How many federal manufacturing contracts actually go to small business anyhow?

If the government needs something made, it is supposed to look for a small business to make it. If no small business exists, an agency can get a waiver from the Small Business Administration to have it made by any domestic company. But there is a problem with waivers. For details on that, the Federal Drive with Tom Temin spoke with Blank Rome procurement attorney Justin Chiarodo.

Tom Temin All right. So, the government has been scrambling to find small businesses for a lot of the needs that it has. I mean IT and services companies dime a dozen if you will. But the supplier base is shrinking for small businesses, even though more dollars are going there. So, what is the basic requirement here? Let’s set the scene.

Justin Chiarodo Absolutely. Tom, I think you’re absolutely right to home in on the on the erosion of the small business base across industry in the last several years has been pretty well documented. Yes, the non-manufacturing rule permits the small business set asides to provide products. Principle is of another small business unless those products are not available in sufficient quantities. And the exception here under the non-manufacture rule, basically provides for the ability for a company to seek a waiver of the application of that rule to submit products in cases where there aren’t comply products available.

Tom Temin That is to say a non-manufacturer can supply it.

Justin Chiarodo That’s right. Essentially a resale of products from outside of small business.

Tom Temin So the non-small business could be a giant manufacturer. But they would use the small business as the way in which is contrary to the standard way in which if you award to a small business the small business must do at least 50% of the work. That is to say.

Justin Chiarodo Right.

Tom Temin Northrop Grumman can’t do 90% of the work under a small business set aside, with the small business just being the conduit.

Justin Chiarodo That’s right. And so, you know, typically you’re looking for things like value-added resale, right. Or they’re small businesses or providing additional value in this process in the supply chain to drive that base. But, you know, the issue is obviously creating a massive end around the rule generally erodes the ability for manufacturers to develop the capacity to actually deliver these products.

Tom Temin So the waiver process exists by which an agency goes to the SBA and says there’s nobody to make these gyroscopes or these 16 by 27-foot steel beams. That’s a small business. So, we’re going to have, you know, United Acme Steelworks make it, but it’s going to be sold to us through mom-and-pop distribution.

Justin Chiarodo Mom and Pop distribution company. That’s exactly right.

Tom Temin So what’s the problem?

Justin Chiarodo Well, there are a lot of problems. I think, practically speaking, there’s a lot of administrative process that needs to go into the waiver request generally. And frankly, there’s not a lot of depth of manufacturing capability out here. And a lot of these product categories and more generally are real strong demand, particularly looking at things like defense, manufacturing and defense articles right now, you know, a tremendous demand on a lot of these products and not the ability for the manufacturing base to meet the demand. So, you really have a confluence of issues, complexity, limited resources, right? Limited time within the contracting activities to move through this process and a limited base.

Tom Temin And how does that manifest itself? And what say your clients ask you for help with?

Justin Chiarodo Yeah, it’s a great question, Tom. I think it’s important for companies to really be thinking about their outreach and more go to market strategy as far ahead in advance of some of these opportunities as they can, and really build awareness, both within agencies and with other stakeholders within the procurement process, in my view, to get out the front and build the groundwork necessary for the, you know, the procuring activities, to be aware of this, to be essentially helpful, right? You know, an extra potential pair of hands or tools to help ensure that these processes are being managed appropriately. You’re seeing things like that with Inflation Reduction Act, right? Domestic manufacturing, those types of issues. You see a lot of people thinking about how to position themselves for these opportunities before they’re on the table.

Tom Temin We’re speaking with procurement attorney Justin Chiarodo of Blank Rome. Maybe the real issue is that the small business manufacturers are out there. They just don’t want to bid on government contracts because federal government contracts and a lot of state government contracts come with rules for your carbon footprint, rules for your labor practices, yes, for your DEI, you name it. Maybe they’re out there, but they say, who needs this when it comes to dealing with the federal government because of the enormous compliance costs?

Justin Chiarodo Well, and let’s not forget the early holiday present of, a draft CMMC rule coming out as well for cybersecurity. So, you’re absolutely right. There is a tremendous burden that is added on top of this. And I think government community is working. You certainly see this with outreach to Silicon Valley on ways to make it easier for people to participate. There is the recent DoD rule for commercial procurement that’s seeking to streamline some of the burdens that contractors may face. I think there are also a lot of trade associations out there, and efforts within the small business community to combine forces to build advocacy networks and outreach that can make it easier to do this. And. And I frankly think you need to see some industrial policy as well that is seeking to actually put money to work right for these things. You’ve certainly seen that with the submarine supply base. I’ll call out as an example, where a bunch of money has been basically pushed out through grant programs to try and stabilize that supply base. So, I think there are a number of factors that are going to need to be brought to bear to arrest and turn around this erosion that we’ve seen into and to make it a more attractive marketplace.

Tom Temin And what have you seen with respect to SBA and the process for granting waivers? How does the SBA verify that there actually is no one to bid on a particular contract? And who does the market research and how does all that work?

Justin Chiarodo Yeah, the market research, you have sort of a policing function, right, because the contracting activity should be the one doing the market research to identify whether or not there are sufficient small businesses out, you know, in the community to meet a particular requirement. You know, SBA from a resource perspective and policing and reviewing that. Again, it’s this limited resource problem, right, of being able to come in and look at what potentially could be a smaller procurement, right. How can I bring in an extra set of eyes to do that. And so, I think it really comes back to the importance of contractors that may see, and again, shouldn’t be a burden on the contractor to do it, but to be thinking about how they can make their case build that network of advocates. And many agencies are going to have a good Office of Small Business utilization, right? Procurement, technical assistance. The centers are out there. Lawyers are out there. Lobbyists are out there, certainly in this town that can again build this awareness and again create a set of usable data, actionable data that’s digestible, that’s easy to understand, that can help make it easier to push this process along.

Tom Temin And there are manufactured products and then there are manufactured products. If you want to buy a production level copier machine. Well, there is no small business that makes such a thing. Or if you want to buy a fleet of electric vehicles, there are not well, they started out big. Most of them have disappeared, but there are no small businesses that can supply that. That’s different. That’s a different issue. You would have to go to a distributor or reseller, and that’s probably the norm for copiers and electric vehicles or whatever. But what about small assemblies, machined parts, forgings, castings, connectors, extruded parts? These used to be made by thousands upon thousands of small companies. So, you really have two classes of product here. Yeah.

Justin Chiarodo And that latter category, it’s a huge challenge. I think we’re seeing today the challenges that we have in these manufactured parts and their availability. And there’s been a lot of efforts to consolidate a lot of these suppliers within larger companies. It’s a big problem. It’s a big challenge.

Tom Temin Because if the original OEM product was made by a large manufacturer, say that an electric car and, you know, Tesla made it or somebody made it, well, they don’t make most of the parts that go in there. And it’s the parts that fail, not the chassis. And so, if you need a new I don’t know what’s an electric car motor. You don’t need oil. Whatever I need in there. Well probably you can’t get it from the OEM.

Justin Chiarodo That’s right, that’s right. Where can I get that steering knuckle right that I need to, you know, around the bend and there just fewer people and companies that are in a position to meet those needs. So, I think it really, you know, it’s this concept of a whole, a government approach to address the erosion of the manufacturing base. When you look at the national security challenge and the government is talking about this, you know, the whole the government is talking about this specific pivot to strategic competition. There is an awareness and a recognition that we don’t have the manufacturing capability in the United States and our allies, right or close friends that we need to meet that challenge. And this is an interesting manifestation of some of that problem and the resources that it’s going to take. I’m certainly going to have dollars right put to work on this. But I also think trying to go it alone as a contractor is probably tough. It’s finding those networks and trade associations and other advocacy channels that can help build this awareness, where it’s just not there right now.

Tom Temin And perhaps, maybe one course for the government is to gain visibility into the component supply chain at the outset of a procurement of, say, a platform.

Justin Chiarodo That’s absolutely right. And certainly, the government is going to want to know where its stuff is coming from. That’s become important today. I mean, even manufacture products, right? We have a commitment and recent domestic preference law to increase the percentages of domestic content right, in the coming years. And so, I think there are a lot of forces that are coming to bear here that will eventually impact this. But today it’s a challenge.

Tom Temin And the government has to be prepared for what it costs to get replacement parts. If you ever tried to replace, say, the module in a 25-year-old double oven in the wall, which I have, well, you know, you can either get a whole new oven or you can get that module if you can find it.

Justin Chiarodo Yes. Well, in there, you know, you raise an interesting engineering, challenge. They don’t make ovens like they used to. But you see this also in talking about defense platforms. How can we simplify production in these systems to make it easier, right, to sustain them, to keep them running, and to ensure that we have sufficient spare parts, availability and capability to keep things moving? I mean, that’s why are certain electric manufacturing vehicles very successful is they’ve really focused incredible energy on simplifying manufacturing. Right. Improves margins and improves the ability to, you know, service products and keep them running. So again, you know, it sounds like it’s really a technical issue not a manufacture or rule. This is really arcane. This is sort of government contractors in the green shades. But it really does sort of shed a spotlight on the policy challenge and the procurement challenge that I think, you know, is going to be with us for a while.

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