Department of Energy: Achieving Small Business Prime Contracting Goals Involves Both Potential Benefits and Risks
Published: 2004-05-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Under the Small Business Reauthorization Act of 1997, the federal government has a goal of awarding at least 23 percent of prime, or direct, contracting dollars to small businesses each fiscal year. The Department of Energy (DOE), like other federal agencies, shares in the responsibility for meeting this goal. In fiscal year 2003, DOE spent $21.6 billion on prime contracts. More than 80 percent of this amount was spent on facility management contracts to manage and operate DOE's sites. Before 1999, DOE included subcontracts awarded by its facility management contractors when calculating its small business prime contracting achievements. In 1999, however, the Office of Federal Procurement Policy determined that DOE could no longer do so. This testimony discusses (1) the effect of the 1999 policy change on the amount of prime contract dollars that DOE will be required to direct to small businesses, (2) the steps that DOE has taken or plans to take to achieve its small business contracting goals, and (3) the likely implications for DOE's programs resulting from these changes.
section_title: What GAO Found
paragraphs: To meet its share of federal goals, DOE would need to direct significantly more prime contracting dollars to small businesses. If it is to reach its near-term goals of 5.06 percent in fiscal year 2004, and 5.50 percent in fiscal year 2005, DOE must direct to small businesses an additional $226 million and $319 million, respectively, over the $847 million it directed to small businesses in fiscal year 2003. Achieving a long-term goal of directing 23 percent of prime contracting dollars to small businesses would require DOE to contract with small businesses at about 6 times its current rate. Such an increase is about equal to the combined annual budgets for Los Alamos and Sandia--the two largest national laboratories. To address its near-term small business prime contracting goals, DOE has improved its outreach efforts and has redirected to small businesses some contract dollars not associated with facility management contracts. DOE has also begun to review facility management contracts up for renewal to identify work that could be redirected to small business prime contracts. Achieving a long-term goal of 23 percent is much more problematic. Notably, DOE's three largest offices--the National Nuclear Security Administration (NNSA), Environmental Management (EM), and Science--have differing views as to what extent facility management contract work can be redirected to small businesses without having a negative impact on accomplishing their missions. EM is in favor of doing so if redirecting the work is consistent with its accelerated cleanup strategy. NNSA and Science officials express concern that redirecting work now done by facility management contractors could jeopardize critical research missions at the laboratories. DOE's efforts to increase small business prime contracting involve both potential benefits and risks, which depend on the eventual goal DOE attempts to achieve. The potential benefits to DOE of increased small business prime contracting include increasing the pool of potential contractors, which could result in better competition and better prices for the government; finding new and innovative approaches to the work developed by small businesses; and providing experiences to small businesses to allow them to better compete for other federal contracts. The potential risks include integrating and coordinating the work of a greater number of contractors at a site in a safe, secure, and effective manner, and having adequate federal resources for effective contract management and oversight--areas that already pose significant challenges for DOE. In addition, DOE's efforts to increase small business prime contracting may cause its facility management contractors to reduce the amount of subcontracting that they direct to local and regional small businesses. DOE largely agreed with the information in this testimony. However, it disagreed with GAO's characterization of DOE's long-term small business prime contracting goal and its strategy to achieve it. GAO believes that both the longterm goal and DOE's strategy have been accurately described.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Department of Energy’s  (DOE) efforts to increase its direct contracting with small businesses. The  Small Business Act, as amended by the Small Business Reauthorization  Act of 1997, established a government-wide goal of directing at least 23  percent of prime contracting dollars to small businesses each fiscal year.  DOE, like other federal agencies, shares in the responsibility for meeting  this goal. Contracting is particularly significant at DOE, which spends  more on contracting than any other civilian agency in the federal  government. More than 90 percent of DOE’s total fiscal year 2003 budget,  or $21.6 billion, was spent on prime contracts. The majority of this  amount—$18.2 billion, or more than 80 percent of the contracting  dollars—was spent on 37 large contracts for the management of DOE’s  laboratories, production facilities, and environmental restoration sites. As  a group, these contracts are referred to as facility management contracts.  Under these facility management contracts, a contractor is responsible for  performing, managing, and integrating the work at a DOE site, often  subcontracting specific portions of the work to other businesses.
DOE’s approach to reporting its small business prime contracting dollars  has been affected by a change in federal policy concerning whether  subcontracts with small businesses can in certain situations be counted  toward achieving small business prime contracting goals. For most of the  1990s, DOE included in its calculations of small business prime  contracting achievements the subcontracts awarded to small businesses  by its facility management contractors. The Office of Federal Procurement  Policy had allowed DOE to include these subcontracts because of DOE’s  unique reliance on facility management contractors to operate its facilities  and carry out its missions. In 1999, however, the Office of Federal  Procurement Policy determined that to ensure consistent reporting of  achievements across the federal government, DOE could no longer include  the subcontracts under facility management contracts when calculating  the percentage of prime contracting dollars awarded to small businesses.
You asked us to examine what has happened as a result of this policy  change. My testimony will discuss (1) the effect of the 1999 policy change  on the amount of prime contracting dollars that DOE will be required to  direct to small businesses, (2) the steps that DOE has taken or plans to  take to achieve its small business contracting goals, and (3) the likely  implications for DOE’s programs, if any, resulting from these changes.
My testimony is based on a review of DOE small business contracting  goals and achievements from fiscal year 1990 through fiscal year 2003. Our  work included a review of DOE’s plans to achieve its near-term goals and  the projected incremental increases needed to achieve long-term goals.  These goals were developed by DOE’s Office of Small and Disadvantaged  Business Utilization (referred to in this testimony as DOE’s Small Business  Office) within its Office of Economic Impact and Diversity. We also  reviewed documentation provided by DOE and the Small Business  Administration (SBA), and completed and current procurements for new  small business prime contracts. We interviewed DOE and contractor  officials at DOE headquarters and selected sites, as well as national and  regional small business associations and advocacy groups. Our scope  included DOE’s three largest offices–the National Nuclear Security  Administration (NNSA), and the Offices of Environmental Management  (EM) and Science–that account for about 70 percent of DOE’s annual  budget. We conducted our review from February 2004 through May 2004 in  accordance with generally accepted government auditing standards. Our  review included a data reliability assessment on DOE’s small business  prime contracting and subcontracting results for fiscal years 1990 through  2003. These data are being used primarily for context. Our assessment of  DOE’s prime contracting data determined that the data are sufficiently  reliable for the purposes of this testimony. Although we are not as  confident of the reliability of the subcontracting data as reported to DOE  by its facility management contractors, we determined that these are the  only data available and they are sufficiently reliable for the observations  presented in this testimony.
In summary, we found the following:    To comply with the 1999 federal policy change and to achieve federal  small business prime contracting goals, DOE would need to direct  significantly more prime contracting dollars to small businesses. To  achieve DOE’s near-term small business prime contracting goals of 5.06  percent in fiscal year 2004, and 5.50 percent in fiscal year 2005, DOE  will have to direct an additional $226 million in fiscal year 2004, and  $319 million in fiscal year 2005, above the roughly four percent of  prime contracting dollars directed to small businesses in fiscal year  2003. The long-term goal of 23 percent in small business prime  contracting represents a level significantly beyond what DOE has ever  achieved—about 6 times the $847 million directed to small businesses  in fiscal year 2003. Placed in the context of DOE’s current contracting  base, such an increase would represent an amount approximately equal  to the annual budgets of the two largest laboratories—Los Alamos and  Sandia National Laboratories.
DOE has taken steps to increase its near-term small business prime  contracting, but has no consistent strategy for reaching the eventual  goal of directing 23 percent of its prime contracting dollars to small  businesses. To achieve the near-term goals, DOE has focused primarily  on improving outreach to the small business community and directing  additional contract dollars to small businesses from procurements not  associated with facility management contracts. In addition, as certain  facility management contracts are due for renewal, DOE, and  especially EM, has begun identifying potential work that could be  redirected in the form of small business prime contracts. In the longer  term, it is less clear how, or if, DOE intends to achieve an eventual goal  of 23 percent small business prime contracting. In 2002, DOE’s Small  Business Office prepared a 20-year plan outlining when and how the  department would achieve the 23 percent small business prime  contracting goal. Since DOE’s facility management contracts represent  about 80 percent of its total contract dollars, the department cannot  mathematically achieve the 23 percent goal without redirecting some of  those dollars to small business prime contracts. Although the 20-year  plan proposed that eventually DOE would redirect about a fifth of its  facility management contract dollars to small business prime contracts,  it provides no details as to which offices would provide those dollars.  DOE’s three largest offices have differing views as to how much of the  work that is done by facility management contractors can be redirected  to small businesses without jeopardizing the department’s missions.  While the EM program has begun to move work from its facility  management contracts and redirect these dollars to small business  prime contracts, EM officials said that doing so must be consistent with  the overall strategy of accelerating cleanup at DOE sites and must be at  a level that can be effectively managed by EM contract and project  management staff. In contrast, officials in the two offices that oversee  DOE’s research laboratories—NNSA and Science—said that their  programs are less able to redirect significant segments of their work  from facility management contracts to small businesses without  jeopardizing critical research missions. DOE has not reconciled these  differing views into a consistent strategy for achieving its long-term  small business contracting goals.
The implications of increasing small business prime contracts depend  on the eventual goals that DOE attempts to achieve. Given the  contrasting views of DOE’s three largest offices, it is not clear if DOE  as a whole will commit to the incremental increases that would  eventually lead to a 23 percent rate of prime contracting to small  businesses. Regardless of how far DOE moves in the direction of  providing more prime contracting dollars for small businesses, efforts  to increase small business prime contracting involve both potential  benefits and risks. In addition to helping the federal government meet  the overall goal of 23 percent prime contracting, potential benefits  include increasing the pool of possible contractors, which could result  in better competition and perhaps better prices for the government;  finding new and innovative approaches developed by small businesses;  and providing experiences to small businesses that could enhance their  capacity to compete for other federal contracts. The potential risks  associated with increasing the number of small business prime  contracts include difficulties integrating and coordinating the activities  of a greater number of prime contractors at a site to ensure safe,  secure, and effective operations and having adequate federal resources  for effective contract management and oversight—two areas that  continue to be a challenge for DOE. Furthermore, DOE’s efforts to  increase small business prime contracting may cause facility  management contractors to reduce the amount of subcontracting  dollars that they direct to local and regional small businesses.
We discussed a draft of this testimony with DOE officials representing  DOE’s Small Business Office, procurement organizations, NNSA, EM, and  Science. DOE officials generally agreed with the information and  observations presented in the testimony, with two exceptions. First, DOE  said that it disagreed with our statement that DOE has no consistent  strategy for reaching an eventual goal of directing 23 percent of its prime  contracting dollars to small businesses. DOE argued that its 20-year plan,  its annual goal-setting process with SBA, and the individual goal setting  that occurs within NNSA and the program offices collectively represented  a consistent strategy. We disagree. Although DOE has a 20-year plan that  projects incremental increases in small business prime contracting up to  23 percent by 2022, no strategy is in place that defines how DOE will  achieve this goal, identifies what the contributions of the various DOE  organizational components will be, or reconciles the differing views within  DOE as to what would be an appropriate level of small business prime  contracting. Second, DOE said that we have mischaracterized its 23  percent small business prime contracting goal as an eventual long-term  goal, while DOE views it as a goal that it may or may not agree to, based  on its annual negotiations with SBA. We believe we have appropriately  described DOE’s goal and we stated that it is not clear if DOE will commit  to the incremental increases that would lead to achieving the goal. Finally,  DOE suggested technical corrections, which we incorporated as  appropriate.
subsections: section_title: Background
paragraphs: DOE has about 50 major sites around the country where the department  carries out its missions, including developing, maintaining, and securing  the nation’s nuclear weapons capability; cleaning up the nuclear and  hazardous wastes resulting from more than 50 years of weapons  production; and conducting basic energy and scientific research, such as  mapping the human genome. This mission work is carried out under the  direction of NNSA and DOE’s program offices.
With a workforce of 16,000 federal employees and more than 100,000  contractor employees, DOE relies primarily on contractors to manage and  operate its facilities and to accomplish its missions. In addition to  accomplishing DOE’s core mission work, managing and operating the sites  involves a broad range of support activities, such as information  technology, safety, security, and purchase of products and services.
The Small Business Act, as amended by the Small Business  Reauthorization Act of 1997, directed the President to establish the goal  that not less than 23 percent of the federal government’s prime contracting  dollars would be directed to small businesses each fiscal year. SBA is  charged with working with federal agencies to establish agency small  business contracting goals that, in the aggregate, meet or exceed the 23  percent government-wide goal. SBA negotiates an annual goal with each  agency based on the overall amount of contracting in the agency  (contracting base) and the agency’s past achievements. SBA guidelines for  setting individual agency goals specify that certain types of federal  spending should not be included in the contracting base. These exclusions  include items such as grants, purchases from mandatory sources, or  contracts for work done internationally for which U.S. small businesses  would not be competing. For fiscal year 2003, excluding such items  resulted in a DOE contracting base of about $21 billion subject to the small  business prime contracting goal. As figure 1 shows, facility management  contracts account for more than 80 percent of this amount.
DOE’s Small Business Office negotiates annual small business contracting  goals with SBA, coordinates outreach efforts with the small business  community, and works with NNSA and DOE’s program offices to establish  and monitor annual goals for small business contracting. DOE’s Office of  Procurement and Assistance Management and NNSA’s Office of  Acquisition and Supply Management establish policies and guidance for  conducting procurements according to federal and departmental  regulations, and maintain the information systems on the department’s  prime contracts, including annual dollars provided to each contract. NNSA  and DOE’s program offices, such as EM and Science, are responsible for  identifying opportunities for small business contracting and providing  program oversight and direction to the contractors.
section_title: Unprecedented Levels of Small Business Prime Contracting Necessary for DOE to Meet Future Goals
paragraphs: Since the 1999 federal policy change, DOE can no longer include  subcontracts of its facility management contractors when calculating the  department’s small business prime contracting goals. As a result, to  achieve even its near-term small business prime contracting goals, DOE  will have to direct more prime contracting dollars to small businesses than  it ever has in the past. Further, meeting a long-term goal of 23 percent  small business prime contracting would represent an achievement far  beyond what DOE has ever reached—about 6 times the $847 million that it  directed to small businesses in fiscal year 2003.
subsections: section_title: Meeting Near-term Goals Requires More Small Business Prime Contracting Dollars Than Previously Achieved
paragraphs: Now that DOE’s facility management subcontracts can no longer be  counted toward achieving its small business prime contracting goals,  achieving its near-term goals for fiscal years 2004 and 2005, will require  DOE to expand the amount of prime contracting dollars it provides  directly to small businesses. The department has a goal of directing to  small business prime contracts 5.06 percent of its contracting base in fiscal  year 2004, and 5.50 percent of its contracting base in fiscal year 2005.  These goals surpass any of DOE’s small business prime contracting  achievements prior to fiscal year 2004. As figure 2 shows, the percentage  of prime contracting dollars DOE directed to small businesses in any year  since 1996 ranges from 2.68 percent to 3.99 percent. During 1991 through  1999, when DOE could include in its achievements those dollars going to  small business subcontractors of facility management contractors, as well  as dollars going directly to small business prime contractors, DOE’s  reported percentages of prime contracting dollars awarded to small  businesses ranged from 15.7 percent to 19.9 percent. However, most of  the reported achievements during those years came from facility  management subcontracting dollars going to small businesses. The  remainder of the reported achievements came from prime contracts to  small businesses for work not associated with facility management  contracts.
Meeting the small-business prime contracting goals in fiscal years 2004 and  2005 will require DOE to achieve a substantial increase over the $847  million in prime contracting dollars that DOE provided directly to small  businesses in fiscal year 2003. To meet its fiscal year 2004 goal, DOE will  need to direct an additional $226 million, or 26.7 percent, over the 2003  amount. Meeting the department’s 2005 goal will require directing $319  million more than in 2003, an increase of 37.7 percent over 2003 levels.
section_title: Meeting the Long-term Goal of 23 Percent Requires Huge Increases in Small Business Prime Contracting
paragraphs: Although achieving DOE’s near-term small business prime contracting  goals for fiscal years 2004 and 2005 will not be easy, the long-term goal of  23 percent would require an achievement far beyond what DOE has  accomplished in the past. SBA expects DOE to achieve a small business  prime contracting goal at least on par with the federal goal of 23 percent.  DOE’s response has been to formulate a plan for gradual compliance. In  2002, DOE’s Small Business Office submitted a plan to SBA to achieve the  23 percent goal in 20 years, by the year 2022.
According to this 20-year plan, DOE would increase its level of small  business prime contracting by about 1 percentage point per year to  achieve the 23 percent goal by 2022. To achieve this goal, the department  would need to increase its small business prime contracting to about $5  billion, or 6 times its 2003 achievement. Put in terms of DOE’s current  contracting base, the additional amount of contracting dollars necessary  to achieve the 23 percent goal approximately equals the combined annual  budgets of the facility management contracts for the two largest  laboratories—Los Alamos and Sandia National Laboratories.
Meeting the 23 percent goal under DOE’s current contracting approach  means that a substantial portion of dollars now included in facility  management contracts would have to be redirected to small business  prime contracts, resulting in more prime contracts for DOE to manage.  Redirecting these dollars would be necessary because prime contracts not  associated with facility management generally account for less than 20  percent of DOE’s total prime contract dollars. Therefore, even if all the  dollars not associated with facility management contracts were directed to  small businesses, the total amount would be insufficient to meet the 23  percent small business prime contracting goal.
section_title: DOE Has Near-term Plans But No Consistent Strategy for Achieving Long- term Small Business Contracting Goals
paragraphs: Although DOE has an agreed upon organizational strategy to achieve its  near-term small business prime contracting goals, a consistent view does  not prevail within the department on whether or how to reach the eventual  goal of directing 23 percent of prime contracting dollars to small  businesses. To achieve the near-term goals of 5.06 of prime contracting  dollars to small businesses in fiscal year 2004, and 5.50 percent in fiscal  year 2005, DOE has focused primarily on improving outreach to the small  business community, directing more of the dollars not associated with  facility management contracts toward small businesses, and beginning to  redirect selected facility management contract activities to small business  prime contracts. It is less clear, however, how DOE intends to achieve the  eventual long-term goal of 23 percent small business prime contracting.  DOE’s Small Business Office’s 20-year plan calls for redirecting about 20  percent of facility management contract dollars to small business prime  contracts but provides no details as to how NNSA and the program offices,  such as EM and Science, would implement the plan. Officials in these  offices have differing views as to how much of the work done by their  facility management contractors can be redirected to small businesses  without jeopardizing critical agency missions.
subsections: section_title: Near-Term Plans Focus Primarily on Increasing Awards of Non-Facility Management Contracts to Small Businesses
paragraphs: DOE’s plan for achieving its near-term small business prime contracting  goals focuses primarily on directing more of the dollars not associated  with facility management contracts to small businesses. To increase the  percentage of such dollars going to small businesses, DOE has expanded  its outreach to the small business community, notifying small businesses  of contracting opportunities and preparing them to compete for these  contracts. DOE’s Small Business Office has developed a variety of  outreach and capacity-building activities designed to assist small  businesses in competing for DOE prime contracts. For example, DOE’s  Small Business Office fosters mentor-protégé relationships between small  businesses and DOE’s large prime contractors to help the small businesses  expand their expertise. In addition to these department-wide efforts,  offices such as NNSA and EM have also developed outreach activities,  generally related to specific prime contract opportunities (see table 1 for  examples.)
In addition to its outreach efforts, DOE has taken steps in two other major  areas. First, it has established internal requirements that it believes will  help make progress toward achieving its small business prime contracting  goals. These internal requirements were part of a 14-item plan of action  included in the 20-year plan. The plan of action includes reviews of  upcoming contracts to identify work activities that could potentially be  awarded to small businesses, and regular monitoring of DOE program  level and agency-wide achievements toward DOE’s annual goals. For  example, each year DOE’s Small Business Office requires each program  office to develop a small business plan that reflects the program’s goals for  increasing prime contracts with small businesses. These program plans are  used to develop DOE’s overall small business contracting goals, and DOE’s  Small Business Office tracks progress toward these goals quarterly.  Second, DOE has modified some of its procurement processes to eliminate  certain barriers for small businesses, such as bonding requirements, and to  help small businesses minimize the cost of developing proposals. For  example, DOE has limited the amount of documentation that small  businesses are required to submit in response to a request for proposals to  50 pages instead of volumes of supporting documentation.
To achieve the near-term small business prime contracting goals in fiscal  years 2004 and 2005, DOE is concentrating primarily on contracts not  associated with facility management, because doing so does not involve  significant changes in the way the department does business. For  contracts not associated with facility management, as new work is  identified or existing contracts come up for renewal, DOE sets them aside  for small businesses and awards them as small business prime contracts  whenever possible. For example, the information technology support  contract for DOE headquarters came up for renewal in January 2002. DOE  determined that this contract, which was held by a large business, could  be carried out by a small business. The new contract, for a 5-year term  with a total value of $409 million, was awarded in January 2003, to a team  that included a consortium of 10 small businesses.
NNSA and the program offices have also focused primarily on  procurements not associated with their facility management contracts.  NNSA, EM, and Science officials issued policy letters stressing the  importance of directing contracts for activities not associated with facility  management to small businesses to the maximum extent possible. For  example, for any upcoming contract not associated with facility  management, program office personnel must first conduct market  research to determine if any small businesses are capable of performing all  or parts of the work and have the necessary qualifications to do so. If the  program office finds two small businesses capable of doing the work, the  policy requires the contract or parts of the contract to be “set aside” from  unrestricted competition and instead generally be made available for a  more restricted competition among small businesses. Any exceptions to  this policy must be approved by the head of the program office.
Although in the near term DOE is concentrating primarily on contracts not  associated with facility management, it has also begun to look at certain  facility management contracts as they come up for renewal to identify  potential work that could be made available to small businesses. DOE’s  Offices of EM and Fossil Energy have identified several specific activities  that had been within a facility management contractor’s scope of work and  have set those activities aside for small business prime contracts. (See  table 2 for examples.)
Of the examples shown in table 2, the procurement at the Strategic  Petroleum Reserve in Louisiana is the only one that DOE has completed so  far. According to DOE officials with the Office of Fossil Energy, when the  facility management contract was nearing the end of its term, DOE’s Small  Business Office asked the program office to look for opportunities for  small business prime contracts. DOE officials at the Strategic Petroleum  Reserve said they identified a number of construction projects that could  be performed by small businesses, and awarded several prime contracts to  small businesses for this work. DOE officials then decided to remove all  the construction management work from the facility management contract  for the site so that a new small business prime contractor for construction  management could then award and manage subcontracts for individual  construction projects. According to DOE’s contracting officer at the  Strategic Petroleum Reserve, having the new prime contractor responsible  for awarding and managing the contracts will reduce the amount of  additional work required by DOE procurement and program personnel.  The prime contract was awarded in November 2003.
section_title: DOE’s Small Business Office and Program Offices Have Different Views on the Extent to Which Facility Management Contract Dollars Can Be Redirected to Small Business
paragraphs: While DOE’s Small Business Office and the three largest offices have a  consistent approach to their near-term goals—primarily focusing on  increasing small business prime contracting by using dollars not  associated with facility management contracts—a consistent view does  not prevail in the department on whether or how to achieve the eventual  goal of directing 23 percent of prime contracting dollars to small  businesses. DOE’s Small Business Office’s plan to achieve the long-term  small business prime contracting goals has two main components. The  first is to continue increasing the small business share of contract dollars  not associated with facility management contracts. For any new contracts  not associated with facility management, DOE has a stated preference to  set aside those contracts for small businesses where possible. The three  largest offices have been consistent in their efforts to do so. However,  even this portion of DOE’s contracting base (about 20 percent of total  contract dollars) is not immediately available for small business prime  contracts. For example, many of the contracts not associated with facility  management cover multiple years, so only a portion of these contracts are  up for award or renewal in a given year. In addition, some contracts for  work not associated with facility management may not be available for  award to small businesses, for example, if market research determines  that there are not at least two small businesses capable of performing all  or parts of the work in an upcoming procurement.
Because of the limited amount of contracting dollars for work not  associated with facility management, the second component of DOE’s  Small Business Office’s long-term plan is to redirect dollars now going to  facility management contracts to small business prime contracts. DOE’s  20-year plan calls for increasing dollars redirected from facility  management contracts to small business prime contracts from less than 1  percent in 2003 to about 20 percent by 2022 (see figure 3).
Nevertheless, DOE does not have a consistent strategy in place to  accomplish its plan for redirecting dollars from its facility management  contracts to small business prime contracts. Officials in NNSA, EM, and  Science have considerably different views about the feasibility of  redirecting significant amounts of funding from their facility management  contracts to small businesses. For example:    Both NNSA and Science officials are very concerned about the  implications of setting aside for small businesses significant portions of  the dollars now going to facility management contractors that operate  the weapons and research laboratories. NNSA and Science officials’  concerns stem from the large scale of laboratory operations, the  integrated nature of the mission and mission support work, and the  complexity and critical importance of the laboratory missions. These  officials said that fragmenting mission activities among several  contractors at the research laboratories, whether the contractors were  large or small businesses, was inadvisable. Therefore, according to  NNSA’s Director of Acquisition and Supply Management and Science’s  Director of Grants and Contracts, NNSA and Science may never  achieve a 23 percent small business prime contracting level because  doing so would be inconsistent with accomplishing their missions  safely, securely, and effectively.
Despite the reluctance to fragment core mission activities, NNSA and  Science officials said they would explore opportunities to contract  separately with small businesses for mission support functions at the  laboratories if those mission support functions were not closely  integrated with the laboratories’ core missions. For example, NNSA is  analyzing its own purchases of goods and services, such as computer  hardware, software, and staffing services, as well as similar purchases  by its facility management contractors. NNSA is assessing the  feasibility of purchasing these items in bulk under a prime contract,  rather than multiple separate contracts. An NNSA official said that  NNSA is not trying to increase its small business prime contracting  numbers by becoming a purchasing agent for its facility management  contractors, but rather combining similar requirements as a way to  possibly increase NNSA’s level of prime contracting to small business.  On the basis of this analysis, NNSA is pursuing three potential  opportunities, valued at about $80 million, involving technical services  and services to provide temporary staff, and is exploring other  opportunities.
By contrast, EM officials were more optimistic about the potential role  of small businesses in accomplishing its core missions. The Assistant  Secretary for EM said that part of its initiative to accelerate the cleanup  of DOE sites involves greater use of alternatives to traditional facility  management contracts, including removing work from facility  management contracts and setting that work aside for small  businesses. The Assistant Secretary said that these small business  procurements are part of EM’s overall strategy to clean up sites more  quickly and at a lower cost to the government, not just to increase the  amount of small business prime contracting.
EM is also developing a complex-wide contracting arrangement, called  indefinite delivery/indefinite quantity, which will result in prime  contracts with both large and small businesses for smaller-scale  cleanup activities. According to EM’s Director of Acquisition  Management, the multiple contracts awarded under this initiative will  allow EM sites nationwide to quickly purchase cleanup services from  small and large businesses without having to conduct a separate  procurement, which can take months to complete. Instead, either EM  or the facility management contractor will be able to simply write a  task order against these existing contracts.
Finally, it is unclear to what extent EM can expand its use of small  business prime contracts to accomplish its core missions. According to  the Assistant Secretary, the main constraint is the ability of EM staff to  effectively oversee those contracts, not the availability of qualified  small businesses to perform the work. The Assistant Secretary said that  EM is proceeding carefully to ensure that effective management and  oversight will occur; that cost, schedule, and technical standards are  met; and that safety and security issues are adequately addressed.
section_title: Potential Benefits and Risks of Increased Small Business Prime Contracting Depend on the Goal that DOE Tries to Achieve
paragraphs: Since DOE is in the early stages of implementing a long-term strategy to  redirect facility management contracting dollars to small businesses, the  implications of increased small business prime contracting are still  relatively uncertain. However, the implications depend heavily on the  extent to which DOE agrees, in its negotiations with SBA, to meet the 23  percent small business prime contracting goal. Given the differences we  heard in the approaches of the three largest offices, it is not clear if DOE  will commit to the incremental increases that would eventually lead to a 23  percent rate of prime contracting to small businesses, as detailed in the 20- year schedule prepared by DOE’s Small Business Office. Absent more  specific direction from Congress or the executive branch, DOE’s eventual  commitment to a particular small business prime contracting goal appears  to rest heavily on whether the department will be willing to change its  approach to contracting for activities at the science and weapons  laboratories, its environmental cleanup work, or both. Regardless of the  extent to which DOE directs more prime contracting dollars to small  businesses, efforts to increase small business prime contracting involve  potential benefits as well as potential risks.
subsections: section_title: Potential Benefits of Increasing Small Business Prime Contracting
paragraphs: An overarching benefit of increasing small business prime contracting is  that DOE would be helping to carry out the President’s small business  agenda and would be contributing to the federal government’s overall goal  of directing 23 percent of prime contracting dollars to small businesses.  Beyond contributing to this overall effort, DOE’s Small Business Office  and procurement officials explained that the benefits included increased  competition, greater innovation, and enhanced small business capacity.
One example of increased competition can be seen in EM’s program.  DOE’s efforts to increase small business contracting have resulted in new  procurements with narrower scope. In the past, EM has been concerned  about the limited pool of potential contractors for large cleanup projects,  sometimes receiving only two proposals on multibillion dollar  procurements. By structuring the cleanup work into smaller contracts and  opening them to individual small businesses or small business teams, EM  expects to attract more potential bidders. One of EM’s current  procurements is for cleanup work at the Fast Flux Test Facility at the  Hanford site in Washington state. Currently included in a facility  management contract, EM is in the process of redirecting this work as a  small business set-aside. EM officials said that in the response to the  request for proposals for this project, with an estimated contract amount  of $46 million per year for up to 8 years, DOE received proposals from  several small business teams. According to EM officials, increased  competition from a larger pool of potential contractors could result in  better prices for the government. However, since the contracts for the  current small business procurements have not yet been awarded, it is too  soon to tell whether better prices will be realized.
In addition to increased competition, DOE procurement and program  office officials believe that small businesses may bring new ideas and  innovative approaches to the work. For example, as part of its accelerated  cleanup strategy, EM has been looking for better and faster ways to  accomplish cleanup at its sites and facilities. According to EM officials,  expanding the pool of potential contractors for cleanup projects may  increase the potential for new technology and ideas.
Increasing small business prime contracting can also provide small  businesses with the experience necessary to compete for other federal  prime contracts. According to small business associations and advocacy  groups that we contacted, a direct contracting relationship with DOE  provides small businesses with more challenging work and better  opportunities to grow and expand their businesses. The use of mentor- protégé arrangements or teaming with other small or large businesses also  provides opportunities for growth and economic development. For  example, an owner of a small construction company in New Mexico told  us that his business had successfully teamed with a large construction  company for several projects and that his small company was now the  senior member of that team and was competing for DOE prime contracts.
section_title: Potential Risks of Increasing Small Business Prime Contracting
paragraphs: DOE’s long-term strategy for achieving a 23-percent small business prime  contracting goal includes redirecting a substantial amount of facility  management contract dollars to small business prime contracts. DOE  procurement and program officials acknowledge that doing so would  significantly increase the number of prime contracts DOE would have to  manage. Increasing DOE’s number of prime contracts, whether these are  with small or large businesses, could create problems with integrating and  coordinating the efforts of more contractors at a site, as well as create  problems with contract management and oversight. In addition, DOE’s  efforts to increase small business prime contracting could inadvertently  reduce the amount of small business subcontracting directed to local and  regional small businesses.
Increasing the number of prime contracts at a site raises concerns about  integration, coordination, and accountability. If a facility management  contractor has primary responsibility for accomplishing work at the site,  that contractor is also accountable for integrating the efforts of multiple  subcontractors to ensure that the mission work is accomplished. In  addition, the facility management contractor has the responsibility for  ensuring that all contractor and subcontractor employees at the site  comply with DOE safety and security standards. If the work done by the  facility management contractor becomes fragmented and spread among  multiple prime contracts, DOE may need to carry out these integration  functions, which places more oversight responsibilities on federal program  and project management personnel. If the number of prime contractors at  a site increases significantly, the challenges associated with integrating  and coordinating the activities also increase. Both DOE and facility  management contractor officials have expressed concerns about  successfully integrating and coordinating the efforts of an increased  number of prime contractors at a site. Ensuring that all work is performed  in accordance with DOE safety and security standards is a significant  concern, especially given the continuing challenges that the department  faces in these two areas.
To begin to address the constraint of having a limited number of federal  employees to perform coordination and integration functions, DOE is  considering awarding small business prime contracts but then having the  facility management contractors at the sites manage and oversee the work.  As some facility management contracts are extended or awarded, DOE  includes a provision that specifically allows the department to identify and  redirect work within the facility management contract to a small business  prime contract. The provision also allows DOE to request the facility  management contractor to manage and oversee the work. Since the work  that DOE would redirect is generally already being done by a facility  management subcontractor, the only actual change is the contractual  relationship. In fiscal year 2003, NNSA started using this arrangement for  facilities and infrastructure restoration projects at the Sandia National  Laboratory in New Mexico. NNSA awarded prime contracts—$100,000 in  fiscal year 2003 and an estimated $3 million in fiscal year 2004—to small  businesses for some of these projects. Although it is too soon to fully  assess the implications of this arrangement, facility management  contractor officials at the Sandia laboratory have expressed concern that  it could confuse the lines of authority and accountability at the site,  because the contractual relationship is not consistent with the daily  management and oversight of the activities being performed. In prior  work, we have also expressed concerns about confusing the lines of  authority, which can make it difficult to hold contractors accountable for  performance.
Regarding contract management and oversight, increasing the number of  prime contracts with DOE could place further strain on DOE’s  procurement and program oversight personnel. DOE’s reliance on  contractors to operate its facilities and carry out its missions, coupled with  the department’s history of inadequate contractor management and  oversight, led us in 1990 to designate DOE contract management as a high- risk area vulnerable to fraud, waste, abuse, and mismanagement. This  high-risk designation is still in effect. GAO and others have stated that one  of the contributing factors to DOE’s inadequate oversight of its contractors  has been a shortage of personnel with the right skills to perform these  functions.
Although DOE has over the past several years made progress in training  and certifying its procurement and project management personnel, DOE  procurement and program officials said that the overall number of  available personnel has not grown, and has significantly decreased in  NNSA. More prime contracts would create additional work for federal  employees in two phases: managing the procurement process by  requesting and evaluating proposals to award a contract, and overseeing  the work of the contractor to ensure that performance is acceptable. DOE  officials at headquarters and at the sites we visited expressed concerns  that significantly increasing the number of prime contracts could reduce  the ability to adequately oversee and evaluate contractor performance.
While headquarters and site office officials in the EM program  acknowledge the potential risks that additional prime contracts can create  in both integrating work activities at a site and contract management and  oversight, they are pursuing ways to mitigate those risks. To address  concerns about sitewide integration of safety and security, DOE officials  at Hanford plan to use contract language and incentives to encourage the  site’s new small business prime contractors and the facility management  contractors to work together. To earn potential incentive fees under this  proposed arrangement, for example, all prime contractors will have to  cooperate in such areas as safety and security. But, since these are new  approaches and the small business prime contracts have yet to be  awarded, the extent to which these steps will mitigate the potential risks is  unknown. To lessen the impact of additional prime contracts on  procurement and program personnel, EM officials said they intend to use a  contract for small business procurements that has a well-defined  statement of work and that ties incentive fees to accomplishing the  contract’s stated final goal rather than to interim steps. According to EM’s  Director of Acquisition Management, administering such contracts  generally may require less federal involvement, although EM will also have  to train its staff on the most effective way to manage these contracts.
In addition to the potential risks discussed above, DOE and contractor  officials, as well as representatives of small business advocacy groups,  raised concerns about DOE’s efforts to increase small business prime  contracting. One concern expressed was that such efforts could  inadvertently result in less total contracting dollars directed to the small  business community. Procurement regulations require that all facility  management contractors have a small business subcontracting plan and  facility management contractors must generally negotiate annual small  business subcontracting goals with the department. However, if work is  removed from a facility management contract, the facility management  contractor may negotiate lower subcontracting goals with the department  and then subcontract less of the remaining work to small businesses. Since  the efforts to redirect facility management contract dollars to small  businesses is in its early stages, no data are yet available to validate this  concern.
A related concern is that if DOE removes work from a facility management  contract and sets that work aside for a small business procurement, there  may be fewer contracting dollars available to local and regional small  businesses. This could occur because DOE’s facility management  contractors generally are not required to follow federal regulations in their  procurements, but instead comply with “best business practices.” In doing  so, a facility management contractor can restrict a competition for its  subcontracts to the local small business community. In contrast, DOE  must generally open up its procurements to nationwide competition,  which may result in fewer contracts going to local and regional small  businesses. Again, no data are yet available to validate this concern.
Finally, representatives of some small business advocacy groups told us  that some small businesses would rather have a subcontract with a facility  management contractor than a prime contract with DOE. This is because  facility management contractors generally have fewer administrative  requirements and a less burdensome and faster procurement process.
It is not clear to what extent these potential risks will affect DOE’s ability  to carry out its missions in a safe, secure, and effective manner. The  impact on DOE’s missions of increasing small business prime contracts  will depend both on the total number of new prime contracts awarded and  on how well the department manages the contractors and the work. The  stakes are high as DOE attempts to contribute to the federal government’s  goal of increasing the prime contracting dollars directed to the small  business community, while striving to accomplish its missions efficiently  and effectively.
This concludes my testimony. I would be pleased to respond to any  questions that you may have.
For further information on this testimony, please contact Ms. Robin  Nazzaro at (202) 512-3841. Individuals making key contributions to this  testimony included Carole Blackwell, Ellen W. Chu, Matt Coco, Doreen  Feldman, Jeff Rueckhaus, Stan Stenersen, and Bill Swick.
section_title: Appendix I: Department of Energy (DOE) Contract Dollars Directed to Small Businesses, Fiscal Years 1990–2003
subsections: section_title: Small business subcontracts awarded by prime contractors
paragraphs: Small business  subcontracts awarded by  all other prime contractors  Small and large business  subcontracts awarded by prime  contractors  Small business prime and subcontracts  (as a percent of contracting base)
Small business subcontracts  awarded by prime contractors  Small business  subcontracts awarded by  all other prime contractors  Small and large business  subcontracts awarded by prime  contractors  Small business prime and subcontracts  (as a percent of contracting base)
DOE’s contracting base includes dollars that can potentially be directed to U.S. small businesses,  excluding, under Small Business Administration (SBA) guidelines, dollars that cannot go to small  business prime contracts, such as grants and purchases from mandatory or foreign sources.
We calculated the percentage of DOE’s contract dollars going to small business prime contracts by  dividing small business prime contract dollars (row 5) by the contracting base (row 1).
For fiscal years 1991 through 1999, DOE’s annual small business prime contracting achievements,  as reported to SBA, included DOE subcontracts awarded to small businesses by its facility  management contractors, as well as prime contracts awarded directly to small businesses. To  calculate small business prime contracting achievements for these 9 years, we therefore added rows  5 and 7 and divided the sum by row 1. We did not do this calculation for fiscal years 1990 and 2000  through 2003 because small business subcontracts from facility management contractors did not  “count” in those years toward small business achievement percentages.
We calculated the overall percentage of DOE’s contract dollars going to small businesses—via both  prime contracts and subcontracts—by dividing DOE’s contract dollars to small businesses (row 4) by  the contracting base (row 1).
We calculated the percentage of total subcontracting dollars going to small business by dividing small  business subcontract dollars from prime contractors (row 6) by total subcontract dollars going to small  and large businesses (row 9).
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