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Wednesday, January 26, 2011

“Disadvantaged” Small Businesses: Definitions and Designations for Purposes of Federal and Federally Funded Contracting Programs

Kate M. Manuel
Legislative Attorney

This report discusses what constitutes a “disadvantaged” small business for purposes of federal and federally funded contracting programs and how firms are certified or otherwise designated as such. Three primary categories of disadvantaged small businesses are currently eligible for various contracting programs: (1) small businesses participating in the Small Business Administration’s (SBA’s) Minority Small Business and Capital Ownership Development Program (commonly known as the 8(a) Program) (8(a) participants); (2) “small disadvantaged businesses” (SDBs) and (3) “disadvantaged business enterprises” (DBEs).

These firms are characterized as disadvantaged because they are at least 51% owned by one or more socially and economically disadvantaged individuals or groups. However, social and economic disadvantage is defined somewhat differently for each program. Members of certain racial and ethnic groups are presumed to be socially disadvantaged for purposes of the 8(a) and SDB programs, while women are also presumed to be socially disadvantaged for purposes of the DBE program. Similarly, individuals’ net worth must be $250,000 or less for entry into the 8(a) Program, while net worth can be as high as $750,000 for newly designated SDBs or DBEs.

The programs for the various types of firms also differ in their operation. The 8(a) Program is open only to firms that have been certified by SBA, and firms and individual owners may participate in the 8(a) Program for a maximum of nine years. 8(a) participants are eligible for setaside or sole-source contracts, as well as other assistance from the SBA. All 8(a) firms qualify as SDBs. Other firms must be certified by procuring agencies, private certifying entities, or state or local governments to qualify for federal programs for SDB prime contractors, although they may self certify for similar programs for SDB subcontractors. SDB certification, when required, lasts three years, but firms may be certified multiple times. There are government-wide and agencyspecific goals for the percentage of federal contract and subcontract dollars awarded to SDBs. Additionally, certain prime contractors must have “plans” for subcontracting with SDBs as terms of their contracts; agencies may use past performance in subcontracting with SDBs as an evaluation factor in source selection decisions; and agencies may give prime contractors “monetary incentives” for subcontracting with SDBs. DBEs must be certified by the state of the funding recipient. Certifications last at least three years, and firms cannot be required to reapply for certification as a condition of continuing participation in the program unless the factual basis upon which the certification was made changes. There is a national goal that 10% of federal funding for certain transportation-related projects be awarded to DBE contractors and subcontractors. Funding recipients must set similar goals, including on individual contracts.

All programs are based in statute. Section 8(a) of the Small Business Act authorizes the 8(a) Program; Section 8(d) of the Small Business Act, the SDB program; and various transportation statutes, the DBE program. However, many of the specific requirements pertaining to these programs derive from agency regulations.

In part because of small businesses’ widely reported role in job creation and concerns that the recent recession disproportionately affected disadvantaged small businesses, Members of the 111
th Congress enacted or proposed numerous bills that assisted disadvantaged small businesses in various ways. Members of the 112th Congress may consider similar legislation if concerns about disadvantaged small businesses persist. Members of the 112th Congress may also review agency programs for disadvantaged small businesses, including proposed regulatory changes to the eligibility and certification requirements for 8(a) firms and DBEs.

Date of Report: January 3, 2011
Number of Pages: 19
Order Number: R40987
Price: $29.95

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