New steps in a difficult dance

Mention small-business contracting policy around Washington, D.C., and you will typically find strong opinions — anger or approval, but rarely ambivalence.

The Small Business Administration has proposed new guidelines for holding prime contractors to their small-business subcontracting plans, entertained the notion of annually certifying small businesses and pursued streamlined size standards. In addition, last October, SBA issued a final rule designed to limit contract bundling, the practice of lumping multiple requirements into one big contract.

SBA's actions are in a state of flux, with most of the policies — apart from the bundling rule — at different stages of the evaluation process. Still, industry executives have a lot to say about SBA's small-business plans.

Phillip Foote, executive vice president and chief operating officer of STG Inc., believes the new and proposed rules underscore a lack of understanding of small-business issues. At $170 million in earnings and 1,350 full-time employees, Foote's information technology and engineering services company has outgrown most small-business classifications.

"There's a thread that goes through all these things," Foote said. "The essential thread is that our administration...has failed to recognize that the definition of small has changed." He contends that SBA and the Bush administration are out of step with a consolidating market in which "the definition of small is anything south of half a billion" dollars.

On the other hand, William Teel, president and chief executive officer of 1 Source Consulting Inc., a Seabrook, Md.-based 8(a) firm, commends SBA and the Bush administration.

"Small business is really tied to the President's Management Agenda," he said. "This administration has made a firm and sincere commitment to small business, and it is really starting to pay off."

Although opinions are sharply divided, most parties agree that SBA's rules could significantly impact relationships between large integrators and small IT businesses.

Scrutiny for subcontracting plans

For years, subcontracts have been a springboard into the federal market for many small firms. SBA officials negotiate subcontracting goals with federal agencies in an effort to ensure that governmentwide goals are met. Prime contractors, accordingly, must reserve a certain portion of their subcontracting slots for small businesses and demonstrate their intentions by submitting small-

business subcontracting plans to the government.

When the system works well, small businesses gain access to bigger deals and the business development resources of larger integrators. But industry executives report that some prime contractors fail to live up to their plans, leaving small businesses out in the cold.

"There's little to no oversight to ensure [that] what was

procurement-mandated in terms of dollars to small business is contractually obligated," Teel said.

Foote agreed that subcontracting plans are not policed well, noting that small businesses may end up with little work. "In my opinion, it is just terrible the way [a plan] is monitored," he said.

In the civilian sector, SBA monitors contractor compliance, while the Defense Contract Management Agency handles that task for the Defense Department. A 2001 General Accounting Office report suggested that the process could be improved, noting that SBA conducted on-site audits for 15 percent of the contractors with subcontracting plans. About half of the contractors were subjected to less-comprehensive "desk reviews," according to the report.

SBA officials hope to rectify the situation with a proposed rule that provides guidelines for determining whether prime contractors are delivering on their subcontracting plans. Evidence of a good-faith effort to comply includes partitioning projects into smaller units to facilitate small-business involvement, identifying small-business subcontractors through market research and involving small firms in the early stages of a business opportunity.

On the subject of market research, SBA officials point to vehicles such as its Subcontracting Network Web service, where prime contractors can post subcontracting opportunities. Early involvement in the acquisition cycle, SBA officials reason, will give small businesses sufficient time to submit a timely offer for the subcontract.

Some small businesses welcome the increased scrutiny of subcontracting plans, while others continue to question how easy they will be to enforce.

Linda Allan, executive vice president of strategic programs at NCI Information Systems Inc., said she believes resource-strapped contracting offices will have a hard time auditing subcontracting plans and may employ liquidated damages clauses as a stick-to-the-plan incentive. In that situation, the financial penalty equals the sum by which the prime contractor failed to meet the subcontracting goal.

"You are going to see that liquidated damages clause probably be included in more rather than fewer" requests for proposals, Allan said. Agency contracting shops, she added, "are going to try to use that clause to get people to pay attention."

However, Foote said such clauses will hamper the negotiation process between prime contractors and subcontractors, making it more difficult for them to develop partnerships. "Poison isn't the answer," he said.

Instead, he believes past performance would be a better enforcement mechanism. "I'd like to see part of past performance be references from subcontractors," Foote said. He believes having half of a prime contractor's past-performance credit come from subcontractor references could make a difference in how small businesses are treated.

SBA's proposed rule on subcontracting plans does include a proposal to let contracting officers use subcontracting plans as an evaluation factor in awarding work under Federal Supply Service contracts and governmentwide acquisition contracts, as well as other multiple-award contracts. Contracting officers would also be allowed to consider "the contractor's past performance in meeting its goals on previous contracts," according to the proposed rule.

Barry Meltz, acting associate administrator of SBA's Office of Policy, Planning and Liaison, said public comments are being reviewed on the proposed rule. "We expect to publish a final rule in the near future," he said.

Defining small businesses

SBA officials also are mulling rules for small-business size standards. Specifically, they are seeking to reduce the current glut of 37 standards to 10. The standards would operate on a single principle: Small businesses would be defined by the number of people they employ. Today, SBA uses both head count and revenue as criteria.

Some executives see the employee-based standards as an improvement over the existing model. They cite size standards that have grown little during the past two decades, despite the industry's growth and the increased dollar value of individual contracts.

"The definition of size standards based on dollars has not kept pace with reality," Allan said. The employee count, on the other hand, would give "primes a lot more freedom and flexibility...for putting together a small-business subcontracting plan."

But even here opinions differ. Some observers say adopting standards based on staff size is not enough. Foote believes SBA needs to broaden employee-based size categories so that a small business could be defined as one with 5,000 or fewer employees. Currently, SBA's small-business categories top out at 1,500 employees. Foote said a small business crossing the 1,500 threshold is still relatively tiny but now must compete head on with top-tier government contractors."We need to see that 1,500 bar raised," Foote said.

Still others have concerns about basing standards on head counts alone. Ernst Volgenau, chairman and chief executive officer of SRA International Inc., said he sees value in having a more unified set of size standards because he believes using a single criterion for defining a small business may be insufficient.

A product reseller, for example, may generate more revenue per employee than a services company, he said. So a reseller and a services provider could conceivably have the same number of employees but dramatically different revenues. Similarly, a high-end integrator may generate higher revenue per employee than a low-end service provider.

"Those categories of small businesses...need to be thought out carefully," Volgenau said.

Industry views on SBA's proposed annual certification plan also vary. Today, a firm awarded a contract set aside for small businesses can continue working on that contract even after it grows out of its small-business bracket. But if such firms are recertified annually, they might be compelled to drop out of contracts in midstream.

Industry leaders in one camp believe the rule would be highly disruptive. "From a pure business sense, it's very impractical," Allan said. "You've spent the money to compete...and for somebody to take [the contract] away in midstream — when you are trying to plan a strategic direction around it — makes no sense to me." She said such disruptions could also affect small businesses' relationships with banks.

Ken Guest, senior vice president of business development and strategic planning at Anteon Corp., said the annual certification would create "a big-time workload for small businesses" that have infrastructure limitations in the first place.

Other executives, however, believe annual certification will preserve set-asides for only the companies that are truly small businesses. Michael Beckley, co-founder of Appian Corp., said annual recertification would close a loophole and ensure that agencies are "dealing with a small business and not a shell entity" that has merged into a larger company.

Appian itself is making the transition from small-business status. "In another year or two, we will no longer be a small business, and it will be a challenging step for us," Beckley said. "But that's the whole point of this. Eventually you have to graduate."

Meltz said SBA officials are preparing the final rule on certification after having solicited industry comment. As for the restructured size standards, he said SBA is "still waiting for [the Office of Management and Budget's] approval to publish the proposed rule."

Meanwhile, the House version of the SBA reauthorization bill (H.R. 2802) calls for recertification no more frequently than every five years. The bill is scheduled to come up for consideration this month. Murray Schooner, director of supplier diversity for Unisys Corp., said that two-year and three-year recertification spans have also been suggested as possibilities.

A bundle of trouble

Meanwhile, a rule on contract bundling is already on the books. Last October, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council published the rule in the Federal Register. SBA simultaneously updated its regulations.

The rule aims to curb the practice of consolidating smaller contracts into larger vehicles that may be beyond the reach of small businesses. The regulation calls for agencies to provide justification for cases in which bundling is deemed necessary. Contracts above a certain dollar threshold — $7 million for DOD, $5 million for NASA and the Energy Department, and $2 million for other agencies — are subject to the bundling review.

The Senate version of the SBA reauthorization bill (S. 1375), which passed last year, also contains language that limits contract consolidation. That legislation includes additional requirements for "higher-value consolidated contracts."

For example, a DOD agency with a procurement strategy involving a consolidated contract valued in excess of $7 million would have to, among other things, assess barriers to small-

business participation and take action to promote small businesses as both prime contractors and subcontractors. The fate of that language depends on the passage of the House version of the SBA reauthorization bill and the subsequent negotiations to square it with the Senate version.

As for the SBA rule, industry executives say it hasn't been around long enough to have a measurable effect on bundling. But some doubt it will ever have much of an impact.

Schooner called bundling "very hard to control" because the government doesn't have enough procurement people to oversee all the contracts. "I don't think the federal government workforce is big enough to unbundle," he said.

"We continue to see an increase in effort by government agencies to consolidate contracts," Appian's Beckley said. But he believes the key driver is a desire to mitigate risks, not a lack of procurement employees. Agency officials, he said, want to push the risk of technically complex undertakings to a single party managing a single contract.

If contract bundling is inevitable, small businesses will become more dependent on large integrators. And that situation will make SBA's pending regulations, particularly those involving small-business subcontracting plans, all the more critical, he said.

Schooner cited the need for enforcement and incentives to make sure prime contractors stick to their small-business commitments. The latest round of SBA regulations is one more attempt to make that happen.

Moore is a freelance writer based in Syracuse, N.Y.

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