Bundling Increases Sub-Opportunities

April 13, 2006

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Another factor that has increased subcontracting opportunities, while at the same time decreasing prime contracting opportunities, for small businesses is the recent (and controversial) trend by federal agencies of combining or bundling small contracts for different activities or requirements into large contract packages.

The government maintains that combining several smaller projects under one large umbrella contract is more efficient than managing several smaller contracts, allowing it to leverage its purchasing power to its advantage and to reduce its operating costs.

However, the umbrella contracts are too large for small and mid-size companies to realistically handle and often require project management capability that they usually don't have. The upshot is that thousands of small businesses have lost federal contracts in recent years because government agencies bundled contracts into large packages that were awarded to big businesses.

But there is a silver lining in all of this: Many big companies that get these awards are managers, not doers, and therefore must find capable subcontractors to help get the work done.

There is another boon to prospective small business subs. Under new SBA guidelines, if a bundled contract is seen as a necessity by the buying agency, the agency must establish a significant evaluation factor that will allow, to the maximum extent possible, subcontracting by small businesses. Part of this may include evaluating the prime contractor's past efforts in providing small firms with the chance to subcontract.

Effects of bundling. The Small Business Reauthorization Act of 1997 stated that federal agencies are allowed to bundle contracts only to achieve "measurably substantial benefits" in terms of cost, shorter acquisition cycles, or better terms and conditions, among other benefits. Congress and the SBA, which have been tracking the increased use of this trend, have been concerned that if left unchecked the trend could lead to a decrease in prime federal contracting with small and mid-size businesses, which, according to 1998 statistics, averages about $40 billion per year of the $180 billion total.

Recently, the SBA has issued new rules that prohibit government buying agencies from combining contracts unless it is necessary and they can document "measurably substantial benefits" from doing so. In a move that may enable small businesses to compete for big umbrella contracts that, to date, only big companies could handle, the SBA also has established guidelines for small businesses that want to create joint ventures to go after bundled contracts. Under the former rules, small businesses banding together were sometimes disqualified because the resulting new employee count or combined revenues would exceed SBA's definition of a small business. However, the new SBA guidelines provide that, if the firms are small before they enter the arrangement, a joint venture won't change that status.

According to a study released by Congress, the number of federal contracts issued to small businesses fell 23 percent from 1997 to 1999. At the same time, however, the SBA says that the federal government met its goal of awarding small businesses 23 percent of its total contract dollars in 1998 and 1999. But because of bundling, fewer small businesses receive these contracts. The number of federal contractors dropped from 83,915 in 1992 to 70,755 in 1998, according to a study by Eagle Eye Publishers Inc. of Fairfax, Va.