# Federal Contracting and Subcontracting with Small Businesses: Issues in the 112th Congress > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/crs%3AR42390 ## Record - **Collection:** Congressional research report - **Document type:** CRS Report - **Published:** January 24, 2013 - **Citation:** R42390 ## Text Federal Contracting and Subcontracting with Small Businesses: Issues in the 112th Congress (name redacted) Legislative Attorney (name redacted) Legislative Attorney January 24, 2013 Congressional Research Service 7-.... 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. Congressional Research Service Federal Contracting and Subcontracting with Small Businesses Congressional Research Service 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 Congressional Research Service 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., 1 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). 2 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.”). 3 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). 4 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)). 5 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). Congressional Research Service 1 Federal Contracting and Subcontracting with Small Businesses 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 6 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). 7 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). 8 See, e.g., SBA Proposes to Increase Small Business Size Standards for Three NAICS Sectors, Fed. Cont. Daily, October 22, 2009. 9 Id. 10 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. Congressional Research Service 2 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 11 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. 13 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 Register 7490 (February 10, 2012) (increasing the size standards for 35 industries, effective March 12, 2012); Small 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). 14 National Defense Authorization Act for FY2013, P.L. 112-239, §1661,—Stat.—(January 2, 2013). 15 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). 16 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). 12 Congressional Research Service 3 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) 17 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. 18 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). 19 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. 20 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). 21 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. Congressional Research Service 4 Federal Contracting and Subcontracting with Small Businesses 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 22 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). 23 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. 24 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). 25 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. 26 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)). 27 15 U.S.C. §644(g)(1). 28 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...) Congressional Research Service 5 Federal Contracting and Subcontracting with Small Businesses 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.”). 29 See, e.g., Jeff Kinney, SBA Notes Drop in Small Business Contract Awards for FY2011, 98 Fed. Cont. Rep. 27 (July 10, 2012). 30 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. 31 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)). 32 P.L. 112-239, §1631(b),—Stat.—. 33 Id., at §(a). 34 Id., at §(b). 35 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...) Congressional Research Service 6 Federal Contracting and Subcontracting with Small Businesses • 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). 36 P.L. 112-239, §1631(c),—Stat.—. 37 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. 38 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). 39 P.L. 112-239, §1633,—Stat.—. See also Government Efficiency through Small Business Contracting Act of 2012, H.R. 3850, §§2, 4. 40 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. 41 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. 42 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. Congressional Research Service 7 Federal Contracting and Subcontracting with Small Businesses 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 43 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). 44 Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, tit. I, §105. 45 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). 46 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). 47 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). 48 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). 49 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. Congressional Research Service 8 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 50 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). 51 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). 52 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). 53 See supra notes 19-24 and accompanying text. 54 See infra notes 187-203. 55 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) (continued...) Congressional Research Service 9 Federal Contracting and Subcontracting with Small Businesses 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. 56 15 U.S.C. §637(a)(1)(A). 57 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). 58 15 U.S.C. §637(a)(5). 59 15 U.S.C. §637(a)(6)(A). 60 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). 61 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”). 62 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”). 63 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. 64 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). 65 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”). 66 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). 67 The SBA’s net worth standards are not acquisition-related thresholds subject to periodic adjustment for inflation (continued...) Congressional Research Service 10 Federal Contracting and Subcontracting with Small Businesses 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 Register 5716, 5717 (February 4, 2010) (“Examples of thresholds that are not viewed as ‘acquisition-related’ as defined [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. 68 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. 69 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. 70 Small Business Jobs Act of 2010, P.L. 111-240, tit. I, subtitle C, §1345, 124 Stat. 2546. 71 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). 72 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). Congressional Research Service 11 Federal Contracting and Subcontracting with Small Businesses 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. 73 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%. 74 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. 75 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). 76 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). 77 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 (continued...) Congressional Research Service 12 Federal Contracting and Subcontracting with Small Businesses 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. 78 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). 79 For more on the HUBZone program, see generally CRS Report R41268, Small Business Administration HUBZone Program, by (name redacted). 80 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). 81 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). 82 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). Congressional Research Service 13 Federal Contracting and Subcontracting with Small Businesses 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 83 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.” 84 15 U.S.C. §632(p)(4)(A)-(B). 85 15 U.S.C. §632(p)(4)(C). 86 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.”). 87 P.L. 112-239, §1698,—Stat.—. See also HUBZone Expansion Act of 2012, S. 3675, §2. 88 Consolidated Appropriations Act, 2005, P.L. 108-447, §152, 118 Stat. 3456-57 (December 8, 2004). Congressional Research Service 14 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 89 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). 90 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. 91 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). 92 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). 93 Native Hawaiian HUBZone Opportunity Act of 2012, H.R. 5729, §2. 94 15 U.S.C. §632(p)(3)(B)-(D). 95 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. 96 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)). Congressional Research Service 15 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 97 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). 99 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 (continued...) 98 Congressional Research Service 16 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...) Congressional Research Service 17 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)). Congressional Research Service 18 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 Congressional Research Service 19 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)). Congressional Research Service 20 Federal Contracting and Subcontracting with Small Businesses 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 Congressional Research Service 21 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 Congressional Research Service 22 Federal Contracting and Subcontracting with Small Businesses 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. Congressional Research Service 23 Federal Contracting and Subcontracting with Small Businesses 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 Congressional Research Service 24 Federal Contracting and Subcontracting with Small Businesses 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 Register 60827, 60829 (October 12, 2000) (authorizing SBA or the procuring agency to “seek assistance” from OMB 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 d [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR42390. Public record. Not legal advice.