The Demise of the Small Business Program

1. The Demise of the Small Business Program TRACK – SMALL BUSINESS SESSION #1705 Philip G. Bail, Jr., CPCM, Fellow Derco Aerospace, Inc Milwaukee, Wisconsin (A Sikorsky Aerospace Services Company)

2. Overview • Identify Small Business Program “Problems” • Make Recommendations for Saving the Program

3. The Problems • The Original Intent of the Small Business Act Has Been Changed Over the Years • Solicitation Mandated Subcontracting Goals Don’t Recognize Prime Contractor Workforce or Subcontracting opportunities and May Violate the Federal Acquisition Regulation (FAR) • The Word “Goal” Is Not Interpreted Correctly • Flavor of the Day Mentality • Small Business “Types” Compete for Attention - FAR Case 2006-034 • GSA, SBA, NAVAIR • Setasides for WOSBs • Realities of Supply Chain Are Not Considered • DCMA Reorganization of Small Business Specialists Away from Geographic Orientation Has Negatively Affected the Small Business Program

4. The Problems (Continued) • Contractor SBLOs and Government Small Business Specialists Knowledge of FAR Part 19.7 Is lacking • Non Compliance with 13CFR125.6, Limitations on Subcontracting and Non Manufacturing Rule • Myths • Bundling • Innovation Exclusivity To Small Businesses • Other Issues • DFARS 252.215-7003 Excessive Pass-Through Charges – Identification of Subcontract Effort (APR 2007)

5. Historical Perspective of the Small Business Program – The Beginning • 1929 Reconstruction Finance Corporation (RFC) • 1938 Wagner-O’Day Act (“JWOD”) • National Industries for the Blind • Javits-Wagner-O’Day Program (now “AbilityOne”) • 1942 Smaller War Plants Corporation (WSPC) • 1947 Armed Services Procurement Act (ASPR) • 1950 Small Defense Plants Administration (SDPA) • 1953 Congress Created the Small Business Administration • 1958 The Small Business Investment Act (PL 85-536)

6. Historical Perspective of the Small Business Program – Focus Changes • 1978 - Public Law 95-507 – Amended the Small Business Act of 1958 • Made Large Business Participation Mandatory. • Changed “Best Efforts” to “Maximum Practicable Opportunities”, • Required a Subcontracting Plan • Redefined Minority Firms as Socially and Economically Disadvantaged Business Concerns (SDBs) • Reserved all solicitations under $25,000 for Small Business • Required Federal Agencies to Establish Small Business Goals and Explain to Congress when Goals Were Not Met • Established the Office of Small and Disadvantaged Business Utilization (SADBU) • 1987 - Public Law 99-661- Implemented 5% Small Disadvantaged Business Goal and SDB Setaside (Setaside rescinded in 1996) • 1988 – Public Law 100-656 Established the 8(a) Program, Liquidated Damages Clause, 20% small business prime contract goal • 1994 Federal Acquisition Streamlining Act - P.L.103-355 added a Woman-Owned Small Business goal of 5% in both prime and subcontracts

7. Historical Perspective of the Small Business Program – Focus Changes (Continued) • 1997 - The HUBZone Act P.L. 105-135 – preferences to small businesses located in HUBZones, 35% of employees living in HUBZones. Subcontracting Plans must incorporate these goals. • 1997 – Small Business Reauthorization Act, P. L 105-135, increased annual goal of small business prime contracts from 20 to 23 percent. • 1999 - P.L 106-50 – Established goal for subcontracts by large businesses to Service Disabled Veteran Owned Small Business of 3%. Subcontracting Plan must incorporate these goals • 1999 – FAR Part 19, Size Standards, Policies for Small Business Subcontracting Program

8. Historical Perspective of the Small Business Program – Summary • Originally Created to Loan Money to all Businesses Following Depression. • Federal Government and Large Businesses Encouraged to Buy from Small Businesses • Business Education Provided to Small Businesses • Small Business Administration Created to “…aid, counsel, assist and protect Small Businesses and Ensure a Fair Proportion of Government Contracts to Small Businesses • Subsets of Small Businesses Created. • Setasides to Small Businesses Begin • Setasides to Different Types of Small Businesses

9. Solicitation Mandated Goals May Violate FAR 19.704 (a) (2) • 19.704 (a) (2) requires a prospective contractor to identify total dollars planned to be subcontracted • $’s planned to be subcontracted might differ greatly from company to company depending on in-house capability • Contracting Officer cannot mandate his/her “goals” without fully understanding the individual company • Example…

10. Example • US Army Corps of Engineers, New York District Solicitation W912DS-07-B-0011 • Small Business Goals Identified in RFP • SB 51.71% • SDB 8.89% • HUBZone 7.37% • WOSB 3.13% • VOSB 3.00% • SDVOSB 2.00% • “If plan includes goals less than indicated, explain extenuating circumstances why (COE) identified goals can’t be met…” • Protests or Responsiveness of Bids Could Be An Issue (see FAR 14.301(a))

11. What is a “Goal”? Goal “The purpose toward which an endeavor is directed; objective” The American Heritage Dictionary Some Agencies requiring goals based on “Contract” value Some Agencies requiring statutory goals as “minimum”

12. Flavor of the Day -Setasides to Different Types of Small Businesses • DoD SDVOSB Strategic Plan – In Response of Executive Order 13360 • Winter 2007 Issue of “Beyond Goals” Air Force Small Business Newsletter Scott Denniston, Director of the Office of Small and Disadvantaged business Utilization, Department of Veterans Affairs stated: “…in past years contracting officers had been encouraged to setaside procurements to 8(a) certified disadvantaged small businesses and women-owned small businesses…” He hopes that government contracting officers will now focus on veteran-owned small businesses. • GSA 21 Gun Salute

13. Flavor of the Day – (Continued) • SBA Initiative #3 • Increase Contracting Opportunities for Small Business • Reform Procurement Center Representative (PCR) Responsibilities to better help agencies meet goals • Require Agencies to Provide PCRs with All Purchase Requests (DD Form 2579 from CO’s to SBA) • NAVAIR Strategic Plan To Increase Awards to SDVOSB’s • Increase Training & Outreach to Increase Use of Sole Source and Restricted Competition with SDVOSB’s • Work with CVE to Identify Potential Suppliers • Disseminate Information On How To Do Business With NAVAIR • Setasides to WOSBs • Still Under Heated Discussion • Only Allows Setasides Under 4 of 140 Industries IF Agency can show underutilization of WOSBs in the Industry to be Setaside

14. Realities of Large Business Supply Chain Management Decisions • Improve Supplier Selection Process • Reduce the Number of Suppliers • Decrease Outsourcing Costs per Unit by Leveraging Major Suppliers for Lower Prices • Increase Global Sourcing, especially in geographic areas of lower labor costs • Maximize Economies of Scale • RESULT: These Initiatives Are Not Always a Good Fit With Small Business Requirements

15. DCMA Audit of Large Business Small Business Program Doesn’t Always Recognize Outreach Efforts of the Large Business • Limited Face-To-Face Contact with Each Large Business • Limited Understanding of Large Businesses Products/Services or the Market Itself • Unrealistic Focus On Year-Over-Year Increases in Goal Accomplishment • Outstanding Rating – must exceed at least 1 goal and meet all other on every contract • Highly Successful – Meet all “Traditional” Goals and at Least 1 of New Goals for Each Contract. • Acceptable – good faith effort to meet all goals • Possible Light At End of Tunnel – Newly Assigned Head of DCMA Small Business Program – Kevin R. Loesch, formally with U.S. Army Communications-Electronics Life Cycle Management Command (CELCMC)

16. Contractor SBLOs and Government Small Business Specialists Knowledge of FAR Part 19.7 Is lacking • Can’t Differentiate Between a Comprehensive, Master, Commercial, or Individual Subcontracting Plan • Are Not Familiar with SF 294, SF 295 and/or eSRS • Cannot Identify Mandatory Requirements of a Subcontracting Plan • Don’t Know How to Report Small Business Dollars if a Small Business Fits More Than One Business Size Category • Don’t Understand That an Individual Small Business Subcontracting Plan Should identify Dollar and Percentage Goals of Expected Vendor Spend • Don’t Realize That Contracting Agencies Must Allow Use of a Commercial Plan on “Their” Contract if the Plan Covers the Product Line or Division It Was Approved For

17. Non Compliance with 13CFR125.6, Limitations on Subcontracting and Non Manufacturing Rule • Limitations on Subcontracting • FAR 52.219-14 Limitations on Subcontracting • Non Manufacturer Rule – see 13 CFR 121.406 • "Non-manufacturer rule" - a contractor under a small business or 8 (a) set-aside shall be a small business under the applicable size standard and shall provide either its own product or that of another domestic small business manufacturing or processing concern • Refer to FAR 19.102(f)(1)-(7) for waivers.

18. Myths • Bundling • SBA claims 34,221 new bundled contracts were awarded from 1992 to 2001, transferring $840 Billion of contract revenue from small to large businesses, causing a 56% decline in the number of small businesses contracting with the government • Yet, only 25 bid protests were filed by contractors between 1992-2004 over contract bundling, sharply contradicting the government’s estimates of bundling frequency.* *Government Contract Bundling: Myth and Mistaken Identity by Timothy T. Nerenz, Defense Acquisition Review Journal, December 2007, Vol. 14, NO. 3

19. Myths (Continued) • Innovation Is Exclusively a Small Business Phenomenon “Some sectors are hobbled with intractable, industry-wide problems that only a large company can solve.” Andy Grove – Co Founder of INTEL • Examples: • Apple Computer -----------Music Business • Wal-Mart ---------------------In Store Health Clinics • General Electric ------------”Could Probably” Build An Electric Car Source: Portfolio Magazine, December 2007

20. Other Issues • Excessive Pass Through Charges • DFARS 252.215-7003 Excessive Pass-Through Charges – Identification of Subcontract Effort (APR 2007)

21. Saving the Small Business Program • Require Large Business Compliance with FAR 19.702 • Evaluate Contractor Identified “subcontracting opportunities” and Goals Instead of Mandating Goals • Re-assign Military Services Small Business Specialists to Contract Specialist or Item Manager Billets and Rely on SBA and Procurement Technical Assistance Centers (PTAC) To Work with and Identify Small Businesses to the Agencies • Re-Examine Size Standards for Small Business. Maybe a small business manufacturer should have fewer than 50 employees rather than fewer than 500 employees. • Assign DCMA Small Business Specialists Oversight of Large Business To Companies In Immediate Geographic Area • Change FAR Part 19.5 by Eliminating Current Small Business Setasides Unless Quantifiable Data Supports the Present Assumption that Small Businesses Cannot Exist in the Federal Marketplace and Receive a Fair Proportion of Government Contracts Without Setasides. • Re-compete procurements formerly setaside for Small Business as Open Competition, Large or Small and Evaluate Impact on Small Businesses and Prices Paid • Revert to Original Intent of Small Business Act – Loans and Training

22. Background Reading Material • The Future of Small Businesses in the U.S. Federal Government Marketplace, Major Clark III, J.D. and Chad Moutray, Ph.D, Office of Advocacy, U.S. Small Business Administration, Presented at the International Public Procurement Conference, Ft. Lauderdale, Florida, October 21-23, 2004 • Socioeconomic Programs - On the Road to Failure?, Philip G. Bail, Jr., CPCM, Fellow, Contract Management Magazine April 2006 • The Government’s Role in Aiding Small Business Federal Subcontracting Programs in the United States, Office of Advocacy, U.S. Small Business Administration, September 2006 • Questioning the Sacred Cow: Reexamining the Justifications for Small Business Set Asides, Andrew George Sakallaris, Public Contract Law Journal, Vol. 36, No 4, Summer 2007 • Q&A, A Conversation with Scott Denniston, Beyond Goals, Winter 2007

23. Questions or Comments Send Feedback to p.bail@dercoaerospace.com or call me at (414) 371-3326 Thank You For Your Attention www.dercoaerospace.com