USAID Small Business Set-Aside Contracting Guidance

For decades, the United States Agency for International Development (USAID) has relied on contractors – implementing partners in agency lingo – to manage a wide range of the global development projects within its robust programming portfolio. As highlighted in several reports and analyses in recent years, the majority of the agency’s contracts have been awarded to just 25 implementing partners, despite the presence of hundreds of U.S.-based and overseas international development firms. A growing desire to diversify this partner base has emerged – underscored by the vision Samantha Power, the USAID Administrator appointed by President Biden in 2021 – as criticism about the effectiveness of service delivery and cost efficiency have arisen. A number of recent steps and policy directives have sought to initiate this diversification – with a focus on enhancing the number of small businesses supporting USAID and, most notably, how much funding is allocated to local partner organizations in the countries where the agency operates.

The push to diversify USAID’s implementing partner network, particularly through localization efforts, produced an interesting acquisition reform in the last year. In September 2021, USAID’s Office of Acquisition & Assistance issued an Acquisition and Assistance Policy Directive (AAPD) that outlined exceptions to the limitation on subcontracting requirements for small business set-asides. This directive provided USG acquisitions professionals and contractors alike guidance on new carve outs for small businesses as it relates to the well-known 50% contract value threshold that set-aside awardees are legally required to stay above when executing a contract. Simply put, in the past, if a small business receives a set-aside contract for, say, $100K, they had to ensure that the majority of the contract value was retained by their firm – the prime contractor. In that example, awardee must demonstrate that at least $50,000.01 of the total contract value that been absorbed by the prime (or by themselves and “similarly-situated entities” – i.e. a women-owned small business could further subcontract to other WOSBs without having to maintain the majority value).

What is particularly notable about this AAPD are the exemptions (or deviations) from the normal FAR provisions and agency policies it addresses. It is evident that the carve outs were tailored to encourage further flexibility for traditionally underrepresented USAID contractors and encourage the diversification of the agency’s implementing partners network. The three exemptions for the 50% limitation are:

  1. Other direct costs, like travel, communications, or event logistics expenditures, so long as they are not the principal purpose of the acquisition;
  2. Work performed outside the United States on awards made pursuant to the Foreign Assistance Act of 1961; and,
  3. Work performed outside the United States required to be performed by a local contractor.

Most critical to the continued diversification of USAID’s partner base are exceptions 2 and 3, which provide for a wholly transformed contracting and operational environment for set-aside awardees when implementing for the agency, since the Foreign Assistance Act of 1961 is the legislative foundation of USAID’s creation and policy mandate, and the vast majority of the organization’s programming is managed in foreign countries.

In many cases, small businesses face limitations to winning and executing larger or more complex USAID projects due to limited capacity, despite often possessing innovative solutions or approaches not mirrored by favored large contractors. So, the ability to receive a larger award for overseas implementation without being hampered by the 50% threshold allows a small business to leverage a unique approach and set of resources to implement in a simplified, more efficient manner. Moreover, local experts and contractors are an invaluable resource whose expanded utilization should be actively encouraged by USAID as a means of developing capacity, sharing knowledge and best practices, and supporting locally driven development methodologies. In this new acquisition context, local organizations – at the heart of Administrator Power’s strategic vision – are in a position to significantly benefit, either as prime awardee or subcontractor, as they are able to receive more resources without being burdened by arduous limitations that can handcuff their crucial involvement at an intimate level.

USAID should, of course, ensure that this deviation is not abused my implementers, resulting in just another way in which large businesses can secure new projects and revenue on the backs of small businesses. This new guidance could very realistically result in a scenario in which a small business receives a set-aside award for overseas implementation and partners with a large implementer for support, citing the need for expanded capacity, geographic reach, or specialized expertise, only to eventually find they are overly reliant on the large, creating a value of share of, for example, 30% / 70%. Rather, this reform should be viewed as an opportunity for USAID to advocate for diverse coalitions of partners to work together when implementing abroad. For example, a U.S.-based small business might reserve ~40% of the contract value for itself to provide overall project management and lead key task areas, commit 40-50% for local firms or independent contractors to spearhead on-the-ground support services, and set aside 10-20% for a large partner who may have unique country experience, logistical networks, technical capabilities, or required expertise in complex project components. Prior to the introduction of these exemptions, this division of labor and value would not have been allowable.

WBD welcomes the introduction of the valuable new guidance related to set-aside contracts. As a service-disabled veteran-owned small business (SDVOSB), we encourage acquisition and policy reforms that make it easier for small firms to more easily implement for USAID. Our firm is particularly keen on leveraging local resources to ensure successful project management and delivery for global development projects. In South Asia, where we manage the Cross-Border Infrastructure and Connectivity (CBIC) activity, WBD oversees the unique combination of resources from two American small businesses, local organizations in India, Bangladesh, and Sri Lanka, international subject matter experts from Europe, and a expansive network of local technical specialists and coordinators to implement several discrete capacity building and infrastructure projects.

Under this implementation regime, the U.S.-based small businesses (including WBD) provide project management, high-level technical direction, and quality assurance, while international experts are able to leverage their specialized knowledge and experience to train and enhance capacity amongst our local partners, resulting in transfer of knowledge and uptake of innovative, proven approaches. Local resources simultaneously play key on-the-ground coordination and troubleshooting roles, ensuring timely communication with government officials, sourcing additional expertise, and spearheading field data collection, stakeholder engagement, and analysis. This management approach is mutually beneficial and cost-effective for all parties, and, most critically, creates invaluable opportunities for eventual localization of project management by facilitating the transmission of key knowledge and expertise. For example, in conducting a feasibility and preliminary design study for a new lock and inland waterway transport route in India’s West Bengal state, our team is leveraging the world-class expertise of inland waterways specialists in the Netherlands, visionary engineering techniques from a German firm, and the specialized skills of local hydrology engineers and infrastructure financing experts.

USAID’s new AAPD is a step in the right direction to achieving much-needed diversification of the agency’s implementing partner network. Not only does it further enhance the role of American small businesses in the international development space, but it allows for increased involvement of local organizations and individuals in managing development interventions and creates the circumstances for adoption of locally driven methodologies. USAID should continue to explore innovative ways to shift funding to new or traditionally underutilized partners, with a focus on development programming that has the biggest impact on local communities.

Author: Trey Fields, Lead Consultant at WBD and engaged with the firm’s Private Sector Engagement Support award with the United States Agency for International Development.