Policy change would help small businesses

White House proposes annual recertification<@VM>Big win by RSIS raises eyebrows

Angela Styles, administrator of the Office of Federal Procurement Policy

The White House has proposed a far-reaching policy change that would require small businesses to recertify annually their eligibility for some contracts reserved for small business.

The move would prevent fast-growing companies from competing for small-business contracts after they have outgrown the program's size restrictions.

Angela Styles, administrator of the Office of Federal Procurement Policy, announced the change in letters sent the week of Feb. 10 to the four federal agencies holding governmentwide acquisition contracts.

Styles told the Commerce Department, General Services Administration, National Institutes of Health and NASA that they must require GWAC vendors to recertify their size and type of business annually, such as small disadvantaged business or woman-owned business.

Agencies must add the recertification clause to their contracts by April 1, or OFPP will not renew their executive GWAC designation, which lets other agencies use the vehicles, Styles said.

At the same time, OFPP is pursuing a change to the Small Business Administration regulations and the Federal Acquisition Regulations to require annual recertification for all multiple-award contracts, including Federal Supply Service schedules, Styles said.

After annual recertification, vendors that have exceeded the small-business size standard will not be able to compete for new set asides offered on multiple-award contracts. However, they will be able to continue work on jobs they've already won.

"Accuracy requires us to look at this annually," Styles said. "This may take more work, but you can't have a system that people believe in or hold accountable unless someone that is designated a small business is a small business."

Right now, small businesses are not required to recertify their status after winning a multiple-award contract. Consequently, a small business would be eligible to win small-business set-aside contracts -- for up to 20 years in the case of a GSA schedule contract, which has a five-year base and three five-year options -- regardless of how much that business grew during the life of the contract.

This policy has prompted complaints to OFPP, the Small Business Administration and members of Congress from some executives of small IT businesses, who said the practice is unfair and is pushing them out of the federal marketplace.

Regarding OFPP's actions, SBA officials "are supportive of any effort to maintain the integrity of small business programs and small business certification," said Gary Jackson, SBA assistant administrator for size standards.

OFPP officials decided to take action six or eight weeks ago after hearing about repeated problems with long-term contracts, Styles said. Its actions are among several efforts in recent months to close a contracting loophole that allows companies to win small-business set-aside contracts for years after they have exceeded the size standard, which varies according to the type of work performed.

OFPP's move also was prompted in part by the Energy Department's five-year, $409 million task order award in January to RS Information Systems Inc. of McLean, Va. The award was made through the Commerce Department's Commerce Information Technology Solutions GWAC, a vehicle set aside for small businesses.

To qualify for the COMMITS vehicle in 1999, bidders could not exceed $18 million in average annual receipts for three preceding fiscal years. But by 2003, some had grown substantially larger. RSIS, for example, has $195 million in annual revenue and 1,350 employees.

Neither the Energy Department nor RSIS did anything wrong in the contract process, but the result was troubling, Styles said. Some small business owners agreed with her.

"No regulations have been violated. The problem is that it is a huge loophole, and they have circumvented the intent of the law. If [the Energy Department] wanted to award to a small business, they should have awarded to a small business," said the manager of a small, Washington-area IT business, who did not want to be identified because the company is pursuing other work with the Energy Department.

SBA officials also have crafted a proposed rule that would clarify when small businesses must recertify their status. The rule is in the final stage of SBA review, and it could be sent to the Office of Management and Budget for review as early as next month, Jackson said.

"We will propose an approach we feel is appropriate," Jackson said. "We are anxious to get feedback from agencies and small businesses."

GSA was the first to take action, in October issuing a class deviation to the Federal Acquisition Regulation that would require recertification every five years on its multiple-award contracts. This regulation change would supersede GSA's internal policy change, Styles said.

Styles' letters and the forthcoming rule change could help many small businesses, said Valerie Perlowitz, president and chief executive officer of Reliable Integration Services Inc., a woman-owned small business in Dunn Loring, Va.

"This is a step in the right direction," she said. "COMMITS was the first small-business-only vehicle, and it helped a lot of companies be successful. But once they have achieved success, [companies] should not be eligible for new contract awards. New vendors can move into their spot. It is in the best interest of the government and what they are doing to encourage small business success."

Indeed, Bush administration officials have taken several steps to boost small businesses. The president's small-business agenda calls for myriad measures to help, including a review of contracting procedures to ensure small businesses can compete in the federal marketplace.

But the rule change, rather than helping small businesses, could cause agencies to shy away from GWACs, said Chip Mather, co-founder of Acquisition Solutions Inc. in Oakton, Va. The company consults with government agencies on contracting practices.

Mather, whose firm helped the Commerce Department design the COMMITS vehicle, said agency officials won't want to hold annual competitions to replace small businesses on multiple-award contracts as they graduate. Mather said he supports the intent of Style's proposal, but thinks more discussion is needed about how often recertification should occur.

One agency's small-business director voiced similar caution.

"Program managers and contracting officers may be reluctant to set aside acquisitions for fear that the small firm may become large within two or three years, which means they will have to go through the process of awarding another contract before the normal five-year cycle," said the official, who requested anonymity. "Given the limited resources, federal officials may prefer full and open competition instead of set asides."

Five years should be sufficient time to recertify; otherwise, companies will be penalized too soon after they've become successful, the official said.

Rodney Hunt, president and CEO of RSIS, winner of the Energy Department task order, agreed. He said annual recertification would punish small businesses for their success. Recertification after five or 10 years would be more appropriate, he said.

"That is a good amount of time to allow growth and establish an infrastructure and base to continue on," said Hunt, who added that he'd really like to see contract extensions based on vendor performance.

"Nowhere is there a discussion of if you perform well, and if you are able to satisfy your customer, you should receive an extra year or two," he said. "I would rather see emphasis on meeting and exceeding performance goals to reward business vs. saying we are only going to give you a certain number of years because you were successful."

Twenty-three percent of federal prime contract dollars are supposed to go to small businesses each year. Current practice means agencies are counting contracts toward their small-business goals when the awardees are not small, Styles said.

"I think this change will help agencies and small business," she said. "We need to have a system and numbers that we can rely on. If we are saying we are awarding 23 percent to small business, but we are not, we need to know that. We need to make changes to the system so we have reliable numbers and meet our goals. A lot of agencies want to award to small businesses and go to vehicles such as COMMITS for that reason." *

Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com. Jason Miller can be reached at jmiller@postnewsweektech.com.
RS Information Systems Inc.'s Jan. 15 award from the Energy Department illustrates the pros and cons of multiple-award contracting practices that allow businesses to qualify for small-business set-asides even after they have grown large.

All of the finalists -- RSIS, QSS Group Inc., ITS Services Inc. and STG Inc. -- have annual revenue ranging from $31 million to $195 million. Although the four companies had grown significantly since qualifying in 1999 for the Commerce Information Technology Solutions governmentwide acquisition contract, a five-year vehicle set aside for small businesses, they were allowed to go after the Energy Department deal.

Under government rules, once a company has won a place on a GWAC as a small business, it retains its status as a small business throughout the life of the contract, regardless of how large it grows.

Under the $409 million Information Technology Integrator Support Services task order, McLean, Va.-based RSIS and its team members will handle IT and telecommunications support, cybersecurity and enterprise architecture.

Executives of some small IT firms complained, even before the job was awarded, that it wouldn't go to a small business, because smaller companies don't have the capabilities or resources to compete with large companies. When the task order was awarded, some took offense that Energy Secretary Spencer Abraham said making opportunities available to small business is one of his priorities.

"Saying this is a boon to small business is an affront to the entire small-business community in Washington," said a manager of a small, Washington-area small IT firm, who did not want to be identified because the company is pursuing other work with the Energy Department.

But under the contract rules, the Energy Department did award to a small business, said agency spokeswoman Corry Schiermeyer.

"The company is considered a small business," she said. "Our goal is to have the most qualified people doing the work."

The award will count toward the agency's goal of sending 3.7 percent of its annual budget of $18 billion to $19 billion to small businesses, Schiermeyer said.

Some observers said the RSIS award is proof that the COMMITS vehicle does what it was designed to do: provide good IT contracting opportunities for small businesses and allow them to grow large over a five-year period.

"Vendors are becoming big during this five-year period, but it's not necessarily giving them the leverage they need to compete against larger businesses," said Tina Burnette, COMMITS program manager. "The five-year performance period allows them to become more competitive by establishing their performance record in the industry, thereby increasing their opportunity for success."

While Rodney Hunt, RSIS president and chief executive officer, stresses his firm will still qualify for small-business set-asides in two categories of IT work until year's end, he acknowledged his firm has grown well beyond the threshold set for entry onto the COMMITS vehicle, which was $18 million or less in annual revenue.

But rather than complaining, Hunt said his smaller competitors should emulate his business practices.

"The whole objective [of small-business programs] is to assist emerging small businesses in becoming viable, competitive businesses for the long term," he said. "A small business should not be angry. They should say [RSIS is] an example of what can be accomplished with a lot of hard work and self-marketing and quality customer service."

Hunt said RSIS is providing opportunities for small businesses under the Energy Department task order. RSIS will perform 50 percent to 55 percent of the work. Its four large-business subcontractors will share 30 percent of the work, and its 10 small-business subcontractors will share the remaining 15 percent to 20 percent of the work.

"Out of $409 million, 15 percent for other small businesses is roughly $61 million -- not bad over five years," he said. "This, together with the fact that a small business [RSIS] is responsible for the successful execution of the overall program, means significant opportunities for small business as a whole." *

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