Uncertainty looms over procurement parity dispute

Obama administration officials fear that small businesses could begin losing out on millions of dollars in federal contracts unless lawmakers move quickly to restore parity to socioeconomic procurement programs.

For the past several months, Small Business Administration officials have lobbied lawmakers to support legislation that would place contractors in the 8(a) and service-disabled veteran-owned small business programs on equal footing with companies located in Historically Underutilized Business Zones. The 8(a) designation refers to businesses owned by socially or economically disadvantaged individuals; HUBZone firms are located in low-income neighborhoods.

The three programs were thrown into a state of uncertainty after the Government Accountability Office ruled in May 2009 that HUBZone firms are legally at the top of the small business pecking order. The Office of Management and Budget and Justice Department disagree with that decision and have directed agencies to disregard it.

The result is contracting officers don’t know how to proceed, said Joe Jordan, associate administrator of SBA’s Office of Government Contracting and Business Development. Disregarding an OMB directive is not an option. But following the agency’s advice could prompt protest, further delaying the contract award. Given those two undesirable options, Jordan fears that contracting officers, a risk-averse group to begin with, could choose a third approach: avoiding small businesses altogether.

“We are talking about a few million contract actions, and we are not going to be able to monitor all of them on a retail level,” Jordan said in an interview with Government Executive on Wednesday. “Certain contracting officers could get nervous and just send contracts out to full-and-open [competition.]”

The dispute was sparked in 2009 when GAO ruled in favor of a protest filed by Mission Critical Systems, a HUBZone small business that had lost out on an Army IT contract to an 8(a) minority-owned small business.

The decision came down to the words “shall” and “may.” The law that governs the 8(a) and the service-disabled veteran-owned business program stated, “a contracting officer may award contracts” based on limited competition while the HUBZone statute uses the word “shall.” GAO argued that the language, which had been on the books for decades, was unambiguous and clearly favored HUBZone firms. The ruling sparked a fury of activity, with OMB and Justice issuing memos instructing agencies to discount disregard GAO’s nonbinding decision because it could “significantly limit the discretion contracting officers.

In a separate March ruling, the Court of Federal Claims ruled in favor of Mission Critical Systems. But, Justice, which is appealing the decision, has refused to budge from its position, instructing agencies that the court’s decision applies only to the one contract.

The Air Force recently followed OMB’s directive, telling GAO that it was ignoring its ruling in a second HUBZone protest case filed by DGR Associates Inc. “Contracting officers are not to provide a priority to HUBZones,” Air Force officials told agency attorneys, according to correspondence Government Executive obtained.

GAO, meanwhile, essentially has wiped its hands of the dispute, stating it would no longer waste time and resources resolving similar HUBZone protests. “We will decide future protests raising the issue here in an expedited and summary manner, in the interest of reducing the costs associated with filing and pursuing such protests,” wrote Lynn Gibson, GAO’s acting general counsel in the DGR protest decision.

So far, DGR is the only other HUBZone protest that GAO has ruled on since Mission Critical Systems, said Ralph O. White, the watchdog’s managing associate general counsel for procurement law. But Jordan said it’s too soon to know the true impact of the controversy. The Defense Department, which is responsible for roughly 75 percent of all contract actions, has a 90-day lag in submitting its small business contracting data.

“We are entering the fourth quarter [of the fiscal year], where a disproportionate amount of the spending happens and I can’t predict the impact,” he said. “It won’t be until after potentially all of the damage has been done that we will be able to quantify it. I have grave concerns about what that is going to mean for women, veterans and minority-owned businesses.”

Jordan and other SBA leaders have met with dozens of lawmakers in recent months urging immediate legislative action. Results have been mixed.

Sen. Mary Landrieu, D-La., has sponsored a two-line bill that would change the HUBZone statute from “shall” to “may.” But the bill has only five co-sponsors and has not moved from the Landrieu’s Small Business and Entrepreneurship Committee. An identical bill was introduced in the House, but has only two sponsors and has been stalled in Small Business Committee since October 2009.

Lawmakers also are considering including the language in the upcoming Defense authorization bill. An attempt by the Senate to attach similar parity language to last year’s Defense bill proved unsuccessful when the provision was yanked by a conference committee.

Jordan, who has spent more than a year making improvements to the oversight of the HUBZone program, suspects there are political forces on Capitol Hill that are using the dispute to advance personal motivations. “I fear that there are some people that would rather have a crisis situation, despite the harm that may be done in the interim, to get through something that they believe is a worthwhile end that justifies those means,” he said.

While legislation remains in doubt, the dispute does appear to be reaching a judicial conclusion. The U.S. Court of Appeals for the Federal Circuit will soon hear Justice’s appeal of the Mission Critical Systems case. And, unlike the Court of Federal Claims, the Appeals Court ruling has precedential effect, meaning its decision would apply to future HUBZone priority cases.

If Congress fails to act, and the Appeals Court rules against the administration, the decision could dramatically shift the federal procurement landscape, affecting virtually every contract that attracts the interest of HUBZone firms.

“Lack of parity is terrible for the HUBZone program because I am not going to be able to sustain all of the improvements we have made to the operations of the program,” Jordan said. “You will have a flood of applications and then there will be angry applicants. Putting more widgets through the factory at this point scares the heck out of me.”

– By Robert Brodsky – GovExec.com - June 11, 2010