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[Senate Report 107-294]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 624
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-294

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           COMBINED 8(a) AND HUBZONE PRIORITY PREFERENCE ACT

                                _______
                                

                October 1, 2002.--Ordered to be printed

                                _______
                                

 Mr. Kerry, from the Committee on Small Business and Entrepreneurship, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 1994]

    The Committee on Small Business and Entrepreneurship, to 
which was referred the bill, S. 1994, to establish a priority 
preference among certain small business concerns for purposes 
of Federal contracts, and for other purposes, having considered 
the same, reports favorably thereon with amendments and 
recommends that the bill (as amended) do pass.
    On July 24, 2002, the Small Business and Entrepreneurship 
Committee considered S. 1994, the ``Combined 8(a) and HUBZone 
Priority Preference Act.'' The Committee adopted by unanimous 
voice vote an amendment offered by the Ranking Republican, 
Senator Christopher S. Bond and the Chairman, Senator John F. 
Kerry. As amended, S. 1994 would provide certain benefits to 
small business concerns with both 8(a) Business Development 
(BD) Program and Historically Underutilized Business Zone 
Program (HUBZone) certifications (8(a) HUBZone small business 
concern) under restricted competition contracts within each 
program; establish a price evaluation preference for the 
purposes of bidding on Federal procurement contracts under full 
and open competition for 8(a) HUBZone small business concerns; 
and raise the sole-source threshold for all 8(a) BD and HUBZone 
small business concerns to $4 million on goods and services 
contracts and $6 million for manufacturing contracts, an 
increase of $1 million for each category. Having considered S. 
1994, as amended, the Committee reports favorably thereon 
without further amendment and recommends that the bill do pass.

                            I. Introduction

    On June 24, 1997, legislation was introduced by then 
Chairman of the Committee on Small Business, Senator 
Christopher S. Bond, to establish a preference program for 
small business concerns based on their geographic location. The 
legislation, S. 208, the ``HUBZone Act of 1997,'' provided for 
Federal contracting opportunities for small businesses located 
in historically underutilized business zones (HUBZones).
    On June 26, 1997 the HUBZone Act was approved by the 
Committee with an amendment in the nature of a substitute 
designed to protect the 8(a) Business Development (BD) Program 
by removing the priority granted the HUBZone Program under the 
legislation and replacing it with language to establish parity 
between the 8(a) BD and the HUBZone programs. The HUBZone Act 
was subsequently included in the Small Business Reauthorization 
Act of 1997 without further amendment and was signed by 
President Clinton on December 12, 1997.
    On June 11, 1998, the SBA published a final rule in the 
Federal Register (63 Federal Register 31896-916) to create Part 
126 implementing the HUBZone program. One of the difficult 
issues involved in the rulemaking was the relationship between 
the HUBZone program and the 8(a) program. Under the 1998 
regulations, if the small business concern is certified in both 
programs, it moves to the front of the line in getting 
government contracts.
    On January 28, 2002, the SBA published a proposal in the 
Federal Register to amend its HUBZone regulations. Among the 
proposal's considerable changes to the HUBZone program and its 
relationship to the 8(a) BD program, the SBA proposed 
eliminating the ``first priority'' status granted to HUBZone 
8(a) firms. In doing so, the SBA cited an opinion from the SBA 
General Counsel the agency does not have the statutory 
authority to grant a special priority to HUBZone 8(a) firms.\1\
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    \1\ Letter dated August 17, 2001, from Robert Gangwere, Acting 
General Counsel, Small Business Administration, to Senator Bond.
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    The SBA's decision to eliminate the super-priority came at 
a difficult time for 8(a) BD firms. As demonstrated at the June 
19, 2002, Committee roundtable titled, ``Are Government 
Purchasing Policies Hurting Small Business?'' 8(a) BD firms are 
currently experiencing a percentage decline in Federal 
procurement contract awards, which climbed to 20 percent 
between Fiscal Years 1998 and 2001.\2\
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    \2\ Based on data reported by the Federal Procurement Data Center.
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    The cause of this decline has its roots in the new 
procurement environment created by the reforms in the mid-
1990s, such as passage of the Federal Acquisition Streamlining 
Act [P.L. 103-335] and the Federal Acquisition Reform Act [P.L. 
104-106], in the regulatory changes to procurement programs in 
response to the United States Supreme Court decision, Adarand 
Inc. v. Pena, in the reductions in the acquisition workforce 
and a procurement culture that favors expediency, and short-
term cost savings over small business participation. Because 
negative trends hit socially and economically disadvantaged 
firms first and hardest, these small businesses have borne a 
disproportionate share of the percentage decline in Federal 
contract dollars being awarded to small businesses in general.
    The HUBZone program has also suffered from the lack of 
procurement personnel, as well as the current procurement 
culture of expediency. For example, although the government-
wide procurement goal for qualified HUBZone small business 
concerns was set at 2 percent for FY 2001, the Federal 
government only achieved 0.72 percent, costing these firms 
nearly $3 billion in lost contracts.
    The Committee believes S. 1994 will re-establish and 
improve the benefits available to dual-certified small business 
concerns under the original HUBZone regulations, as well as 
assist all 8(a) BD and HUBZone small business concerns by 
raising the sole-source thresholds, thus creating more 
contracting opportunities for these firms.

                        II. Legislative History

    S. 1994, the ``Combined 8(a) and HUBZone Priority 
Preference Act,'' was introduced by Senators John F. Kerry and 
Christopher S. Bond on March 6, 2002. The Committee held a 
roundtable on June 19, 2002 titled, ``Are Government Purchasing 
Policies Hurting Small Business?'' During the roundtable, S. 
1994 was a topic of discussion.
    Small business advocates that participated in the 
roundtable supported the re-establishment of a super-priority, 
known as a ``priority preference,'' as envisioned in S. 1994, 
and supported the increase in the sole-source thresholds by $1 
million for goods and services contracts and manufacturing 
contracts. However, concerns were raised about the 
legislation's price evaluation preference of 20 percent under 
full and open competition for firms with a dual 8(a) Business 
Development (BD) Program and Historically Underutilized 
Business Zone (HUBZone) Program certification (8(a) HUBZone 
small business concerns). Additionally, concerns were raised 
about the meaning on the word ``comparable'' when used as a 
determining factor in awarding bids to 8(a) HUBZone small 
business concerns under restricted competition within the 8(a) 
BD and HUBZone Programs.
    During consideration of S. 1994, the Committee adopted, by 
voice vote, an amendment proposed by Senators Bond and Kerry to 
make changes to the types of benefits available to 8(a) HUBZone 
small business concerns under restricted competition, as well 
as to clarify the benefits to these firms for contracts under 
full and open competition. The amendment also included a 
provision to clarify when a publicly held small business 
concern may participate in the HUBZone program.
    The amendment was the result of a compromise agreement 
reached between the Committee's Chairman and Ranking Republican 
and reflects suggestions raised at the June 19, 2002, Committee 
roundtable.

  III. Analysis of S. 1994, the ``Combined 8(a) and HUBZone Priority 
                      Preference Act,'' as Amended

                                PURPOSE

    The primary purpose of the ``Combined 8(a) and HUBZone 
Priority Preference Act,'' as amended, is to clarify the status 
of a small business that is certified in both the HUBZone and 
8(a) contracting programs. This amendment will provide 
statutory authority for a ``superpreference'' for firms that 
are certified for both HUBZones and 8(a). This 
``superpreference'' will be afforded to combined HUBZone 8(a) 
small businesses if their bids are comparable to other firms 
that are only eligible for one program. The word ``comparable'' 
has been difficult to define, and the amendment replaces this 
``comparable'' language with more standard, more understandable 
language about best value contracts.
    S. 1994 also establishes a price evaluation preference for 
the purposes of bidding on Federal procurement contracts under 
full and open competition for small business concerns that have 
received both 8(a) Business Development (BD) Program and 
Historically Underutilized Business Zone (HUBZone Program) 
certification. The bill also raises the sole-source threshold 
for goods and services contracts, as well as manufacturing 
contracts by $1 million. Finally, the legislation would clarify 
non-citizen ownership of a HUBZone small business concern and 
would limit non-citizen ownership of up to fifteen percent 
(15%) of the outstanding shares of a HUBZone small business 
concern that is publicly traded.

                  ESTABLISHMENT OF PRIORITY PREFERENCE

Effect on best value contracting

    The Committee-adopted amendment provides that best value 
contracts would be considered with a separate evaluation factor 
to recognize bidders participating in both the HUBZone and 8(a) 
programs. The amendment would replace all the existing set-
aside and full-and-open preferences with a best value approach. 
Best value contracts consider both price and ``non-price'' 
factors; giving preference to a firm for its participation in 
both programs (a HUBZone 8(a) dual status firm) is clearly a 
``non-price'' factor. The Committee believes that implementing 
this concept in a best value approach makes the most sense. The 
amendment awards such bidders extra points when their bids are 
evaluated on ``non-price'' factors such as the competitiveness 
of its delivery schedules, quality of the goods or services, 
and technical support, etc.

Effect on price evaluation preference

    As amended, S. 1994 will provide to an 8(a) HUBZone small 
business concern a price-evaluation preference for contracts 
under full and open competition. In competition against a small 
business concern, the price evaluation preference would be 10 
percent. In competition against a large business, the price 
evaluation preference would be 12 percent. For example, if a 
large business were to bid $100 on a contract and would be the 
winning bidder, an 8(a) HUBZone small business concern would be 
awarded the contract with any bid up to $112, if the award were 
based solely on price. If a small business bid $100 on a 
contract, an 8(a) HUBZone small business concern would be 
awarded the contract with any bid up to $110, if the award were 
based solely on price.
    The legislation specifically excludes the 8(a) BD small 
business concern's 10 percent price evaluation preference 
stemming from its status as a small disadvantaged business 
(SDB) concern from being combined with the price evaluation 
preference for an 8(a) HUBZone small business concern.

                         NON-CITIZEN OWNERSHIP

    As enacted in 1997, the HUBZone program has encountered 
issues relating to the statutory requirement that a HUBZone 
firm be 100% owned and controlled by U.S. citizens. This means 
that potential applicants for HUBZone certification need to be 
flesh and blood citizens, either by birth or naturalized. This 
requirement also raises an issue about potential HUBZone firms 
with stock that is publicly traded. Because stock may be 
exchanged at any moment, the management of such a firm cannot 
certify to the SBA that all its stock is owned and controlled 
by U.S. citizens.
    After consulting with the Securities and Exchange 
Commission and other interested parties, it was concluded that 
a HUBZone firm could be certified and maintain its 
certification so long as non-citizens did not control more than 
fifteen percent (15%) of the outstanding shares of a HUBZone 
small business concern that is publicly traded.

                     SOLE-SOURCE THRESHOLD INCREASE

    The cap on the value of a contract that may be awarded to 
an 8(a)BD or a HUBZone firm under sole-source authority 
(without competition) is raised by $1 million under the 
legislation, for both goods and services contracts and 
manufacturing contracts. The sole-source thresholds for each 
program would be $4 million for goods and services contracts 
and $6 million for manufacturing contracts.

                           IV. Committee Vote

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following votes were recorded on July 24, 2002. 
A motion by Senator Kerry to adopt an amendment by Senators 
Bond and Kerry concerning an agreement on the legislation 
passed by unanimous voice vote. A motion by Senator Kerry to 
adopt S. 1994, the ``Combined 8(a) and HUBZone Priority 
Preference Act,'' as amended, was approved by a 19-0 recorded 
vote, with the following Senators voting in the affirmative: 
Kerry, Bond, Levin, Harkin, Lieberman, Wellstone, Cleland, 
Landrieu, Edwards, Cantwell, Carnahan, Burns, Bennett, Snowe, 
Enzi, Fitzgerald, Crapo, Allen and Ensign.

                   V. Evaluation of Regulatory Impact

    In compliance with rule XXVI(11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that no 
significant additional regulatory impact will be incurred in 
carrying out the provisions of this legislation. There will be 
no additional impact on the personal privacy of companies or 
individuals who make use of the services provided.

                           VI. Cost Estimate

    In compliance with rule XXVI(11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be equal to the amounts indicated by the 
Congressional Budget Office in the following letter.

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 11, 2002.
Hon. John F. Kerry,
Chairman, Committee on Small Business and Entrepreneurship, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1994, the Combined 
8(a) and HUBZone Priority Preference Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Matthew 
Pickford.
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

S. 1994--Combined 8(a) and HUBZone Priority Preference Act

    S. 1994 would establish new criteria for evaluating bids on 
certain federal procurement contracts. CBO estimates that 
implementing S. 194 would cost about $1 million a year, subject 
to the availability of appropriated funds. The bill would not 
affect direct spending or receipts, so pay-as-you-go procedures 
would not apply. S. 1994 contains no intergovernmental or 
private-sector mandates as defined in the Unfunded Mandates 
Reform Act and would not affect the budgets of state, local, or 
tribal governments.
    Under this bill, certain contracts would be deemed less 
expensive than others when being evaluated for price. For 
contracts subject to full and open competition, the bill would 
establish a price preference of up to 12 percent for firms that 
are dually certified under the Small Business Administration's 
(SBA's) 8(a) Business Development program and Historically 
Underutilized Business Zone (HUBZone) program. For contracts 
restricted to small businesses, firms that are dually certified 
would be given a price preference over comparable bids from 
firms that are only certified under the 8(a) program or the 
HUBZone program.
    Based on information from SBA and the Office of Federal 
Procurement Policy (OFPP), CBO estimates that adding these new 
evaluation criteria would increase administrative costs about 
$1 million annually, assuming the availability of appropriated 
funds. Price preferences could increase federal costs if it 
resulted in the award of higher-cost contracts, but based on 
information from SBA and OFPP, we expect that such effects 
would be insignificant.
    The CBO staff contact for this estimate is Matthew 
Pickford. This estimate was approved by Peter H. Fontaine, 
Deputy Assistant Director for Budget Analysis.

         VII. Section-by-Section Analysis, S. 1994, as Amended

Section 1. Short title

    This Act is titled the ``Combined 8(a) and HUBZone Priority 
Preference Act.''

Section 2

    This section amends Section 3(p) of the Small Business Act 
to add paragraphs 9-13 defining the terms ``best value 
contract,'' ``best value factor relative importance,'' 
``contracting officer'' and ``8(a) HUBZone Small Business 
Concern.''

Section 3

    (a) Amends Section 8(a)(1)(D) of the Small Business Act to 
provide a price evaluation preference of ten percent (10%) to 
an 8(a) HUBZone small business concern in a competition for a 
best value contract with one or more 8(a) small business 
concerns.
    (b) Amends Section 31(b)(2)(B) of the Small Business Act to 
provide a price evaluation preference of ten percent (10%) to 
an 8(a) HUBZone small business concern in a competition for a 
best value contract with one or more HUBZone small business 
concerns.
    (c) Amends Section 31(b)(3) of the Small Business Act to 
insert subparagraph (D), establishing a twelve percent (12%) 
price evaluation preference for 8(a) HUBZone small business 
concerns in a full and open competition, unless the otherwise 
lowest and response offer is from a small business concern, and 
the price evaluation preference will be ten percent (10%).

Section 4

    Amends Section 3(p) of the Small Business Act to modify the 
requirement in existing law that requires a HUBZone small 
business concern to be owned by one or more U.S. citizens. The 
change would permit limited non-citizen ownership so long as it 
does not exceed fifteen percent (15%) of the beneficial 
ownership of the outstanding shares of the small business 
concern. This change affects those small business concerns that 
are required to file reports with the Securities and Exchange 
Commission.

Section 5

    (a) Amends Section 8(a)(1)(D)(i)(II) of the Small Business 
Act to increase the sole-source threshold by $1 million for 
8(a) small business concerns for both goods and services 
contracts and manufacturing contracts.
    (b) Amends Section 31(b)(2)(A)(ii) of the Small Business 
Act to increase the sole-source threshold by $1 million for 
qualified HUBZone small business concerns for both goods and 
services contracts and manufacturing contracts.

                     VIII. Changes in Existing Law

    In the opinion of the Committee, it is necessary to 
dispense with the requirement of rule XXVI (12) of the Standing 
Rules of the Senate in order to expedite the business of the 
Senate.

                                  
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