Free Small Companies From Contract Bundling

Marc J. Lane

bundling," the discriminatory practice of combining several federal projects into one large package that is almost inevitably awarded to big business
Small business has been systematically cheated out of its fair share of federal government contracts.

The culprit is "bundling," the discriminatory practice of combining several federal projects into one large package that is almost inevitably awarded to big business. By consolidating contracts, government agencies deny small business the right to participate: The sheer size, complexity and capital to support large, multifunctional contracts are beyond the grasp of most smaller businesses.

Agency procurement officers argue that pooling carpentry, electrical and plumbing services, for instance, saves taxpayer money and efficiently shortcuts the process. But, just as surely, it shortchanges small business.

Contract bundling displaces entrepreneurial prime contractors and discourages competition. It also sabotages a congressionally mandated goal that 23% or more of the nearly $200 billion spent each year by the federal government on goods and services go to small businesses.

And some small business advocates insist that bundling actually inflates costs. Because fewer companies can compete for bundled contracts, those that remain may well drive prices up.

Worse still, quality suffers when small contractors that could do more for less are shut out. However smart they are and however hard they work, local caterers simply won't be awarded food-service contracts if they're forced to supply multistate regions, and not just, say, individual military bases. Nor can small, specialized travel agencies win huge bundled contracts to sell both business and leisure travel services to military personnel.

The pace of consolidation is accelerating, and contracts are growing bigger than ever.

According to a study released recently by the U.S. Small Business Administration's Office of Advocacy, the average bundled contract was valued at $8 million in the federal government's 1999 fiscal year, representing a 21% increase in the value of the average contract awarded over the previous eight years. And, in fiscal 1999, small firms received only 15% of bundled contract dollars and 19% of prime contract dollars, more than four percentage points short of the federal goal.

But relief is in sight.

Last July, the SBA issued final regulations intended to remove barriers faced by small businesses that pursue prime contracts. Before federal agencies can bundle, they're now put to the task of establishing that real savings will result, savings of at least 10% for most contracts. The benchmark is set to prevent expediency from trumping efficiency.

But the SBA still can't block a single bundled contract. Even if significant savings aren't in the offing, all an agency needs to claim is that a contract is necessary in the pursuit of its public mission, and it can flout the regulations and proceed to bundle.

The SBA's initiative obviously didn't go far enough, but a new federal law keeps small businesses in the running for federal contracts. It directs the SBA to maintain a database of bundled contracts, to keep track of exactly how many small businesses are displaced as prime contractors and to see if bundled contracts actually save money. The law also instructs the SBA's administrator to report annually to the House and the Senate on bundled contracts and their impact on small business.

It's clear that preserving and increasing contracting opportunities for smaller businesses while achieving greater efficiency in government operations is a tricky balancing act. The next logical step is for federal law to impose tough and unequivocal limits on contract bundling.

At a minimum, the bundling approval process needs to be tightened and bundling altogether outlawed in any agency that fails to meet its annual small business procurement goal.

About the Author

Marc Lane is a business and tax attorney, a Master Registered Financial Planner, a Registered Financial Consultant, and a Certified Investment Specialist. Marc is the author of 30 books on business organization, taxation, and personal finance. His newest book, "Advising Entrepreneurs: Dynamic Strategies for Financial Growth" draws from his experience working with those who have successfully built their businesses. Marc is an Adjunct Professor of Law at Northwestern University and an Adjunct Professor of Business at the University of Illinois. His practice areas include Individual Taxation, Corporate Tax Planning, Business Tax Planning, Estate Planning, Investments, Retirement Planning,Elder Law, International Trade, Business Law, and Wills, Trusts and Estates. Additional articles, case studies, and a free email newsletter are available at www.marcjlane.com.