Springfield Business Journal Articles
Sarah Delano Pavlik and Tom Pavlik write a monthly column on legal and business issues for the Springfield Business Journal.

Their columns will be added here each month after publication.
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Many small businesses think that bidding on contracts from a federal agency is a waste of time because they cannot compete with their larger competitors. Under a new method of awarding these contracts, that may no longer the case. 

First, you might be wondering where you can find out what government contracts are out for bid. A good starting place is http://fedbizopps.gov. Although a government web site, it is actually fairly user friendly, and even supports a search by Zip Code for all available contracts. The site also contains a wealth of information on what must be included in any bid. For the uninitiated, the requirements can seem quite byzantine. Don't forget that you can also bid on contracts that extend beyond Illinois. You might be surprised at the business opportunities available. Second, you might be wondering whether you are a small business. If you have to ask, you likely are. The rules and regulations in this regard are very detailed and vary by industry. The particulars can be found at www.sba.gov/size. However, the general description is an 'independent business having fewer than 500 employees.' For more particulars, put your tax dollars to work for you and contact the Small Business Administration (SBA). (Note that you may also be a Very Small Business Concern, which is generally defined as having no more than 15 employees with annual receipts that do not exceed one million dollars.)

Turning now to the bidding system, the 'Competition in Contracting Act' dictates that government procurement, with few exceptions, must be done through full and open competition. However, due to the principle of economies of scale, most small businesses have scant chance of ever being awarded such contracts when they are up against large businesses. 

Because of this concern, and having recognized that small businesses are of vital importance to job growth and economic strength, the federal government has established a small business set-aside program under the auspices of the SBA. Under this program, each federal agency must earmark a number of prime contracts for small businesses. Once such a contract has been set aside, large businesses are prohibited from bidding. However, if the bids received by the small businesses exceed what is determined to be fair market value, the agency must 're-bid' the contract to all who are interested. Practically speaking, many small businesses still lose out on federal contracts. Further, in many instances the contracting agencies resist placing certain contracts into the set-aside program. 

However, that will not always be the case now under a relatively new method that is continuing to grow in the field of government contracting. It's called the 'small business cascading set-aside.' Under this method, certain contracts are selected by the relevant agency, with input from the SBA. These contracts are neither set aside for small businesses nor are subject to unrestricted competition. Instead, while both small and large businesses are permitted to submit proposals, those from Section 8(a) companies (generally speaking, companies that are at least 51 percent owned, controlled and managed by certain minority groups) are considered first, those from small businesses are considered second, and finally all remaining bids are considered. No large business bid may be considered unless there are fewer than two competitive bids from small businesses or Section 8(a) companies. Sometimes, the 'pecking' order is different, but the concept always remains the same - the smallest and most disadvantaged businesses are given the first bite at the apple.
The federal government is reporting that, under this system, a larger number of contracts will now be available to small business bidders.

Large businesses have lodged legal challenges to this system, but to date those challenges have been rejected. Small business concerns, however, have also complained about the new system. First, some small businesses have complained that the cascading system creates an undue burden because of the resources required to prepare proposals that will not be considered unless there are at least two competitive bids. That complaint has also been rejected, in large part because the federal General Accounting Office found that the cascading program increased opportunities for small businesses.

More recently, small businesses have been complaining that contracting agencies have been reviewing large business bids in order to determine whether small business bids are competitive. Because of the principle of economies of scale, large-business bids contain lower prices (especially in contracts spread out over several regions) and, as a result, small business bids are rejected as not competitive. Reports indicate this practice is still in place with certain agencies, so the new program's reality may not always match its laudable objective. Whether for contracts let under this new system, or for those under the traditional small business set-asides, a little prospecting with the Federal Government may pay you large rewards.

by Thomas C. Pavlik, Jr.
Posted in: November, 2004
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