New Defense Legislation a Mixed Bag for Small Business

By Lepow, Leslie H.; Specht, Damien C. | National Defense, March 2013 | Go to article overview
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New Defense Legislation a Mixed Bag for Small Business


Lepow, Leslie H., Specht, Damien C., National Defense


The 2013 National Defense Authorization Act included several provisions related to small businesses, which include expanded opportunities as well as potentially harsher penalties for failure to follow regulations.

Although other agencies have created similar programs, the Small Business Administration (SBA) mentor-protege program provides firms of all sizes with a number of benefits. The new legislation helps small businesses that are part of this program and subcontractors to large firms.

The current arrangement is, however, limited to businesses that are accepted into the 8(a) program--a subset of small business set-asides that are limited to firms which are owned by economically or socially disadvantaged individuals who go through an SBA certification process.

The act provides the administration with new authority to create a mentor-protege program for the thousands of other non-8(a) small businesses so that they can participate in programs modeled on the current structure.

If it chooses to exercise this authority, more small businesses will benefit from the experience, capabilities and, in some instances, capital of large business mentors while also gaining access to government prime contracts that previously may have been outside of their capabilities.

In addition, more large business mentors will be eligible to receive access to, with the protege, set-aside contracts for which they would otherwise have been ineligible. They would also receive an exception from affiliation with proteges based on the mentor-protege relationship, ownership of up to 40 percent of the smaller firm and, in certain circumstances, performance of up to 60 percent of the work and up to 60 percent of the profit for contracts performed by the joint venture.

Notably, this final provision, allowing a large company to perform the majority of a small business set-aside contract, seems inconsistent with the NDAA's focus on the limitation on small business subcontracting. As a result, there is no guarantee that SBA will exercise this new authority, and its actions in this regard should be of interest to firms both large and small.

The NDAA also reflects the government's increasing understanding that small businesses often gain a foothold in federal government as subcontractors. This understanding has led to increased emphasis on prompt payment of their plans.

The NDAA continues Congress' interest in this area by increasing transparency within subcontracting plans and further emphasizing compliance. Currently, firms are required to submit detailed subcontracting plans for negotiated or sealed bidding procurements above $500,000 or $1 million for construction contracts.

The plans must include, among other things, percentage goals for subcontracting with each type of small business and the efforts the larger companies will take to meet these goals.

Although the act does not impose new participation requirements for small business subcontracting, it uses an alternate strategy to increase their participation and monitor compliance. Specifically, it adds a requirement that any small business identified in a subcontracting plan as a potential participant must be notified prior to its inclusion. This prevents big firms from padding their plans with small companies they have no intention of using and later turning that work over to large subcontractors.

The NDAA also requires the Small Business Administration to establish a reporting mechanism to allow subcontractors to report fraud or bad faith by a prime contractor with respect to the subcontracting plan. It is still unclear how this system will be implemented and what penalties will be used to enforce compliance. Despite these lingering questions, these mechanisms may serve to increase the number of dollars that actually make it to small businesses and will call for greater prime contractor diligence in administering plans.

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