Proposed rules would limit contract bundling

Proposed FAR changes

In an effort to reverse a decade-long decline in new federal contracts going to small businesses, two proposed rules would require greater scrutiny on bundled contracts and add more triggers for agencies to review and justify such bundles.

The proposals, published in the Jan. 31 Federal Register, would amend the Federal Acquisition Regulation and the Small Business Administration's rules for small business prime contracting assistance.

Bundling, a controversial practice in which multiple contracts are grouped and awarded to one contractor, has proved to be a double-edged sword: It increases government efficiency, but limits opportunities for smaller players. According to the Office of Management and Budget, the number of small businesses receiving new contracts fell from 26,506 in 1991 to 11,651 in 2001.

Small businesses are high on the Bush administration's domestic agenda.

Contract bundling and advancing small business in general are top priorities for OMB, said Angela Styles, administrator of OMB's Office of Federal Procurement Policy, at a Coalition for Government Procurement meeting last month.

The proposed rules would "close loopholes" in the current system to steer more business to small companies, said Linda Williams, SBA's associate administrator for government contracting.

The rules are modeled after a nine-step plan presented in an OMB report last October, she said.

"The president sent a clear message to the agencies that they will be held accountable for improving contract opportunities to small businesses," she said. "The rules are aimed at getting that message across."

Among the key changes proposed:

n Require bundling reviews of multiple-award contract vehicles and task and delivery orders issued under those vehicles. Currently, the reviews are not required for multiple-award contracts, multi-agency contracts, governmentwide acquisition contracts or the General Services Administration's schedule program.

n Require an agency to coordinate with its small business specialist for contracts beyond specific dollar-value thresholds: $7 million for the Defense Department; $5 million for NASA, the Energy Department and GSA; and $2 million for all other agencies. If the specialist finds unjustified bundling or bundling not properly identified, the specialist will notify the agency's Office of Small and Disadvantaged Business Utilization.

n Require that office to periodically review its agency's track record for using small businesses, for documenting and justifying bundling, and for mitigating the effects of justified bundling on small businesses.

n Require contracting officers to assess contractor compliance in subcontracting to small businesses. The current FAR requires contractors to prepare plans for subcontracting with small businesses when receiving product and services contracts of $500,000 or more, but oversight of their compliance has been inconsistent, according to the OMB report.

The bundling controversy is nothing new, said Cathy Garman, vice president of public policy for the Contract Services Association of America. Her group's 300 members include businesses of varying sizes, making it difficult to stake out a definitive position for the organization.

"We have small businesses who are very opposed to bundling. We have small businesses who say, 'We don't care if it's a bundled contract as long as we get a piece of it,' " she said. "Medium-sized businesses usually get totally left out."

However, the proposed rule changes don't address some elements her group is most concerned about, she said. For one, agencies can remove contracts from small businesses and add them to a bundle at any time, she said.

"If you're performing well and suddenly the government says, 'I want to take it away from you and bundle it,' that's not a fair practice," she said. "That's raised eyebrows among all of our businesses."

Although there are no hard numbers pertaining specifically to contract bundling, statistics do show trends that lead procurement experts to conclude that the practice is harming small businesses, said Payton Smith, manager of public-sector market analysis services at Chantilly, Va.-based Input.

However, there are already measures in place that could ameliorate that effect, he said.

"The small business community is always concerned that they're going to be pushed out by the larger players," he said. "The thing that gets overlooked a lot is that the small business set-aside goals have not changed."

The large companies who win bundled contracts become responsible for subcontracting some of the work to small businesses, he said. However, "there is not a lot of accountability" in the system as it stands, he added.

The government's vision has to look beyond the fate of individual small businesses, argued consultant John Okay, president of J.L. Okay Consulting. Contract bundling has distinct advantages from the government's point of view, he said.

"I think it's had a lot of benefits in allowing them to get access to large companies that can take a lot of the integration and overall project management burden on themselves," he said. "It's buying a solution set rather than buying individual components."

And regardless of the strength of an enforcement mechanism, large companies have business-based incentives to hire small businesses as subcontractors, he said.

"The fact that a lot of the awards on these bundled contracts have gone to large companies doesn't mean that small business doesn't have a role," Okay said. "There are not too many large companies that have within their ranks all of the skills and capabilities to carry out all the work."

But, he added, "I think small businesses have a legitimate concern. They really have been getting a smaller piece of the overall federal IT pie."

Creative agencies can create contracts that bring them both large companies' project management skills and smaller companies' focused technological expertise, Okay said. "But it takes an effort. The natural tendency is 'get somebody in here quick to do the whole thing.' "

Comments are due on the proposals by April 1. DOD, GSA and NASA issued the proposed rule recommending changes to the FAR. SBA joined them in issuing the proposed changes to its own regulations.