Contract unbundling plan causes optimism, concern

New administration strategy seeks to help small businesses

Every small business has been affected by contract bundling, says Doug Wagoner, vice president and general manager of Data Systems Analysts Inc.

Olivier Douliery

The Bush administration's new plan to help small businesses by unbundling large federal contracts is generating cautious optimism among small players, but it is uncertain how the proposal will affect large contractors.

Administration officials, led by Mitchell Daniels, director of the Office of Management and Budget, released the strategy Oct. 30. It calls for unbundling large federal contracts where possible and, when bundling is justified, for agencies to strengthen subcontracting goals for small businesses.

Contract bundling is the practice of consolidating procurements for goods or services in a single contract. In recent years, government agencies have bundled contracts to simplify the buying process and facilitate large-scale information technology projects, where the government wants a single contractor to be in charge and accountable for the results. Because smaller companies typically do not have the resources or size to bid on large integration projects, the bundling of contracts tends to limit their prime contracting opportunities.

There is some concern among large contractors that, under the administration's new policy, contracts will get broken up at renewal, said Jim Kane, president and chief executive of Federal Sources Inc., a McLean, Va., information technology market research firm. Small businesses will probably win more contracts, he said.

In response to the new policy, "some [large] companies will probably take a much more defensive approach," Kane said. "Others will say, 'How do we capitalize on this? Do we need to make business relationships with smaller companies and make this a win-win situation?'"

The number of small businesses receiving federal contracts has declined dramatically, from a high of 26,506 in fiscal 1991 to a low of 11,651 in fiscal 2000, according to the administration's strategy report. According to a recent report prepared for the Small Business Administration by Eagle Eye Publishers Inc. of Fairfax, Va., fiscal 1992 and fiscal 2001, federal agencies reported 1.24 million prime contracts worth $1.89 trillion. Of those contracts, 8.6 percent were bundled, accounting for $840.3 billion, or 44.5 percent of prime contract dollars over that period. Small firms won 13 percent of the bundled prime contract dollars.

"I think every small business has been affected by contract bundling," said Doug Wagoner, vice president and general manager of Data Systems Analysts Inc., a small IT company with headquarters in Pennsauken, N.J. "There are 50 percent fewer small businesses getting contracts."

Mid-size companies have been affected as well, said Louis Ray, president of Matcom International Corp., an IT firm in Alexandria, Va. The company has about 625 employees and annual revenue of about $70 million.

"Some of the bundles get so big, anybody who isn't immense can't compete for them," he said. "I believe the answer is to improve the subcontracting process. ... Unbundling is a great idea, but I don't think you can unbundle everything."

Wagoner agreed. Bundling has been done with the best of intentions, he said. With the strategy, "I think they tried to keep the efficiencies of bundling in place, while trying to encourage more opportunities for small businesses," said Wagoner, whose company employs 150 and earns less than $25 million in revenue annually.

The plan calls for increased agency reviews for unjustified contract bundling. To mitigate the effects of bundling on small businesses, it requires agencies to use contractor compliance with subcontracting plans as an evaluation factor for future contract awards and encourages the development of teams of small businesses to compete for bundled contracts. The Office of Management and Budget will require quarterly reports on agency efforts to address contract bundling issues, said Angela Styles, administrator of the Office of Federal Procurement Policy at OMB.

Agencies are supposed to award 23 percent of their prime contracts annually to small businesses; prime contractors on procurements of $500,000 or more for products or services are required to prepare plans for subcontracting with small businesses.

"If we can get agencies to pay close attention in areas where they have justified bundling, through better compliance with subcontracting plans, and with some additional reviews [of bundling], that will drive more small businesses work," said Linda Williams, associate administrator for government contracting at SBA.

Williams said SBA could not project how many contracts might be unbundled at renewal or how much more work might be awarded to small businesses as a result of less bundling in the future.

Large IT systems integrators said the strategy won't change what they're already doing: providing subcontracting opportunities to small businesses as required by the agencies they work for.

"The bottom line is that we need to ensure agencies implement the set-aside requirements that are in the laws. If they set aside enough for small businesses, then Unisys has no problem subcontracting to those small businesses. We commit beyond the [small-business] minimums in our contracts," said Lee Cooper, vice president and general manager of sales for the U.S. federal group of Blue Bell, Pa., Unisys Corp.

Meghan Mariman, spokeswoman for Lockheed Martin Corp., Bethesda, Md., said the firm is working to increase small business participation in its contracts by identifying subcontracting opportunities and firms that can perform the work.

Industry analysts view the administration's new policy as balancing two competing goals: helping small businesses win federal contracts and making government operations more efficient and cost effective.

Bundling really makes sense in performance-based contracting in which the vendor is paid according to the success of the project, said Chip Mather, co-founder of Acquisition Solutions Inc., a Chantilly, Va., firm that provides procurement consulting services to government agencies and some commercial clients.

"You want to bundle similar services so the contractor has more control over the outcome. If you separate telecommunications from computers, you'll have finger pointing later about who is responsible for the system being down," Mather said.

Bundling is also necessary for many federal e-government initiatives, such as the integration and consolidation of human resources and payroll systems, Kane said.

The administration's strategy, Mather said, is really about identifying and eliminating inappropriate bundling.

Stan Soloway, president of the Professional Services Council, said the administration's strategy seems practical.

"By and large, the message seems to be, 'We need better enforcement and utilization of existing policies.' That was one of our major recommendations all along. We don't have a need for more laws and regulations," he said. PSC of Arlington, Va., represents technical and professional services companies serving the government.

Larry Allen, executive vice president of the Coalition for Government Procurement, said he thought industry groups and at least one more government agency, the General Services Administration, should have been involved in the strategy formulation.

"OMB went forward with its plans thinking of small businesses only as monolithic entity -- taking into account only the people who were complaining, not the ones too busy conducting small business," Allen said. The Washington-based coalition represents Federal Supply Schedule contractors.

The interagency task force that developed the strategy was led by the Office of Federal Procurement Policy and included SBA and the Department of Defense, Williams said.

Joan Kraft, a small business owner, said she is cautiously optimistic that the strategy will help her win more federal work. Kraft recently retired after 20 years with the Navy and started Beacon Partnerships Inc. in Alexandria, Va., providing consulting on the Federal Activities Inventory Reform Act to federal agencies.

"It's all the right words. I'm not sure exactly how it's going to affect me," she said.

Tony Mathews is also taking a wait-and-see approach. Mathews owns a small GSA consulting business in Gaithersburg, Md., and manages the GSA Council for the Computing Technology Industry Association, which is based in Oakbrook Terrace, Ill.

"I think it's a win for the small business community, but we are going to have to see what happens," he said. "Oftentimes, prime contractors reserve the low-margin business on prime contracts for their subcontractors. In many cases, a small business guy gets revenue but very little profit from that. Unbundling may not necessarily fix that." *

Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com

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