On February 11, 2011, the Small Business Administration issued final regulations addressing an array of issues relating to the agency's programs, including the size standards applicable to nonmanufacturers or dealers, the elimination of the vexing use of both SIC and NAICS codes for size standards and adoption of the latter as the sole criteria for use in the standards, and the 8(a) mentor-protégé program. 76 Fed. Reg. 8222 (Feb. 11, 2011).
On September 22, 2011, Senator Claire McCaskill (D-Mo.), acting
as though the new SBA regulations had never been promulgated,
introduced the "Fairness for Small Businesses in Federal
Contracting Act of 2011," which, if enacted, would require
substantial changes to the current system for contracting under the
Small Business Regulations. The Senator believes that her
Subcommittee on Contracting Oversight's investigation of SBA
size standards has established, among other things, that because
the size standard for "nonmanufacturers", i.e.,
distributors of or dealers in products manufactured by others,
allows the entity to have up to 500 employees, it allows large
distributors or dealers to be awarded contracts which should go to
small ones. 13 C.F.R. § 121.406(b)(1)(i). The Senator also
takes issue with so-called loopholes she contends allow large
businesses to perform contracts intended for small businesses
– e.g., the size status of a small business is
determined as of the date of contract award, but the determination
remains valid for the life of the contract – thus,
formerly small businesses continue to perform contracts even though
they have grown into large ones.
Senator McCaskill, who is a former Missouri State Auditor, is
proposing steps that include: (i) elimination of the
"non-manufacturer rule," and (ii) elimination of the
Census Bureau's widely accepted North American Industrial
Classification System ("NAICS"),1 with a
direction to the Small Business Administration to come up with an
entirely new system for classifying industries. The first step is
unnecessary and irrelevant; the second would be both irrelevant and
profoundly disruptive of small business programs specficially and
the procurement system as a whole.
First, Senator McCaskill has missed the boat as to the actual
source of potential abuse of the so-called nonmanufacturer rule,
which is not the intrusion of large business dealers into the space
of small ones but the misuse of the rule by some small dealers
themselves, who Congress has directed "shall not be denied the
opportunity to submit and have considered . . . [their] offer[s]
for any procurement contract for the supply of a product"
under small business programs simply because they are not
manufacturers or processors of the product in question. 15 U.S.C.
§ 637(a)(2)(17)(A). The SBA, perhaps yielding too much in its
implementation of this direction, simply copied the criteria in the
statute, 15 U.S.C. § 637(a)(2)(17)(B), when drafting the size
standard so that it allowed a situation where, for example,
"[a] multi-million dollar supply contract in which a large
business manufacturer [or large distributor or dealer] provides the
supply items directly to the Government procuring agency and the
small business nonmanufacturer provides nothing more than its
status as a small business . . . ." 76 Fed. Reg. 8226 (Feb.
11, 2011). The new rules address this loophole by requiring that,
to take advantage of Congress's guarantee of participation, the
small business dealer must not only meet the size criteria but must
take ". . . ownership or possession of the item(s) with its
personnel, equipment of facilities . . . ." 13 C.F.R.
§121.406(b)(1)(iii).
Second, the notion that small business contractors who have
matured into large ones should forego all contracts awarded while
they were small is contrary to the policy underlying the small
business programs. Allowing a small business to grow as a result of
a Federal contract or subcontract award is the very purpose of
small business contracting programs – without the ability
to grow and benefit from contracts, there is no incentive for small
businesses to participate in the program at all. To the extent
there are real issues with the listing of contractors as small who
are clearly large, the problem is one of enforcement, not to be
solved with a wholesale rewriting of the rules. The Senator's
proposed solution, which entails basing the size standards on an
undefined "new" classification system and eliminating the
use of NAICS would place a huge burden on both the SBA –
whose competence to design and implement such a system is, as the
SBA would itself likely agree, questionable – and the
Federal contracting system as a whole because it would require
small businesses, contracting officers, prime contractors and a
number of other affected parties to understand and implement a
classification system that does not clearly correspond to a
particular type of contract. The effect could be to create a
disincentive to enter into small business contracting
programs.
Moreover, Senator McCaskill's proposed legislation ignores the
SBA's 8(a) Mentor-Protégé program, an area where,
prior to the issuance of the new regulations, the potential for
abuse by large businesses was high, in part because the rules
imposed no specific requirement as to the amount of work to be
performed by the small business participants in joint ventures
formed under the program. The new rules expand opportunities while
tightening the criteria for access, providing that 8(a)
participants (or protégés) in a
Mentor-Protégé Joint Venture ("JV") no
longer merely can perform a "significant portion" of the
JV's work but must perform 40% of the JV's work and receive
profits commensurate with the work it performs. Further, a mentor
who fails to provide sufficient assistance to its
protégé, or who violates the performance
requirements, is now subject to the threat of more severe
penalties, including suspension and debarment from Government
contracting. These changes cured two flaws in the joint venture
regulations that allowed both the small and large business members
of the joint venture to engage in behavior contrary to the purposes
of the program. Thus, the uncertainty of the "significant
portion" standard permitted, in some cases, an 8(a) firm to
have a minor role in contract performance, perhaps only assigned
ancillary or administrative tasks, while receiving 51% of the
profit. On the other hand, the non-8(a) large firm or mentor could
benefit from access to sales via competitive advantage of 8(a)
contracts, while providing no real developmental benefit for the
protégé.
Senator McCaskill's effort to make substantial changes to the
small business contracting programs only months after the
responsible agency has issued comprehensive new rules addressing
relevant problems makes no sense. Federal agencies and contractors
barely have had enough time to understand the new rules, much less
conform their practices to them. The "Fairness"
legislation should be allowed to die without further discussion.
That said, the proposed legislation does serve to highlight
increasing Congressional interest in the efficiency and
transparency of small business contracting which means that these
issues are now "hot-buttons" for SBA officials who now
have evidenced a new enthusiasm for eliminating exploitation of
small business contracting programs by large and small businesses
alike. Clearly, large businesses desiring to partner with small
businesses must take special care to examine any risk factors
particular to relationships with small businesses under SBA
programs.
Footnotes
1."NAICS is a system for classifying establishments (individual business locations) by type of economic activity . . . . NAICS is used by Federal statistical agencies that collect or publish data by industry. It is also widely used by State agencies, trade associations, private businesses, and other organizations." 74 Fed. Reg. 724 (Jan. 7, 2009).
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