MINORITY BUSINESSES AND FEDERAL CONTRACTING – AFFIRMATIVE ACTION IN FEDERAL CONTRACTING

Toni Miller

04/09/2002

Affirmative Action in Federal Contracting is intended to ensure that opportunities are equal to all businesses regardless of race or gender by setting goals and timetables in instances where significant inequities exist.

Should minority groups receive preferential treatment in federal contracting?  Yes, since the passage of the Civil rights Act of 1964, the federal government, and eventually state governments, advanced support for such preferences, known, collectively as “Affirmative Action.”  This issue has gained significant attention with two recent Supreme Court cases (City of Richmond v. A.J. Corson CO., and Adarand v. Pena).  The U.S. Supreme court has indicated its intention to dramatically curtail affirmative action in commercial set-asides.  Proponents of affirmative action argue that such programs are needed to ensure equality to minorities.  They contend that quotas and other affirmative action programs also help redress centuries of lost opportunities for minorities.  Opponents of affirmative action argue that preferential treatment and quotas for minorities are a form of reverse discrimination, taking away opportunities from individuals who are, perhaps, more qualified.  Opponents also point out that eliminating affirmative action does not eliminate provisions in the civil rights law, which prohibit discrimination against an individual on the basis of sex, religion, race, ethnicity, etc. 

Minority and women-owned businesses are still under-represented in federal contracting.  Discrimination in both contracting and in access to capital in the financial markets continues to limit the ability of businesses owned by minorities and to women reach their full earnings potential. Is Affirmative Action constitutional? Yes. In it’s ruling, seven of the nine Supreme Court Justices agreed that the federal government could use affirmative action programs to combat the “lingering effects of racial discrimination.” The courts have recognized that discrimination still exists and affirmative action programs are necessary tools for breaking down discriminatory barriers.  Public support for affirmative action is strongest for programs that ensure equal access to government contracts for minority and women-owned businesses, with 86% of Americans agreeing that the government must ensure that minorities and women have a fair chance to compete for government contracts.

            Federal, state, and local governments have addressed equality barriers with a wide range of affirmative action programs.  These programs fall into two broad categories: The first category of procurement related policies uses race as a factor in the award of contracts.  Examples include the use of sole source contracts, set-asides, price or evaluation advantages, and use of goals for prime subcontracting.  These policies are intended to directly increase the number of contract and subcontract awards received by minority firms.  The second category of procurement-related policies seeks to expand the number of minority owned firms contracting with government by increasing their financial, social, or human capital.  These initiatives are sometimes referred to as affirmative action programs and are labeled “race-neutral” policies. The goal of these policies is to put minority businesses in a better position to compete as either prime contractors or subcontractors.  These policies include lending and bonding assistance, technical assistance programs, expanded notice requirements, and imposing prompt payment directives on government agencies.  In general, these policies are intended to enlarge the pool of potential minority bidders for public contracts.  They do not directly affect outcomes in the contractor selection process. 

Affirmative action programs in contracting have been directed primarily at assisting minority owned business and not, for the most part, at increasing minority employment.  The future of affirmative action is being determined in large measure by the rulings of the Supreme Court in two cases that deal with government contracting: City of Richmond v. A.J. Croson Co. and Adarand Constructors v. Pena.  In 1989, City of Richmond v. A.J. Corson Co., the Supreme Court held that state and local preference programs would be subject to the Court’s rigorous “strict scrutiny standard.” Under this standard of review, racial classifications must serve a “compelling interest” and be “narrowly tailored” to suit that purpose.  It was in response to Croson that many state and local governments commissioned the “disparity studies.”  The disparity studies document the difference between the shares of all minority owned businesses and the percentage of government contracts they receive.  In addition, the role that state, and local governments, as well as the private sector have played in perpetuating historical patterns of discrimination through their contracting practices were also documented.

In June 1995, the Supreme Court decided Adarand Constructors v. Pena, apparently making all federal race-conscious, affirmative action programs subject to the same strict scrutiny standard announced in Croson.  The impact of applying strict scrutiny to affirmative action programs is profound.  Proponents of race-based policies intended the purpose of the policies to assist minorities in competing for federal contracts. 

Contracting is the least visible and probably the least understood aspect of affirmative action.  The federal government spends close to $300 billion a year in products and services from the private sector.  Although 99% of all businesses in the country are small businesses, only 25% of the federal procurement dollars go to small business.  Less than 10% of the federal procurement dollars go to minority or women-owned businesses, which also tend to be small businesses.  Despite these grim statistics, affirmative action programs in contracting have significantly increased the participation of minority and women owned businesses over the last ten years, considering that these types of businesses were virtually non-existent in federal contracting before programs were enacted.  The participation of minority owned businesses has resulted in increased competition for contracts; which means the government pays less for goods and services and taxpayers save money. 

The government has at times set aside a contract for companies that qualify as a minority business (Small Disadvantaged Minority Businesses). To make it more attractive and favorable, some of the contracts were awarded without competition.  The primary purposes of these set aside programs (contracts) were to assist minority and women-owned businesses in winning government contracts. A secondary purpose of the programs is to give minority businesses (Small Disadvantaged Businesses) and women-owned businesses a more level playing field when competing with larger companies for federal contracts. 

Disadvantage businesses must demonstrate both social and economic disadvantage to qualify for Disadvantaged Business Status.  Social disadvantage is determined by tracing racial or ethnic heritage to minority groups.  The Federal government has a goal of contracting 20% of its prime contracts with small businesses.  Within this goal, there is a sub goal of 5% for contracting with small, disadvantaged businesses and Section 8(a) businesses, and 5% for contracting with women-owned businesses.  One quarter of the target amount is awarded to women-owned businesses and another quarter is awarded to disadvantaged businesses.  The federal government recognized the importance of ensuring that all minority businesses have the maximum opportunity to participate in federal contracting opportunities.  The Small Business Administration established that there was widespread discrimination across the board in federal contracting, and established government-wide goals for participation for businesses certified as Disadvantaged Business Enterprise (DBE), which all minority owned business qualify.

The 8(a) program is a business development initiative designed to assist Small Disadvantaged Businesses to overcome social and economic disadvantage and transition them into the economic mainstream.  The 8(a) businesses are assisted through a combination of management and technical assistance and increased access to federal contracting opportunities.  While being certified as 8(a) does not guarantee a company government contracts, it enhances the businesses’ chances of winning them either through non-competitive award or by winning a bid.  In 8(a) process, the U.S. Small Business Administrator works with federal purchasing agents and functions as a prime contractor, subcontracting work to the 8(a) company.

Is the DBE constitutional?  Yes. The fourteenth amendment gives the federal government authority to eradicate public discrimination and prevent the government from acting as a “passive participant” in the persistence of industry –wide practices. The 10^th Circuit Court of Appeals, relying on the Supreme Court’s first Adarand decision, ruled that the current version of the Disadvantaged Business Enterprise (DBE) program is constitutional because it addresses a “compelling state interest as a remedy of existing discrimination and is narrowly tailored” to provide opportunities to socially and economically disadvantaged businesses.  However, in 1995, the DBE program was declared unconstitutional.  The district court determined that while the federal government had the objective of addressing discrimination within, the construction industry, the DBE program did not use race-neutral means to achieve that objective.  The federal government appealed the decision and, in the same time period, Congress rewrote the law that governed the DBE program to follow the guidance of the Supreme Court to utilize more “race-neutral” measures to expand federal contracting opportunities.  On September 25, 2000, the Court of Appeals issued a decision that upheld the constitutionality of the DBE program.  The Court held that the previous contracting program in existence when Adarand v. Pena was originally filed in 1989 was unconstitutional because the program did not pass the strict scrutiny test.  The previous program did not use race-neutral measures to increase contracting opportunities.  In contrast, the current DBE program was race neutral in its original application.

On October 6, 2000, President Clinton signed an executive order that declared, “Direct federal department and agencies, with procurement authority to take aggressive and specific actions,” to make sure that certain racial and ethnic groups receive an increased share of federal contracts.  The order specifically directed each agency to establish goals and to make clear that these were minimum goals and were not to be considered a ceiling for such contracting.  The White House has reinvented its language on affirmative action and re-written the rules on preference programs.  One federal program alone award more than $5 billion in contracts annually.  The move will further institutionalize discrimination in federal contracting and cost the taxpayer millions of dollars.  Opponents of the Presidents new program call it “deceptive and unconstitutional.”

In March 2001, the Supreme Court, the Justices decided to review the constitutionality of the federal statute and regulations granting preferences to minority-owned businesses in the competition of government contracts.  The majority of the Justices believe affirmative action is constitutional under some circumstances, however a race based affirmative action plan has yet to be approved by the Justices.  At the last review of the statute, Justice O’Connor wrote the opinion striking down the federal contracting set-aside and she has been skeptical of “diversity” as a justification for affirmative action. A reasonable argument can be made supporting the constitutionality of the federal affirmative action program for government contracting. On August 11, 2001, President Bush took the encouraging first step in support of affirmative action and equal opportunity when his administration filed a brief with the Supreme Court to uphold affirmative action rules designed to assist minority owned businesses in winning federal government contracts. The Bush Administration defends the constitutionality of the preference program because it is aimed at redressing the effects of discrimination and ensures a level playing field for minority owned businesses competing for federal contracts. The Bush Administration will have to decide whether to defend the federal affirmative action program in contracting before the Court or admit the prior Clinton

Administration position is erroneous and inform the court that the statue authorizing the contracting set aside is unconstitutional.

            In summarized form, the proposed reforms to affirmative action in federal procurement submitted by the Justice Department is as follows:       

 

 “The proposal set forth herin to reform affirmative action in federal procurement has been designed to ensure compliance with the constitutional standards established by the Supreme court in Adarand Constructors, Inc. v. Pena, 115 S. Ct. 2097 (1995).  The proposed structure, which has been developed by the Justice Department, will form a model for amending the affirmative action provisions of the federal Acquisition Regulation and the Defense Federal Acquisition Regulation Supplement.” 

“In Adarand, the Supreme Court extended strict judicial scrutiny to federal affirmative action programs that use racial or ethnic criteria as a basis for decision making.  In procurement, this means that any use of race in the decision to award a contract is subject to strict scrutiny.  Under strict scrutiny, any federal programs that make race a basis for contract decision making must be narrowly tailored to serve a compelling government interest.”             

“Through its initial authorization of the use of section 8(a) of the Small Business Act to expand opportunities for minority owned firms, and through reenactments of this and other programs designed to assist such businesses, Congress has repeatedly made the judgment that race-conscious federal procurement programs are needed to remedy the effect of discrimination that have raised artificial barriers to the formation, development and utilization of businesses owned by minorities and other socially disadvantaged individuals.  In repeated legislative enactments, Congress has among other measures, established goals and granted authority to promote the participation of Small Disadvantaged Businesses (SDBs) in procurement for the Department of Defense. (Proposed Reforms to Affirmative action in Federal Procurement, Justice Department)

 

 

Most of the criticism of affirmative action has come about due to political motives, versus business motives. Affirmative action is necessary, fair and successful.  Americans support it because they see it working in education and in the workplace, and assisting minorities and women –owned businesses gain access to equal opportunity.

SOURCES

 

www.writ.news.findlaw.com

www.namconline.org

www.urban.org/civil

www.doc.gov/osdbu/old-site/newsondbu/programs

www.profs.lp.findlaw.com/govt

www.sanjose.bizjournals.com (Federal contracting program for minorities facing attacks on two fronts, Sougata Mukherjee)

www.cnn.law (White House asks high court to save affirmative action program, Terry frieden)

www.usjoj.gov (Proposed Reforms to Affirmative Action in Federal Procurement, Justice Department).