OMB questions GAO on small biz decisions

The Office of Management and Budget has directed agencies not to implement recommendations from the Government Accountability Office to prioritize certain small business procurement programs, pending a legal review.

In a July 10 memorandum to agency heads, OMB Director Peter R. Orszag called into question recent GAO protest decisions and accompanying recommendations, which stated that the Federal Acquisition Regulation require agencies to award contracts to a historically underutilized business zone company if the contracting officer has a reasonable expectation that two qualified HUBZone businesses will submit offers at a fair market price.

The GAO decisions -- issued in favor of two HUBZone companies, Mission Critical Solutions and International Program Group Inc. -- cite the Federal Acquisition Regulation in stating that agencies must contract with HUBZone companies when certain criteria are met, essentially creating a preference for contracting with HUBZone companies rather than other groups, such as firms owned by socially or economically disadvantaged individuals, or service-disabled veterans.

HUBZone businesses operate in low-income urban and rural neighborhoods. Businesses participating in the 8(a) program are owned by socially or economically disadvantaged individuals. Both categories, along with service-disabled veteran-owned businesses and general small businesses, are eligible for set-aside contracts under certain conditions.

In the decision regarding the International Program Group, GAO General Counsel Gary Kepplinger noted that the FAR stipulates agencies "shall" contract with HUBZone businesses under these criteria. In contrast, the FAR provisions for the service-disabled veteran-owned small business program state that a contracting officer "may" choose to set aside procurement for those businesses.

"Unlike the HUBZone set-aside program, which requires a set-aside if two or more HUBZone [companies] are interested in submitting offers and an award is expected to be made at a fair market price, there is no requirement to set aside a procurement for [service-disabled veteran-owned firms] … rather, the decision to proceed with an SDVOSB [contract] set-aside is discretionary with the contracting officer," Kepplinger wrote.

In the OMB memo, Orszag stated that the GAO decisions are contrary to SBA regulations that provide "parity" among the HUBZone, 8(a) small business and service- disabled veteran-owned small business programs. If agencies were to follow GAO's decisions, the government's efforts to procure goods and services through the 8(a) and SDVOSB programs could be adversely affected, he said. The discretion of contracting officers to meet agencies' acquisition requirements also would be limited.

"Federal agencies should not, as a result of the GAO's decisions, be compelled to prioritize HUBZone small businesses over 8(a) BD or SDVOSBs," Orszag wrote. "Instead, until the legal review is completed, federal agencies should continue to give active consideration to each small business program pursuant to their pre-existing contracting practices and 'parity' policies."

As a legislative branch agency, GAO only can make recommendations for federal agencies; its decisions are not binding.

"The GAO and OMB often work together to improve the efficiency, transparency and effectiveness of the federal government, but the Justice Department is ultimately responsible for issuing controlling interpretations of the law to the executive branch," said Gavin.

SBA spokesman Jonathan Swain said the agency is "absolutely supportive" of the OMB memo, as it would ensure small disadvantaged businesses have access to federal contracts and clarify SBA's position for contracting officers. Swain said the agency moved to have GAO reconsider its position, but the motion was denied.

Michael Golden, managing associate general counsel of GAO's procurement law division, said it is rare for OMB to respond so directly to a GAO protest decision. Gavin said the agency was receiving reports that contracting officials were beginning to change policies and "depart from their adherence to legal regulations" in response to these GAO decisions.

"OMB issued this memorandum to respond to inquiries from agency officials about what action, if any, they should take in response to the GAO's decisions in light of the decisions' conflict with SBA's parity rule," Gavin said.

A proposed FAR rule, filed in March 2008, would have clarified that no order of award preference exists among disabled veteran-owned businesses, those located in underserved or low-income neighborhoods, or firms owned by socially or economically disadvantaged individuals.

"It has been unclear to the acquisition community if there is an order of precedence that applies when deciding whether to satisfy a requirement through an award to small business, HUBZone small business, service-disabled veteran-owned small business, or a small business participation in the 8(a) Business Development program," the proposal stated.

That rule is still under review, according to the FAR secretariat.