Congress Appears Poised To Gut Government Contracts For Small Business


Congress Appears Poised To Gut Government Contracts For Small Business

By Robb Mandelbaum
September 30, 2016

M.L. Mackeyand her husband started their company, Beacon InteractiveSystems, 22 years ago. Since 2002, they have made their living primarilyselling software to the Navy. As far as defense contractors go, theirs is asmall business, to be sure: in the last 14 years, Beacon has booked almost $14million in direct sales to the government, and done even more work as asubcontractor on other projects.

But recentwork building shipboard operating software for energy management — a project,Mackey says, that has been "extremely well received from the waterfront to thePentagon" — has led Mackey to think bigger. "We're actively transitioning ourNavy products into maritime internet of things and manufacturing internet of thingsproducts," she said. The company, she says, has formed strategic partnershipsto launch itself back into the private sector as a prelude to building aninternal sales force. Meanwhile, she anticipates that within a few years,she'll be bidding on, and winning, much larger Navy contracts — worth as muchas $15 million.

Mackeycredits Beacon's success building the energy management software to a closeworking relationship with Navy program managers. "We were able to brainstormand iterate directly with our fleet customer and develop a technology thatdirectly addressed their needs," she says. "When they wanted to do more, theywere able to directly engage with us. And we as a company have more of the I.P.we need to bring to the private sector market expansion. But none of this wouldhave happened if I didn't have a prime contract."

It isprecisely for this sort of reason that steering government contracts to smallcompanies has been a cornerstone of federal economic policy for more than halfa century. Federal agencies set goals for awarding prime contracts to small businessesgenerally — for the government as a whole, the goal is 23 percent — as well assmaller sub-goals for particularly struggling small business communities.Agencies must also make a separate set of goals for subcontracts made withsmall businesses by prime contractors — what are known as first-tiersubcontracts.

All this, ofcourse, is good politics for Congress; it's hard to name a legislator who gotvoted out of office for supporting small business. But now an overlookedprovision in the Senate's version of must-pass bill turns the politicalcalculus on its head and threatens sharp cuts to prime contracts for smallbusiness. The bill is the annual National Defense Authorization Act, and the provision, Section 838, appears to allow the Department of Defense tocount many subcontracts made to small businesses against the agency's primecontract goals. The Pentagon spends 60 percent of all federal contracting dollars eligible to go to smallbusinesses, and should the provision become law, total prime contracts fromthe federal government for small business could drop by as much as a quarter.

The provisionwould apply to certain very large Pentagon contracts known as major defense acquisition programs, and the change isneeded in order to give small businesses a toehold in the biggest defenseprograms, according to Dustin Walker, a spokesman for the Republican majorityon the Senate Armed Services committee, which wrote the bill. "There are noprime contracts for MDAPs going to small business — that's $60 billion incontracts every year," Walker said in an email. "But to date, it has been verydifficult to get small business participation in first- and second-tiersubcontracts" as well. (Second-tier subcontracts are those made by first-tiersubcontractors. Sophisticated defense systems can grow long chains ofsubcontracts.)

Last year,the Defense Department met most of its prime contracting goals, but fell short ofmost of its subcontracting goals, including its overall small-businesssubcontracting goal of 36 percent. "We hope this provision will make it moreattractive for those businesses," Walker said.

Walkerinsisted that the provision does not undermine existing small business goalsbut simply requires separate accounting from the Pentagon. However, the 210words of the proposed new section of law don't explicitly say that, and closeobservers of small-business contracting read them as allowing the Pentagon'scontracting officers, who are under constant pressure to do more with less, towater down their prime contacting goals with subcontracts.

"If your goalis 22 percent, and there's a new pot of money available for reaching that goal,you're going to get to that 22 percent a lot quicker," said John Shoraka, who leads the Small Business Administration'sgovernmentcontracting office. "And once you get to 22 percent, how likely are you toput out more opportunities? And so I don't see how it wouldn't be negative forsmall business."

If thePentagon were to take full advantage of the provision, under its existingsubcontracting goals, it could replace as much as $22 billion in primecontracts with subcontracts. To put that in perspective, the agency's totalcontracts with small businesses amounted to $52 billion in 2015. Across thefederal government, small companies received $91 billion in that year.

Mackey, forher part, said she'd be unable to hatch her big plans if she'd done the work asa subcontractor. "My team wouldn't have had the direct contact to more clearlyunderstand the needs," she said. "Our products are always better when we worktightly with our customer." Moreover, subcontracting makes doing the work moreexpensive, because it adds layers of reporting and integration. And simplygetting the work as a subcontractor, having lost the prime contract, becomesharder, she said. "We not only have to go and connect with and sell to our Navypartners, but we then have to go and do at all over again" with the companythat got the contract. "It's essentially doubling our work effort."

"Subcontractingcan be an important entry into the federal procurement world, especially for anascent firm," said the S.B.A.'s Shoraka. "But once we start mixing the primecontracting world with the subcontracting world, it becomes a very slipperyslope." In any event, because the federal government already counts first-tiersubcontracts under the separate goal, it would surely mean a significant reductionin the total dollars flowing to small businesses.

The defensebill passed the Senate by an overwhelming margin, 85 to 13. The senators who voted in favor of the billincluded Republican David Vitter of Louisiana, who chairs the Small Businesscommittee and the committee's top Democrat, Jeanne Shaheen of New Hampshire. A spokesperson for Sen.Shaheen, Ryan Nickel, said in an email the senator "is concerned about theprovision and is urging conferees to remove it from the defense bill." Sen.Vitter's office did not respond to repeated requests for comment.

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