Location-Based Preferences in Federal and Federally Funded Contracting: An Overview of the Law

Location-Based Preferences in Federal and Federally Funded Contracting: An Overview of the Law

Location-Based Preferences in Federal and
Federally Funded Contracting: An Overview
of the Law
John R. Luckey
Legislative Attorney
Kate M. Manuel
Legislative Attorney
December 30, 2010
Congressional Research Service
7-5700
www.crs.gov
R41115
CRS Report for Congress
P
repared for Members and Committees of Congress

Location-Based Preferences in Federal and Federally Funded Contracting

Summary
The recession that began in December 2007 has prompted increased interest among some
Members of Congress and their constituents in legal authorities that could require or allow federal
agencies to prefer contractors in one state or locality over those in other states or localities.
Federal spending on procurement contracts has remained high, totaling $511.1 billion in FY2010,
at a time when many other businesses have scaled back their purchases of goods and services.
However, this spending has historically been localized in three to five states, which receive nearly
half of all federal procurement dollars, prompting concerns about whether other states receive
their “fair share.”
The federal government generally awards contracts to the lowest qualified responsible offeror,
regardless of the offeror’s location. However, some provisions of federal law require or allow
contracting agencies to favor vendors in certain localities. The main government-wide
preferences are for (1) “local contractors” in areas affected by presidentially declared disasters or
emergencies; (2) businesses in “labor surplus areas,” or areas with particularly high
unemployment; and (3) small businesses in Historically Underutilized Business Zones
(HUBZones), or census tracks, nonmetropolitan counties, or other areas with low household
income or high unemployment. Federal agencies may conduct set-asides for, or grant evaluation
preferences to, local contractors; use firms’ status as labor surplus area concerns, or willingness to
locate facilities in labor surplus areas, as a tie-breaker in sealed bid procurements or an evaluation
factor in certain negotiated procurements; and make special sole-source awards to, conduct set-
asides for, or grant price evaluation preferences to HUBZone small businesses. Other agency-
specific preferences also exist, such as those for “local private, nonprofit, or cooperative entities”
under the Department of the Interior, Environment, and Related Agencies Appropriations Act,
2010 (P.L. 111-88).
There generally must be statutory authority for any geographic preference involving federal
contracts or federally funded contracts. Such statutory preferences do not themselves deprive
vendors outside the targeted area of equal protection in violation of the U.S. Constitution because
classifications based on geography are subject to “rational basis review” and need only have a
rational relationship to a legitimate government interest. However, absent congressional
authorization, attempts by state or local governments to create location-based preferences for
federally funded procurement contracts would violate the constitutional prohibition on state or
local legislation that burdens or discriminates against interstate commerce. Similar attempts by
federal agencies to prefer vendors in certain locations without congressional authorization would
violate procurement integrity regulations and the Competition in Contracting Act (CICA) of
1984.

Congressional Research Service

Location-Based Preferences in Federal and Federally Funded Contracting

Contents
Introduction ................................................................................................................................ 5
Constitutional and Other Legal Issues ......................................................................................... 6
Equal Protection.................................................................................................................... 6
Commerce Clause ................................................................................................................. 7
Procurement Integrity and Competition Requirements........................................................... 8
Existing Geographical Preferences .............................................................................................. 9
“Local Contractors” Under the Stafford Act........................................................................... 9
Labor Surplus Area Concerns Under the Small Business Act and Other Authorities ............. 13
HUBZone Small Businesses Under the HUBZone Act ........................................................ 17
Miscellaneous Provisions .................................................................................................... 21

Tables
Table 1. Comparison of Procurement Preferences for “Local Contractors,” Labor Surplus
Area Concerns, and HUBZone Small Businesses ................................................................... 20

Contacts
Author Contact Information ...................................................................................................... 22

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Location-Based Preferences in Federal and Federally Funded Contracting

Introduction
The recession that began in December 2007 has prompted increased interest among some
Members of Congress and their constituents in legal authorities that could require or allow federal
agencies to prefer contractors in one state or locality over those in other states or localities.1
Federal spending on procurement contracts has remained high, reaching $511.1 billion in
FY2010,2 at a time when many other businesses have scaled back their purchases of goods and
services.3 However, this spending has historically been localized in three to five states, which
receive nearly half of all federal procurement dollars,4 prompting concerns about whether other
states receive their “fair share.” Such concerns may be overstated, given that many contracts must
be performed in or near Washington, DC,5 and shifting the place of performance of existing
contracts from one state to another would generally not decrease overall unemployment.6
Nonetheless, geographic distribution of federal spending and federal funding is often a concern
during economic downturns.7
This report discusses constitutional and other legal issues related to the creation and
implementation of location-based preferences in federal contracting, as well as summarizes key
authorities requiring or allowing federal agencies to “favor” contractors located in specific
places.8 The report does not address federal preferences for domestic products9 or provisions of

1 The National Bureau of Economic Research recently announced that this recession ended in June 2009. See, e.g., Phil
Izzo, Recession Over in June 2009, Wall Street J., Sept. 20, 2010, available at http://blogs.wsj.com/economics/2010/
09/20/nber-recession-ended-in-june-2009/. However, concerns about the distribution of federal contract dollars persist
because of weak economic performance and high unemployment in many states.
2 Prime Award Spending Data, List View, USASpending.gov, available at http://www.usaspending.gov (last accessed
Dec. 29, 2010). This number is down somewhat from FY2009, when the federal government spent $540.4 billion on
procurement contracts. Id.
3 See, e.g., Michael Keating, Government Contracting Remains Recession Proof, GovPro, Feb. 2, 2010, available at
http://govpro.com/federal/government-contractors-revenue-20100202 (“In spite of the private sector’s fiscal struggles
in 2009, government contractors did fairly well.”).
4 In FY2010, the top five states received 37% of federal contract dollars, while the bottom five states received 0.55% of
federal contract dollars. See Federal Contract and Assistance Awards by State: Contracts, USASpending.gov, available
at http://www.usaspending.gov (last accessed Dec. 29, 2010).
5 The District of Columbia and adjacent states (i.e., Maryland and Virginia) all ranked within the top five for federal
procurement spending by state in FY2010. Service contracts, which comprise over 50% of all federal contracts, are
particularly likely to require vendors located near the agencies they serve.
6 It may shift unemployment from state to state; for example, if the place of performance of an existing requirement
were shifted from State A to State B, workers in State A might lose jobs while workers in State B gained them.
Alternatively, when the location of the vendor holding the contract changes but the contract’s place of performance
does not, the vendor’s locale may see only minimal increases in employment. This is, in part, because Executive Order
13495 requires that federal service contracts generally include clauses requiring that contractors and subcontractors
succeeding an incumbent contractor offer non-managerial and non-supervisory employees of that contractor the right of
first refusal for any positions under the contract for which they are qualified. 74 Fed. Reg. 6103 (Feb. 4, 2009).
7 See, e.g., H.R. 3684, 111th Cong. (seeking “improved nationwide distribution” in small business lending).
8 In a few instances, provisions of federal law disfavor “local” vendors in competitions for certain contracts awarded
outside the United States. In those cases, American contractors are preferred over local contractors. See, e.g., 22 U.S.C.
§ 4864(c) (promoting the award of local guard contracts for Foreign Service buildings in excess of $250,000 to U.S.
contractors).
9 See generally CRS Report 97-765, The Buy American Act: Requiring Government Procurements to Come from
Domestic Sources, by John R. Luckey.
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federal law that could, depending upon their implementation, effectively prefer local contractors,
such as project labor agreements.10
Constitutional and Other Legal Issues
There generally must be statutory authority for any geographic preferences involving federal
contracts or federally funded contracts. Such statutory preferences do not themselves deprive
vendors outside the targeted area of equal protection in violation of the U.S. Constitution.
However, absent congressional authorization, attempts by state or local governments to create
location-based preferences for federally funded procurement contracts would violate the
constitutional prohibition on state or local legislation that burdens or discriminates against
interstate commerce. Similar attempts by federal agencies to prefer vendors in certain locations
without congressional authorization would violate procurement integrity regulations and the
Competition in Contracting Act (CICA) of 1984.
Equal Protection
Although the Fifth Amendment assures persons of equal protection under federal law,11 federal
location-based preferences do not unconstitutionally discriminate between persons in different
places. Certain classifications, such as those based on race or gender, are suspect and subject to
heightened scrutiny when challenged.12 In the case of classifications that are subject to strict
scrutiny, this means that the government must show that programs incorporating these
classifications are necessary to meet a compelling government interest.13 Other classifications,
including those based on geography or income, are subject to “rational basis review.”14 Under
rational basis review, the party challenging the government program must show that it is not

10 A project labor agreement (PLA) is a type of collective bargaining agreement commonly used on large private
construction projects. “It forms the centerpiece of labor relations by standardizing terms and conditions of employment
among multiple contractors; providing a single dispute resolution mechanism; and insulating the project from costly
strikes, picketing, and related activities.” Robert W. Kopp & John Gaal, The Case for Project Labor Agreements, 19
Constr. Law. 5, 5 (1999). President Obama has issued an executive order encouraging federal agencies to use PLAs in
federal construction projects valued at $25 million or more. See Executive Order 13502, 74 Fed. Reg. 6985 (Feb. 11,
2009).
11 U.S. Const. amend. V (due process); Bolling v. Sharpe, 347 U.S. 497 (1954) (holding that due process under the
Fifth Amendment encompasses equal protection). Equal protection applies to both natural and juridical persons, which
include corporations. See Santa Clara County v. S. Pac. R.R. Co., 118 U.S. 394 (1886).
12 See, e.g., United States v. Virginia, 518 U.S. 515 (1996) (requiring the state to provide an “exceedingly persuasive
justification” for its policy of maintaining an all-male military academy); Graham v. Richardson, 403 U.S. 365, 371-72
(1971) (subjecting state laws that classify on the basis of alienage to strict scrutiny); Loving v. Virginia, 388 U.S. 1, 11
(1967) (racial classifications must be shown to be necessary to some “legitimate overriding purpose”); McLaughlin v.
Florida, 379 U.S. 184, 192, 194 (1964) (racial classifications “bear a far heavier burden of justification” than other
classifications and are invalid absent an “overriding statutory purpose”); Korematsu v. United States, 323 U.S. 214, 216
(1944) (wartime evacuation of Japanese-Americans from the West Coast “immediately suspect” and subject to “rigid
scrutiny” because it involved a single ethnic group).
13 See, e.g., Rothe Dev. Corp. v. Dep’t of Defense, 545 F.3d 1023 (Fed. Cir. 2008) (striking down a race-conscious
contracting program).
14 San Antonio Indep. School Dist. v. Rodriguez, 411 U.S. 1, 29 (1973) (“[W]ealth discrimination alone [does not
provide] an adequate basis for invoking strict scrutiny.”); McGowan v. Md., 366 U.S. 420, 427 (1961) (holding that
“the Equal Protection Clause relates to equality between persons as such, rather than between areas and that territorial
uniformity is not a constitutional prerequisite.”)
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rationally related to a legitimate government objective by “negativ[ing] every conceivable basis
which might support” the program.15 Rational basis review is thus a very deferential standard of
review and “serves to invalidate only ‘wholly arbitrary acts.’”16
Courts applying rational basis review have, for example, upheld motor vehicle insurance rates
based, in part, on the location where vehicles are garaged17 and “blue laws” applicable only to
certain parts of the state.18 In neither case did alleging flaws in the logic underlying the
geographic distinctions suffice because there still remained some relationship between the
territorial classification and the government’s objective.19 Such a relationship arguably exists in
the case of location-based contracting preferences because, as is discussed below, the government
seeks to promote the economic development of certain communities through such preferences.
Commerce Clause
The Commerce Clause of the Constitution grants Congress the power to regulate interstate
commerce.20 It has long been held that this clause is not only a positive grant of power to
Congress, but also a negative constraint upon the states.21 Thus, absent a positive authorization of
Congress, the states are constrained from discriminating against interstate commerce.
In the area of state procurement, the Supreme Court has generally looked to the source of funding
to see what local preferences are permitted. If the project is locally funded, the Court has allowed
local preferences. If federal funding is involved, then local preferences are permitted only if
specifically authorized by Congress. White v. Massachusetts Council of Construction Employers
illustrates the Court’s approach to local preferences in state or local procurements.22 Here, the
mayor of Boston issued an executive order requiring all construction projects funded, in whole or
in part, by city funds or funds that the city had authority to administer to be performed by a work
force at least half of which were residents of the city. The Court looked to the source of the
funding of the projects to determine the impact of the Commerce Clause. When the city expended
only its own funds, it was entering the market as a “market participant” and was not subject to the
restraints of the Commerce Clause.23 In contrast, when federal funds were involved, the
Commerce Clause required that any local preference be specifically authorized by Congress.24

15 Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 364 (1973).
16 Abdulah v. Comm’n of Insurance, 907 F. Supp. 13 (D. Mass. 1995) (quoting New Orleans v. Dukes, 427 U.S. 297,
303-304 (1976).
17 Id. at 10-15.
18 McGowan v. Md., 366 U.S. at 427.
19 For example, in upholding the territorially based insurance rates, the court noted, “[P]laintiffs point out the fact that a
territory’s claims index is computed based on the frequency of all accidents and thefts involving vehicles garaged in
that territory, even if those accidents or thefts occur outside the territory. But this observation begs the only relevant
inquiry: whether there exists some rational relationship between the territorial rating classifications and the cost of
providing insurance for vehicles within each classification.”). Abdulah, 907 F. Supp. at 17.
20 U.S. Const. art.1, § 8, cl. 3.
21 See Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824). See generally Congressional Research Service, The Constitution
of the United States of America, Analysis and Interpretation 221-231 (2002) and the cases cited therein.
22 460 U.S. 204 (1983).
23 Id. at 206-208 (citing Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976)).
24 Id. at 212.
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Procurement Integrity and Competition Requirements
Attempts by federal agencies to favor local vendors without specific statutory authority would
violate both procurement integrity regulations and the Competition in Contracting Act (CICA) of
1984. Subpart 3.1 of the Federal Acquisition Regulation (FAR), promulgated under the authority
of the Armed Services Procurement Act of 1947 and the Federal Property and Administrative
Services Act of 1949, requires that
Government business shall be conducted in a manner above reproach and, except as
authorized by statute or regulation, with complete impartiality and with preferential
treatment for none.25
Because favoring vendors in specific places would constitute preferential treatment and would not
be completely impartial, doing so is not permissible under this regulation unless authorized by
law.
Additionally, CICA generally requires that contracts be awarded through “full and open
competition” unless (1) a small business set-aside is used; (2) one of seven circumstances exist
that permit other than full and open competition (e.g., single source, urgent and compelling need);
(3) the simplified procedures for “small purchases” ($150,000 or less) are used; or (4) “otherwise
expressly authorized by statute.”26 Absent specific statutory authority, location-based preferences
would violate this provision of CICA because they are inconsistent with full and open
competition and do not involve small business set-asides, circumstances when noncompetitive
procedures are permissible, or “small purchases.” CICA does, however, provide explicit statutory
authority for agencies to define their requirements based upon their needs.27 Thus, if there were a
situation when agency needs were such that a “local” contractor was required, the agency could
generally draft the solicitation so as to select an appropriate contractor because CICA provides
them with explicit statutory authority to do so.28
Absent statutory authority, agencies can only seek to increase the number of contractors in
specific places (e.g., those who are “local” for purposes of the work being performed) awarded
federal contracts by advertising, outreach, or other means that do not give them preference in the
award of a contract. The Updated Implementing Guidance for the American Recovery and
Reinvestment Act of 2009, for example, calls for agencies to
… maximize the economic benefits of a Recovery Act-funded investment in a particular
community by supporting projects that seek to ensure that the people who live in the local
community get the job opportunities that accompany the investment.29

25 48 C.F.R. § 3.101-1.
26 10 U.S.C. § 2304(a)(1) (procurements of defense agencies); 41 U.S.C. § 253(a)(1) (procurements of civilian
agencies).
27 10 U.S.C. § 2305(a)(1)(A)(iii) (procurements of defense agencies) (agencies to “develop specifications in such a
manner as is necessary to obtain full and open competition with due regard to the nature of the property or services to
be acquired”); 41 U.S.C. § 253a(a)(1)(C) (procurements of civilian agencies) (same).
28 See, e.g., Metcom, Inc., B-153450 (May 6, 1964) (finding that a requirements contract limited to a particular
geographical area is no impediment to the issuance of a new invitation for bids for the same items to be supplied to a
different area).
29 Executive Office of the President, Office of Management and Budget, Updated Implementing Guidance for the
American Recovery and Reinvestment Act of 2009, Apr. 3, 2009, available at http://www.whitehouse.gov/omb/assets/
(continued...)
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Existing Geographical Preferences
The federal government generally awards contracts to the lowest qualified responsible offeror,
regardless of the offeror’s location.30 However, some provisions of federal law require or allow
federal agencies to favor contractors located in particular places. There are three main
government-wide geographic preferences for (1) “local contractors” under the Stafford Act; (2)
businesses in labor surplus areas under the Small Business Act of 1958, as amended, and other
authorities; and (3) small businesses in Historically Underutilized Business Zones (HUBZones)
under the HUBZone Act of 1997. Other geographic preferences also exist, but are generally
agency-specific (e.g., the preference for “local private, nonprofit, or cooperative entities” under
the Department of the Interior, Environment, and Related Agencies Appropriations Act, 2010
(P.L. 111-88)).
“Local Contractors” Under the Stafford Act
The preference currently given to “organizations, firms, and individuals residing or doing
business primarily in the area affected by [a] major disaster or emergency”31 originated with the
Disaster Relief Act of 1970.32 Enacted in response to a series of disasters in the 1960s that
required significant federal response and recovery operations, including Hurricane Carla in 1962,
the Alaskan earthquake in 1964, Hurricane Betsy in 1965, and Hurricane Camille in 1969,33 the
act required, among other things, that
[i]n the expenditure of Federal funds for debris clearance, distribution of supplies,
reconstruction, and other major disaster assistance activities which may be carried out by
contract with private organizations, firms, or individuals, preference shall be given, to the
extent feasible and practicable, to those organizations, firms, and individuals who reside or
do business primarily in the disaster area.34
Congress hoped this preference would “revitalize” disaster- and emergency-stricken communities
“by infusions of cash through the use of local people and business firms,”35 and it was one of the
few provisions carried over when Congress repealed the Disaster Relief Act and replaced it with
the Robert T. Stafford Disaster Relief Act in 1974.36 This section of the Stafford Act is almost

(...continued)
memoranda_fy2009/m09-15.pdf.
30 Responsibility is an attribute of the offeror, while price and qualifications are attributes of the offer.
31 42 U.S.C. § 5150(a)(1). For purposes of the Stafford Act, a “major disaster” is “any natural catastrophe … which in
the determination of the President causes damage of sufficient severity and magnitude to warrant major disaster
assistance,” while an “emergency” is “any occasion or instance for which, in the determination of the President, Federal
assistance is needed to supplement State and local efforts and capabilities to save lives and to protect property and
public health and safety, or to lessen or avert the threat of a catastrophe in any part of the United States.” 42 U.S.C. §
5122(1)-(2).
32 P.L. 91-606, 84 Stat. 1744 (Dec. 31, 1970).
33 See, e.g., Jillian L. Morrison, Post-Disaster Contracting: An Examination of the Costs Associated with the Stafford
Act’s Local Contracting Preference and Implementation Proposals to Maximize Community Revitalization, 37 Pub.
Cont. L.J. 687, 697 n.56 (2008).
34 P.L. 91-606, at § 204, 84 Stat. 1748 (codified, as amended, at 42 U.S.C. § 5150(a)(1)).
35 S. Rep. No. 91-1157, at 12 (1970).
36 P.L. 93-288, § 310, 88 Stat. 150. The Stafford Act repealed all sections of the 1970 act except for sections 231, 233,
(continued...)
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identical to its counterpart in the Disaster Relief Act.37 It differs only in that it adds “or
agreement” after “contract,” and it changes the ending slightly to read “residing or doing business
primarily in the area affected by such major disaster.”
Subsequent amendments to the Stafford Act strengthened the preference for “local contractors”
by (1) ensuring that they are preferred in emergencies, as well as major disasters;38 (2) explicitly
authorizing agencies to set aside contracts for contractors located in “specific geographic areas”;39
and (3) requiring agencies to justify in writing any expenditures of emergency assistance funds
with nonlocal contractors and transition response, relief, and reconstruction work to local firms.40
Additionally, regulations have been promulgated that limit the degree to which local contractors
can subcontract with nonlocal firms.41 Minimizing subcontracting with nonlocal firms was of
particular concern for some Members of Congress because extensive use of nonlocal
subcontractors can dilute the economic benefits that local firms and their communities receive
from federal disaster and emergency operations.42
The Stafford Act itself does not define what it means for vendors to “resid[e] or do[] business
primarily” in an area affected by a presidentially declared disaster or emergency. However,

(...continued)
234, 235, 236, 237, 301, 302, 303, and 304. See P.L. 93-288, § 603, 99 Stat. 164 (May 22, 1974).
37 Section 310 was renumbered Section 307 in 1988. See Disaster and Emergency Assistance Amendments of 1988,
P.L. 100-707, § 105(e), 102 Stat. 4691 (Nov. 23, 1988).
38 P.L. 100-707, § 105(e)(2), 102 Stat. 4691 (“Such section is amended by inserting ‘or emergency’ after ‘major
disaster’ each place it appears.”).
39 Local Community Recovery Act of 2006, P.L. 109-218, § 2, 120 Stat. 333 (Apr. 20, 2006) (codified at 42 U.S.C. §
5150(a)(3)). Sections 2 and 3 this act respond directly to a decision by the Government Accountability Office (GAO)
that upheld an agency’s determination to set aside a procurement for contractors located in one state. The disaster had
affected multiple states, and the protester alleged that the agency violated the Stafford Act by excluding contractors in
other states from the set-aside. See AshBritt Inc., B-297889, B-297889.2 (Mar. 20, 2006); infra notes 52-56 and
accompanying text.
40 Post-Katrina Emergency Management Reform Act of 2006, P.L. 109-295, § 694, 120 Stat. 1459-60 (codified at 42
U.S.C. § 5150(b)(1)-(2)). Agencies may avoid such transition only if the head of the agency determines that it is not
feasible or practicable to do so. However, the act also provides that “[n]othing in this section shall be construed to
require any Federal agency to breach or renegotiate any contract in effect before the occurrence of a major disaster or
emergency.”). Id. at § 694(c). The act does not specify the timeframe within which the transition is to occur, but
acquisitions regulations promulgated under its authority specify that the transition should occur “at the earliest practical
opportunity” given (1) the potential duration of the disaster or emergency; (2) the severity of the disaster or emergency;
(3) the scope and structure of the existing contract; (4) the potential impact of a transition, including safety, national
defense, and mobilization; and (5) the expected availability of qualified local offerors who can provide the products or
services at a reasonable price. 48 C.F.R. § 26.603(c)(1)-(5).
41 Dep’t of Defense, General Servs. Admin. & Nat’l Aeronautics & Space Admin., Federal Acquisition Regulation:
FAR Case 2006-014, Local Community Recovery Act of 2006, 71 Fed. Reg. 44546, 44548-49 (Aug. 4, 2006) (codified
at 48 C.F.R. § 52.226-5) (requiring the local contractor to perform with its own personnel at least 50% of the personnel
costs of service contracts; at least 50% of the costs of manufacturing or supply contracts; at least 15% of the costs of
the contract (excluding materials) in general construction contracts; and 25% of the costs of the contract (excluding
materials) in contracts for special-trade construction). There are also statutory limitations on subcontracting that apply
to certain contracts of the Department of Homeland Security. P.L. 109-295, § 692, 120 Stat. 1458 (codified at 6 U.S.C.
§ 792(b)-(c)) (generally requiring the local contractor to perform 65% of the costs of cost-reimbursement type contracts
or task or delivery orders in excess of $150,000).
42 See, e.g., Waste and Fraud in the Aftermath of Hurricane Katrina: Hearing of the Subcommittee on Investigations of
the Committee on Homeland Security, House of Representatives, 109th Cong., 2d Sess. 5 (2007) (statement of
Representative Bennie G. Thompson) (discussing how multiple layers of subcontracts can diminish the value of federal
funding received by local individuals and companies).
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acquisition regulations promulgated under the authority of the act specify that, at least for
purposes of Stafford Act set-asides, a vendor is local if, during the last 12 months, it had its main
operating office in the disaster or emergency area and that office generated at least half of its
gross revenue and employed at least half of its permanent employees.43 Vendors that are not
“local” under these criteria could still qualify as “local” under other criteria, which include
[p]hysical location(s) of the offeror’s permanent office(s) and date any office in the set-aside
area(s) was established; … [c]urrent state licenses; … [r]ecord of past work in the set-aside
area(s) (e.g., how much and for how long); … [c]ontractual history the offeror has had with
subcontractors and/or suppliers in the set-aside area;… [p]ercentage of the offeror’s gross
revenues attributable to work performed in the set-aside area; … [n]umber of permanent
employees the offeror employs in the set-aside area; … [m]embership in local and state
organizations in the set-aside area; and … [o]ther evidence that establishes the offeror resides
or primarily does business in the set-aside area.44
Decisions by the Government Accountability Office (GAO) in bid protests involving
procurements conducted under the authority of the Stafford Act have further construed these
regulations to mean that (1) agencies can consider firms’ place of incorporation and the location
of their corporate headquarters in determining where they “reside”45 and (2) agencies determining
where firms “primarily do business” must consider where these firms do the majority of their
business, not where they do the predominant or largest single amount of their business.46
However, some commentators have suggested that “loopholes” in the regulations could, at times,
defeat the purposes of the Stafford Act by allowing awards to firms that have minimal
percentages of local ownership or relocate from the local area during the period of contract
performance.47
The Stafford Act, as originally enacted, also did not specify what form the “preference” for local
contractors should take,48 which meant that agencies generally had “broad discretion” to craft an
appropriate preference in their regulations or in individual solicitations.49 However, agencies
devised two forms of preferences—(1) set-asides for contractors in specific geographic areas and

43 48 C.F.R. § 52.226-3(c)(1)-(2). There are no regulations explicitly addressing what it means for a firm to reside or do
business in a disaster or emergency area for purposes of evaluation preferences.
44 48 C.F.R. § 52.226-3(d)(1)-(8).
45 AlliedBarton Security Services LLC, B-299978, B-299978.3, B-299978.4 (Oct. 9, 2007) (finding that the Federal
Emergency Management Agency reasonably considered the offeror’s place of incorporation and the location of its
corporate headquarters in determining that the contractor did not reside in Louisiana for purposes of a procurement set-
aside for Louisiana vendors).
46 Executive Protective Security Service, Inc., B-299954.3 (Oct. 22, 2007) (finding that the Federal Emergency
Management Agency’s determination that a firm that received 24% of its gross revenue and had less than 16% of its
total workforce in Mississippi was local for purposes of contract set aside for Mississippi firms was unreasonable).
47 See Post-Disaster Contracting, supra note 33, at 723. Once it obtains a contract based on its “local” status, a firm
could relocate outside the disaster or emergency area. In contrast, a firm that receives a contract based on its status as a
HUBZone small business must remain in a HUBZone throughout the period of contract performance.
48 Cf. HAP Construction, Inc., B-280044.2 (Sept. 21, 1998) (“[T]he statute does not specify the extent of the
preference.”).
49 See, e.g., id. (“Where a statute requires that a preference be given to a class of potential contractors, but does not
specify a particular evaluation formula, agency acquisition officials have broad discretion in selecting evaluation
factors that should apply to an acquisition to effectuate the statutory mandate, and the relative importance of those
factors.”) (quoting US Defense Sys., Inc., B-251544; B-251938; B-251940 (Mar. 30, 1993) (finding that the agency did
not violate a statutory requirement to give U.S. contractors preference in the award of “local guard contracts” under 22
U.S.C. § 4864 when it changed the weight given to technical proficiency relative to price in evaluating offers)).
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(2) evaluation preferences, or consideration of whether a firm is local as a factor in the award of
contracts—that GAO upheld as reasonable interpretations of the Stafford Act. First, in HAP
Construction, Inc., GAO found that an agency sufficiently preferred local vendors when it
considered the location of the offeror’s primary place of business and the extent of subcontracting
with local firms as “significant technical factors” in determining to whom to make an award.50
GAO specifically rejected the disappointed offeror’s assertion that any such factors must be part
of an “evaluation scheme [where locality is on a virtual par with price] which will produce award
to a local contractor, unless all bids from local contractors are so highly priced as to not be
feasible for award.”51 Then, in AshBritt Inc., GAO rejected a disappointed offeror’s allegation that
the agency violated the Stafford Act by setting aside a procurement for vendors located in a
particular state when multiple states had been affected by the same presidentially declared
disaster.52 After the AshBritt decision, Congress enacted legislation that amended the Stafford Act
to explicitly authorize the set-asides for “specific geographic area[s]” that GAO approved of in
AshBritt.53 Regulations promulgated under the authority of this legislation also recognized
agencies’ use of evaluation factors as a means of preferring local contractors.54 Currently, these
regulations authorize agencies to use local area set-asides or evaluation preferences and to define
the geographic area of any set-aside as they see fit so long as it does not include counties not
within the disaster or emergency area.55 The current regulations also permit agencies to further
restrict set-asides to small business concerns within the defined geographic area.56
Sole-source awards for disaster- and emergency-related contracts have recently been of concern
to some Members of Congress and the public, in part because of allegations that agencies may
have effectively limited opportunities for local vendors, particularly small businesses, by making
sole-source awards to large nonlocal vendors.57 Such awards are not made under the authority of

50 Id.
51 Id.
52 B-297889; B-297889.2 (Mar. 20, 2006).
53 P.L. 109-218, § 2, 120 Stat. 333 (Apr. 20, 2006) (codified at 42 U.S.C. § 5150(a)(3)).
54 See Dep’t of Defense, General Servs. Admin., & Nat’l Aeronautics & Space Admin., Federal Acquisition
Regulation; FAR Case 2006-014, Local Community Recovery Act of 2006, 71 Fed. Reg. 44546, 44548 (Aug. 4, 2006);
48 C.F.R. § 26.202(b) (2007) (“The contracting officer may use other appropriate procedures to give preference to
those organizations, firms, or individuals residing or doing business primarily in the area affected by the major disaster
or emergency to the extent feasible and practicable. For example, the contracting officer may implement the preference
by using an evaluation factor.”). The provision presently in the FAR is slightly different. See infra note 55.
55 48 C.F.R. § 26.202 (“Preference may be given through a local area set-aside or an evaluation preference.”); 48
C.F.R. § 26.202-1(b) (“A major disaster or emergency area may span counties in several contiguous States. The set-
aside area need not include all the counties in the declared disaster/emergency area(s), but cannot go outside it.”).
56 48 C.F.R. § 26.202-1(c). Some agencies have had additional preferences for local contractors beyond those described
above. For example, until 2006, the Federal Emergency Management Agency included a clause in its solicitations that
permitted local contractors to “match” the lowest-priced or best-value bid or offer received from otherwise eligible
non-local offerors:
The lowest priced local offeror within 130 percent of the lowest non-local offeror shall have the
first chance to meet the non-local price. If the local offeror meets the lowest non-local price and is
determined to be responsible, award shall be made. If the non-local offer is not met, the next lowest
local offeror within 130 percent shall have the chance to meet the lowest non-local price. This
process shall continue until award is made to a local offeror within the 130 percent requirement or
the supply of local offerors is exhausted and award made to the lowest non-local offeror.
48 C.F.R. § 4452.217-70 (2006). No such agency-specific preferences appear to be in effect at the present time,
however.
57 In 2006, Congress imposed limitations on the length of certain noncompetitive contracts awarded by the Department
of Homeland Security to “facilitate response to or recovery from a natural disaster, act of terrorism, or other man-made
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the Stafford Act, however. They are made under the authority of the Competition in Contracting
Act (CICA) of 1984, which permits agencies to make sole-source awards in certain
circumstances, including when there is “unusual and compelling urgency.”58
Labor Surplus Area Concerns Under the Small Business Act and
Other Authorities
Vendors located in labor surplus areas, or “civil jurisdictions”59 with unemployment rates that are
120% of the national average or 10% or higher,60 are also given certain preferences in federal
contracting. However, while still based in statute, the preferences that such vendors presently
receive are minimal compared to those they formerly received.
Currently, Section 15 of the Small Business Act, as amended, requires that federal agencies give
“priority” to small businesses that “perform a substantial proportion of the production … within
areas of concentrated unemployment or underemployment or within labor surplus areas” when
setting aside contracts for small businesses.61 The act does not indicate what form this “priority”
should take,62 but regulations promulgated under its authority direct agencies to use small

(...continued)
disaster.” Such contracts cannot exceed 150 days unless the Secretary of Homeland Security determines that
exceptional circumstances apply. P.L. 109-295, § 695, 120 Stat. 1460 (Oct. 4, 2006).
58 10 U.S.C. § 2304(c)(1)-(7) (procurements of defense agencies) & 41 U.S.C. § 253(c)(1)-(7) (procurements of civilian
agencies). For more on CICA, see CRS Report R40516, Competition in Federal Contracting: An Overview of the Legal
Requirements, by Kate M. Manuel. An amendment made to CICA by Section 862 of the Duncan Hunter National
Defense Authorization Act for FY2009 imposed similar limitations on the duration of contracts awarded by any agency
in reliance on the exception for unusual and compelling urgency. The term of such contracts may not exceed the time
necessary (1) to meet the unusual and compelling requirements of the work to be performed under the contract and (2)
for the executive agency to enter into another contract for the required goods and services through the use of
competitive procedures. Such contracts may not last longer than one year unless the head of the agency entering into
the contract determines that exceptional circumstances apply. P.L. 110-417, § 862, 122 Stat. 4546 (Oct. 14, 2008).
59 Civil jurisdictions include (1) cities with 25,000 or more people, as measured by the most recent available Bureau of
the Census estimates; (2) towns and townships in the states of New Jersey, New York, Michigan, and Pennsylvania
with 25,000 or more people which possess powers and functions similar to cities; (3) counties except those containing
cities, towns, or townships with 25,000 or more people; (4) all other counties, with any component cities, towns, or
townships excluded; or (5) county equivalents that are towns in the states of Massachusetts, Rhode Island and
Connecticut. 20 C.F.R. § 654.4(b)(1)-(5).
60 No civil jurisdiction may be classified as a labor surplus area if its average unemployment rate is less than 6%. 20
C.F.R. § 654.5(a).
61 15 U.S.C. § 644(d).
62 Although the current text of Section 644(d) of Title 15 of the United States Code still refers to set-asides for labor
surplus area concerns, no such set-asides appear to have been implemented since 1993, and regulations promulgated
under the authority of the Federal Acquisition Streamlining Act (FASA) of 1994, discussed below, construed FASA as
eliminating the labor surplus area set-aside program. Compare 15 U.S.C. § 644(d) (“Notwithstanding any other
provision of law, total labor surplus area set-asides pursuant to Defense Manpower Policy Number 4 (32A C.F.R.
Chapter 1) or any successor policy shall be authorized if the Secretary or his designee specifically determines that there
is a reasonable expectation that offers will be obtained from a sufficient number of eligible concerns so that awards will
be made at reasonable prices. As soon as practicable and to the extent possible, in determining labor surplus areas,
consideration shall be given to those persons who would be available for employment were suitable employment
available.”) with General Servs. Admin., Nat’l Aeronautics & Space Admin., & Dep’t of Defense, FAR Case 94-780:
Federal Acquisition Regulation, Small Business, 60 Fed. Reg. 48258 (Sept. 18, 1995) (“elimination of the Labor
Surplus Area (LSA) set-aside program”).
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businesses’ status as “labor surplus area concerns”63 as a tie-breaker in the event of equal low bids
in procurements conducted by sealed bidding:
Contracts shall be awarded in the following order of priority when two or more low bids are
equal in all respects:
(1) [s]mall business concerns that are also labor surplus area concerns[;]
(2) [o]ther small business concerns; and
(3) [o]ther business concerns.64
These regulations also allow agencies to include “establishment of new facilities in or near labor
surplus areas” as a factor when evaluating the make-or-buy programs of prospective contractors
of any size in certain negotiated procurements.65 Executive Order 10582 further provides that,
although agencies may purchase materials of foreign origin for public use within the United
States under the Buy American Act when the price of materials of domestic origin is unreasonable
or the purchase of such materials is inconsistent with the public interest, they may nonetheless
… reject a bid or offer to furnish materials of foreign origin in any situation in which the
domestic supplier offering the lowest price for furnishing the desired materials undertakes to
produce substantially all of such materials in [an] area of substantial unemployment.66
Although labor surplus areas are not explicitly mentioned here, “area of substantial
unemployment” is generally taken to mean a labor surplus area.67 Various forms of non-

63 As used here, “labor surplus area concerns” are “concern[s] that together with [their] first-tier subcontractors …
perform substantially in labor surplus areas.” 48 C.F.R. § 2.101.
64 48 C.F.R. § 14.408-6(a)(1)-(3). See also 48 C.F.R. § 19.202-3 (“In the event of equal low bids …, awards shall be
made first to small business concerns which are also labor surplus area concerns, and second to small business concerns
which are not also labor surplus area concerns.”). This preference appears to apply only to manufacturing or production
contracts, but the output of first-tier subcontractors, as well as that of the prime contractor, is included when
determining whether at least 50% of the contract price is performed in a labor surplus area. See, e.g., 48 C.F.R. §
52.212-3 (representations and certifications regarding commercial items, including identification of any labor surplus
areas in which the costs to be incurred on account of manufacturing or production by the offeror or first-tier
subcontractors exceed 50% of the contract price); 48 C.F.R. § 52.219-2(b)-(c) (“The bidder’s status as a labor surplus
area (LSA) concern may affect entitlement to award in case of tie bids. If the bidder wishes to be considered for this
priority, the bidder must identify … the LSA in which the costs to be incurred on account of manufacturing or
production (by the bidder or the first-tier subcontractors) amount to more than 50 percent of the contract price. …
Failure to identify the labor surplus areas as specified in paragraph (b) of this provision will preclude the bidder from
receiving priority consideration. If the bidder is awarded a contract as a result of receiving priority consideration under
this provision and would not have otherwise received award, the bidder shall perform the contract or cause the contract
to be performed in accordance with the obligations of an LSA concern.”).
65 48 C.F.R. § 15.407-2(d)(2) & (e)(2)(v). A make-or-buy program is “that part of a contractor’s written plan for a
contract identifying those major items to be produced or work efforts to be performed in the prime contractor’s
facilities and those to be subcontracted.” 48 C.F.R. § 2.101. This provision generally applies to negotiated
procurements requiring cost or pricing data whose estimated value is $12.5 million or more, except when the proposed
contract is for research or development and, if prototypes or hardware are involved, no significant follow-on production
is anticipated. 48 C.F.R. § 15.407-2(c)(1)-(2). However, it can apply to negotiated procurements whose estimated value
is under $12.5 million if the contracting officer determines that the information is necessary and documents the reasons
in the contract file. Id. See 48 C.F.R. § 42.302(a)(55) (providing that contract administration functions include periodic
surveillance to “ensure the contractor’s compliance with … any labor surplus area contractual requirements”).
66 Prescribing Uniform Procedures for Certain Determinations under the Buy-American Act, 19 Fed. Reg. 8723 (Dec.
21, 1954). Bids or offers whose price is “excessive” may still be rejected notwithstanding this provision.
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contractual assistance are also provided to labor surplus areas by federal agencies and state and
local governments, but these are outside the scope of this report.68
Previously, there were additional preferences for vendors of any size located in labor surplus
areas, including price preferences, set-asides, and subcontracting programs. These preferences
originated in 1952 with President Truman’s Defense Manpower Policy No. 4 (DMP-4), which
authorized agencies to award contracts to vendors in “surplus labor areas” even when they were
not the lowest-priced bidders so long as their prices were “reasonable” and did not exceed ceiling
prices set by the Office of Price Stabilization.69 Agencies implemented DMP-4, in part, by set-
asides for labor surplus area concerns and subcontracting programs that required agency prime
contractors to subcontract with such concerns.70 Congress merged the set-asides for labor surplus
areas with those for small businesses in 1977 when it amended the Small Business Act of 1958 to
authorize agencies to use “total labor surplus area set-asides” whenever the Secretary of Labor or
a designee “specifically determines that there is a reasonable expectation that offers will be
obtained from a sufficient number of eligible concerns so that awards will be made at reasonable
prices.”71 In addition to creating a statutory basis for agencies’ existing practices, Congress
created a hierarchy of various types of set-asides for various sized firms.72 Under this hierarchy,
agencies were to use total set-asides for small businesses located in labor surplus areas if
possible.73 If that was not possible, they were to use total set-asides for small businesses, followed
by partial set-asides for small businesses and then total set-asides for labor surplus area
concerns.74 Unlike a total set-aside, a partial set-aside is a procurement for only part of which
competition is restricted; for the other part, any size or type firm can compete. One year later, in

(...continued)
67 See U.S. Department of Labor, Employment and Training Administration, Labor Surplus Area (LSA) List for
Program Year (PY) 2009 (Dec. 2, 2008), available at http://wdr.doleta.gov/directives/attach/ten/ten2008/ten21-08.pdf
(characterizing Executive Order 10582 as one pertaining to labor surplus area concerns).
68 See id.
69 Office of Defense Mobilization, Placement of Procurement in Areas of Current or Imminent Labor Surplus, 17 Fed.
Reg. 1195 (Feb. 7, 1952). DMP-4 was issued as part of broader efforts to ensure that conversion from civilian to
military production did not “result in dislocations causing serious waste of manpower and facilities in many areas, and
thereby reducing our defense potential.” Id.
70 See, e.g., Gov’t Accounting Office, The Labor Surplus Policy: Is It Effective in Providing Government Contracts to
High Unemployment Areas and Jobs to the Disadvantaged? (July 15, 1977), available at http://archive.gao.gov/f1002a/
102959.pdf; John Cibinic Jr. & Ralph Nash Jr., Formation of Government Contracts 628-31 (1st ed. 1982). The
subcontracting program required that government contracts valued above a certain amount include a clause stating that
it is government policy to contract with labor surplus area concerns and obligating the contractor to use its “best
efforts” to award subcontracts to such concerns. For contracts with higher values, contractors had to agree to develop
their own subcontracting “programs” for labor surplus area concerns.
71 An Act to Amend the Small Business Act and the Small Business Investment Act of 1958 to Increase Loan
Authorization and Surety Bond Guarantee Authority, P.L. 95-89, § 502, 91 Stat. 562-63 (Aug. 4, 1977).
72 Id.
73 Id.
74 Id. Congress amended these provisions in 1980 to ensure that small business set-asides took precedence over those
for labor surplus area concerns that were not small businesses. See An Act to Provide Authorization for the Small
Business Administration, and for Other Purposes, P.L. 96-302, § 117, 94 Stat. 839-40 (July 2, 1980) (establishing that
total set-asides for small businesses located in labor surplus areas have priority, followed by total set-asides for small
businesses, then partial set-asides for small businesses located in labor surplus areas, and then partial set-asides for
small businesses). Only after priority was given to these categories of small businesses were agencies to implement
total set-asides for concerns that were not small but would “perform a substantial proportion of the production on those
contracts and subcontracts within areas of concentrated unemployment or underemployment or within labor surplus
areas.”).
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1978, President Carter issued Executive Order 12073, directing agencies to “emphasize
procurement set-asides in labor surplus areas in order to strengthen our Nation’s economy.”75 The
order required that agencies set targets for contracting with labor surplus area concerns and use
set-asides or “other appropriate methods” to meet these targets.76
The Federal Acquisition Streamlining Act (FASA) of 1994 effectively ended most of these
preferences for labor surplus area concerns by repealing those sections of the Small Business Act
that established the order of preference for total and partial set-asides.77 Even prior to FASA,
however, implementation of set-asides for labor surplus area concerns, in particular, had been
limited by the Maybank Amendment. First introduced by Senator Burnet R. Maybank as an
appropriations rider to the Department of Defense (DOD) appropriations act for FY1954, the
Maybank Amendment prohibited DOD from paying “price differential[s] for the purpose of
relieving economic dislocations.”78 Similar provisions were included in subsequent DOD
appropriations acts, forcing DOD to develop a system of partial set-asides in order to comply with
the dual mandates of DMP-4 and the Maybank Amendment. DOD would split the procurement
into two parts, one of which was open to unrestricted bidding. Labor surplus area concerns then
had to match the benchmark price established through the unrestricted bidding to be awarded the
set-aside portion of the contract. Because labor surplus area concerns had to meet competitively
established prices, DOD could assert that it paid no “price differentials” with this approach.79
Even after Congress amended the Small Business Act in 1977 to authorize total set-asides for
labor surplus areas, DOD was still precluded from implementing them because Congress
reenacted the Maybank Amendment after enacting the 1977 amendments. When confronted with
the question of which governed, the 1977 amendments authorizing total set-asides or the re-
enacted Maybank Amendment prohibiting DOD from paying “price differential[s] for the purpose
of relieving economic dislocations,” GAO recommended that the provisions of the Maybank
Amendment prevailed because they were the last enacted,80 and the executive branch complied
with GAO’s recommendations.81 The Maybank Amendment was made permanent and codified at
10 U.S.C. § 2392(b) in 1981.82 It remains in effect even though FASA repealed almost all
provisions of the Small Business Act regarding labor surplus area set-asides, but it does not bar
DOD from implementing set-asides for HUBZone small businesses, discussed below.83

75 Federal Procurement in Labor Surplus Areas, 43 Fed. Reg. 36873, 36873 (Aug. 16, 1978).
76 Id.
77 P.L. 103-355, § 7101, 108 Stat. 3367 (Oct. 13, 1994). See also FAR Case 94-780, supra note 62.
78 An Act Making Appropriations for the Department of Defense and Related Independent Agencies for the Fiscal Year
Ending June 30, 1954 and for Other Purposes, P.L. 83-179, § 644, 67 Stat. 357 (Aug. 1, 1953).
79 See, e.g., An Assessment of the Labor Surplus Area Procurement Preference Program, vol. 1, pt. 1, pg. 23 (1979).
80 Maybank Amendment, B-145136 (Oct. 31, 1977) (“[W]e feel compelled to conclude that the Maybank Amendment
as contained in section 823 of P.L. 95-111 and viewed in its historical context must prevail as the later expression of
Congress.”).
81 Because the “separation of powers” doctrine precludes legislative branch agencies, such as GAO, from controlling
the actions of executive branch agencies, the recommendations that GAO makes in appropriations or bid protest
decisions are not legally binding upon executive branch agencies. See Ameron, Inc. v. U.S. Army Corps of Eng’s, 809
F.2d 979, 986 (3d Cir. 1986).
82 Department of Defense Authorization Act, 1982, P.L. 97-86, § 913(a)(1), 95 Stat. 1123 (Dec. 1, 1981).
83 The HUBZone program arguably does not target “economic dislocations” in the same way that labor surplus area set-
asides did because it was not intended to respond to economic changes brought about by conversion from civilian to
defense production, as labor surplus area set-asides were. Additionally, even if the HUBZone program were seen as
targeting “economic dislocations,” it would prevail over the codified Maybank Amendment because it was enacted
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HUBZone Small Businesses Under the HUBZone Act
Small businesses located in Historically Underutilized Business zones (HUBZones) also receive
preferences in federal contracting. These preferences originated with the HUBZone Act of 1997,
as Title VI of the Small Business Reauthorization Act of 1997 is commonly known,84 an act
characterized by its sponsors as both a jobs bill and a welfare-to-work bill.85 In enacting the
HUBZone Act, Congress hoped that federal spending in “economically stagnant areas” would
enable local businesses to build their capacity and would have a “multiplier effect,” as money was
re-spent within the community.86 Some commentators have characterized the HUBZone program
as a replacement for labor surplus area set-asides,87 while others have described it as an attempt to
assist socially and economically disadvantaged individuals outside the context of the 8(a)
Minority Business Development Program.88 Two years prior to enactment of the HUBZone Act,
the Supreme Court applied strict scrutiny to a federal minority contracting program for the first
time,89 prompting concerns about the future of the 8(a) Program given the presumption that
certain racial and ethnic minorities are disadvantaged incorporated in the Small Business Act.90
A HUBZone is any area located within one or more of the following:
1. qualified census tracts: any census tract designated by the Secretary of Housing
and Urban Development (1) in which 50% or more of the households have an

(...continued)
later.
84 P.L. 105-135, §§ 601-607, 111 Stat. 2627-36 (Dec. 2, 1997). Shortly prior to enactment of the HUBZone Act, then-
President Clinton issued an Executive Order proposing a new program of “empowerment contracting,” under which
agencies could “grant qualified large businesses and qualified small businesses appropriate incentives to encourage
business activity in areas of general economic distress, including a price or an evaluation credit, when assessing offers
for government contracts in unrestricted competitions.” Executive Order 13005, 61 Fed. Reg. 26069, 26069 (May 24,
2006). Under the Order, an “area of general economic distress” included any census tract with a poverty rate of at least
20%; any designated Federal Empowerment Zone, Supplemental Empowerment Zone, Enhanced Enterprise
Community, or Enterprise Community; or any rural or Indian Reservation area designated by the Secretary of Labor
based upon its unemployment rate, degree of poverty, extent of outmigration, and rate of business formation and
growth. Id. at 26070. Executive Order 13005 remains in effect, but there are no regulations implementing it. Some
agencies issued proposed rules under the Order, but none were ever finalized. See, e.g., Dep’t of Commerce,
Empowerment Contracting, 62 Fed. Reg. 27556 (May 20, 1997) (further recognizing “areas of severe economic
distress.”).
85 The HUBZone Act of 1997: Hearing on S. 208 Before the Senate Comm. on Small Bus., 105th Cong. 1 (1997)
(statement of Senator Christopher Bond, Chairman, Senate Committee on Small Business) (“[T]he HUBZone Act
directs specific Federal Government help to inner cities and rural counties that have low household incomes, high
unemployment, and whose communities have suffered from a lack of investment.”).
86 Small Bus. Admin., HUBZone Report to Congress 6, 27 (2002).
87 See, e.g., Deirdre Roney, HUBZones: The Class-Based Idea, 32 Pub. Cont. L. J. 933, 933 (2003) (“This program
constitutes a new form of an older idea, which first appeared in federal regulations as the ‘Labor Surplus Area’
concept.”).
88 The term “historically underutilized business” reportedly originated in 1992 as a synonym for “disadvantaged
business.” See Roney, supra note 87, at 940; Kendall L. Miller, HUBZones: Moving from the Racial Battleground to
the Economic Common Ground, 3 J. of Small & Emerging Bus. L. 367, 376 (1999) (“In light of the mentioned failures
of the 8(a) business development program, several members of Congress originally proposed that the HUBZone
program occupy a higher priority than the 8(a) program.”).
89 Adarand Constructors Inc. v. Peña, 515 U.S. 200 (1995). See generally CRS Report RL33284, Minority Contracting
and Affirmative Action for Disadvantaged Small Businesses: Legal Issues, by Jody Feder.
90 See 15 U.S.C. § 631(f)(1)(C). Such presumptions have been found to constitute “explicit racial classification[s].”
Rothe Dev. Corp. v. Dep’t of Defense, 545 F.3d 1023, 1035 (Fed. Cir. 2008).
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income which is less than 60% of the area median gross income or (2) which has
a poverty rate of at least 25%.91
2. qualified nonmetropolitan counties, or any counties that were not located in a
metropolitan statistical area at the time of the most recent census in which the (A)
the median household income is less than 80% of the nonmetropolitan state
median household income, based on the most recent data available from the
Bureau of the Census; (B) the unemployment rate is not less than 140% 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 (C) a designated “difficult development area” is
located. Difficult development areas are designated by the Secretary of Housing
and Urban Development.92 They can only be designated in Alaska, Hawaii, and
territories or possessions of the United States outside the 48 contiguous states.93
3. lands within the external boundaries of Indian reservations.
4. redesignated areas, or census tracts or nonmetropolitan counties that cease to be
qualified under the criteria described above. Such areas retain their status as
HUBZones only until the later of (1) the date on which the Census Bureau
publicly releases the first results from the 2010 decennial census or (2) three
years after the date on which the census tract or nonmetropolitan county ceases to
be qualified.
5. base closure areas, or lands within the external boundaries of a military
installation that were closed through a privatization process under the authority
of (1) the Defense Base Closure and Realignment Act of 1990; (2) title II of the
Defense Authorization Amendments and Base Closure and Realignment Act of
1988; (3) Section 2687 of Title 10 of the United States Code; or (4) any other
provision of law authorizing or directing the Secretary of Defense or the
secretary of a military department to dispose of real property at a military
installation for purposes relating to base closures or redevelopment, while
retaining the authority to enter into a leaseback of all or a portion of the property
for military use.94
Small firms located in HUBZones that meet certain eligibility requirements—key among which is
that at least 35% of their employees also live in HUBZones95—are eligible for three different
types of preferences in federal contracting. First, agencies may set-aside contracts for
competitions in which only HUBZone small businesses can compete so long as the contracting
officer reasonably expects that at least two qualified HUBZone small businesses will submit
offers and the award can be made at fair market price.96 Second, when the contracting officer does

91 This is the definition of “qualified census tract” contained in 26 U.S.C. § 42(d)(5)(B)(ii).
92 26 U.S.C. § 42(d)(5)(C)(iii).
93 Id.
94 15 U.S.C. § 632(p)(1).
95 15 U.S.C. § 632(p)(5)(A)(i)(I)(bb). Firms must also be (1) “small” under the Small Business Administration’s
(SBA’s) size standards; (2) at least 51% owned by U.S. citizens; and (3) certified by the SBA. 15 U.S.C. §
632(p)(5)(A) (size); 15 U.S.C. § 632(p)(3) (U.S. citizenship); 15 U.S.C. § 632(p)(5)(A) (SBA certification). The firm is
also subject to limitations on subcontracting and must perform certain percentages of work on contracts that it receives
under the HUBZone program with its own employees. 15 U.S.C. § 632(p)(5)(A)(i)(III)(aa)-(bb).
96 15 U.S.C. § 657a(b)(2)(B). Originally, contracts were set aside for HUBZone firms that were also participants in the
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not reasonably expect at least two qualified HUBZone small businesses to submit offers, agencies
can make sole-source awards to such businesses in circumstances in which they could not
generally make sole-source awards to other businesses. While agencies are normally required to
find that specific circumstances exist before making a sole-source award (e.g., single source for
goods and services, unusual and compelling urgency), they may make sole-source awards to
HUBZone small businesses so long as (1) the HUBZone small business is found to be a
responsible contractor with respect to the performance of the contract; (2) the anticipated price of
the contract does not exceed $4 million ($6.5 million for manufacturing contracts); and (3) the
contracting officer determines that the award can be made at a fair and reasonable price.97 Third,
agencies may generally grant a 10% price evaluation preference to offers submitted by HUBZone
small businesses in competitions that are open to all firms.98 Additionally, there are goals for the
percentage of federal contract dollars awarded to HUBZone small businesses government-wide
and by agency.99
The preference for HUBZone firms is not absolute. Procurements may not be made through the
HUBZone program, using any form of HUBZone preference, if they “would otherwise be made
from a different source under section 4124 or 4125 of title 18 or the Javits-Wagner-O’Day
Act.”100 This provision effectively assures that the Federal Prison Industries program and
nonprofit agencies for the “blind or severely disabled” take precedence over HUBZone firms.
Additionally, requirements that have been performed under the 8(a) Program or accepted for the
8(a) Program cannot be awarded to HUBZone firms unless the SBA releases them.101
HUBZone set-asides were once viewed by GAO and the federal courts as having “precedence”
over set-asides for other types of small businesses (e.g., 8(a) small businesses, service-disabled
veteran-owned small businesses) because set-asides under the HUBZone Act were “mandatory,”
when certain conditions were met, while other set-asides were “discretionary.”102 However, this
preference was never widely implemented because the Obama Administration declined to follow

(...continued)
8(a) Minority Business Development Program before being set aside for HUBZone firms that were not 8(a)
participants. See 13 C.F.R. § 126.607(b) (1999). However, this requirement was later removed.
97 15 U.S.C. § 657a(b)(2)(A)(i)-(iii).
98 15 U.S.C. § 657a(b)(3)(A). The price evaluation preference works as follows: if a non-HUBZone business bids
$100,000 and a HUBZone small business bids $110,000, the HUBZone small business would win because, after its
offer is reduced by 10% ($11,000), it is the lower bidder. The amount of the price evaluation preference is not always
10% when the Secretary of Agriculture purchases agricultural commodities for any purpose, including for export
operations through international food aid programs administered by the Farm Service Agency. 15 U.S.C. §
657a(b)(3)(B)-(C).
99 15 U.S.C. § 644(g)(1)-(2). By statute, the government-wide goal must be at least 3%. The agency-specific goals are
set by agencies in consultation with the SBA, and are 3% for most agencies. The government-wide goal for HUBZone
small businesses included only federal contracts, not subcontracts, through FY2010. However, the 111th Congress
enacted legislation allowing both federal contracts and federal subcontracts to count toward the government-wide goal.
See Small Business Jobs and Credit Act of 2010, P.L. 111-240, § 1347(b)(2), 124 Stat. 2547 (Sept. 27, 2010).
100 15 U.S.C. § 657a(b)(4).
101 13 C.F.R. § 126.605(b) (“A contracting activity may not make a requirement available for a HUBZone contract if ...
[a]n 8(a) participant currently is performing the requirement through the 8(a) … program or SBA has accepted the
requirement for award through the 8(a) … program, unless SBA has consented to release the requirement from the 8(a)
… program.”).
102 See generally CRS Report R40591, Set-Asides for Small Businesses: Recent Developments in the Law Regarding
Precedence Among the Set-Aside Programs and Set-Asides Under Indefinite-Delivery/Indefinite-Quantity Contracts, by
Kate M. Manuel.
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the GAO’s recommendations that HUBZone set-asides be used instead of other set-asides
whenever possible.103 The Administration also construed a March 2, 2010, decision by the U.S.
Court of Federal Claims finding that HUBZone set-asides have precedence over 8(a) set-asides as
applying only to the procurement at issue in that case.104 Although an August 13, 2010, decision
by this same court permanently enjoined the executive branch from relying on its interpretation of
the Small Business Act, which provided for “parity” among the set-aside programs,105 the Small
Business Jobs and Credit Act of 2010, enacted on September 27, 2010, amended the HUBZone
Act by removing the language which prompted GAO and the courts to find that HUBZone set-
asides had “precedence” over 8(a) and other set-asides.106 Thus, only in procurements conducted
between August 13, 2010, and September 27, 2010, were agencies clearly required to give
precedence to HUBZone set-asides.
Table 1. Comparison of Procurement Preferences for “Local Contractors,” Labor
Surplus Area Concerns, and HUBZone Small Businesses
Category
Eligibility & Applicability
Preference Type
“Local
Vendors must “reside or do business primarily” in a
Set-Asides
Contractors”
presidentially declared disaster or emergency area
Evaluation preferences
Preference only for contracts for debris clearance,
distribution of supplies, reconstruction, and other

major disaster assistance activities
Set-asides can be limited to small businesses
Labor Surplus
Vendors must be located in a “civil jurisdiction” with an Tie-breaker in sealed bid
Area Concerns
unemployment rate 120% of the national average or
procurements
10% or higher
Evaluation factor in certain
Vendors must “smal ” under the SBA’s size standards
negotiated procurementsa
to be eligible for tie-breaker

103 See Office of Legal Counsel, Department of Justice, Permissibility of Small Business Administration Regulations
Implementing the Historically Underutilized Business Zone, 8(a) Business Development, and Service-Disabled
Veteran-Owned Small Business Concern Programs, August 21, 2009, available at http://www.usdoj.gov/olc/2009/sba-
hubzone-opinion082109.pdf. Because GAO is a legislative-branch agency, the “separation of powers” doctrine
prevents its recommendations from being legally binding upon executive-branch agencies. See Ameron, Inc. v. U.S.
Army Corps of Eng'rs, 809 F.2d 979, 986 (3d Cir. 1986). Rather, agencies are required by statute to notify GAO within
65 days after receiving its recommendations if they do not intend to implement them, and GAO, in turn, must notify
four committees of Congress. 31 U.S.C. § 3554(b)(3) (Senate Committee on Homeland Security and Governmental
Affairs, Senate Committee on Appropriations, House Committee on Oversight and Government Reform, House
Committee on Appropriations).
104 U.S. Department of Justice, Civil Division, Re: Mission Critical Solutions v. United States, No. 09-864 (Fed. Cl.)
(Feb. 26, 2010), Mar. 17, 2010 (letter on file with the author). The judge in this case, Mission Critical Solutions v.
United States, 91 Fed. Cl. 386 (2010), did not explicitly enjoin the government from making future awards based on the
SBA’s view that there is “parity” among the set-aside programs, and the Director of the Commercial Litigation Branch
of the Civil Division at the U.S. Department of Justice (DOJ) subsequently stated that the court’s injunction “applie[d]
only to the specific contract at issue in this case and not to operation of the SBA’s parity rule more generally.”
Agencies were thus instructed to continue applying the parity rule in their other procurements.
105 DGR Assocs., Inc. v. United States, 94 Fed. Cl. 189 (2010).
106 See P.L. 111-240, § 1347, 124 Stat. 2546-47 (Sept. 27, 2010).
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Category
Eligibility & Applicability
Preference Type
HUBZone Small
Vendors must be located in a qualified census tract,
Set-asides
Businesses
qualified nonmetropolitan county, lands within the
external boundaries of Indian reservations,
Sole-source awards
“redesignated areas,” or base closure areas
10% price evaluation preference
Preferences not applicable if requirements would have
been procured through Federal Prison Industries or
from nonprofit agencies for the “blind or severely
disabled;” requirements procured through or accepted
for the 8(a) Program must be released by SBA before
they can be awarded through the HUBZone program
Source: Congressional Research Service
a. Formerly, labor surplus area concerns were also eligible for price preferences, set-asides, and
subcontracting programs. See supra notes 69-83 and accompanying text.
Miscellaneous Provisions
In addition to these government-wide preferences, there are other location-based preferences that
are agency-specific. This section does not attempt to provide a comprehensive listing of such
provisions. However, it does give examples of major “types” of agency-specific preferences.
First, there are provisions in appropriations acts authorizing specific agencies to give “special
consideration” to offers from “local”107 vendors when evaluating proposals,108 or award contracts
to “local” vendors “notwithstanding Federal Government procurement and contracting laws,”
which generally bar agencies from preferring local vendors by requiring full and open
competition.109 These provisions generally involve contracts for specific activities, such as “forest
hazardous fuels reduction, watershed or water quality monitoring or restoration, wildlife or fish
population monitoring, or habitat restoration or management,”110 and apply only to funds
appropriated under the act.111 They are generally not codified.
Second, there are provisions in program authorization acts or other acts that prefer foreign
vendors who are “local” for purposes of the contract being performed because of U.S. military or
diplomatic interests. The National Defense Authorization Act for FY2010 includes such a
preference for “products and services produced in countries along a major route of supply to

107 “Local” is not defined for purposes of this provision.
108 Department of the Interior, Environment, and Related Agencies Appropriations Act, 2010, P.L. 111-88, § 413, 123
Stat. 2958-59 (Oct. 30, 2009) (“In awarding a Federal contract with funds made available by this Act, notwithstanding
Federal Government procurement and contracting laws, the Secretary of Agriculture and the Secretary of the Interior
(the “Secretaries”) may, in evaluating bids and proposals, give consideration to local contractors who are from, and
who provide employment and training for, dislocated and displaced workers in an economically disadvantaged rural
community, including those historically timber-dependent areas that have been affected by reduced timber harvesting
on Federal lands and other forest-dependent rural communities isolated from significant alternative employment
opportunities.”).
109 Id., 123 Stat. 2959 (“[N]otwithstanding Federal Government procurement and contracting laws the Secretaries may
award contracts, grants or cooperative agreements to local non-profit entities, Youth Conservation Corps or related
partnerships with State, local or non-profit youth groups, or small or micro-businesses or disadvantaged businesses.”).
110 Id.
111 Such preferences could, however, be given quasi-permanent effect by being included in consecutive appropriations
acts.
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Afghanistan.”112 Where such products and services are involved, the Department of Defense may
set aside procurements for local vendors or grant other unspecified “preferences” if the Secretary
of Defense makes certain determinations about the proposed use of the products or services and
the effects of restricting competition.113 Such authorities are often temporary, expiring on specific
dates, and are also generally not codified.114
Finally, there are provisions that effectively give residents of “noncontiguous states,” including
Alaska, Hawaii, and certain territories and outlying islands, preference as employees on military
construction or service contracts performed, in whole or in part, in the state. Whenever the state
unemployment rate exceeds that national average, contractors awarded such contracts must
employ “individuals who are residents of that noncontiguous State and who, in the case of any
craft or trade, possess or would be able to acquire promptly the necessary skills to perform this
contract.”115 This requirement can be waived only by the Secretary of Defense on a case-by-case
basis in the interest of national security.116 This preference originated as an appropriations rider in
1999,117 but it was made permanent and codified in 2006.118

Author Contact Information

John R. Luckey
Kate M. Manuel
Legislative Attorney
Legislative Attorney
jluckey@crs.loc.gov, 7-7897
kmanuel@crs.loc.gov, 7-4477

112 P.L. 111-84, § 801, 123 Stat. 2399-400 (Oct. 28, 2009).
113 Id., 123 Stat. 2399 (“A determination described in this subsection is a determination by the Secretary that—(1) the
product or service concerned is to be used—(A) in the country that is the source of the product or service; (B) in the
course of efforts by the United States and the NATO International Security Assistance Force to ship goods to
Afghanistan in support of military or stability operations in Afghanistan; or (C) by the military forces, police, or other
security personnel of Afghanistan; (2) it is in the national security interest of the United States to limit competition or
provide a preference as described in subsection (a) because such limitation or preference is necessary (A) to reduce
overall United States transportation costs and risks in shipping goods in support of military or stability operations in
Afghanistan; (B) to encourage countries along a major route of supply to Afghanistan to cooperate in expanding supply
routes through their territory in support of military or stability operations in Afghanistan; or (C) to help develop more
robust and enduring routes of supply to Afghanistan; and (3) limiting competition or providing a preference as
described in subsection (a) will not adversely affect—(A) military or stability operations in Afghanistan; or (B) the
United States industrial base.”).
114 Id., 123 Stat. 2400.
115 48 C.F.R. §§ 222.7000—222.7002.
116 48 C.F.R. § 222.7003.
117 Department of Defense Appropriations Act, 2000, P.L. 106-79, § 8071, 113 Stat. 1245 (Oct. 25, 1999).
118 Department of Defense Appropriations Act, 2007, P.L. 109-289, § 8048, 120 Stat. 1284 (Sept. 29, 2006) (codified at
10 U.S.C. § 2304 note).
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