Legal Authorities Governing Federal Contracting and Subcontracting with Small Businesses
Released: 2015-02-23T00:00:00

Congress has generally broad authority to impose requirements upon the federal procurement process (i.e., the process whereby agencies obtain supplies 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.

Small business contracting and subcontracting are complicated topics, in part, because numerous statutes—implemented by multiple agencies and subject to interpretation by multiple judicial and other tribunals—require or authorize particular actions by federal agencies. The Small Business Act of 1958, as amended, is key among these authorities. However, other statutes also play a prominent role, especially where the activities of particular agencies are concerned. In addition, while some provisions of the Small Business Act are implemented by SBA, other provisions authorize or require actions by any "procuring activity." Moreover, most of these statutes leave at least something to the discretion of the agency tasked with implementing the statute, which means that regulations are also significant authorities governing federal contracting with small businesses. The SBA has promulgated regulations implementing the Small Business Act. However, other regulations implementing the act have been promulgated by the Federal Acquisition Regulatory Council (FAR Council). The FAR Council has also promulgated regulations implementing other statutory authorities, as have individual agencies. Further, these statutes and regulations are regularly subject to interpretation by various judicial and other tribunals, including SBA's Office of Hearings and Appeals (OHA), for eligibility for small business contracting programs, and the Government Accountability Office (GAO), for certain other questions that do not involve such eligibility. Understanding this legal framework is arguably important not only for its own sake, but also because Congress frequently enacts or proposes legislation that responds to agency regulations or judicial and other decisions.

This report provides an overview of the various legal authorities governing small business contracting and subcontracting, as well as the relationship between them. It also explains the roles of the SBA, procuring activities, OHA, GAO, and other tribunals in implementing and construing the law governing federal contracting and subcontracting with small businesses. (See also Table A-1 .) The report begins with the statutory authorities, then discusses the regulations implementing these statutes, and concludes by discussing the various judicial and other tribunals whose decisions regularly construe small business statutes and regulations. A companion report, CRS Report R43573, Federal Contracting and Subcontracting with Small Businesses: Legislation in the 113 th Congress , by [author name scrubbed], describes measures that Members of the 113 th Congress have enacted or proposed in response to particular issues pertaining to small business contracting and subcontracting.

Statutes

Over the years, Congress has enacted numerous statutes intended to encourage federal agencies to contract or subcontract with small businesses. The Small Business Act of 1958, as amended, is arguably the primary such statute, but other statutes also govern contracting with small businesses. Congress has broad authority to enact legislation in this area because the government has generally been seen to "enjoy[] 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." However, the U.S. Constitution does impose a few limits upon Congress's power in this regard, most notably by guaranteeing all persons equal protection of the law. 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.

Small Business Act

The Small Business Act of 1958, as amended, plays a key role in governing federal contracting and subcontracting with small businesses. Congress established the SBA as a permanent agency "[i]n order to carry out the policies" of this act, and the act specifically tasks the SBA with certain responsibilities pertaining to small business contracting. However, the act also authorizes or requires procuring activities to take certain steps pertaining to contracting and subcontracting with small businesses.

SBA's Responsibilities Under the Act

The Small Business Act delegates a number of responsibilities related to small business contracting and subcontracting to SBA. Three of these responsibilities are particularly noteworthy. First, Sections 7(j) and 8(a) of the act require SBA to establish a "program" to provide non-financial assistance to certain small businesses owned and controlled by socially and economically disadvantaged individuals, and to enter into contracts with other government agencies that are "subcontracted" to such firms. These requirements underlie the SBA's Minority Small Business and Capital Ownership Development Program (commonly known as the 8(a) Program) and arguably distinguish it from federal "programs" for other types of small businesses (e.g., women-owned). SBA is not expressly required by statute to implement assistance programs for other types of small businesses, although it has historically furnished assistance to them pursuant to its general authority to provide "technical, managerial, and informational aids" to small businesses whenever it "determines such action is necessary." Similarly, the Small Business Act does not contemplate SBA contracting with procuring activities for particular supplies and services and then subcontracting this work to other types of small businesses. Rather, as discussed below, the act authorizes procuring activities to contract directly with such businesses. Although SBA, in practice, generally delegates its authority to subcontract with 8(a) firms to other agencies, Section 8(a) gives SBA arguably unique authority over contracting with 8(a) firms, such that SBA must consent to "releasing" requirements formerly procured through the 8(a) Program for procurement outside the 8(a) Program.

Second, Section 8(b) of the act authorizes SBA to

certify to Government procurement officers … with respect to all elements of responsibility, including, but not limited to, capability, competency, capacity, credit, integrity, perseverance, and tenacity, of any small business concern or group of such concerns to receive and perform a specific government contract.

This provision is particularly significant because federal agencies generally may not award a contract without first determining that the awardee is "responsible" for purposes of the contract. The responsibility determination process considers various factors, including whether the prospective contractor has adequate financial resources and the necessary equipment and facilities to perform the contract. Contracting officers have generally broad discretion in determining whether prospective contractors are responsible. However, because of Section 8(b) of the Small Business Act, contracting officers cannot determine that a small business contractor is nonresponsible without first referring the matter to SBA, which may issue a Certificate of Competence (COC) declaring the contractor eligible for the award. When SBA issues a COC, contracting officers are required to "accept [its] decision to issue a Certificate of Competency and award the contract to the concern."

Third, Sections 3 and 5 of the act grant the Administrator of Small Business broad rulemaking authority as to firms' size, eligibility for "assistance" under the act, and related matters. Section 3 establishes the minimum criteria that firms must meet in order to qualify as small under the act; namely, they must be "independently owned and operated" and "not dominant in [their] field of operations." However, Section 3 also provides that,

[i]n addition to the criteria specified [above], the Administrator may specify detailed definitions or standards by which a business concern may be determined to be a small business concern for the purposes of this chapter or any other Act. The[se] standards … may utilize number of employees, dollar volume of business, net worth, net income, a combination thereof, or other appropriate factors.

The Administrator has used this authority to promulgate regulations, discussed below, which set standards for size in various industries based upon firms' annual receipts or number of employees. Section 5 further authorizes the Administrator to "make such rules and regulations as he deems necessary to carry out the authority vested in him by or pursuant to this [Act]." This provision allows SBA to exercise some control over implementation of those provisions of the act which authorize procuring activities to set aside contracts for, or make sole-source awards to, small businesses. Section 36 of the act, for example, provides that contracting officers of any agency may conduct competitions in which only service-disabled veteran-owned small businesses may participate, provided that certain conditions exist. However, Section 3 of the act, which only SBA has the authority to implement, defines "service-disabled veteran," "small business concern owned and controlled by service disabled veterans," and "veteran." This effectively means that SBA may determine eligibility for set-asides for service-disabled veteran-owned small businesses by promulgating regulations implementing Section 3.

Other significant responsibilities with which the act tasks SBA include (1) guaranteeing the bid, performance, and payment bonds of small businesses; (2) providing technical and other assistance to small businesses, including through mentor-protégé programs; (3) consulting with other agencies to ensure that small businesses receive "fair and reasonable treatment," as well as assigning Procurement Center Representatives (PCRs) and other officials to work with the procuring activities to promote small business participation; and (4) making any investigations "deem[ed] necessary" to determine whether persons have engaged in, or are about to engage in, conduct that violates the act or its implementing regulations. Among other things, PCRs are 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 (e.g., as subcontractors) in procurements that are not set-aside. SBA also appoints Commercial Market Representatives (CMRs), who are "SBA's subcontracting specialists," and whose responsibilities include facilitating the matching of large prime contractors with small business subcontractors or suppliers.

Responsibilities of Other Agencies

Unlike the provisions discussed above, which pertain solely to SBA, other provisions of the Small Business Act apply government-wide and authorize or require actions by other federal agencies. Among these provisions are ones authorizing agencies to set aside contracts for small businesses, or make "sole-source" (or noncompetitive) awards to them in circumstances when sole-source awards could not be made to other firms. Table 1 lists these provisions and briefly notes the range of actions agencies may take in reliance upon them. It is important to note that these actions differ by section, which means that the set-aside programs for the different types of small businesses (i.e., 8(a), HUBZone, women-owned, service-disabled veteran-owned) differ. In addition, with the possible exception of Section 15, none of these sections could be construed as requiring agencies to set aside contracts for small businesses or make sole source awards to them. In other words, under these provisions, any set-aside or sole-source award to small businesses is within the discretion of the contracting officer.

Section 8(d) of the Small Business Act also requires agencies to incorporate terms in their prime contracts pertaining to subcontracting with small businesses. Specifically, agencies must

incorporate in contracts valued in excess of $150,000 terms indicating that "[i]t is the policy of the United States" that small businesses have the "maximum practicable opportunity" to participate in the performance of federal contracts as subcontractors and suppliers, and that "[i]t is further the policy of the United States" that its prime contractors establish procedures to ensure timely payment of small business subcontractors; and incorporate in contracts valued in excess of $650,000 ($1.5 million for construction contracts) a "subcontracting plan" that includes "[s]eparate percentage goals" for the amount of work to be subcontracted to various types of small businesses, as well as a statement of the total dollars that are expected to be subcontracted.

Other provisions—in Section 15(g) of the act—establish goals for the percentage of federal contract and/or subcontract dollars awarded to small businesses government-wide and by each agency. The government-wide goal is that at least 23% of federal contract dollars go to small businesses, and that 5% of contract and subcontract dollars go to women-owned small business; 5% to small businesses owned and controlled by socially and economically disadvantaged individuals (i.e., small disadvantaged businesses); 3% to HUBZone small businesses; and 3% to service-disabled veteran-owned small businesses. Individual agencies' goals are to be established after "consultation" with the SBA. Agencies must also develop plans for achieving these goals, and make a "consistent effort to annually expand" small business participation as to each goal.

Yet other provisions seek to promote contracting or subcontracting with small businesses by limiting agencies' ability to "bundle" or "consolidate" their requirements into contracts that are unsuitable for performance by small businesses, and by requiring agencies to include in their prime contracts terms obligating the contractor to notify the contracting officer if it fails to use a subcontractor "used" in preparing in its bid or proposal, or if payment to a subcontractor is reduced or untimely. In addition, agencies are generally required to appoint personnel—Small Business Specialists (SBSs) and Offices of Small and Disadvantaged Business Utilization (OSDBUs)—to assist small business contractors and subcontractors. SBSs are tasked with reviewing all acquisitions valued above a certain amount ($2.5 million to $8 million, depending upon the agency) as early in the acquisition process as possible (and no later than 30 days before the issuance of a solicitation), and making recommendations on how procurements that involve "substantial bundling" could be restructured to reduce or minimize the scope of bundling. OSDBU Directors are similarly tasked with (1) identifying acquisitions that involve "significant bundling" and working with the agency to devise alternative procurement strategies; (2) assisting small businesses in obtaining payment, any required interest penalties for late payment, or information regarding payment from agencies and contractors; and (3) making recommendations to contracting officers as to whether particular acquisitions should be awarded to any type of small business.

When these provisions are involved, SBA generally may exercise its rulemaking authority to determine whether firms are eligible for set-asides, sole-source awards, or other assistance provided under the act. In other respects, however, SBA plays a limited role. Authority to enter contracts inheres in each federal agency, and is delegated from the agency head through the heads of "procuring activities" to individual contracting officers. SBA generally cannot prohibit agencies from contracting with large businesses, or require them to contract with small businesses. For example, SBA procurement center representatives (PCRs)—who are assigned to work with procuring activities—may appeal to the head of the procuring activity when they disagree with the contracting officer as to whether a particular procurement is bundled, "substantially bundled," or consolidated. If the head of the procuring activity agrees with the contracting officer, the PCR may notify SBA, which may then appeal to the secretary of the department or the head of the agency. However, the secretary or agency head's determination is final, and SBA cannot overrule that determination under current law. The same is true in other areas; SBA consults with and advises other agencies in their procurement activities, but generally cannot control their actions.

Titles 10 and 41 of the United States Code

The Small Business Act is not the only statute applicable to federal contracting and subcontracting with small businesses, however. The general contracting authorities—the provisions of the former Armed Services Procurement Act (ASPA) of 1947 codified in Title 10 of the United States Code and the provisions of the Federal Property and Administrative Services Act (FPASA) of 1949 codified in Title 41—grant defense and civilian agencies, respectively, broad authority to contract with any responsible firm, including small businesses. While Titles 10 and 41 do not authorize agencies to set aside contracts for small businesses, or make sole-source awards to them in circumstances when sole-source awards could not be made to other firms, agencies may still "favor" small businesses in certain procurements conducted under their authority by using small-business status as an evaluation factor in negotiated procurements. A negotiated procurement is one in which the government awards the contract to the contractor whose offer represents the "best value" for the government in light of various factors established by the government and incorporated into the solicitation for the contract. Cost or price must be among these factors, but it need not be the primary factor or carry any specific weight in the overall award. Other factors may include contractors' compliance with the solicitation requirements, technical excellence, management capability, personnel qualifications, prior experience, and small-business status. Commentators sometimes call contracts that are awarded using firms' size as an evaluation factor "preference contracts" because they allow agencies to prefer various types of small businesses without setting aside a procurement for them. Certain requirements pertaining to contracts with small businesses under the authority of the Small Business Act—most notably, the limitations on subcontracting, discussed below—have been found to be inapplicable to preference contracts because these contracts are not awarded under the Small Business Act.

Veterans Benefits, Health Care, and Information Technology Act

The Veterans Benefits, Health Care, and Information Technology Act of 2006, as amended by the Veterans' Benefits Improvements Act of 2008, imposes upon the Department of Veterans Affairs (VA) some unique requirements pertaining to contracting with small businesses owned by serviced-disabled and other veterans. Under the 2006 and 2008 acts, the Secretary of Veterans Affairs is required to establish annual goals for the "participation in Department contracts (including subcontracts)" of small businesses owned by service-disabled and other veterans, the former of which cannot be less than 3%. The 2006 and 2008 acts also authorize VA to use "other than competitive procedures" in meeting these goals. Specifically, VA may award any contract whose value is below the simplified acquisition threshold (generally $150,000 ) to a veteran-owned business on a sole-source basis, and it may also make sole-source awards of contracts whose value (including options) is between $150,000 and $5 million provided that certain conditions are met. When these conditions are not met, VA is generally required to set aside the contract for service-disabled or other veteran-owned small businesses, although it could retain discretion not to set aside contracts for veteran-owned small businesses in certain circumstances. For example, the U.S. Court of Appeals for the Federal Circuit recently upheld a lower court decision finding that VA may procure supplies and services from the Federal Supply Schedules instead of through a set-aside for veteran-owned small businesses because the 2006 and 2008 acts do not unambiguously require such purchases to be made from small businesses. (A petition for Supreme Court review of this decision is pending, however. )

Other Statutes

Other notable agency-specific statutes pertaining to contracting and subcontracting with small businesses (1) establish the mentor-protégé program of the Department of Defense, which differs from the mentor-protégé programs under the Small Business Act by focusing upon small business subcontractors and suppliers, not prime contractors; (2) set goals for the percentage of contract and subcontract dollars awarded to small businesses that exceed the government-wide goals in the Small Business Act; and (3) authorize agencies to take particular actions which would otherwise not be in accordance with federal "competition requirements" in order to promote contracting with small businesses.

Regulations

Because most small business statutes leave at least something to the discretion of the agency tasked with implementing them, regulations promulgated by agencies also play a significant role in federal contracting and subcontracting with small businesses. SBA regulations, which implement the Small Business Act, generally apply. However, depending upon circumstances, the Federal Acquisition Regulation (FAR) and/or various agency-specific regulations may also apply. Agencies' power to promulgate regulations intended to promote contracting or subcontracting with small businesses is more limited than Congress's authority in this regard, although it can still be quite broad depending upon the context. The agency must have been delegated authority to promulgate the regulation by Congress, and the regulation itself must correspond to the statute if "Congress has directly spoken to the precise question at issue." If Congress has not directly spoken to the precise question, the agency can have considerable discretion, and a regulation implementing the agency's governing statute will generally be upheld by judicial or other tribunals so long as it is "based upon a permissible construction of the statute. '" However, there are certain things that Congress has effectively prohibited agencies from doing, by regulation or otherwise, where contracting is concerned. Arguably the foremost among these is establishing a new set-aside program for small or other businesses. A key obstacle to the creation of such programs by regulation is the Competition in Contracting Act (CICA) of 1984, which generally requires that agencies obtain "full and open competition through the use of competitive procedures" unless other procedures are expressly authorized by statute. Because CICA defines "full and open competition" to mean that "all responsible sources are permitted to submit bids or competitive proposals on the procurement," it would appear to bar agencies from implementing set-asides—which are competitions in which only certain responsible firms may compete—unless they have express statutory authority to do so.

SBA Regulations

Like the Small Business Act, SBA regulations are important authorities governing federal contracting and subcontracting with small businesses. These regulations, which are codified in Title 13 of the Code of Federal Regulations , are the source of many requirements commonly associated with small business contracting and subcontracting. For example, SBA regulations specify the "size standards," or the maximum annual receipts or number of employees that firms in particular industries may have while qualifying as small. Other SBA regulations govern eligibility for the set-aside programs for different types of small businesses (e.g., HUBZone small businesses), and establish

what it means for firms to be at least 51% unconditionally "owned" and "controlled" by women, service-disabled veterans, or socially and economically disadvantaged individuals; a rebuttable presumption that members of certain racial and ethnic groups are socially disadvantaged; the maximum net worth that economically disadvantaged women and socially disadvantaged individuals may have while remaining eligible for contracting preferences under the authority of the Small Business Act; who counts as an employee and what it means for at least 35% of a HUBZone small business's employees to reside in a HUBZone; and when the spouse or "permanent caregiver" of a service-disabled veteran with a permanent and severe disability may exercise control over a service-disabled veteran-owned small business.

Yet other regulations expand upon the statutory "limitations on subcontracting," and require that small businesses awarded construction contracts under the authority of the Small Business Act perform certain percentages of the cost of the contract with their own employees, instead of subcontracting the work. SBA regulations are also the source of the "nonmanufacturer rule," which applies in the procurement of manufactured products under small business set-asides or through the 8(a) Program, and provides that, regardless of the applicable size standard, a firm that does not manufacture the product may be considered small if it (1) does not have more than 500 employees and (2) will supply the product of a small business manufacturer, or obtains a waiver of this requirement from SBA. In addition, SBA regulations establish procedures for protests of firms' size and status (e.g., HUBZone small business), as well as penalties for misrepresentations of size or status. Among other things, the latter regulations permit protests of firms' size by any offeror who has not been eliminated for reasons unrelated to size, the contracting officer, certain SBA officials, and "other interested parties," potentially including large businesses. These regulations also provide that persons who misrepresent their eligibility for assistance under the Small Business Act may be subject to debarment or suspension from government contracting, civil penalties under the False Claims Act and the Program Fraud Civil Remedies Act, civil or criminal penalties under Section 16 of the Small Business Act, and/or other penalties.

Federal Acquisition Regulation

The Federal Acquisition Regulation (FAR) also plays a significant role in federal contracting and subcontracting with small businesses. The FAR was promulgated in 1984 as part of an effort to standardize procurement rules across the government, and generally governs the conduct of agency contracting officers. The FAR is codified in Title 48 of the Code of Federal Regulations , and Subpart 19, in particular, addresses "small business programs." While many of the topics covered in Subpart 19 are also addressed in SBA regulations, the FAR often provides additional guidance specifically applicable to agency contracting officers exercising their authority under the Small Business Act, or complying with the act's requirements. For example, the FAR instructs contracting officers on how to apply SBA size standards to particular procurements by

(1) [c]lassifying the product or service being acquired in the industry whose definition, as found in the North American Industry Classification System (NAICS) Manual …, best describes the principal nature of the product or service being acquired;

(2) [i]dentifying the size standard SBA established for that industry; and

(3) [s]pecifying the size standard in the solicitation, so that offerors can appropriately represent themselves as small or large.

The FAR also provides guidance for contracting officers on locating potential small business sources, determining what constitutes a fair market price when deciding whether to set aside a particular acquisition for small businesses, and what reasons do not justify failure to set aside an acquisition for small businesses. In addition, several topics are addressed solely in the FAR, and not in the SBA regulations. These topics include how to calculate liquidated damages in cases where prime contractors fail to make "good faith efforts" to comply with their subcontracting plans, and the use of monetary incentives promoting subcontracting with small businesses. Specifically, the FAR authorizes contracting officers to consider prime contractors' past and proposed performance in subcontracting with SDBs when awarding contracts, and to pay prime contractors up to 10% of the amount by which their performance in subcontracting with SBDs exceeds their targets for subcontracting with SDBs.

When they address the same topics, the FAR and SBA regulations generally correspond. However, on certain topics and at certain times, they can differ. When this occurs, one can generally determine whether the FAR or SBA regulations prevail by considering whether the Federal Acquisition Regulatory Council (FAR Council) or SBA is tasked with administering the statute underlying the regulation. For example, the FAR Council is tasked with implementing Section 807 of the Ronald W. Reagan National Defense Authorization Act for FY2005, which calls for "acquisition-related dollar thresholds" to be adjusted for inflation on October 1 of each year evenly divisible by five. This means that the FAR prevails over any SBA regulations that might give different amounts when specifying the value of contracts that may be set aside for small businesses, or when directing agencies to take particular actions regarding "bundled" contracts. SBA, in contrast, is generally tasked with implementing those provisions of the Small Business Act governing firm size, and SBA size standards would prevail over the FAR to the degree that they were inconsistent.

Agency-Specific Regulations

Depending upon the circumstances, agency-specific regulations may also be relevant, including agency FAR supplements. For example, both the VA regulations, codified in Title 38 of the Code of Federal Regulations , and the Department of Veterans Affairs FAR Supplement (commonly known as the Veterans Administration Acquisition Regulation (VAAR)), codified in Title 48, have provisions governing set-asides and sole-source awards under the authority of the Veterans Benefits, Health Care, and Information Technology Act of 2006, as amended. The Defense Federal Acquisition Regulation Supplement (DFARS) similarly has provisions governing the DOD mentor-protégé program, including the contents of the agreements between mentors and protégés. The agency-specific regulations noted here interpret statutes applicable only to VA and DOD, respectively, so they may—and do—diverge from the FAR. Where such statutory authority is lacking, agency regulations may generally only "implement Government-wide policies and procedures within the agency," or establish "additional policies and procedures required to satisfy the specific and unique needs of the agency." This limitation upon the promulgation of agency-specific procurement regulations is one reason why the mentor-protégé programs developed by agencies without express statutory authority to create such programs generally provide only for protégés to receive technical or other assistance from mentors, and for mentors to have their participation counted towards their subcontracting plans or as evaluation factors in future procurements. Such agencies have less flexibility in authorizing reimbursement of advance payments made by mentors to small business subcontractors, like DOD can, because advance payments are strongly disfavored under federal procurement law. Such agencies also cannot provide that joint ventures between mentors and protégés may qualify as small for purposes of federal procurements, as SBA can. SBA may authorize such treatment because the Small Business Act grants it broad authority over size determinations, and SBA has historically taken the view that only its mentor-protégé program, or other programs expressly approved by it, are eligible for this treatment.

Judicial and Other Decisions

The statutes and regulations governing contracting and subcontracting with small businesses are regularly subject to interpretation by the federal courts and other tribunals, whose decisions can have considerable effect upon the law in these areas. The 2008 decision by the U.S. Court of Appeals for the Federal Circuit in Rothe Development Corporation v. Department of Defense illustrates this. In Rothe , the court struck down a statute authorizing the Department of Defense (DOD) to apply a 10% "price evaluation adjustment" to the offers of small disadvantaged businesses on the grounds that Congress lacked a strong basis in evidence for concluding that there was discrimination on the basis of race within the defense industry when it re-authorized this program in 2006. Although other provisions of law had prohibited DOD from granting price evaluation adjustments in every fiscal year since 1998, the Rothe decision was nonetheless significant because it resulted in SBA delaying implementation of the set-aside program for women-owned small businesses so that it could "review[] the relevance of the standard for disparity studies discussed in" Rothe . Congress also re-enacted certain preferences for minority-serving institutions of higher education that the district court, to which the Federal Circuit remanded the case in Rothe , had struck down on the grounds that they were "contingent" upon the provision authorizing price evaluation adjustments. In addition, in October 2014, the Obama Administration amended the FAR to repeal the regulations governing the price evaluation adjustment authority struck down in Rothe .

SBA's Office of Hearings and Appeals

Depending upon the context, various courts and other tribunals have issued decisions that significantly affect federal contracting and subcontracting with small businesses. Key among these tribunals is SBA's Office of Hearings and Appeals (OHA), which was established in 1983 to hear "protests" of, or challenges to, particular firms' eligibility for assistance under the Small Business Act. Its decisions generally address

the appropriate NAICS codes for particular procurements; whether particular firms qualify as small; and whether particular firms are otherwise eligible for the 8(a) Program or other small business contracting programs.

While these decisions generally focus upon specific procurements or firms, they often articulate standards that are applied broadly in determining size or status, such as the seven-part test commonly used in determining when a subcontractor is an "affiliate" of a firm. This test is significant because, when firms are found to be affiliates, their annual receipts or number of employees are generally combined when determining whether each firm is small or other than small for purposes of the Small Business Act (e.g., if firms A and B are found to be affiliates, the number of firm A's employees are added to the number of firm B's employees when determining whether firm A is small). OHA does not hear protests regarding the award, or proposed award, of federal contracts, as discussed below. Conversely, the Government Accountability Office (GAO), which is one of the primary forums to hear the latter types of protests, expressly disclaims jurisdiction over "Small Business Administration issues," such as those heard by OHA.

GAO and the Court of Federal Claims

Where questions of small business law unrelated to the size or status of particular firms are concerned, other judicial and/or other tribunals play a role. GAO and the U.S. Court of Federal Claims, along with the procuring agencies, have jurisdiction to hear "bid protests," or challenges to the award or proposed award of federal contracts. Decisions in such bid protests can play an arguably important role in interpreting the various statutes and regulations governing federal contracting and subcontracting with small businesses, such as happened in 2008-2010 when GAO and the Court of Federal Claims construed the Small Business Act, as it then existed, as giving set-asides for HUBZone small businesses "precedence" over set-asides for other small businesses. Subsequently, GAO construed the Veterans Benefits Act as removing VA's discretion to procure supplies or services through the Federal Supply Schedules when a set-aside for veteran-owned small businesses could be used, an interpretation which, some suggested, could have resulted in veteran-owned small businesses receiving an additional $3 billion in federal procurement dollars annually. However, the Court of Appeals for the Federal Circuit recently reached a different conclusion, upholding a lower court decision which had found that the relevant statute was ambiguous and that VA's interpretation was entitled to deference. VA had provided, in the prologue to certain regulations implementing the Veterans Benefits Act, that supplies or services which could potentially be obtained from veteran-owned small businesses may be purchased through the Federal Supply Schedules.

Such differences of opinion between GAO and the Court of Federal Claims are relatively unusual. These tribunals generally agree in their interpretations of various procurement laws and regulations. However, the court's decisions are legally binding upon executive branch agencies, while GAO's are not. GAO is a legislative branch agency, and the "separation of powers" doctrine precludes it from dictating the conduct of executive branch agencies. GAO can only make "recommendations" in its bid protest decisions, although these recommendations are highly influential and typically adopted by the procuring agencies.

Federal District Courts

The federal district courts currently do not have jurisdiction to hear bid protests. However, they may hear certain questions related to small business contracting and subcontracting that do not arise in connection with a procurement or proposed procurement. Thus, the federal district and appellate courts have heard suits (1) seeking to compel disclosure under the Freedom of Information Act (FOIA) of forms tracking prime contractors' compliance with their subcontracting plans; (2) asserting that particular agency actions are contrary to federal law and, thus, violate the Administrative Procedure Act (APA); and (3) alleging liability under the False Claims Act for fraudulent subcontracting plans or reports. In addition, at least one federal district court has found that it has jurisdiction to hear challenges to agency insourcing determinations brought by small businesses.

Appendix. Entities with Significant Roles in Federal Procurement from Small Businesses