Report to Congressional Committees

United States General Accounting Office

GAO

June 2001 CONTRACT

MANAGEMENT

Small Businesses

Continue to Win

Construction

Contracts

GAO-01-746
Page i GAO-01-746 Contract Management

Letter 1

Results in Brief 2

Background 2

Small Businesses Continue to Win Construction Work 4

Some Contracts Consolidated Requirements and Limited Small

Businesses’ Participation 5

Agency Comments 8

Scope and Methodology 8

Appendix I Comments From the Small Business Administration 11

Related GAO Products 13

Tables

Table 1: Construction Contract Obligations, Fiscal Years 1997-2000 5

Table 2: Selected Contracts Reviewed 9

Abbreviations

DOD Department of Defense

FASA Federal Acquisition Streamlining Act of 1994

GAO General Accounting Office

SBA Small Business Administration

Contents
Page 1 GAO-01-746 Contract Management

June 29, 2001

The Honorable Carl Levin

Chairman

The Honorable John W. Warner

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Bob Stump

Chairman

The Honorable Ike Skelton

Ranking Minority Member

Committee on Armed Services

House of Representatives

The Congress appropriates billions of dollars annually to fund the

construction of buildings and other facilities to support military training

and operations. Historically, small businesses have carried out a

significant portion of this work. The Congress and small business

advocates, however, had become concerned that agencies were combining

requirements into larger contracts that small businesses could not win.

Contracts that combine requirements to such an extent that they present a

barrier to small businesses' ability to compete are considered to be

"bundled contracts."

The Floyd D. Spence National Defense Authorization Act for Fiscal Year

20011

 directed us to report on the contract bundling of military

construction requirements. As agreed with your offices, our specific

objectives were to determine whether (1) overall data on construction

contract awards to small businesses indicated that their ability to compete

for contracts had been impaired and (2) selected Department of Defense

(DOD) contracting offices had combined construction requirements in

ways that hampered small businesses' ability to compete.

 1

P.L. 106-398, Oct. 30, 2000.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-746 Contract Management

To address these questions, we analyzed data from DOD's prime contract

database2

 for fiscal years 1997 through 2000. We also identified the Army

and Navy contracting offices with the highest dollar value of awards for

general repair and construction work during fiscal year 1999. At these two

locations—the Army Corps of Engineers' Mobile District, Mobile,

Alabama, and the Naval Facilities Engineering Command's Southern

Division, Charleston, South Carolina—we reviewed all contracts valued at

$5 million or more awarded during fiscal year 2000 for construction in the

United States. Our results cannot be generalized to the universe of military

construction contracts.

Overall data on military construction contract awards to small businesses

revealed that small businesses are generally continuing to win work and

that their ability to compete is not being impaired. Specifically, the share

of awards going to small businesses increased from 25 percent in 1997 to

32 percent in 2000.

Because the overall data available did not identify bundled contracts, we

reviewed selected large contracts to assess whether agencies were

consolidating requirements. Of the 26 contracts we reviewed, 5 were large

contracts that, according to officials, consolidated requirements to the

point of limiting small businesses' participation. In each of these cases,

however, DOD took steps to determine whether the construction work

being performed could accommodate smaller contractors, and Small

Business Administration officials reviewed and approved DOD's plans.

Small businesses were able to compete for the remaining contracts and, in

some cases, won work worth millions of dollars.

The law and regulations that govern federal procurement are designed to

foster competition and to promote desirable social objectives, among

other goals. The Congress has long encouraged agencies to ensure that

 2

DOD's prime contract database accumulates data that contracting officers report on form

DD 350, "Individual Contract Action Report." Generally, contracting officers must complete

this form for contract actions that obligate $25,000 or more. The form includes data on the

contracts' value, the items purchased, the kind of contract awarded, the solicitation

procedures used, and whether the contractor was a small business.

Results in Brief

Background
Page 3 GAO-01-746 Contract Management

small businesses3 have an opportunity to participate in federal

procurements and has authorized agencies to reserve certain requirements

for award to small businesses. For example, in 1988 the Congress

established an annual governmentwide goal of awarding not less than 20

percent of prime contract dollars to small businesses4

 and in 1997

increased this goal to 23 percent.5

When all the laws and regulations to achieve the procurement system's

objectives were considered, some came to believe that the result was a

complex and unwieldy system that left little room for agencies to exercise

sound business judgment in satisfying their needs. Two pieces of reform

legislation—the Federal Acquisition Streamlining Act of 1994 (FASA)6

 and

the Clinger-Cohen Act of 19967

—were passed to address these problems as

well as other government acquisition and investment-related concerns.

Each act included provisions designed to streamline the procurement

system, increase its responsiveness, and make it more efficient.

As agencies began to implement acquisition reform initiatives,

representatives of small businesses began to express concerns that the

initiatives would have an adverse effect on small businesses. Agencies

combined existing contracts into fewer, larger contracts—referred to as

"bundled contracts"—to streamline procurement and reduce contract

administration costs. Questions were raised about the extent to which

contract requirements were being bundled and the effect that such

bundling had on small businesses' ability to participate in federal

procurement. In light of these concerns, the Congress amended the Small

Business Act to create a legislative definition of contract bundling.8

 As

amended, the act defines contract bundling as the consolidation of two or

 3

Under the Small Business Act, a company is considered to be a small business when it is

independently owned and operated and not dominant in its field of operations. Also, the

Small Business Administration is responsible for further defining a small business and does

this through its Small Business Size Standards Regulations, found at 13 C.F.R. part 121. In

general, the definition of a small business varies by industry.

4

Business Opportunity Development Reform Act of 1988 (P.L. 100-656, Nov. 15, 1988).

5

Small Business Reauthorization Act of 1997 (P.L. 105-135, Dec. 2, 1997).

6

P.L. 103-355, Oct. 13, 1994.

7

The Clinger-Cohen Act was enacted as Divisions D and E of the National Defense

Authorization Act for Fiscal Year 1996. (P.L. 104-106, Feb. 10, 1996).

8

Small Business Reauthorization Act of 1997 (P.L. 105-135, Dec. 2, 1997).
Page 4 GAO-01-746 Contract Management

more procurement requirements for goods or services previously provided

or performed under separate, smaller contracts into a solicitation of offers

for a single contract that is likely to be unsuitable for award to a small

business concern because of

• the diversity, size, or specialized nature of the elements of the

performance specified;

• the aggregate dollar value of the anticipated work;

• the geographic dispersion of performance sites; or

• any combination of these three criteria.

The statute also defines a "separate, smaller contract" as a contract that

has been performed by one or more small businesses or was suitable for

award to one or more small businesses.

The Small Business Act, as amended, states that, to the maximum extent

practicable, agencies shall avoid unnecessary and unjustified bundling of

contract requirements that precludes small businesses' participation in

procurements as prime contractors. For those contracts considered to be

bundled, the Small Business Act establishes criteria for determining

whether contract bundling was necessary and justified, and requires

agencies that intend to bundle requirements to document that these

criteria have been met.

Our analysis of overall data on construction contract awards indicates that

small businesses are continuing to win work and that their ability to

compete is not being impaired. Since 1997, construction contract awards

to small businesses have increased steadily in the face of a decline in

overall construction awards. As table 1 shows, awards to small businesses

increased from about $1.6 billion to about $1.9 billion from fiscal year 1997

through fiscal year 2000 (in constant fiscal year 1999 dollars) while overall

awards declined from about $6.6 billion to about $5.9 billion.

Consequently, the share of awards going to small businesses increased

from about 25 to about 32 percent.

Small Businesses

Continue to

Win Construction

Work
Page 5 GAO-01-746 Contract Management

Table 1: Construction Contract Obligations, Fiscal Years 1997-2000

Construction contract obligations

(Constant fiscal year 1999 dollars in

millions)

Year Overall

Small

businesses

Percentage of

obligations

going to small

businesses

1997 $6,572 $1,618 24.6

1998 5,897 1,658 28.1

1999 6,163 1,762 28.6

2000 5,922 1,902 32.1

Source: GAO's analysis of DOD's prime contract database information.

Our analysis also showed that this trend occurred despite an increase in

awards to foreign firms and domestic firms performing abroad. The

proportion of total DOD construction awards going to such firms

increased from 10 percent in fiscal year 1997 to 14 percent in fiscal year

2000. Contracting officials pointed out that small business construction

firms generally confine their operations to a specific region or geographic

area, sometimes pursuing work only in the metropolitan area where the

firm is headquartered. According to the officials, small business

construction firms would typically not have the resources to perform work

abroad and would be very unlikely to win contracts for such projects.

Because the overall data do not identify bundled contracts, we were not

able to measure the extent of contract bundling directly. Accordingly, we

reviewed selected contracts to assess whether agencies were

consolidating requirements.

Of the 26 contracts we reviewed, 5 were large contracts that consolidated

requirements to the point of limiting small businesses' participation. These

particular contracts combined the components of a multiple-facility

project under a single contract. Officials analyzed these projects to assess

whether the work could accommodate smaller contractors but concluded

that only by having a single contractor build the entire project could the

work be performed efficiently.

For example, the Navy requested proposals for the construction of a

complex of eight facilities at the Stennis Space Center in Mississippi to

house a Special Operations Forces unit. The Navy estimated the cost of

the complex at $24.2 million. A large business received the contract, and

Some Contracts

Consolidated

Requirements and

Limited

Small Businesses’

Participation
Page 6 GAO-01-746 Contract Management

the Navy official responsible for monitoring small business contracting

indicated that small businesses would have had difficulty undertaking a

project of this size. The contracting officer told us that because these

facilities were clustered on a compact site and were served by common

cooling and mechanical systems, a single contract was awarded for

constructing the entire complex. Space at the construction site would not

have accommodated multiple contractors. Contracting officials told us

that when contracting to construct a multiple-facility project, they have

historically considered whether components of the project can be

acquired through separate, smaller contracts suitable for award to small

businesses. However, if an analysis of site and project characteristics

indicated that a single contractor would be necessary in order for the

work to be performed efficiently, a single contract would be awarded.

In cases like these, Small Business Administration (SBA) representatives

normally review planned construction contracts and—when it appears

unlikely that small businesses will be able to compete for a contract—may

recommend alternative contracting approaches that will increase

opportunities for small businesses. At the two locations we visited,

contracting officers had submitted each of the contracts we reviewed to

the appropriate SBA representatives and received approval to proceed

with their planned contracting approach.

Another six of the contracts we reviewed involved ordering construction

projects under task-order contracts. In these cases, small businesses were

able to participate. Task-order contracts define the broad outlines of the

government's needs and permit the government to place orders to acquire

specific work over a fixed period within stated dollar limits. Under FASA,

agencies may award task-order contracts as part of initiatives to

streamline federal procurement. To encourage competition, the Congress

established a preference for awarding task-order contracts to multiple

contractors rather than to a single one and for providing each of the

contractors an opportunity to be considered for specific orders. To

preserve the simplicity and flexibility of administering task-order

contracts, the Congress provided contracting officers broad discretion to

define the procedures used to evaluate offers and select contractors when

placing orders. According to contracting officials, placing orders under

task-order contracts allows them to acquire construction work more

quickly and with less administrative effort than awarding individual

contracts.

Small businesses won some task-order contracts at the locations we

visited. For example, the Army awarded six task-order contracts that
Page 7 GAO-01-746 Contract Management

provided for ordering construction and incidental design services over a 4-

year period, including options. While the Army expected that individual

projects would be valued in the $100,000 to $500,000 range, the Army

could order up to $5 million in work annually or $20 million over the 4-

year period. The contracts called for contractors to submit competitive

proposals on orders and for the Army to select the most advantageous

proposal. The Army awarded two of the six task-order contracts through

competitions limited to small disadvantaged businesses participating in

the 8(a) program. In the competition for orders under the contracts, these

two small disadvantaged businesses won $4 million, or about 28 percent,

of the work acquired under the six contracts through November 2000.

Another nine of the contracts we reviewed combined the requirements for

design and construction work on a single facility under a single contract.

In these cases, again, small businesses were able to participate. Agencies

have traditionally awarded separate contracts for design and construction

work. As part of the Clinger-Cohen Act's initiatives to streamline federal

procurement, however, the Congress authorized agencies to award single

contracts covering both design and construction work, referred to as

"design-build contracts." Under the statute, agencies use a two-phase

approach to selecting a design-build contractor, initially inviting

contractors to submit information on their qualifications and technical

approach to the work. Agencies use this information to identify the most

highly qualified contractors and invite these firms to submit more-detailed

information, such as design concepts and cost or price data. On the basis

of their experience to date, officials indicated that using design-build

contracts has enabled them to reduce project completion times and costs.

Small businesses competed successfully for design-build contracts at the

locations we visited. For example, the Navy requested proposals for the

design and construction of a wharf and an associated administrative, shop,

and storage building estimated to cost about $8.4 million. Initially, 12 firms

submitted information on their capabilities and past performance. After

evaluating this information, the Navy concluded that two small businesses

and one large business were best qualified to undertake the project and

invited these firms to submit a design proposal and price for the work.

Navy evaluators considered the design solutions submitted by the two

small businesses to be superior to that submitted by the large business.

Since one of the small businesses also proposed the lowest price, this firm

was awarded a contract for the work. Contracting officials pointed out

that, to compete successfully for design-build contracts, construction

firms must team up with design firms. Of these nine design-build
Page 8 GAO-01-746 Contract Management

contracts, small businesses won two and were considered among the most

highly qualified contractors in the competition for two others.

Lastly, of the remaining six contracts, five were separate contracts

covering the construction of single facilities for which complete designs

had been previously prepared. Small businesses won three of these five

contracts. Finally, the last of the six contracts covered the design and

construction of two closely related facilities. This final project was modest

in scope, having an estimated cost of $5.7 million and—although this

contract was not awarded to a small business—two small businesses were

considered among the most highly qualified contractors competing for the

contract.

DOD and SBA reviewed a draft of this report. DOD's Director of Small and

Disadvantaged Business Utilization told us that DOD had no comments on

the draft. SBA's written comments are contained in appendix I.

SBA indicated that the report's analysis is useful in improving an

understanding of contract bundling and contract consolidation. SBA

noted that the report does not discuss the Small Business Competitiveness

Demonstration Program and its applicability to construction contracts. An

evaluation of this program was beyond the scope of this review. SBA

suggested that we include an appendix detailing the cases reviewed.

Accordingly, we have incorporated a list of the contracts reviewed in our

discussion of the scope and methodology of the review.

To identify trends in DOD's contracting for construction and use of small

business contractors, we analyzed data from DOD's prime contract

database for fiscal years 1997 through 2000. Using this database, we

determined trends in total obligations on contracts for construction work

by converting obligations into constant fiscal year 1999 dollars and using

gross domestic product deflator indexes in the President's Budget

submission applicable to military outlays. In addition, we determined the

shares of total obligations going to various classifications of business

entities. We did not independently verify the accuracy of the information

in DOD's database.

To assess the extent to which DOD's contracting officers had combined

construction requirements, we reviewed the laws and implementing

regulations defining contract bundling and reviewed large contracts for

construction awarded at selected contracting offices. Using DOD's prime

Agency Comments

Scope and

Methodology
Page 9 GAO-01-746 Contract Management

contract database, we ranked DOD's contracting offices in terms of total

dollars awarded for general repair and construction work in fiscal year

1999. (Data for fiscal year 2000 were not available at the time we were

planning our work.) After ranking DOD's contracting offices, we reviewed

contracts at the highest-ranked Army and Navy contracting offices: the

Army Corps of Engineers' Mobile District, Mobile, Alabama, and the Naval

Facilities Engineering Command's Southern Division, Charleston, South

Carolina. At these two locations, we reviewed all contracts valued at $5

million or more awarded during fiscal year 2000 for construction in the

United States. We did not review contracts at an Air Force contracting

office because the Army and Navy provide the Air Force with contracting

support and the 28 highest-ranked offices were either Army or Navy

contracting offices. Table 2 lists the 26 contracts—valued at $347 million—

selected for review.

Table 2: Selected Contracts Reviewed

Army Corps of Engineers Naval Facilities Engineering Command

DACW01-00-D-0010 N62467-96-C-1093

DACW01-00-D-0011 N62467-98-C-0935

DACW01-00-D-0012 N62467-98-C-1049

DACW01-00-D-0013 N62467-99-C-0882

DACW01-00-D-0014 N62467-99-C-0893

DACW01-00-D-0015 N62467-99-C-0983

DACA01-00-C-0002 N62467-99-C-1000

DACA01-00-C-0012 N62467-99-C-1021

DACA01-00-C-0017 N62467-99-C-1032

DACA01-00-C-0018 N62467-99-C-1055

DACA01-00-C-0021 N62467-00-C-0255

DACA01-00-C-0022

DACA01-00-C-0024

DACA01-00-C-0026

DACA01-00-C-0034

For these contracts, we reviewed contract documentation to determine

whether requirements had been combined, the reasons cited for

combining requirements, and the extent of small businesses' participation

in competition for the contracts. We also discussed these issues with

contracting officials, the contracting offices' small business utilization

monitors, and SBA representatives responsible for overseeing the selected

contracting offices. Our results cannot be generalized to the universe of

construction contract awards.
Page 10 GAO-01-746 Contract Management

We conducted our review from November 2000 through May 2001 in

accordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense and the

Acting Administrator of the Small Business Administration. We will make

copies available to others on request.

If you have any questions regarding this report, please contact me on

(202) 512-4841 or Ralph Dawn on (202) 512-4544. Other key contributors to

this report were Monty Peters, Ralph Roffo, and John Van Schaik.

David E. Cooper

Director

Acquisition and Sourcing Management Issues
Appendix I: Comments From the Small Business

Administration

Page 11 GAO-01-746 Contract Management

Appendix I: Comments From the Small

Business Administration
Appendix I: Comments From the Small Business

Administration

Page 12 GAO-01-746 Contract Management
Related GAO Products

Page 13 GAO-01-746 Contract Management

Small Business: Trends in Federal Procurement in the 1990s

(GAO-01-119, Jan. 18, 2001).

Federal Procurement: Trends and Challenges in Contracting With

Women-Owned Small Businesses (GAO-01-346, Feb. 16, 2001).

Small Businesses: Limited Information Available on Contract

Bundling's Extent and Effects (GAO/GGD-00-82, Mar. 31, 2000).

Defense Contracting: Sufficient, Reliable Information on DOD's MentorProtege Program Is Unavailable (GAO/NSIAD-98-92, Mar. 30, 1998).

Base Operations: DOD's Use of Single Contracts for Multiple Support

Services (GAO/NSIAD-98-82, Feb. 27, 1998).

Related GAO Products

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