New Ruling Makes Set-Aside Contracts Even More Complicated

The U.S. government seeks to award 25 percent of contracts to small business. In 2008, the last year data is available, the government fell short but a record amount of contracts (measured by value) were awarded. In 2008, for example, the Department of Defense awarded more than $75 billion in contracts to small businesses.

In addition to the 25% goal, there are specific types of companies that are considered disadvantaged and they also get more favorable treatment. These include businesses owned by women, minorities, disabled veterans and Native Americans. Certain geographic areas, mainly in cities deemed as Historically Underutilized Business Zones (HUBZones), also get special consideration. The Defense Department in 2008 gave $4.9 billion to HUBZone companies.

If a large contract is awarded to, say, Boeing (BA), the company may be required to submit a plan explaining how it will meet these goals.

All this is complicated enough; now it looks to become even more so.

Mission Critical Solutions of Tampa, FL filed a lawsuit to overturn an Army decision to give a $10.5 million IT contract to Copper River Information Technology, an Alaska-based Native American-owned small business. The contract was awarded without competition, a practice known as a sole-source award.

Mission Critical was the incumbent when Copper River won the contract. The lawsuit claimed that there should have been a competition for the work and that HUBZone companies should take precedence over other set-aside categories. The Chief Judge of the Court of Federal Claims ruled in favor of Mission Critical on both counts.

The Army has not yet decided what to do; in the meantime, Copper River continues to do the work.

The social goals of these types of program are desirable. The problem is that numerous categories and goals can conflict with each other. There have been similar lawsuits by disabled-veteran owned companies, for example, who have claimed priority over women- and minority-owned ones.

In this case, the Court's ruling makes clear that where more then one HUBZone company is likely to bid on the work, there has to be a competition. It said that set-asides for other disadvantaged companies are not required and thus don't take precedence. This means that qualified HUBZone companies will get a leg up in competitions over other small businesses.

The Office of Management and Budget (OMB) in 2009 released a memo to federal agencies advising them that the different programs could be considered equal. Not so, according to the court. Without a change in law, HUBZone businesses will continue to be favored.

The lawsuit illustrates two problems with the programs. First, by limiting competition, set-aside contracts do not necessarily bring the best value for the government. Second, there could be more fraud, with companies being set up to claim the HUBZone or disadvantaged category in a hope to get a leg up on contracts. Certainly, the process costs time and adds complexity.