Small firms squeezed by growth in multiple-order contracts

Small- and mid-sized companies have been squeezed as agencies have shifted more of their information technology spending to large multiple-order contracts, according to a new industry analysis.

A report published by the Reston, Va., market research firm INPUT, found that IT spending through governmentwide acquisition contracts and multiple-award contracts went from just 6 percent of all IT spending in 1997 to almost one quarter of it in 2005.

In the past three years, that trend has translated to companies with more than $1 billion in revenue from prime contracts seeing a boost in their share of multiple-order IT prime contracting dollars, INPUT analysts found.

Companies bringing in less than $250 million have seen a steadily declining share of those federal contracts, the analysts said. Companies in the $250 million to $1 billion revenue group maintained a level share of those contracts from 2003 to 2005, the analysis showed.

"Mid-sized firms, in particular, are not big enough to be credible primes for the large-scale awards yet are too big to qualify for the [small and disadvantaged business] set-aside awards," analysts wrote.

Researchers found that, adding to the problems of the smallest vendors, the numbers of companies with less than $10 million in annual business grew 38 percent from 2003 to 2005. In this period, those companies' share of prime awards under multiple-order federal IT contracts fell about 5 percent.

Small- and mid-sized businesses are turning to strategies that allow them to compete in a supersized federal marketplace, researchers found. These include subcontracting with larger groups to gain the required experience and credibility that large contracts demand. They can also adjust their products or services to become more niche-oriented and make them stand out when it comes time to form multiple-company teams.

Angela Styles, a former head of procurement policy at the Office of Management and Budget and now a contracts lawyer with the firm Miller & Chevalier, said one of the challenges of multiple-order schedules is that if a company misses the opportunity to become listed when the schedule is first established, it will be shut out for the entire duration, which could be five to 10 years. Large businesses may be more able to devote resources to tracking and taking advantage of the limited windows of opportunity.

But she said subcontracting, which was not included in the INPUT analysis, provides key opportunities for small- and medium-sized businesses. "A lot of companies don't want to be the prime contractor," Styles said. "A lot of subcontractors learn how to be a federal contractor from their prime contractor, and these teaming arrangements."

While some small businesses have trouble transitioning out of preference programs as they grow larger, those that have established strong agency relationships generally succeed, she said. But medium-sized companies making their first approach to federal contracting could fall between the cracks and have trouble, she added.

Still, creating preference programs for medium-sized businesses, along the lines of those that already exist for firms owned by minorities and veterans and those in disadvantaged areas, would only add to the complexity that contracting officers face, Styles said.

Agencies use multiple-order contracts in part because they are easier and faster than traditional competitions. Simplifying the preferences for small firms would help contracting officers understand and use the programs available to help disadvantaged businesses, Styles said.