Background

Over the last decade, changes in procurement practices, acquisition  workforce reductions, and legislative changes have challenged agencies  to create efficiencies in their acquisition processes. By consolidating  contracts—that is, combining existing requirements into fewer contracts— agencies can streamline the procurement process and thereby reduce  acquisition and administrative complexity and cost. A subset of contract  consolidation is contract bundling. The Small Business Reauthorization  Act of 1997 defines a bundled contract as one that consolidates two or  more procurement requirements that previously were provided or  performed under separate, smaller contracts into a solicitation for offers  for a single contract that is likely to be unsuitable for award to a small  business. For example, a small business might be able to perform certain  maintenance tasks, such as plumbing and carpentry at a single government  facility. However, if a solicitation were to add paving and electrical repairs  and also expand the performance site to more than one regional area, such  a solicitation may be beyond the capability of any small business. In sum,  a consolidated contract can be suitable for award to a small business and a  bundled contract is not.
To help ensure that contract bundling does not unnecessarily disadvantage  small businesses, the Small Business Reauthorization Act of 1997 requires  that to the maximum extent practicable, agencies are to avoid contract  bundling unless they can demonstrate “measurably substantial benefits,”  such as cost savings, quality improvement, reduction in acquisition cycle  times, or better terms and conditions.
OFPP’s strategy to address contract bundling and increase federal  contracting opportunities for small businesses contains nine action items  designed to change contract bundling regulations, hold 23 agencies  accountable to eliminate unnecessary contract bundling, mitigate the  effects of necessary bundling, and increase small business contracting  opportunities. Most action items were incorporated into Federal  Acquisition Regulation (FAR) and SBA regulations on October 20, 2003.  The nine action items and their status are described in appendix I.
As part of implementing its strategy, OFPP also required OSDBUs from the  23 agencies to report quarterly on their implementation of the nine action  items. OSDBUs have a central role in monitoring contract bundling  activity. They are responsible for overseeing their agency’s functions and  duties related to the awarding of contracts and subcontracts to various  types of small businesses. Moreover, the Congress intended that OSDBU  directors serve in their respective agencies as advocates for these  businesses.

	Agency Data Are Inconsistent with FPDS Data

In their reports to OFPP, only 4 of the 23 accountable agencies reported  that they had bundled contracts for fiscal year 2002. Further, the four  agencies reported only a total of 24 bundled contracts—far fewer than the  928 contracts reported as bundled in FPDS. Of the remaining 19 agencies,  16 reported no bundled contracts, and 3 did not provide contract bundling  information. (See app. II for details on contract bundling activity reported  by agencies.)
Through our review of FPDS bundling data, we found that much of the  data are inaccurate, causing FPDS to record more bundled contracts and  actions than reported by the agencies to OFPP. For example, about  33 percent of FPDS-coded bundled contract actions were also shown as  being awarded to small businesses. By definition, a small business is  essentially precluded from being awarded a bundled contract. According  to OSDBU officials at the Departments of Defense (DOD), Veterans  Affairs, Interior, Health and Human Services, and Transportation—the five  agencies with the largest number of FPDS-reported bundled actions in  fiscal year 2002—the inaccuracies in FPDS were coding errors made as  the result of confusion about the statutory definition of contract bundling,  inadequate verification of data, and ineffective controls in the FPDS  reporting process. For example, through a review of Interior’s  80 contracting offices, Interior’s OSDBU found that all had erroneously  coded contracts as bundled. Interior’s OSDBU attributed the coding errors  to confusion over the statutory definition of a bundled contract. DOD  similarly had its military departments and defense agencies review the  109 contracts originally identified as bundled, and they determined that  only 8 out of the 109 contracts met the statutory definition of a bundled  contract. The 101 miscoded contracts were primarily the result of  confusion about the definition of bundling and lack of controls and  oversight in the FPDS reporting system.
Inaccuracies in FPDS data are a long-standing problem, which we have  previously reported on—most recently on December 30, 2003, when we  issued a letter to OMB expressing our concern that continuing problems  with the reliability of FPDS data could adversely impact decision-making  and oversight of the federal procurement system. We identified a number  of examples where poor data limited our ability to assess procurement  programs and found that many of the FPDS data problems, including  inaccurate data on bundling activity, were the result of confusion over  information requirements, which led to data entry mistakes by agency  contracting officials. We made recommendations to improve the reliability  of FPDS data. OMB generally concurred with our recommendations and,  as of March 25, 2004, are considering actions to respond to them.

	Effect of Regulatory Changes on Small Business Contracting Opportunities Will Be Difficult to Gauge, Although Certain Changes May Yield Increases

According to OFPP, the primary goal of its strategy—and the recent FAR  changes—is to increase small business federal contracting opportunities.  However, it will be difficult to determine whether any increases in small  business opportunities are the result of the recent regulatory changes or  other factors, such as continuing agency efforts. While some aspects of the  changes have the potential to help achieve desired goals, the new  regulations do not provide for metrics to measure agency accountability  for improving small business participation in federal procurement.
Despite OFPP’s stated goal for its strategy—to increase small business  federal contracting opportunities—several factors will make it difficult to  assess the effect of the regulatory changes on such opportunities. First,  because contract bundling FAR and SBA rules were not amended until  October 2003, it is too early to determine whether the regulations have  achieved desired outcomes. Further, SBA has yet to disseminate best  practices to agencies—an action item in OFPP’s strategy. One key purpose  of the best practices is for agencies to incorporate them into training  courses and materials. In January 2003, SBA requested agency senior  procurement executives to provide proven best practices to optimize  prime and subcontracting opportunities for small businesses. According to  SBA officials, that input has been received and a best practices guide has  been drafted. SBA, however, has not established a schedule to disseminate  the guide, and until such time, agencies can do little to respond to this  OFPP strategy action item.
Second, it will be difficult to determine whether any increased  opportunities are the result of the regulatory changes or other  factors, such as continuing agency efforts to address bundling. DOD,  the Department of Energy (DOE), the National Aeronautics and  Space Administration (NASA), and the General Services Administration  (GSA)—which together procured about 80 percent of the federal  government’s goods and services in fiscal year 2002—each have a history  of seeking opportunities to increase small business contracting  opportunities. Since 1982, DOD has issued five policy memoranda on small  business participation in consolidated and bundled contracts. The first  memorandum directed that functions currently performed by small  businesses should not be consolidated and that, unless there were  overriding national security interests, future solicitations should be  packaged so as not to preclude performance by small businesses. The  most recent policy memorandum, dated January 17, 2002, requires  (1) review of multiple award indefinite-delivery, indefinite-quantity  contracts to avoid unnecessary bundling and (2) consideration of small  business participation from acquisition planning through program  execution. A benefit analysis guidebook was disseminated with the  January 2002 memorandum that includes guidance on avoiding contract  bundling, outlines how to perform a benefit analysis to justify necessary  bundling, and addresses how to mitigate the impact on small businesses  when a bundled contract has been determined to be necessary and  justified. Further, the National Defense Authorization Act for Fiscal Year  2004 imposes additional requirements on senior procurement executives  to ensure that small businesses are given appropriate opportunities to  participate in consolidated acquisitions in excess of $5 million—a  threshold that is $2 million lower than the substantial bundling threshold  established in the new regulations.
The other three agencies also have a history of efforts to address contract  bundling and increase small business contracting opportunities. For  example, in 1992, NASA put a policy in place that required its contracting  offices contemplating contract consolidation to get concurrence from the  NASA Chief of Staff at Headquarters, who was required to seek advice  from the NASA OSDBU. In 2000, NASA required contract bundling  justification, review, and approval of orders from Federal Supply  Schedule contracts, governmentwide acquisition contracts, or other  indefinite-delivery contracts. NASA further imposed the substantial  bundling documentation requirements, as well as Headquarters Office of  Procurement review, on each proposed bundling activity expected to  exceed $5 million in total value—half the substantial bundling threshold of  $10 million in effect at that time. DOE’s procurement executive has  similarly issued acquisition letters dating back to April 2000 that focused  on how to maximize small business opportunities in federal contracting.  According to GSA officials, GSA’s Multiple Award Schedule Program has,  for several years, allowed Federal Supply Schedule contractors to team up  to deliver a total solution to customer agencies from multiple industries.  Such arrangements have the potential to enhance the ability of small  businesses to capture all or a portion of a customer’s total requirement.  Further, the Federal Supply Schedule, which GSA administers, also  contains a strong small business presence, with approximately 78 percent  of Federal Supply Schedule contracts awarded to small businesses,  according to GSA.
Finally, the recent regulations relate primarily to contract bundling—an  activity most agencies report they do not engage in. The regulations, for  example, are designed to require agency officials to review proposed  acquisitions to preclude unnecessary bundling and mitigate the effects of  necessary contract bundling. However, because 16 of the 23 agencies  held accountable by the OFPP strategy reported that they had no bundled  contracts in fiscal year 2002 and the bundling that was reported was  limited, it is unclear to what extent the regulations will help increase small  business contracting opportunities at these agencies.
Despite the uncertainties regarding the effect of the recent regulatory  changes on small business contracting opportunities, certain changes in  the FAR and SBA regulations have the potential to increase such  opportunities—specifically those related to mandatory coordination of  agency officials and increased oversight. These regulatory changes were  designed to preclude unnecessary contract bundling and mitigate the  effects of justified bundling on small contractors. For example, the FAR  now requires OSDBUs to conduct periodic reviews to assess (1) the extent  to which small businesses are receiving their fair share of federal  procurements under the Small Business Act, (2) the adequacy of contract  bundling documentation and justification, and (3) the actions taken to  mitigate the effects of necessary and justified bundling on small  businesses. OSDBUs are required to submit their assessments to the head  of their agency and the SBA Administrator.
The FAR and SBA regulations now require agencies to assess contractor  performance against small business goals identified in subcontracting  plans in contracts that require a subcontracting plan. This action requires  agencies to systematically review contracts of $500,000 for products or  services and contracts of $1 million for construction and ensure they  comply with required small business subcontracting plans. Further, the  new regulations established agency-specific dollar thresholds to invoke  mandatory coordination with agency small business specialists. The new  thresholds are $7 million for DOD; $5 million for DOE, GSA, and NASA;  and $2 million for all other agencies. The regulations also specify that  multiple award indefinite quantity contracts and orders placed against  Federal Supply Schedule contracts and governmentwide acquisition  contracts are now subject to bundling requirements and restrictions.
Finally, SBA now requires SBA procurement center representatives to  ensure that small business participation is maximized through teaming  arrangements by working with agency small business specialists and  OSDBUs, as early in the acquisition process as practical. The new SBA  regulation is designed to (1) allow small business teams to compete for  acquisitions when contract bundling is determined to be necessary, and  hence, unsuitable for individual small businesses to perform and  (2) remove obstacles small businesses face in forming teams, such as the  relatively limited time available to respond to solicitations.

	Regulatory Changes Do Not Establish Metrics and Information to Monitor Contract Bundling Trends and Effects

Over the last several years, we have been asked to review acquisition  reforms and initiatives to determine whether they are achieving desired  outcomes. Determining whether desired outcomes are being achieved is  dependent on metrics and reliable information. However, as we testified  in March 2003 before the Senate Committee on Small Business and  Entrepreneurship, agencies often lack metrics and reliable information to  enable the Congress and the President to ensure agency accountability for  improving small business participation in federal procurement. Despite  our findings, the new contract bundling regulatory changes do not  establish metrics or identify the information needed to determine the  extent to which agencies bundle contracts and measure the impact of  bundling on small businesses—a weakness exacerbated by the fact that  past data on bundling has been limited and unreliable.
Recording and distributing timely and accurate information on contract  bundling is key to ensuring accountability, monitoring contract bundling  trends, and adjusting practices as warranted. Although agency OSDBUs  must now submit annual reports to assess the small business share of  federal procurements, the adequacy of bundling documentation, and  actions taken to mitigate the effects of bundling to their agency head and  the SBA Administrator, there is no requirement for metrics or specific  bundling-related information. Without metrics and information to measure  contract bundling and its impact, annual assessments will likely be  process oriented, citing, for example, senior executive memos stressing  commitment to eliminate unnecessary contract bundling and identifying  who is accountable to optimize contracting opportunities for small  businesses. Potential metrics and information OSDBUs could use in their  required annual reports to monitor contract bundling trends and impacts  include (1) the number and dollar value of bundled contract actions and  contracts, (2) benefit analyses (dollars saved) to justify why contracts are  bundled, (3) the number of small businesses losing federal contracts  because of bundling, (4) how bundled contracts complied with agencies  subcontracting plans, and (5) how mitigation actions, such as teaming  arrangements, provided increased contracting opportunities to small  businesses.

	Conclusions

As we have reported over the past several years, a lack of reliable data on  contract bundling activity at federal agencies has limited the Congress’  and the President’s ability to accurately assess the extent of contract  bundling governmentwide and its effect on small business contracting  opportunities. Although the most recent regulatory changes have the  potential to increase contracting opportunities for small businesses, until  such time that OFPP takes action to improve FPDS data reliability and  establish metrics to measure contract bundling activity, the extent to  which contract bundling impacts small business federal contracting  opportunities will continue to be limited or unknown.

	Recommendations for Executive Action

We are recommending that the Director, Office of Management and  Budget,    ensure that planned FPDS reliability improvements include accurate  agency reporting to provide uniform and reliable contract bundling  information and    direct the Administrator, OFPP, to establish metrics to measure  contract bundling and the extent to which contract bundling impacts  contracting opportunities for small businesses.
We are also recommending that the Administrator, SBA, expedite the  dissemination of best practices to maximize small business contract  opportunities for incorporation into agencies’ training courses, as required  by the OFPP strategy.

	Agency Comments and Our Evaluation

In March 2004, we requested comments on a draft of this report from the  Director of OMB and from the Administrator, SBA.
In written comments, OMB concurred with the first recommendation, but  not the second. OMB expressed concern with our recommendation that  OFPP be directed to establish metrics to measure contract bundling and  the extent to which contract bundling impacts contracting opportunities  for small businesses. OMB is concerned that our recommendation  envisions that OMB establish new, governmentwide reporting and   record-keeping requirements outside of FPDS, which is duplicative and  possibly labor-intensive. In addition, OMB suggested that the our  recommendation be revised to require OFPP to work with SBA to explore  possible inclusion of new reporting requirements in FPDS that would  track the impact of bundling on contracting opportunities for small  businesses.
We believe OMB’s concern is unfounded. The purpose of our  recommendation is to establish contract bundling metrics, not a new  reporting and record-keeping system outside of FPDS. The establishment  of bundling metrics, together with the implementation of our  recommendation that OMB ensure that its planned FPDS reliability  improvements include accurate agency reporting of contract bundling  information, does not require a new reporting and record-keeping system  outside of FPDS.
We believe OMB’s suggestion that our recommendation be revised to  explore possible inclusion of new reporting requirements to track the  impact of bundling on small businesses will not provide the Congress  sufficient information to understand the effects of bundling on small  businesses, unless metrics are established. As stated in our report,  determining whether acquisition reforms and initiatives are being achieved  is dependent on metrics. Without metrics to measure contract bundling  and its impact, the information needed to ensure agency accountability to  eliminate unnecessary contract bundling, mitigate the effects of necessary  bundling, and increase small business contracting opportunities will be  limited or unknown.
In official oral comments on the report, staff from SBA concurred with the  SBA recommendation and had no other comments on the report.

	Scope and Methodology

To identify the number of contracts agencies reported as bundled in fiscal  year 2002, we reviewed the data submitted by agencies in their reports to  OFPP. We also analyzed fiscal year 2002 contract actions coded as  bundled in FPDS to compare information reported by the agencies. Where  large discrepancies existed between agency and FPDS data, we contacted  agency OSDBU officials to obtain an explanation. Those agencies were the  Veterans Administration and the Departments of Defense, Health and  Human Services, Interior, and Transportation. We did not verify the  agency-reported data used in this report. Its reliability is dependent on  OSDBU review of their agency contracts. We believe the data OSDBUs  reported to OFPP to be generally reliable because OSDBUs (1) have a  central role in monitoring contract bundling activity, (2) are responsible to  oversee their agency’s functions and duties related to the awarding of  contracts and subcontracts to various types of small businesses, and  (3) researched and then explained the difference between the bundling  data they reported to OFPP and what is in FPDS.
To assess the potential effectiveness of the OFPP strategy and the  regulatory changes resulting from it, we reviewed the four required  quarterly reports submitted by the agencies to OFPP. Those reports were  to describe agency efforts to implement the strategy. In addition, we met  with procurement and OSDBU officials from five federal agencies—DOD,  DOE, GSA, NASA, and the Veterans Administration—that collectively  spent over 85 percent of the total procurement dollars in fiscal year 2002.  We obtained their views on the impact of the strategy and subsequent  regulatory changes. We also contacted officials from the OSDBUs of the  remaining 18 agencies held accountable by the strategy to obtain their  views on its implementation. Finally, we met with officials from OFPP and  SBA to gain a better understanding of the objectives of the strategy, as  well as a governmentwide perspective on contract bundling and its effect  on small business opportunities within the federal procurement  community.
We also reviewed applicable contract bundling laws, policies, and  regulations.
As agreed, unless you publicly announce its contents earlier, we plan no  further distribution of this report until 30 days after the date of this letter.   At that time, we will send copies of this report to the Administrators of the  OFPP and SBA, and the heads of the 23 executive agencies held  accountable by OFPP’s strategy. We will also provide copies to others on  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have questions concerning this report, please  contact me at (202) 512-4841 or by e-mail at cooperd@gao.gov, or  James Fuquay at (937) 258-7963. Key contributors to this report were  Johnetta Gatlin-Brown, Daniel Hauser, Julia Kennon, Mary Jo Lewnard,  Sylvia Schatz, and Karen Sloan.

Appendix I: Status of Nine Action Items Contained in OFPP’s Report

In October 2002 in response to the President’s tasking to develop a  strategy to hold agencies accountable for contract bundling practices, the  Office of Federal Procurement Policy (OFPP) issued “Contract  Bundling: A Strategy for Increasing Federal Contracting Opportunities  for Small Business.” The status of the strategy’s nine action items, as of  February 25, 2004, is presented below.

Appendix II: Summary of Agency Responses to OFPP-Directed Metrics

OFPP required OSDBUs from 23 agencies to report quarterly on  implementation of OFPP’s contract bundling strategy. Table 2 summarizes  agency responses to the OFPP-directed metrics for fiscal year 2002.

Appendix III: Summary of Contract Bundling Rule Changes

The FAR Council and Small Business Administration issued final rules in  2003 amending the bundling requirements in the FAR and SBA regulations  (effective October 20, 2003). These amendments implemented  recommendations in the Office of Management and Budget’s October 2002  report “Contract Bundling: A Strategy for Increasing Federal Contracting  Opportunities for Small Business.” The following table summarizes the  changes and new mandates incorporated in the amendments.

Related GAO Products

Contract Management: DOD Needs Measures for Small Business  Subcontracting Program and Better Data on Foreign Subcontracts.   GAO-04-381. Washington, D.C.: April 5, 2004.
Small and Disadvantaged Businesses: Most Agency Advocates View  Their Roles Similarly. GAO-04-451. Washington, D.C.: March 22, 2004.
Reliability Federal Procurement Data. GAO-04-295R. Washington, D.C.:  December 30, 2003.
Small Business Contracting: Concerns About the Administration’s Plan  to Address Contract Bundling Issues. GAO-03-559T. Washington, D.C.:  March 18, 2003.
Small Business: Trends in Federal Procurement in the 1990s.   GAO-01-119. Washington, D.C.: January 18, 2001.
Small Business Subcontracting Report Validation Can Be Improved.  GAO-02-166R. Washington, D.C.: December 13, 2001.
Small Business: Limited Information Available on Contract Bundling’s  Extent and Effects. GAO/GGD-00-82. Washington, D.C.: March 31, 2000.
How Selected DOD Consolidation Efforts Affected Small Business  Opportunities. GAO/NSIAD-83-30. Washington, D.C.: August 12, 1983.

Summary:
Why GAO Did This Study

To achieve efficiencies and respond to procurement reforms, agencies have consolidated their procurement contracts--that is, combined existing smaller contracts into fewer larger contracts. To ensure contract bundling--a subset of contract consolidation--does not unfairly disadvantage small businesses, the President tasked the Office of Management and Budget (OMB) to develop a strategy that would hold agencies accountable for contract bundling practices. In October 2002, the Office of Federal Procurement Policy (OFPP) within OMB issued its strategy. This report discusses the extent to which contracts were bundled in fiscal year 2002 and assesses the potential effectiveness of regulatory changes that have recently resulted from OFPP's strategy.

What GAO Found

In contrast to data captured in the Federal Procurement Data System (FPDS), only 4 of the 23 agencies held accountable by OFPP's strategy reported a total of 24 bundled contracts in fiscal year 2002--far fewer than the 928 contracts identified as bundled in FPDS. Agency officials, after researching their contracts, determined that the bundling data in FPDS were miscoded due to confusion about the statutory definition of contract bundling, inadequate verification of information, and ineffective controls in the FPDS reporting process. For example, about 33 percent of FPDS contract actions identified as bundled were miscoded, because they were awarded to small businesses. By definition, a small business is essentially precluded from being awarded a bundled contract. The Department of Defense, which reported the second largest number of bundled contracts, determined that only 8 of the 109 contracts identified as bundled in FPDS met the statutory definition of a bundled contract. Although the actual number of bundled contracts reported by agencies is small, concerns about the effect of contract bundling on small businesses remain. According to OFPP, the primary goal of its strategy--and the resulting regulatory changes--is to increase small business federal contracting opportunities. Because new regulations have only recently been established, it is too early to determine whether agencies are achieving this goal. In addition, part of OFPP's strategy--to identify and disseminate best practices for maximizing small business contract opportunities--has not been implemented. Yet even with time and guidance, it could be difficult to assess the effect of the recent regulations, in part because any increases in small business contracting opportunities could be attributed to other factors. For example, the largest procuring agencies have a history of seeking opportunities to increase small business contracting, and according to the General Services Administration, nearly 80 percent of Federal Supply Schedule contracts are awarded to small businesses. Further, because the regulations primarily relate to contract bundling--an activity most agencies report they do not engage in--the regulations may have little impact on increasing small business contracting opportunities. Nevertheless, certain regulatory changes--especially those related to oversight--have the potential to promote greater small business opportunities. For example, the new regulations require agencies to annually assess the extent to which small businesses receive a fair share of federal procurements, the adequacy of contract bundling documentation and justifications, and actions taken to mitigate the effects on small businesses of necessary and justified contract bundling. However, the new regulations do not establish metrics to measure agency accountability, and past data on bundling and its effects on small businesses have been limited and unreliable. Without metrics and reliable data, it will be difficult to gauge agency efforts to identify and eliminate contracts that are unnecessarily bundled.