The Emergence of the Current Interest in the Defense Small Business and Labor Surplus Area Subcontracting Programs

• Author: BY Irving Maness
• Pages: 04

I. INTRODUCTION

The defense small business subcontracting program and the labor surplus area subcontracting program are separate (but not equal) programs. The small business propram is authorized by statutory law' as well as executive policy. The labor surplus areas program, on the other hand, came into being as a result of DefenseManpower Policy No. 4.' For these reasons the two programs will be treated mparately in this article.

The two programs are somewhat incompatible Since the interests of small business firms outside labor surplus areas may be in conflict with those of large and small firms within such areas. As will be seen later, however, the two programs have reached anaccommodation which is perhaps more a marriage of necessity than of convenience.

11. TflE DEFESSE S\IALL BCSISESS SL'RCOSTIIACTISG PROGE.\N

1. WHAT IS SMALL BUSINESS AND

   WHY A SMALL BUSIIYESS POLICY?

   of the total purchases and contracts or subcontracts for property and services for the Government (including contracts or sub-contracts far maintenance, repair, and construction) are placed with small business concerns.'

   The Small Business Act defines a small business concern a8 onewhich is independently owned and operated and which i8 not dominant in its field of operation.' In addition to these criteria, the Administrator of the Small Business Administration' is authorized, in making B detailed definition, to consider the number of employees and dollar volume of business and to determine within an industry the business enterprises which are to be designated as small business concern8 for the purpo8e of effectuating the provisions of the Act.' Pursuant to this authority, the SBA has issued rules and regulations defining small business size standards and special definitions have been issued far certain industries. Generally, however, any concern is small if it does not employ more than 600 persons and meets the statutory requirements..

   The simplest answei to the concern for mall busmess is found in section 2(a) of the Small Business Act itself, which deciares that the American economic system of private enterprise is predicated upon full and free competition, the preservation and expansion of which is deemed basic to the economic well-being and se-curity af the nation: This policy did not originate in 1968 with the Small Business Act, but is in the tradition of this country's antitrust and trade practices legislation which is based on the premise that competition produces the best distribution of the nation's economic resources, the greatest progress, and at the same time an environment conducive to the preservation of democratic, political and social institutions.

   The United States began its political career as the democracs of small farmers and traders. Its economic development, contrary to that of Europe, began directly with competitive capitalism. It is no coincidence that wherever totalitarianism ha8 gained control, free enterprise has been replaced by cartels, atate corporations, or other forms of monopoly.

   To illustrate the significance of the mall business community to the American economy, approximately 90 percent of the busi- 8 75 Stat. 666 (1961), 15 P.S.C. 9 631(a) (Supp 111. 1962)'72 Stat. 384 (1958), 15 U.S.C. 9 632 (1958)r The Small Buninens Admmistrstion will be cited hereinafter 8s the SBA. '72 Stst. 388 (1S5S), 15 USC. $ 637(h) ( 6 ) (IE68).-See 13 C F R. $5 121.3-121.3-11 (Supp. 1961) far the regulations issued by the SEA. The Department of Definae adopted there definitions in formu. latine their re~uiationa. See Armed Services Procurement Reg pam. 1-701.1(Feb. 16, 1962) (hereinafter eired 811 ASPR).

   120 AGO I:mB

   <75 Stat 666 (1981). 15 T2.S.C I 631(sl (SUPP. 111, 19621.

   SMALL BUSINESS AND LABOR SURPLUS

   ness enterprises in this country are classified as small business. This represents about 4111 million firms providing employment to around 40 million people. Of the 324,000 manufacturing concerns in the country today,D employing from 16 to 11 million persons,'" an estimated 310,000, employing from 5 to 51/2 million, are small con-cerns. Among them can he found many competent small firms possessing imagination, ingenuity, and inventiveness. United States Patent Office records reveal that individuals accounted for about 40 percent of all patents issued between 1939 and 1956 and, of the patents issued to American corporations during that period, about 33.4 percent of the total was issued to small and medium concerns and only about 20.8 percent to the 176 largest corporations."

   In the light of predictions far the vast economic growth of the nation and with the tremendous expansion of the defense establishment, there is an increasing need for making full use of all the nation's human, technological, and productive resources.

   The economics of the national defense requires a strong, healthy, broad-based and dispersed industry in which the millions of small business enterprises scattered throughout the width and breadth of the land must be utilized. A small company can frequently furnish a needed product or service more rapidly and efficiently, of better quality, and at a lower cost than many large concerns which do not ordinarily manufacture these products or provide these services. Size alone does not always bring success, and what the small concern may lack in financial resources, knowledge af market conditions, and research facilities, it may more than compensate for in greater flexibility, closer control and more intensive effort.

2. GENESIS OF THE CURREYT INTEREST

   1. Legal Besis of the Pyogram

   The present defense Small business subcontracting program wa5 established in implementation of the Small Business Act Amendments of 1961.L' Regulations implementing the program were adapted by the Department of Defense."

   ~~

   U.S.

   Dep't of Commerce, Survey of Current Business (June, 1961).

   In U.S. Deft of Labor, Employment and Eernings 11, Table Bl (Msrch,,982)...., Staff of Subeomm. on Patents, Trademarks, and Copyrights, Senate Comm. on fh? ,Judiri;#ry 84rh Canp,, 2d Srsi.. Dkstribution of Palenis to Car-porations (1939.1956) 3, 8 (Comm. Print 1957) (Study No. 3).

   "75 Stat. 656-669 11961j. 16 U.S.C. S S 631-647 (Supp. 111, 19621 (herem. after cited 8s 1961 Amendments).

   "ASPR 1-707. 2-407.S(a)(lj, 8-808.Z(h) (si1 dated Feb. 16, 1951) and 5 3, Pert 8 (dated ~ariously Aov. 16, 1961, and Feb. 15, 1962)

   Prior to enactment of the 1961 Amendments there w-as almost no legislation on the subject of subcontracting. There was a sub-contracting program but it was based upon the provisions of the Armed Services Procurement Regulation. Up to January 1960 the defense small business subcontracting program was on B voluntary basis. In the absence of any statutory requirement, however. the ASPR provisions were ineffective and the program had "little more vitality than an after-the-fact Statistical reporting system."-' On January 1, 1960. by virtue of revised regulations of the Department of Defense, the program became mandatory on a11 prime contractors and also on all subcontractors who obtained contracts of one million dollars or more with substantial subcontracting posslbilities. The new regulations provided some improvement but were still found to be inadequate, and in March 1961 Mr.

   John E.

   Horne,

   Administrator of the SBA, testified before a Senate committee that legidation was needed to provide a basis far a fair and effective subcontracting program.'

   2. The Seed io? a?, Effeettre Subcontracting ProgramDespite the small business set-aside program a and all other programs designed to insure that a fair proportion of Government purchasing be placed with mall business, climaxed by the request made by President Kennedy in January 1961 that the Secretary of Defense increase the share of procurements for small business by 10 percent, the small busineas share af military dollar purchases declined each year since 1954 from 25.3 percent to an all time low of 15.9 percent in fiscal year 1961. The percentage far the first eight months af fiscal year 1962 rose to 16.3, however, indicating that these programs may be paying off. The percentages of the total annual military dollar awards of prime contracts that were received by mall business concerns are shown on Table I below To be noted particularly iB the diminishing trend of d mall businesses' share.

   ~~ ~

   1. S. Rep. KO.

   716, 86th Cong., 1st Sern. 5 (1858)

   1: Xeartnga on S 898 Bejorr a Subcommriter ot the Senate Committee onBonhmg and Currene~.

   86th Cong., 1st Sers. 68 (1961) (hereinafter cited as 1961 Hearings).

   1YThe aebaiide program 1% authariied by 5 Z(15) of the Small Buslnesa Act, 72 Stat. 385 (1858), 15 U.S.C. I644 (195S), and is implemented m ASPR 1.706 (Kav. 15, 1861). Under this program purehasen are Bet aside m whale or m part exclusively for amali business and bidding or negotiation is limited to Small business concoma. As B requirement far such a ret-anide, there must be a reasonable expactatmn that bids or pmpoaals uill be obtained from P sufficient nvmber of reaponribie amall business emeern~ so that awards will be made at reasonable pnces.122 *GO 6188s

   SMALL BUSINESS AND LABOR SURPLUS Tohie I 114'.*.19iili

   Small Business Percentage of Total Dollar Awards to Business Firms in U.S.

   ~ ~ ~~~~~ ~~ ~~ ~~~ ~~~~~~~~

   1954 ~ 26.3 1965 21.5 1866 18 6 1957 18.81956 17.11958 16.61860 16.1 1861 15.9

   SOURCE: Statistical Reports of the Department of Defense.

   Research and development contract dollar awards to small firms also dropped from 3.4 percent in fiscal year 1960 to 2.8 percent in fiscal year 1961, Although research and development award6 consituted 21.2 percent of the total military dollar purchases in the first six months of fiscal year 1962, small concerns received only 1.9 percent. This is the lowest research and development share for small firms since records have been kept. In fact, there has been a progressive decline in small firms' share of research and development contracts from...