The United States excludes procurement that is subject to preferences for U.S. small and minority businesses from its commitments under the WTO Government Procurement Agreement (GPA) and free trade agreements (FTAs). This post provides background on the preferences, which have garnered significant attention from GPA and FTA parties.
The small business preferences arise from a variety of measures enacted by the U.S. Congress, beginning with the Small Business Act of 1953, to promote federal contracting and subcontracting with small businesses. A 2012 report (Legal Authorities Governing Federal Contracting and Subcontracting with Small Businesses) by the Congressional Research Service describes the measures as:
- declaring a congressional policy of ensuring that a “fair proportion” of federal contract and subcontract dollars are awarded to small businesses;
- establishing government-wide and agency-specific goals for the percentage of prime contract and subcontract dollars to be awarded to small businesses;
- requiring or authorizing agencies to conduct competitions in which only small businesses may compete (i.e., set-asides), or make noncompetitive awards to them; and
- directing the Small Business Administration (SBA) and procuring agencies to maximize opportunities for small businesses.
The current overall target of procurement to be awarded to small businesses is almost a quarter (23%) of federal procurement dollars. To help ensure that a diverse set of small businesses share in the jobs and opportunities created by federal procurement, the following sub-goals have been established:
- 5% of the total value of prime contracts and subcontracts for small businesses owned by socially and economically disadvantaged individuals;
- 5% of the total value of prime contracts and subcontracts for women-owned small businesses;
- 3% of the total value of prime contracts and subcontracts for small businesses in Historically Underutilized Business Zones (HUBZones); and
- 3% of the total value of prime contracts and subcontracts for service-disabled veteran-owned small businesses.
For purposes of the small business programs, the Small Business Act defines a small business as “one which is independently owned and operated and which is not dominant in its field of operation“. In implementing the law, the SBA has further refined the definition of a small business as “a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor“.
Whether a firm is considered a “small business” for purposes of a procurement preference depends upon its size in relation to the industry sector in which it is engaged. The SBA establishes size standards for various types of economic activity and industry, based on the North American Industry Classification System (NAICS). Firms self-certify their small business status.
The programs with sub-goals are described below:
Small Disadvantaged Business: A small disadvantaged business is an entity that is 51% or more owned, controlled and operated by a person(s) who is socially and economically disadvantaged. African Americans, Hispanic Americans, Asian Pacific Americans, Subcontinent Asian Americans and Native Americans are presumed to qualify; other individuals can qualify if they show by a “preponderance of the evidence” that they are disadvantaged. The SBA certifies eligibility.
Historically Underutilized Business Zone (HUBZone): The HUBZone program was enacted as part of the Small Business Reauthorization Act of 1997. It is designed to promote economic development and employment growth in distressed areas (HUBZones) by providing preferential access to federal procurement opportunities such as set-asides and price preferences. To qualify for the program, a business must: be certified by the SBA as a small business residing in a HUBZone; be owned and controlled by 51% or more U.S. citizens; have its principal office in a HUBZone; and have at least 35% of its employees residing in a HUBZone.
Women-Owned Small Business: A woman-owned small business is a small business that is 51% or more owned and controlled by one or more women and whose management and daily business operations are controlled by one or more women. The women must be U.S. citizens. Women-Owned Small Businesses may use a Third Party Certifier to demonstrate eligibility for the program, or they may self-certify.
Service-Disabled Veteran-Owned Small Business: The Veterans Entrepreneurship and Small Business Development Act of 1999 established an annual government-wide goal of not less than 3% of the total value of all prime contract and subcontract awards for participation by small businesses that are 51% or more owned and controlled by service-disabled veterans. In addition, the management and daily business operations of the firm must be controlled by one or more service-disabled veterans or, in the case of a service-disabled veteran with permanent and severe disability, the spouse or permanent caregiver of such veteran.
Where an eligible small business is awarded a contract, it is counted against the goal in each of the categories in which it is eligible.
A portion of the small business goals are met through open competition with other suppliers. One tool that is used with the aim of meeting the goals is the set-aside of procurements for small businesses. Federal government procurement at or below US$150,000 in value is generally reserved for competition between small businesses. Procurements above the US$150,000 threshold will be set-aside for small businesses where there is a “reasonable expectation” that at least two responsible small businesses will submit offers in the procurement and the award will be made at fair market prices.
The U.S. Congress explicitly prohibits a waiver of any preference for small or minority businesses from U.S. commitments under trade agreements.
Jean Heilman Grier
December 8, 2014