1. Analysis and Commentary by Tim Fay.

Brief Legislative History:

          On December 20, 2007 the U.S. Small Business Administration issued its proposed rule for federal contracting set asides for WOSBs.

          In fairness to the SBA it should be noted that in passing the 2000 Act the U.S. Congress delegated to SBA an enormously complex assignment which required SBA to navigate the current legal and constitutional issues surrounding race or gender set asides.  In previous years Congress itself has taken it upon itself to make a legislative finding of discrimination as the justification for race or gender based set asides.  For whatever reason this time around Congress delegated this task to the SBA.

          Furthermore, in the many years since the enactment of other set aside programs for various minority groups, the U.S. Supreme Court has issued a series of definitive, precedent setting decisions which substantially raised the bar for: (a) proving the existence of contracting discrimination based on race or gender, and (b) for imposing constitutionally problematic race or gender based set asides as the solution to such discrimination.

Summary of SBA's Proposed Rule for WOSBs:

          In essence, SBA's proposed rule establishes six tests, or hurdles, which each federal agency must meet in order to reserve a contract for a WOSB.  These six tests are:

Test 1:    The proposed rule allows federal contracting agencies to set aside 5% of their contracts for WOSBs only in industries where SBA has determined that WOSBs are underrepresented or substantially underrepresented.  This determination will be made on an ongoing basis by SBA.  As of publication of this proposed rule SBA has found underrepresentation or substantial underrepresentation of WOSBs only in the following four industries:

• National Security and International Affairs (NAICS code 9281)

• Coating, Engraving, Heat Treating, and Allied Activities (NAICS code 3328)

• Household and Institutional Furniture and Kitchen Cabinet Manufacturing (NAICS code 3371)

• Other Motor Vehicle Dealers (NAICS code 4412)

Test 2:  A contract may not be set aside for a WOSB if the work has been set aside as an 8(a) procurement by SBA, or if there is an 8(a) firm currently performing the work. (SBA can choose to waive the 8(a) designation for the work, i.e., re-designate the work as a non-8(a) procurement if, and only if, an 8(a) firm is not currently performing the work.)

Test 3:  The estimated contract price, including options, must be less than $5 million for manufacturing and less than $3 million for all other contracts.

Test 4:  The contracting agency must conduct an appropriate analysis of the agency's procurement history and make a determination of whether there is evidence of relevant gender discrimination in that industry by that agency.  (SBA points out that this analysis is necessary to justify a gender-based restriction on competition under the equal protection requirements of the Due Process Clause of the Fifth Amendment of the Constitution.)

Test 5:  The contracting agency must determine if two or more economically disadvantaged (minority-owned) WOSBs (EDWOSBs) are available, qualified and likely to bid upon the work.    If so, competition for the contract can be restricted (set aside) for an EDWOSB.

Test 6:  If no EDWOSBs are available to bid upon the work, then and only then can the contracting agency set aside the work for a non-minority owned WOSB, but only if it determines that there are two or more WOSBs available, qualified, and likely to bid upon the work.

Political Party Differences:

          Conservatives and liberals alike have reasons both to celebrate and to complain about this proposed new rule.

          Political conservatives will probably celebrate the fact that SBA's proposed regulation is very limited in scope (as mandated by a series of Supreme Court rulings), and effectively makes it difficult for a federal contracting officer to set aside federal contracts based in any part upon the gender of the business owner.

          Political liberals will probably celebrate the fact that they have won a set aside for a putative "underrepresented group" of federal contractors, WOSBs, which may increase business opportunities for this group.

          Conservatives will also celebrate the fact that SBA's proposed new rule pays legal homage to the Supreme Court decisions which collectively established a principle of "strict scrutiny" regarding race or gender based contracting preferences.

          These Supreme Court decisions essentially said that race or gender based set asides are only to be used as a last resort to correct "historic discrimination" against "underrepresented groups", and that race neutral and gender neutral efforts to correct for that prior discrimination must first be exhausted prior to imposing more legally and constitutionally problematic race or gender based preferences.

          These same court rulings also set a very high bar for proving that discrimination is the reason for any existing underrepresentation.  This is a significant part of the reason that it was so difficult, and that it took so long, for SBA to craft a new rule for WOSBs.

          On the other hand, conservatives will complain that the feds should get out of the business of awarding contracting opportunities based in any part upon the race or gender of the business owner.    Conservatives will tend to argue that race neutral and gender neutral outreach and assistance efforts, market forces, and adherence to principles of nondiscrimination are sufficient to ensure that WOSBs, as well as all other groups, have an equal opportunity to bid on and competitively win federal contracts.

          Similarly, liberals will complain that the SBA has only found a tiny handful of industries in which WOSBs are underrepresented.

          In the final analysis, the proposed SBA rule provides very little in the way of contract set asides and preferences for WOSBs.    Conservatives believe this is as it should be, while liberals believe that WOSBs should be guaranteed at least 5% of all federal contract awards.  In fact, this past autumn one Congressman submitted an amendment which would have required an 8% set aside for WOSBs.  The amendment was not adopted.

          Also, SBA's proposed rule requires that each federal contracting agency provide proof that WOSBs are, in fact, underrepresented in that agency's contract awards and that the reason for that underrepresentation is gender discrimination.  Liberals will argue that this is burdensome and that it is a disincentive for federal contracting officers to set aside contracts for WOSBs.

Statistical Facts Regarding Set Asides:

          Historically, the biggest federal contract set aside programs have been reserved for racial minorities.  These include the 8(a) program, the Small Disadvantaged Business (SDB) program, and the Historically Underutilized Business Zone (HUBZone) program.  Together these three programs accounted for $42.6 billion or 12.5% of all federal contracts in FY 2006.  It should be noted that 33% of 8(a) program participants are woman-owned, and 30% of HUBZone participants are woman-owned.

Data from SBA's "Federal Procurement System Small Business Goaling Report"
FY 2006:

*There is currently no statutory set aside for WOSBs.  However, for many years federal agencies have been required to track and report the proportion of contracts their agencies award to WOSBs.

          The small business set aside program is race and gender neutral.  This means that any small business may bid on contracts set aside for small businesses without regard to the race, gender or ethnicity of the owner.  22.8% ($77.7 billion) of all federal contracts were set aside for small businesses in FY 2006.

          Even without the proposed WOSB set aside program, woman-owned businesses are entitled to bid upon -- and do win -- significant contracting opportunities which are shielded from open competition. The woman owned businesses in all of the above set aside programs are also permitted and encouraged to bid upon all federal contracts, including especially the race-neutral small business set aside program.

          In addition, if a woman owned business is certified as an 8(a) firm or as an SDB firm then they are automatically certified as a WOSB for purposes of this proposed rule.

          According to the SBA's own figures, women owned small businesses have enjoyed a steadily increasing percentage of federal contracting dollars. Federal contracts to WOSBs accounted for $11.6 billion in FY 2006 and 3.4 percent of federal procurement, an increase of $1.4 billion or 0.2 percent from FY 2005.

          Currently, SBA's support for WOSBs includes funding or affiliations with Small Business Development Centers (SBDC), Women’s Business Centers (WBC), SCORE, Procurement Technical Access Centers (PTAC), and the Office of Small Disadvantaged Business Utilization (OSDBU) centers within each federal agency. Most OSDBUs have a women's business advocate.

Recap:

          The pertinent question is whether a set aside for woman owned small businesses is necessary or desirable.

          There are already literally dozens of federal programs and initiatives designed to help all small businesses compete, including programs specifically targeted toward helping woman owned small businesses.

          In FY 2006 the federal government awarded fully 41.3% of all contracts ($140.7 billion) to small businesses many of which are owed by racial minorities and women. 12.5% of contracts ($42.6 billion) went to firms owned by racial or ethnic minorities, a substantial number of which are owned by women.

          The U.S. Supreme Court has ruled that preferences based in any part upon race, gender or ethnicity must be narrowly tailored, limited in duration, and must be designed to alleviate actual discriminatory practices. Most importantly, under current case law race and gender neutral methods to remedy any discrimination must be exhausted prior to imposing legally and constitutionally problematic race or gender preferences. The purpose of any preference is not to correct underrepresentation but to correct actual discrimination.

-- Tim Fay, Adversity.Net

Download the MS Word version of this analysis.

2. SBA Facts about WOSBs

"How to help women-owned small businesses"
by Steve Preston
Administrator
U.S. Small Business Administration
Originally published on the SBA Web Site 1/15/08

          "In 1994, Congress set a government-wide target that 5 percent of all federal contracts should go to women-owned small businesses (WOSBs). More recently, legislation was signed into law creating a set-aside for such businesses but requiring that the Small Business Administration study the issue to determine in which — if any — of the government’s 313 contracting categories, many of which are defense-related, WOSBs were underrepresented.

          "Some critics have not been satisfied, pointing out that women are 52 percent of the population and own 28 percent of American businesses, yet in 2006 — the last year for which we have data — they received only 3.4 percent of federal contract dollars.

          "However, it is important to recognize this is an apples-to-oranges comparison. Women-owned businesses may be more than one-fourth of all businesses, but their gross receipts were only 4.2 percent of the economy, according to census data, because of the inclusion of large companies, many of which are led by women.

          "The census also indicates that women-owned businesses with fewer than 500 employees make up 3.4 percent of the economy. For the SBA rule, the pool was confined to the nearly 56,000 women-owned small businesses that were registered federal contractors at the time.

          "The data in fact reveal positive news for women: When WOSBs compete for contracts, they do well. In 136 of the 140 categories where RAND had sufficient survey samples to analyze, the data indicated that when women compete for federal contracts they succeed.

          "Actual contracting dollars to women-owned small businesses have increased dramatically under President Bush: Prime contract dollars to such companies increased from $4.6 billion in 2000 to $11.6 billion in 2006. The year-over-year increase from 2005 to 2006 was the largest ever, $1.5 billion. Subcontracting dollars also increased, from $3.6 billion in 2000 to more than $10 billion in 2006.

          "Moreover, the share of federal contracting dollars that goes to WOSBs is growing as a percentage of the federal contracting universe. In 2000, these businesses received 2.3 percent of the federal government’s contracts. That share has increased steadily each year of the administration and, as mentioned, reached 3.4 percent in 2006.

          "The better way to increase women-owned small businesses’ share of federal contracts is to get more such firms “ready, willing and able” to perform federal contracts, and ensure they are registered in the Central Contractor Registration system.

          "Currently, there are some 63,000 women-owned small businesses in the registration system, receiving 3.4 percent of contracting dollars. It stands to reason that if we can get more ready, willing and able WOSBs into the system, we can increase their share of federal contracting dollars. Simple arithmetic suggests that to reach the target of 5 percent, there will need to be thousands more qualified women-owned small businesses in the system competing.

          "Therefore, a bipartisan agenda that should unite all parties and avoid constitutional hurdles is to increase the number of capable WOSBs competing for federal contracts.

"On this, SBA has taken the lead:

• "Agency field staff is focused on contracting to businesses owned by targeted groups, including women.

• "We recently instituted a government-wide scorecard of federal agencies to rate their small business contracting efforts, including for women, bringing greatly enhanced transparency and accountability to the process.

• "And, on a smaller but still significant level, in 2007 SBA women-owned business procurements exceeded the government-wide statutory goal of 5 percent, reaching 24.7 percent.

          "In this age of partisanship, people want positive solutions. Helping more women-owned small businesses compete for government contracts, and doing it the right way, is a winner for all sides."

-- Steve Preston, Administrator, SBA

Click this LINK to access the original copy of Preston's remarks on the SBA web site.

3. Additional Resources and Reading

ARTICLE - National Review Online Jan. 14, 2008

HEAD:  Setting Aside Set Asides

SUBHEAD: The Bush administration on sex discrimination.

By Roger Clegg (Center for Equal Opportunity)

          "The Bush administration is under fire from various women’s groups because of a new rule its Small Business Administration has proposed regarding set-asides for female-owned companies. No surprise here: Naturally, the women’s groups want more set-asides than the rule would allow.

          "The truth is that the administration actually did a good job here, since the Constitution itself allows such discrimination only if, at a minimum, the government can show that women are being denied contracting opportunities on account of their sex. As it turns out, there are relatively few sectors in which this can be shown, and so the rule quite rightly limits set-asides to those sectors. ..."

Read the entire article at National Review Online at the last known LINK.

ARTICLE - Washington Post Jan. 7, 2008

HEAD:  Coverage Continues on Criticism of SBA's Proposal

By Sharon McLoone, Washington Post

          "In today's Business section Washington Post staff writer Kendra Marr covers the uproar over the Small Business Administration's new proposal to change contracting rules governing women-owned businesses.

          "In its proposal, released two weeks ago, the agency identified just four industries in which it said women-owned small businesses are underrepresented and thereby eligible for set-asides: intelligence; engraving and metalworking; furniture and kitchen cabinet manufacturing; and a limited category of motor vehicle dealers, Marr reports.

          "For more background information, see Small Business blog posts I've written on the reaction of women's groups and lawmakers."

Read this article at the last known LINK:

Published Response by Roger Clegg, Center for Equal Opportunity Jan. 9, 2008:

          "It's no surprise that various women's groups are unhappy with the Small Business Administration's proposed rules regarding set-asides for female-owned companies. Naturally, they think there should be more set-asides.

          "But, as a legal and policy matter, there should no such preferences, period. The underlying statute requires no such discrimination, and it is extremely unlikely that, in the year 2008, the only way to ensure that contracting is nondiscriminatory for women is by mandating discrimination in their favor. And, of course, the taxpayers lose whenever contracts go to anyone other than the lowest bidder. The Bush administration should, at a minimum, go no further down this silly road than the proposed rules would take it; ideally, it would reconsider and not go down this road at all."

ARTICLE - Boston Herald Fri., Jan. 25, 2008

HEAD:  Latest federal regs still aren't enough aid for biz women

By Jennifer Heldt Powell

          "Wendi Goldsmith is the poster child for government programs that favor women and minorities.

          "As president of the Bioengineering Group in Salem she has built a successful company in the male-dominated field of construction and environmental engineering in part because of government favoritism.

          "That's why she is among those disappointed with proposed regulations who say they fail to give women more access to government contracts. "They fall short of offering a useful strategy to solve a very real problem," she said. "The playing field is not equal."

          "The regulations are designed to make bullet-proof against constitutional challenges a new law requiring the government to set aside 5 percent of its contracts for women-owned businesses. [In fact, a series of Supreme Court rulings spanning the late 1980's into the 1990's definitively stipulate that contracting preferences based in any part upon the race or gender of the owner are to be used only after race neutral and gender neutral alternatives have been tried and exhausted.  --Editor, Adversity.Net]

"The problem is the regulations leave it up to the agencies to show that they have discriminated against women. [In fact, in accord with the Supreme Court rulings on the subject, SBA points out that this analysis is necessary to justify a gender-based restriction on competition under the equal protection requirements of the Due Process Clause of the Fifth Amendment of the Constitution.  --Editor, Adversity.Net]

          "Of course, that seems highly unlikely. But not everyone is upset about the proposed regulations.

          "Roger Clegg, president of the Center for Equal Opportunity in Virginia, said in an article for National Review that if anything, they went too far. He says that if contracts go to anyone but the lowest bidder, taxpayers lose.

          "The study the SBA used to write the regulations showed that women are under-represented in only four of 140 categories: national security and international affairs; coating and engraving; furniture and cabinet making; and all terrain vehicle dealerships.

          "Under the SBA criteria, of the 6.5 million women-owned businesses, only 1,247 could potentially benefit from the program, according to the Center for Women's Business Research."

Read the entire Boston Herald story at this last known LINK.

4. RAND Study of Underrepresentation of WOSBs

[Note:  In the text below use of the pronoun "we" refers to Kaufman-RAND and/or the authors cited above.  --Editor.]

Summary

          "In 2000, the Small Business Reauthorization Act (Public Law 106-554, Section 811) authorized contracting officers to restrict competition for federal contracts on a discretionary basis in certain industries to women-owned small businesses (WOSBs). These industries are determined by the Small Business Administration (SBA) to be characterized by underrepresentation or substantial underrepresentation of WOSBs in federal prime contracts. Through a series of legal decisions, especially decisions regarding minority-owned firms, underrepresentation in government contracting has come to mean that the share of contracts awarded to a particular type of firm is small relative to the prevalence of such firms in the pool of firms that are “ready, willing, and able” to perform government contracts.

          "This measure of underrepresentation is typically referred to as a disparity ratio. A disparity ratio of 1.0 suggests that firms of a particular type are awarded contracts in the same proportion as their representation in the industry—that is, there is no disparity. A disparity ratio of less than 1.0 suggests that the firms are underrepresented in federal contracting, and a ratio greater than 1.0 suggests that they are overrepresented.

Measuring Disparity Ratios in Federal Contracting

          "The SBA asked RAND to compute disparity ratios for WOSBs based on both the dollar value and the number of contracts awarded to WOSBs. The SBA also requested that RAND define the population of firms that are ready, willing, and able to perform federal contracts in two ways: (1) as the population of all firms in the economy and (2) as the population of firms that have registered as potential bidders for federal contracts.

          "In this study, we compute disparity ratios by industry, defined according to the North American Industry Classification System (NAICS) at the 2-, 3-, and 4-digit levels (corresponding to increasingly disaggregated industry classifications). Following SBA guidelines, we classify WOSBs as underrepresented in industries in which the disparity ratio is between 0.5 and 0.8, and substantially underrepresented in industries in which the disparity ratio is between 0 and 0.5.

Data

          "We used three datasets to compute the four types of disparity ratios. The Federal Procurement Data System (FPDS) contains data on federal prime contracts over a certain size. These data can be used to compute the value of federal contracts awarded to WOSBs and all other firms. We use FPDS data from three fiscal years (FYs): FY02, FY03, and FY05. The Central Contractor Registry (CCR) lists the firms that have registered with the federal government in anticipation of bidding on federal contracts.  With these data, we computed the number of ready, willing, and able WOSBs and the number of all ready, willing, and able businesses. Because the CCR data are not archived, we used the October 2006 file to compare with the most recent available contracting data in the FY05 FPDS. Finally, we constructed measures of the total number of employer businesses and women-owned employer businesses in the population, using the 2002 Survey of Business Owners (SBO), part of the 2002 Economic Census.

          "We did not make any adjustments to the official NAICS industry groupings; thus, dissimilar industries sometimes fall into the same code. (For example, NAICS code 6115 includes cosmetology schools as well as flight-training schools.) Finally, only industries with samples large enough to calculate significant differences across groups were analyzed.

Key Findings

          "We found that the measurement of whether WOSBs are underrepresented in federal contracting is sensitive to whether contract awards are measured in dollars or in number of awards and to whether the population of ready, willing, and able firms comprises essentially all employer firms or just those firms that have registered as potential bidders on federal contracts. Depending on the measure used, underrepresentation of WOSBs in government contracting occurs either in no industries or in up to 87 percent of industries. The variation is especially large in the measures that use contract dollars rather than number of contracts. This report does not advocate a particular measure. Rather, it highlights industries where disparities occur and discusses how the identification of these industries varies depending on the methodology used and on data limitations."

<END Kaufman-RAND's synopsis of their disparity study for the SBA>

Download a more detailed summary of RAND's disparity study HERE.

Visit the RAND web site to purchase the complete 62 page study HERE.