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According to the October 2011 Small Business Index poll from Wells Fargo and Gallup, small business owners identified government regulations as their top problem. Let me show you why.  The Federal Acquisition Regulations, believe it or not, contains regulations which have been used for years to limit small and disadvantaged businesses access to contracts. I am referring to so called ‘exemptions.' which have been diverting $64 billion in contracts annually - $44 billion in GSA Federal Supply Schedule contracts and $20 billion in commodity contracts destined for military bases and U.S. embassies in foreign soil.  According to the Umbrella Initiative Think Tank, over the last decade such diversion has totaled $640 Billion.

What exactly are the Exemptions?

Exemptions are procurement regulations codified into the FAR, thanks in part, to the lobbying efforts of large businesses with a zeal to monopolize government contracting. The exemptions literally exclude government programs from the set-aside provisions of The Small Business Act (pdf), which require that ALL procurements between $3,000 and $150,000 must be reserved for small businesses. 

First of all, Congress has never authorized any procurement program to be exempt from the set-aside provisions of the Act. Second, the legislation which created the GSA Federal Supply Schedule Program has no statutory exemption. Finally, regulators relied on faulty assumptions to establish exemptions on procurements destined for military bases and embassies on foreign soil.  

Senators John Kerry and Olympia Snowe put it all in perspective in 2005 when - as Chair and Ranking Member of the Senate Committee of Small Business and Entrepreneurship - they stated "The unambiguous Congressional intent [is] that the [Small Business] Act govern all procurements... Executive Departments do not have the discretion to interpret the law in a matter inconsistent with its plain language." 

The Fight Against Exemptions

Challenging the GSA Federal Supply Schedule Exemption and the Foreign Exemption has been part of my legacy.  It started in 2005, with the founding of the Fairness in Procurement Alliance (FPA) and continued with its offspring, The Umbrella Initiative, which established a Think Tank and Legal Center to enlist University and Law professors to defend the rights of small and disadvantaged businesses and to bring them justice.

In 2008, at my urging, the SBA Office of Advocacy scheduled the Foreign Exemptions for removal through its r3 Initiative.  FPA demonstrated that the foreign exemption precluded the FAR, was based on false assumptions and they had not gone through the required review called for by the Regulatory Flexibility Act. Unfortunately, government regulators were again persuaded by the lobbying efforts of large businesses and have done nothing to remove them.

Support for the removal of the exemptions came originally from 14 trade groups. This support includes many University and Law Professors. The Minority Business Roundtable (MBRT) memorialized such efforts at a meeting of small and minority business leaders.  The National Federation of Independent Businesses (NFIB), through their own "Small Businesses for Sensible Regulations Coalition" has issued an Open Letter to the President against onerous regulations.  

The May 2011 White House Small Business Agenda Report stated  that "President Obama is committed to listening to and working with small business in order to better understand where the Administration can improve regulations."  FPA and its coalition - now with its Umbrella Initiative representing the procurement interests of a constituency of 10 million small businesses - want the President to eliminate the exemptions from the FAR.   

Challenges through GAO Protests

Proof that the Exemptions limit the access to contracts for small businesses have come in the form of GAO Protests. I started it all in August 2007 with Protest B-309911 to an Army solicitation which GAO refused to hear, as reported by the Bureau of National Affairs. My challenge, however, convinced SBA to issue their historic February 2007 Legal Opinion, which declared the GSA Federal Supply Schedule Exemption illegal.

In October 2008, there was the GAO Delex B-400403 Protest against the Navy (pdf), which declared that the set-aside provisions of the Small Business Act did apply to the GSA Federal Supply Schedule.

Most recently, in October 2011, the Aldevra GAO B-405271 Protest decision (pdf) confirmed that the GSA Federal Supply Schedule Exemption was being used by the Department of Veterans Affairs to restrict veterans and disabled veterans access to FSS contracts. 

What to do When GAO Decisions Are Ignored

I was dumbfounded after the GAO Aldevra decision with the action of Jan R. Frye, VA Deputy Assistant Secretary for Acquisitions and Logistics, who distributed a Memo FPA had secured ordering the VA contracting community to ignore the GAO decision.  Frye's memo stated, "VA is of the opinion GAO's interpretation is flawed and legally incorrect. Executive Branch agencies are not bound by GAO's legal advice."

When this happens, consider bringing up more GAO protests and demand that your Representatives at Capitol Hill  intervene. Senator Snowe unsuccessfully attempted to clear up this subject by introducing an amendment to the Defense Authorization Act to stop the widespread use of the GSA Federal Supply Schedule Exemption to divert contracts, but her effort was also blocked by the lobbying interests of large businesses.

In April 2011, FPA acknowledged SBA for its announcement - during the 2010 Jobs Act Tour - claiming that SBA would move to create set-asides on the GSA Federal Schedule. Frankly, small businesses do not need nor want yet another regulation, as SBA has proposed, to give them the rights they already have.  What SBA needs to do, however, is to rely on its own Legal Opinion and their own Office of Advocacy r3 decision to dismantle the exemptions. 

FPA, through its Umbrella Initiative Think Tank and Legal Center and the efforts of the National Association of Federal Contractors (NaFCA) intend to appeal to the President using Section 25 of the OFPP Act (41 U.S.C. 421) to nuke the illegal and abusive exemptions.

When Agencies Limit Your Access to Contracts

The government reverse auction vehicle has become the primary venue Agencies are using to circumvent the statutory set-aside provisions of The Small Business Act.  I have been pointing this out since 2007 through Congressional Testimony, white papers and lectures. Yet nothing has been done. 

The SBA Legal Opinion of February 2007 stated that "according to statute and regulations, small business set asides are mandatory for acquisitions valued from $3,000 to $100,000 (upgraded to $150,000 in 2011) and take priority over GSA Schedule contracts. This interpretation is consistent with the declared and unambiguous intent of Congress as it relates to Federal procurement and small businesses."  In other words, Agencies do not have any latitude on the matter.

I urge small businesses to consider challenging ALL GSA Federal Supply Schedule and Foreign solicitations between $3,000 and $150,000 if they are not set-aside for small businesses.  If you are a small business, you are entitled to compete for those contracts without the interference of large businesses.

Do as I've done  by initiating two new GAO protests, along with Requests for Agency Reports and a Congressional review on how not only the GSA Exemption, but the use of reverse auctions are being used to circumvent the statutory set-aside provisions of the Small Business Act.

Federal Agencies have never met their statutory 23% requirement in contracting with small businesses and have never told the truth about the results of their efforts. Frankly, Agencies could have easily relied on the $64 billion they have been diverting to level the playing field in contracting. This fact was reported by the SBA OIG in its Report 05-15, which our Think Tank has addressed. The OFPP Administrator, Daniel Gordon, has even said, "Federal Procurement data that is gathered by, reported and entered by procurement Agencies into information systems... is often incomplete, inaccurate and untimely."  

Increasing Participation Means Creating New Jobs

The Umbrella Initiative Think Tank provided Congress with entrepreneurial out-of-the-box solutions with which to level the playing field by preventing Agencies - including the SBA Report Card - from being used to misinform taxpayers. 

We have now addressed the Exemptions.  What's left for you now is to help convince bureaucrats to focus on increasing the participation of small and disadvantaged businesses in government contracting not solely at the Federal level, but also at the State and Local governments.  Let's face it, we are being shut out from participating in a $3 trillion dollar market!

At the Federal level, due in part to the exemptions and to the distrust in government, small business participation has been less than 2%. If the government is serious about creating jobs and regaining trust, they can start by eliminating the Exemptions!  

Small Business Participation in Government Contracting at the Federal Level as of March 2011

Raul Espinosa, Founder of the Fairness in Procurement Alliance (FPA) coalition is the Managing Partner of The Umbrella Initiative whose mission is "to double the number of small and minority businesses contracting with the Federal, State and Local governments by the year 2020. He has been championing the fight against the Exemptions since 2007. A coalition, led by NaFCA, will be  pursuing the elimination of the Exemption to level the playing field. Raul can be contacted at raul@umbrellainitiative.org