Looking Ahead: Opportunities and Challenges for Entrepreneurship and Small Business Owners
Purpose
This paper outlines the most important issues and opportunities facing small business owners and entrepreneurs this year.
Challenges
The paper outlines five major challenges that small business owners will face in the coming years.
Strengthening the Overall Economy.
Small businesses continue to struggle in the economic downturn, and it will be important for policy leaders to get the economy moving again. Small businesses will be a large part of that, as entrepreneurs will spur new innovation and employment in the coming years. These firms will continue to be the job generators that we have become accustomed to. With that said, industries will recover from the downturn in different ways, and some industries have clearly been hit harder this time than in past business cycles.
Taxes and Regulation.
Business conditions have a fundamental impact on entrepreneurial activity, and small business owners frequently cite tax and regulatory policies as a concern. Moving forward, it will be important for policymakers to consider the impact of taxes and regulations on small business owners and would-be entrepreneurs.
Cost and Availability of Health Insurance.
Health insurance premiums have risen substantially in this decade. The Kaiser Family Foundation reports that the cost of employee-sponsored health insurance plans has increased 119 percent since 1999. It is also well-documented that employees at smaller firms are less likely to be offered health care coverage. Finding ways to control the cost of providing health insurance to employees and increasing coverage will remain a priority for our national and state leaders.
Attracting and Retaining a Quality Workforce.
Small businesses must compete for labor with their larger counterparts. This is more difficult in light of the disparity in total compensation, especially benefits, and the result is greater employee turnover. Demographic trends in the coming years might also exacerbate these challenges.
Global Competition.
American businesses face competitors on a number of fronts, both at home and abroad. The U.S. government has worked to increase the ability of our firms to compete overseas by lowering trade barriers. There are also some structural disadvantages that work to make our products less competitive, and many companies have reduced their costs by outsourcing some processes and tasks abroad. While insourcing also exists, many of these issues - especially the assertion that firms are "outsourcing jobs" - remains controversial; yet, firms argue that these are necessary strategies for survival in a global marketplace.
Opportunities
The paper also discusses five opportunities that small businesses will hopefully pursue in the next decade.
Increased Investments in Technology and Innovation.
There are strong linkages between innovationand new firm formation, and policy makers fully understand that risk-taking entrepreneurs have positive impacts on regional economic development. With many regional officials seeking the "next big thing" that will drive their local and regional economies for years to come, there is an appreciation that small businesses are leading the way toward new inventions, processes, and products. Such innovations are vital to our economic growth, and they will provide the tools to make our economy more competitive in an increasingly globalized marketplace.
"Economic Gardening" and Grooming Local Entrepreneurs.
Proponents of "economic gardening," which has communities plow the dollars that would have been spent on luring big businesses to their town to promote local small businesses instead, argue that grooming existing firms can ultimately lead to greater payoffs in terms of job creation.
Pursuing New Markets Overseas.
One of the strengths in our current economic climate is the export sector, and international trade represents an opportunity for small businesses. Historically, many small business owners have not been proactive about trading with foreign partners. While 28.9 percent of the known export value stemmed from small firms, entrepreneurs have yet to fully tap the potential for growth in the export arena.
Promoting Business Ownership among Selected Demographic Groups.
Women and minorities have been extremely entrepreneurial over the past few years - a trend that is expected to continue. One of the driving factors for minorities has been the influx of immigrants coming to this country. Recent studies show a strong connection between immigration and high technology entrepreneurship, suggesting enormous benefits for embracing these new citizens. In addition, many of the veterans returning home from Iraq and Afghanistan are likely to devote themselves to entrepreneurship, as previous generations of veterans have done. Policymakers should find ways to promote greater business ownership among each of these groups.
Advancing Education and Training.
Education and training are important as there are strong linkages between entrepreneurship and human capital. Moreover, small business owners devote significant resources to training their workforce. These firms are able to increase their labor productivity and reduce their labor turnover. In this way, small business owners should look at education not just as a means of retraining their workers, but also as methods of building new skills, developing new human talent, and preserving employee morale. Failure to do so might result in a reduced competitive position for the most talented employees.
This paper was prepared for presentation at "Entrepreneurship in a
Global Economy," a conference sponsored by the Western New England
College's Law and Business Center for Advancing Entrepreneurship, held
in Springfield, Massachusetts, on October 17, 2008.
|
| Court Decision Voids Major Small Business Contracting Law
A federal appeals court has thrown out a law establishing a 5 percent goal for awarding defense contracts to small businesses owned by socially and economically disadvantaged individuals.
The decision has the potential to invalidate the small disadvantaged and 8(a) contracting programs, which help socially and economically disadvantaged firms win billions of dollars in federal contracts every year.
The opinion, issued by the U.S. Court of Appeals for the Federal Circuit, strikes down a legislative provision, first enacted in 1986 and renewed numerous times since, which sets a goal that 5 percent of federal defense contracting dollars each fiscal year must be awarded to certain entities, including small disadvantaged companies.
The court noted that this provision incorporates the 1953 Small Business Act's presumption that African-American, Asian-American, Hispanic-American and Native American business owners are socially disadvantaged.
The provision therefore violates the equal protection component of the Fifth Amendment right to due process, because it authorizes the Defense Department to afford preferential treatment on the basis of race and does not meet a "strict scrutiny" standard, the appeals court decided. Under this requirement, the government must prove that the preference is "narrowly tailored to serve a compelling government interest."
"Because Congress did not have a 'strong basis of evidence' upon which to conclude that DoD was a passive participant in pervasive, nationwide racial discrimination -- at least not on the evidence produced by DoD and relied on by the district court in this case -- the statute fails strict scrutiny," the decision stated.
Defense's practice of giving minority companies a 10 percent price credit meant that companies owned by certain socially and economically disadvantaged groups did not have to be the lowest bidder to win federal contracts, and helped the department achieve the congressionally mandated goal. Defense is required to waive price adjustments if it is meeting the small business goals, and has not employed adjustments since March 2007.
The initial suit was filed in 1998 by Rothe Development Corp., a Texas-based information technology company that lost a Defense contract to an Asian-American-owned business. Rothe, owned by a Caucasian woman, had been the lowest bidder.
David Barton, of the San Antonio-based Gardner Law Firm, who represented Rothe, said the decision will force minority-owned businesses to compete on an equal playing field.
"If they know they're going to have to bid like everybody else, it's going to make their bidding more difficult, but it opens up bidding for nonminority businesses -- not certified minority businesses -- because they don't have to worry about putting in the lowest bid and still getting whacked down," Barton said.
Barton said in addition to a small $10,000 monetary award limited by statute, Rothe was granted declaratory relief finding that the law was unconstitutional. The Defense Department was ordered not to employ the statute or race-based contracting preferences.
Guy Timberlake, chief executive officer of the American Small Business Coalition, said the full impact of the decision is unclear, but that it seems to invalidate elements of the small disadvantaged business program and the federal contracting component of the 8(a) business development program.
"This specifically applies to [small disadvantaged businesses and] does not on the surface directly impact 8(a) or the other social economic programs, but it potentially could depending on who was going to run this ruling up the flagpole," Timberlake said. "Woman-owned, 8(a), all the programs under [the Small Business Administration] are based on a socioeconomic designation. My concern is that this court is saying the entire small business program is unconstitutional."
Timberlake noted that elements of these programs have been rolled back in recent months, with SBA announcing that small disadvantaged businesses would be able to self-certify. SBA, along with the Justice Department, also used concerns about constitutionality to explain delays in implementing the women-owned small business program.
Agencies such as NASA, which also employed the 10 percent price credit, have rolled back that practice and Barton said that is a direct result of the ongoing lawsuit.
"Limitations on this [price credit] statute have been implemented since we filed suit in 1998. They just don't want to go far enough, because politically they feel they have to keep the program," Barton said.
Defense spokeswoman Cheryl Irwin said the department was reviewing the ruling, along with the Justice Department.
|
| New Contractor Business Ethics Compliance Program and Disclosure Requirements
Effective December 12, 2008, all government contractors and subcontractors will risk suspension and debarment if they fail to make timely, mandatory disclosures to the Office of Inspector General ("OIG") relating to the receipt of substantial overpayments, violations of specified federal criminal laws, and violations of the civil False Claims Act ("FCA"). This new regulation represents an extreme departure from the voluntary disclosure programs historically utilized by the government. The new regulation also imposes business ethics compliance program requirements on all contractors and subcontractors with contracts over specified value and duration thresholds.
Background
As of December 24, 2007, except for commercial item contracts and contracts performed outside of the United States, contracts and subcontracts over $5,000,000 with a period of performance of 120 days or more were required to contain FAR 52.203-13, "Contractor Code of Business Ethics and Conduct." FAR 52.203-13 required contractors to, have a written code of business ethics and conduct, provide a copy of the code to each employee engaged in the performance of the contract, promote compliance with its code, and establish an ongoing business ethics and business conduct awareness program and an internal control system. In response to criticism regarding the exemption for commercial item contracts and contracts performed outside of the United States, in June 2008 the Supplemental Appropriations Act, P.L. 110-252, included a provision, Close the Contractor Fraud Loophole, which mandated that the FAR require timely notification of violations of criminal law or overpayments in contracts and subcontracts, including those performed outside of the United States and those for commercial items. This final rule implements those provisions
Requirements That Apply To All Contracts and Subcontracts
The final rule amends FAR Subpart 9.4 to include as a basis for suspension and debarment a "knowing failure by a principal, until 3 years after final payment on any Government contract awarded to the contractor, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract or a subcontract thereunder, credible evidence of: (i) Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; (ii) Violation of the civil False Claims Act (31 U.S.C. 3729-3733); or (iii) Significant overpayment(s) on the contract, other than overpayments resulting from contract financing payments as defined in 32.001." The final rule defines "principal" as "an officer, director, owner, partner, or person having primary management or supervisory responsibilities within a business entity (e.g., general manager; plant manager; head of a subsidiary, division, or business segment; and similar positions)." This cause for suspension and debarment applies to all contractors and subcontractors, regardless of contract type, value or duration.
This new cause for suspension and debarment raises several questions regarding how a contractor can properly comply with the rule. First, a contractor is required to make a "timely" disclosure. It is not clear what constitutes a timely disclosure - is it before an internal investigation has begun or after the investigation is complete? The FAR council responded to these questions by noting that a contractor does not need to make a disclosure unless and until it has "credible evidence" of the referenced offenses. The "credible evidence" standard is not an evidentiary standard used by courts and therefore does not provide contractors with much guidance regarding when they must make disclosures to the OIG.
Second, this mandatory disclosure obligation applies retroactively to contracts and subcontracts that are still open or for which final payment was made within the last three years. The FAR council commented that the "timely" disclosure standard will be measured from the later of the date the contractor has credible evidence of the violation or the effective date of the rule, December 12, 2008.
Last, the requirement for contractors to disclose violations of the FCA presents significant challenges. Contractors will need to train their principals on how to identify a violation of the FCA, despite the fact that judicial interpretations conflict regarding when a violation of the FCA has occurred. Moreover, the FCA permits the initiation of a lawsuit by a qui tam relator (i.e., a disgruntled employee or a whistleblower). The contractor's disclosure of a FCA violation to the OIG will likely prompt a qui tam lawsuit.
Requirements That Apply To Contracts and Subcontracts Over $5,000,000
The final rule expands on the requirements contained in, and the applicability of, FAR 52.203-13, by requiring the clause to be included in all contracts and subcontracts over $5,000,000 with a period of performance of 120 days or more, including FAR Part 12 commercial item contracts and subcontracts and contracts performed outside of the United States. However, not all of the requirements in the clause are applicable to commercial item contractors and small businesses. The requirements of FAR 52.203-13 have a prospective application in that contractors are only required to comply with such requirements for contracts that contain the revised clause. The revised clause will be included in solicitations issued after December 12, 2008.
The revised clause requires contractors to, within thirty days after contract award, have a written code of business ethics and conduct and make a copy of the code available to all employees engaged in the performance of the contract. Contractors are also required to "exercise due diligence to prevent and detect criminal conduct" and "otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law." Additionally, the clause requires contractors to timely disclose, in writing, to the OIG with a copy to the contracting officer, when the contractor has credible evidence of a violation of a federal criminal law discussed above or a violation of the FCA. This mandatory disclosure obligation not only applies to the contractor's violations, but also to the violations of the contractor's subcontractors performing work on the government contract.
Unless the contractor is a small business concern or the contract is a commercial item contract, contractors are also required to establish, within ninety days of contract award, an ongoing business ethics awareness and compliance program and an internal control system. The business ethics awareness program consists of training programs and other means of disseminating information to principals and employees and, if appropriate, agents and subcontractors. The internal control system consists of, among other things: (i) assignment of responsibility at a high level and adequate resources to ensure effectiveness of the program; (ii) reasonable efforts not to include an individual as a principal if they have engaged in conduct contrary to the code; (iii) periodic reviews of practices, policies, procedures, and internal controls for compliance with the code and government contract requirements; (iv) an internal reporting mechanism that allows for anonymity or confidentiality (e.g., a hotline); (v) disciplinary action for improper conduct or for failing to take reasonable steps to prevent or detect improper conduct; (vi) timely disclosure procedures for mandatory disclosure requirements; and (vii) full cooperation with any Government agencies responsible for audits, investigations, or corrective action. The most controversial requirement has been the "full cooperation" requirement. Although the clause provides that full cooperation does not require waiver of the attorney client privilege or the Fifth Amendment, it remains to be seen whether a company will be deemed to have fully cooperated with the Government if it withholds certain information based on these privileges.
Last, contractors are required to flowdown this clause to its subcontractors with subcontracts greater than $5,000,000 and periods of performance longer than 120 days.
Conclusion
Although the requirements in FAR 52.203-13 are not applicable to all contractors, the new cause for suspension and debarment, in effect, requires all contractors to establish compliance programs and internal control systems consistent with the guidelines set forth in FAR 52.203-13. Further, these guidelines mirror the U.S. Sentencing Guidelines, which the DOJ relies upon when making charging and sentencing decisions. Accordingly, it will be in the best interests of all federal government contractors to review their existing compliance programs and put in place mechanisms for preventing, detecting, and reporting misconduct.
George W. Ash and Erin L. Toomey are members of the law firm of Foley & Lardner LLP in Detroit, where they specialize in government procurement issues. They may be reached at (313) 234-7100.
Note: This update provides information of general interest presented in summary form, and does not constitute individual legal advice.
| |
