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Timestamp: 2019-04-18 19:09:45+00:00

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An Overview Of Small And Disadvantaged Business Contracting - Seidman & Associates, P.C.
many small firms find government work to be financially rewarding.
Most small businesses find it difficult, however, to participate in the federal procurement process. The fact is that most federal contracting dollars are awarded on a noncompetitive basis.2 Although ready, willing, and able to perform government work at lower prices, small businesses have been repeatedly discouraged by contracting officials who find it easier to deal with larger firms.3 Small businesses also find it difficult to deal with the paper work and other requirements peculiar to contracting with Uncle Sam.
To realize the strategic benefits of small business participation in the defense industrial base, the declared policy of Congress, as stated in the Small Business Act, is to “aid, counsel, assist, and protect . . . the interests of small business concerns” and “insure that a fair proportion of the total purchases and contracts or subcontracts . . . be placed with small business enterprises.”4 To achieve this objective, certain advantages have been given to small businesses and to small businesses owned by disadvantaged persons in the procurement process. These benefits will Se discussed in detail below, following a discussion of what a small business is.
Many small businesses are family owned. Often the sale or gift of part of a business to another family member will be proposed to remain within applicable small business size standards. SBA regulations provide, however, that members of the same family have an identity of interest and are treated as one person. 14 If read literally, this rule would result in the affiliation of all businesses owned or controlled by members of the same family. The SBA Site Appeals Board has ruled, however, that family relationship alone does not establish affiliation. In Size Appeal of Maintenance Engineers, 15 for example the board found two concerns unaffiliated where a father owned 100 percent of company A and his son, a former officer of company A, owned 83 percent of company B. The board emphasized that firms A and B had separate books and offices, were in different lines of business, had no contractual relations, and were financially independent.
A contracting officer may, at any time after bid opening, question the size status of any offeror by filing a protest with the SBA.26 Thus, even if a protester is late, his protest may be considered for the instant procurement, if the contracting officer adopts the protest as his own. Protesters should not count on contracting officers adopting late protests as their own, however.
Any other identifiable interested person.
More detailed guidance on OHA procedures can be found in SBA contained in 13 C.F.R, Part 121.11.
There is often a question whether a solicitation for a small business set-aside includes the correct size standard. As noted above, small business size standards are established by standard industrial classification code (commonly referred to as SIC code), prepared and published by the Office of Management and Budget. The ultimate question is generally whether a solicitation contains the size standard for the correct SIC code.
The use of an improper SIC code can be detrimental to small business bidders. If too high a standard is used, as a result of using either the wrong SIC code or a clerical error, large businesses can compete for and be awarded contracts set aside for small business. Small business concerns should therefore be prepared to take timely action to assure that a proper size standard is used.
If there is sufficient time, it is advisable to first bring the perceived error to the contracting officer’s attention. In many cases, a contracting officer will acknowledge the error, cancel or amend the defective solicitation, and resolicit using the correct size standard. It is important to leave enough time to submit a timely appeal to SBA if necessary.
Note that a contracting officer is not barred from amending a solicitation to correct an improper size standard just because the time for appealing to the SBA has elapsed. It is not good practice to count on this, however. Any oral communications or understandings reached with a contracting officer should be promptly confirmed in writing.
Set-aside programs are of three basic types. The first is the traditional set-aside under which contracts may be set aside for small business concerns if there is adequate small business competition.44 The second is small business small purchase set-asides, established in 1978 under Public Law 95-507 amendments to the Small Business Act. These amendments reserve for small business concerns contracts that are under $10,000 and subject to small purchase procedures, unless the contracting officer is unable to find two or more small business concerns capable of performing.” The third type is small business innovation research (SBIR) set-asides under Public Law 97-219.
Procurement regulations provide that contracts, or a class of contracts, “shall” be set aside for small business if the contracting officer determines that there is a reasonable expectation that 1) bids or proposals will be received from at least two small businesses offering the products of different small businesses and 2) an award will be made at a reasonable price.46 The word “shall” appears to make set-asides mandatory if the required conditions are met. In practice, however, set asides are highly discretionary with contracting officials.
Irrespective of a contractor’s percentage contribution, it will not qualify as a manufacturer if its efforts are limited to subdividing and packaging the end product. For example in Size Appeal of Platt & Son, Inc.,55 it was held that although a firm’s contribution consisted of 51 percent of the contract price, it did not qualify as a manufacturer of wire rope where it would just cut, lubricate, seize the ends of, coil, build boxes for, and ship the end product.
Based on the .language enacted by Congress, small business/small purchase set-asides appear superior to the standard set-asides in several respects. To begin, there is a statutory presumption that these contracts are suitable for a set-aside. To establish a standard set aside, it must be affirmatively demonstrated that there are two or more small businesses willing to bid. Under small business/small purchase set-asides, a requirement is set aside unless the contracting officer is unable to find two or more small business bidders. To the further advantage of small businesses, these set-asides use simplified small purchase procedures and provide for expedited payment. Unfortunately for the small business community, as often is the case, appearance belies reality.
The rule that a contract must be set aside unless the contracting officer is unable to find at least two small business bidders has led contracting officers to overlook small businesses ready, willing, and able to bid. Contracts for aircraft spare parts are a prime example. These contracts are repeatedly awarded to the same large firms on a noncompetitive basis, with the actual work often performed by small business subcontractors with whom the armed services choose not to contract directly.
A recently promulgated regulation, aimed at fostering spare parts competition, exempts contracts with an annual buy value of under $10,000 from screening for new sources. 58 This rule perpetuates the sole-source award of such contracts to members of the Fortune 500.
“Numerous studies have shown that small businesses are our Nation’s most efficient and fertile source of innovations. Yet only 3.5 to 4 percent of the Federal R. & D. dollar is spent with small firms. This underutilization of small businesses in Federal R. & D. programs is especially regrettable when considering the highly successful track record of small firms in generating jobs, tax revenues, and other economic and societal benefits.
“According to the Office of Federal Procurement Policy, between 1953 and 1973, firms with fewer than 1,000 employees accounted for approximately one-half of the major U.S. innovations. Moreover, these firms had a ratio of innovations to R. & D. employment which was four times greater than that found in larger firms and a total cost per R. & D. scientist or engineer which was about one-half that found in firms of over 1,000 employees.
“Similarly, a National Science Foundation survey of major innovations introduced in to the market between 1953 and 1973 found that small firms produced about 24 times as many innovations per R. & D. dollar as large firms and 4 times as many as medium sized firms.
“Studies also show the important role of small innovative businesses in creating jobs and stimulating economic growth. David Birch of MIT found that firms with 500 or less employees provided 87 percent of all new jobs in the United States between 1969 and 1976. He also found that the best job creator was the small high technology-based firm.
For a firm to be awarded a government contract, a determination must be made that it is responsible (i.e., capable of performing).85 To be determined responsible, a prospective contractor must meet the general standards set forth in FAR 9.104-1.
However, small businesses may request review by the SBA of a contracting officer’s negative responsibility determination. The SBA is also given the final authority, under the Small Business Act 5 8(b)(7),87 to determine whether a small business is a “manufacturer” or “regular dealer” eligible for contract award under the Walsh-Healy Public Contracts Act, 41 U.S.C. 5 35(a). The review contemplated is conducted under SBA’s certificate of competency program.
Recent controversy has focused on the use of bidder prequalification by contracting officials to avoid the certificate of competency process. Under bidder prequalification, a business is required to demonstrate its capability to perform before submitting a bid or proposal. Procuring agencies have taken the position that a small business is entitled to certificate of competency review only if it would have been awarded a contract except for a contracting officer’s negative responsibility determination. If a small business is precluded from bidding, this stage in the procurement process is never reached.
Many small businesses prefer to sell to the government indirectly as subcontractors to avoid the bureaucratic entanglement involved in federal prime contracting.
Subcontracting plans are required to include percentage subcontracting goals for small businesses in general and small businesses owned and controlled by socially and economically disadvantaged individuals. The plans are also required to describe the efforts that will be taken to meet these goals.104 Furthermore, the procuring agency must determine that the plan provides maximum practicable opportunity for subcontracting to small businesses and small businesses owned and operated by socially and economically disadvantaged individuals. The failure of a contractor to comply with a subcontracting plan is a “breach of contract” justifying a termination for default.”105 Despite numerous cases of noncompliance, however, this drastic remedy is apparently not being used.
For subcontracting assistance, information on subcontracting opportunities can be obtained from SBA field offices. Subcontracting opportunities can also be identified in the Commerce Business Daily listings of prime contract awards.
A potential subcontractor should realize that subcontracts are commercial rather than government contracts. Unlike’ the government, which is required to deal with potential sources on an impartial basis, a prime contractor can generally deal with whomever it wants. Therefore, a potential subcontractor should use the same marketing techniques used with its other commercial accounts.
To be admitted to the 8(a) program, as discussed below, a firm must be owned and operated by “‘socially and economically disadvantaged individuals” and have a reasonable prospect of success. The substantial economic benefits available to disadvantaged firms include the award of federal contracts on a sole-source basis, interest-free loans in the form of advance payments, and the outright gift of government funds known as business development expense (BDE).
Because of the few firms graduating from the program, Congress in Pub. L. 96-481 required fixed program participation terms (RPTs) for all 8(a) firms. Implementing regulations set the maximum FPM at five years, plus a possible extension for up to two years.109 These aspects of the 8(a) program will now be addressed.
“(A) The individual’s social disadvantage must stem from his or her color; national origin; gender; physical handicap; long-term resident in an environment isolated from the mainstream of American society; or other similar cause not common to small business persons who are not socially disadvantaged.
“(B) The individual must demonstrate that he or she has personally suffered social disadvantage, not merely claim membership in a non-designated group which could be considered socially disadvantaged.
“(C) The individual’s social disadvantage must be rooted in treatment which he or she has experienced in American society, not in other countries.
“(D) The individual’s social disadvantage must be chronic, long-standing, and substantial, not fleeting or insignificant.
An otherwise eligible small business must demonstrate “that with contract, financial, technical, and management support the small business will be able to perform contracts which may be awarded to such concern . . . and has reasonable prospects for success in competing in the private sector.”118 The SBA considers, in addition to the firm’s potential, the finite SBA resources for assisting 8(a) firms.119 Thus a promising construction firm could be denied entry because not enough construction opportunities are available.
The “Catch-22” of obtaining entry to the program is demonstrating both economic disadvantage and a reasonable prospect for success. Stated otherwise, to obtain program entry an applicant must simultaneously demonstrate that it is economically disadvantaged, but not too economically disadvantaged.
A federal contract placed in the program is first awarded without competition to the SBA. It is then subcontracted (again without competition) to an 8(a) firm.122 This two tier approach is used because most disadvantaged firms are small businesses. As intended by Congress,123 however, 8(a) concerns bear the brunt of negotiating the contracts and dealing with the procuring agency during contract performance. In fact, it has been held that this scheme results in privity of contract between the procuring agency and the 8(a) subcontractor.
The purpose of the 8(a) program is to pro­ vide assistance to firms owned by disadvantaged individuals until they demonstrate their ability to compete in the marketplace without 8(a) assistance. Few firms have graduated, however. This has made SBA unable to admit new firms into the program.
The prudent small business person should attempt to maximize the advantages incident to small business status in marketing to the Government. Even with such advantages, however, small businesses will find it difficult to overcome contracting officials’ preference for dealing with larger firms.
The answer to our contracting problems is to let small businesses openly compete with large defense contractors rather than continue to make awards to the large firms on a non-competitive basis. It is to be hoped that the recent revelations that the armed service pay $750 for a pair of pliers, $1,100 for plastic stool, and $9,600 for simple hexagonal wrenches will lead to a move in that direction.
1. Source: Federal Procurement Data Center, Standard Report, April 1, 1984, and Special Report 1226A, July 26, 1984.
2. 56.3 percent or $75.1 billion of the $133 billion in contracts placed by DoD in FY 84 were awarded noncompetitively. Federal Procurement Data System Standard Report Fiscal Year 1984 Fourth Quarter, p. 25 (1985).
3. See Seidman, “How to Save A Few Billion Dollars: Defense Bureaucrats Could Save That Much by Contracting With Smaller Companies.” Inc., 12 (February 1982).
4. Small Business Act, Section 2(a), 15 U.S.C. §631(a).
6. 13 C.F.R. §121.2 (1985).
7. 49 Federal Register 5024, February 9, 1984.
8. Standard Industrial Classification Manual (1972) and 1977 Supplement, prepared by Statistical Policy Office, Office of Management and Budget.
9. See 13 C.F.R. §121.3(a)(vi)(C).
13. Size Appeal of Propper International Inc., Size Appeal #769 (July 24, 1975). 14. 13 C.F.R. §121.3(a)(ii).
15. Size Appeal #770 (July 30, 1975). To the same effect: In the Matter of Kasper Brothers, Size Appeal #1252 (April 9, 1979); Size Appeal of Eastern Trans-Waste Corp., Size Appeal #1569 (July 13, 1982).
17. Size Appeal #1728, (1983).
18. Integrated Systems Analysts, Inc., Size Appeal #1923, (April 11, 1984). 19. 13 C.F.R. §121.5(a).
21. 18 U.S.C. §287. See also 31 U.S.C. §§3729-3730 (1983).
22. 13 C.F.R. §121.9(a); see Size Appeal of Fennell Container Co. Size Appeal #2080 (November 23, 1984). 23. 13 C.F.R. §121.9(a).
29. 48 Federal Register 55832, December 16, 1983.
32. Size Appeal of Fordice Construction Co., No. 1926, April 13, 1984. Contra Wilkinson & Jenkins v. Army Corps of Engineers, No. 85-205-Civ-J-16 (M.D. Fla. April 4, 1985) discussed at 43 BNA Federal Contracts Report 744, April 29, 1985.
42. See Pacer Systems, Inc., B-215999, 84-2 CPD %45 (1984).
43. 15 U.S.C. §644(a), FAR §19.502-1.
44. 15 U.S.C. §644, FAR §19.502-2.
52. 13 C.F.R. §§121.5(b)(l) and (2).
53. Size Appeal of Michigan Instruments Corporation, No. 2012, August 23, 1984.
54. No. 1262, June 1, 1979.
55. No. 1946, May 8, 1984.
56. Pub. L. 95-507, §221.
58. DOD FAR Supplement, Supplement No. 6, §S6-201.2(k). 59. FAR §19.501(f)(2).
65. S. Rep. No. 97-194, 97th Cong., 1st Sess. 6 (1984).
68. SBA Policy Directive on the Small Business Innovation Development Act, SOP 65 01.2 (September 84).
69. Id. at para. 4.g.
70. Id. at para. 6.c.
71. Id. at para. 6.d(l).
72. Id. at para. 12.j.(1).
73. Id. at para. 12.k.(1).
74. Id. at para. 6.b.
75. Id. at para. 10.a.
76. Id. at para. 10.b.
77. Id. at para. 6.d.(2).
78. Id. at para. 12.j.(2).
79. Id. at para. 12.k.(1).
80. Id. at para. 6.d.(3).
82. SBA Policy Directive No. 65 01.2, para. 12.e.
84. 35 U.S.C. §§200-211; OMB Bulletin 81-22, 46 Fed. Reg. 34775 (1981). For a good discussion of the Pub. L. 96-517, Patent Policy for Small Businesses and Nonprofit Organizations, see R. Nash & L. Rawicz, Patents and Technical Data, 145-161 (1983).
85. 10 U.S.C. §§2305(b)(3), 2305(b)(4)(D); 41 U.S.C. §253b. FAR §9.103(b).
88. Senate Hearings on S. 2250, 77th Cong., 2nd Sess. 89. 15 U.S.C. §637(b)(7)(A).
91. U.S. Small Business Administration, The State of Small Business: A Report to the President, March 1984, p. 329.
93. 60 Comp. Gen. 104, 80-2 CPD ¶ 419 (1980).
94. Letter from Bernard Kulik, associate administrator, for Procurement Assistance, SBA, to Michael J. Boyle, senior attorney, GAO (Mar. 20, 1981).
95. Pub. L. 98-577, §401, 15 U.S.C. §637(b)(7)(C).
96. 47 Federal Register 34972, August 12, 1982.
97. To Consider S. 2446 and Other Small Business Procurement Reforms; Hearings Before the Senate Committee on Small Business, 97th Cong., 2nd Sess., 23, 36 (1982), (Statement of Bruce N. Holn, manager, Government Affairs).
98. Pub. L. 98-577, 15 U.S.C. §637(b)(7)(C).
99. Pub. L. 95-507, §223(a).
100. Lavelle Aircraft Company, B-211479, 83-2 CPD U60, affirmed 83-2 CPD 300 (1983). 101. W.B. Jolley, B-209933, 83-1 CPD 609 (1983).
109. Pub. L. 96-481, codified at 15 U.S.C. §636(j)(10)(A)(i); 13 C.F.R. §124.1-1(£)(4).
120. SBA Standard Operating Procedure (SOP) 80-05, Chapter 7.
121. Rowe Contracting Service, Inc., B-203542, 81-2 CPD 92 (1981). 122. 15 U.S.C. §637(a)(l).
124. R & R Construction Co., VACAB No. 1101, 74-2 BCA 10857 (1974).
125. SOP 80-05, para. 52.e., and Appendix 3.
128. Smith, Millions in U.S . Loans Squandered in Minority Program, Inquiry Finds, N.Y. Times, Nov. 9, 1979, p.l.
130. SOP 80-05, para. 94.
132. SOP 80-5, para. 97.
135. SOP 80-05, para. 97.
136. Pub. L. No. 96-481, codified at 15 U.S.C. §636(j)(10)(A)(i); 13 C.F.R. §124.1-l(f)(4).
143. 13 C.F.R. §124.10 et seq.

References: §631
 §121
 §121
 §121
 §121
 §287
 §121
 §121
 v. 
 §644
 §19
 §644
 §19
 §221
 §19
 §253
 §9
 §637
 §401
 §637
 §637
 §223
 §636
 §124
 §637
 §636
 §124
 §124