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SULLIVAN: Men need not apply

Program reserving contracts for women only warrants constitutional challenge

- The Washington Times - Tuesday, August 2, 2011

The U.S. Army Corps of Engineers has issued a solicitation for a contract to provide support services at Fort Detrick in Maryland. Nothing unusual there, except that the contract reflects a new Obama administration program to restrict competition on the basis of gender.

The solicitation explains, "This procurement is set aside for Women-Owned Small Business (WOSB) firms only." No one but women need apply. The WOSB program is a federal contracting preference that hurts male African-Americans, Hispanic-Americans, Asian-Americans or American Indians in exactly the same way white men are hurt.

Here's how the WOSB program works: In most of the industries in which the federal government does business, if a) there are two female-owned companies likely to bid on a contract, and b) the contract is for less than $6.5 million for manufacturing and $4 million for everything else, and c) the contract can be awarded for a "fair and reasonable price," that contract can be awarded without competition from male-owned firms. The Small Business Administration runs the program.

How much the WOSB set-aside program will add to the cost of federal government procurement is unknown. A set-aside by definition restricts competition. Could a company owned by a minority or white man be able to supply the labor, material and equipment necessary to perform the Fort Detrick contract or the many contracts to be awarded under this program - and do so at less cost to the taxpayer than whichever female-owned firm gets the contract? We'll never know because only female-owned businesses can compete. The answer almost certainly is yes; otherwise why have the set-aside?

The only limit to the potential added costs to the taxpayer is the requirement that a contract be set aside "for a fair and reasonable price." Is setting aside a contract for 1 percent more than it would have cost if men had been allowed to compete a "fair and reasonable price"? Is 10 percent more? Would an extra cost of $5,000 be fair and reasonable? How about an added $50,000?

The decision to set aside an individual contract is made by the contracting officer. The Small Business Act requires that 5 percent of the hundreds of billions of federal tax dollars spent every year go to female-owned small businesses. Predictably, internal bureaucratic pressure will be brought on contracting officers to set aside contracts. The officers will prefer the set-aside to putting the contracts out for competitive bid, which might result in the work going to a male-owned firm.

WOSB not only sets aside contracts for female-owned firms, but distinguishes between firms owned by women who are considered economically disadvantaged and those owned by women not so considered. But economic disadvantage hardly equates with poverty. A woman is considered economically disadvantaged if her annual income does not exceed $350,000. Very few Americans would see having an income of $350,000 as being disadvantaged, but the Small Business Administration (SBA) does. The $350,000 figure was selected because about 2 percent of all Americans have incomes above that level. So, according to the SBA, 49 out of 50 women in this country are economically disadvantaged.

Even more remarkable is that in industries with substantial underutilization of female-owned firms, there is no income limit whatsoever. In those industries, women, however wealthy, are spared competing with men. Thus, in addition to the benefits inevitably resulting from their wealth, these rich women are sheltered from the competition of the marketplace. The WOSB program offers no justification for this, nor does the federal government explain why it views rich women as victims of discrimination.

It is certainly not because of discrimination in the private sector. For example, one of the industries in which the set-aside may be applied is coded NAICS 8129, "Other Personal Services." This industry is composed of businesses such as pet care, photo finishing and parking services. What theory of discrimination could possibly lump together these three very different activities?

Nor does the program claim discrimination by the public sector. Before the program took effect, there was consideration of requiring each federal agency to certify it had not engaged in discrimination against WOSBs. That requirement has been abandoned.

There is no discrimination alleged by the women participating in the program. The certification form each participant completes to join the program asks about ownership and control of the firm. Discrimination against that woman is not alleged, let alone established.

Because the WOSB program is disconnected from discrimination in the private and public sectors and because discrimination is not claimed by the women in the program, the set-aside cannot be intended as a remedy for claimed discrimination. In fact, the program is based on underutilization, not discrimination. This would seem to leave the program vulnerable to court challenge. Case law, from the Supreme Court in Adarand Constructors v. Pena (1995) on down, is clear that no preference program in public contracting can be justified merely by underutilization. The existence of discrimination must be proved.

The statistical support for the Women-Owned Small Business program is supposedly a study done four years ago by the Rand Corp., "The Utilization of Women-Owned Small Businesses in Federal Contracting." Here are three structural flaws of that report:

First, the Rand study's disparity ratios (comparing use of female-owned firms with their availability) are based on only one year, a too-narrow time frame. Worse, that year was fiscal 2005 - six years ago - before the recession and long before present efforts to cut federal spending. The data are too old to accurately reflect current contracting. Second, the study did not analyze subcontractor data. It is on the subcontracting level that female-owned businesses often enjoy their greatest success.

Finally, the study counted as available any firm in the Central Contractor Registration database. Registering with the government is no guarantee a firm is qualified for all federal contracts in an industry. A firm unqualified for a contract is not available to do that contract and should not be counted as such.

Any preference program in public contracting based on underutilization and not discrimination - a program that benefits the wealthy and is supported by unpersuasive statistics - would appear to be of questionable constitutionality. A program like the WOSB, which is a set-aside, is especially vulnerable.

There are three ways to attack this program: One is to persuade the Obama administration to undo what it has done. The second is to get Congress to intervene. The third is to challenge the program in court.

John Sullivan is associate director of the Project for Civil Rights in Public Contracting.

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