By Jenna Tynan, HLS Class of 2016 –
This year, Harvard Business School celebrates the 50th anniversary of its first coed class. This effort to break gender barriers in education was just one piece of the greater movement (advanced through direct action, judicial decisions, and legislation) to enhance the status of women in the business community. The next legislative advance for female entrepreneurs comes from an unlikely source: The National Defense Authorization Act of 2013 (NDAA).
The specific provision in the 600-plus-page document eliminates caps on contracts set aside for Women-Owned Small Businesses (WOSB) and Economically Disadvantaged Women-Owned Small Businesses (EDWOSB). Previously, contracting officers could only set aside contracts valued less than $6.5 million for manufacturing and $4 million for all other industries. Proponents believe that government agencies will be in a better position to meet the statutory goal of WOSBs representing no less than 5% of federal contracting and subcontracting revenue. But should women business owners celebrate because the NDAA has cut the cap?
The legislation provides an example of how the law of unintended consequences may thwart otherwise favorable efforts. The legislative history itself fails to indicate dubious intentions: Senator Olympia Snowe (R-Me.) proposed the amendment, which was co-sponsored by six senators (Democrats and Republicans, male and female). However, this change may not favor female small business-owners as expected. First, the number of contracts set aside for women-owned small business concerns may dwindle as agencies meet representation goals with a few big-ticket procurements. In essence, the same amount of contracting funds may become concentrated in a few WOSBs. If these businesses remain under revenue thresholds for their procurement category, a WOSB oligopoly could ensue, thereby restricting the competition the amendment sought to enhance. However, considering the practical context of government procurement, this result is highly unlikely to occur: “small business” definitions prevent, perhaps imperfectly, such concentration.
The more interesting result involves an ancillary amendment in the NDAA that changes how subcontracting is calculated for “similarly situated entities.” Small business “set aside” contractors generally cannot subcontract out more than 50% of a contract’s value. However, the amendment now treats activities subcontracted to “similarly situated entities” (i.e. other women-owned businesses) as “prime activities” (i.e. not subcontracted) for purposes of the threshold. What’s the issue? Assume Rosie Rivets (a WOSB) wins a $10 million contract, but that Rosie Rivets subcontracts 70% of the project to Betty Builders (another WOSB). There’s no problem yet, as both contractors are promoting the legislation’s goals. Now assume that Betty Builders subcontracts out 90% of its tasks to Big Boys, a standard company (i.e. not a small business and not women-owned). Because the amount contracted to Betty Builders is treated as “prime” no subcontracting flag is raised. As a result, Rosie Rivets walks away with $ 3 million in revenue, Betty Builder with $700,000 and Big Boy’s wins the lion’s share of $6.3 million.
Many protections against this type of gaming do exist. For example, contracting officers are not impelled but merely allowed to set aside higher contracts. Moreover, procurement regulations and/or the fact that economic benefits from the arrangement would be minimal may further restrict gaming on the behalf of larger contractors. Thus, well-intentioned legislation may result in unexpected consequences, but for now, Rosie has indeed cut the cap.
The views in this blog post are solely the views of the author and not of the Harvard Law School Journal on Legislation. The article image was taken from http://en.wikipedia.org/wiki/File:We_Can_Do_It!.jpg, which indicates that the image is in the public domain.