Goal IX Newsletter

Winter 2000, Volume 6, Number 1

Affirmative Action and Subcontracting by: Gregory Saunders

Affirmative action in federal contracting has undergone significant saunders.jpg (4594 bytes) changes in the aftermath of the Supreme Court’s holding in Adarand Constructors, Inc. v. Pena, 115 S. Ct. 2097 (1995). The government describes the changes as a "mend it, don’t end it" approach to affirmative action. Minority, women-owned, small and disadvantaged businesses (SDBs) must stay abreast of these changes in procurement rules to effectively secure and retain government contracts. A review of the U.S. Department of Defense (DoD) regulations offers examples that are similar to other federal agencies’ recently revised procurement rules.

In Adarand, the Supreme Court held that federal procurement programs that use race as a basis for decision making are subject to the strict scrutiny standard. To survive strict scrutiny, a program must serve a compelling governmental interest and be narrowly tailored to accomplish this goal.

Six factors are considered when determining the "narrowly tailored" prong of strict scrutiny:

1. whether the government considered race neutral alternatives and determined that they would prove insufficient before resorting to race conscious action;

2. the scope of the program and whether it is flexible;

3. whether race is relied on as the sole factor in eligibility, or whether it is used as one factor in the eligibility determination;

4. whether any numerical target is reasonably related to the number of qualified minorities in the applicable pool;

5. whether the duration of the program is limited and whether it is subject to periodic review; and

6. the extent of the burden imposed on non-beneficiaries of the program. (See the Department of Justice "Proposed Reforms to Affirmative Action in Federal Procurement," p. 2.)

aaquote.jpg (20091 bytes)In order to comply with the Supreme Court’s holding in Adarand requiring a more "narrowly tailored" affirmative action program, the federal government created the following three procurement mechanisms to encourage the use of SDBs:

1. a price evaluation adjustment of up to 10 percent;

2. a source selection evaluation factor or subfactor for a planned SDB participation, primarily at the subcontract level, in the performance of the contract; and

3. a monetary incentive for subcontracting with SDBs.

The administrator of the Office of Federal Procurement Policy, based on recommendations made by the Department of Commerce, will annually publish the authorized SDB procurement mechanisms for the year. According to the Department of Justice’s proposed reforms, the benchmarks theoretically represent the percentage of minority contracts that one would reasonably expect to find in a market absent of discrimination or its effects. A benchmark for the DoD of 5 percent of the total budget is established in 10 U.S.C. § 2323. This percentage is a goal for the DoD. If the DoD wishes to grant more than 5 percent of its total budget to SDBs it may do so; however, the mechanisms listed above may not be used after the 5 percent target has been reached.

How do the changes in procurement rules satisfy the Adarand decision?

Both the former and the new SDB programs exist because race neutral alternatives were shown to be ineffective in combating the effects of racism. Race is not the only factor considered for eligibility, however. Non-minorities may also participate in the program if they satisfy the definition of a SDB: defined as business owners who have been subjected to racial or ethnic prejudice of cultural bias because of their identity as a member of a group without regard to their qualities as individuals. The post-Adarand program differs, however, from the former program when the other factors are considered.

The new rules eliminated formal "set-asides." Prior to the Court’s decision in Adarand, the Department of Defense, followed the "Rule of 2" in its contract procurement process to promote participation by small, minority and disadvantaged businesses. The "Rule of 2" provided an SDB set aside for situations where a contracting officer could identify two or more SDBs who were qualified to bid on a project. This method does not satisfy all of the factors that have been used in "narrowly tailored" determinations. In particular, this program was not flexible and there was no numerical target.

The new procurement mechanisms are subject to annual review and are flexible by allowing the contracting officer to use the mechanisms as incentive for use of SDBs, as opposed to requiring set asides. In addition, the 5 percent benchmark is estimated to be the amount of SDBs one would reasonably find in a market absent the effects of racism. Lastly, the mechanisms are designed to cease for the fiscal year once the DoD has reached its benchmark of 5 percent. When this benchmark is reached, this has the greatest impact on minority contracting.

What are the effects of the post-Adarand changes?

Once the DoD has achieved its goal of doing 5 percent of its business with SDBs, the suspension of the procurement mechanism is automatic. It is unclear whether the total includes contracts with SDBs, where the procurement mechanisms were not used. "DoD spent some $9.5 billion in fiscal 1998, or 8.7 percent of all DoD contracting, with small and disadvantaged firms, and that spending automatically activated the suspension for all solicitations…"

The automatic suspension assumes that SDBs can compete with the bigger companies simply because of one year’s procurement numbers. This automatic suspension prevents the DoD from considering the type of contracts that are available from year to year and the likelihood that a change in the type of contracts available will cause the SDB procurement number to fall below 5 percent in the following fiscal year. Consequently, instead of securing 8.7 percent of DoD business, procurement involving SDBs as prime contractors could fall significantly below the DoD’s 5 percent goal.

Is this the end of the affirmative action argument in federal procurement?

The issue of affirmative action has not been closed. Congress recognized the need for race-based measures to combat the lingering effects of discrimination. The creation of 10 U.S.C. § 2323 confirms this fact. The effective date for this section ends, however, in fiscal year 2000. The section could be changed or repealed at this time with changes in the makeup of Congress.

In addition, the constitutionality of 10 U.S.C. § 2323 may still be challenged by opponents of even more limited forms of affirmative action. There is no set test or definition for the "narrowly tailored" prong of the scrutiny test. Various courts have considered some or all of the six factors considered when examining whether a program is narrowly tailored. It is unknown what weight, if any will be given to the various factors for determining the "narrowly tailored" prong. Without a Supreme Court holding defining the importance of each of the "narrowly tailored" factors, the debate on this issue will continue.

What requirements are enforced for federal prime contractors?

Generally, federal prime contractors that are not SDBs must make good faith attempts to spend a targeted percentage of its total planned subcontracting dollars with small, minority, and women-owned businesses. Subcontracting dollars may include contract deliverables as well as all types of support services, e.g., printing and publishing, mail fulfillment, building services, information systems, accounting services, and legal services. Because of the source selection credit and competitive pressures, the SDB subcontracting target could be significantly more than the modest target of the federal agency responsible for the procurement (e.g., 5 percent for the DoD).

Prime contractors need to take several affirmative steps to effectively carry out their plans. They must:

• submit periodic reports and cooperate in any studies or surveys as may be required by the contracting agency;

• submit reporting forms (for DoD, these are Standard Form 294 and 295) on a semi-annual basis; and

• maintain certain records, including:

1. source lists, guides and other data identifying small, small disadvantaged, and women-owned business concerns;

2. a list of organizations contacted for information regarding small, disadvantaged, and women-owned business concerns;

3. on a contract-by-contract basis, records on all subcontract solicitations over $100,000 indicating (i) whether small, small disadvantaged, or women-owned business concerns were solicited, and if not, why not; and (ii) reasons for the subcontract award to other than a small, small disadvantaged, or women-owned business concern;

4. records to support outreach efforts such as contact lists, and attendance at meetings and trade fairs;

5. records to support internal activities such as training programs, and attendance at workshops and seminars; and

6. on a contract-by-contract basis, records to support subcontract awards including the name, address, and business size of each subcontractor.

FAR § 52.219-16 establishes the penalties for a failure to meet the SDB plan goals. Prime contractors must make a good faith effort to satisfy the SDB plan. If a contracting officer determines that a good faith effort was not made, the contractor may be forced to pay liquidated damages. If a contractor fails to actually meet designated SDB subcontracting targets, FAR § 19.705-7 identifies factors a contracting officer may consider when making a determination whether or not a contractor attempted in "good faith" to meet SDB subcontracting goals. The factors include:

• a failure to attempt to identify, contact, solicit, or consider for contract award small, small disadvantaged or women-owned small business concerns;

• a failure to designate and maintain a company official to administer the subcontracting program and monitor and enforce compliance with the plan;

• a failure to submit SF 294, Subcontracting Report for Individual Contracts or SF 295, Summary Subcontract Report, in accordance with the instructions on the forms or as provided in agency regulations;

• a failure to maintain records or otherwise demonstrate procedures adopted to comply with the plan; or

• the adoption of company policies or procedures that have as their objectives the frustration of the objectives of the plan.

aaquote2.jpg (18923 bytes)If the contracting officer determines that the contractor failed to make a good faith effort, he or she will provide written notice to the contractor. At this time, a contractor may assert areas where good faith efforts have been made. A failure to respond to the notice may be taken as an admission that the determination is correct and no acceptable reasons for failure exist.

A failure to meet SDB plan goals may have a negative impact on past performance evaluations, a major factor for the contractor in competing for any new procurements. FAR § 15.305 states that the "evaluation [of the proposal] should include the past performance of offerors in complying with subcontracting plan goals for small disadvantaged business concerns."

What outreach can federal contractors do to increase subcontractor diversity?

Federal prime contractors can take various steps to increase their ability to meet their SDB subcontracting targets:

1. The institution of a Mentor-Protégé Program, and actual identification of some SDBs for the prime contractor to mentor.

2. Development of policies and procedures to complete the SF 294 and SF 295 (DoD reporting forms on SDB utilization).

3. Inclusion of policies and procedures on consideration of small business subcontracting goals in the contractor’s overall procurement P&Ps.

4. Development of internal training modules for managers on the contractor’s SDB plan requirements, and attendance by key employees at external training events on SDB subcontracting.

5. Increasing contacts with trade associations representing minority, women-owned, and other small businesses.

Additional Resources

A number of websites exist relating to the underlying regulatory requirements for the SDB (also referred to as "SADBU") program, including:

www.acq.osd.mil/sadbu/pro-net.sba.gov/

PRO-Net is marketed by the SBA as "an electronic gateway of procurement information—for and about small businesses." It is a search engine for contracting officers, a marketing tool for small firms and a "link" to procurement opportunities and important information. It is designed to be a "virtual" one-stop-procurement-shop. PRO-Net is an Internet-based database of information on more than 171,000 small, disadvantaged, Section 8(a), and women-owned businesses. It is free to federal and state government agencies as well as prime and other contractors seeking small business contractors, subcontractors, and/or partnership opportunities. PRO-Net is open to all small firms seeking federal, state, and private contracts.

In addition, the Department of Defense has a website for its Mentor-Protege Program: www.acq.osd.mil/sadbu/mentor_protege/.

Conclusion

Affirmative action in federal contracting may have become more difficult in the light of the Adarand reforms, but it remains an important vehicle to assist minority, women-owned and other disadvantaged businesses to overcome historical barriers. The revised guidelines adopted by the Department of Defense and other federal agencies can still help level the playing field for SDBs to compete for federal dollars, whether as prime contractors or as subcontractors to prime contractors. Given that a significant percentage of large companies have federal contracts, this is a large playing field indeed. But especially given the cutbacks in federal affirmative action imposed by Adarand, an even greater premium is placed on understanding the SDB contracting requirements and pursuing opportunities with the federal government or with prime contractors to the federal government. In this competitive marketplace, qualifying firms may have the opportunity to parlay this understanding into a financial advantage.

Gregory Saunders is chair of the Commission’s Minority In-House Counsel Group.

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