Senators hear bundling complaints

The Senate Small Business and Entrepreneurship Committee held a hearing today on the impact that contract bundling has had on small business.

Sen. Olympia Snowe (R-Maine), the committee's chairwoman, listened to testimony from federal officials and small-business representatives about the harm bundling has done and efforts under way to reform the process.

Bundling is a practice in which agencies combine several small contracts into one large one, out of the reach of small businesses to compete for directly.

Small companies have lost opportunities to bid on contracts because of bundling, according to the witnesses. In some cases, large companies have listed smaller ones as subcontractors in order to meet federal goals for subcontracting to small firms, and then sent no task orders their way, testified Carol Kuc, an Illinois businesswoman and procurement chair of Women Impacting Public Policy.

Key questions Snowe asked witnesses concerned the progress of efforts under the President's Management Agenda to reform contract bundling and how progress in that realm will be measured. The Office of Federal Procurement Policy (OFPP) and the Small Business Administration published proposed rules in January that will call for agencies to subject procurements to bundling reviews at lower thresholds than they do now.

Snowe was especially concerned when OFPP Administrator Angela Styles noted that more than nine agencies, including the departments of State, Commerce, Interior and Justice, have not yet filed the quarterly progress reports that were due in January.

"That seems to be an indication that an agency isn't taking the requirement seriously," Snowe said. Styles agreed with the concern, but said some agencies are taking longer than others to learn how to meet the new requirement.

Snowe also challenged OFPP's proposal to lower the threshold at which contracts would be subject to bundling review. Under current rules, a bundled contract worth $10 million or more per year is termed a "substantial bundle" and subject to review. Under the proposed new rule, Defense Department contracts are called substantial if they exceed $7 million; NASA, Energy Department and General Services Administration contracts $5 million; and all other agencies $2 million.

Because most small-business contracts are measured in thousands of dollars, Snowe found even the proposed lower thresholds to be unreasonably high.

Styles said she believes the amounts are appropriate, and — perhaps more importantly --enforceable. "We wanted to set thresholds we could actually fulfill," she said.

DOD puts an emphasis on hiring small companies, and 82 percent of its prime contractors are small firms, testified Deidre Lee, director of Defense procurement and acquisition policy.

Small businesses received about $50 billion in federal contracts in 2001, about 22.8 percent of the total for the year, said SBA Administrator Hector Barreto. In addition, large contractors subcontracted about $35.5 billion to small firms.

However, studies show that for every 100 bundled contracts, 106 contracts become unavailable to small businesses, he said. And while the dollar amount spent with small businesses has remained relatively constant in recent years, the number of new contract awards has dropped from 86,243 in 1991 to 34,261 in 2001, he said.

Barreto put some of the blame for declining small-business participation on multiple-award contracts, which are not subject to uniform reviews for bundling and small-business participation. Orders under such contracts increased from $21 billion in 1990 to $72 billion in 2001, about 31 percent of the total $235 billion 2001 procurements, he said.

Eric Adolphe, chief executive officer of Optimus Corp. in Silver Spring, Md., testified that bundling has hurt his technology company directly.

Founded in 1992, Optimus went through the tough financial years typical of technology start-ups, he said. During that period, the company discovered that large firms don't always honor the subcontracting pledges they make to win contracts, he said.

"Optimus has been essentially shut out of numerous federal contracts that could have turned things around for us and significantly eliminated the amount of financial hardship we initially faced," he said.

In one case, the Environmental Protection Agency put Optimus in touch with a large contractor that wasn't meeting its small-business subcontracting goal. The firm, which Adolphe declined to name, signed Optimus up as a subcontractor and the EPA extended the prime contractor's contract into the option period.

"After the option was exercised, we never heard from them again," he said.