Feds Struggle To Meet Set-Asides Commitment

Government agencies have long been suspected of not meeting internal guidelines when it comes to setting aside a portion of their supplier contracts to specific companies. Two new reports illustrate just how severe these shortfalls are, especially when it comes to complying with mandates for allocating contracts to small businesses and companies owned by disabled U.S. service veterans.

Some background: Each year, the federal government allocates certain monies, known as "set-asides," for specific would-be suppliers, including small businesses and companies owned by women, minorities, disabled veterans and others. The government has a mandate to set aside a certain percentage of the money it spends on IT for these and other categories. Twenty-three percent of IT budgets, for example, are supposed to go to small businesses. An additional 5 percent are supposed to go to minority-owned businesses or what are known as small, disadvantaged businesses, 5 percent for woman-owned businesses, and 3 percent for service-disabled, veteran-owned businesses (SDVOBs).

One new study concludes that the government has had mixed results at best when it comes to meeting these guidelines. On the plus side, government agencies have done a solid job of accommodating small businesses, meeting their mandate an average of 100 percent of the time in 2001, 2002 and 2003, according to Input, a Chantilly, Va.-based research firm. In addition, Input predicts spending through SDVOBs to grow to $2.8 billion annually from the $103.7 million that was set aside for these companies in 2003.

That's the good news. There are downsides, however. For starters, the stellar success rate for meeting various mandates may not be as high as it appears. The reason is some of the money spent by the government is going to companies that may not be deserving of its generosity. Analysis by Eagle Eye Publishers, a Fairfax, Va.-based market-intelligence firm, found that 44 of the top 1,000 small-business contractors for 2002 were actually large firms, nonprofit organizations and/or government agencies. Total contract dollars mistakenly allocated amounted to $2 billion. The worst offenders at the agency level were the Department of Defense and the General Services Administration (GSA), which accounted for 79 percent of the contracts that were found to have been awarded to improperly categorized entities.

So, how is this happening? Consider the Individual Contract Action Report (ICAR) maintained by the GSA's Federal Procurement Data System (FPDS), the master database of how agencies spend available procurement dollars. Records of awards to small businesses are entered into an ICAR file, which the FPDS accesses for determining the success or failure of small-business procurement policies. What experts are learning is that companies are sometimes coded improperly.

"The coding problem could have been the result of erroneously assigned types of business codes, or a large firm's acquisition of a small firm during the fiscal year, or of a small firm's growing out of its size classification among other possible reasons," the Eagle Eye report states. This, of course, is not sitting well with those who feel cheated by the procurement process.

"Right now, a company can be awarded a 10-year contract as a small business, and they're then able to report themselves as a small or small disadvantaged business the entire length of that contract," says Mark Martinez, president of San Antonio-based M2 Technologies, a small, veteran minority-owned government VAR. "The SBA needs to require companies to recertify annually. That would help people on the program and deserving to be on the program immensely."

As for SDVOBs, encouraging projections don't overshadow the fact that federal agencies have fallen drastically short of the mandate. According to Input, the success rate for meeting the SDVOB mandate was 6 percent in 2001, 2002 and 2003; that's compared with 142 percent for the small, disadvantaged business category, and 57 percent for the woman-owned business category. Furthermore, 74 percent of the $103.7 million awarded in fiscal year 2003 went to the same top 20 contractors. Given that, those solution providers that stand to gain from the forecasted windfall may only see benefits if the government changes its ways.

"A government agency can't just put out a bid saying, 'We need disabled-veteran business participation,' because, generally speaking, it will not happen," says Donald Parks, president of Sacramento, Calif.-based Applied Technology, which was the first certified SDVOB in the country. "A disabled-veteran-owned business, which is generally smaller, won't have a shot at competing with other companies--even other minority businesses."

Rather than shoulder the mandate themselves, agencies can pass the buck, so to speak, by requiring disabled-veteran participation goals of subcontractors. The federal government doesn't preclude itself from requiring subcontractor participants, Parks says, but agencies just don't seem to be doing it. California, on the other hand, regularly writes the requirement into subcontracts to meet state mandates. "Agencies need to decide to do something to see success for this particular category, and disabled-veteran-owned businesses need to get themselves noticed," he says.

To better accomplish this, SDVOBs can form alliances with larger companies that have complementary skillsets. By doing so, the larger firm has a carrot to dangle in front of government agencies by offering a set-aside contribution, and the SDVOB benefits from increased exposure and a more expansive track record. In that sense, small businesses and SDVOBs alike could shoulder some of the responsibility of finding contracts by properly marketing themselves and their skillsets.

"The onus of finding business today rests with the companies," Martinez says. "I'm a firm believer that no company should be entitled to business just because it's a diversity play. What you need to do is market yourself and your capabilities to clients, and then use the program to facilitate the contractual piece."