2
Legal Framework

The Small Business Reauthorization Act of 2000, Public Law 106-554, Section 811(m), paragraph (2), permits federal contracting officers to restrict competition for certain types of federal contracts to women-owned small businesses. Paragraph (4) requires the Small Business Administration (SBA) to “conduct a study to identify industries in which small business concerns owned and controlled by women are underrepre-sented with respect to Federal procurement contracting.” Paragraph (3) contains language that expands the scope of the SBA study to determine industries in which women-owned small businesses are “substantially underrepresented.” Box 2-1 presents relevant excerpts from the legislation.

To provide a context for the SBA study and its evaluation, this chapter briefly reviews the legislative and judicial history of small business preferential treatment in contracting (see www.sba.gov/aboutsba/history.html [December 2004]; Enchautegui et al., 1997). Contracting policy toward women-owned small businesses can be seen as developing from policy toward minority-owned small businesses. Box 2-2 defines various kinds of small businesses, including women-owned firms.

LEGISLATION AND EXECUTIVE ORDERS

The SBA was officially established in 1953, but its mission began to take shape years earlier in a number of predecessor agencies, largely as a response to the pressures of economic depression and war. These agencies included the Reconstruction Finance Corporation (RFC), created by Presi-



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Analyzing Information on Women-Owned Small Businesses in Federal Contracting 2 Legal Framework The Small Business Reauthorization Act of 2000, Public Law 106-554, Section 811(m), paragraph (2), permits federal contracting officers to restrict competition for certain types of federal contracts to women-owned small businesses. Paragraph (4) requires the Small Business Administration (SBA) to “conduct a study to identify industries in which small business concerns owned and controlled by women are underrepre-sented with respect to Federal procurement contracting.” Paragraph (3) contains language that expands the scope of the SBA study to determine industries in which women-owned small businesses are “substantially underrepresented.” Box 2-1 presents relevant excerpts from the legislation. To provide a context for the SBA study and its evaluation, this chapter briefly reviews the legislative and judicial history of small business preferential treatment in contracting (see www.sba.gov/aboutsba/history.html [December 2004]; Enchautegui et al., 1997). Contracting policy toward women-owned small businesses can be seen as developing from policy toward minority-owned small businesses. Box 2-2 defines various kinds of small businesses, including women-owned firms. LEGISLATION AND EXECUTIVE ORDERS The SBA was officially established in 1953, but its mission began to take shape years earlier in a number of predecessor agencies, largely as a response to the pressures of economic depression and war. These agencies included the Reconstruction Finance Corporation (RFC), created by Presi-

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting dent Hoover in 1932 to lend funds to all businesses hurt by the Great Depression, large and small; the Smaller War Plants Corporation, authorized by the Small Business Mobilization Act of 1942, which made loans to and advocated for small enterprises; the Office of Small Business in the U.S. Department of Commerce, which provided individual entrepreneurs with education and training; and the Small Defense Plants Administration, established during the Korean War, which certified small businesses to the RFC that it determined to be competent to perform the work of government contracts. In the Small Business Act of July 30, 1953, Congress created the Small Business Administration, whose function was to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.” Its charter also stipulated that it would ensure small businesses a “fair proportion” of government contracts and sales. By 1954, the SBA was making direct business loans and guaranteeing bank loans to small businesses, working to obtain government procurement contracts for small businesses, and helping business owners with management and technical assistance and business training. The Investment Company Act of 1958, among other things, authorized the SBA to license, regulate, and help provide funds for privately owned and operated venture capital investment firms, which provided long-term debt and equity investments to high-risk small businesses. The creation of this program resulted from a Federal Reserve Board study that determined, in the simplest terms, that small businesses could not get the credit they needed to keep pace with technological advancement.1 1961 to 1980 The 1960s saw the beginning of small business contracting assistance programs that focused specifically on socially and economically disadvantaged small businesses (principally minority-owned businesses), subsequently bringing in women-owned small businesses. In 1964, the SBA adopted the Equal Opportunity Loan Program. The program relaxed the credit and collateral requirements for business loan applicants living below the poverty level in an effort to encourage new businesses that had been unable to attract financial backing but were nevertheless deemed to be sound commercial initiatives. Following the 1967 Report of the Commission on Civil Disorders (the Kerner Commission), which found that minorities did not own many busi- 1   Every 5 years since 1987, the Federal Reserve Board has conducted a Survey of Small Business Finances, which provides information on credit availability for businesses with fewer than 500 employees (see Federal Reserve Board, 2002).

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting BOX 2-1 Small Business Reauthorization Act of 2000, Section 811(m), Excerpts A. Section 8 of the Small Business Act (15 U.S.C. 637) is amended by adding at the end the following: 811(m) PROCUREMENT PROGRAM FOR WOMEN-OWNED SMALL BUSINESS CONCERNS— (1) DEFINITIONS—In this subsection, the following definitions apply: (A) CONTRACTING OFFICER…. (B) SMALL BUSINESS CONCERN OWNED AND CONTROLLED BY WOMEN—The term “small business concern owned and controlled by women” has the meaning given such term in section 3(n), except that ownership shall be determined without regard to any community property law. [see Box 2-2] (2) AUTHORITY TO RESTRICT COMPETITION—In accordance with this subsection, a contracting officer may restrict competition for any contract for the procurement of goods or services by the Federal Government to small business concerns owned and controlled by women, if— (A) each of the concerns is not less than 51 percent owned by 1 or more women who are economically disadvantaged…[italics added]; (B) the contracting officer has a reasonable expectation that 2 or more small business concerns owned and controlled by women will submit offers for the contract; (C) the contract is for the procurement of goods or services with respect to an industry identified by the Administrator pursuant to paragraph (3); (D) the anticipated award price of the contract (including options) does not exceed— (i) $5,000,000, in the case of a contract assigned to an industrial classification code for manufacturing; or (ii) $3,000,000, in the case of all other contracts; nesses, the SBA adopted regulations to require federal contracts to be set aside for firms owned by “socially and economically disadvantaged “ persons. All blacks, Hispanics, Asians, and Native Americans were determined to qualify as socially disadvantaged. A 1978 amendment to the Small Business Act (P.L. 95-507) provided a statutory basis for the SBA program in Section 8(a), which allowed contracts of any size to be awarded on a sole-source basis to eligible firms. The amendment also required all federal agencies to establish goals for awarding contracts to small minority-owned businesses and to explain to Congress when the goals were not met. It reserved all awards under $25,000 for small businesses (unless no qualified small businesses were available to bid) and required agencies to establish goals for larger businesses to subcontract to small businesses. To carry out these provisions, the amendment estab-

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting (E) in the estimation of the contracting officer, the contract award can be made at a fair and reasonable price; and (F) each of the concerns: (i) is certified by a Federal agency, a State government, or a national certifying entity approved by the Administrator, as a small business concern owned and controlled by women; or (i) certifies to the contracting officer that it is a small business concern owned and controlled by women and provides adequate documentation, in accordance with standards established by the Administration, to support such certification. (3) WAIVER—With respect to a small business concern owned and controlled by women, the Administrator may waive subparagraph (2)(A) if the Administrator determines that the concern is in an industry in which small business concerns owned and controlled by women are substantially underrepresented [italics added]. (4) IDENTIFICATION OF INDUSTRIES—The Administrator shall conduct a study to identify industries in which small business concerns owned and controlled by women are underrepresented with respect to Federal procurement contracting. [italics added] (5) ENFORCEMENT; PENALTIES—…. (6) PROVISION OF DATA—Upon the request of the Administrator, the head of any Federal department or agency shall promptly provide to the Administrator such information as the Administrator determines to be necessary to carry out this subsection. NOTE: The reference to paragraph (3) in subsection A(2)(C) is incorrect, as paragraph (3) refers to the waiver provision and not to the identification of industries, which is in paragraph (4). SOURCE: Questions and Answers Regarding WOSB Certification, Question 4, www.sba.gov/GC/cawbo-teaming.htm [December 2004]. lished a Small and Disadvantaged Business Utilization Office at each federal agency that engaged in contracting. The 1978 amendment required both social and economic disadvantage for participation in the Section 8(a) program. Certain groups (racial minorities) that were given preference were presumed to be socially disadvantaged. At the time, Congress could not decide how to treat white women, and this indecision led to some litigation over allowing white women into the program. White women challenged the program on grounds that it was too difficult to become qualified on an individual test basis. In 1979, President Carter issued Executive Order 12138, which charged all agencies to assist women-owned businesses in federal contracting. At that time, it was estimated that women-owned small businesses received only 0.2 percent of all federal procurements (U.S. General Accounting Office, 2001:8).

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting BOX 2-2 Generic Definitions for Small Businesses, 13 Code of Federal Regulations, Part 124 A small business is organized for profit; has a place of business in the United States; pays taxes or uses American products, materials, or labor; and does not exceed the numerical size standard for the industry. It may be a sole proprietorship, partnership, corporation, or any other legal form. There is a small business size standard, usually stated as the maximum qualifying number of employees or average annual receipts, for every private sector industry defined in the North American Industry Classification System (NAICS). There are general size standards for industry groups: for example, 500 employees for a manufacturing business; 100 employees for a wholesale trade business; $28.5 million average annual receipts for a general or heavy construction business (except dredging); and $3 million average annual receipts (including commissions and other income) for a travel agency. Some industries have higher size standards than the general one for the industry group. See www.sba.gov/tableofsizestandards for details [December 2004]. A socially disadvantaged small business is one that is at least 51 percent unconditionally and directly owned by one or more individuals who are U.S. citizens and determined to have suffered from bias or discrimination. The law allows groups to petition to be designated as socially disadvantaged; and a 1978 amendment to the Small Business Act designated minorities as such. An economically disadvantaged small business is one that is at least 51 percent unconditionally and directly owned by one or more individuals who submit financial and narrative information that the SBA determines qualifies them for the designation. For initial designation as eligible for the Section 8(a) Program, the net worth of an individual claiming disadvantage must be less than $250,000; for continued eligibility after initial admission to the program, the individual’s net worth must be less than $750,000 (in both instances excluding equity in one’s primary residence and equity in the socially and economically disadvantaged small business). A small disadvantaged business (SDB) is an economically disadvantaged small business certified by the SBA, except that the net worth of the owner can be as high as $750,000 (excluding equity in a primary residence and in the SDB). The Department of Transportation classifies women-owned small businesses as a “disadvantaged business enterprise” (DBE). A woman-owned small business is “one that is at least 51 percent owned by one or more women; and whose management and daily business operations are controlled by one or more of such women.” A woman-owned small business may also qualify as socially and economically disadvantaged. Self-certification as a woman-owned business is currently allowed. NOTE: Other categories of small businesses may receive preferential treatment: veteran-owned small businesses, service-disabled veteran-owned small businesses, and “HUBZone” small businesses (see www.sba.gov/GC/goals/ [December 2004]). SOURCE: Compiled from information on the SBA web site, www.sba.gov.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting 1981 to 2000 The 1980s and 1990s saw a continuation and expansion of programs to assist minority-owned small businesses and, to a lesser extent, women-owned small businesses. The National Defense Authorization Act of 1987 (P.L. 99-661) established the Small Disadvantaged Business Program in the Department of Defense. The act set a goal of 5 percent of total dollar awards of prime contracts to be made to small disadvantaged businesses, which were given a 10 percent evaluation preference over other competitors. The act also provided for contracting set-asides, that is, competitions restricted to small disadvantaged businesses. A “rule of two” was adopted, whereby a competition was set aside for small disadvantaged businesses if the contracting officer determined that two or more such businesses were likely to bid. The Business Opportunity Development Reform Act of 1988 (P.L. 100-656) amended the Section 8(a) program to limit sole-source awards of contracts to 8(a) participants to $5 million or less for manufacturing contracts and to $3 million or less for all other contracts. It required competition for larger contracts that were restricted to Section 8(a) participants. The Women’s Business Ownership Act of 1988 (P.L. 100-588) provided for assistance to women in starting, managing, and growing small businesses. This law set up an office of women’s business ownership in the SBA, which helped women-owned small businesses with loans and management. Under the Department of Transportation statute, women-owned small businesses qualified for the “disadvantaged business enterprise” (DBE) program. The Federal Acquisition Streamlining Act of 1994 contained provisions to encourage agencies to consolidate contracts and streamline contracting processes, while ensuring a role for small businesses. It established a threshold of $100,000 for simplified acquisition and reserved all contracts from $2,500 to $100,000 for small businesses. It extended to all federal agencies authority to establish certain kinds of race-based contracting preference programs (authority that was previously authorized for the Department of Defense, Department of Transportation, and the National Aeronautics and Space Administration—see U.S. Department of Justice, 1996). It established a goal that 5 percent of total federal procurement dollars for both prime contracts and subcontracts go to women-owned small businesses. The Small Business Reauthorization Act of 1997 (P.L. 105-135) established a goal of 23 percent of federal procurement dollars for small businesses beginning in fiscal year 2003. It also included language to restrict unnecessary bundling of contracts so that contracts would not be so big that small businesses could not credibly bid on them. Finally, the Small Business Reauthorization Act of 2000 (P.L. 106-554) approved a set-aside program for women-owned small businesses to assist

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting agencies in meeting the 5 percent goal. The act also required the SBA to determine the representation of women-owned small businesses by industry (see Box 2-1). COURT DECISIONS AND AGENCY RESPONSE: RACE-BASED PROGRAMS Croson Case As this brief history makes clear, programs to affirmatively assist small businesses, including minority-owned and, subsequently, women-owned small businesses, were regularly and almost routinely passed by Congress. At the same time, race-based programs were challenged in court (see Enchautegui et al., 1997:3-4). By the late 1980s, such challenges were beginning to succeed. In a 1989 case, City of Richmond v. J.A. Croson Co., 488 U.S. 469 (1989), the U.S. Supreme Court determined that state and local preference programs for minority-owned firms must meet the court’s “strict scrutiny standard” under which racial preferences must serve a “compelling interest” and be “narrowly tailored” to meet that need. Culminating a trend in the Supreme Court and appellate courts toward tightening the standards for race-based programs of state and local governments, Croson affirmed that state and local agencies may act to remedy direct or indirect discrimination in their own contracting processes but could not use evidence of society-wide discrimination or past discrimination in an industry as the basis for giving preferences to minorities. Furthermore, state and local agencies could not assume that evidence of discrimination against one minority or in one market supported a finding of discrimination against all minorities or in all markets. The test of discrimination in contracting, according to Croson, was whether qualified, willing, and able minority-owned firms were underused. If such evidence were found, then agencies must first use race-neutral remedies (for example, outreach, mentoring, assistance in receiving bonding); if such programs were deemed insufficient, agencies could then develop race-based remedies that were narrowly tailored to serve the purpose. In response to Croson, many state and local governments commissioned “disparity studies,” which attempted to demonstrate differences between minority ownership as a share of all businesses in their jurisdiction and as a share of state or local government contracts received. These studies also described barriers to minorities in attempting to start or grow their own businesses and, in some instances, contracting practices by state and local governments and the private sector that impeded the ability of minority-owned businesses to win awards. Such studies have been cri-

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting tiqued on a number of grounds (see Chapter 4 for a methodological review). Adarand Case In 1990, Adarand Constructors, Inc., brought suit alleging that a U.S. Department of Transportation regulation that gave a preference to minority subcontractors on federal highway projects was unlawful. The case made its way through the courts, and, in 1995, the U.S. Supreme Court determined in Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995), that the Croson strict scrutiny standard must also apply to federal affirmative action programs, including federal contracting and other areas (www.usdoj.gov/olc/adarand.htm [December 2004]). In this decision, the court explicitly overruled an earlier decision, Metro Broadcasting, Inc. v. FCC, 497 U.S. 547 (1990), which had stipulated that congressionally mandated “benign” racial classifications need only satisfy a less exacting standard of intermediate scrutiny (see “Gender-Based Programs” below). Agency Response Reacting to Adarand’s threat to the federal contracting programs favoring small disadvantaged businesses, the Clinton administration decided to “mend it [affirmative action] not end it.” The administration required that every department list all race-conscious programs and evaluate these programs in light of the decision. The Department of Justice contracted with the Urban Institute to review and combine the findings of 95 disparity studies in contracting outcomes conducted by state and local governments. On the basis of results from 58 of these studies (the other 37 were discarded for various reasons), the Urban Institute study estimated that there were “substantial disparities between the share of contract dollars received by minority-owned firms and the share of all firms that they represent. Based on their number, minority-owned firms received only 57 cents for every dollar they would be expected to receive” (Enchautegui et al., 1997:vii; see Chapter 4 for a review of the methodology). The Urban Institute study also estimated that women-owned small businesses received only 29 percent of the expected dollars. From the legislative history of relevant statutes, the Urban Institute study, and other evidence of barriers to participation of minority-owned firms in government contracting, the Justice Department concluded that race-based “affirmative action in federal procurement is necessary, and that the federal government has a compelling interest to act on that basis in the award of federal contracts” (U.S. Department of Justice, 1996:26042). The department focused its efforts on revising race-based procurement pro-

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting grams to tailor them narrowly to serve the government’s interest, making three kinds of changes to the programs. First, the Justice Department required SBA certification of small disadvantaged businesses for the entire government instead of allowing such businesses to self-designate. (Firms eligible under the Section 8(a) program were always required to be certified by the SBA.) Second, it established a procedure whereby the Department of Commerce would develop benchmarks to be used in determining which industry groups and, possibly, regions of the country would be eligible for race-based procurement, thus targeting race-based programs to specific industries. Third, it required agencies to conduct proactive outreach and technical assistance efforts for minority-owned firms, and it allowed agencies to use three race-based contracting mechanisms, putting a fourth mechanism—set-aside procurements for small disadvantaged businesses—on hold. The permitted race-based contracting mechanisms include: the SBA Section 8(a) program;2 bidding or price evaluation credits for small disadvantaged business prime contractors; and evaluation credits for nonminority prime contractors that proposed to use small disadvantaged businesses as subcontractors (see Chapter 3). Use of bidding credits and evaluation credits was made subject to the Department of Commerce benchmark results: for example, the size of a bidding credit could be less than the maximum 10 percent depending on the extent of the disparity between the benchmark and the actual participation of minority-owned small businesses in federal contracting. The Department of Commerce published its first industry benchmarks in June 1998, determining that a 10 percent bidding credit for small disadvantaged businesses could be employed in contracts in 71 industry groups (defined by 2-digit Standard Industrial Classification codes), as well as in all 9 geographic divisions for 3 construction industry groups (U.S. Office of Management and Budget, 1998:35714). In September 1999, the department issued updated benchmarks, which provided for a 10 percent bidding credit for small disadvantaged businesses in a smaller number of industry groups (51), as well as in all 9 geographic divisions for 3 construction industry groups (U.S. Office of Management and Budget, 1999:52806). The benchmark analyses were discontinued by the present Administration. The Commerce Department’s methodology involved four steps for each industry group (see Chapter 4 for more detail): (1) identifying a set of firms that were “ready and willing” to supply the federal government by combin- 2   The Section 8(a) program is currently under challenge in a court case, ongoing in Washington, DC, since 1996, brought by the Center for Individual Rights.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting ing and removing duplicates from three relevant lists of firms; (2) estimating a “use” share for small disadvantaged firms in the set as their share of the total net contract dollars awarded to the entire set; (3) estimating the capacity to supply the government of each ready and willing firm in the set from a regression equation using variables related to firm size and age and estimating a “capacity” share for the small disadvantaged firms in the set; and (4) comparing the use and capacity shares for small disadvantaged firms and recommending price evaluation credits when the use share fell short of the capacity share. (See Chapter 4 for a review of the methodology.) Other actions taken in response to the Adarand decision included suspension by the Defense Department in October 1995 of its small disadvantaged business set-aside program based on the rule of two: that is, limiting competition to minority firms whenever the contracting officer determined that two or more responsible small disadvantaged firms could bid on a project. Such rule-of-two contracting accounted for one-sixth of all Defense Department contracting with minority-owned firms in 1994 (U.S. Department of Justice, 1996:26042). GENDER-BASED PROGRAMS To date, the legal history with regard to gender-based programs for promoting women-owned small businesses is sparse. There have been two or three lawsuits brought by women who were seeking disadvantaged status to get into the Section 8(a) program. There have been no challenges to the planned new federal program for set-asides for women-owned small businesses as yet or from women-owned small businesses alleging gender discrimination in federal contracting.3 A few relevant cases have involved state and local contracting or related areas, such as alleged discrimination against women in employment and college admission. Standard of Review The constitutional basis under which a new procurement program for women-owned small businesses would be reviewed by the courts derives from the due process clause of the Fifth Amendment to the U.S. Constitution, which provides that no “person” shall be “deprived of life, liberty, or property, without due process of law.” This language has been interpreted 3   A lawsuit was brought in November 2004 to require the SBA to proceed with the regulations for women-owned small business set-asides.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting by the U.S. Supreme Court to include the equal protection of the law, although the amendment contains no express language to that effect. Equal protection, as the term implies, requires that all individuals (including corporations as “persons”) be treated equally by the government, unless there is some overriding reason to prefer one group over another. This legal doctrine bars the federal government from giving contracting preferences to particular groups unless there is some compelling reason for doing so and the scope of the preference is not too broad so as to unduly injure innocent third parties. The Fourteenth Amendment has a similar provision applicable to the states. The Supreme Court has enunciated two different standards for judging whether racial or gender preferences are permissible in contracting. Racial preferences in federal contracting must meet the strict scrutiny standard of review, according to the 1995 Adarand decision discussed above. This is a two-pronged test. Under the first prong of the test, the government must have a compelling governmental interest in employing the preference, such as remedying past discrimination in a specific area (general societal discrimination is not enough).4 Under the second prong of the test, the remedy must be narrowly tailored so that its scope, duration, and effects are as limited as possible. Satisfying the requirement for narrow tailoring includes examining whether race-neutral remedies were tried and were unsuccessful, determining whether the preference is of limited duration, and examining the harm to persons not eligible for the race-conscious remedy or program. Gender preferences are subject to a lesser standard, which has been referred to as “intermediate scrutiny.” That standard was most recently enunciated by the U.S. Supreme Court in United States v. Virginia, 518 U.S. 515 (1996), which held that the exclusion of women from the state-run Virginia Military Institute was unconstitutional. In making its ruling, the Supreme Court stated that, in seeking to uphold a gender preference, the government must establish “an exceedingly persuasive justification” for it. In essence the government must show that the preference “serves important governmental objectives and that the discriminatory means employed are substantially related to the achievement of those objectives.” While the two standards may appear somewhat different, lower court decisions applying the equal protection doctrine to government contracting have not yet clarified precisely how the standards differ. In particular, they have not agreed on the extent to which the intermediate scrutiny standard is 4   Recent cases involving admissions at the University of Michigan entertain diversity as a justification for racial preferences in the educational setting—Gratz et al. v. Bollinger et al., 123 U.S. 2411 (2003), and Grutter v. Bollinger et al., 123 U.S. 2325 (2003).

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting less demanding than strict scrutiny. On one hand, the Eleventh Circuit has held that under intermediate scrutiny the party defending preferences for women-owned businesses is not limited to a showing of past discrimination against women-owned businesses by the governmental entity alone, but it may also show more general societal discrimination against women—see Engineering Contractors Ass’n of South Florida Inc. v. Metropolitan Dade County, 122 F.3d 895 (11th Cir. 1997), and Ensley Branch, N.A.A.C.P. v. Siebels, 31 F.3d 1548 (11th Cir. 1994), involving employment discrimination. On the other hand, the Seventh Circuit has said in a case involving a contracting preference program for women and minorities in Chicago that the difference between the two standards is “vanishing”—Builders Assoc. of Greater Chicago v. County of Cook, 256 F.3d 642 (7th Cir. 2001). Justification: Statistical Disparity Whatever the difference between the two standards of review, the justification of a governmental preference program in contracting, whether based on race or gender, typically depends in part on its claimed remedial necessity. Justification of that necessity is often made by offering statistical evidence of disparities between the target group’s share of contract awards (utilization) and its share of a universe or population of firms (availability). The procurement program for women-owned small businesses provided for in the 2000 Small Business Reauthorization Act, 15 U.S.C. 637(m)(4), requires the SBA to undertake a study to determine the industries in which women-owned small businesses are underrepresented in terms of federal contract awards. The legislation does not specify the meaning of underrepresentation (or substantial underrepresentation). In its administration of laws barring employment discrimination, the Equal Employment Opportunity Commission (EEOC) has used a four-fifths (4/5 or 0.8) rule of thumb as a disparity threshold, below which a group may be taken to be underrepresented relative to its share of a total population. However, even in the context of EEOC enforcement activity, the four-fifths rule is somewhat flexible. Outside that realm, it has no legal significance and has not been controlling in the courts, which have favored formal tests of statistical significance. Nonetheless, common practice in the literature of disparity studies has been to use a disparity ratio of less than 0.80 as a definition of underrepresentation for minority-owned or women-owned small businesses in federal contracting (see Chapter 4 on disparity ratios and issues in measuring them). The 2000 legislation also does not define the universe of firms to be used in estimating availability, implying that the universe could encompass all firms. Yet case law to date, involving challenges to preferential contract-

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting ing programs of local governments for women-owned and minority-owned small businesses, indicates that it is not enough to show evidence of disparities based on a broad definition of the available universe of firms. Instead, for a program to pass constitutional muster, what appears to be required is evidence of disparities when the universe is defined to be only those firms that are ready, willing, and able to compete for government contracts. In disparity studies that have restricted the universe of available firms, the determination of ready, willing, and able has been variously based on lists of registered firms, responses to sample surveys to ascertain interest in applying for contracts, and predictions from statistical regression equations that include such variables as firm size and age (see Chapter 4). Studies that do not attempt to narrow the universe of firms in a defensible way have been thrown out of court. Thus, in Contractors Association of Eastern Pennsylvania, Inc. v. City of Philadelphia, 893 F. Supp. 419 (3rd Cir. 1995), the Third Circuit invalidated a local preferential contracting plan favoring women and minorities because the government’s disparity analysis assumed that all firms were equally ready, willing, and able to perform city-financed public works contracts without considering how many minority-owned and women-owned firms actually sought to bid on them. The court wanted to ensure that measured disparities were attributable to discrimination in the contracting process and not to other factors that might limit the contractor pool—for example, that women-owned and minority-owned small businesses might be smaller and less experienced on average than other businesses and so less likely to bid on or be selected for contracts. Another way of stating the standard that extant case law appears to require for a disparity analysis is that it should not only meet statistical standards regarding the reliability of the data, but it should also support a hypothesis of discrimination in the contracting process. However, this concept has not been rigorously defined. Thus, in Bazemore v. Friday, 478 U.S. 385 (1986), the court stated that a statistical model does not have to include all measurable variables in order to be admissible as evidence of discrimination. In that case, which involved allegations of discrimination against minorities in employment and provision of services by the U.S. Department of Agriculture Extension Service, the court held that “a plaintiff…need not prove discrimination with scientific certainty; rather, his or her burden is to prove discrimination by a preponderance of the evidence.” Basically, it appears that one side must put forward a model that rules out as many obvious explanations of disparities as seems possible with the available data, while the other side strives to put up a better model. At that point, the adversarial process takes over. In fact, it is no easy matter to produce valid estimates of disparities. Moreover, inferring discrimination from reliably measured statistical dis-

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting parities is fraught with methodological difficulties. After describing the federal contracting process in Chapter 3, we discuss conceptual, measurement, and data issues in estimating disparities in Chapter 4 and issues in inferring discrimination from statistical evidence of disparities in Chapter 5.