the contractor fails to do so, it must provide the contracting officer with a written explanation. 15

U.S.C. §637(d)(6)(G)(i)). SBA recently proposed regulations implementing this provision. Among other things, these

regulations provide that a prime contractor would be said to have “used” a small business in preparing its bid or

proposal only if (1) it referenced the small business as a subcontractor in its bid or proposal; (2) it has a subcontract or

agreement in principle to subcontract with the small business to perform a portion of the specific contract; or (3) the

small business drafted part of the bid or proposal, or the offeror used the small business’s pricing or cost information,

or technical expertise, in preparing the bid or proposal, and there was an “intent or understanding that the small

business concern will be awarded a subcontract for the related work if the offeror is awarded the contract.” Small Bus.

Admin., Small Business Subcontracting: Proposed Rule, 76 Federal Register 61626, 61631 (October 5, 2011); Small

Bus. Admin., Small Business Subcontracting: Proposed Rule; Reopening of the Comment Period, 76 Federal Register

74749 (December 1, 2011) (extending the comment period on the proposed regulation through January 6, 2012).

Assuming this regulation, with its arguably narrow definition of when a prime contractor could be said to have “used” a

small business in preparing its bid or proposal, is adopted, concerns about “bait and switch” by prime contractors could

persist despite the enactment of the Small Business Jobs Act. Contractors are commonly said to have engaged in “bait

and switch” when they represent to agencies in their bids or proposals that they will subcontract particular work to

small businesses, but ultimately subcontract that work to other firms.

100

P.L. 111-240, tit. I, subtitle C, §1334, 124 Stat. 2542-43 (codified at 15 U.S.C. §637(d)(12)). The act also requires

contracting officers to consider the “unjustified failure” of a prime contractor to make full or timely payment to a

subcontractor when evaluating the contractor’s performance. Id.

101

Previously, failure to comply in good faith with a subcontracting plan constituted a material breach of the contract,

and agencies were generally required to consider contractors’ performance vis-à-vis their subcontracting plans when

evaluating their “past performance.” See 15 U.S.C. §637(d)(8) (“The failure of any contractor or subcontractor to

comply in good faith with (A) the clause contained in paragraph (3) of this subsection, or (B) any plan required of such

contractor pursuant to the authority of this subsection to be included in its contract or subcontract, shall be a material

breach of such contract or subcontract.”); 48 C.F.R. §42.1502(g) (“Past performance evaluations shall include an

assessment of contractor performance against, and efforts to achieve, the goals identified in the small business

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Federal Contracting and Subcontracting with Small Businesses

•

requires that offerors who intend to identify a particular small business as a potential

subcontractor notify that firm prior to doing so;

•

requires that SBA establish a mechanism whereby subcontractors may report fraud or bad

faith by a contractor with respect to a subcontracting plan;

•

directs SBA to ensure that the electronic subcontracting reporting system

(http://www.esrs.gov/) is modified so that it can identify contractors who fail to submit

required reports; and

•

requires annual reporting on the number of contractors who file subcontracting reports, as

well as the number of contractors who exceed, meet, or fail to meet their goals for

subcontracting with small businesses.102

Some Members of the 112th Congress also proposed legislation that would have (1) held prime

contractors accountable for failure to report their subcontracting activities;103 (2) required

withholding of a certain percentage of the contract price if the contractor fails to achieve certain

goals in its subcontracting plan;104 and (3) required that contractors who fail to notify small

businesses identified as potential subcontractors in their bids or proposals be fined a percentage of

the contract price.105 Each of these proposals was arguably an expansion upon current law, which

requires that contractors report on their performance in subcontracting semiannually during

contract performance,106 but provides only that failure to make a “good faith effort” to comply

(...continued)

subcontracting plan when the contract includes the clause at 52.219-9, Small Business Subcontracting.”). However, the

112th Congress expressly made failure to comply with a subcontracting plan—as opposed to performance vis-à-vis

subcontracting goals—a consideration in evaluating past performance. Agencies are generally required to consider

contractors’ past performance when making source selection decisions in negotiated procurements whose value

exceeds $150,000. 48 C.F.R. §15.304(c)(2)-(3).

102

P.L. 112-239, §1653,—Stat.—.

103

Subcontracting Transparency and Reliability Act of 2012, H.R. 3893, tit. II, §201 (requiring that subcontracting

plans include assurances that the contractor will submit periodic reports on its subcontracting activities, and providing

that failure to provide the requisite assurances constitutes a material breach of the contract); National Defense

Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1655 (same). These measures would also have

authorized SBA procurement center representatives (PCRs) and commercial market representatives (CMRs) to delay

for up to 30 days acceptance of subcontracting plans that they determine fail to provide the “maximum practicable

opportunity” for small businesses to participate in the performance of the contract. PCRs and CMRs currently do not

have the authority to delay a contract award because of concerns about the subcontracting plan. Agencies may not

award a contract until there is a subcontracting plan that is acceptable to the contracting officer. See 15 U.S.C.

§637(d)(4)(C); 15 U.S.C. §637(d)(5)(B).

104

Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §106 (requiring withholding of not less

than $5,000 on contracts valued at or below $100,000; 3% of the contract price on contracts valued between $100,000

and $5 million; and 5% of the contract price on contracts valued in excess of $5 million, if the contractor fails to meet

its goals for subcontracting with small disadvantaged businesses).

105

An Act to Require Contractors to Notify Small Business Concerns that Have Been Included in Offers Relating to

Contracts Let by Federal Agencies and for Other Purposes, S. 370 (subjecting contractors that fail to provide written

notice to potential subcontractors on certain procurements be fined an amount equal to 20% of the contract value, for a

first offense; fined 50% of the contract value and debarred for one year for a second offense; and debarred for a third or

subsequent offense). No term of debarment was proposed for third or subsequent offenses, perhaps suggesting that any

such debarment is intended to be permanent.

106

48 C.F.R. §19.704(a)(10)(A) (Individual Subcontract Reports (ISRs) to be submitted semiannually during contract

performance for the periods ending March 31 and September 30). ISRs are also required for each contract within 30

days of completion. In addition, contractors are required to submit Summary Subcontract Reports (SSRs) within

(continued...)

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Federal Contracting and Subcontracting with Small Businesses

with subcontracting-plan goals could subject the contractor to liquidated damages.107 However, if

enacted, certain proposals could have raised issues of contract and/or constitutional law. Contract

law generally permits parties to agree upon liquidated damages in cases where the injury caused

by the breach is uncertain or difficult to quantify.108 The imposition of liquidated damages to

“punish” a party for failure to perform under the contract, in contrast, is generally disfavored.109

Thus, if contract provisions calling for withholding or liquidated damages were viewed as

punitive, as opposed to bona fide attempts to quantify the damages for breach, they might not be

enforced. Similarly, fining contractors for failure to meet goals or notify subcontractors could

potentially be found to violate the Eighth Amendment of the U.S. Constitution. The Eighth

Amendment prohibits the imposition of excessive fines,110 and courts have found that “a punitive

forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a

defendant’s offense.”111 Thus, assuming a fine were seen as punitive, it could potentially be found

unconstitutional if it is disproportionate to the offense in light of the extent of the harm, the

gravity of the offense, the nature and extent of the offense, and the availability of other

penalties.112 Equal protection issues could also be raised if the penalties were so severe that the

goals for subcontracting with minority- or women-owned small businesses, in particular, were

seen as tantamount to quotas.113

Limitations on Subcontracting

Congress originally imposed “limitations on subcontracting” upon 8(a) firms in 1986 in order to

ensure that small businesses participating in the 8(a) Program developed capacity to perform as

federal or other contractors.114 Because of these limitations, 8(a) firms were required to perform at

(...continued)

specific time periods that vary depending upon the identity of the contracting agency. See 48 C.F.R. §19.704(a)(10)(B).

107

48 C.F.R. §19.705-7(b). See also 15 U.S.C. §637(d)(4)(F); 48 C.F.R. §19.702(c). Liquidated damages are damages

whose amount was agreed upon, as compensation for specific breaches, by the parties at the time of the contract’s

formation.

108

See, e.g., Wise v. United States, 249 U.S. 361, 365-66 (1919). It is “customary, where Congress has not adopted a

different standard, to apply to the construction of government contracts the principles of general contract law. That has

been done in other cases where the Court has considered the enforceability of ‘liquidated damages’ provisions in

government contracts.” Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411 (1947) (holding that a provision calling

for the imposition of liquidated damages in a contract of the Federal Surplus Commodities Program constituted an

unenforceable penalty). See also M. Maropakis Carpentry, Inc. v. United States, 84 Fed. Cl. 182 (2008) (finding that

the liquidated damages provision was enforceable because the plaintiff failed to prove that it was a penalty).

109

See, e.g., Priebe & Sons, 332 U.S. at 412-13.

110

U.S. Const. amend. VIII.

111

United States v. Bajakajian, 524 U.S. 321, 334 (1988).

112

See, e.g., United States v. 3814 NW Thurman St., Portland, Or., 164 F.3d 1191, 1197-98 (9th Cir. 1999) (citing

Bajakajian, 524 U.S. at 336-39).

113

See, e.g., City of Richmond, 488 U.S. 469 (holding that a municipal ordinance requiring the city’s prime contractors

to award at least 30% of the value of each contract to minority subcontractors was unconstitutional); DynaLantic Corp.,

2012 U.S. Dist. LEXIS 114807, at *10 (upholding the 8(a) Program against a facial challenge, in part, because federal

goals for contracting with minority-owned small businesses are aspirational, and there are no penalties for failure to

meet the goals).

114

An Act to Authorize Appropriations for Fiscal Year 1987 for Military Activities of the Department of Defense, for

Military Construction, and for Defense Activities of the Department of Energy, to Prescribe Personnel Strengths for

Such Fiscal Year, to Improve the Defense Acquisition Process, and for Other Purposes, P.L. 99-661, §921, 100 Stat.

3927 (November 14, 1986) (codified, as amended, in 15 U.S.C. §637(a)).

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Federal Contracting and Subcontracting with Small Businesses

least 50% of the cost of contracts for services (excluding construction) with their own personnel,

and at least 50% of the cost (excluding materials) of contracts for goods.115 Similar requirements

were imposed upon other contracts awarded under the authority of the Small Business Act in

1987,116 and also in 1987, SBA promulgated limitations on subcontracting for construction

contracts, requiring firms to perform at least 15% of the cost (excluding materials) of general

construction, and 25% of the cost (excluding materials) of construction by special trade

contractors.117 These statutory and regulatory provisions remained unchanged between 1987 and

2012, although modifications were periodically suggested because of concerns about “pass

through” contracts.118

Then, the 112th Congress enacted legislation that restates how the limitations on subcontracting

are expressed—in terms of the amount paid instead of the costs of performing119—in the hopes of

“ensur[ing] that small businesses that get contracts are doing the bulk of the work.”120 Under this

legislation, small businesses may subcontract no more than 50% of the “amount paid to [them]

under the contract,” in the case of contracts for services (other than construction) or supplies

(other than from a regular dealer in such supplies).121 SBA is to establish similar limitations for

general and special trade construction.122 The legislation also grants SBA the authority to modify

any statutory limitations on subcontracting if it determines that “such change is necessary to

reflect conventional industry practices” for small businesses, and to apply similar percentages to

other contracts not awarded under the authority of the Small Business Act.123 In addition, the

legislation provides that, if a contractor exceeds these limitations, it may be fined the greater of

115

15 U.S.C. §637(a)(14)(A)(i)-(ii) (limitations on subcontracting for 8(a) firms).

An Act to Make Technical Corrections in Certain Defense-Related Laws, P.L. 100-26, §10, 101 Stat. 288 (April 21,

1987) (codified, as amended, in 15 U.S.C. §644(o)(1)(A)-(B)).

117

Small Bus. Admin., Small Business Size Standards, 52 Federal Register 32870 (August 31, 1987).

118

Cf. Lars E. Anderson, Terry L. Elling, Michael W. Robinson, and Dismas Locaria, GTSI’s Suspension Shows That

Contractors Should Ensure Accurate Representations Concerning Small Business Matters, 94 Fed. Cont. Rep. 414

(October 26, 2010) (reporting on a subcontractor that was suspended by SBA after it was discovered that it performed

the majority of the work on a contract that had been set aside for and awarded to a small business). As used in this

context, a “pass through” contract is one that is nominally held by a small business, but that is performed primarily by a

firm that is other than small.

119

P.L. 112-239, §1651,—Stat.—. This provision originated in the Subcontracting Transparency and Reliability Act of

2012, H.R. 3893, §101.

120

See, e.g., Charles S. Clark, House Republican Seeks to Curb “Deceitful” Subcontracting, Govt. Exec., February 2,

2012, available at http://www.govexec.com/contracting/2012/02/house-republican-seeks-curb-deceitfulsubcontracting/41074/. However, some commentators have questioned the practical effects of such a change. See, e.g.,

Deborah Billings, House Bill Seeks to Ensure Set Asides Largely Performed by Small Business Subs, 97 Fed. Cont.

Rep. 113 (February 7, 2011).

121

P.L. 112-239, §1651,—Stat.—. In the case of contracts for supplies from a regular dealer in such supplies, the

contractor must supply the product of a domestic small business manufacturer or processor unless a waiver is granted

on the grounds that no such entity can reasonably be expected to offer a product meeting the specifications (including

period for performance) required by the contract, or no such entity is available to participate in the Federal procurement

market. Id.

122

Id.

123

Id. The latter provision effectively overturns the GAO’s decision in Washington-Harris Group. See Comp. Gen.

December No. B-401794; B-401794.2, 2009 U.S. Comp. Gen. LEXIS 226 (November 16, 2009) (finding that the

limitations on subcontracting provided for in the Small Business Act and SBA regulations do not apply to contracts

awarded under other authority). For more on this decision, see generally CRS Report R40998, The Inapplicability of

Limitations on Subcontracting to “Preference Contracts” for Small Businesses: Washington-Harris Group, by (name re

dacted).

116

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Federal Contracting and Subcontracting with Small Businesses

$500,000, or the amount expended, in excess of permitted levels, on subcontractors.124 The latter

provision, in particular, could help address the recurring question, discussed below, of how to

calculate the loss or damage to the government when a firm misrepresents its size or status for

purposes of a federal contract or subcontract by providing an explicit measure of such loss or

damage.125 However, potential constitutional issues could be raised if the fine were seen as

punitive and the amount of the fine were seen as disproportionate to the offense.126

Payment

Because small businesses can be more vulnerable to changes in capital flow than large ones,

payment of small businesses by federal agencies and prime contractors has long been of concern

to Members of Congress and commentators.127 The Prompt Payment Act of 1982 requires that

federal agencies pay interest on payments not made to contractors by the date specified in the

contract, or within 30 days of receipt of a “proper invoice.”128 Amendments made to the Prompt

Payment Act in 1988 extended these protections to certain subcontractors by requiring agencies to

include in their construction contracts terms obligating the contractor (1) to pay the subcontractor

for “satisfactory performance” under the subcontract within seven days of receiving payment

from the agency, and (2) to pay interest on any amounts that are not paid within the proper time

frame.129 Like the original Prompt Payment Act, the 1988 amendments effectively protect small

businesses even though the legislation does not specifically mention them. Small business

subcontractors are especially prevalent in the construction industry.130

Concerns about payment of small businesses generally, and of small business subcontractors in

particular, were widespread during the recession of 2008-2009. Partly in response to such

concerns, the 111th Congress enacted legislation addressing the payment of small business

subcontractors. This legislation requires that prime contractors notify the contracting officer

whenever payment to a small business subcontractor is late or withheld,131 as well as authorizes

the contracting officer to consider the contractor’s failure to make full or timely payment to

124

P.L. 112-239, §1652,—Stat.—. This provision also originated in the Subcontracting Transparency and Reliability

Act of 2012, H.R. 3893, §102.

125

See infra note 231 and accompanying text.

126

See supra notes 110-112 and accompanying text.

127

See, e.g., Payment Practices of the Defense Commissary Agency: Hearing of the House Committee on Armed

Services, 102nd Cong., 2d Sess. (June 11, 1992).

128

P.L. 97-177, 96 Stat. 85 (May 21, 1982) (codified, as amended, at 31 U.S.C. §§3901-3907). Among other things, a

proper invoice contains (1) the name of the contractor, the invoice date, and the contract number; (2) a description of

the goods rendered and the shipping and payment terms; (3) other substantiating documentation or information required

under the contract; and (4) the name, title, telephone number, and complete mailing address of the person to whom

payment should be sent. 31 U.S.C. §3903(a)(1)(A)-(B). The interest rate to be used is that determined by the Secretary

of the Treasury twice a year under the Contract Disputes Act. See 31 U.S.C. §3902(a).

129

P.L. 100-496, §9, 102 Stat. 3460-63 (October 17, 1988) (codified at 31 U.S.C. §3905(b)(1)-(2)). A subcontractor’s

work may generally be said to be satisfactory if the “property and services received conform to the requirements of the

contract.” See New York Guardian Mortg. Corp. v. United States, 916 F.2d 1558, 1560 (Fed. Cir. 1990).

130

See, e.g., Prompt Payment Act Amendments of 1988: Hearing of the House Committee on Government Operations,

100th Cong., 2d Sess., at 26 (1988) (reporting that subcontractors perform 80% of the work on construction projects,

and generally do not get paid until after the prime contractor has been paid).

131

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1334, 124 Stat. 2542-43 (codified at 15 U.S.C.

§637(d)(12)).

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subcontractors when evaluating the contractor’s performance.132 In addition, SBA is apparently

considering requiring prime contractors who fail to meet their obligations in paying

subcontractors to enter into “funds control agreements” with neutral third parties.133 The Obama

Administration has also issued guidance addressing the payment of small business contractors

and subcontractors. Initially, this guidance called for agencies to pay small business contractors

within 15 days of receipt of a proper invoice.134 However, subsequent guidance sought to address

payment of small business subcontractors by calling for agencies to “temporarily accelerate

payments to all prime contractors, in order to allow them to provide prompt payments to small

business subcontractors.”135 In neither case are agencies required to pay interest on payments not

made within the proposed time frames, unlike with “late” payments under the Prompt Payment

Act.

Legislation introduced in the 112th Congress would have similarly directed agencies to pay small

business contractors “as quickly as possible after invoices and all proper documentation,

including acceptance, are received and before normal payment due dates established in the

contract.”136 However, like the Obama Administration’s guidance, this measure contained no

explicit sanctions for failure to pay in accordance with the policy (e.g., required interest

payments).

Surety Bonds

SBA administers a surety bond guarantee program,137 designed to encourage sureties to issue

bonds when they would otherwise determine that a small business presents an unacceptable

degree of risk. Historically, under the program, SBA could guarantee bid, performance, and

payment bonds for individual contracts of $2 million or less for small businesses that cannot

obtain surety bonds through regular commercial channels,138 with the guarantee ranging from

132

Id.

76 Federal Register at 61628.

134

Exec. Office of the President, Office of Mgmt. & Budget, Accelerating Payments to Small Businesses for Goods

and Services, September 14, 2011, available at http://www.whitehouse.gov/sites/default/files/omb/memoranda/2011/

m11-32.pdf.

135

Exec. Office of the President, Office of Mgmt. & Budget, Providing Prompt Payment to Small Business

Subcontractors, July 11, 2012, available at http://www.whitehouse.gov/sites/default/files/omb/memoranda/2012/m-1216.pdf. The Federal Acquisition Regulatory Council (FAR Council) has begun the process of amending the Federal

Acquisition Regulation (FAR) to provide for accelerated payments to small business subcontractors. Under the

proposed FAR amendment, prime contractors would generally be required, “[u]pon receipt of accelerated payments

from the Government, [to] make accelerated payments to a small business subcontractor, to the maximum extent

practicable and prior to when such payment is otherwise required under the applicable contract or subcontract, after

receipt of a proper invoice and all other required documentation from the small business contractor.” Dep’t of Defense,

Gen. Servs. Admin. & Nat’l Aeronautics & Space Admin., Federal Acquisition Regulation: Accelerated Payments to

Small Business Subcontractors: Proposed Rule, 77 Federal Register 75089, 75091 (December 19, 2012). Contractors

would also be required to include language to this effect in all subcontracts with small businesses (including those for

the acquisition of commercial items), thereby binding themselves to similar terms as to their subcontractors. Id.

136

Acquisition Savings Reform Act of 2011, S. 1736, §12 (directing the FAR Council to amend the FAR to “reflect

that governmentwide policy is to assist small business concerns by paying them as quickly as possible”).

137

15 U.S.C. §694b. For more information on the Surety Bond Guarantee Program, see CRS Report R42037, SBA

Surety Bond Guarantee Program, by (name redacted). For these purposes, a surety bond is an instrument between a

surety, a contractor, and a project owner, under which the surety assumes the contractor’s responsibilities to ensure that

the project is completed in the event the contractor is unable to successfully perform the contract.

138

See 15 U.S.C. §694b(a)(1).

133

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Federal Contracting and Subcontracting with Small Businesses

70% to 90% of the surety’s loss if a default occurs.139 However, in response to the recession of

2007-2009,140 the 111th Congress temporarily increased, from February 17, 2009, through

September 30, 2010, the maximum bond amount from $2 million to $5 million, and allowed the

amount to increase to $10 million if a federal contracting officer certified that the larger guarantee

was “necessary.”141 ARRA also temporarily modified the program’s size standards so that a

business would be eligible for the program if it (and its affiliates) did not exceed the size standard

for the primary industry in which the business was engaged.142 This change allowed more

businesses to qualify for the program, and SBA subsequently used its rulemaking authority to

make this change permanent.143

Concerns about the ability of small businesses to secure the surety bonds needed to compete for

contracts persisted after the recession ended in 2009, however, and the 112th Congress enacted

legislation that permanently increases the maximum bond amount to $6.5 million ($10 million if

the contracting officer certifies that the larger guarantee is “necessary”).144 This legislation also

provides for the basic bond amount ($6.5 million) to be periodically adjusted for inflation, and

essentially codifies the SBA regulation which made permanent the temporary size standard

authorized by the 111th Congress.145

Bundling and Consolidation

The way in which agencies structure their requirements can have significant implications for

small businesses. When multiple requirements are grouped into a single contract, that contract

may be difficult, or impossible, for small businesses to perform. For this reason, Congress has

enacted progressively more stringent limitations upon the “bundling” and “consolidation” of

139

See 15 U.S.C. §694b(c).

See, e.g., 155 Cong. Rec. S1486 (daily ed. February 4, 2009) (statement by Sen. Snowe) (temporarily increasing the

bond limit is necessary to “ensure that small businesses are able to secure the surety bonds they need to compete for

contracts, grow, and hire more employees” and, that “in our current economic recession, small businesses are finding it

even more difficult to secure the credit lines necessary to get bonds in the private sector”); 155 Cong. Rec. S2283 (daily

ed. February 13, 2009) (statement by Sen. Cardin) (temporarily increasing the bond limit would create “significant

opportunities to create jobs now in which small businesses will participate and be the driving engine for creation of

new jobs in our country”).

141

American Recovery and Reinvestment Act of 2009, P.L. 111-5, §508, 123 Stat. 158-59 (February 17, 2009).

142

Id., at §508(c), 123 Stat. 153-54.

143

See Small Bus. Admin., Surety Bond Guarantee Program; Size Standards: Direct Final Rule, 76 Federal Register

48549, 48550 (August 11, 2010) (codified at 13 C.F.R. §121.301(d)(2)). SBA was able to increase the size standards

for certain industries within the surety bond guarantee program by regulation only because of its broad statutory

authority over such standards. It lacks similar authority over the maximum bond amounts, which are prescribed by

statute.

144

P.L. 112-239, §1695(a),—Stat.—. Other legislation introduced in the 112th Congress would have increased the

maximum guarantee in varying amounts and for varying periods. See, e.g., Expanding Opportunities for Main Street

Act of 2011, H.R. 2424; S. 1334, tit. I, §103 (permanently increasing the maximum bond amount to $5 million and

authorizing SBA to guarantee a bond of up to $10 million if a federal contracting officer certifies that a larger guarantee

is necessary); American Jobs Act of 2011, H.R. 12; S. 1549; S. 1660, tit. I, Subtitle B, §112 (temporarily increasing the

$2 million threshold to $5 million until September 30, 2012, and appropriating $3 million in additional funding); A Bill

to Remove the Sunset Date for Amendments to the Small Business Investment Act of 1958, and for Other Purposes, S.

2187, §1 (permanently increasing the maximum bond amount to $5 million); SUCCESS Act of 2012, S. 3442, §511

(same).

145

P.L. 112-239, §1695(c),—Stat.—.

140

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requirements by federal agencies. First, in 1997, Congress amended the Small Business Act to

define “bundling” as

consolidat[ing] 2 or more procurement requirements for goods or services previously

provided or performed under separate smaller contracts into a solicitation of offers for a

single contract that is likely to be unsuitable for award to a small business concern due to—

(A) the diversity, size, or specialized nature of the elements of performance specified; (B) the

aggregate dollar value of the anticipated award; (C) the geographical dispersion of the

contract performance sites; or (D) any combination of the factors described in subparagraphs

(A), (B), and (C),

and to require agencies to take certain steps to ensure that any bundling which they engage in is

“necessary and justified.”146 Then, in 2003, Congress amended the Armed Services Procurement

Act (ASPA) to prohibit defense agencies from executing any acquisition strategy that includes a

“consolidation” of contract requirements valued in excess of $6 million147 without first (1)

conducting market research, (2) identifying any alternative contracting approaches that would

involve a lesser degree of consolidation of contract requirements, and (3) determining that the

consolidation is necessary and justified.148 Later, in 2010, Congress imposed similar restrictions

upon the “consolidation” of requirements valued in excess of $2 million by non-defense

agencies.149 However, concerns that agencies’ bundling or consolidation of contract requirements

limits opportunities for small businesses to perform as federal contractors persisted despite these

146

Small Business Reauthorization Act of 1997, P.L. 105-135, §§411-417, 111 Stat. 2617-20 (December 2, 1997)

(codified, as amended, in 15 U.S.C. §631, §632, and §644) (emphasis added). Specifically, the 1997 act (1) requires

agencies to conduct market research to determine whether consolidation of requirements is “necessary and justified”

before proceeding with an acquisition strategy that could lead to a contract containing consolidated requirements; (2)

establishes factors that agencies may consider in determining whether consolidation is necessary and justified; and (3)

generally prohibits agencies from relying on reductions in administrative or personnel costs alone as a justification for

bundling contract requirements. The 1997 act also requires that, when a proposed procurement involves “substantial

bundling,” the agency identify the benefits to be derived from bundling; assess the impediments to small businesses’

participation as prime contractors that result from bundling and specify actions designed to maximize small business

participation as subcontractors and/or suppliers; and determine that the anticipated benefits of the bundled contract

justify its use. For more on bundling and consolidation, discussed below, see generally CRS Report R41133, Contract

“Bundling” Under the Small Business Act: Existing Law and Proposed Amendments, by (name redacted).

147

The statute imposed limitations upon consolidation of requirements valued in excess of $5 million. See 10 U.S.C.

§2382(a)(1). However, this amount was increased to $6 million by regulation, pursuant to the Ronald W. Reagan

National Defense Authorization Act for FY2005. See P.L. 108-375, §807, 118 Stat. 2010-11 (October 28, 2004); 48

C.F.R. §207-170-3(a).

148

National Defense Authorization Act for FY2004, P.L. 108-136, div. A, tit. VIII, §801(a)(1), 117 Stat. 1538

(November 24, 2003) (codified, as amended, in 10 U.S.C. §2382). The 2004 act defined “consolidation” as the “use of

a solicitation to obtain offers for a single contract or a multiple award contract to satisfy two or more requirements …

that have previously been provided … or performed … under two or more separate contracts smaller in cost than the

total cost of the contract for which the offers are solicited.” 10 U.S.C. §2382(c)(1) (emphasis added).

149

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1313, 124 Stat. 2538-39 (codified at 15 U.S.C. §657q).

These provisions of the Small Business Jobs Act also apply to defense agencies until the Small Business

Administration determines they are “in compliance with the … contracting goals under section 15” of the Small

Business Act. In addition, the Small Business Jobs Act amended Section 15 of Small Business Act (which governs

bundling, but not consolidation) to require (1) agencies to include in solicitations for multiple-award contracts valued in

excess of the simplified acquisition threshold a provision inviting bids from small businesses or joint ventures of small

business concerns; (2) the FAR Council to establish a government-wide policy on bundling to be published on each

agency’s website; (3) agencies to publish on their websites listings of and rationales for any bundled contracts; and (4)

the Administrator of SBA to report periodically to Congress on procurement center representatives (PCRs) and

commercial market representatives (CMRs). P.L. 111-240, tit. I, subtitle C, §1312, 124 Stat. 2537. PCRs and CMRs are

tasked with detecting and mitigating the effects of bundled procurements, as discussed below.

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amendments to the Small Business Act, in large part because of how “bundling” and

“consolidation” were defined in federal law. These definitions encompassed only requirements

that were previously provided or performed under separate smaller contracts, and some federal

agencies sought to defend challenged procurements by arguing that requirements for construction

are, per se, new requirements.150 Some agencies also asserted that adding a new requirement to

requirements previously performed means there is no bundling.151

The 112th Congress enacted legislation that amended the definition of “consolidation of contract

requirements” so that it includes contracts to “satisfy the requirements ... for construction projects

to be performed at 2 or more discrete sites,” as well as

2 or more requirements ... for goods or services that have been provided to or performed ...

under 2 or more separate contracts lower in cost than the total cost of the contract for which

the offers are solicited.152

This legislation also repeals the provisions on consolidation enacted in 2003, which applied only

to defense agencies,153 although such agencies would generally be subject to the same

requirements as civilian agencies under the 2010 act, as amended. In addition, the legislation

requires GAO to review existing data on consolidation, including (1) the extent to which written

determinations that consolidation is “necessary and justified” to meet legal requirements; (2) the

amount of savings from consolidated contracts; (3) the extent to which consolidation is consistent

with small business subcontracting plans; and (4) the adequacy of data collected pursuant to

Section 15 of the Small Business Act regarding bundling.154

Members of the 112th Congress introduced legislation that would have similarly amended the

definition of “bundling” to include construction, as well as specified that a

combination of contract requirements that would meet the definition of a bundling of

contract requirements but for the addition of a procurement requirement with at least 1 new

good or service shall be considered to be a bundling of contract requirements unless the new

features or functions substantially transform the goods or services and will provide

measurably substantial benefits to the Federal Government in terms of quality, performance,

or price.155

150

See, e.g., Tyler Construction Group v. United States, 83 Fed. Cl. 94, 100-01 (2008).

See, e.g., Nautical Engineering, Inc., B-309955 (November 7, 2007) (agency asserting that there was no bundling

because of the addition of a new requirement, planning services, to the admittedly consolidated requirements pertaining

to drydock and dockside maintenance and repair).

152

P.L. 112-239, §1671(a),—Stat.—.

153

Id., at §1671(c)(1).

154

Id., at §1671(d). This legislation also requires Procurement Center Representatives (PCRs) to review any bundled or

consolidated contracts. Id. at §1621(b).

155

Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §104. This measure would also have

defined “separate smaller contract” to mean a “contract or order that has been performed by 1 or more small business

concerns or was suitable for award to 1 or more small business concerns.” Id. However, it would have exempted larger

contracts (valued at up to $5 million) from its requirements than the Small Business Jobs Act does ($2 million). See

also Contractor Opportunity Protection Act of 2012, H.R. 4081, §3 (amending Section 44 of the Small Business Act,

which governs consolidation, to include a definition of “bundling of contract requirements” that encompasses “the use

of any bundling methodology to satisfy 2 or more procurement requirements for new or existing goods or services

provided to or performed for the Federal agency, including any construction services, that is likely to be unsuitable for

award to a small business concern.”); National Defense Authorization Act for FY2013, H.R. 4310, as passed by the

House, at §1671 (same). This legislation would have repealed the existing provisions regarding bundling in Section 15

(continued...)

151

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This legislation would also have authorized SBA to delay the issuance of a solicitation for up to

10 days to make recommendations whenever SBA and the procuring agency disagree as to the

existence or extent of bundling. This time period is arguably shorter than that provided for under

current law.156 However, the procuring agency, not SBA, presently determines whether any such

delay occurs.157 Other legislation would have written into statute and arguably strengthened

various responsibilities of Procurement Center Representatives (PCRs) and other small business

advocates vis-à-vis bundled solicitations that are currently addressed primarily in regulations.158

For example, this legislation would have required procuring activities to provide a copy of the

proposed procurement to the PCR at least 45 days prior to the issuance of a solicitation and

explain, among other things, why construction cannot be procured as separate discrete projects.159

This legislation would also have authorized the Administrator of Small Business to file an appeal

with the appropriate agency board of contract appeals (which generally hears disputes between

agencies and contractors under existing contracts) whenever the Administrator and the agency fail

to agree.160

In addition, legislation was introduced that would address bundling of requirements by the

Department of Homeland Security (DHS). Because of DHS’s previous reliance upon “lead

systems integrators,”161 there have been particular concerns about its bundling of requirements,162

and legislation introduced in the 112th Congress would have required GAO to include in its

review of DHS’s Secure Border Initiative a discussion of any bundling that limits the ability of

small businesses to compete.163 Any such review could result in findings that could inform future

legislation.

(...continued)

of the act, and amended the provisions currently in Section 44, which address consolidation, so that they address

bundling. The legislation also apparently provided that bundling-related restrictions apply to proposed procurements

that would, among other things, “adversely affect one or more small business concerns, including the potential loss of

an existing contract.”

156

See, e.g., 48 C.F.R. §19.505 (generally providing for the issuance of a solicitation to be delayed for 15 days, so that

SBA may make a written appeal to the secretary or agency head, who has 30 days to respond). The proposed legislation

would also have written into statute the role of the Office of Management and Budget (OMB) in mediating bundlingrelated disagreements between procuring agencies and SBA, a role that is currently provided for in Executive Order

3170. See Executive Order 13170, Increasing Opportunities and Access for Disadvantaged Businesses, 65 Federal

in cases where there is disagreement as to the existence or extent of bundling).

157

Compare Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §104 with 48 C.F.R.

§19.505(d) (authorizing procuring activities to proceed with disputed acquisitions if the contracting officer determines

that proceeding to contract award and performance is “in the public interest”).

158

Contractor Opportunity Protection Act of 2012, H.R. 4081.

159

Id., at §2. Under this bill, if an agency failed to provide the required notice, and the Administrator of Small Business

determined that the proposed procurement is subject to the bundling restrictions, the Administrator could have required

the procuring activity to produce the requisite notice and postpone the solicitation process for “at least 10 days but no

more than 45 days” to allow for review.

160

See, e.g., Contractor Opportunity Protection Act of 2012, H.R. 4081, §2. If the Administrator did not pursue an

appeal, any small business that would be directly or indirectly adversely affected by the proposed procurement, or any

trade association of which it is a member, would have been able to protest to GAO. If a protest were brought by a trade

association, it could not have been required to identify a specific member in connection with the protest.

161

A lead system integrator is an agent with authority to acquire and integrate goods from a variety of suppliers on

behalf of the organization that is acquiring a complex system.

162

See, e.g., Coast Guard Acquisition Reform Act of 2009: Report of the House Committee on Transportation and

Infrastructure, H.Rept. 111-215 (July 20, 2009).

163

SAVE Act of 2011, H.R. 2000, §112.

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Federal Contracting and Subcontracting with Small Businesses

Insourcing

Recent attempts by the Department of Defense, in particular, to save money by insourcing certain

functions performed by contractors prompted strong reactions from some small businesses

concerned about agency performance of functions they had previously performed, as well as the

government’s hiring of their employees.164 Several small business contractors filed suit

challenging agency determinations to insource particular functions on the grounds that these

determinations were contrary to agency guidelines and, thus, violated the Administrative

Procedure Act (APA). At first, there was some uncertainty as to whether the U.S. Court of Federal

Claims had jurisdiction over such suits under the Administrative Disputes Resolution Act

(ADRA) of 1996, or whether the federal district courts had jurisdiction under the APA.165 While

this question appears to have been resolved, with most courts finding that the Court of Federal

Claims has exclusive jurisdiction over challenges to insourcing determinations, questions have

recently arisen as to whether contractors who are “interested parties” for purposes of ADRA must

also meet prudential standing requirements, as well as whether vendors whose contracts have

expired have standing to challenge insourcing determinations.166 In addition, prior challenges to

sourcing determinations have raised questions about whether particular guidelines for

determining whether government personnel or contractor employees should perform certain

functions are legally binding. Such questions could recur if and when courts resolve current

questions about whether particular contractors have standing to challenge insourcing

determinations.167

164

See generally CRS Report R41810, Insourcing Functions Performed by Federal Contractors: An Overview of the

Legal Issues, by (name redacted) and (name redacted).

165

Compare K-Mar Indus., Inc. v. U.S. Dep’t of Defense, 752 F. Supp. 2d 1207 (W.D. Okla. 2010) (finding that the

district court has jurisdiction over a challenge to an insourcing determination because no contract or prospective

contract is at issue, and an insourcing determination is not made in connection with a procurement or proposed

procurement) with Vero Tech. Support, Inc. v. U.S. Dep’t of Defense, 437 Fed. App'x 966 (11th Cir. 2011), aff'g 733 F.

Supp. 2d 1336 (S.D. Fla. 2010)) (finding that the Court of Federal Claims has exclusive jurisdiction over challenges to

insourcing determinations because contractors have a direct economic interest in the government’s decision not to

award a contract, and an insourcing determination is made in connection with a procurement).

166

Compare Santa Barbara Applied Research, Inc. v. United States, 98 Fed. Cl. 536 (2011) (expressly rejecting the

government’s argument that the case should be dismissed because the plaintiff contractor could not meet the prudential

standing requirements) with Hallmark-Phoenix 3, LLC v. United States, 99 Fed. Cl. 65 (2011) (dismissing on

prudential standing grounds a contractor’s challenge to the Air Force’s determination to insource certain supply

services that the contractor had provided) and Triad Logistics Servs. Corp. v. United States, 2012 U.S. Claims LEXIS

393 (April 16, 2012) (expressing both disagreement with the Hallmark-Phoenix decision, and reservations about

whether the plaintiff contractor could be found to be within the “zone of interests” of one of the statutes that the court

relied upon in Santa Barbara).The concept of prudential standing is a “judicially self-imposed limit[] on the exercise of

federal jurisdiction.” Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 11 (2004) (internal quotations omitted). It is

“founded in concern about the proper—and properly limited—role of the courts in a democratic society.” Warth v.

Seldin, 422 U.S. 490, 498 (1975). In determining whether prudential standing exists, the analysis focuses upon

“whether the interest sought to be protected by the [plaintiff] is arguably within the zone of interests to be protected by

the statute … in question.” Ass’n of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 152-53 (1970). The

prudential standing requirement is satisfied when the plaintiffs’ interests are within this zone, but not when the

plaintiffs are “merely incidental beneficiaries” of the statutory provisions at issue. Nat’l Credit Union Admin. v. First

Nat’l Bank & Trust Co., 522 U.S. 479, 494 n.7 (1998). However, the Supreme Court recently indicated that prudential

standing requirements are “not meant to be especially demanding,” and “foreclose[] suit only when a plaintiff’s

‘interests are so marginally related to or inconsistent with the purposes implicit in the statute that it cannot reasonably

be assumed that Congress intended to permit the suit.’” Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v.

Salazar,—U.S.—, 132 S. Ct. 2199, 2210 (2012).

167

See, e.g., Labat-Anderson, Inc. v. United States, 65 Fed. Cl. 570, 578 (2005) (finding that certain of the guidelines

(continued...)

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Federal Contracting and Subcontracting with Small Businesses

The Obama Administration responded to small businesses’ concerns regarding insourcing, in part,

by including certain protections for small businesses in its final policy letter on “inherently

governmental functions.”168 Specifically, the policy letter directs agencies to place a lower

priority on reviewing certain work performed by small businesses, as well as give small

businesses preference when determining who performs work that will remain in the private sector

after related functions are insourced.169 The 112th Congress also responded by enacting legislation

that calls for the Office of Management and Budget (OMB) to establish “procedures and

methodologies” for use by agencies in deciding whether to insource functions performed by small

businesses, including procedures for (1) identifying which contracts are considered for

conversion; (2) determining whether particular functions are inherently governmental or critical

functions; and (3) comparing the costs of performance by contractor personnel with the costs of

performance by government personnel.170 This legislation also requires agency Offices of Small

and Disadvantaged Business Utilization (OSDBUs) to review and to advise on insourcing

determinations, and SBA procurement center representatives (PCRs) to consult with OSDBUs

and other agency personnel on insourcing determinations.171 However, it does not appear that

PCRs or OSDBUs would have authority to delay or block an agency insourcing determination.

Other legislation introduced in the 112th Congress would have amended 31 U.S.C. § 3551(1) to

expressly provide that the term “protest” includes a written objection to the “conversion of a

function that is being performed by a private sector entity to performance by a Federal

employee,” and that “any small business whose economic interest would be affected by the

conversation” is an “interested party.”172 The legislation would also have amended the Small

Business Act by adding a new Section 46, which would have prohibited an agency from

converting functions performed by small businesses to performance by federal employees unless

it has “made publicly available, after providing notice and an opportunity for public comment,”

its procedures for making insourcing determinations.173 The requirement that agency procedures

be made publicly available after a notice-and-comment period, in particular, could help remove

questions as to whether agencies are bound by their insourcing guidelines that have arisen when

(...continued)

that the agency allegedly violated when insourcing particular functions were not legally binding).

168

“Inherently governmental functions” are functions that, as a matter of federal law and policy, must be performed by

federal government employees and cannot be contracted out because they are so intimately related to the public interest

as to require performance by federal employees. For more on inherently governmental functions, see CRS Report

R42325, Definitions of “Inherently Governmental Functions” in Federal Procurement Law and Guidance, by (name re

dacted) and (name redacted).

169

Office of Mgmt. & Budget, Office of Fed. Procurement Pol’y, Publication of the Office of Federal Procurement

Policy (OFPP) Policy Letter 11-01, Performance of Inherently Governmental and Critical Functions, 76 Federal

generally requires that a contract be set aside for small businesses if at least two small businesses are capable of

performing it at a fair market price—when deciding whether small or “large” businesses should perform the remaining

private-sector work.

170

P.L. 112-239, §1655,—Stat.—. Other Members of the 112th Congress introduced measures that called for agency

procurement center representatives (PCRs) to “participate in any session or planning process and review any

documents with respect to a decision to convert an activity performed by a small business concern to an activity

performed by a Federal employee.” Small Business Opportunity Act of 2012, H.R. 3980, §101

171

See, e.g., P.L. 112-239, §1621(a)(6) (PCRs); id., at §1691 (OSDBUs). This requirement originated in the Small

Business Advocate Act of 2012, H.R. 3851, §2.

172

Subcontracting Transparency and Reliability Act of 2012, H.R. 3893, §301.

173

Id., §302. While the legislation enacted by the 112th Congress requires OMB to establish “policies and procedures,”

OMB would not necessarily have to promulgate these through a notice-and-comment process.

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these guidelines were promulgated as policy or guidance documents.174 However, questions about

prudential standing could potentially remain, notwithstanding the enactment of this legislation,

because prudential standing is a “judicially self-imposed limit[] on the exercise of federal

jurisdiction.”175

Procurement Center Representatives; Offices of

Small and Disadvantaged Business Utilization

A number of SBA and agency personnel currently are tasked, under various statutes and

regulations, with protecting the interests of small businesses in the federal procurement process.

Among these personnel are procurement center representatives (PCRs), who are assigned by the

SBA to work with the procuring activities in structuring acquisitions so as to maximize the

participation of small businesses,176 and Offices of Small and Disadvantaged Business Utilization

(OSDBUs), which are established in the procuring activities to help devise alternatives to

procurements involving “significant bundling,” among other things.177 In part because of

concerns about federal performance in contracting and subcontracting with small businesses,

some Members of Congress and commentators have recently questioned the effectiveness of

PCRs and/or OSDBUs, including whether these officials have the requisite authority and lines of

reporting to adequately protect the interests of small businesses.178 In part because of these

concerns, the 111th Congress enacted legislation requiring the Administrator of Small Business to

report periodically to Congress on the activities of PCRs and commercial market representatives

(CMRs), who are tasked with facilitating contracting between agencies’ prime contractors and

small businesses.179

The 112th Congress expanded upon these provisions by enacting legislation that addresses the

training and experience of PCRs and OSDBUs, as well as their responsibilities. As to PCRs, this

legislation generally requires PCRs to have a Level III Federal Acquisition Certification (or

equivalent), and expressly provides that they are to (1) review barriers to small business

174

For example, some, but not all, federal circuits have found that the 1983 and 2003 versions of OMB Circular A-76,

which provides guidelines for agencies’ identification of commercial functions potentially suitable for performance by

the private sector, were issued pursuant to statutory authority, which is one of the conditions for guidelines being

reviewable by the federal courts. See Labat-Anderson, 65 Fed. Cl. at 578 (2003 version); Diebold v. United States, 947

F.2d 787, 800 (6th Cir. 1991) (1983 version).

175

But see Bennett v. Spear, 520 U.S. 154, 163 (1997) (noting that Congress can “expressly negate” prudential standing

requirements); Elmendorf Support Services Joint Venture v. United States, 2012 U.S. Claims LEXIS 651 (June 22,

2012) (finding that a contractor challenging an insourcing determination satisfied any prudential standing requirements

in light of the Supreme Court’s recent decision in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v.

Salazar).

176

See, e.g., 13 C.F.R. §125.2. See also supra note 5 and accompanying text.

177

See, e.g., 15 U.S.C. §644(k)(1)-(10).

178

See, e.g., Charles S. Clark, Four Departments Resist Call to Comply with Small Business Act, Gov’t Exec.,

September 16, 2011, available at http://www.govexec.com/federal-news/2011/09/four-departments-resist-call-tocomply-with-small-business-act/34926/ (reporting on a hearing of the House Small Business Subcommittee on

Contracting and the Workforce that raised issues about whether OSDBU Directors report to the proper persons, among

other things).

179

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1312, 124 Stat. 2537. CMRs are “SBA’s subcontracting

specialists,” and their responsibilities include facilitating the matching of large prime contractors with small business

subcontractors or suppliers. See 13 C.F.R. §125.3(e).

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Federal Contracting and Subcontracting with Small Businesses

contracting; (2) review bundled and consolidated contracts; (3) have access to procurement

records and data; (4) receive unsolicited proposals; (5) consult regarding insourcing; and (6)

advocate for the “maximum practicable utilization of small businesses.”180 As to OSDBUs, this

legislation requires that OBSBUs generally have experience relevant to federal contracting (e.g.,

program manager, contracting officer, attorney specializing in procurement), and expressly

provides that OSDBUs are to (1) review and advise on insourcing determinations; (2) advise on

acquisition strategies and market research; (3) provide training; and (4) receive unsolicited

research proposals.181 This legislation also clarifies to whom OSDBU Directors must report,182 in

response to recent findings by GAO that the OSDBU Directors of several federal agencies do not

report to the agency head.183

The legislation enacted by the 112th Congress also requires the Federal Acquisition Institute (FAI)

and Defense Acquisition University (DAU) to establish courses on small business contracting,

which are to be required for Federal Acquisition Certification (or equivalent).184 In addition, it

requires agency small business opportunity specialists to have Level I certification,185and directs

the Small Business Procurement Advisory Council, established pursuant to Section 7104(b) of the

Federal Acquisition Streamlining Act, to conduct reviews of each OSDBU to determine

compliance with reporting and other requirements, and to identify best practices for “maximizing

small business utilization.”186

Restricted Competitions and Non-Competitive

Awards

Competition is generally valued in federal contracting because it can result in the government

paying lower prices, ensure some level of transparency and accountability, and help prevent

fraud.187 However, Congress has authorized agencies to use other than full-and-open competition

in certain circumstances in order to promote other policy objectives, including contracting with

small businesses.188 The Competition in Contracting Act (CICA) of 1984 currently provides that

agencies may use “other than full and open competition” when making awards to small

180

P.L. 112-239, §1621,—Stat.—. Many of these provisions originated with the Small Business Opportunity Act of

2012, H.R. 3980, and the Small Business Advocate Act of 2012, H.R. 3851.

181

P.L. 112-239, §1691,—Stat.—.

182

Id. It also prohibits OSDBU Directors from holding “any other title, position, or responsibility except as necessary

to carry out responsibilities under this subsection.” Id.

183

See Gov’t Accountability Office, Small Business Contracting: Actions Needed by Those Agencies Whose

Advocates Do Not Report to Agency Heads as Required, GAO-11-418 (June 16, 2011).

184

P.L. 112-239, §1622,—Stat.—.

185

Id. Small business opportunity specialists are tasked with advising small business owners on individual procurement

opportunities and how to do business with particular procuring activities.

186

Id., at §1692.

187

See generally CRS Report R40516, Competition in Federal Contracting: A Legal Overview, by (name redacted).

188

Cf. 48 C.F.R. §1.102(b) (“The Federal Acquisition System will—(1) [s]atisfy the customer in terms of cost, quality,

and timeliness of the delivered product or service by, for example—(i) [m]aximizing the use of commercial products

and services; (ii) [u]sing contractors who have a track record of successful past performance or who demonstrate a

current superior ability to perform; and (iii) [p]romoting competition; (2) [m]inimize administrative operating costs; (3)

[c]onduct business with integrity, fairness, and openness; and (4) [f]ulfill public policy objectives.”).

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Federal Contracting and Subcontracting with Small Businesses

businesses.189 Such awards may be made on a set-aside or sole-source basis, pursuant to the Small

Business Act.190 Congress amended the Small Business Act in 2010 to expressly authorize

agencies to set-aside all or part of multiple-award contracts for small businesses,191 something

which GAO had previously found was required in certain circumstances.192

The 112th Congress enacted legislation that similarly expands agencies’ authority to conduct

competitions restricted to small businesses in the hopes of increasing the extent of contracting

with such firms. Specifically, this legislation authorizes agencies to set aside contracts of any

value for women-owned small businesses (WOSBs).193 Previously, only contracts whose value is

below $4 million ($6.5 million for manufacturing contracts) could be set aside for such firms.194

This legislation also requires SBA to periodically identify industries in which WOSBs are

underrepresented.195 Set-asides for WOSBs may only be used in industries where such firms are

underrepresented or substantially underrepresented.

Other legislation introduced in the 112th Congress would have authorized agencies to “award a

sole source contract under [Section 8(m) of the Small Business Act] to a small business concern

owned and controlled by women under the same conditions as a sole source contract may be

awarded to a qualified HUBZone small business concern under section 31(b)(2)(A).”196 The

Small Business Act presently does not authorize sole-source awards to women-owned small

businesses, although it does authorize such awards to HUBZone small businesses, among others,

whenever

189

10 U.S.C. §2304(b)(2) (procurements of defense agencies) & 41 U.S.C. §3303(b) (procurements of civilian

agencies).

190

See 15 U.S.C. §637(a) (small disadvantaged businesses participating in the 8(a) Business Development Program);

15 U.S.C. §637(m) (women-owned small businesses); 15 U.S.C. §644 (small businesses generally); 15 U.S.C. §657a

(HUBZone small businesses); 15 U.S.C. §657f (service-disabled veteran-owned small businesses).

191

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1331, 124 Stat. 2541 (codified at 15 U.S.C. §644(r))

(requiring the promulgation of regulations authorizing agencies to (1) “set aside part or parts of a multiple award

contract” for small businesses; (2) place orders against multiple-award contracts without giving all contractors a fair

opportunity to be considered for such awards; and (3) “reserve 1 or more contract awards for small business concerns

under full and open multiple award procurements”). See also Consolidated Appropriations Act, P.L. 112-74, §7057(h),

125 Stat. 1245 (December 23, 2011) (authorizing the U.S. Agency for International Development to provide an

exception to the fair opportunity process for placing task orders under multiple-award indefinite-delivery/indefinite

quantity (ID/IQ) contracts when the order is placed with “any category of small or small disadvantaged business”);

Department of State, Foreign Operations, and Related Programs Appropriations Act, 2013, H.R. 5857, §5057(h)

(same).

192

See Delex Systems, Inc., B-400403, 2008 U.S. Comp. Gen. LEXIS 170 (October 8, 2008) (determining that task and

delivery orders issued under multiple-award ID/IQ contracts are subject to set-asides for small businesses). However,

the General Services Administration responded to the Delex decision, in part, by asserting that contracts under the

Federal Supply Schedules are not subject to set-asides for small businesses because they are governed by a different

section of the FAR than other multiple-award ID/IQ contracts. See GSA Memorandum from David A. Drabkin, Senior

Procurement Executive, to All GSA Contracting Activities, October 28, 2008), quoted in Arnold & Porter LLP, GAO’s

Delex Decision and GSA’s Response: The Clash of Titans, available at http://www.arnoldporter.com/resources/

documents/CA_GAOsDelexDecision&GSAsResponse_012609.pdf.

193

P.L. 112-239, §1697,—Stat.—.

194

See 15 U.S.C. §637(m)(2)(D) (2010).

195

P.L. 112-239, §1697,—Stat.—.

196

Fairness in Women-Owned Small Business Contracting Act of 2012, S. 2172, §2. The Women’s Procurement

Program Improvement Act of 2012, H.R. 4203, would similarly have amended Section 8(m) to authorize sole-source

awards to women-owned small businesses, although it would have done so without explicit reference to sole-source

awards to HUBZone firms.

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1. the business is determined to be responsible with respect to the performance of

the contract, and the contracting officer does not reasonably expect that two or

more such businesses will submit offers;

2. the anticipated award will not exceed $4 million ($6.5 million for manufacturing

contracts); and

3. the award can be made at a fair and reasonable price.197

Another measure introduced in the 112th Congress would have amended the Veterans Benefits Act

to require that VA make sole-source awards to veteran-owned small businesses whenever (1) the

business is determined to be a responsible source with respect to the performance of the contract

opportunity; (2) the anticipated award price of the contract (including options) exceeds the

simplified acquisition threshold (generally $150,000)198, but is less than $5 million; and (3) in the

estimation of the contracting officer, the contract award can be made at a fair and reasonable price

that offers best value to the United States).199 VA currently has authority to make sole-source

awards when these circumstances exist, but is not required to do so.200

Yet other measures would have exempted contracts “authorized” under the Small Business Act

from certain limitations imposed upon agency’s use of noncompetitive procedures when entering

contracts to procure property or services “in connection with natural disaster reconstruction

efforts,”201 as well as amended the Small Business Act to require, rather than just authorize, setasides of or under multiple-award contracts.202 The latter measure would also generally have

required agencies to conduct an outreach program designed to increase the participation of small

businesses in multiple-award contracts, as well as required the President to establish annual goals

for the “total dollar value of all task and delivery orders placed against multiple award contracts,

blanket purchase agreements, and basic ordering agreements awarded to small business[es].”203

197

15 U.S.C. §657a(b)(2)(A)(i)-(iii) (statutory requirements); 48 C.F.R. §19.1306(a)(1)-(6) (increasing the price

thresholds, among other things).

198

In the case of supplies or services to be used in support of a contingency operation or to facilitate defense against or

recovery from nuclear, biological, chemical, or radiological attack, the simplified acquisition threshold increases to

$300,000 for contracts to be awarded and performed inside the United States, and $1 million for contracts to be

awarded and performed outside the United States. 48 C.F.R. §2.101.

199

An Act to Amend Title 38, United States Code, to Promote Jobs for Veterans through the Use of Sole Source

Contracts by Department of Veterans Affairs for Purposes of Meeting the Contracting Goals and Preferences of the

Department of Veterans Affairs for Small Business Concerns Owned and Controlled by Veterans, H.R. 240, §1.

200

38 U.S.C. §8127(c).

201

Natural Disaster Fairness in Contracting Act of 2011, S. 129, §4(c)(3).

202

Small Business Procurement Improvement Act of 2012, H.R. 4118, §2 (amending Section 15(r) of the act by

replacing language indicating that “agencies may, at their discretion, set aside part or parts of a multiple award contract

for small business[es],” among other things, with language indicating that agencies “shall, to the maximum extent

practicable, include small business concerns in multiple award contracts”).

203

Id., §§2(b) & 4.

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Federal Contracting and Subcontracting with Small Businesses

Use of Small Businesses When Making

“Small Purchases”

Federal law currently distinguishes between (1) purchases whose value is below the micropurchase threshold (generally $3,000)204; (2) those whose value is above the micro-purchase

threshold, but below the simplified acquisition threshold (generally $150,000)205; and (3) other

purchases. Those acquisitions whose value falls between the micro-purchase threshold and the

simplified acquisition threshold have long been “exclusively reserved” for small businesses,206

although agencies are also encouraged to use small businesses for purchases outside this range.207

The 111th Congress enacted legislation intended to foster increased use of small businesses for

micro-purchases by requiring the Office of Management and Budget (OMB), in consultation with

the General Services Administration, to issue

guidelines regarding the analysis of purchase card expenditures to identify opportunities for

achieving and accurately measuring fair participation of small business concerns in

purchases in an amount not in excess of the micro-purchase threshold … and dissemination

of best practices for participation of small business concerns in micro-purchases.208

OMB issued this guidance on December 19, 2011, reminding agencies that those holding

government-wide commercial purchase cards should consider small businesses “to the maximum

extent practicable” when making micro-purchases.209 However, prior to the issuance of this

guidance, one Member of the 112th Congress introduced legislation that would have expanded the

value of the “small purchases” in which small businesses could be preferred. Among other things,

this legislation would generally have required agencies “to the extent practicable” to award

contracts whose value exceeds $3,000, but is below $500,000, to small businesses.210 The

legislation would also have given contracting officers additional authority to award contracts

valued within this range to small businesses on a sole-source basis.211 Specifically, this legislation

204

The micropurchase threshold can be lower or higher than $3,000, depending on the goods or services acquired and

the circumstances of the acquisition. Micropurchases for construction services subject to the Davis-Bacon Act or other

services subject to the Service Contract Act have lower limits: $2,000 and $2,500, respectively. Those for goods or

services that the agency head has determined will be used to support a contingency operation or facilitate defense

against or recovery from nuclear, biological, chemical, or radiological attack have higher limits: $15,000 in the case of

contracts to be awarded or performed, or purchases to be made, inside the United States and $30,000 in the case of

contracts to be awarded or performed, or purchases to be made, outside the United States. 48 C.F.R. §13.201(g)(1)(i)(ii).

205

See supra note 198 for a discussion of when the simplified acquisition threshold may exceed $150,000.

206

15 U.S.C. §644(j)(1). Such purchases are made using “simplified acquisition procedures,” such as government-wide

commercial purchase cards, purchase orders, blanket purchase agreements, imprest funds, third-party drafts, and certain

standard forms (e.g., SF44). See 48 C.F.R. Subpart 13.3.

207

See, e.g., 48 C.F.R. §19.201 (“It is the policy of the Government to provide maximum practicable opportunities in

its acquisitions to small business[es].”).

208

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1332, 124 Stat. 2541.

209

Exec. Office of the President, Office of Mgmt. & Budget, Increasing Opportunities for Small Businesses in

Purchase Card Micro-Purchases, December 19, 2011, available at http://www.whitehouse.gov/sites/default/files/omb/

procurement/memo/increasing-opportunities-for-small-businesses-in-purchase-card-micro-purchases.pdf. For more on

government-wide commercial purchase cards, see generally CRS Report RL34602, Misuse of Government Purchase

Cards, by (name redacted).

210

Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §101.

211

Id. This legislation would also have given SBA additional control over the procuring activities by requiring agencies

(continued...)

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Federal Contracting and Subcontracting with Small Businesses

would have authorized agencies to make sole-source awards of contracts valued at between

$150,000 and $500,000 to women-owned small businesses, or other small businesses that are not

8(a), HUBZone, or service-disabled veteran-owned small businesses. The Small Business Act

currently does not authorize sole-source awards to such businesses.212 Rather, it only authorizes

agencies to set aside contracts for them.

Mentor-Protégé Programs

Mentor-protégé programs are intended to promote contracting and/or subcontracting with small

businesses by pairing new businesses with more experienced businesses in mutually beneficial

relationships.213 Congress established the first mentor-protégé program for small businesses in

1990, when it authorized the Department of Defense (DOD) Mentor-Protégé Pilot program.214

Eight years later, in 1998, SBA promulgated regulations establishing a mentor-protégé program

for small disadvantaged businesses participating in the 8(a) Program.215 DOD’s Mentor-Protégé

Pilot Program differs from SBA’s 8(a) Mentor-Protégé program in that it focuses upon promoting

the use of small businesses as subcontractors and suppliers on federal contracts, and not upon use

of small businesses as prime contractors.216 Specifically, under DOD’s program, prime contractors

may be reimbursed for advance payments made to small business subcontractors or suppliers,217

while under SBA’s program, mentors and protégés may form joint ventures that qualify as small

for purposes of certain federal prime contracts.218 More recently, a number of other agencies have

implemented their own mentor-protégé programs, by regulation or otherwise.219 These programs

differ, among themselves and as compared to the DOD and SBA programs, in their eligibility

(...continued)

to notify SBA of any determinations that award to a small business is not practicable, and authorizing SBA to open the

opportunity for the submission of additional offers, if it determines that doing so is appropriate.

212

See CRS Report R42391, Legal Authorities Governing Federal Contracting and Subcontracting with Small

Businesses, by (name redacted) and (name redacted), at Table 1.

213

For more on small business mentor-protégé programs, see generally CRS Report R41722, Small Business MentorProtégé Programs, by (name redacted) and (name redacted).

214

An Act to Authorize Appropriations for Fiscal Year 1991 for Military Activities of the Department of Defense, for

Military Construction, and for Defense Activities of the Department of Energy, to Prescribe Personnel Strengths for the

Armed Forces and for Other Purposes, P.L. 101-510, §831, 104 Stat. 1607-08 (November 5, 1990) (codified, as

amended, at 10 U.S.C. §2302 note).

215

Small Bus. Admin., Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business

Status Determinations; Rules of Procedure Governing Cases Before the Office of Hearings and Appeals: Final Rule, 63

Federal Register 35739 (June 30, 1998).

216

Compare 10 U.S.C. §2302 note (DOD mentor-protégé program) with 13 C.F.R. §124.520(a) (SBA’s mentor-protégé

program for 8(a) firms).

217

48 C.F.R. §219.7102(d)(1)-(2); 48 C.F.R. §19.702(d). In addition, mentors may receive credit toward their

subcontracting goals because of developmental assistance provided to protégés.

218

13 C.F.R. §124.520(a). Mentors in the 8(a) mentor-protégé program may also receive credit toward their

subcontracting goals. 13 C.F.R. §125.3(b)(3)(ix).

219

48 C.F.R. Subpart 919.70 (Department of Energy); 48 C.F.R. §352.219-70 (Department of Health and Human

Services); 48 C.F.R. §3052.219-71 (Department of Homeland Security); 48 C.F.R. §619.202-70 (Department of State);

48 C.F.R. Subpart 1019.202-70 (Department of the Treasury); 48 C.F.R. Subpart 819.71 (Department of Veterans

Affairs); 48 C.F.R. §§1552.219-70 to 1552.219-71 (Environmental Protection Agency); FAA Mentor-Protégé Program,

available at http://www.sbo.faa.gov/MentorProtege.cfm (Federal Aviation Administration); 48 C.F.R. Subpart 519.70

(General Services Administration); 48 C.F.R. Subpart 1819.72 (NASA); 48 C.F.R. Subpart 719.273 (U.S. Agency for

International Development).

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Federal Contracting and Subcontracting with Small Businesses

requirements and the types of assistance that mentors provide to protégés.220 Such differences

have raised concerns among some Members of Congress and commentators that the programs

lack “parity,” are duplicative, and/or are confusing for small businesses.221

The 111th Congress responded to the concerns about parity by enacting legislation that authorizes

SBA to establish mentor-protégé programs for HUBZone, women-owned, and service-disabled

veteran-owned small businesses modeled on its 8(a) mentor-protégé program.222 However, partly

in response to the concerns about duplication, this legislation also directs GAO to study existing

mentor-protégé programs and “other relationships and strategic alliances” pairing larger and small

businesses to determine whether they are “effectively supporting the goal of increasing the

participation of small business concerns in Government contracting.”223

The 112th Congress also enacted legislation addressing similar concerns. This legislation

authorizes SBA to establish a mentor-protégé program open to all small businesses.224 By

comparison, the legislation enacted by the 111th Congress addressed only HUBZone, womenowned, and service-disabled veteran-owned small businesses. The legislation enacted by the 112th

Congress also prohibits federal agencies, with certain exceptions, from carrying out a mentorprotégé program for small businesses unless the plan for this program has been submitted to and

approved by SBA.225 Depending upon its implementation, this provision could help ensure that

there are not significant disparities among the various agency programs, and that these programs

do not unnecessarily duplicate one another.226

220

See CRS Report R41722, Small Business Mentor-Protégé Programs, by (name redacted) and (name redacted), at

Table A-1, for a comparison of the eligibility criteria for, and types of assistance provided under, various agencies’

mentor-protégé programs.

221

See, e.g., Gov’t Accountability Office, Opportunities to Improve the Effectiveness of Agency and SBA Advocates

and Mentor-Protege Programs, GAO-11-844T (September 15, 2011).

222

Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1347(b), 124 Stat. 2547.

223

Id., §1345, 124 Stat. 2546. GAO issued this report on June 15, 2011, finding that most agencies do not collect

information on protégés after the conclusion of their mentor- protégé agreements, which makes it difficult to assess the

efficacy of these programs. See Gov’t Accountability Office, Mentor-Protégé Programs Have Policies That Aim to

Benefit Participants But Do Not Require Postagreement Tracking, GAO-11-548R (June 15, 2011).

224

P.L. 112-239, §1641,—Stat.—. This provision originated with the Building Better Business Partnerships Act of

2012, H.R. 3985, §2. SBA would appear to have discretion as to whether to establish such a mentor-protégé program

under the legislation enacted by the 112th Congress. Id. (“The Administrator is authorized to establish a mentor-protege

program for all small business concerns.”). However, if such a program is established, it would have to be “identical to

the mentor-protégé program of the Administration for small business concerns that participate in the program under

section 8(a) of this act.” Because of legislation enacted by the 111th Congress, any SBA mentor-protégé program for

HUBZone, woman-owned, and service-disabled veteran-owned small businesses must also be “modeled” on that for

8(a) firms. See supra note 222 and accompanying text.

225

P.L. 112-239, §1641,—Stat.—.. Certain mentor-protégé programs are, however, exempt from this requirement,

including “[a]ny mentor-protégé program of the Department of Defense,” and “mentoring assistance” provided under

the Small Business Innovation Research and Small Business Technology Transfer programs. Existing mentor-protégé

programs are also exempt from these requirements for one year after the measure’s enactment.

226

Other legislation introduced in the 112th Congress would have required GAO to conduct a study within two years of

its enactment to examine whether potential affiliation issues between mentors and protégés under prior programs have

been “resolved,” and whether SBA’s re

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