Federal Contracting and Subcontracting with
Small Businesses: Issues in the 112th Congress
Kate M. Manuel
Legislative Attorney
Erika K. Lunder
Legislative Attorney
September 11, 2012
Congressional Research Service
7-5700
www.crs.gov
R42390
CRS Report for Congress
Pr
epared 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 Kate
M. Manuel and Erika K. Lunder, 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 have enacted or
proposed in response to particular issues pertaining to small business contracting and
subcontracting. The majority of such measures appear to address (1) the standards under which
firms’ size is measured, including the establishment of size standards for “early stage” small
businesses and “mid-sized” firms (H.R. 585, H.R. 1812, H.R. 3184, H.R. 3987, H.R. 4121, H.R.
4310, S. 1590); (2) government-wide or agency-specific goals for contracting and subcontracting
with small businesses (H.R. 2424, H.R. 2921, H.R. 2949, H.R. 3184, H.R. 3438, H.R. 3779, H.R.
3850, H.R. 4048, H.R. 4310, H.R. 5829, H.R. 6078, S. 180, S. 1110, S. 1154, S. 1334, S. 3213);
and (3) eligibility for the set-aside programs for particular types of small businesses (e.g.,
HUBZone small businesses) (H.R. 598, H.R. 2131, H.R. 2416, H.R. 2424, H.R. 2921, H.R. 3754,
H.R. 5729, S. 236, S. 633, S. 976, S. 1334, S. 1756, S. 1874, S. 2157).
Other measures address federal contractors’ obligations vis-à-vis small business subcontractors
(H.R. 2424, H.R. 3893, H.R. 4310, S. 370, S. 1334); limitations on the amount of work that may
be subcontracted under contracts awarded under the authority of the Small Business Act (H.R.
3893, H.R. 4310); expedited payment of small business contractors (S. 1736); increases to the
maximum surety bond amount that SBA may guarantee (H.R. 12, H.R. 2424, H.R. 4310, S. 1334,
S. 1549, S. 1660, S. 2187, S. 3442); bundling and consolidation of requirements into contracts
unsuitable for award to small businesses (H.R. 2424, H.R. 4081, H.R. 4310, S. 1334); and agency
“insourcing” of functions performed by small businesses (H.R. 3851, H.R. 3893, H.R. 3980, H.R.
4310). Yet other measures address the responsibilities of SBA Procurement Center
Representatives and agency Offices of Small and Disadvantaged Business Utilization (H.R. 3851,
H.R. 3980, H.R. 4310; S. 3442); the circumstances in which agencies may set aside contracts for
small businesses or make non-competitive awards to them (H.R. 240, H.R. 4118, H.R. 4203, S.
129, S. 2172); the use of small businesses when making “small purchases” (H.R. 2424, S. 1334);
mentor-protégé programs wherein large businesses provide financial and other assistance to small
businesses (P.L. 112-81, H.R. 3985, H.R. 4310); the deterrence and punishment of fraud in small
business contracting programs (H.R. 3184, H.R. 4206, H.R. 4310, S. 633, S. 914, S. 1184, S.
3442); and contracting or subcontracting with small businesses by particular agencies (P.L. 112-
74, P.L. 112-81, H.R. 4310, H.R. 6004, S. 1546, S. 3405).
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 .................................................................................... 8
8(a) Program.............................................................................................................................. 9
HUBZone Program.................................................................................................................. 12
Subcontracting Plans ..................................................................................................................... 14
Limitations on Subcontracting....................................................................................................... 17
Payment ......................................................................................................................................... 18
Surety Bonds.................................................................................................................................. 20
Bundling and Consolidation .......................................................................................................... 21
Insourcing ...................................................................................................................................... 24
Procurement Center Representatives; Offices of Small and Disadvantaged Business
Utilization ................................................................................................................................... 26
Restricted Competitions and Non-Competitive Awards ................................................................ 28
Use of Small Businesses When Making “Small Purchases” ......................................................... 30
Mentor-Protégé Programs.............................................................................................................. 31
Deterrence of and Penalties for Fraud ........................................................................................... 33
Agency-Specific Programs ............................................................................................................ 36
Contacts
Author Contact Information........................................................................................................... 38
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 Kate
M. Manuel and Erika K. Lunder, 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 have 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 small-
business 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).
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increasing SBA’s size standards, increasing government-wide or agency-specific goals for
contracting and/or subcontracting with small businesses). In particular, it analyzes changes to
existing law that would be made were these measures 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, or 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 types of 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 be updated regularly, as additional legislation is introduced, while the 112th
Congress is in session.
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 Robert Jay Dilger.
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. 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 Job Act authorizing SBA to promulgate “alternative” size standards pertain only to
loan programs. See P.L. 111-240, §1116, 124 Stat. 2509.
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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 as many as 8,350
additional firms becoming eligible for small business programs.12 Some increases to the size
standards took effect in March 2012; other increases are still pending.13
Concerns about the size standards and, in particular, SBA’s discretion in crafting them have
persisted, however, notwithstanding the legislation enacted by the 111th Congress and the changes
made or proposed by SBA. Some Members of the 112th Congress have introduced legislation that
would expressly require SBA to
• establish a new classification system to replace the current system based on
North American Industrial Classification System (NAICS) codes;14
• 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;15
• make available certain information (e.g., a detailed description of the industry
and its competitive environment) whenever SBA conducts rulemaking to revise,
modify, or establish size standards;16
• make available a justification demonstrating that any single size standard for a
grouping of four-digit NAICS codes is appropriate for each individual industry
classification included in the grouping;17 and
11 See infra notes 214-216 and accompanying text.
12 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-mixed-
reactions/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 Fairness for Small Businesses in Federal Contracting Act of 2011, S. 1590, §2. The new system would have to (1)
consist of not more than 20 industries; (2) include, as industries, manufacturing, construction, professional services,
wholesale, and retail; and (3) be “based on market conditions as identified by the most recent Economic Census of the
United States.” Id. SBA would also be required to review the new classification system periodically, as provided in the
Small Business Jobs Act. According to its sponsor, this legislation is specifically “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).
15 Fairness for Small Businesses in Federal Contracting Act of 2011, S. 1590, §2. In place of the nonmanufacturer rule,
SBA would be 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.
16 National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1661.
17 Small Business Protection Act of 2012, H.R. 3987, §2; National Defense Authorization Act for FY2013, H.R. 4310,
as passed by the House, at §1661. These measures 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
(continued...)
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• 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 have 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 reflect fears 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 reflect 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—
reflect 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 the larger ones.
Depending upon how eligibility for any new set-aside program is defined, certain programs could
potentially be vulnerable to challenge upon equal protection or other grounds.22 The current 8(a)
(...continued)
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).
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 must meet to qualify as small under the act 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 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 discretion as to whether such contracts are awarded via a set-aside or on a sole-source basis,
although they would appear to be required to award any contract identified as suitable for award to such entities to
them. SBA would help 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.
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).
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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
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
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 Jody Feder.
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
[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).
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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 directors of Small and Disadvantaged
Business Utilization communicate to their subordinates “the importance of achieving small
business goals.”31 In addition, some Members of the 112th Congress have introduced legislation
that would increase the goals, or create greater incentives for agencies to meet their goals. The
first category includes bills that would (1) increase the statutorily set government-wide goals;32
(2) require a specific agency to meet a goal;33 or (3) direct entities that may be exempt from the
requirements of the Small Business Act to establish goals for contracting with small businesses.34
Some bills also address 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 goaling purposes;35
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 veteran-
owned 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 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 calls 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.
33 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 does not specify what the consequences might be if the Department failed to meet this goal.
34 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.
35 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
(continued...)
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• limiting to two the number of categories in which one business could be counted
(e.g., HUBZone and women-owned);36
• specifying that certain types of businesses (e.g., foreign-owned) not be included
in the count,37 and
• otherwise directing SBA on how to count certain contracts.38
The second category includes bills that seek to improve the government’s performance in meeting
existing contracting and subcontracting goals. These types of measures tend to focus on
increasing reporting by the agencies or SBA and publicizing the information,39 or requiring SBA
or the Government Accountability Office (GAO) to study the activities of federal agencies and
provide recommendations on how to improve goaling performance.40 Other provisions appear
intended to improve performance through better training,41 or by penalizing agencies that fail to
(...continued)
meeting the goals” under the Veterans Benefits Act).
36 Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, tit. I, §105.
37 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).
38 Government Efficiency through Small Business Contracting Act of 2012, H.R. 3850, §2; National Defense
Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1631 (removing SBA’s discretion to exclude
certain contracts when determining the total value of contract dollars awarded each year because of (1) where these
contracts are awarded or performed; (2) whether federal law mandates that the contract be performed by an entity other
than a small business; (3) whether funding for a contract subject to the Competition in Contracting Act (CICA) was
made available in an appropriations act; or (4) whether the contract was subject to the FAR); Small Business
Contracting Opportunities Expansion Act of 2012, H.R. 6078, §2 (same). SBA has 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 Documented,
Advisory Memorandum Report No. 12-04, December 6, 2011 (copy on file with the authors).
39 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 of the businesses that received a contract because they were identified as
small businesses); Government Efficiency through Small Business Contracting Act of 2012, H.R. 3850, §3 (requiring
SBA to report to Congress on the goaling performance of each agency and the federal government as a whole, as well
as information about small business contracting broken down by category of small business and type of preference,
within 60 days of receiving a report from each agency); 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 veteran-owned small businesses and to include recommendations on whether any
prime contractor should be recognized by Congress for “outstanding progress” in contracting with such businesses);
Small Business Goaling Act of 2012, S. 3213, §3 (requiring certain reports by the procuring agencies and SBA).
40 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).
41 Government Efficiency through Small Business Contracting Act of 2012, H.R. 3850, §§2, 4 (requiring senior
procurement employees and program managers to communicate to subordinates the importance of achieving goals, and
that senior executives in federal agencies be trained about federal procurement requirements, including contracting
requirements under the Small Business Act); National Defense Authorization Act for FY2013, H.R. 4310, as passed by
the House, at §1633 (requiring that training programs for senior executives include federal procurement requirements,
(continued...)
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meet their goals.42 However, the latter type of provisions could potentially raise 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.43 However, if legislation were to
impose mandatory goals, or change the nature of 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.44
Eligibility for Existing Set-Aside Programs
Ever since Congress established the first set-aside program in 1978,45 the criteria governing
eligibility for such programs have periodically been of interest to Members of Congress and the
public.46 Currently, the primary concerns appear to center upon eligibility for the 8(a) and
(...continued)
including contracting requirements under the Small Business Act).
42 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).
43 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.
44 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. See also 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).
45 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 Kate M.
Manuel and John R. Luckey.
46 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).
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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.”47 Proposals 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.”48
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,49 and to enter into contracts
with other government agencies that are subcontracted to such firms.50 Taken together, these
requirements form the basis for SBA’s 8(a) Program.51 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,”52 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.53
However, outside of limiting participation in the 8(a) Program by firms and individual owners to
a maximum of nine years,54 and finding that members of certain groups are socially
disadvantaged,55 the Small Business Act generally gives SBA considerable discretion as to the
criteria for eligibility for the 8(a) Program.56 This is particularly true where economic
47 See supra notes 19-24 and accompanying text.
48 See infra notes 171-186.
49 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)
marketing assistance, and (V) management assistance.
50 15 U.S.C. §637(a)(1)(A).
51 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 Kate M. Manuel
and John R. Luckey.
52 15 U.S.C. §637(a)(5).
53 15 U.S.C. §637(a)(6)(A).
54 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).
55 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”).
56 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”).
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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)57—are established by regulation, not statute.58
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,59 which were set in 198960
and have not been adjusted for inflation since then.61 Relatedly, some have expressed concern that
firms are not adequately prepared to compete for federal or other contracts upon leaving the
program,62 and that certain firms receive a disproportionately large share of all 8(a) contracts,
leaving other firms with diminished opportunities to grow and develop.63 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.”64
Members of the 112th Congress have 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 includes measures that would allow firms to
participate in the program for more than nine years and require SBA to provide technical
assistance to those who are no longer eligible to participate, as well as measures that would
57 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.
58 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).
59 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”).
60 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).
61 The SBA’s net worth standards are not acquisition-related thresholds subject to periodic adjustment for inflation
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.
62 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 218 to 221 and
accompanying text.
63 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.
64 Small Business Jobs Act of 2010, P.L. 111-240, tit. I, subtitle C, §1345, 124 Stat. 2546.
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increase the net worth threshold.65 The second category—legislation intended to restrict the
participation of certain populations in the 8(a) Program—includes measures that would subject
firms owned by Alaska Native Corporations (ANCs) to the same eligibility and other
requirements to which individually owned 8(a) firms are subject.66 This legislation, which
responds to the widely reported increase in federal contract dollars awarded to ANCs and their
subsidiaries over the past decade,67 would remove the alleged “special … advantages”68 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 million69);
• 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.
65 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.
66 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 Kate M.
Manuel, John R. Luckey, and Jane M. Smith.
67 See, e.g., Federal Contracting, supra note 63, 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%.
68 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_july9-
15_0.pdf.
69 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).
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These changes would effectively bar 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.70 They would also
require that all affiliations of ANC-owned firms count when the firms’ size is determined.71 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.
Other legislative proposals would require 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.72
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.73 A series of GAO reports, published
between 2008 and 2010, found that the HUBZone program was vulnerable to fraud,74 prompting
70 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).
71 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
owned by a socially and economically disadvantaged Indian tribe (or a wholly owned business entity of such 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.
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, §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 has been 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).
73 For more on the HUBZone program, see generally CRS Report R41268, Small Business Administration HUBZone
Program, by Robert Jay Dilger.
74 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).
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interest among some Members in measures that would ensure only eligible firms participate in the
program. More recently, the release of the results of the 2010 decennial census has 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.75 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.76 HUBZones include “qualified census tracts,” as that term is
defined in 26 U.S.C. Section 42(d)(5)(C)(ii),77 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.78
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.79
SBA has stated that, for purposes of the HUBZone program, the Census Bureau released the first
results of the 2010 census on October 1, 2011.80
Legislation has been introduced in the 112th Congress that addresses both reported fraud in the
HUBZone program and the loss of HUBZone status by certain firms due to the 2010 census.
Among the former are bills that would require 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
75 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).
76 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).
77 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.”
78 15 U.S.C. §632(p)(4)(A)-(B).
79 15 U.S.C. §632(p)(4)(C).
80 Small Bus. Admin., HUBZone: Latest News and Articles, available at http://www.sba.gov/content/hubzone-latest-
news-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.”).
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the efficacy of the program, or develop measures and implement plans to assess its
effectiveness.81 Among the latter are measures that would extend 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.82 Other legislative proposals would require the Secretary of
Housing and Urban Development (HUD) to designate HUBZones based on the new census data
within a specified time frame,83 or would designate a particular county as a HUBZone for a
specified time period.84 The latter types of provisions are arguably 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 has also been introduced in the 112th Congress that would amend 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.85 The proposed provisions parallel those that presently address small
businesses owned by Alaska Native Corporations, Indian tribal governments, and Community
Development Corporations.86 Small businesses owned by these various types of entities have, at
times, been subject to different treatment under the Small Business Act,87 and the proposed
legislation appears 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
81 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).
82 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.
83 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).
84 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).
85 Native Hawaiian HUBZone Opportunity Act of 2012, H.R. 5729, §2.
86 15 U.S.C. §632(p)(3)(B)-(D).
87 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 Kate M. Manuel and John R. Luckey, at Appendix.
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percentage of agency subcontract dollars awarded to small businesses.88 Nonetheless, despite
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,89 and in part because of alleged mistreatment of small
business subcontractors by agency prime contractors.90 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
• 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,”91 and
• 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.92
Although SBA is still in the process of implementing the changes made by the 111th Congress,
Members of the 112th Congress have proposed additional legislation addressing subcontracting
plans. Among other things, these measures would (1) hold prime contractors accountable for
failure to report their subcontracting activities;93 (2) require withholding of a certain percentage of
88 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)).
89 See, e.g., Federal Government Misses Small Business Contracting Goal, supra note 29.
90 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).
91 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.
92 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.
93 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 authorize SBA
procurement center representatives (PCRs) and commercial market representatives (CMRs) to delay for up to 30 days
(continued...)
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the contract price if the contractor fails to achieve certain goals in its subcontracting plan;94 and
(3) require 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.95 Each of
these proposals is arguably an expansion upon current law, which requires that contractors report
on their performance in subcontracting semiannually during contract performance,96 but provides
only that failure to make a “good faith effort” to comply with subcontracting-plan goals could
subject the contractor to liquidated damages.97 However, if enacted, certain proposals could raise
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.98 The imposition of liquidated damages to “punish” a party for failure to perform under
the contract, in contrast, is generally disfavored.99 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,100 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.”101 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
(...continued)
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).
94 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).
95 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 is proposed for third or subsequent offenses, perhaps suggesting that any
such debarment is intended to be permanent.
96 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
specific time periods that vary depending upon the identity of the contracting agency. See 48 C.F.R. §19.704(a)(10)(B).
97 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.
98 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).
99 See, e.g., Priebe & Sons, 332 U.S. at 412-13.
100 U.S. Const. amend. VIII.
101 United States v. Bajakajian, 524 U.S. 321, 334 (1988).
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the offense, and the availability of other penalties.102 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.103
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.104 Because of these limitations, 8(a) firms are required to perform at
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.105 Similar requirements
were imposed upon other contracts awarded under the authority of the Small Business Act in
1987,106 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.107 These statutory and regulatory provisions have not been changed since 1987,
although amendments have periodically been proposed because of concerns about “pass through”
contracts.108 In particular, Members of the 112th Congress have proposed legislation that would
restate how these limitations are expressed—in terms of the amount paid under the contract
instead of the costs of performing the contract109—in the hopes of “ensur[ing] that small
102 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).
103 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).
104 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)).
105 15 U.S.C. §637(a)(14)(A)(i)-(ii) (limitations on subcontracting for 8(a) firms).
106 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)).
107 Small Bus. Admin., Small Business Size Standards, 52 Federal Register 32870 (August 31, 1987).
108 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.
109 See, e.g., Subcontracting Transparency and Reliability Act of 2012, H.R. 3893, §101 (adding a new Section 45 to
the Small Business Act, which would provide that a small business may not expend on subcontractors more than (1)
50% of the amount paid to it under contracts for services (except construction); (2) 85% of the amount paid to it (minus
the cost of materials) under contracts for construction; (3) 75% of the amount paid to it (minus the cost of materials)
under contracts for construction by special trade contractors; and (4) 50% of the amount paid to it (minus the cost of
materials) under contracts for supplies (other than from a regular dealer in such supplies)); National Defense
Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1651 (generally prohibiting a small business
from expending on subcontractors more than 50% of the amount paid under contracts for services or supplies, but
authorizing SBA to change these percentages if such a change is necessary to “reflect conventional industry practices”).
(continued...)
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businesses that get contracts are doing the bulk of the work, while making it easier to crack down
on ‘deceptive large businesses hiding behind small businesses.’”110 This legislation would also
authorize SBA 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.111 This legislation would also provide that, in the event the limitations on subcontracting are
exceeded, the contractor would be fined the greater of $500,000, or the amount expended, in
excess of permitted levels, on subcontractors.112 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.113 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.114
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.115 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.”116 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
(...continued)
The latter measure would also allow SBA to establish limitations on subcontracting for construction contracts through a
notice-and-comment process.
110 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-deceitful-
subcontracting/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).
111 This latter provision would effectively overturn 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 Kate M.
Manuel.
112 Subcontracting Transparency and Reliability Act of 2012, H.R. 3893, §102; National Defense Authorization Act for
FY2013, H.R. 4310, as passed by the House, at §1652.
113 See infra note 214 and accompanying text.
114 See supra notes 100-102 and accompanying text.
115 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).
116 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).
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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.117 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.118
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,119 as well as authorizes
the contracting officer to consider the contractor’s failure to make full or timely payment to
subcontractors when evaluating the contractor’s performance.120 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.121 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.122 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.”123 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 has also been introduced in the 112th Congress that would similarly direct 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.”124 However, like the Obama Administration’s guidance, this measure
contains no explicit sanctions for failure to pay in accordance with the policy (e.g., required
interest payments).
117 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).
118 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).
119 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)).
120 Id.
121 76 Federal Register at 61628.
122 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.
123 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-12-
16.pdf.
124 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 after invoices
and all proper documentation, including acceptance, are received and before normal payment due dates established in
the contract”).
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Surety Bonds
SBA administers a surety bond guarantee program,125 designed to encourage sureties to issue
bonds when they would otherwise determine that a small business presents an unacceptable
degree of risk. Under the program, SBA may 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.126 The guarantee ranges from 70% to 90% of the surety’s
loss if a default occurs.127
Recent congressional interest in the surety bond guarantee program has focused primarily on
ensuring that small businesses have the means to the secure surety bonds needed to compete for
contracts during the economic downturn.128 The American Recovery and Reinvestment Act of
2009 (ARRA)129 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.” 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.130 This provision effectively increased the program’s size
standard for certain industries, and thus allowed more businesses to qualify for the program.
Using its rulemaking authority, the SBA subsequently made ARRA’s temporary size standard
permanent.131
Some Members of the 112th Congress have introduced legislation that would reinstate the ARRA
increases to the maximum bond amount, with some provisions doing so permanently and others,
temporarily.132 Such legislation would arguably be necessary to increase the maximum bond
125 15 U.S.C. §694b. For more information on the Surety Bond Guarantee Program, see CRS Report R42037, SBA
Surety Bond Guarantee Program, by Robert Jay Dilger. 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.
126 See 15 U.S.C. §694b(a)(1).
127 See 15 U.S.C. §694b(c).
128 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”).
129 P.L. 111-5, tit. II, §508, 123 Stat. 158-59 (February 17, 2009).
130 P.L. 111-5, tit. II, §508(c), 123 Stat. 153-54.
131 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)).
132 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); National Defense Authorization Act for FY2013, H.R. 4310, as
passed by the House, at §1695 (permanently increasing the maximum bond amount to $6.5 million, as adjusted for
inflation, and authorizing SBA to guarantee a bond of up to $10 million if a federal contracting officer certifies that a
larger guarantee is necessary); A Bill to Remove the Sunset Date for Amendments to the Small Business Investment
(continued...)
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amount. SBA was able to increase the size standards for certain industries within the surety bond
guarantee program by regulation133 only because of its broad statutory authority over such
standards. It lacks similar authority over the maximum bond amounts, which are prescribed by
statute.
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
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 that they engage in is
“necessary and justified.”134 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 million135 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.136 Finally, in 2010, Congress imposed similar restrictions
(...continued)
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).
133 See supra note 130.
134 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 Kate M. Manuel.
135 The statute imposes limitations upon consolidation of requirements valued in excess of $5 million. See 10 U.S.C.
§2382(a)(1). However, this amount has been 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).
136 National Defense Authorization Act for FY2004, P.L. 108-136, div. A, tit. VIII, §801(a)(1), 117 Stat. 1538
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upon the “consolidation” of requirements valued in excess of $2 million by non-defense
agencies.137 However, concerns that agencies’ bundling or consolidation of contract requirements
limit opportunities for small businesses to perform as federal contractors have persisted despite
these amendments to the Small Business Act, in large part because of how “bundling” and
“consolidation” are defined in federal law. These definitions currently encompass only
requirements that were previously provided or performed under separate smaller contracts, and
some federal agencies have sought to defend challenged procurements by arguing that
requirements for construction are, per se, new requirements.138 Some agencies have also asserted
that adding a new requirement to requirements previously performed means there is no
bundling.139
Members of the 112th Congress have introduced legislation that would apparently preclude such
arguments by amending the definition of “bundling” to include construction, and by specifying
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.140
(...continued)
(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).
137 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.
138 See, e.g., Tyler Construction Group v. United States, 83 Fed. Cl. 94, 100-01 (2008).
139 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).
140 Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §104. This measure would also define
“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 exempt 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 repeal the existing provisions regarding bundling in Section 15 of the act, and
amend the provisions currently in Section 44, which address consolidation, so that they address bundling. The
legislation also apparently provides that bundling-related restrictions apply to proposed procurements that would,
(continued...)
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This legislation would also authorize 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.141 However, the procuring agency, not SBA, presently determines whether any such delay
occurs.142 Other legislation would write into statute and arguably strengthen various
responsibilities of Procurement Center Representatives (PCRs) and other small business
advocates vis-à-vis bundled solicitations that are currently addressed primarily in regulations.143
For example, this legislation would require 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.144 This legislation
would also authorize 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.145
In addition, legislation has been introduced that would address bundling of requirements by the
Department of Homeland Security (DHS). Because of DHS’s previous reliance upon “lead
systems integrators,”146 there have been particular concerns about its bundling of requirements,147
and recently introduced legislation would require 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.148 Any such review could result in findings that could inform future legislation.
(...continued)
among other things, “adversely affect one or more small business concerns, including the potential loss of an existing
contract.”
141 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 write into statute OMB’s role in mediating bundling-related 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 the Office of Management and Budget (OMB) in
cases where there is disagreement as to the existence or extent of bundling).
142 Compare Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §104 with 48 C.F.R.
§19.505(d) (authorizing procuring activities to proceed with disputed acquisitions if the contracting officer determines
that proceeding to contract award and performance is “in the public interest”).
143 Contractor Opportunity Protection Act of 2012, H.R. 4081.
144 Id., at §2. If an agency fails to provide the required notice, and the Administrator of Small Business determines that
the proposed procurement is subject to the bundling restrictions, the Administrator must require the procuring activity
to produce the requisite notice and postpone the solicitation process for “at least 10 days but no more than 45 days” to
allow for review. Identical provisions are included in the House-passed National Defense Authorization Act for
FY2013. See H.R. 4310, as passed by the House, at §1671.
145 See, e.g., Contractor Opportunity Protection Act of 2012, H.R. 4081, §2. If the Administrator does not pursue an
appeal, any small business that would be directly or indirectly adversely affected by the proposed procurement, or any
trade association of which it is a member, may protest to the GAO. If a protest is brought by a trade association, it shall
not be required to identify a specific member in connection with the protest.
146 A lead system integrator is an agent with authority to acquire and integrate goods from a variety of suppliers on
behalf of the organization that is acquiring a complex system.
147 See, e.g., Coast Guard Acquisition Reform Act of 2009: Report of the House Committee on Transportation and
Infrastructure, H.Rept. 111-215 (July 20, 2009).
148 SAVE Act of 2011, H.R. 2000, §112.
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Insourcing
Recent attempts by the Department of Defense, in particular, to save money by insourcing certain
functions performed by contractors prompted strong reactions from some small business
contractors concerned about agency performance of functions they had previously performed, as
well as the government’s hiring of their employees.149 Several small business contractors filed
suit challenging agency determinations to insource particular functions on the grounds that these
determinations were contrary to agency guidelines and, thus, violated the Administrative
Procedure Act (APA). At first, there was some uncertainty as to whether the U.S. Court of Federal
Claims had jurisdiction over such suits under the Administrative Disputes Resolution Act of
1996, or whether the federal district courts had jurisdiction under the APA.150 While this question
appears to have been resolved, with most courts finding that the Court of Federal Claims has
exclusive jurisdiction over challenges to insourcing determinations, questions have recently
arisen as to whether vendors whose contracts have expired have standing to challenge insourcing
determinations, as well as whether contractors who are “interested parties” for purposes of ADRA
must also meet prudential standing requirements.151 In addition, prior challenges to sourcing
determinations have raised questions about whether particular guidelines for determining whether
government personnel or contractor employees should perform certain functions are legally
binding. Such questions could recur if and when courts resolve current questions about whether
particular contractors have standing to challenge insourcing determinations.152
149 See generally CRS Report R41810, Insourcing Functions Performed by Federal Contractors: An Overview of the
Legal Issues, by Kate M. Manuel and Jack Maskell.
150 Compare K-Mar Indus., Inc. v. U.S. Dep’t of Defense, 752 F. Supp. 2d 1207 (W.D. Okla. 2010) (finding that the
district court has jurisdiction over a challenge to an insourcing determination because no contract or prospective
contract is at issue, and an insourcing determination is not made in connection with a procurement or proposed
procurement) with Vero Tech. Support, Inc. v. U.S. Dep’t of Defense, 437 Fed. App'x 966 (11th Cir. 2011), aff'g 733 F.
Supp. 2d 1336 (S.D. Fla. 2010)) (finding that the Court of Federal Claims has exclusive jurisdiction over challenges to
insourcing determinations because contractors have a direct economic interest in the government’s decision not to
award a contract, and an insourcing determination is made in connection with a procurement).
151 Compare Santa Barbara Applied Research, Inc. v. United States, 98 Fed. Cl. 536 (2011) (expressly rejecting the
government’s argument that the case should be dismissed because the plaintiff contractor could not meet the prudential
standing requirements) with Hallmark-Phoenix 3, LLC v. United States, 99 Fed. Cl. 65 (2011) (dismissing on
prudential standing grounds a contractor’s challenge to the Air Force’s determination to insource certain supply
services that the contractor had provided) and Triad Logistics Servs. Corp. v. United States, 2012 U.S. Claims LEXIS
393 (April 16, 2012) (expressing both disagreement with the Hallmark-Phoenix decision, and reservations about
whether the plaintiff contractor could be found to be within the “zone of interests” of one of the statutes that the court
relied upon in Santa Barbara).The concept of prudential standing is a “judicially self-imposed limit[] on the exercise of
federal jurisdiction.” Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 11 (2004) (internal quotations omitted). It is
“founded in concern about the proper—and properly limited—role of the courts in a democratic society.” Warth v.
Seldin, 422 U.S. 490, 498 (1975). In determining whether prudential standing exists, the analysis focuses upon
“whether the interest sought to be protected by the [plaintiff] is arguably within the zone of interests to be protected by
the statute … in question.” Ass’n of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 152-53 (1970). The
prudential standing requirement is satisfied when the plaintiffs’ interests are within this zone, but not when the
plaintiffs are “merely incidental beneficiaries” of the statutory provisions at issue. Nat’l Credit Union Admin. v. First
Nat’l Bank & Trust Co., 522 U.S. 479, 494 n.7 (1998). However, the Supreme Court has recently indicated that
prudential standing requirements are “not meant to be especially demanding,” and “foreclose[] suit only when a
plaintiff’s ‘interests are so marginally related to or inconsistent with the purposes implicit in the statute that it cannot
reasonably be assumed that Congress intended to permit the suit.’” Match-E-Be-Nash-She-Wish Band of Pottawatomi
Indians v. Salazar,—U.S.—-, 132 S. Ct. 2199, 2210 (2012).
152 See, e.g., Labat-Anderson, Inc. v. United States, 65 Fed. Cl. 570, 578 (2005) (finding that certain of the guidelines
that the agency allegedly violated when insourcing particular functions were not legally binding).
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The Obama Administration responded to small businesses’ concerns regarding insourcing, in part,
by including certain protections for small businesses in its final policy letter on “inherently
governmental functions.”153 Specifically, the policy letter directs agencies to place a lower
priority on reviewing certain work performed by small businesses, as well as give small
businesses preference when determining who performs work that will remain in the private sector
after related functions are insourced.154 However, some Members of the 112th Congress have
proposed a different approach, introducing legislation that would help resolve uncertainties in the
case law. This legislation would amend 31 U.S.C. Section 3551(1) to expressly provide that the
term “protest” includes a written objection to the “conversion of a function that is being
performed by a private sector entity to performance by a Federal employee,” and that “any small
business whose economic interest would be affected by the conversation” is an “interested
party.”155 The legislation would also amend the Small Business Act by adding a new Section 46,
which would prohibit an agency from converting functions performed by small businesses to
performance by federal employees unless it has “made publicly available, after providing notice
and an opportunity for public comment,” its procedures for making insourcing determinations.156
The requirement that agency procedures be made publicly available after a notice-and-comment
period, in particular, could help remove questions as to whether agencies are bound by their
insourcing guidelines that have arisen when these guidelines were promulgated as policy or
guidance documents.157 However, questions about prudential standing could potentially remain,
notwithstanding the enactment of this legislation, because prudential standing is a “judicially self-
imposed limit[] on the exercise of federal jurisdiction.”158
153 “Inherently governmental functions” are functions that, as a matter of federal law and policy, must be performed by
federal government employees and cannot be contracted out because they are so intimately related to the public interest
as to require performance by federal employees. For more on inherently governmental functions, see CRS Report
R42325, Definitions of “Inherently Governmental Functions” in Federal Procurement Law and Guidance, by John R.
Luckey and Kate M. Manuel.
154 Office of Mgmt. & Budget, Office of Fed. Procurement Pol’y, Publication of the Office of Federal Procurement
Policy (OFPP) Policy Letter 11-01, Performance of Inherently Governmental and Critical Functions, 76 Federal
Register 56227, 56239-40 (September 12, 2011). In particular, agencies are directed to use the “rule of two”—which
generally requires that a contract be set aside for small businesses if at least two small businesses are capable of
performing it at a fair market price—when deciding whether small or “large” businesses should perform the remaining
private-sector work.
155 Subcontracting Transparency and Reliability Act of 2012, H.R. 3893, §301.
156 Id., §302. The bill would also require that agency procedures specify that all insourcing determinations must be
“reviewed” by any appropriate Office of Small and Disadvantaged Business Utilization (OSDBU) or procurement
center representative (PCR). However, while OSDBUs and PCRs would have the opportunity to “review” such
determinations, they would apparently not have authority to overrule an insourcing determination. Another measure
introduced in the 112th Congress would prohibit civilian agencies from insourcing a function performed by a small
business unless the agency “makes publicly available the procedures and methodologies” it used in making the
determination to insource, including those for (1) determining which contracts were considered for potential
conversion, (2) evaluating whether a function is inherently governmental or critical, and (3) estimating and comparing
costs. National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1658. However,
agencies subject to these requirements would not necessarily have to promulgate their procedures and methodologies
through a notice-and-comment process.
157 For example, some, but not all, federal circuits have found that the 1983 and 2003 versions of OMB Circular A-76,
which provides guidelines for agencies’ identification of commercial functions potentially suitable for performance by
the private sector, were issued pursuant to statutory authority, which is one of the conditions for guidelines being
reviewable by the federal courts. See Labat-Anderson, 65 Fed. Cl. at 578 (2003 version); Diebold v. United States, 947
F.2d 787, 800 (6th Cir. 1991) (1983 version).
158 But see Bennett v. Spear, 520 U.S. 154, 163 (1997) (noting that Congress can “expressly negate” prudential standing
requirements); Elmendorf Support Services Joint Venture v. United States, 2012 U.S. Claims LEXIS 651 (June 22,
(continued...)
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Other Members of the 112th Congress have introduced measures that call for SBA and/or agency
advocates for small businesses to have more involvement in insourcing determinations. One such
measure calls for agency procurement center representatives (PCRs), discussed below, to
“participate in any session or planning process and review any documents with respect to a
decision to convert an activity performed by a small business concern to an activity performed by
a Federal employee.”159 Another calls for the directors of various agency Offices of Small and
Disadvantaged Business Utilization (OSDBUs), also discussed below, to review and advise
agencies on decisions to convert an activity performed by a small business to an activity
performed by federal employees.160 However, it is not clear whether PCRs and OSDBUs would
necessarily have the authority to delay or block an agency insourcing determination under these
measures.
Procurement Center Representatives; Offices of
Small and Disadvantaged Business Utilization
A number of SBA and agency personnel currently are tasked, under various statutes and
regulations, with protecting the interests of small businesses in the federal procurement process.
Among these personnel are procurement center representatives (PCRs), who are assigned by the
SBA to work with the procuring activities in structuring acquisitions so as to maximize the
participation of small businesses,161 and Offices of Small and Disadvantaged Business Utilization
(OSDBUs), which are established in the procuring activities to help devise alternatives to
procurements involving “significant bundling,” among other things.162 In part because of
concerns about federal performance in contracting and subcontracting with small businesses,
some Members of Congress and commentators have recently questioned the effectiveness of
PCRs and/or OSDBUs, including whether these officials have the requisite authority and lines of
reporting to adequately protect the interests of small businesses.163 In part because of these
concerns, the 111th Congress enacted legislation requiring the Administrator of Small Business to
report periodically to Congress on the activities of PCRs and commercial market representatives
(CMRs), who are tasked with facilitating contracting between agencies’ prime contractors and
small businesses.164
(...continued)
2012) (finding that a contractor challenging an insourcing determination satisfied any prudential standing requirements
in light of the Supreme Court’s recent decision in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v.
Salazar).
159 Small Business Opportunity Act of 2012, H.R. 3980, §101.
160 Small Business Advocate Act of 2012, H.R. 3851, §2; National Defense Authorization Act for FY2013, H.R. 4310,
as passed by the House, at §1691.
161 See, e.g., 13 C.F.R. §125.2. See also supra note 5 and accompanying text.
162 See, e.g., 15 U.S.C. §644(k)(1)-(10).
163 See, e.g., Charles S. Clark, Four Departments Resist Call to Comply with Small Business Act, Gov’t Exec.,
September 16, 2011, available at http://www.govexec.com/federal-news/2011/09/four-departments-resist-call-to-
comply-with-small-business-act/34926/ (reporting on a hearing of the House Small Business Subcommittee on
Contracting and the Workforce that raised issues about whether OSDBU Directors report to the proper persons, among
other things).
164 Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1312, 124 Stat. 2537. CMRs are “SBA’s subcontracting
specialists,” and their responsibilities include facilitating the matching of large prime contractors with small business
subcontractors or suppliers. See 13 C.F.R. §125.3(e).
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Members of the 112th Congress have introduced additional measures that would involve PCRs
earlier, and arguably more extensively, in the procurement process, expressly authorizing them to
attend any provisioning conference or similar evaluation session during which a
determination may be made with respect to the procurement method to be used to satisfy a
requirement, review any acquisition plan with respect to a requirement, and make
recommendations regarding procurement method determinations and acquisition plans.165
If enacted, such legislation would mark an arguably significant departure from current law, which
does not explicitly provide for the involvement of PCRs until after the proposed acquisition
package has been developed.166
Members of the 112th Congress have also introduced legislation that would
• clarify to whom OSDBU Directors must report,167 in response to recent findings
by GAO that the OSDBU Directors of several federal agencies do not report to
the agency head;168
• require the Defense Acquisition University and the Federal Acquisition Institute
to provide courses on contracting requirements under the Small Business Act, the
completion of which would generally be required for the certification of
contracting officers;169 and
• require the Small Business Procurement Advisory Council, established pursuant
to Section 7104(b) of the Federal Acquisition Streamlining Act, to conduct
reviews of each OSDBU to determine compliance with reporting and other
requirements, and to identify best practices for “maximizing small business
utilization.”170
165 Small Business Opportunity Act of 2012, H.R. 3980, §101; National Defense Authorization Act for FY2013, H.R.
4310, as passed by the House, at §1621. These measures would also expressly authorize PCRs to review barriers to
small business participation in Federal contracting, and receive copies of unsolicited proposals from small business
concerns, as well as any information on outcomes relating to such proposals. Id.
166 48 C.F.R. §19.202-1(e)(1).
167 Small Business Advocate Act of 2012, H.R. 3851, §2; National Defense Authorization Act for FY2013, H.R. 4310,
as passed by the House, at §1691; SUCCESS Act of 2012, S. 3442, §542. This legislation would also task OSDBUs
with some additional functions, such a providing agency acquisition officials with advice and comments on acquisition
strategies and market research. It would also prohibit OSDBU Directors from holding “any other title, position, or
responsibility except as necessary to carry out responsibilities under this subsection.” Id.
168 See Gov’t Accountability Office, Small Business Contracting: Actions Needed by Those Agencies Whose
Advocates Do Not Report to Agency Heads as Required, GAO-11-418 (June 16, 2011).
169 National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1622. New PCRs and
business opportunity specialists would be required to have Level III and Level I certifications, respectively. Persons
currently holding those positions could continue to serve without certification for five years. Id., at §§1621-1622.
170 Small Business Advocate Act of 2012, H.R. 3851, §3; National Defense Authorization Act for FY2013, H.R. 4310,
as passed by the House, at §1692.
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Restricted Competitions and Non-Competitive
Awards
Competition is generally valued in federal contracting because it can result in the government
paying lower prices, ensure some level of transparency and accountability, and help prevent
fraud.171 However, Congress has authorized agencies to use other than full-and-open competition
in certain circumstances in order to promote other policy objectives, including contracting with
small businesses.172 The Competition in Contracting Act (CICA) of 1984 currently provides that
agencies may use “other than full and open competition” when making awards to small
businesses.173 Such awards may be made on a set-aside or sole-source basis, pursuant to the Small
Business Act.174 Congress amended the Small Business Act in 2010 to expressly authorize
agencies to set-aside all or part of multiple-award contracts for small businesses,175 something
which GAO had previously found was required in certain circumstances.176
Members of the 112th Congress have similarly introduced legislation that would expand agencies’
authority to conduct competitions restricted to small businesses, or make sole-source awards to
them, in the hopes of increasing the extent of contracting with small businesses. One such
measure would amend Section 8(m) of the Small Business Act to authorize agencies to set aside
contracts of any value for women-owned small businesses.177 Currently, only contracts whose
171 See generally CRS Report R40516, Competition in Federal Contracting: An Overview of the Legal Requirements,
by Kate M. Manuel.
172 Cf. 48 C.F.R. §1.102(b) (“The Federal Acquisition System will—(1) [s]atisfy the customer in terms of cost, quality,
and timeliness of the delivered product or service by, for example—(i) [m]aximizing the use of commercial products
and services; (ii) [u]sing contractors who have a track record of successful past performance or who demonstrate a
current superior ability to perform; and (iii) [p]romoting competition; (2) [m]inimize administrative operating costs; (3)
[c]onduct business with integrity, fairness, and openness; and (4) [f]ulfill public policy objectives.”).
173 10 U.S.C. §2304(b)(2) (procurements of defense agencies) & 41 U.S.C. §3303(b) (procurements of civilian
agencies).
174 See 15 U.S.C. §637(a) (small disadvantaged businesses participating in the 8(a) Business Development Program);
15 U.S.C. §637(m) (women-owned small businesses); 15 U.S.C. §644 (small businesses generally); 15 U.S.C. §657a
(HUBZone small businesses); 15 U.S.C. §657f (service-disabled veteran-owned small businesses).
175 Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1331, 124 Stat. 2541 (codified at 15 U.S.C. §644(r))
(requiring the promulgation of regulations authorizing agencies to (1) “set aside part or parts of a multiple award
contract” for small businesses; (2) place orders against multiple-award contracts without giving all contractors a fair
opportunity to be considered for such awards; and (3) “reserve 1 or more contract awards for small business concerns
under full and open multiple award procurements”). See also Consolidated Appropriations Act, P.L. 112-74, §7057(h),
125 Stat. 1245 (December 23, 2011) (authorizing the U.S. Agency for International Development to provide an
exception to the fair opportunity process for placing task orders under multiple-award indefinite-delivery/indefinite
quantity (ID/IQ) contracts when the order is placed with “any category of small or small disadvantaged business”);
Department of State, Foreign Operations, and Related Programs Appropriations Act, 2013, H.R. 5857, §5057(h)
(same).
176 See Delex Systems, Inc., B-400403, 2008 U.S. Comp. Gen. LEXIS 170 (October 8, 2008) (determining that task and
delivery orders issued under multiple-award ID/IQ contracts are subject to set-asides for small businesses). However,
the General Services Administration responded to the Delex decision, in part, by asserting that contracts under the
Federal Supply Schedules are not subject to set-asides for small businesses because they are governed by a different
section of the FAR than other multiple-award ID/IQ contracts. See GSA Memorandum from David A. Drabkin, Senior
Procurement Executive, to All GSA Contracting Activities, October 28, 2008), quoted in Arnold & Porter LLP, GAO’s
Delex Decision and GSA’s Response: The Clash of Titans, available at http://www.arnoldporter.com/resources/
documents/CA_GAOsDelexDecision&GSAsResponse_012609.pdf.
177 Fairness in Women-Owned Small Business Contracting Act of 2012, S. 2172, §2. See also Women’s Procurement
Program Improvement Act of 2012, H.R. 4203, §2 (amending Section 8(m) to authorize agencies to set aside contracts
(continued...)
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value is below $4 million ($6.5 million for manufacturing contracts) may be set aside for such
firms.178 Similarly, the proposed legislation would authorize agencies to “award a sole source
contract under this section to a small business concern owned and controlled by women under the
same conditions as a sole source contract may be awarded to a qualified HUBZone small business
concern under section 31(b)(2)(A).”179 The Small Business Act presently does not authorize sole-
source awards to women-owned small businesses, although it does authorize such awards to
HUBZone small businesses, among others, whenever
1. the business is determined to be responsible with respect to the performance of
the contract, and the contracting officer does not reasonably expect that two or
more such businesses will submit offers;
2. the anticipated award will not exceed $4 million ($6.5 million for manufacturing
contracts); and
3. the award can be made at a fair and reasonable price.180
Another measure introduced in the 112th Congress would amend the Veterans Benefits Act to
require that VA make sole-source awards to veteran-owned small businesses whenever (1) the
business is determined to be a responsible source with respect to the performance of the contract
opportunity; (2) the anticipated award price of the contract (including options) exceeds the
simplified acquisition threshold (generally $150,000181), but is less than $5 million; and (3) in the
estimation of the contracting officer, the contract award can be made at a fair and reasonable price
that offers best value to the United States).182 VA currently has authority to make sole-source
awards when these circumstances exist, but is not required to do so.183
Yet other measures would exempt contracts “authorized” under the Small Business Act from
certain limitations imposed upon agency’s use of noncompetitive procedures when entering
contracts to procure property or services “in connection with natural disaster reconstruction
efforts,”184 as well as amend the Small Business Act to require, rather than just authorize, set-
asides of or under multiple-award contracts.185 The latter measure would also generally require
(...continued)
of any value for women-owned small businesses).
178 See 15 U.S.C. §637(m)(2)(D).
179 Fairness in Women-Owned Small Business Contracting Act of 2012, S. 2172, §2. H.R. 4203 would similarly amend
Section 8(m) to authorize sole-source awards to women-owned small businesses, although it would do so without
explicit reference to sole-source awards to HUBZone firms.
180 15 U.S.C. §657a(b)(2)(A)(i)-(iii) (statutory requirements); 48 C.F.R. §19.1306(a)(1)-(6) (increasing the price
thresholds, among other things).
181 In the case of supplies or services to be used in support of a contingency operation or to facilitate defense against or
recovery from nuclear, biological, chemical, or radiological attack, the simplified acquisition threshold increases to
$300,000 for contracts to be awarded and performed inside the United States, and $1 million for contracts to be
awarded and performed outside the United States. 48 C.F.R. §2.101.
182 An Act to Amend Title 38, United States Code, to Promote Jobs for Veterans through the Use of Sole Source
Contracts by Department of Veterans Affairs for Purposes of Meeting the Contracting Goals and Preferences of the
Department of Veterans Affairs for Small Business Concerns Owned and Controlled by Veterans, H.R. 240, §1.
183 38 U.S.C. §8127(c).
184 Natural Disaster Fairness in Contracting Act of 2011, S. 129, §4(c)(3).
185 Small Business Procurement Improvement Act of 2012, H.R. 4118, §2 (amending Section 15(r) of the act by
replacing language indicating that “agencies may, at their discretion, set aside part or parts of a multiple award contract
for small business[es],” among other things, with language indicating that agencies “shall, to the maximum extent
(continued...)
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agencies to conduct an outreach program designed to increase the participation of small
businesses in multiple-award contracts, as well as require the President to establish annual goals
for the “total dollar value of all task and delivery orders placed against multiple award contracts,
blanket purchase agreements, and basic ordering agreements awarded to small business[es].”186
Use of Small Businesses When Making
“Small Purchases”
Federal law currently distinguishes between (1) purchases whose value is below the micro-
purchase threshold (generally $3,000187); (2) those whose value is above the micro-purchase
threshold, but below the simplified acquisition threshold (generally $150,000188); and (3) other
purchases. Those acquisitions whose value falls between the micro-purchase threshold and the
simplified acquisition threshold have long been reserved for small businesses,189 although
agencies are also encouraged to use small businesses for purchases outside this range.190 The 111th
Congress enacted legislation intended to foster increased use of small businesses for micro-
purchases by requiring the Office of Management and Budget (OMB), in consultation with the
General Services Administration, to issue
guidelines regarding the analysis of purchase card expenditures to identify opportunities for
achieving and accurately measuring fair participation of small business concerns in
purchases in an amount not in excess of the micro-purchase threshold … and dissemination
of best practices for participation of small business concerns in micro-purchases.191
OMB issued this guidance on December 19, 2011, reminding agencies that those holding
government-wide commercial purchase cards should consider small businesses “to the maximum
extent practicable” when making micro-purchases.192 However, prior to the issuance of this
(...continued)
practicable, include small business concerns in multiple award contracts”).
186 Id. §§2(b) & 4.
187 The micropurchase threshold can be lower or higher than $3,000, depending on the goods or services acquired and
the circumstances of the acquisition. Micropurchases for construction services subject to the Davis-Bacon Act or other
services subject to the Service Contract Act have lower limits: $2,000 and $2,500, respectively. Those for goods or
services that the agency head has determined will be used to support a contingency operation or facilitate defense
against or recovery from nuclear, biological, chemical, or radiological attack have higher limits: $15,000 in the case of
contracts to be awarded or performed, or purchases to be made, inside the United States and $30,000 in the case of
contracts to be awarded or performed, or purchases to be made, outside the United States. 48 C.F.R. §13.201(g)(1)(i)-
(ii).
188 See supra note 181 for a discussion of when the simplified acquisition threshold may exceed $150,000.
189 15 U.S.C. §644(j)(1). Such purchases are made using “simplified acquisition procedures,” such as government-wide
commercial purchase cards, purchase orders, blanket purchase agreements, imprest funds, third-party drafts, and certain
standard forms (e.g., SF44). See 48 C.F.R. Subpart 13.3.
190 See, e.g., 48 C.F.R. §19.201 (“It is the policy of the Government to provide maximum practicable opportunities in
its acquisitions to small business[es].”).
191 Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1332, 124 Stat. 2541.
192 Exec. Office of the President, Office of Mgmt. & Budget, Increasing Opportunities for Small Businesses in
Purchase Card Micro-Purchases, December 19, 2011, available at http://www.whitehouse.gov/sites/default/files/omb/
procurement/memo/increasing-opportunities-for-small-businesses-in-purchase-card-micro-purchases.pdf. For more on
government-wide commercial purchase cards, see generally CRS Report RL34602, Misuse of Government Purchase
(continued...)
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guidance, one Member of the 112th Congress introduced legislation that would expand the value
of the “small purchases” in which small businesses could be preferred. Among other things, this
legislation would generally require agencies “to the extent practicable” to award contracts whose
value exceeds $3,000, but is below $500,000, to small businesses.193 The legislation would also
give contracting officers additional authority to award contracts valued within this range to small
businesses on a sole-source basis.194 Specifically, this legislation would authorize agencies to
make sole-source awards of contracts valued at between $150,000 and $500,000 to women-
owned small businesses, or other small businesses that are not 8(a), HUBZone, or service-
disabled veteran-owned small businesses. The Small Business Act currently does not authorize
sole-source awards to such businesses.195 Rather, it only authorizes agencies to set aside contracts
for them.
Mentor-Protégé Programs
Mentor-protégé programs are intended to promote contracting and/or subcontracting with small
businesses by pairing new businesses with more experienced businesses in mutually beneficial
relationships.196 Congress established the first mentor-protégé program for small businesses in
1990, when it authorized the Department of Defense (DOD) Mentor-Protégé Pilot program.197
Eight years later, in 1998, SBA promulgated regulations establishing a mentor-protégé program
for small disadvantaged businesses participating in the 8(a) Program.198 DOD’s Mentor-Protégé
Pilot Program differs from SBA’s 8(a) Mentor-Protégé program in that it focuses upon promoting
the use of small businesses as subcontractors and suppliers on federal contracts, and not upon use
of small businesses as prime contractors.199 Specifically, under DOD’s program, prime contractors
may be reimbursed for advance payments made to small business subcontractors or suppliers,200
while under SBA’s program, mentors and protégés may form joint ventures that qualify as small
for purposes of certain federal prime contracts.201 More recently, a number of other agencies have
(...continued)
Cards, by Garrett Hatch.
193 Expanding Opportunities for Main Street Act of 2011, H.R. 2424; S. 1334, §101.
194 Id. This legislation would also give SBA additional control over the procuring activities by requiring agencies to
notify SBA of any determinations that award to a small business is not practicable, and authorizing SBA to open the
opportunity for the submission of additional offers, if it determines that doing so is appropriate.
195 See CRS Report R42391, Legal Authorities Governing Federal Contracting and Subcontracting with Small
Businesses, by Kate M. Manuel and Erika K. Lunder, at Table 1.
196 For more on small business mentor-protégé programs, see generally CRS Report R41722, Small Business Mentor-
Protégé Programs, by Robert Jay Dilger and Kate M. Manuel.
197 An Act to Authorize Appropriations for Fiscal Year 1991 for Military Activities of the Department of Defense, for
Military Construction, and for Defense Activities of the Department of Energy, to Prescribe Personnel Strengths for the
Armed Forces and for Other Purposes, P.L. 101-510, §831, 104 Stat. 1607-08 (November 5, 1990) (codified, as
amended, at 10 U.S.C. §2302 note).
198 Small Bus. Admin., Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business
Status Determinations; Rules of Procedure Governing Cases Before the Office of Hearings and Appeals: Final Rule, 63
Federal Register 35739 (June 30, 1998).
199 Compare 10 U.S.C. §2302 note (DOD mentor-protégé program) with 13 C.F.R. §124.520(a) (SBA’s mentor-protégé
program for 8(a) firms).
200 48 C.F.R. §219.7102(d)(1)-(2); 48 C.F.R. §19.702(d). In addition, mentors may receive credit toward their
subcontracting goals because of developmental assistance provided to protégés.
201 13 C.F.R. §124.520(a). Mentors in the 8(a) mentor-protégé program may also receive credit toward their
(continued...)
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implemented their own mentor-protégé programs, by regulation or otherwise.202 These programs
differ, among themselves and as compared to the DOD and SBA programs, in their eligibility
requirements and the types of assistance that mentors provide to protégés.203 Such differences
have raised concerns among some Members of Congress and commentators that the programs
lack “parity,” are duplicative, and/or are confusing for small businesses.204
The 111th Congress responded to the concerns about parity by enacting legislation that authorizes
SBA to establish mentor-protégé programs for HUBZone, women-owned, and service-disabled
veteran-owned small businesses modeled on its 8(a) mentor-protégé program.205 However, partly
in response to the concerns about duplication, this legislation also directs GAO to study existing
mentor-protégé programs and “other relationships and strategic alliances” pairing larger and small
businesses to determine whether they are “effectively supporting the goal of increasing the
participation of small business concerns in Government contracting.”206 Some Members of the
112th Congress have also proposed legislation addressing similar concerns. This legislation would
authorize SBA to establish a mentor-protégé program open to all small businesses.207 By
comparison, the legislation enacted by the 111th Congress addressed only HUBZone, women-
owned, and service-disabled veteran-owned small businesses. The legislation introduced in the
112th Congress would also prohibit federal agencies, with certain exceptions, from carrying out a
mentor-protégé program for small businesses unless the plan for this program has been submitted
to and approved by SBA.208 Depending upon its implementation, such a provision could help
(...continued)
subcontracting goals. 13 C.F.R. §125.3(b)(3)(ix).
202 48 C.F.R. Subpart 919.70 (Department of Energy); 48 C.F.R. §352.219-70 (Department of Health and Human
Services); 48 C.F.R. §3052.219-71 (Department of Homeland Security); 48 C.F.R. §619.202-70 (Department of State);
48 C.F.R. Subpart 1019.202-70 (Department of the Treasury); 48 C.F.R. Subpart 819.71 (Department of Veterans
Affairs); 48 C.F.R. §§1552.219-70 to 1552.219-71 (Environmental Protection Agency); FAA Mentor-Protégé Program,
available at http://www.sbo.faa.gov/MentorProtege.cfm (Federal Aviation Administration); 48 C.F.R. Subpart 519.70
(General Services Administration); 48 C.F.R. Subpart 1819.72 (NASA); 48 C.F.R. Subpart 719.273 (U.S. Agency for
International Development).
203 See CRS Report R41722, Small Business Mentor-Protégé Programs, by Robert Jay Dilger and Kate M. Manuel, at
Table A-1, for a comparison of the eligibility criteria for, and types of assistance provided under, various agencies’
mentor-protégé programs.
204 See, e.g., Gov’t Accountability Office, Opportunities to Improve the Effectiveness of Agency and SBA Advocates
and Mentor-Protege Programs, GAO-11-844T (September 15, 2011).
205 Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1347(b), 124 Stat. 2547.
206 Id., §1345, 124 Stat. 2546. GAO issued this report on June 15, 2011, finding that most agencies do not collect
information on protégés after the conclusion of their mentor- protégé agreements, which makes it difficult to assess the
efficacy of these programs. See Gov’t Accountability Office, Mentor-Protégé Programs Have Policies That Aim to
Benefit Participants But Do Not Require Postagreement Tracking, GAO-11-548R (June 15, 2011).
207 Building Better Business Partnerships Act of 2012, H.R. 3985, §2; National Defense Authorization Act for FY2013,
H.R. 4310, as passed by the House, at §1641. SBA would appear to have discretion as to whether to establish such a
mentor-protégé program under the proposed legislation. However, if such a program were established, it would have to
be “identical to the mentor-protégé program of the Administration for small business concerns that participate in the
program under section 8(a) of this act.” Because of legislation enacted by the 111th Congress, any SBA mentor-protégé
program for HUBZone, woman-owned, and service-disabled veteran-owned small businesses must be “modeled” on
that for 8(a) firms. See supra note 205 and accompanying text.
208 Building Better Business Partnerships Act of 2012, H.R. 3985, §2; National Defense Authorization Act for FY2013,
H.R. 4310, as passed by the House, at §1641. Certain mentor-protégé programs would be exempted from this
requirement, including “[a]ny mentor-protégé program of the Department of Defense,” and “mentoring assistance”
provided under the Small Business Innovation Research and Small Business Technology Transfer programs. Existing
mentor-protégé programs would also be exempted from these requirements for one year after the measure’s enactment.
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ensure that there are not significant disparities among the various agency programs, and that these
programs do not unnecessarily duplicate one another.209
Deterrence of and Penalties for Fraud
Fraud in small business contracting programs has been a perennial concern for Congress and
commentators because the advantages that firms can obtain by misrepresenting their size and
status are apparently so great that reports of fraud emerge with some regularity.210 Firms that
fraudulently misrepresent their size or status have long been subject to civil and/or criminal
penalties under Section 16 of the Small Business Act; SBA regulations implementing Section 16;
and other provisions of law, such as the False Claims Act, Fraud and False Statements Act,
Program Fraud Civil Remedies Act, and Contract Disputes Act.211 In addition, various entities,
including contracting officers, SBA officials, and certain other firms, have been authorized to
“protest” firms’ size or status with the SBA’s Office of Hearings and Appeals.212 However, recent,
high-profile reports of fraud in the small business programs have heightened concerns about
whether the existing penalties and/or protest provisions are adequate to deter fraud and ensure
that ineligible firms do not take improper advantage of small business contracting and
subcontracting programs.213
Partly in response to concerns about fraud in the small business contracting programs, the 111th
Congress enacted legislation which provides that ineligible small businesses may not receive an
“offset” or “credit” for the value of the goods or services they supplied to the government when
the amount of “loss to the United States” is calculated for purposes of the civil False Claims Act
or the U.S. Sentencing Guidelines, among other purposes.214 This legislation also provides that
209 The National Defense Authorization Act for FY2013 would require GAO to conduct a study within two years of its
enactment to examine whether potential affiliation issues between mentors and protégés under prior programs have
been “resolved,” and whether SBA’s regulations have increased opportunities for mentor-protégé pairs. See H.R. 4310,
as passed by the House, at §1641.
210 See, e.g., Gov’t Accountability Office, Small Business Administration: Undercover Tests Show HUBZone Program
Remains Vulnerable to Fraud and Abuse, GAO-10-920T (July 28, 2010); Gov’t Accountability Office, 8(a) Program:
Fourteen Ineligible Firms Received $325 Million in Sole-Source and Set-Aside Contracts, GAO-10-425 (March 30,
2010); Gov’t Accountability Office, Service-Disabled Veteran-Owned Small Business Program: Case Studies Show
Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts, GAO-10-108 (October 23,
2009).
211 See 15 U.S.C. §645; 13 C.F.R. §125.29.
212 See 13 C.F.R. §121.1001(a)(i)-(iv) (permitting 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).
213 See, e.g., Del Quentin Wilber & Robert O’Harrow, “Brazen” Contracting Scam: Records Provide a Window into
Audacious Swindle, Wash. Post, December 24, 2011, available at http://www.washingtonpost.com/local/brazen-
contracting-scam-detailed-in-federal-allegations/2011/12/20/gIQA8hw5FP_story.html (reporting that government
personnel and employees of ANC-owned firm participating in the 8(a) Program inflated invoices by $20 million for
personal gain).
214 Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1341, 124 Stat. 2543-44 (codified at 15 U.S.C.
§632(w)(1)). Specifically, this legislation amended the Small Business Act to provide that
In every contract, subcontract, cooperative agreement, cooperative research and development
agreement, or grant which is set aside, reserved, or otherwise classified as intended for award to
small business concerns, there shall be a presumption of loss to the United States based on the total
amount expended on the contract, subcontract, cooperative agreement, cooperative research and
development agreement, or grant whenever it is established that a business concern other than a
(continued...)
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when a company (1) submits a bid or offer for a contract or subcontract set aside for, or otherwise
classified as intended for, award to small businesses; (2) encourages the government to award it a
contract based on its size or status; or (3) registers in any federal database for purposes of being
considered for a federal contract or subcontract, it shall be deemed to have “affirmatively,
willfully, and intentionally” certified its size and status.215 In addition, the legislation requires the
development of a government-wide policy on the prosecution of size and status fraud, and that
each business certified as small annually re-certify its size in the Online Representations and
Certifications (ORCA) database, or any successor database.216
Members of the 112th Congress have also proposed measures that would address fraud in small
business contracting programs in various ways, including by
• amending Title 18 of the United States Code to provide that persons who
knowingly make certain misrepresentations regarding their small business status
in order to obtain, retain or complete a federal contract are subject to
imprisonment for up to five years and/or a fine of $1 million, or an amount equal
to twice the value of the goods or services involved, whichever is greater;217
• amending Section 16 of the Small Business Act to expressly include service-
disabled veteran-owned small businesses among the types of small businesses
subject to penalties for fraud under Section 16;218
• requiring that service-disabled veteran-owned small businesses register in the
Department of Veterans Affairs’ (VA’s) VetBiz database, or any successor
database, and have their status verified by VA in order to be eligible for
(...continued)
small business willfully sought and received the award by misrepresentation.
This change potentially overturns a series of court decisions finding that the value of any goods or services that the
government obtains as a result of the contractor’s misrepresentations must be deducted from the amount of loss or
damage incurred by the United States when calculating the contractor’s ultimate liability for its misrepresentations. See,
e.g., United States v. Bornstein, 423 U.S. 303, 317 (1976). In contrast, courts have found that, when persons receive
grants due to misrepresentations of their size or status, their liability should equal the total amount that the government
paid them because the government received no tangible benefit, and any intangible benefit that it received is impossible
to calculate. See, e.g., Longhi v. Lithium Power Techs., Inc., 575 F.3d 458, 473 (5th Cir. 2009).
215 Small Business Jobs Act, P.L. 111-240, tit. I, subtitle C, §1341, 124 Stat. 2543-44.
216 Id., §§1342-1343, 124 Stat. 2544-45. In addition, such certifications would have to be made by an “authorized
official” of the company. Id., §1341, 124 Stat. 2543-44. Previously, firms registered in ORCA were supposed to update
their certifications and representations on an annual basis. 48 C.F.R. §4.1201(b)(1). However, P.L. 111-240 expanded
upon this requirement by imposing a penalty on businesses that fail to file their annual registrations in ORCA.
217 Contracting Oversight for Small Business Jobs Act of 2012, H.R. 4206, §2. This measure would also amend Section
16(d) of the Small Business Act to establish a “safe harbor” for certain defendants who misrepresented their status “in
reliance on a written advisory opinion from a licensed attorney who is not an employee of the defendant.” Id., at §3. It
would also amend Section 5 of the Small Business Act to create express statutory authority for SBA’s Office of
Hearings and Appeals (OHA). Id., at §4. The House-passed National Defense Authorization Act for FY2013 includes
similar provisions regarding safe harbors and OHA. See H.R. 4310, as passed by the House, at §§1681-1682.
218 Small Business Contracting Fraud Prevention Act of 2011, S. 633, §3; SUCCESS Act of 2012, S. 3442, §523.
Currently, Section 36 of the Small Business Act, which governs set-asides and sole-source awards for service-disabled
veteran-owned small businesses, provides that “[r]ules similar to the rules of paragraphs (5) and (6) of section 637(m)
of this title shall apply for purposes of this section.” Section 8(m) governs set-asides for women-owned small
businesses, and itself provides that such businesses are subject to penalties for fraud under Section 16. Thus, an
argument could potentially be made that service-disabled veteran-owned small businesses are currently subject to
penalties under Section 16 even if they are not expressly included there.
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contracting preferences for service-disabled veteran-owned small businesses
under the Small Business Act;219
• 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;220
• requiring SBA to submit annual reports to Congress on the number of persons
debarred or suspended from government contracting, or considered for
debarment or suspension from government contracting, for violations of the
act;221
• amending the Veterans Benefits Act to require that firms be debarred for five
years if they misrepresent their status as veteran-owned for purposes of programs
under the act;222
• requiring that “contracting rules and regulations” be amended to ensure that
businesses are debarred from government contracting for no less than five years
if they fraudulently represent that they are small as part of a bid or proposal for a
small business contract awarded under the Small Business Act or other
authority;223
• authorizing “any person” to file a “complaint” with the SBA and/or the procuring
agency regarding firms’ status, and requiring that complaints be resolved in a
timely manner;224 and
• requiring the Contractor Central Registration (CCR), or any successor database,
include “adequate warning” of the criminal penalties under Section 16(d) of the
Small Business Act for misrepresenting firm size or status.225
219 Id., §4. This section would also expressly authorize SBA to debar or suspend any firm that knowingly and willfully
misrepresented itself as a service-disabled veteran-owned small business for purposes of programs under the Small
Business Act.
220 Id., §5. The Administrator of Small Business would also be required to “begin to” make unannounced site-visits to
8(a) firms, and to use fraud detection tools. Id.
221 Id., §7; National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1684. Debarment
refers to firms’ exclusion from contracting and, potentially, subcontracting with the government for a fixed period of
time. It does not refer to firms’ eligibility to participate in programs for specific types of small businesses under the
Small Business Act. Firms that are debarred would generally be ineligible for such programs by virtue of the facts that
gave rise to their debarment (i.e., their being other than small, their being other than veteran-owned). However,
remedying the grounds for their ineligibly (e.g., ensuring that a veteran owns at least 51% of the business) would not
necessarily result in their debarment being lifted. See also Contracting Oversight for Small Business Jobs Act of 2012,
H.R. 4206, §6 (requiring similar annual reports from SBA).
222 An Act to Amend Title 38, United States Code, to Revise the Enforcement Penalties for Misrepresentation of a
Business Concern as a Small Business Owned and Controlled by Veterans or as a Small Business Concern Owned and
Controlled by Service-Disabled Veterans, and for Other Purposes, S. 1184, §1 (amending the Veterans Benefits Act to
require that firms determined to have misrepresented their status as veteran-owned small businesses be debarred for a
period of not less than five years, as well as requiring that any debarment action be commenced no later than 30 days
after determining that the firm misrepresented its status, and completed no less than 90 days after this determination);
Veterans Programs Improvement Act of 2011, S. 914, §703 (generally the same as S. 1184, 112th Cong., but amending
the Veterans Benefits Act to clarify that only firms that deliberately misrepresent their status shall be debarred).
223 Fairness and Transparency in Contracting Act of 2011, H.R. 3184, §9(b); Act for the 99%, H.R. 3639, §1309(b).
224 Fairness and Transparency in Contracting Act of 2011, H.R. 3184, §9(a); Act for the 99%, H.R. 3639, §1309(a). In
contrast, under current law, only certain persons—namely, contracting officers, certain SBA officials, and certain other
firms—may file “protests” challenging a firm’s status. See supra note 212 and accompanying text.
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The proposed measures regarding debarment from government contracting, in particular, would
arguably depart significantly from current law, which grants VA and other agencies broad
discretion as to whether to debar contractors for misrepresenting their size or status, or for other
wrongdoing. The Veterans Benefits Act currently states that firms which misrepresent their size or
status “shall” be debarred for a “reasonable period of time, as determined by the Secretary” of
Veterans Affairs.226 However, it does not specify the period of debarment for such
misrepresentations. Similarly, although both the Small Business Act and the FAR authorize
debarment for misrepresentations of size or status, they do not require debarment, or prescribe the
duration of any debarment.227
Requiring service-disabled veteran-owned small businesses to register in the VetBiz database
would also be a departure from current law, which permits such firms to self-certify their status
for purposes of the Small Business Act.228 However, the effectiveness of any such change would
depend upon how it is implemented by SBA and VA.229
Agency-Specific Programs
Members of the 112th Congress have also enacted or proposed several measures addressing
contracting and subcontracting with small businesses by particular agencies. Among the measures
enacted was one appropriating $15 million to the Department of Defense (DOD) for use in
making “incentive payments” under Section 504 of the Indian Financing Act (IFA) of 1974 to
contractors or subcontractors that use certain Indian-owned small businesses as subcontractors or
suppliers.230 The FAR authorizes agencies to pay similar “monetary incentives” to prime
contractors that subcontract with small disadvantaged businesses.231 However, Congress has
(...continued)
225 Fairness and Transparency in Contracting Act of 2011, H.R. 3184, §8; Act for the 99%, H.R. 3638, §1308.
226 38 U.S.C. §8127(g). Although Section 8127(g) uses “shall” when describing when persons are to be debarred, such
debarments are punishments, and an argument could, thus, be made that the determination as to whether to debar a
particular person remains within the agency’s prosecutorial discretion. See, e.g., United States v. Nixon, 418 U.S. 683,
693 (1974) (citing the Confiscation Cases, 7 Wall. 454 (1869) (“[T]he Executive Branch has exclusive authority and
absolute discretion to decide whether to prosecute a case.”)); Heckler v. Cheney, 470 U.S. 821, 832 (1985) (noting that
an agency decision to initiate an enforcement action in the administrative context “shares to some extent the
characteristics of the decision of a prosecutor in the executive branch”); Matter of E-R-M & L-R-M, 25 I. & N. Dec.
520, 523 (2011) (finding that determinations as to whether to pursue expedited removal proceedings (as opposed to
removal proceedings under Section 240 of the Immigration and Nationality Act (INA)) are within the executive
branch’s discretion, even though the INA uses “shall” in describing who is subject to expedited removal).
227 See, e.g., 15 U.S.C. §645(d)(2)(C) (“Any person who violates paragraph (1) shall be subject to debarment or
suspension[, among other things].”); 48 C.F.R. §9.406-2(c) (authorizing debarment whenever an agency official finds,
by a preponderance of the evidence, that there exists “any other cause of so serious or compelling a nature that it affects
the present responsibility of a contractor”). Debarment under the FAR lasts for a “period commensurate with the
seriousness of the cause(s),” generally not exceeding three years. 48 C.F.R. §9.406-4(a)(1).
228 See 13 C.F.R. §§125.9-125.13.
229 For example, if VA is not thorough in conducting reviews of owners’ status as service-disabled veterans, the
enactment of such a measure might be of limited effectiveness in preventing fraud in the service-disabled veteran-
owned small business program.
230 Consolidated Appropriations Act, P.L. 112-74, §8019, 125 Stat. 808-09 (December 23, 2011). Subcontracting
bonuses under this authority can be paid on any contract or subcontract valued in excess of $500,000. See also
Department of Defense Appropriations Act, 2013, §8019 (authorizing certain such bonuses for FY2013).
231 See 48 C.F.R. §19.1203 (authorizing agencies to pay prime contractors up to 10% of the amount by which their
performance in subcontracting with small disadvantaged businesses (SDBs) exceeds their targets for subcontracting
(continued...)
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historically not appropriated funds specifically for the payment of such incentives, unlike with
incentive payments made by DOD under the IFA. The 112th Congress has also enacted legislation
extending the Comprehensive Small Business Subcontracting Program for three years.232 This
temporary program was established in 1989 to determine if comprehensive subcontracting plans
on a corporate, division, or plant-wide basis (as opposed to on a per-contract basis) would lead to
increased opportunities for small businesses.233
In addition, Members of the 112th Congress have introduced legislation that would direct the
Department of Homeland Security’s (DHS’s) Under Secretary for Management to “ensure” that
DHS’s website includes information on programs, policies, and initiatives designed to encourage
small businesses to participate in agency acquisitions.234 Members have also introduced
legislation that seeks to improve DOD’s performance in contracting and subcontracting with
small businesses by (1) ensuring that the heads of DOD Offices of Small Business Programs
participate in the requirements development and acquisition processes;235 (2) requiring that
officials within the Defense Contract Audit Agency and Defense Contract Management Agency
be designated as “Small Business Advocates” and tasked with monitoring the timeliness of audit
closeouts for small businesses, among other things;236 (3) requiring independent assessments of
DOD’s performance in contracting with small businesses and in transitioning technologies
developed by small businesses into major weapons systems and major automated information
systems;237 and (4) prohibiting DOD from outsourcing certain functions until it assesses whether
DOD has carried out “sufficient outreach programs” to assist women-and minority-owned small
businesses located in the geographic area “near” the military base where the function is
performed.238
Other measures introduced by Members of the 112th Congress would:
• require that certain contracts and subcontracts which are financed with federal
funds, but to which the federal government is not a party, “comply with
provisions for small business assistance and protection that would have been
applicable to the contract had the [government] been a party to the contract”;239
(...continued)
with SDBs).
232 National Defense Authorization Act for FY2012, P.L. 112-81, §866, 125 Stat. 1526 (December 31, 2011).
233 An Act to Authorize Appropriations for Fiscal Years 1990 and 1991 for Military Activities of the Department of
Defense, for Military Construction, and for Defense Activities of the Department of Energy, to Prescribe Personnel
Strengths for Such Fiscal Years for the Armed Forces, and for other Purposes, P.L. 101-189, §834, 103 Stat. 1509-10
(codified, as amended, at 15 U.S.C. §637 note). The program has been expanded and/or extended several times since
then. For more on the program, see generally http://www.acq.osd.mil/osbp/programs/csp/background.html.
234 Department of Homeland Security Authorization Act of 2011, S. 1546, §111.
235 National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1612 (requiring the
Secretary of Defense to develop guidance ensuring that, at minimum, Office of Small Business Program heads serve as
advisors to the Defense Acquisition Board and Information Technology Acquisition Board, and that the chiefs of the
Armed Forces and acquisition executives coordinate with the Directors when approving requirements documents and
acquisition strategies or plans).
236 Id., at §1613.
237 Id., at §§1614-1615.
238 National Defense Authorization Act for FY2013, H.R. 4310, as passed by the House, at §1696.
239 Depleting Risk from Insect Infestation, Soil Erosion, and Catastrophic Fire Act of 2012, H.R. 5960, §141.
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• establish a preference for “local contractors”—or contractors that have their
principal offices or locations within a 60-mile radius of the facility covered by
the contract—in the award of contracts to veteran-owned small businesses under
the Veterans Benefits, Health Care, and Information Technology Act;240 and
• allow surviving spouses or dependants who acquire the ownership rights of a
member of the Armed Forces who owned at least 51% of a small business and
was killed in the line of duty to be treated as if they were veterans with service-
connected disabilities for purposes of contracting goals and preferences under the
Veterans Benefits, Health Care, and Information Technology Act.241
Yet other measures, addressing specific aspects of contracting or subcontracting with small
businesses (e.g., goals), were discussed earlier in this report as examples of possible approaches
to these issues (i.e., the enactment of agency-specific legislation).242
Author Contact Information
Kate M. Manuel
Erika K. Lunder
Legislative Attorney
Legislative Attorney
kmanuel@crs.loc.gov, 7-4477
elunder@crs.loc.gov, 7-4538
240 A Bill to Amend Title 38, United States Code, to Direct the Secretary of Veterans Affairs to Give Preference to
Local Contractors, and For Other Purposes, H.R. 6004, §1.
241 Veterans Small Business Protection Act of 2012, S. 3405, §2.
242 See, e.g., supra note 33 and accompanying text.
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