Buying Stuff with Government Funds: A Procurement Primer

Nathan Smith

Article by Nathan Smith Featured Author

Posted June 2023

Since passing the Mississippi Bar back in the dim times, I have had the unique opportunity to work on all sides of the collection and distribution of State and Federal funds. Early in my career, my job was to minimize the conversion of private funds into government funds by representing taxpayers.1 Later I represented the State of Mississippi as a Senior Attorney for the Department of Revenue. My job there was the reverse: maximize the collection of tax revenue in accordance with state law. For the last several years I have worked in Federal grant compliance and monitoring: in a nutshell, ensuring that taxpayer funds are distributed in accordance with State and Federal law.

Having worked with the labyrinthine laws, rules, and regulations governing the collection of taxpayer funds, it only makes sense that the government’s use of those funds is bound by similarly complex restrictions. Some of the strongest and most brightly colored strings attached to the distribution of State and Federal funds are the rules and regulations governing “procurement.”

What is procurement? Prior to my work for the State, I had never even heard the word used in a formal sense. For the purposes of this article, it is any acquisition of goods or services using government funds. There are State procurement laws, rules, and regulations governing the acquisition of goods and services with state funds 2, and there are Federal rules and regulations governing the acquisition of goods and services with Federal funds.3 These rules apply to government agencies, local governments, non-profits, for-profits, subrecipients, and any other entity that is receiving State or Federal funds to carry out a project or a program. In the case of State entities that are carrying out a Federal program, the State entity is required to follow the State procurement procedures that apply to it, as well as certain other Federal requirements.4 In the case of “other non-Federal entities” carrying out a Federal program, specific Federal procurement requirements will apply to them.5

If your eyes haven’t involuntarily rolled back in your head and/or shut at this point, I want to assure you that the scope of this article will only cover general procurement standards and aspects of the Federal rules, specifically regarding the use of Federal funds by state agencies and other non-federal entities. Since Katrina days, Mississippi has received various tranches of Federal funds, with pandemic-related funds, i.e. CARES Act funds and ARPA funds, being the most recent. These funds are all subject to Federal procurement rules.

But before that, I want to address why procurement laws even exist. Private, for-profit entities spending their own funds have a wide range of discretion on their use of funds. After all, private businesses operate in a free market economy. Most private entities seek to keep expenses as low as possible by seeking the best price on which to spend their hard-earned dollar.

Government entities, however, and private entities receiving government funds, didn’t earn those funds. These are the funds of the taxpayers. Individuals working for these entities may have altruistic goals, and they are typically working within a budget. But altruism and good intentions can’t be measured or policed by conventional means, while a system of procurement procedures can. The goal of procurement laws is to ensure that taxpayer dollars are spent in a manner that minimizes costs, eliminates waste and abuse, and prevents conflicts of interest.

There are teeth behind procurement laws too. These aren’t merely guidelines or suggestions. The government’s primary enforcement tool is the audit. Any Federal program receiving $750,000 or more a year is subject to mandatory single audit. Various Federal agencies have the ability to audit their programs, with the Office of Inspector General operating independently to audit Federal fund usage. At best, a procurement violation will be considered a finding with a corrective action plan instated. At worst, a procurement violation will result in a clawback of any expenditures related to the procurement. Since funds have already been disbursed by the time of an audit, a clawback can result in disastrous consequences for the distributing entity.

Given this threat, what should an entity that has been tasked with distributing Federal funds do? First, the entity must be able to recognize what a procurement is and when it will occur. In other words, if the entity is holding Federal dollars and intends to send those dollars to another entity to provide goods or services, it must think about procurement. Once the entity has identified that a procurement is taking place, it must consider the amount of the proposed expenditure. For example, under Federal procurement rules, a purchase under $10,000 (a so-called “micro purchase”) only requires the entity to determine that the cost of the purchase is reasonable. However, a purchase of $250,000 or more requires a full-blown competitive bidding process. The third necessary consideration is that the entity must thoroughly document each step it takes in the procurement process. Simply following procurement rules is inadequate if the entity doesn’t leave an audit trail to support the steps that were taken. It is the equivalent of “showing your work” while solving an Algebra problem, which should strike fear in the hearts of most lawyers.

Overarching Considerations in Federal Procurements

1. Full and Open Competition

In addition to the three considerations above (is a procurement taking place? For how much? Am I documenting the steps taken?), there are other overarching considerations at play in procurements with Federal funds. The first is that there must be “full and open competition” for any procurement. This must be demonstrated in various ways depending on the fact scenario presented. For example, full and open competition in the procurement of $125,000 worth of widgets can be shown by obtaining quotes from various vendors and selecting the vendor with the lowest price. A memo to the file explaining the reasoning process, complete with documentation of the quotes obtained, can be used to fill any gaps.

On the other hand, full and open competition for a $10 million construction project would require public advertisement and a sealed bidding process. In these cases, the low bid typically must be accepted. In the case of professional services contracts, a request for qualifications or request for proposals may be the required course of action, with a documented scoring system to ensure impartiality.

There are limited exceptions to full and open competition.6 These include “single source,” (or “sole source”) procurements, public exigency or emergency procurements, and a catch-all of inadequate competition. These exceptions should rarely, if ever, be used. Most sole source justifications fall apart under close scrutiny, and they also tend to invite such scrutiny. Likewise, and emergency or exigency is typically found not to be such. For example, the COVID-19 pandemic cannot be cited as an emergency that justifies non-competitive procurement for pandemic-related Federal funds, even though it is clearly an emergency.7 Micro purchases, discussed previously, are the only common procurements which may be treated as noncompetitive.8 Even in the case of a micro purchase, however, the guidance is clear that contracts and purchase orders may not be broken down into smaller pieces simply to fit under the micro purchase threshold.9

2. Affirmative Socioeconomic Outreach

Standing beside the requirement of full and open competition is the requirement that affirmative outreach must be made to certified minority — and women-owned business enterprises (“MBE/WBE”).10 While at first blush this may appear to be an anti-competitive requirement that flies in the face of the full and open competition requirement, it has been structured to produce equitable outcomes as opposed to anti-competitive ones. The key points to bear in mind are: 1. The requirement applies to every procurement with Federal funds, unless impractical, 2. The requirement is to make affirmative outreach that gives M/WBE businesses the best opportunity to participate, not to actually procure a M/WBE businesses,11 and 3. All six enumerated steps of 2 CFR 200.321 must be followed and documented.

The first point is equally as important as identifying that a procurement is taking place. If a procurement is taking place with Federal funds, the procuring entity must look to 2 CFR 200.321 and document the six steps enumerated therein. They are as follows:

  1. Qualified minority — and women-owned businesses must be placed on solicitation lists. How does one identify qualified M/WBE businesses? In Mississippi, the Mississippi Development Authority (“MDA”) maintains a Mississippi Minority Business Registry at mmbr.mississippi.org.
  2. Using NAICS codes appropriate to the goods or services that are the subject of the procurement, one can search this list and identify M/WBE businesses to solicit.
  3. Assuring that minority and women-owned businesses are solicited whenever they are potential sources. This means that identified M/WBE businesses must be contacted when a procurement is made. It isn’t enough to simply advertise a request for proposals and state that “minority — and women-owned businesses are encouraged to apply,” the solicitation must be affirmative and direct. Examples include sending certified mail to the M/WBE businesses or sending emails with read receipt enabled.
  4. Dividing total requirements, when economically feasible, into smaller tasks or quantities to permit maximum participation by smaller businesses, which minority — and women-owned businesses tend to be.
  5. Establishing delivery schedules, where the requirement permits, which encourage participation by minority — and women-owned businesses. This step is similar to step three, in that it is designed to break a project into bite-sized pieces that are more easily tackled by a small business.
  6. Utilizing the services of the Small Business Administration (“SBA”), when appropriate, to assist in completing the prior four steps. SBA.gov maintains a nationwide database of certified M/WBE businesses and provides other services such as financing and grants to assist M/WBE firms in successfully bidding and completing projects.
  7. When a prime contractor hires subcontractors, the prime is required to follow the prior five steps in awarding subcontracts. To ensure this step is met, the procuring entity typically includes a contract provision with the prime that requires the prime to follow the requirements of 2 CFR 200.321.

The astute reader will note that qualifiers such as “when economically feasible” or “when appropriate” are attached to many of these steps. In some cases it is not feasible to break down a project into smaller parts, or a qualified M/WBE firm does not exist for the requested service, or the services of the SBA are not required because the procuring entity already located qualified M/WBE businesses to solicit. In these cases the efforts to complete each step must be documented, with a memorandum to file that explains the processes followed.

There are rare cases when it is impractical to make an affirmative outreach to M/WBE businesses. For example, in the case of a sole source procurement, the only source may not be a M/WBE business. It is exceptionally difficult to prove a sole source procurement, however, and audit findings are littered with failed sole source justifications. There is also guidance that, despite the broad language of 2 CFR 200.321, it is difficult to square the six affirmative steps with the minimal requirements of a micro purchase.

In some instances, a M/WBE business that supplies the goods or services necessary to carry out a government program simply does not exist. If this is the case, all search efforts must be documented, and they must be exhaustive. But Federal guidance also cautions against using unreasonable requirements, such as excessive bonding, that would deter a M/WBE business from taking on a project. In other words, a procuring entity could not simply say that a M/WBE business could not be located because none of the potential M/WBE businesses met the procuring entity’s excessive requirements.

Conclusion

This article is meant to be a very broad overview that draws awareness to the world of governmental procurement and some of the specific Federal requirements that must be followed when Federal funds are at stake. As always, you should seek the advice of a professional if faced with a governmental procurement. Bear in mind, however, if you intend to hire the procurement professional with government funds, you are making a procurement. You’ve got the cart before the horse. See? This is tricky. Holding Federal funds is like holding a hot potato.

  1. As Justice Learned Hand acerbically quipped, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 293 U.S. 465 (1935).
  2. See Miss. Code Ann. Sections 31-7-1 - 31-7-423.
  3. 2 CFR 200.317-327.
  4. 2 CFR 200.317.
  5. Id.
  6. 2 CFR 200.320(c).
  7. This makes sense. If the pandemic was cited as justifying non-competitive procurement for pandemic-related funds, there would effectively be no Federal procurement standards for any expenditures of those funds.
  8. Even if the procurement is non-competitive, the goods or services procured are subject to a cost reasonableness test.
  9. Note how this contrasts with step three of 2 CFR 200.321, discussed below. There is a tightrope to walk here.
  10. CFR 200.321.
  11. In fact, the Federal Emergency Management Agency has published an example of a recipient of Federal funds that procured a M/WBE business to perform work. However, because the entity did not follow the six affirmative steps of 2 CFR 200.321, the use of funds was still subject to an audit finding. See the downloadable Fact Sheet at https://www.fema.gov/fact-sheet/purchasing-under-fema-award-socioeconomic-contracting.