Agencies Shun Contract Set-Asides for Disadvantaged Areas

A contracting program designed to give certain disadvantaged businesses a chance at federal dollars suffers from a lack of agency incentives and program requirements. As such, agencies tend to favor other set-aside programs, contractors say.

The Historically Underutilized Business Zone program, also known as HUBZone, was created by Congress in 1997 to provide small businesses located in economically distressed areas with greater access to federal contracting opportunities. Since the program’s inception, the government has been unable to reach its goals—at least 3% of prime contracts and subcontracts to be awarded to qualified HUBZone small business.

The HUBZone program is underused, witnesses said at a Thursday hearing, because it appears to compete with other set-aside programs that are easier to use. One concrete solution might come from barring agency “double counting” of set-aside contracts—i.e., using one deal with a small business to hit multiple benchmarks.

“Do we throw the whole thing out and start over again? Or do we admit that there are some real serious issues that this committee ought to be looking at to try to find a way to enhance the program and the participation in the program?” queried Rep. Kweisi Mfume (D-Md.), who chairs the House Small Business Committee Subcommittee on Contracting and Infrastructure.

The best way to make the program better is to award more contracts with it, said Matthew Schoonover, managing member at Schoonover & Moriarty LLC.

“Given the time and expense that it takes to comply and to maintain your certification, unless and until there are more contracts awarded under the program, quite frankly, it can be a tough sell for some businesses,” he said.

To become a HUBZone certified business, the company must be located in a “historically underutilized business zone,” owned and controlled by one or more US citizens, and have at least 35% of its employees residing in a HUBZone.

A HUBZone must be located in least one of three types of places—a qualified census tract, a qualified “non-metropolitan county” with a median household income less than 80% of the statewide median or with an unemployment rate at least 140% of the statewide average, or within the boundaries of federally recognized Indian reservations.

‘Overshadowed’

The low usage of the HUBZone program among government contracting offices may stem from a preference for other socioeconomic set-aside programs like the Woman-Owned Small Business Program, the Service-Disabled Veteran Owned Small Business Program, and another program called 8(a) that allows the Small Business Administration to contract with federal agencies to award subcontracts to disadvantaged small businesses.

GovSmart CEO Brent Lillard said the HubZone program has been “overshadowed” by the 8(a) program specifically. He said that 8(a) contracts can’t be protested, which means the award process is faster and easier on federal agencies.

An April 2021 Small Business Administration report found that agencies often meet 8(a) and HUBZone goals by “strategically” seeking out firms that are both 8(a) and HUBZone-certified and contracting with them through an 8(a) sole-source solicitation. Small businesses and advocates also reported that 8(a) sole sourcing has fewer requirements in terms of vetting a contractor’s capability and work experience compared to set-asides.

Contracts worth up to $150,000 are automatically set aside for small businesses.

Small contractors are frustrated with agencies’ ability to double count the socioeconomic dollars awarded to small businesses under the SBA programs to reach government-wide small business contract quotas. Each federal agency receives an annual SBA scorecard to evaluate their use of small business contracts.

Subcommittee member Rep. Dan Meuser (R-Pa.) agreed with their sentiments, adding that he’s introduced a bill (H.R. 7685) that would limit agencies from counting contract awards towards multiple goals. The bill has been referred to the House Small Business Committee.

Subcontracting

In fiscal 2020, 1.6% of subcontracting dollars went to HUBZone businesses, Mfume said.

Inés Rivas-Hutchins, president of Intec Group, said there is no accountability for federal agencies to meet subcontracting small business goals and asked for the committee to consider incentives.

For women-owned construction companies, “subcontracting is sometimes the only way to enter the federal marketplace. It allows construction companies to build up a positive past-performance record,” Rivas-Hutchins said. “There is no incentive for meeting or consequences for failure to meet the subcontracting goal.”

To contact the reporter on this story: Patty Nieberg in Washington at pnieberg@bloombergindustry.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com