Adarand Decision Jeopardizes Set-Asides

8(a) companies and small disadvantaged businesses face a difficult future as the courts, Congress, the White House and the states debate whether to scuttle the controversial $10.5 billion programs

The Supreme Court Adarand decision has exposed small companies owned by women and minorities to legal and political challenges that might upend the $10.5 billion contract set-aside programs.

But industry and government officials say the Adarand decision has had no immediate impact on government infotech contracting. "It's business as usual," until the government rewrites the affirmative action policy, said D.J. Caulfield, spokesman for the Small Business Administration, which manages the 8(a) set-aside program.

In 1994, the affirmative action programs provided more than $1 billion to infotech companies, many of which are based in the Washington region. This total includes funds from the 8(a) program, which awarded $4.4 billion in mostly sole-source contracts to a pool of 5,400 companies and the Small Disadvantaged Business program, which awarded $6.1 billion in competitive contracts.

The long-term future of the various programs depends on whether the infotech industry can survive the "strict scrutiny" test laid down in the Adarand decision, which reviewed the government's award of a 10 percent contract bonus to companies that hire minority subcontractors for road construction. To pass the strict scrutiny test, an affirmative action program must solve a compelling government need and be narrowly tailored, the court decided in a 5-4 vote.

If the affirmative action programs fail the test, the winners will likely be the many small infotech companies excluded from the 8(a) program. Such firms have seen their share of federal infotech awards decline from 27 percent to 20 percent over the last 13 years, according to an estimate prepared by Federal Sources Inc., a market research firm based in McLean, Va. During the same period, 8(a) infotech companies increased their share from 3 percent to more than 7 percent, while the top 100 infotech firms kept more than 70 percent of the market.

But opinions are divided -- often sharply -- on how this decision will affect the 8(a) program. This court's test, and parallel political pressure from groups determined to scale back or eliminate affirmative action policies, dooms the programs, said Bob Dornan, a senior vice president at Federal Sources.

"The 8(a) program will be history. I'll bet the ranch on it," he said.

The Adarand decision "certainly raises the standard for the 8(a) program," said one congressional staff member. To survive, the program must pass the Adarand test in the courts, he said. "Yes, we firmly believe that it will," said Marina Laverdy of the Washington-based Latin American Management Association. The 8(a) program has accepted some disadvantaged whites and has rejected some racial minorities lacking social disadvantages, proving it is not only a race-based program, she said. And minorities face disadvantages such as lack of capital and general prejudice, providing a compelling need for the program, she said.

"I think [8(a)s] can make their case. The numbers certainly are there that there isn't a fair distribution" of contracts, said Bob Deller, vice president of Input Inc. in Vienna, Va. But 8(a) officials may have to plead their case sector by sector, said Anthony Robinson, president of the Washington-based Minority Business Legal Defense And Education Fund Inc. For example, the courts may approve continued use of the 8(a) program for infotech contracts, but not for janitorial or security services which have a greater proportion of minority-owned firms.

But this sector-by-sector analysis may create more trouble for the 450 8(a) infotech firms. They have won 7 percent of prime contracts for infotech programs, up from 3 percent in 1983. This is a greater share of federal contracts than the roughly 5 percent of non-infotech contracts won by non-infotech 8(a) firms in 1995, Dornan said.

Following the 1989 Richmond vs. J.A. Croson Co. case, local officials have developed affirmative action rules designed to meet the strict scrutiny test, said Robinson. After developing these rules, minority contracting in Richmond, Va., has grown from 3 percent to 10 percent, he said. However, these state-developed strict scrutiny rules are being reviewed in several courts, and may yet be struck down.

The separate program for companies that declare themselves to be small disadvantaged businesses may be more legally vulnerable than the 8(a) program because it lacks rigorous procedures to ensure company owners are really disadvantaged, said Devon Elizabeth Hewitt, an attorney with Shaw, Pittman, Potts & Trowbridge in McLean, Va. SDB contracts have lower profit margins, providing little incentive for losing companies to legally attack the program, she said.

But before the courts rule on the future of these programs, Congress and the White House are likely to step in with new policies that could greatly alter the landscape for affirmative action programs, said Hewitt.

For example, Rep. Charles Canady, chairman of the House Judiciary Committee's panel on constitutional law, is pushing a bill that would bar all affirmative action programs.

The House Committee on Small Business, chaired by Kansas Rep. Jan Meyer, is preparing legislation to overhaul the Small Business Administration and its 8(a) program. "We're trying to seek a way to foster business development, [which]... is not what we consider to be a racially charged issue. It is more a skills issue," said a congressional staff member. The committee will likely come up with an answer that "focuses on persons... rather than [racial] groups," he said.

But "it is not absolutely necessary that Congress do anything.... The courts could end up making the decisions," he said.

Administration officials are waiting for the results of the White House's review on affirmative action, SBA's Caulfield said. On June 13, President Bill Clinton directed the review team to analyze the Supreme Court's decision and its implications in their final report. "What we are hearing is distressing.... The administration may be prepared to scuttle affirmative action [business] programs," said Robinson.

Also, several states, including California, may vote to bar all affirmative actions programs in planned statewide referendums.

The future of the programs may also be shaped by White House and congressional effort to simplify procurement laws, which reduces the attractiveness of 8(a) sole-source awards for the infotech industry, said Dornan.

Despite the legal and political uncertainty of the 8(a) program, infotech companies and government agencies aren't abandoning the program, which allows contracting officers to quickly and easily grant awards of up to $3 million to 8(a) businesses. Virginia Wydler, a Navy infotech contracting official, said she will not change contracting plans, and has not received calls from contractors concerned about the Adarand decision.

Large infotech companies also like the program because they have allied themselves with successful 8(a) companies that win the hassle-free 8(a) sole-source contracts. Many of the 8(a) infotech contracts are for services and maintenance, low-profit work often ignored by larger companies.

"I think the integrators will very cautiously, if at all, walk away from those [established] relationships," Dornan said.

Harry Carr, AT&T vice president of advanced markets, does not expect the Adarand decision to change how primes such as AT&T team with companies such as 8(a)s. For example, AT&T works with many small companies, including 8(a)s, because they provide subcontracting support for commercial and government contracts. "We are way beyond the point of doing it because of regulations. We do it because it's good business sense," he said.

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