Small-biz provisions threaten businesses

Two provisions in the Small Business Administration's funding bill could arbitrarily take business away from large companies and load prime contractors with rigid requirements to pay subcontractors or be held in breach of contract, according to critics.

Industry groups, including the Information Technology Association of America and the Professional Services Council, are in talks with Senate staffers in an effort to change the language when the Senate reconvenes. The bill passed the Senate Small Business and Entrepreneurship Committee before Congress adjourned this month.

One provision, Section 403 of the Small Business Administration 50th Anniversary Reauthorization Act of 2003 (S. 1375), would require that agencies make all purchases ranging from $2,500 to $100,000 from small businesses. If at least two small businesses offer reasonable bids and can fulfill the agency's requirements, the requirement would include purchases from the General Services Administration's Federal Supply Service schedules contracts.

The other provision, Section 406, would allow the government to withhold payments from contractors who do not pay subcontractors on time.

Although friendly to small businesses, the provisions would be burdens for large companies, according to critics.

Section 403 would "drastically change the nature and utility" of the federal supply schedules system, said Olga Grkavac, executive vice president of the Executive Solutions Division of the Information Technology Association of America. Section 406 "would interject the government directly into disputes between primes and subs," which would increase the workload for contracting officers, she added.

"The government is not a party to contracts between primes and subs and should not be able to dictate to the prime how it should conduct its business vis-a-vis its subcontractors," she said.

Section 406 holds prime contractors in material breach if they do not pay small-business subcontractors on time. Contracting officers are expected to consider any legitimate arguments about the subcontractor's poor performance before making that determination.

"The [Senate] staff has been very open to discussion and [has] acknowledged issues that maybe they weren't aware of," said Stan Soloway, president of the Professional Services Council. "We certainly support policy that will ensure adherence to the small-business rules, but one has to be very careful before you create a rigid statutory regime. There [are] a lot of variables and nuances that have to be considered."

The small business committee has prepared an amendment that would require contracting officers to consider only small-business offers, said committee spokesman Craig Orfield. The amendment has not been introduced, however, and he said it is not certain that it will be.

The Bush administration wants the government to spend at least 23 percent of its contracting dollars with small businesses. Measures such as the ones proposed in the SBA bill, or efforts to limit contract bundling and other recent initiatives, are misguided efforts to help agencies meet that goal, said Chip Mather, senior vice president of Acquisition Solutions Inc.

"We keep attacking the symptoms," he said. "We keep attacking bundling. We attack this. Why not just hold the agencies accountable for the 23 percent and let them figure it out?"

The provision, if it survives unchanged, could undermine the GSA schedules system, too, Mather added. If agencies don't want to procure from small companies, they will find other routes to buy what they need.

"There are all these unintended consequences that can pop up when you legislate these things piecemeal," he said.

Large companies that trade in relatively low-cost products and services, such as GSA Schedule 70 champ Dell Computer Corp., have the most to lose from the provision, critics said. Many or most individual purchases from such companies are well under $100,000.

Large companies would have to become more dependent than ever on small-business partners if Section 403 passes, said Ron Clevenger, vice president of government sales at MPC Computers LLC. He said he's not concerned about it, however.

"The way that our business model operates, it's friendly doing business directly through any number of contracts that we hold, as well as partnerships we have in the small-business community," he said. "The ability to enter into teaming agreements has made that process very simple and easy. You can enter into an agreement with another schedule holder and they can go sell products that we manufacture."

The key challenge for information technology companies is keeping up with changing rules, he added. "You certainly need to be plugged in and not take for granted that what you know today is applicable a year from now," he said. "For us, it's our life's blood. The federal business is our No. 1 market segment."

Small companies might prefer the proposed new rules, said Shiv Krishnan, president and chief executive officer of Indus Corp. in Vienna, Va. His interest is in Section 406.

A similar rule is already in effect, he said. Prime contractors can't get paid until they've paid their subcontractors. There is little power to enforce the rule, however, and some larger companies will bill the government as soon as they get the invoices from their subcontractors, paying the smaller firms only when they have money in hand.

"It looks like they put some teeth into it," he said.

***

Reading the fine print

Two sections of the Small Business authorization bill have raised concerns from vendors.

Section 403: For purchases between $2,500 and $100,000, agencies must make the purchase from a small business if two or more small businesses submit offers competitive in pricing and quality. The rule includes purchases from the General Services Administration schedules.

Section 406: Prime contractors are in material breach of contract if they do not pay subcontractors in a timely manner. Agencies may withhold payments from prime contractors in breach of contract.