News Column

A Contracting Conundrum

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Ron Utt

Bundling results in cost savings and improved service. Most consolidated contracts end up being broken up anyway.
// By Ron Utt

At all levels of government throughout the United States, as well as in other countries, competitive contracting is maximizing market forces and enabling the public sector to lower taxpayer costs while improving services.

One way to do that is through the "bundling" of government contracts. This allows a government agency to combine several small projects into a single large contract.

Doing so saves money, because the agency has to approve only one contract, instead of many. It's also an efficient way to lower government operating costs.

Unfortunately, the Bush administration and members of Congress are trying to crack down on bundling, claiming it can hurt small businesses.

It is true that bundling reduces the number of small businesses that get government contracts directly.

However, most bundled contracts are eventually broken up anyway. In such cases, the company that wins the contract divides up the duties and subcontracts them out. Small businesses can bid on these individual subcontracts and continue their work for the government.

This is an excellent way of using the competitive marketplace to achieve cost savings and improve service. Since the contract is likely to be broken down into subcontracts, the various subcontractors will be answering to a private contractor, not a government agency. The contractor will do everything necessary to make sure the work is finished on time and on budget. That helps avoid the cost overruns that can plague work done by government agencies.

In addition, bundling eliminates a layer of bureaucracy. Instead of reviewing half a dozen small contracts, agencies can issue just a single larger one. Plus, over the life of the agreement, they have to supervise only one contract instead of many.

Many of the largest government contracts today use bundling, including some awarded by the Defense Department. Under rules proposed by the Bush administration, Defense Department acquisitions of $7 million or more would have to be reviewed to determine if the requirements could be unbundled.

Again, doing so might seem to provide a short-term gain by allowing small businesses to bid on the unbundled contracts. However, it would also force the government to pay more in administrative costs and other overhead than it would pay for the single, bundled one.

A bundled contract is a way for the government to "buy in bulk." In much the same way that a shopper can save by purchasing a super-size box of laundry detergent rather than several smaller boxes, the government can save by allotting one large contract rather than several small ones. And the contractor, not a federal agency, then assumes responsibility for the oversight of subcontractors.

Small businesses are critical to the financial future of the United States. They should continue to get their fair share of government contracts.

But bundling government contracts won't stop that from happening. Small businesses will still get their contracts, and we'll all save money in the long run. That's an outcome that everyone especially taxpayers can benefit from.

Ron Utt is a senior research fellow for the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Grace Napolitano

Contract bundling succeeds only in excluding small businesses from the federal procurement marketplace.
// By Grace Napolitano

Small businesses are generally regarded as the backbone of the U.S. economy. They produce 75 percent of all new jobs, employ 53 percent of the private-sector workforce, and generate more than half of our nation's GDP.

Hispanic-owned small businesses in particular have made tremendous strides in the last decade, rising to become the second-fastest-growing segment of the U.S. small-business community. There are now more than 1.2 million Hispanic small firms in the United States.

Unfortunately, the federal government continues to overlook the importance of these smaller enterprises and the extent to which many depend on federal contracts for their economic well-being.

Contract bundling is an insidious and pervasive practice whereby federal agencies combine smaller contracts into a single contract that is too large for small businesses to bid on, in effect preventing such firms from competing.

As the single largest purchaser of goods and services in the world, the U.S. government has a unique opportunity to help small businesses grow by ensuring that the contract process is both open and fair. But the Small Business Committee Democrats' annual scorecard report (see "Fourth-Year Flunk-Out," The Informant, July/August) dramatically shows that for the past four years federal agencies have failed to meet congressionally mandated contracting goals, largely because of contract bundling.

Federal agencies are required to award 5 percent of their contracts to small and medium-size enterprises (SMEs) owned by disadvantaged minorities, including Hispanics.

But in fiscal year 2002, only 2.4 percent of contracts were awarded to such firms. Even more troubling is the fact that this number has steadily declined since it peaked at 3.8 percent in fiscal year 1995.

Overall for fiscal year 2002, the federal government received a grade of "D" on the scorecard. The two agencies with the greatest purchasing power, the Department of Defense and the Department of Energy, received grades of "D" and "F," respectively.

When the federal government fails SMEs and minority-owned small businesses, it fails the country. No federal agency has been able to demonstrate a single dollar of savings from contract bundling. It is an ill-conceived and inefficient practice that cost minority-owned SMEs $1.5 billion in lost opportunities in fiscal year 2002 alone!

President Bush has acknowledged that contract bundling is a problem. More than two years ago, while announcing his small-business agenda, the president vowed to help small businesses penetrate the federal procurement system. More recently he proposed a plan to implement new regulations that would enable the SBA's Procurement Center Representatives (PCRs) to help small businesses enter the federal marketplace.

But PCRs are already woefully underfunded and unable to meet their responsibilities. If the president is serious about helping small businesses thrive and about stimulating our economy, he needs to prove it with the needed dollars and direction to federal agencies that bundle contracts. He must start holding federal agencies accountable when they fail to meet their small-business contracting goals.

Government contracts to small business are not handouts. Small businesses often are capable of fulfilling contracts at lower cost to the government than are big businesses, saving precious taxpayer dollars.

Changing bureaucracies is never easy, but unbundling federal contracts is the right course right for small business, for the federal government, and for our country.

Rep. Grace Napolitano (D-CA) serves on the House Small Business Committee.

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