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Tuesday, September 7, 2010

Set-Asides for Small Businesses: Recent Developments in the Law Regarding Precedence Among the Set-Aside Programs and Set-Asides Under Indefinite-Delivery/Indefinite-Quantity Contracts

Kate M. Manuel
Legislative Attorney

In government contracting law, a "set-aside" is a procurement in which only certain businesses can compete. Set-asides can be exclusive or partial, depending upon whether the entire procurement, or just part of it, is so restricted. Eligibility for set-asides is typically based on business size, as well as demographic characteristics of the business owners. Currently, federal law provides, in various ways, for set-asides for (1) small businesses generally, (2) small businesses located in Historically Underutilized Business Zones (HUBZones) (HUBZone small businesses), (3) service-disabled veteran-owned small businesses (SDVOSBs), (4) small businesses owned and controlled by socially and economically disadvantaged individuals that are participating in the Minority Small Business and Capital Ownership Development Program authorized by Section 8(a) of the Small Business Act (8(a) small businesses), and (5) womenowned- and-controlled small businesses. 

This report provides an overview of recent decisions by the U.S. Court of Federal Claims and the Government Accountability Office (GAO) interpreting the laws establishing or implementing the set-aside programs for small businesses. Several decisions address "precedence" among the setaside programs, or which set-aside program agency officials should use when multiple programs could be used. In its August 13, 2010, decision in DGR Associates, Inc. v. United States, the Court of Federal Claims permanently enjoined the government from using an 8(a) set-aside when there is a reasonable expectation that at least two qualified HUBZone small businesses will submit offers and the award can be made at a fair market price. The court did so based, in part, on the interpretation of the Small Business Act set forth in its March 2, 2010, decision in Mission Critical Solutions v. United States. In Mission Critical Solutions, the court held that set-asides for HUBZone small businesses have precedence over those for 8(a) small businesses because HUBZone set-asides are mandatory while 8(a) set-asides are discretionary, and mandatory agency actions take precedence over discretionary ones. However, the Obama Administration has construed the decision in Mission Critical Solutions as enjoining only the award of the contract in question, not the application of SBA's "parity rule" generally. It has also appealed the Mission Critical Solutions decision to the U.S. Court of Appeals for the Federal Circuit. The litigation in both DGR Associates and Mission Critical Solutions resulted, in part, because the Obama Administration previously declined to implement recommendations made by GAO in bid protests. In a series of decisions issued on and after May 4, 2009, GAO recommended that HUBZone set-asides be given precedence over 8(a) set-asides because HUBZone set-asides are mandatory, while 8(a) set-asides are discretionary. In a September 19, 2008, decision in International Program Group, Inc., GAO also recommended that HUBZone set-asides be given precedence over SDVOSB set-asides for the same reason. 

Another decision addresses set-asides and multiple-award indefinite-delivery/indefinite-quantity (ID/IQ) contracts. In its October 28, 2008, decision in Delex Systems, Inc., GAO recommended that orders issued under such contracts be subject to set-asides for small businesses because they are "acquisitions," and any acquisition over $100,000 is subject to set-asides for small businesses. 

These decisions could have significant effects upon small businesses. The decisions regarding precedence among the set-aside programs, in particular, could result in a larger percentage of federal contract dollars going to HUBZone small businesses, while smaller percentages go to other types of small businesses. Members of the 111th Congress have introduced legislation that could make HUBZone set-asides discretionary (H.R. 3729, H.R. 6022, S. 1489, S. 3190) and remove the basis upon which the Court of Federal Claims and GAO found that HUBZone setasides have precedence over other set-asides.

Date of Report: August 23, 2010
Number of Pages: 27
Order Number: R40591
Price: $29.95

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