Market Watch: Don't squeeze mid-sized contractors out of market

Jerry Grossman

Competitive stress on mid-sized federal contractors has risen in recent years. Contract bundling is increasing the size prime contractors need to be; at the same time, the administration is pushing for more contract awards to small and disadvantaged businesses.

These trends often don't benefit either government or citizens, however laudable the forces or goals driving them. But the natural factors behind these trends are difficult to fix, given government business practices and staffing realities.

Contract bundling¸ for example, is a function of the mandates of modern government. Today's more complex information technology systems require contractors with greater technical knowledge and project management. The larger companies, more often, have the technical bandwidth and experience to manage these projects. In addition, they possess the financial capacity to mobilize resources and fund unforeseen remedial actions.

Coincident with these trends, the ranks of federal procurement officials have been shrinking. It's extremely difficult to recruit and retain technical people who have the knowledge to oversee large federal technology implementations. Federal officials have found some relief in outsourcing to large prime contractors, a process successfully executed by large entities in the private sector.

Contracts that are being awarded away from mid-sized contractors to small businesses continue to reflect the long-standing commitment of the federal government to the small-business community. Many agencies recently have increased set-aside goals, ostensibly to fix the "underperformance" of agencies relative to the small-business target of 23 percent of prime contracts.

A recent report, called Scorecard IV, by the House Small Business Committee Democratic staff, noted that governmentwide, small-business achievement last year was 22.6 percent. Translated, small business "lost" $900 million while it won approximately $53.1 billion. Hardly seems like a loss.

Very few industry people quibble with the concept of support for small business. Most of today's mid-sized companies began as small businesses. However, most believe that the targets are substantial enough in dollar terms, and that small-business programs need other refinements.

For example, smaller companies need mentoring to grow successfully. Accordingly, subcontract dollars should be counted where mentoring is a natural byproduct of the contract.

To work best, procurements should give active consideration to four factors:

  • The contractor's domain expertise -- knowledge and experience -- with the government agency and the environment in which the service or product will be delivered;

  • The contractor's functional and subject- matter expertise;

  • The criticality of the deliverable, including the risk to the government of failed delivery or underperformance;

  • Value of the proposed work or solution, its features and benefits, balanced against cost.

Agencies must be mindful of these selection factors to avoid removing contracts from mid-sized companies and giving them to inexperienced small businesses that have insufficient qualifications to perform to standard.

Often, mid-sized contractors have spent years building domain and subject-matter expertise, and are performing very well for the government and its constituents. Setting aside contracts in these circumstances benefits no one: not the government, not the citizens, and clearly not the small business put in a position to fail to perform to the required standard.

Most public companies in the government IT sector are mid-sized. Their ability to achieve meaningful organic growth is a function of how the set-aside program is managed. It is important to the government and industry contractors that a healthy public market and investment environment be sustained within a solid procurement context. *

Jerry Grossman is managing director at Houlihan Lokey Howard & Zukin in McLean, Va. He can be reached at

About the Author

Jerry Grossman is managing director at Houlihan Lokey Howard and Zukin.

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