XOSBs get an A
Programming note: I am off the next two weeks for summer vacation!
We are in the midst of the final quarter of fiscal year 2023, during which acquisition professionals everywhere are scrambling to obligate end-of-year funding. So what better time, I guess, to look a whole year backward at how the government performed on its small-business goals in fiscal year 2022?
Yesterday, the Small Business Administration announced that the federal government obligated "an all-time high 26.5% of federal contract dollars to small businesses" in fiscal year 2022. There are many zeros in the contract award amounts behind that percentage: $162.9 billion... There's even an annual scorecard, and the government got an A with a score of 104.05%!
Lest you think grade inflation is at play, dear reader, please understand that to get an A+, you must get more than 120%! Also, the government didn't hit all of its goals and there are fewer small businesses that got awards in FY2022 than did in FY2021. But the government still got an A and over 100%. Math is a funny thing.
Anyway, small business procurement is a big deal in government contracting, so I can understand why the government is excited about the increase in small-business spend.
Still, as we've talked about before, the government's definition of a "small business" is not especially intuitive. The basic idea is that a company's status as a small business depends on the what industry the company is in, the number of employees that work at the company, and the company's revenue. But there of course are fun complications; we are talking about government contracts after all!
Size isn't the only thing that matters, though. In addition to small business goals more broadly, the scorecard also tracks agencies' progress toward "socio-economic goals" specifically.
Folks who are new to government contracting are often suprised to learn that there are four "special" categories of small businesses, which I call the XOSBs.[1]
What's an XOSB? An XOSB is a Woman-Owned Small Business (a "WOSB"), a Service-Disabled Veteran-Owned Small Business (a "SDVOSB"), a small disadvantaged business (an "SDB"), or a HUBZone-certified business ("HUBZone"). In other words, an XOSB is an "X-Owned Small Business," where X describes who owns the company.[2]
These four categories of XOSB companies all share an important characteristic: they are owned by someone who has been historically and presently excluded from government contracts and they are all reported on the SBA's Small Business Procurement Scorecard.
XOSB companies have super powers in federal contracting! The government sets goals for percentages of contracts to go to XOSBs as prime contractors and as subcontractors, and the government often uses contract "set asides" for XOSBs. Being an XOSB is a big deal!
As you can imagine, though, because they're important, there are rules about what companies can qualify for being an XOSB. There are formalities! And one pretty important requirement is an XOSB has to be owned and operated by, uh, whatever X is (a woman, a veteran, etc). There's a certification process administered by the Small Business Administration, with a lot of paperwork and reviews.
As one sort of silly example of how this works (or doesn't), the SBA Office of Hearings and Appeals recently took up an appeal of a company called "One Veteran LLC" that hoped to become a certified XOSB.
I'll give you a moment to solve for X. You're right: One Veteran LLC applied to be certified as a Service-Disabled Veteran-Owned Small Business (a "SDVOSB"). Unfortunately for One Veteran LLC, it didn't quite play out the way it hoped.
You see, under the regulations, for One Veteran LLC to get certified as an SDVOSB, it needed to demonstrate that "one or more qualifying veterans must serve as managing members [of the LLC], with control over all decisions of the [LLC]." Despite the name "One Veteran LLC", which would suggest that there's one member of the LLC and that the member is a veteran, One Veteran LLC actually had two members: one veteran member and one non-veteran member.[3] Making matters worse for One Veteran LLC, the veteran member "acknowledged that responsibility for [the LLC's] daily business operations had been 'delegated' to [the non-veteran member]."
The LLC's operating agreement stipulated that both members had authority to bind the LLC in contract and also required "unanimous consent of all Members" for certain actions. Having two members, delegating daily business operations to one of them, and requiring consent of both members for certain actions sure seems like one member doesn't have control over all decisions of the LLC, as required by the regulations.
One Veteran LLC did counter that one specific provision in the LLC's Operating Agreement gave the veteran "the unilateral ability to overcome supermajority voting requirements, which gives him ultimate control over all decisions of the [LLC]." But the SBA pretty summarily concluded that the provision was "inconsistent with other information submitted by [the LLC] including other provisions of [the LLC's] Operating Agreement." Ah well.
In the end, because the one veteran in One Veteran LLC did not have control over all decisions of One Veteran LLC, the LLC could not be certified as a SDVOSB. Appeal denied. Them's the breaks.
Is that outcome particularly surprising? No, not really. Is it the right outcome? Yeah, I think so. Given the facts presented by the SBA, it seemed pretty clear that it would end badly for One Veteran.
But the mere fact of the case is also kinda exemplary of our weird govcon world? Yes, true, One Veteran LLC was not certified as a SDVOSB, but it is sorta telling that the company delegated daily business operations to one of two non-veteran members, and still attempted to plausibly argue that One Veteran LLC should be a SDVOSB because some throwaway provision in the LLC's operating agreement gave the veteran a veto.
Could it have gone differently with a bit more clever lawyering on the Operating Agreement? I mean... sure? maybe? probably?
Nevertheless, as we can celebrate the $28.1 billion of contracts that went to SDVOSBs, we can take some comfort in the fact that there is at least some rigor in how the 5,341 SDVOSBs that did get awards in fiscal year 2022 are certified.
Good work SBA.
Oh, what the hell... I'm feeling generous: let's give it an A!
[1] Yes, I went there. No, I'm not sorry.
[2] There are other XOSB categories, but I'm sticking to the four in the SBA Report Card.
[3] I mean, it's not wrong. One Veteran LLC's management really does have One Veteran!