Obtaining a Piece of the Pie: Small Business Preferences in Federal Contracts

The federal government is the single largest purchaser of goods and services in the world. Some of these purchases, of course, are for highly specialized goods or services produced or performed by large corporations. For the remaining purchases—everyday contracts for goods and services—the government sets aside acquisitions for small businesses. Knowing which contracts are set aside, and to whom, will assist in obtaining a competitive advantage.

“It is the policy of the government to provide maximum practicable opportunities in its acquisitions to small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, and women-owned small business concerns.”[23] In fact, the federal government’s statutorily set goal is to set aside twenty three percent of all its contracts annually to small businesses.[24]

In federal acquisitions, a small business (or a “small business concern”) is a business which is independently owned and operated and which is not dominant in its field of operation.[25] In addition, the business must meet certain size standards (generally either by the number of employees or the amount of annual receipts) as established by the Small Business Administration in that business’s industry.[26] To qualify as a small disadvantaged business, the small business concern must also be at least 51 percent owned or controlled by socially and economically disadvantaged individuals and be under the control of such individuals for its management and day-to-day operations.[27] A small disadvantaged business might qualify to participate in the Small Business Administration’s 8(a) program, through which the SBA contracts with other agencies and then subcontracts the work to 8(a) contractors.[28]

The requirements to qualify as a woman-owned or a veteran-owned business are similar. Women-owned small businesses are majority-owned by at least one woman and whose daily operation and management are controlled by at least one woman.[29] A veteran-owned business is majority-owned and controlled by at least one eligible veteran.[30] By statute, the government’s hope is to award at least five percent of all federal prime and subcontracts each fiscal year to women-owned small businesses and at least three percent of its contracts to veteran-owned small businesses.[31]

Previous Under Construction editions have discussed another important topic in determining a business’s size: affiliation. In addition to the business’s number of employees or annual receipts, the Small Business Administration also will consider those of the business’s affiliates in making size determinations. Affiliation exists when the small business concern is so dependent upon another business concern that its economic viability would be in jeopardy without such relationship. This dependency or control can arise through ownership, joint management, or other contractual relationship (such as a joint venture or teaming arrangement). To determine whether two separate business concerns are effectively affiliated, the government applies a totality of the circumstances test. Affiliation might operate to preclude some businesses for qualifying for small business set asides, so it’s something for every small business to consider.

So what is the benefit of a small business classification? Set asides: the government is required to set aside acquisitions for supplies or services having an anticipated dollar value between $3,000 and $150,000.[32] The government must also set aside contracts over $150,000 if there is a reasonable expectation that (1) offers will be made by at least two responsible small business concerns offering the products of different small business concerns, and (2) the award will be made at fair market prices.[33]

If setting aside the total acquisition for small businesses is not appropriate, the government can instead set aside a portion of an acquisition, with the exception of construction, for small businesses if the requirement is severable into two or more production runs or lots, one or more small business is expected to have competence and capacity to satisfy the set aside at a fair market price, and the acquisition is not subject to simplified acquisition procedures.[34]

There are, of course, a myriad of issues when considering whether to seek a small business certification and how to do so. Further, such issues are ripe grounds for a bid protest or False Claims Act qui tam action. But depending on a business’s characteristics, a small business classification might be an effective way to get a piece of the pie in government contracts.

[23] Federal Acquisition Regulation (“FAR”) § 19.201(a).

[24] 15 U.S.C. 644(g)(1).

[25] 15 U.S.C. § 632(a)(1).

[26] 15 U.S.C. § 632(a)(2).

[27] 15 U.S.C. § 637(d)(3)(C).

[28] See generally FAR § 19.8(a).

[29] 15 U.S.C. § 637(d)(3)(D).

[30] 15 U.S.C. § 637(d)(3)(E).

[31] 15 U.S.C. § 644(g)(1).

[32] FAR § 19.502-2(a).

[33] FAR § 19.502-2(b).

[34] FAR § 19.502-3(a).