Do small-business preferences make the grade?

In 2006, Congress set a governmentwide goal of awarding 23 percent of federal contracting dollars to small, minority and disadvantaged businesses. That year and every year since, the government has failed to hit the target. Nevertheless, supporters argue that the Small Business Administration’s goal and score card are serving their purpose: They are pushing agencies to think more about small-business contracting and taking to task those that consistently fall short.

“The goals are useful to help us understand how we’re doing with small businesses in the different categories and to keep our eyes on the goal,” said Jiyoung Park, associate administrator for small business utilization at the General Services Administration. “Without a management goal, it’s a lot harder to manage a program.”

Small business by the numbers

GSA and the Treasury Department are the only agencies that earned an A-plus on the small-business contracting score card in 2011. Of the other 22 agencies graded, 13 received As for exceeding the goal, five received Bs for achieving 90 percent to 99 percent of the goal, and four received Cs for meeting 80 percent to 90 percent of the goal.

SBA gave the government a B overall in 2011. That year, agencies awarded $91.5 billion in prime contracts to small companies. That represents 21.65 percent of federal contracting dollars, but it’s a decrease from 22.7 percent in fiscal 2010. In percentage terms, the slip is small, but small businesses felt the effects when $6.4 billion less flowed into their community in 2011.

“It’s a big deal to small businesses,” said Steven Koprince, a government contracts attorney and author of “The Small-Business Guide to Government Contracts.” “It’s not big digits, but it is big bucks.”

In addition, agencies failed to meet the goals for three of the four categories of small businesses.

Agencies did exceed one goal: Small, disadvantaged businesses received $32.4 billion, or 7.67 percent of contracting dollars. That exceeded the 5 percent target set by SBA but was a decline from fiscal 2010 when such firms received $34.4 billion, or 7.95 percent of contracting dollars.

John Shoraka, SBA’s associate administrator for government contracting and business development, wrote on SBA’s blog that the 2011 score card revealed that federal officials must find ways to improve their small-business contracting.

The goals behind the grades

Congress amended the Small Business Act in 1978 to require agencies to work with SBA to set small-business contracting goals each year. A decade later, Congress required governmentwide goals for the individual categories of small businesses.

Lawmakers in both parties have long voiced support for small businesses, and it's more than good politics. According to statute, Congress must support small businesses to ensure a viable marketplace: “The preservation and expansion of such competition is basic not only to the economic well-being but to the security of this nation. Such security and well-being cannot be realized unless the actual and potential capacity of small business is encouraged and developed.”

That sentiment remains strong on Capitol Hill. “Small businesses provide great products and services for federal agencies and save taxpayers money,” said Rep. Sam Graves (R-Mo.), chairman of the Small Business Committee. “We should be doing whatever we can to incentivize federal agencies to make it easier for small businesses to compete for federal contracts.”

Moreover, the set-aside programs seek to help groups that have historically struggled to succeed. “They were almost an extension of the civil rights legislation, designed to help minority, especially black-owned, businesses,” said Mark Amtower, a consultant and founding partner of Amtower and Co. “Set-aside quotas were designed to make certain agencies actually awarded some business to small companies. It was a well-intentioned, much-needed program.”

And in the case of preferences for veteran-owned businesses, there was a sense that individuals’ military service had earned them special consideration, particularly those who had been disabled by battlefield injuries. Set-asides, like the preferences given in civil service hiring, represent a veterans’ benefit that does not require dedicated funding. "The veterans’ program isn’t like a civil rights program," said Scott Denniston, executive director of the National Veteran Small Business Coalition. "It’s an earned right for service to the country."

In addition, a provision of the Federal Acquisition Regulation known as the Rule of Two requires agencies to give small businesses an advantage over other companies if there are at least two small companies that can offer reasonable bids.

Procurement officials recognize the importance of helping small firms. “Contracting officers generally accept the social responsibility,” said Bob Guerra, a partner at consulting firm Guerra Kiviat. “Philosophically, they believe in helping small businesses. They know the government is doing the right thing.”

Nevertheless, the preferences have their drawbacks, Guerra said. For instance, agencies sometimes pay more for a product or service through a small company than they would through a large corporation that boasts greater resources and more flexibility.

And assisting small businesses, although important, is not the only responsibility of contracting officers. Koprince noted that agencies must abide by pages and pages of FAR rules and the general practices of fairness, good competition and reasonable prices. “Small business is only one item in a large suite,” he said.

There is also the ever-present question of time — and the pervasive shortage of it. Agencies face significant pressures to hit deadlines but suffer relatively little fallout when they miss small-business goals, Amtower said. Indeed, only half of the 24 agencies that are graded have hit their overall goal even once since 2006, yet there have been no formal consequences for repeatedly falling short.

“Many procurement people look for the fastest and easiest way to get things done,” he said. That could mean awarding a sole-source small-business contract, whether or not it represents the best value. That approach can boost the agency’s small-business numbers and get things done quickly, but it can also lead to bid protests if a company believes an agency failed in some aspect of the solicitation or competition.

Aiming for an A

The SBA grades are arguably the clearest gauge of whether agency officials are carrying out the congressional policy of encouraging small-business contracting. To reach those goals, agency officials plan their strategies prior to the fiscal year’s start and then spend time interacting with the small-business community to learn which companies might be potential partners.

Lorraine Cole, director of the Treasury Department’s Office of Minority and Women Inclusion, said the Treasury’s deputy secretary addresses small-business goals during his quarterly performance meetings with each bureau’s senior staff, the senior procurement executive holds monthly meetings on the topic, and officials send out weekly reports to the department’s acquisition offices.

“These meetings drive accountability to make and sustain improvements,” Cole said.

Officials also emphasize small-business contracting by including relevant goals in the performance plans for all of Treasury’s acquisition employees, including senior staff members who have acquisition responsibilities.

All that effort seems to have paid off: Treasury surpassed its small-business goal in fiscal 2011. “We had a strong campaign, which had as a mantra ‘Crush the goals!’” Cole said.

SBA set a goal of 32 percent for the department in 2012, but Cole said Treasury is aiming for 35 percent instead.

Officials at the Department of Housing and Urban Development have taken a different tack by actively looking for small-business partners. Jemine Bryon, who has been HUD’s chief procurement officer since 2009, said she has found market research to be invaluable.

“Government should not sit and wait for people to come to them,” she said. “We should go out into the industry and find these companies.”

Many agencies have shied away from such networking to the point that the Office of Federal Procurement Policy began a campaign in 2011 to address misconceptions about agencies’ relationships with vendors. Like Bryon, then-OFPP Administrator Daniel Gordon stressed that market research is important to finding more businesses and boosting competition, and he made it clear that acquisition officials may talk to companies without fear of ruining a procurement.

“The government loses when we limit ourselves to the companies we already work with,” Gordon wrote.

Despite its outreach efforts, HUD was one of four agencies that received a C grade on the 2011 score card. According to Bryon, that is partly because the department’s work doesn’t lend itself to small-business contracting. HUD spends roughly $300 million annually through a mortgage program that requires working with large banks, and several major IT infrastructure contracts are going to large companies.

“That makes us have to hustle as much as possible” to meet the small-business goals, Bryon said.

Each spring, HUD officials draft a preliminary contracting plan and work with SBA on setting the goals. But officials continue looking for small-business opportunities as solicitations are drawn up, even if that means veering from the initial plan.

“It’s sort of a double bite of the apple,” she said.

Benefits and boondoggles

Good intentions do not automatically equal effective programs, however. Small-business set-asides are tempting targets for vendors of all sizes, and there have been loopholes since the beginning. Whether it’s ownership status or company location, attempts are made to bend or skirt the rules.

“As with many such programs, some weasels immediately started setting up shell companies,” Amtower said.

The Government Accountability Office has uncovered a number of instances of fraud. A father and son, for example, based their two-man grounds maintenance company in a HUBZone in Alabama. The company’s address was a mobile home in a residential trailer park, but the father and son lived some 90 miles away and the person living in the trailer didn’t work for the company.

Other firms have set up small businesses as fronts for larger companies, and all the work is passed through to the larger firm even though the law requires the small company that received the contract to perform a certain percentage of the work.

Scandals surrounding Alaska Native Corporations, which are eligible for SBA’s 8(a) set-asides and exempt from size caps on contracts and other restrictions, are perhaps the clearest example of good intentions gone bad. As the Washington Post’s Robert O'Harrow Jr. documented in a 2010 special report, tens of billions of dollars in federal contracts have gone to ANCs, yet their native Alaskan shareholders often received just a few hundred dollars each, while the bulk of the money went to non-native consultants and big subcontractors. That same year, Northern Virginia-based GTSI was suspended for a time from federal contracting for allegedly exploiting such ANC set-asides.

ANC advocates counter that the program benefits tribal communities through shareholder dividend payments and college scholarships and that regional corporations provide many jobs for Alaska natives.

Successful small businesses are often attractive acquisition targets for larger companies, particularly after they win lucrative set-aside contracts. It can look questionable at times: A large firm buys a small company and gets the contract’s work while the contract is still deemed a small-business award in terms of helping the agency achieve its annual goal.

Agencies aren’t above a bit of gamesmanship either, and sometimes seek small-business partners when the project is anything but small. In 2010, for example, the General Services Administration designated a $900 million commercial satellite communications project as a small-business set-aside contract.

And this summer, in a move some thought was motivated by politics and the upcoming election, the Department of Veterans Affairs urged procurement officers to steer all projects larger than $3,000 to small businesses. A VA spokesperson said no formal policy has been put in place, but multiple sources confirmed that any contract or task order going to a company other than a small business for the remainder of fiscal 2012 will require special approval.

Still, officials say, the benefits of small-business contracting can be substantial for all the parties involved. Agencies get to work with some of the most responsive and innovative companies, often with a direct line to the CEO, several officials said. Moreover, the smaller companies rely on those contracts and it shows. As Bryon put it, “The small businesses work harder because they know it’s their bread and butter.”

Officials need to recognize that small businesses can be important partners in achieving mission goals, not merely a goal to hit, said Kim Hayes, president and co-founder of the Ambit Group, a woman-owned, service-disabled veteran-owned small company.

“Setting aside work for small businesses can't be about hitting a target,” Hayes said. “Program offices must see small businesses as value-added partners that can effectively help them accomplish mission objectives. Helping program [offices] see that connection will lead to a meaningful understanding of the goals.”

Nevertheless, Cole said the real payoff goes to the small-business community rather than to her department or its budget. “Treasury exceeded its overall small-business contracting goal by a 6 percent margin,” she said. “Each 1 percent of Treasury’s contracting spending with small businesses translated into a $22 million investment in the small-business community.”

Tougher grading ahead?

Rule-breaking contractors and definition-stretching agencies might draw congressional ire, but legislators’ love of small-business preferences shows no sign of slowing. The House’s fiscal 2013 National Defense Authorization Act (NDAA) has a number of key provisions that would affect agency acquisition offices.

One of the most important changes would increase how much money the government awards to small firms. The House wants to raise the current 23 percent governmentwide goal to 25 percent. That would equate to $1 out of every $4 going to small businesses.

The authorization bill would also elevate the role of the small-business advocate at the Defense Department and would require officials to ensure that the director of each of the small-business programs participates in developing the requirements for all acquisitions and has a role in the decision-making process.

In addition, the bill would strengthen and clarify the role of DOD’s procurement center representatives, who advocate for small businesses within the department. The bill would also expand the definition of a bundled contract and eliminate procedures related to contract consolidation. Furthermore, DOD would have to designate an official at each defense audit agency to consider small-business issues.

Graves said his committee members have worked hard to pass the bipartisan reforms to help small contractors in the federal marketplace. “Our hope is that the Senate listens to the needs of small business and includes the critical reforms in their NDAA before the end of this year,” he said.

The authorization bill is must-pass legislation, but there is no guarantee that the small-business provisions will be retained in the final version. And the Obama administration has raised various concerns about the bill’s language, particularly the increased governmentwide small-business contracting goal.

The increase “would establish a laudable but overly ambitious governmentwide small-business procurement goal and unrealistic individual agency goals that could undermine the goals process and take away the government’s ability to focus its efforts where opportunities for small-business contractors are greatest,” according to a White House policy statement on the bill.

In other words, there might be more important questions that are overshadowed by all the scorekeeping.