Congress tried to help small-business contractors. Here’s why it’s backfiring.


Nearly two years ago, Congress approved legislation meant to help small contractors. But many of the changes have still not been adopted by the Small Business Administration. (Carolyn Kaster/AP)

More than a year and a half ago, Congress passed and the president signed legislation intended to help small businesses more easily navigate the federal contracting arena and win more government work.

However, most of the rules have yet to be adopted — and until they are, life for some small contractors has instead become even more complicated.

“It’s unfathomable for me to understand why it’s taking so long when many of these are minor regulatory changes,” Angela Styles, a former White House administrator and now partner at Crowell & Moring in Washington, said this week during a congressional hearing.

Currently in limbo are several rule changes included in the defense budget authorization law signed by President Obama at the very start of 2013. Among them, Styles says that one of the most important was a revision to the rules outlining the share of work a company awarded a government contract reserved for small businesses could turn around and subcontract out to another company.

Under longstanding rules — which are meant to prevent large firms from using small ones to win set-aside contracts and then performing the majority of the work itself — small businesses that win such contracts are required to use a complex formula based on labor hours and wages to determine exactly how much work can be passed along to subcontractors.

“In practice, the rule has been absolutely impossible to understand or implement,” said Styles, who works with firms to navigate federal contracting laws. She previously served as administrator for federal procurement policy within the budget office at the White House.

“Nobody knows how to administer this correctly, and the uncertainty has led to many disputes with the government and between prime and subcontractors,” she added.

Many of her small-business clients therefore cheered when the president signed the law last year switching to what she described as a “simple, easy-to-use” formula for set-aside subcontracting limits. Under the new rules, small firms that win set-aside awards cannot pass along more than half of the money paid by the federal government to other businesses.

Problem is, the Small Business Administration, which oversees the small-business set-aside program and must implement the rule changes authorized by Congress, has yet to revise its contracting regulations to reflect that adjustment.

John Shokora, the SBA’s associate administrator for government contracting and business development, said that the agency has pitched the rule change to other departments for approval and plans to release an interim rule for public comment soon. He said his team is being careful to “get the rulemaking process right the first time around.”

Moreover, he noted that the agency has “made significant strides” toward implementing other changes included in the same law, such as eliminating caps on contracts that can be awarded under the agency’s women-owned business programs and revising some of its small-business size standards. Shokora said the agency has tried to first tackle some of the rules that were easiest to adopt before moving on to more complicated reforms.

Rep. Richard Hanna (R-N.Y.), chair of the House Small Business Committee’s panel on contracting and workforce that held the hearing, shot back, saying it feels “like you are addressing those you like and ignoring those you don’t.” He added that, by his count, the agency has yet to implement about 40 of the 56 changes mandated last January.

“Nineteen months is a long time,” Hanna added.

Among the other outstanding rules are changes that would allow similar small businesses to team together to compete for more government contracts, improve the SBA’s suspension and debarment process for small-business programs, and expand the department’s mentor-protege program (which pairs large contractors with new and small firms looking to break into the market). Shokora says the agency is in the process of adopting those provisions of the law but did not provide estimated timetables.

Styles says the wait is particularly painful for small businesses coping with the set-aside subcontracting limits. That’s because business owners are required to follow both the laws enacted by Congress and the regulations issued by the SBA. Consequently, she said, this period of limbo has left them in an even more difficult position than before, scrambling to “comply with two inconsistent provisions — one in the regulation and one in the statute.”

Styles added that she has already started to see a “dramatic increase in compliance questions” as a result, which has likely added millions of dollars in legal costs for small contractors. In many cases, those contractors then pass the added costs along to the government in the form of higher prices.

“SBA’s failure to act is crippling the very small businesses it is supposed to protect and to assist... and resulting in lost opportunity for economic growth,” Styles said.

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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