Under The Veil Of Small Business

Why some large businesses are fulfilling government contracts reserved for small businesses.

Reserved For Small BusinessAt Earlbeck Gases & Technologies, we are no strangers to federal contracts. Being a small business allows us to bid on small business set-asides, contracts that the government reserves exclusively for small firms in recognition of the fact that small businesses create jobs and drive the economy. And being located in Baltimore, Maryland, there are several military bases within our service area. For years, we have done business with local Army, Navy, Marines and Air Force facilities.

In the last few years, the landscape for government contracts has changed. When the federal government moved procurement to Internet portals, it opened doors for businesses in other parts of the country. Businesses halfway across the country are bidding on—and winning—federal contracts. With an open landscape, we now also face competing contractors located in HUBZones, or historically underutilized business zones. Organizations in these rural and urban areas—Chicago being one—are given preferential access to small business contracts.

When we lose a contract or a sale at Earlbeck Gases & Technologies, we always perform what we call a “post-mortem,” where we work diligently to find out why we were not able to win the customer’s business. I always learn more from the sales we don’t make than those we do. After being outbid for a small business set-aside contract to supply gases to a local government end-user, I contacted the local procurement officer to find out who the contract was awarded to. Not only had I never heard of the company, but it was located 700 miles away in Chicago, Illinois. The company has outbid us on several contracts since.

Thinking the name might be a DBA for a fellow distributor, I turned to Google Earth to see who I was dealing with—the Internet is a wonderful thing—and found not a plant, but an office building. I made a call to the end-user to find out who was making the deliveries for this small business set-aside and learned that the gas requirements had been subcontracted to another local gas supplier…one that does not fit the description of “small business.” A contractor may gain preferential access to set-asides for being a disadvantaged business, woman-owned or located in a HUBZone, but when you add the resources of a large business into the mix, it is difficult for other small businesses to remain competitive.

Wading the Gray Area
Government contracts are regulated by federal acquisition regulations (FARs), but the rules are largely self-enforced. A procurement officer does not need to investigate whether the successful awardee on a small business set-aside is actually small unless he has a reason to suspect that it’s not. It is up to contractors to know the regulations and point out any possible violations. And given the sheer number of regulations, a distributor practically needs its own legal team to sort through them all.

The regulations that apply to subcontracting, FAR 52.219-14 (b)(2), Limitations on Subcontracting, state: “By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for supplies (other than procurement from a nonmanufacturer of such supplies), the concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.”

Because we are talking about gases, the key phrase here is “other than procurement from a nonmanufacturer of such supplies.” As a producer of gases, Earlbeck Gases & Technologies would be considered a manufacturer, meaning we would have to perform work for at least half of the cost of manufacturing. The regulations for manufacturers are clear—but there are no stated rules for the nonmanufacturer itself. So as an office that specializes in being a third party, our competitors in Chicago may not face the same restrictions and are able to subcontract the work to a larger company. We are currently investigating the legalities of this business arrangement.

On The Edge
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As a businessperson, I have no problem with what our competitor is doing if it follows the regulations. In the past, we have teamed up with other independents to fulfill large contracts for commercial accounts. Sometimes it is the only way small distributors can compete on that level. But as a taxpayer, I question whether subcontracting to a large business is true to the intent of small business set-asides. When Congress set out to help small businesses create jobs, I do not believe it was their intent that a small business could fill out the paperwork and pass the job on to a larger entity.

Then again, the government works in strange and mysterious ways. That’s why I’m an engineer and not a politician.

Gases and Welding Distributors Association

Jim Earlbeck Meet the Author
Jim Earlbeck is president of Earlbeck Gases & Technologies, located in Baltimore, Maryland, and on the Web at www.earlbeck.com.