DOD halts small-biz benefits

The Defense Department last month suspended for one year all pricing preferences for small and disadvantaged businesses after the agency reported that it had exceeded its SDB contracting goals for the year. The move is expected to cost small businesses at least $50 million in DOD contracts.

DOD froze the preferences after the amount that DOD spent in fiscal 1998 with small and minority-owned businesses exceeded 5 percent of DOD's total spending, as required by the fiscal 1999 Defense authorization law. DOD put the preferences in place to help small and minority-owned businesses compete more effectively with larger businesses for government contracts. Under the policy, when a potential-bidders list includes an SDB and a large business, 10 percent is added to the large business' bid cost.

DOD spent some $9.5 billion in fiscal 1998, or 8.7 percent of all DOD contracting, with small and disadvantaged firms, and that spending automatically activated the suspension for all solicitations from Feb. 24, 1999, through February 2000, said Tim Foreman, acting deputy director of DOD's Office of Small and Disadvantaged Business Utilization. DOD did not put the suspension into effect until fiscal 1999 because it took several months before final performance numbers were available, according to Foreman.

"The legislation said if the Department of Defense has accomplished the goal of doing 5 percent of their business with SDBs [during fiscal 1998], then they will not have to use the price-evaluation adjustments," a spokesman for the Small Business Administration said.

Sen. Rick Santorum (R-Pa.), who offered the suspension amendment to the authorization law last year, could not be reached for comment.

In fiscal 1998, SDBs won roughly 6 percent of all prime contracts in DOD, totaling $6.5 billion. In addition, of the $53.1 billion that went to subcontractors, SDBs received $3 billion.

When it comes to doing business with SDBs, "you never know during the fiscal year what you're going to achieve," Foreman said. However, "we keep seeing more growth and competence among small and disadvantaged businesses, making them very competitive."

Devon Hewitt, a lawyer with Shaw, Pittman, Potts & Trowbridge, McLean, Va., said the decision takes away the "life raft'' that allowed SDBs to compete against larger firms, which can afford to offer lower prices for prime contracts. Although SDBs were able to collect $9.5 billion worth of DOD business in fiscal 1998, that success "doesn't mean they can swim with all the sharks. It just means that on the life raft, they fared better than expected," Hewitt said.

Now, Hewitt said, small businesses could be relegated to subcontractor status.

Industry Concerned

More competition worries Ashok Thareja, chief executive officer of A&T Systems, an SDB taking part in DOD's Mentor-Protege program with Lockheed Martin Corp. "There's not a lot of small business set-asides anymore," Thareja said. "The deals today are such that we just get excluded. The suspension does not create a level playing field for the little guy."

The preference freeze took industry by surprise. Bert Concklin, president of the Professional Services Council, said that on its face the suspension language is not very clear and makes little sense. "Why [DOD] would suspend set-asides and pricing preferences in a subsequent year doesn't make any sense," Concklin said.

Likewise, Olga Grkavac, senior vice president of the Information Technology Association of America's Enterprise Solutions Division, said the freeze is perplexing because "DOD tends to be very concerned about small businesses."

"I think federal agencies are in a bit of a squeeze here," said Ann Costello, a principal with Acquisition Solutions Inc. According to Costello, the Supreme Court's 1996 decision in Adarand Constructors Inc. v. Pena "handicapped the capability of federal agencies to implement and award contracts" to small businesses. The specific guidelines laid out in Adarand went into effect Oct. 1, 1998.

The Adarand case established that the "strict-scrutiny standard" must be applied to contract determinations and decision-making based on race, according to a 1997 study by Acquisition Solutions. The strict-scrutiny standard, as interpreted in subsequent affirmative-action reforms published by the Justice Department, requires any federal programs that make race a basis for contract decisions to be narrowly tailored to serve a compelling government interest.

"Adarand's effect has been to constrain the hand of government, legally and constitutionally, in achieving congressional and administration goals for socio-economic acquisition," Costello said.

Still, DOD officials worry that the preference freeze may hurt SDBs financially. "We are very concerned," Foreman said. "We don't want to lose them. We would hate it if they thought they've been abandoned, because they haven't."

DOD hopes new legislation will extend the SDB program through fiscal 2005. The goal of the legislation would be to reauthorize SDB contracts and to change or remove some of the guidelines, particularly the 5 percent mandated goal.

--Elana Varon contributed to this article.