Defense encounters obstacles to small business contracting

The percentage of work that Defense Department contractors farm out to small businesses is falling despite efforts to reverse the trend, according to a new report from the General Accounting Office.

Large Defense contractors told GAO it is becoming increasingly difficult to award subcontracts to small businesses because of a "changing acquisition environment." In this environment, prime contractors find themselves vying for contracts that are broader in scope and complexity. To formulate successful bids, contractors more frequently enter into teaming arrangements with other large companies, GAO found.

Under these arrangements, prime contractors often agree to funnel a high proportion of subcontracts to large partner companies, reducing the work available to small businesses, the report (GAO-04-381) said.

To stay competitive, prime contractors are also deciding to employ fewer subcontractors, GAO found. Large companies bidding on work for the Pentagon have cut their base of subcontractors by up to 50 percent in attempts to "leverage their purchases, cut costs and improve performance."

Defense contractors told GAO that when they do make room for small-business subcontracting, they often don't receive enough quality bids.

The latest numbers available show that while small-business subcontracting at Defense appears on the rise, the proportion of work that prime contractors award to small companies is actually declining, GAO reported. In fiscal 2002, Defense contractors awarded a total of $75.5 billion in subcontracts of which $25.8 billion, or 34.2 percent, went to small businesses. A decade earlier, small companies received 37.5 percent, or $19.9 billion, of the $53 billion in Defense subcontracts.

The proportion of Defense subcontracts awarded to small business peaked at 43 percent, or $21.7 billion, in fiscal 1995, and has declined since, with the exception of a slight increase in 1998, according to the statistics collected by GAO.

These declines come despite efforts to smooth the path for more small-business subcontracting at the Pentagon, GAO reported. Officials at the Defense Contract Management Agency recently boosted efforts to track small-business subcontracting.

In September 2003, the oversight agency circulated new guidelines for hiring small companies as subcontractors, the GAO report noted. Several months prior to that, DCMA incorporated small-business subcontracting into criteria used to grade prime contractors' overall performance.

Under the Federal Acquisition Regulation, companies holding Defense agreements worth $500,000 or more must aim to relay as much work as possible to small businesses, and must arrive at a plan for doing so. Two times each year, prime contractors must submit progress reports to DCMA.

Traditionally, companies have needed to hand in separate reports for each large contract. But in an effort to reduce paperwork, lawmakers established the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans in the Defense Authorization Act for fiscal 1990 and 1991. The program allows participating prime contractors to submit one annual companywide plan for small-business subcontracting, rather than separate plans for each contract.

The test program is designed to lighten burdens on contractors and at the same time encourage them to rethink small-business goals regularly and on a broad scale. Companies opting out of the plan establish small-business goals at the outset of each prime contract.

Companies participating in the test program, which will expire in fiscal 2005, awarded about 41 percent of Defense Department subcontracts in 2002, GAO found. But Defense officials haven't fully assessed whether the program is filling its intended purpose, the report said. In response to the finding, Pentagon officials agreed they should figure out a better way to track the program's success.

GAO's findings on small-business subcontracting at Defense come at a time when the percentage of prime contract dollars awarded to smaller companies vying for work across the federal government has reportedly reached record highs.