Industry wary of unbundling rule

Small firms want more teeth in new regulation<@VM>Government to grade contractors' small-business plans

"A lot of this [bundling] has been done for convenience purposes, but there are other economic and social purposes we are trying to pursue." ?  Rob Burton, acting administrator of OMB's Office of Federal Procurement Policy

J. Adam Fenster

Jim Cheng

A new procurement rule to protect small businesses from losing business from bundled contracts is getting mixed reviews in the first weeks after its release.

While small-business executives are hopeful the rule will create opportunities for them to bid as prime contractors, they question whether the rule is strong enough to effect the desired change.

"We're looking for teeth from the rule," said Jim Cheng, president and chief executive officer of Computer & Hi-tech Management Inc. in Virginia Beach, Va. "The rule calls for no unnecessary bundling, but these things are so easily argued both ways. If the government really wants to bundle, they can find a way."

Other executives said they worry the rule will hurt business by slowing acquisitions, because contracts will have to undergo more reviews.

The rule subjects governmentwide and multiple-award contracts, as well as task orders under those contracts, to review for unnecessary or unjustified bundling. It also calls on agency small-business specialists to identify alternate contracting strategies when an acquisition plan involves substantial bundling.

The final rule, published Oct. 20 in the Federal Register, implements recommendations in an October 2002 Office of Management and Budget report on contract bundling and increasing federal contracting opportunities for small businesses.

Bundling is the consolidation of two or more contracts for goods or services previously provided under separate, smaller contracts. Small-business executives say the requirements of bundled contracts often are too large and complex for their firms to handle.

"As a small company, we see bundling happen all the time. You may get an opportunity to subcontract, but it's very hard to grow because you usually get stuck with whatever the prime doesn't want to do," Cheng said.

[IMGCAP(2)]"Contract bundling reviews might help," he said. "When you're an incumbent, you're going to be afraid of it, but when you're out looking for business, it could help you."

The Small Business Administration estimated the rule will lead to the review of about $3 billion in orders against the General Services Administration's Federal Supply Schedules.

However, SBA officials could not estimate how much work might be unbundled because of the new reviews, because the government's data about its contracts is flawed, said Dean Koppel, SBA's assistant administrator for policy and research.

Still, SBA official Linda Williams is optimistic that the rule will help identify bundled contracts.

"We have no doubt we are going to find cases of bundling that have not been truly justified," said Linda Williams, associate administrator of policy planning and liaison at the SBA.

The rule "will help us identify opportunities where we can send more opportunities to small businesses by asking agencies to break up their requirements ... or through teaming and joint ventures and other procurement strategies," Williams said.

OMB officials especially want to see unbundling of contracts that combine dissimilar services, such as lawn services and missile building, said Rob Burton, acting administrator of OMB's Office of Federal Procurement Policy. He said small business participation on prime contracts has declined significantly over the last 10 years.

"We're not convinced one contractor can provide the best service and value for the taxpayer," Burton said. "A lot of this [bundling] has been done for convenience purposes, but there are other economic and social purposes we are trying to pursue."

Ed Naro, an executive at Northrop Grumman Information Technology, said he's worried that government customers and industry suppliers could both be hurt by the rule.

The schedules "provide the government customer with what they need at the speed of their need. That is going to be somewhat eroded by adding a review requirement which is going to be contestable," said Naro, vice president of GSA and indefinite delivery, indefinite quantity programs at the Herndon, Va.-based IT unit of Northrop Grumman Corp.

"Any two people may or may not agree that it is bundling," Naro said. "That is going to have to be resolved on almost every task order, which makes the schedules program less attractive if it slows down the procurement process. I worry about that as a potential pitfall, not just for Northrop Grumman, but for anybody, and for government customers particularly."

Staff Writer Gail Repsher Emery can be reached at
The government will monitor closely whether prime contractors are meeting goals to use small businesses as subcontractors, if a proposed procurement rule is approved.

Under the rule, published by the Small Business Administration Oct. 20 in the Federal Register, large prime contractors must devise subcontracting plans that use small businesses as much as possible.

"We are encouraging agencies to do a better job, to have more people to ensure that contractors are complying with their plans," said Linda Williams, associate administrator of policy planning and liaison at the SBA.

The proposed rule, which applies to prime contracts worth more than $500,000, or $1 million for construction of a public facility, provides detailed guidance on assessing contractors' efforts to fulfill their subcontracting plans.

It also puts increased emphasis on using fulfillment of subcontracting goals as part of a contractor's past performance evaluation. This means that contractors may have trouble winning new contracts without good evaluations.

According to the proposed rule, evidence of good-faith efforts to fulfill subcontracting plans includes:

  • Breaking out contract work items into units that small businesses can perform;

  • Conducting market research to identify small-business subcontractors and suppliers;

  • Soliciting small businesses as early in the acquisition process as practicable.

  • "We always hear about bait-and-switch from small businesses -- large companies include them as part of their contract proposals, but they never get any work. This rule will give prime contractors a better appreciation for how the government will evaluate their performance," Williams said.

    Some industry executives said they welcome the new emphasis.

    "Some companies really take it seriously and try to meet and exceed their subcontracting goals. Some companies put a plan in [the contract] but don't really try. If you are going to put it in the contract, I think it should be part of the performance evaluation criteria," said Esther Burgess, vice president of the governmentwide acquisition contract division at Fairfax, Va.-based STG Inc.

    Penalties for nonfulfillment of subcontracting plans already include termination for default or assessment of liquidated damages, but those penalties are rarely assessed, because it's difficult to assess good faith, Williams said. Linking fulfillment of subcontracting goals more closely to past performance assessments will do more to encourage prime contractors to improve their efforts, she said.

    "Companies know that in order to do future government business, they need to do a good job. We can use that as a way to weed them out without having to go through the courts," Williams said.

    Executives of large systems integration firms said they're not threatened by the rule. Firms that meet their goals could even benefit from it with future contract awards, said Ed Naro, vice president of General Services Administration and indefinite delivery, indefinite quantity programs at Herndon, Va.-based Northrop Grumman IT.

    Michael Bush, corporate director of supplier diversity at Bethesda, Md.-based Lockheed Martin Corp., said the company already expends considerable effort to give small businesses access to its procurement staff, and in many units holds procurement staff accountable for meeting small-business contracting goals.

    From October 2002 to August 2003, Lockheed Martin exceeded its goals, sending $4 billion in contracts to small businesses, $870 million to small disadvantaged businesses and $793 million to women-owned small businesses, Bush said.

    Comments on the proposed rule are due Dec. 19 via e-mail to or at

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