In recent weeks, federal agencies have received increasing scrutiny regarding the handling of their obligations to award contracts to small businesses. According to an Oct. 22, 2008 article in the Washington Post, “U.S. government agencies made at least $5 billion in mistakes in their recent reports of contracts awarded to small businesses, with many claiming credit for awards to companies that long ago outgrew the designation or never qualified in the first place, a Washington Post analysis shows” (emphasis added).1 In this environment of enhanced scrutiny, the U.S. Small Business Administration (“SBA”) has “changed the game” regarding agencies’ setting aside contracts for womenowned small businesses.

On Oct. 1, 2008, SBA issued a final rule amending SBA regulations governing small business contracts. The final rule authorizes federal agencies to set aside contracts for women-owned small businesses (“WOSBs”) in industries where such firms are shown to be underrepresented, and the procuring agency determines that a set-aside would justify a restriction on competition consistent with the equal protection requirements of the Due Process Clause of the Fifth Amendment of the Constitution.  

Prior to this final rule, SBA issued a proposed rule on Dec. 27, 2007, setting forth standards for determining the eligibility of business concerns qualifying as WOSBs and economically disadvantage women-owned small businesses (“EDWOSBs”). When the comment period closed March 21, 2008, approximately 1,591 of 1,720 comments requested that the proposed rule be withdrawn.2 Despite the extraordinary percentage of comments in opposition of the proposed rule, SBA is moving forward with the final rule setting forth contracting procedures for WOSBs and EDWOSBs.  

Statutory Authorization

SBA is authorized to issue the Final Rule under Section 811 of the Small Business Reauthorization Act of 2000, codified at Section 8(m) of the Small Business Act, 15 U.S.C. § 637(m). “[A] contracting officer may restrict competition for any contract for the procurement of goods or services by the Federal Government to small business concerns owned and controlled by women, if [certain conditions are met].” 15 U.S.C. § 637(m)(2). Section 8(m) implements Congress’ intent to reach a government-wide WOSB participation goal of 5 percent of the value of all contract awards. “The Government-wide goal for participation by small business concerns owned and controlled by women shall be established at not less than 5 percent of the total value of all prime contract and subcontract awards for each fiscal year.” 15 U.S.C. § 644(g)(1). Thus, the Final Rule falls within SBA’s statutorily mandated rulemaking authority to achieve certain levels of WOSB contracting.  

Overview of the Final Rule

The Final Rule implements a new procedure for determining which contracts may be set aside for WOSBs and EDWOSBs. The Final Rule creates a two-step process for determining which contracts are eligible for WOSB or EDWOSB set-asides. First, an agency must refer to an SBA-approved study to determine whether WOSB’s are underrepresented in the relevant industry. Then, if underrepresentation exists in an industry, the agency may set-aside contracts for WOSBs or EDWOSBs, if additional requirements are met that are specific to the procurement in question. The Final Rule further includes protest procedures and establishes penalties for business concerns that misrepresent their status. The following discussion talks about the two-step process for determining whether WOSB or EDWOSB setasides are appropriate, then highlights other aspects of the Final Rule that should be of interest to the contractor community.  

Industry Underrepresentation Determinations

The Final Rule defines “underrepresentation” as a ratio representing the WOSB share of federal prime contract dollars divided by the WOSB share of total business receipts. 13 C.F.R. § 127.102. Under the Final Rule, SBA will conduct a study every five years to identify the industries in which WOSBs and EDWOSBs are underrepresented or substantially underrepresented. 13 C.F.R. § 127.501(a) (1). “In determining the extent of disparity of WOSBs in Federal contracting, SBA may request that the head of any Federal department or agency provide SBA, or other designated entity, data or information necessary to analyze the extent of disparity of WOSBs in Federal contracting.” 13 C.F.R. § 127.501(a)(2). SBA will use four-digit North American Industry Classification System (“NAICS”) Industry Subsector industry codes to identify industries in which WOSBs are underrepresented or substantially underrepresented. 13 C.F.R. § 127.501(a)(3). Each agency seeking to reserve procurement for competition exclusively among WOSBs and EDWOSBs must conduct an analysis of its procurement history and decide if a set-aside would cure past discrimination. 13 C.F.R. § 127.501(b). Prior to issuing the proposed rule in December 2007, SBA instructed Kauffman- RAND Institute for Entrepreneurship Public Policy (“RAND”) to conduct a study to identify industries in which the Final Rule would apply. The RAND study outlined 28 different approaches to utilize a disparity ratio based on different data sources to yield levels of WOSB representation in federal procurement. SBA selected an approach that compared the percentage of federal contact dollars awarded with WOSBs to the percentage of total revenue from all sources going to WOSBs in industries falling within particular NAICS codes. Based on this approach, four industries were found in which WOSBs are underrepresented. Many of the comments SBA received took exception to SBA’s selected approach. Nevertheless, SBA has pressed forward with its RAND-study-determined identification of industries in which WOSBs are underrepresented.  

Eligibility Determinations

Once an agency has determined that the industry from which it will draw products or services is one in which WOSBs have been historically underrepresented, it can move to the second step of the process. The second step of the process is, itself, a two-step process. First, a contracting officer must determine whether a contract is appropriate for an EDWOSB set-aside. If a procurement is not EDWOSB-eligible, then the contracting officer may conduct the procurement as a WOSB set-aside. The following discussion sets forth the circumstances in which an EDWOSB set-aside is appropriate, and the circumstances in which a WOSB set-aside is appropriate.  

EDWOSB Set-Aside – A contracting officer may restrict competition to EDWOSBs if the contracting officer has “a reasonable expectation based on market research” that the following conditions are met: (1) two or more EDWOSBs will submit offers for the contract; (2) the anticipated award price of the contract (including options) does not exceed $5 million in the case of a contract assigned an NAICS code for manufacturing, or $3 million in the case of all other contracts; and (3) a contract award may be made at a fair and reasonable price. 13 C.F.R. § 127.503(a).  

WOSB Set-Aside – If the EDWOSB requirements are not met, then the contracting officer can consider the WOSB requirements. 13 C.F.R. § 127.503(b). A contracting officer may restrict competition to WOSBs if the following criteria are met: (1) the requirement is in an industry that SBA has designated as substantially underrepresented with respect to WOSBs; and (2) the contracting officer has “a reasonable expectation based on market research that two or more WOSBs will submit offers; the anticipated award will not exceed $5 million for manufacturing, or $3 million for other contracts; and a contract award may be made at a fair and reasonable price. Id.  

Finally, an agency’s ability to set aside an award for EDWOSBs, or WOSBs, is subject to an important caveat. A contracting officer may not restrict competition to eligible EDWOSBs or WOSBs if an “8(a) BD Participant”3 is currently performing the requirement under the 8(a) BD Program, or SBA has accepted the requirement for performance under the authority of the 8(a) BD program. SBA, however, may consent to release the requirement from the 8(a) BD program.  

Criticism of Eligibility Determinations

SBA received much criticism on the proposed rule during the comment period ending March 31, 2008. Commenters disapproved of the approach SBA selected and the data sources used for such determinations. In particular, critics focused on the fact that the RAND study was based on information pulled from the Central Contractor Registration (“CCR”) database. Further, companies that filed critical comments argued that the information in the database contained an inherent limitation that resulted in business concerns’ total revenues being counted for multiple NAICS codes and overstatements of aggregate revenue figures.  

Despite the negative comments, SBA continues to stand behind the approach it selected. SBA considers this approach, based on federal contract dollars, consistent with the Congressional intent and statutory requirements for WOSB Federal Contract Assistance Procedures. SBA, however, does acknowledge potential problems with the CCR data. Thus, the final rule, effective Oct. 31, 2008, does not identify the industries in which WOSBs and EDWOSBs are underrepresented or substantially underrepresented. Concurrent with the issuance of the final rule, the SBA seeks comments concerning the effect of the CCR data on the disparity ratio and the use of alternative data-sets previously not analyzed or contemplated. SBA will not identify the eligible industries until it reviews submitted public comments.  

Representations and Penalties

The Final Rule requires business concerns to confirm their status as a WOSB or an EDWOSB. 13 C.F.R. § 127.300(a). To qualify as a WOSB, a business concern must be at least 51 percent unconditionally and directly owned by at least one woman who is a U.S. citizen. WOSB qualifications also require one or more women to control the management and daily business operations of the business concern. 13 C.F.R. § 127.300(b). To qualify as an EDWOSB, a business concern must meet the same requirements as a WOSB and demonstrate that the owner or owners’ ability to compete in business has been impaired because of diminished capital and credit opportunities. Id.  

A business concern attempting to qualify as a WOSB or an EDWOSB must certify that it meets the SBA requirements for such designation. It must also attest that no changes in its circumstances have affected its eligibility since it submitted its certification. SBA maintains a list of approved certifiers that can assist WOSBs in self-determinations regarding their eligibility. 13 C.F.R. §§ 127.303, 127.304. SBA, at its discretion, may conduct an eligibility examination to investigate the eligibility of a business concern. 13 C.F.R. § 127.400. In addition, WOSBs that have been found not to qualify by SBA or a third-party SBA-approved certifier may request an eligibility examination. 13 C.F.R. § 127.405. A decision resulting from an SBA examination constitutes a final agency decision and will be effective and apply to all future solicitations.  

Persons or concerns that falsely self-certify or misrepresent a concern’s status as a WOSB or EDWOSB may be subject to suspension and debarment; administrative and civil remedies under the False Claims Act, 31 U.S.C. § 3729 et seq.; administrative and criminal remedies under the Small Business Act, 15 U.S.C. § 645(a) and (d); or criminal penalties under 18 U.S.C. § 1001.  

Protest Procedures

A business concern may challenge its eligibility in connection with a specific WOSB or EDWOSB requirement through a status protest prior to a final SBA decision. 13 C.F.R. § 127.601. “SBA will consider a protest challenging the status of a concern as an EDWOSB or WOSB if the protest presents credible evidence that the concern is not owned and controlled by one or more women who are United States citizens and, if the protest is in connection with an EDWOSB contract, that the concern is not at least 51% owned and controlled by one or more women who are economically disadvantaged.” 13 C.F.R. § 127.602. All protests must be in writing and must specify the grounds upon which the protest is based. 13 C.F.R. § 127.603. Any interested party or individual may submit information to the contracting officer in an effort to persuade SBA to conduct an examination of the WOSB or EDWOSB status of a business concern. Id. If an examination uncovers false certifications or other misrepresentations concerning WOSB or EDWOSB status, the business concern may be subject to criminal penalties, as well as suspension and debarment. 13 C.F.R. § 127.700.  

In addition, third parties may challenge the eligibility of another offeror or an awardee based on the offeror or awardee’s status as a WOSB or EDWOSB. 13 C.F.R. § 127.600. “An interested party[4] may protest the EDWOSB or WOSB status of an apparent successful offeror on an EDWOSB or WOSB contract.” Id. “Any other party or individual may submit information to the contracting officer or SBA in an effort to persuade them to initiate a protest or to persuade SBA to conduct an [EDWOSB or WOSB status] examination….” Id. Thus, the Final Rule not only provides procedures for protecting a contractor’s own size status, but also creates the opportunity to ensure that ineligible competitors do not win contracts set aside for EDWOSBs or WOSBs. Ostensibly, an interested party could further protest an agency’s failure to set aside a contract for EDWOSBs or WOSBs, or for improperly setting aside a procurement for EDWOSBs or WOSBs; but, currently, there do not appear to be any such cases considered by the Government Accountability Office or U.S. Court of Federal Claims.  

Opportunity to Comment

As mentioned above, SBA seeks comments concerning the effect of the CCR data on the calculations that determine whether WOSBs are underrepresented in particular industries and the use of alternative data-sets previously not analyzed or contemplated. SBA will not identify the eligible industries until it reviews submitted public comments. The Final Rule does not establish a date on which comments are due, so it is imperative that contractors whose interests may be affected by use of CCR data submit comments as soon as possible.