The risks of pushing for procurement equity

NOTE: This article first appeared on FCW.com.

Without proper oversight, experts warn, a White House plan to steer $100 billion in federal contracting opportunities toward small disadvantaged businesses (SDBs) will likely run into major challenges that pave the way for large corporations to take advantage of set-asides for those historically marginalized firms.

Contracting experts and former federal officials say the new initiative announced last month requires an expanded focus on regulations to avoid significant risks, including fraud and mismanagement, as recent examples have shown.

“This is one of those things that look good on paper and in practice can also bring some positive things,” said Larry Allen, former president of the Coalition for Government Procurement. “But in practice, history has shown it can also bring unintended consequences.”

On the 100-year anniversary of the Tulsa race massacre, President Joe Biden announced a government-wide effort to address the racial wealth gap in the United States. The plan focuses on rooting out racial discrimination in the housing market, providing grants and new funding for community-driven civic infrastructure projects and expanding federal contracting by 50 percent for SDBs.

The expanded contracting opportunities will translate to $100 billion over the next five years for SDBs, the White House said in a fact sheet, in addition to $31 billion for mentoring and other forms of technical assistance for those small businesses. 

But money doesn’t always end up in the right hands, and it remains unclear how the administration plans to oversee the robust agency-wide call-to-action, according to former NASA CIO Linda Cureton, who described in a recent interview how larger firms can take advantage of SDBs through initiatives like government mentor-protégé programs.

Under the previous administration, Congress changed the law so larger businesses can take up to a 40 percent stake in SDBs in exchange for technical and management guidance, training and networking opportunities. Those firms can then form a joint partnership to secure contracting opportunities meant for SDBs.

Larger firms have been known to abuse those programs, Cureton said, using small businesses to collect set-asides in cases that sometimes lead to criminal charges and million-dollar lawsuits. 

“Let’s say you're a white-owned company, you see an up-and-coming Black-owned company, so you buy a stake in it and enrich yourself. Now you're getting richer, and the Black-owned company isn't necessarily gaining the benefits,” she said, adding: “This needs to be looked at in a more holistic way.”

Opportunities dwindle as the small business contracting market grows

Federal spending with SDBs sharply increased starting in fiscal year 2009, from six to 10 percent, but has since plateaued at those rates over the last four years. Meanwhile, as of June 1, there were 1,185 active participants in SBA's mentor-protege program -- a number that jumped to 1,242 by July.

The small business contracting market has seen continued growth over the past decade, according to Antonio Doss, deputy associate administrator for SBA's office of government contracting and business development, who said applications are up for SBA’s initiatives targeting smaller firms.

However, Doss acknowledged opportunities “are not as widespread" as in previous years, due in part to an increase in consolidation and bundling, along with a government-wide centralizing of procurement functions within certain departments "and with a small group of preferred contractors."

"SBA and other agencies will need to redouble our efforts to reach small disadvantaged businesses," he said, "particularly those that are not currently participating in government contracting.”

As the government doubles down on investments towards SDBs, it must simultaneously ensure marginalized firms won’t be used for “pass-through” work -- a term used to describe how big businesses have at times misused mentor-protégé programs when agencies or military branches target specific firms for federal spending -- in order to continue expanding federal contracting opportunities for marginalized firms, according to several experts who spoke to FCW.

When the Air Force decided nearly a decade ago it wanted to partner with service-disabled veteran-owned businesses, Allen said he “saw a whole raft of companies calling themselves service-disabled veteran-owned businesses that popped up overnight.” He added: “These were companies that weren’t even companies at all.”

Preventing fraud and misuse is a full-time job

While addressing nationwide racial inequities has become a main focus for the Biden administration, the former Coalition for Government Procurement suggested the goal of expanding federal spending for SDBs “is nothing new under the sun.”

Allen recalled other examples of misused mentor-protégé programs he saw during his tenure with the coalition, noting how some contracting shops may see actions like the recently-announced White House push towards SDBs as obstacles requiring workarounds. 

“We’ve seen a lot of pass-through work where the small business is the window front, the storefront, and they get the contract awarded based on their status,” he said.

The SDB “may do little if any work,” Allen said, “and the large business is the one that does all the work. SBA has done a very good job on that front to prevent pass-throughs from happening, but the fact of the matter is, if the government says they want to spend more money somewhere, there will be a line of people waiting, not all of whom have the best of intentions.”

In a statement, SBA said it "remains focused on preventing abuse across all government contracting programs" and has established risk-mitigation procedures while continuing "to refine the program to preserve the foundational principle that the mentor-protégé program is for the benefit of small businesses."

SBA also said it revised its regulations in November of last year to include a mechanism incentivizing reporting for protégé firms and allowing the for protégé to request SBA to intervene on its behalf.

"Where SBA determines adverse impact, SBA will terminate the relationship," the agency said.

SDBs face institutional challenges and roadblocks in working with the federal government

Beyond fraud and competing against well-established firms, SDBs face institutional challenges and roadblocks in creating partnerships with the federal government: for example, SDBs cannot acquire a facility clearance without already having a contract, which requires a clearance. 

Still, if implemented as written, the actions “would provide meaningful benefit to all SDB qualified entities and their communities,” according to Guy Timberlake, cofounder of the government contracting group GovCon Club.

However, Timberlake also said “the administration will need to close loopholes” to “ensure the dollars reach their intended destinations.”

Several former officials pointed to the SBA’s 8(a) program as an example of one with proven successes building partnerships between the federal government and SDBs. The 8(a) program provides assistance to firms which are at least majority-owned by socially and economically disadvantaged individuals in gaining opportunities to secure federal contracts.

“If the intention is to truly direct funding to restore a semblance of ‘Black Wall Street’, then using the Small Business Administration’s well-regulated 8(a) program may be a more effective option,” Cureton said while discussing the administration’s all-of-government effort. “If funding is set aside for SDBs, I doubt that we will see a meaningful increase in minority business. The best way to get money in the hands of those minority businesses would be through the 8(a) program.”

Alan Chvotkin, partner at Nicholas Liu LLP and former executive vice president and counsel of the Professional Services Council, agreed the SBA’s 8(a) program was the vehicle to get the job done, adding: “But it’s going to be a heavy lift to be certain.”

“The SBA 8a program at its core is a contracting program,” he said. “It operates as an intermediary and there’s a rigorous review process.”

In order for the White House to have a decent shot of success in meeting its goal over the next five years, Chvotkin said the passage of the infrastructure bill and continued investments in rebuilding the economy were critical. 

“We’re not going to have the same growth between 2021 and 2025 that we saw in 2020 and 2021,” he predicted, noting how the government poured investments into companies amid the coronavirus pandemic -- some of which were new SDBs working to produce personal protective equipment and critical infrastructure.

“Study after study shows the biggest need in the SDB community is access to capital,” he said. “That’s where the critical shortfall exists.”

SBA has taken other steps to root out misuse of its programs geared for smaller businesses, including an annual review process of the mentor-protégé relationship for all active program participants and preserving the cap on the number of protégé’s a mentor can have at three. The agency said it will continue carefully analyzing mentor-protégé agreements before approval to ensure the integrity of the program.