SBA Proposes New Rules Authorizing Set-Asides for Women-Owned Small Businesses
January 7, 2008
Joseph Hornyak - Northern Virginia
Megan M. Mocho- Northern Virginia
At long last, the Small Business Administration (SBA) has issued proposed regulations implementing the Equity in Contracting for Women Act of 2000. The proposed rules, published in the Federal Register on December 27, 2007, are intended to increase federal contracting opportunities for women-owned small businesses.
The proposed rules authorize contracting officers to set aside certain types of procurements for women-owned small businesses (WOSBs) and a new sub-category of WOSBs called “economically disadvantaged” WOSBs (EDWOSBs). Prior to this rule, contracting officers were not authorized to set aside procurements for women-owned businesses, whether or not they are economically disadvantaged.1 If finalized, the new rules will be codified in a new part 127 of the SBA’s regulations (Title 13 of the CFR).
In general, the proposed regulations define a WOSB similar to the definition in existing SBA regulations.2 That is, to qualify as a WOSB, the concern must be “small” under the applicable size standard, and one or more women must own at least 51 percent and conduct the day-to-day management and administration of the concern. The proposed regulations, however, provide much more details on what constitutes ownership and control for this purpose, modeled in large part on existing SBA regulations governing 8(a) status. One difference between the proposed rule and the existing 8(a) regulations is that a woman’s ownership interest is determined without regard to community property laws.3 Thus, in a community property state, the SBA does not assume that the husband maintains a one-half interest in a company otherwise wholly owned by his wife. In contrast, 8(a) applicants are subject to state community property laws, and in some cases, spouses may be required to “transmute” a percentage of their community property interest in the 8(a) company in order to establish 51 percent ownership by the disadvantaged spouse.
Like any small business concern, a WOSB must also comply with the “50 percent rule” requiring the prime contractor to perform more than 50 percent of the contract’s labor dollars with its own personnel (for services contracts).
The new creation, an EDWOSB, is simply a WOSB that is owned and controlled by an “economically disadvantaged” woman. To qualify as economically disadvantaged, the woman must “demonstrate that her ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business.”4 Although this standard may appear highly subjective, the proposed regulations contain at least one objective test for economically disadvantaged status, namely, the woman’s personal net worth must be less than $750,000, not counting her ownership interest in the concern and equity in her primary personal residence.5 In this regard, the SBA again seems to have borrowed a concept from its 8(a) regulations.
The Certification Process
One notable difference between new part 127 and the SBA’s existing 8(a) regulations is the certification process. Under existing SBA regulations, only 8(a) contractors and HUBZone small businesses must apply for and receive a formal certification by SBA of their status. In contrast, small businesses and Service-Disabled Veteran-Owned (SDVO) small businesses may self-certify, subject to the protest process. Although the SBA appears to have wrestled with this issue, it ultimately decided to permit WOSBs and EDWOSBs to self-certify their status as such through the Online Representations and Certifications Application (ORCA) of the Central Contractor Registration (CCR) database.6 WOSBs may only use certain third-party certification as evidence supporting their representations in ORCA.
The proposed rules authorize competing bidders to pursue size protests regarding a putative awardee’s self-certification as a WOSB or EDWOSB in essentially the same way a protest can be pursued against other types of self-certifications.
As with other socio-economic categories, the proposed rules also permit WOSBs and EDWOSBs to submit an offer as part of a joint venture without losing their preferred status.7 The combined annual receipts or employees of the two entities participating in the joint venture must meet the size standard for the applicable NAICS code and one or both of the joint venturers must be certified as a WOSB or EDWOSB. The proposed rule is not clear, however, as to whether existing exceptions to affiliation for joint ventures in part 121 apply.
Only Four Industries Eligible for the Set-Aside
Though facially these rules appear to implement a much needed opportunity for women-owned small businesses, several members of Congress have already expressed disappointment in the new rules. For example, Sen. John Kerry (D-MA), who chairs the Senate panel overseeing the SBA, called the new regulations “a slap in the face to women business owners.”
The controversy over the new rules stems from certain limitations the SBA proposes to place on these set-asides. Specifically, contracting officers may only restrict procurements in those industries in which the SBA has pre-determined that WOSBs are “underrepresented.” Currently, the SBA has determined that WOSBs are only underrepresented in the four following industries:
• national security and international affairs
• coating, engraving, heat treating and allied activities
• household and institutional furniture and kitchen
cabinet manufacturing
• certain motor vehicle dealers
The SBA proposes to revisit this list in five years to identify other potential industries in which WOSBs are underrepresented.8 Until then, only these four NAICS codes are eligible for the set-aside.
Constitutional Analysis
In addition to the SBA’s determination of eligible industries, agencies themselves must analyze whether, within the four eligible industries, the particular procurement is suitable for a set-aside. Before setting aside a procurement for WOSBs or EDWOSBs, the contracting agency must analyze its own procurement history and determine that there is evidence of past discrimination in that industry by that agency.9 The SBA does not provide agencies with any other substantive guidance on what an appropriate analysis should entail.
This requirement attempts to satisfy the Due Process Clause of the Fifth Amendment to the U.S. Constitution. The Supreme Court has interpreted that clause to prevent the federal government from granting preferences on the basis of sex unless the preference furthers and important governmental objective and the means employed are substantially related to those objectives. This heightened standard for discrimination based upon sex was established by the U.S. Supreme Court in 1996. See United States v. Virginia, 518 U.S. 515 (1996).
No such requirement exists with regard to other types of set-asides, despite being based upon preferences that are also subject to heightened levels of constitutional scrutiny. For example, the 8(a) program provides a contracting preference based upon racial or ethnic status. Such a preference is subject to strict scrutiny and must be narrowly tailored to satisfy a compelling governmental need. See Adarand v. Slater, 228 F.3d 1147 (10th Cir. 2000). Yet, contracting officers wishing to set aside procurements for 8(a) participants are not required to conduct a constitutional analysis.10
Other Complications and Concerns
Other aspects of the proposed rules will complicate the contracting agency’s ability to set aside procurements for WOSBs. For example, the anticipated award price must not exceed $3 million ($5 million for manufacturing).11 No such limitations, either as to NAICS code or price, are placed on set-asides for other types of contractors, such as 8(a), HUBZONE or ordinary small business concerns. Also, a procurement may not be set aside for WOSBs or EDWOSBs if it is currently being filled by an 8(a) concern.12
Even before these proposed regulations were issued, several members of Congress were upset with SBA because of the lengthy delay – seven years – since Congress authorized set-asides for women-owned businesses. In its Federal Register notice, the SBA hinted that the delay resulted from ambiguities in the authorizing legislation, as well as the need to obtain review by the Department of Justice to address constitutional concerns. That did not stop members of Congress from immediately criticizing SBA’s approach. “We’ve been trying for seven years to get the administration to end unfair contracting practices,” Sen. Kerry said in a statement issued the day the rule was released. “By cherry picking data, they’ve not only done nothing to level the playing field, they’ve actually shut women out of the process for thousands of different types of contracts.”
Rep. Nydia Velazquez (D-NY), who chairs the House Small Business Committee, said: “This proposal would create an initiative benefiting only a tiny fraction of the businesswomen of this country. It is a sad day for the female entrepreneurs of this country when the administration will use whatever means necessary to hinder their participation in the federal marketplace.” Velaqzquez plans to hold a hearing on the matter in February 2008 to determine whether the agency ignored congressional intent in crafting its program.
The proposed rule is open to public comment until February 25, 2008.
For more information, email Joseph P. Hornyak or Megan M. Mocho at joe.hornyak@hklaw.com or megan.mocho@hklaw.com, respectively, or call toll free, 1-888-688-8500.
1 See 18 U.S.C. § 637 (2000)
2 Compare proposed 13 C.F.R. § 127.102 with existing FAR 52.219-1.
3 Proposed 13 C.F.R. § 127.201
4 Proposed 13 C.F.R. § 127.203(a)
5 Proposed 13 C.F.R. § 127.203(b)
6 Proposed 13 C.F.R. § 127.300
7 Proposed 13 C.F.R. § 127.506
8 Proposed 13 C.F.R. § 127.501(a)
9 Proposed 13 C.F.R. § 127.501(b)
10 13 C.F.R. § 124.502
11 Proposed 13 C.F.R. § 127.503
12 Proposed 13 C.F.R. § 127.503(c)