SBA issues draft rules to curb bundling

The Small Business Administration has proposed regulations to slow agencies' practice of combining small, individual contracts into one large contract, a increasingly common strategy in the post-procurement reform era of large government contracts.

SBA announced last month that it wants to add its proposed regulations for contract bundling to rules outlined in the Small Business Reauthorization Act, which Congress passed in 1997. The act raised the percentage of small business participation in overall government procurement from 20 percent to 23 percent.

The regulations address the practice of combining several small contracts that have been awarded to small businesses into a single large contract. Although it can save agencies money and sometimes makes good business sense, SBA and other small-business advocates maintain that contract bundling often shuts out small businesses, which previously could manage one or two of the small contracts but do not have the capital and other resources to perform as the prime contractor on the larger contract.

Agencies are bundling and consolidating contracts at "exorbitant" rates, according to Craig Lynch, executive vice president of Productive Data Federal Solutions Inc., Denver, Colo. "Consolidation and bundling cripples the small-business community."

The proposed rules have broad implications for the government and the overall economy because they are key to the principle that government should foster the development and maturity of small business, Lynch said.

SBA's proposed rules define contract bundling and identify circumstances that might justify the practice, but they also stress that agencies should avoid bundling. The definition is significant, according to SBA spokesman D.J. Caulfield, because although the SBA has been collecting information on bundling for years, it has relied on a "we-know-it-when-we-see-it" approach.

"The question of whether it's bundling couldn't be determined because we didn't have a working definition," Caulfield said. "Now you can go ahead and see where you are going to cross the line."

SBA recognizes that contract requirements sometimes can be logically combined, especially when goods and services are similar, Caulfield said. "But if the only justification mentioned is because it makes it easier for contract officers...that's not going to be a sufficient explanation."

SBA's proposed regulations would make it easier for small companies to team up to go after a contract, Caulfield said. Companies would no longer risk being disqualified because their combined size makes them too big to be classified as a small business. If the individual companies are classified as small businesses going into the bidding process for a bundled contract, then they cannot be disqualified, Caulfield said.

But this proposed change would not affect the so-called 51 percent rule, which requires small businesses that team with a large business to underwrite 51 percent of the labor costs. The 51 percent rule is a pre-existing requirement that is not formally included in the proposed rules.

"Even though we will permit small businesses to form these teams, they still have a performance requirement," Caulfield said. "They should be aware of that, as a team, they still must underwrite 51 percent of the labor costs."

The proposed regulations also restate procedures by which SBA can appeal a bundling case that it feels adversely affect small businesses.

Under the proposal, procurement center representatives at each agency would play an expanded role in the appeal process. Contract authorities would have to tell the center about their agencies' acquisition strategy at least 30 days in advance if it involves combining contracts previously held by small businesses into contracts too big for the small businesses to pursue.

The procurement center representative could recommend the contract be broken into components for which small businesses could compete. SBA would retain the right to appeal to the head of the department or agency any disputes it loses.

Agencies would have to give each small business participating in contracts that are planned to be bundled 30 days' notice before the new solicitation is released. Contract authorities also would have to conduct market research to justify the move and explain how it would produce measurably substantial benefits, such as efficiency and better terms and conditions.

Despite SBA's efforts, some people in the small business procurement community feel the SBA should focus more on helping small businesses without making things more difficult for agencies.

"We are starting to see the SBA do some good things for small business to enable small businesses to compete, but they still seem to want to rely too much on forcing agencies to jump through hoops," said Phil Butler of Acquisition Solutions Inc.

The comment period lasts through March 15. The proposed regulations were developed with the Office of Federal Procurement Policy, which did not return calls requesting comment.