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What are government procurement set asides for small businesses? A brief history

When discussing state supplier diversity, words matter.

In the 1980s, Richmond, Virginia had a race-based “set aside” program for contractors designed to repair a massive gap: While the city was 50% Black, only 0.67% of its prime construction contracts had been awarded to minority businesses. This set aside program required that prime construction contractors hired at least 30% minority-owned subcontractors for the project. In essence, it was saying that if the prime contractors were going to larger, mostly white-owned businesses, those businesses had to at least hire some minority subcontractors.

In 1988, a white-owned company called J.A. Croson Co. was awarded a plumbing contract from Richmond. Croson, the owner, applied for a waiver for the 30% subcontracting set-aside, saying that he wasn’t able to find minority-owned businesses for the job. His application was rejected by local gov and, because he was unable to meet the 30% requirement, Croson lost the contract.

Croson took it to court. After initially losing in district court, an appeals court was eventually convinced that the set asides were racial quotas, and unconstitutional under the Fourteenth Amendment’s Equal Protection Clause. The case then went all the way to the US Supreme Court, where, in 1989, the race-based set aside program was found to be unconstitutional.

Despite that landmark case, set asides aimed at increasing supplier diversity for minority business owners have lived on in one way or another — and still do to this day.

What set asides look like now

The federal government allocates 5% of the federal government contract budget specifically to socially and economically “small disadvantaged businesses” (SDB) that participate in the 8(a) Business Development Program. The language here is race neutral; it doesn’t preclude a poor white business owner from receiving a contract under the allocation. But “socially disadvantaged” business owners are likely to be Black, Indigenous or recent immigrants. These set asides are also for woman-owned businesses, service-disabled veteran-owned businesses, and HUBZone (Historically Underutilized Business Zone) businesses located in certain designated areas.

While some, generally small, race-based set aside programs do still exist for minority-owned businesses on the state and municipal levels, those programs sometimes get legal pushback, with Richmond vs. J.A. Croson often cited.

The vast majority of procurement set asides today go to small businesses, with no further designation. The federal government automatically sets aside every purchase between $10,000 and $250,000 for small businesses, with the exception of purchases where there are not at least two companies capable of providing the product or service at a fair price. Small Business Administration regulations and the Federal Acquisition Regulation require contracting offices to consider socioeconomic programs first for set aside contracts above $250,000.

Since there are scenarios in which there are not enough businesses participating in socioeconomic programs to qualify for a set aside, the 5% allocation in the federal contract budget is technically a goal that may use set asides to be reached.

It can be confusing to see the difference between the two, but the gist is, a goal is the amount an agency aspires to meet, while a set aside is requirement, sometimes as a remedy for past discrimination against a group of people.

Reforming set asides

In June 2021, the Biden administration announced reforms to federal contracting allocations that would increase the SDB goal to 15% by 2025, or an additional $100 billion to SDBs over five years. The reforms also include additional transparency on the race and ethnicity of business owners, as well as adopting management practices that will foster accountability in meeting goals and to boost opportunities for underserved businesses.

You may notice that with these reforms, “goal” is used frequently, while “set aside” doesn’t appear once in the announcement.

That distinction makes procurement goals much easier to navigate legally than set asides. J.A. Croson Co. made its case in the ‘80s by convincing courts that racial quotas, specifically, were unconstitutional. Goals can increase the number of minority government contractors  — see Maryland as a case study — while striving to meet goals.

Setting aspirational goals can give a procurement agency the opportunity to build its way up to its equity goals, especially if paired with a good disparity study, which may find roadblocks for businesses of color that can be corrected with additional programming. For example, maybe access to journeyman certification needs to be expanded, and after it is, meeting those goals will be easier. Growth is expected year over year, as opposed to a hard and fast quota.

Because goals avoid the potential legal issues of set asides, some states set goals that would likely never go through as a quota post-Croson. Maryland, for example, has a goal of 29% of contracts going to minority and women owned businesses; the actual percentage of awards to minority and women owned businesses in its latest small business contracting report was just over 17%.

But goals are not simply aspirational. New York State, which according to the 2021 census has a Black population of about 15% and a Hispanic population of about 20%, set its goal for minority- and women-owned businesses at 30%, and in 2021 virtually nailed it with those groups landing 29.51% of the state contracts.

Ssome state goals and set-asides across the mid-Atlantic region:

  • Maryland — 29% goal for minority/women-owned businesses
  • New York — 30% goal for minority/women-owned businesses
  • Pennsylvania — 26.3% goal for “small diverse” businesses
  • New Jersey — 25% small business set aside
  • Virginia — 23.1% goal for minority/women-owned businesses
  • Connecticut — 25% small business set aside, of which 25% must go to minority/women-owned businesses

Thus, in one of the nation’s most diverse regions, goals fall between 23% and 30%, usually somewhere around the percentage of racial and ethnic minorities in a given state.

How does a minority- or woman-owned business get seen when a state is working to meet this type of goal? Certification. In the next part of this five-part series, will explain the certification process, how many certifications you need and what you need to know before you get certified.


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