United States: Diversity: Success In Small Business Contracting: How To Maximize The Opportunities And Avoid The Pitfalls

The uncertainty of the current construction market has left many contractors looking for opportunities in new markets.  Over the past several years, the federal government, and specifically their small business contracting programs, has been a valuable source of opportunity for construction contractors.  Although many of these opportunities are specifically set aside for small businesses, small businesses and large businesses alike can benefit from these opportunities.    

Although set-aside programs provide a tremendous opportunity for small businesses to develop their expertise, this opportunity must be pursued with a strong understanding of the regulations governing the programs.  A failure to understand and comply with these regulations will foreclose opportunities to do business with the federal government and may even result in civil or criminal liability.

This article addresses the various contracting programs established by the federal government that are intended to increase participation by minority and women contractors in the construction industry.  This article also addresses the common pitfalls related to affiliation that can turn an exciting opportunity into a nightmare.

Federal Programs for Disadvantaged and Women-Owned Small Businesses:

The federal government seeks to award close to a quarter of all federal prime contract dollars to small business groups, with subcontracting goals for certain small business groups as well.  The U.S. Small Business Administration (SBA) implements and administers multiple programs to assist small businesses contracting with federal agencies.  Among these programs are the 8(a) Business Development Program and the Women-Owned Small Business (WOSB) Program. 

The 8(a) Business Development Program

The 8(a) Business Development (BD) Program was established to assist small disadvantaged businesses compete for federal contracts.  In order to qualify for the 8(a) BD Program, a small business must be unconditionally owned and controlled by one or more "socially and economically disadvantaged individuals" who are of good character, citizens of the United States, and demonstrate a potential for success. 

The regulations governing the 8(a) provide that socially disadvantaged individuals include: Black Americans, Hispanic Americans, Native Americans, and Asian Pacific Americans.  However, minority status is not required to demonstrate social disadvantage. 

Economic disadvantage is characterized by an impaired ability to compete in the free enterprise system due to diminished capital and credit opportunities.

In addition, 8(a) participants must fall within the size standards applicable to their industry NAICS codes.  These standards govern threshold to be considered "small" and are calculated based on a company's average annual receipts for the prior three years. 

To qualify as "economically disadvantaged", an individual cannot exceed any one of the thresholds set forth for personal income, personal net worth, or total assets.  The threshold for personal net worth is $250,000.  An applicant's personal residence, as well as funds invested in an IRA or other "official retirement account that [is] unavailable to an individual until retirement age without a significant penalty," are specifically excluded from the personal net worth determination.  

The regulations further provide that income received from an applicant that is a S Corp., LLC or partnership will be excluded from an individual's net worth where the applicant can demonstrate that the income was reinvested in the firm or used to pay taxes arising in the normal course of operations of the firm.  Losses from the business entity, however, are losses to the company only, not losses to the individual, and cannot be used to reduce an individual's net worth.

The SBA 8(a) Mentor-Protégé Program

Businesses that are eligible for the 8(a) BD Program also have the opportunity to participate in SBA's 8(a) Mentor-Protégé Program.  Under the Program, the Mentor provides its expertise and resources to the Protégé.  The regulations provide that any concern or non-profit entity that demonstrates a commitment and the ability to assist developing 8(a) Participants may act as a mentor.  In order to qualify as a mentor, an entity must (1) demonstrate favorable financial health, (2) possess good character, (3) cannot appear on the federal list of debarred or suspended contractors, and (4) must be able to impart value to the Protégé due to lessons learned and practical experience. 

In order to initially qualify as a Protégé, an 8(a) Participant must (1) be in the developmental stage of participation, (2) have never received an 8(a) contract, or (3) have a size that is half the size standard corresponding to its primary NAICS code.

Women-Owned Small Business Program

The Women-Owned Small Business (WOSB) Program facilitates federal contracting with WOSBs and economically disadvantaged women-owned small business (EDWOSBs).  This Program authorizes federal agencies to set aside certain contracts for competition solely among WOSBs and EDWOSBs, in an effort to meet the federal government's goal of awarding a certain percentage of both prime and subcontract dollars to these groups.   

In order to qualify as a WOSB, the business concern must be at least 51% directly and unconditionally owned and controlled by one or more women who are citizens of the United States.  An EDWOSB includes the additional requirement that the women are economically disadvantaged. 

Although no program has been established yet, the SBA intends to create a Mentor-Protégé program for WOSBs that is similar to the 8(a) program.  This program is likely to provide similar contracting benefits to WOSBs as the current program provides to 8(a) participants.  These benefits are discussed below. 

State-Level Programs

Programs supporting minority or women-owned small businesses are not limited to the federal government.  Many states have also implemented similar programs. 

For instance, the State of Maryland established the Minority Business Enterprise (MBE) Program to assist minority- and women-owned businesses gain access to state government contracting opportunities.  The MBE Program requires that approximately 70 state agencies and departments strive to spend a quarter of their contracting dollars on certified MBEs.  In FY 2012, the State of Maryland achieved this goal, with a total MBE participation of 25.2%.

For contracts that are fully-funded by the State of Maryland, or a combination of state and local government funds, an MBE is defined as: "Any legal entity, other than a joint venture, organized to engage in commercial transactions which is at least 51 percent owned and controlled by one or more minority persons, or a non-profit entity organized to promote the interests of the physically or mentally disabled." 

Minority persons generally include a member of the following groups: African American, American Indian/Native American, Asian, Hispanic, Women, and Physically or Mentally Disabled.  The MBE Program also has a Personal Net Worth (PNW) eligibility requirement.  An individual's PNW is the net value of assets held by that individual.  In 2013, the PNW cap for the MBE Program is $1,615,663.00.

Teaming Arrangements on Set-Aside Contracts

Although these programs are intended to assist minority and women-owned businesses to grow and develop, they also provide a tremendous business opportunity to large businesses that are willing to provide a guidance and assistance to these entities on set-aside contracts. 

The most common methods of collaboration are small Prime Contractor/ large Subcontractor teams or Joint Ventures.  Traditionally, a joint venture is considered affiliated, and the partners' combined annual receipts will be considered to determine size eligibility for small business set-aside contracts.   A Joint Venture between an SBA-approved Mentor and its 8(a)Protégé, however, is exempt from this general affiliation rule.  Prime/Sub teams offer an opportunity for large firms to work with small firms on set aside contracts even if they are not in a formal Mentor-Protégé relationship. 

The FAR encourages these teaming arrangements because they allow the participating businesses to "complement each other's unique capabilities" while "offer[ing] the Government the best combination of performance, cost, and delivery."  But these arrangements must be properly structured in order to avoid an affiliation determination by the SBA. 

Common Pitfalls Related to Affiliation

There is a great deal of opportunity for disadvantaged and women-owned small businesses to contract with the federal government as well as state and local governments.  But it is particularly important for small businesses, as well as the businesses they team with, to be aware of the relevant regulations and common pitfalls. 

The most common issue businesses are likely to face is affiliation.  A finding of affiliation will affect whether a business qualifies as small for any given contract.   Businesses are affiliated if one controls or has the power to control the other, or a third party or parties controls or has the power to control both.  To determine whether two firms are affiliated, the SBA generally considers ownership, management, previous relationships between the two businesses, and contractual relationships. 

The practical consequence of two firms being affiliated is that their annual receipts of both business and all of their affiliates will be aggregated.  In most instances, this will render the small business ineligible for set-aside contracts because it no longer meets its applicable size standard. 

Affiliation Can Arise In the 8(a) Mentor-Protégé Program

Although the 8(a) Mentor-Protégé Program provides a valuable protection from a finding of affiliation, this protection is not absolute.  Instead, the exemption applies only to assistance provided by the Mentor under the Parties' Mentor-Protégé Agreement.  Accordingly, it is important to structure the work performed by each Joint Venture partner to be consistent with the terms of the Mentor-Protégé Agreement.

For example, Mentor-Protégé joint ventures may be deemed affiliated if they have an extensive relationship outside the 8(a) BD Program.  The SBA Office of Hearings and Appeals issued a decision in Size Appeal of Patriot Construction, Inc., SBA No. SIZ-5439 (2013) where it suggested that "extensive sharing of employees between the two concerns, outside of the contracts the approved joint ventures performed, was beyond the scope of the assistance provided under the mentor/protégé agreement, and thus constituted a basis for finding affiliation between [the two participating businesses] for other reasons." 

2. Ostensible Subcontractor Rule

In a Prime/Sub teaming arrangement on a set-aside contract, the small business prime contractor retains control over the contract management and is solely responsible for performance.  If, however, the government determines that a subcontractor is "perform[ing] the primary and vital requirements of a contract" or the prime contractor is "unusually reliant" on the subcontractor, the prime and its "ostensible subcontractor" will be treated as affiliates.

In order to avoid a finding of affiliation under the ostensible subcontractor rule, it is critical that the small business, prime contractor retain control over the project.  This may be difficult to achieve, particularly when the prime contractor is a small business that has subcontracted with a larger business that has more resources and experience. 

A carefully drafted subcontract agreement can protect Prime/Sub teams from a finding of affiliation under the Ostensible Subcontractor Rule.  In drafting the agreement, the parties should give extra consideration to the following terms:

  • undue restrictions on the prime's right to select another subcontractor;
  • excessively favorable provisions for the subcontractor;
  • sharing of program management responsibility with the subcontractor

3. Bonding Assistance

Small businesses competing for federal construction and infrastructure projects may have a difficult time securing the necessary bonds.  One solution to this problem is for the large business to provide bonding assistance on the project.  

However, businesses must be careful upon entering into these agreements because they might indicate affiliation.  Although the SBA Office of Hearings and Appeals has repeatedly held that bonding assistance is not dispositive of affiliation, it can form the basis for an affiliation determination when considered with other factors.

For example, in Appeal of David Boland, Inc., SBA No. SIZ-4965 (2008), the SBA OHA found two businesses to be affiliated where they entered into a bonding assistance agreement and had a long-term relationship in which each business was dependent on the other for a large portion of its revenue. 

It is critical that businesses contemplating a bonding assistance agreement are careful craft the agreement to mitigate affiliation concerns.  Specifically, the two businesses should ensure that they reduce, to the extent feasible, other business relationships to avoid affiliation pitfalls that may ultimately prevent the small business from obtaining construction set-asides.


As noted herein and as detailed in the regulations and case law, when pursuing opportunities under these contracting programs, contractors should be mindful of issues related to affiliation and take proactive steps to avoid such a determination.  This careful approach to contracting under these programs will yield tremendous business opportunities and opportunities for growth and development of small and large businesses alike and avoid sanctions.

The authors would like to thank Sonia Tabriz, a third year law student at George Washington University School of Law, for her diligent efforts in assisting with the drafting of this article. 

Previously published in the Under Construction ABA Newsletter

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.