The New Anti-Bundling Rules

On Wednesday, July 26^th, the Small Business Administration adopt­ed fi­nal rul­es to ad­dress un­nec­es­sary con­so­li­da­tion of con­tract re­quire­ments that would pre­clude small busi­nes­ses com­pet­ing as prime contractors. 65 Fed. Reg. 45831 (2000). We’re talking here about “bund­ling,” the con­sol­i­da­tion in­to sing­le ac­qui­si­tions that pre­clude small busi­nes­ses from com­pe­ting, of re­quire­ments for goods or serv­ices prev­ious­ly pro­vid­ed or per­formed un­der sep­ar­ate, smal­ler contracts.

Bundling has al­ways been im­prop­er, this un­der gen­er­al stat­u­tory pro­vis­ions that de­mand full and open com­pe­ti­tion and al­low res­tric­tions on avail­able com­pe­ti­tion only as au­thor­i­zed by law, or as nec­es­sary to satis­fy agen­cy needs. 10 U.S.C. § 2305(a)(1)(B)(ii); 41 U.S.C. § 253a­(a)­(2)­(B) (so­li­ci­ta­tions may “in­clude res­tric­tive pro­vis­ions or con­di­tions only to the ex­tent nec­es­sary to sat­is­fy the ne­eds of the agen­cy or as au­thor­i­zed by law”).

But “com­mon sen­se” teach­es that it is al­ways eas­ier to deal with few­er ven­dors, and in or­der that the in­ter­ests of small busi­nes­ses in par­ti­ci­pat­ing as fed­er­al prime con­trac­tors not be sac­ri­fi­ced to ac­qui­si­tion tream­lin­ing, Cong­ress en­act­ed a pref­er­ence with sec­tion 413 of the Small Busi­ness Re­aut­hor­i­za­tion Act of 1997, a pref­er­ence for un­bundl­ed ac­qui­si­tions suit­able for small busi­ness competition.

This statutory pref­er­ence so far has not stem­med an ever-dim­in­ish­ing share of fed­er­al pro­cure­ment for small busi­ness prime con­trac­tors. The now fi­nal rul­es add­ress this prob­lem by bol­ster­ing the stat­u­tory pref­er­ence—but whet­her or not the fi­nal rules will be ef­fec­tive is an open question.

The statutory preference for un­bundl­ed pro­cure­ments is set out here:

(j) Contract bundling. In complying with the state­ment of cong­res­sion­al policy ex­pres­sed in subsection (a) of this section, relating to fos­ter­ing the par­ti­ci­pa­tion of small bus­i­ness concerns in the con­trac­ting ac­tiv­i­ties of the Gov­ern­ment, each Fed­er­al agen­cy, to the maxi­mum ex­tent practicable, shall—

(1)  comply with congressional intent to foster the participation of small bus­i­ness concerns as prime con­trac­tors, sub­con­trac­tors, and suppliers;

(2)  structure its contracting requirements to facilitate competition by and among small busi­ness con­cerns, taking all rea­son­able steps to eliminate ob­sta­cles to their par­ti­ci­pa­tion; and

(3)  avoid unnecessary and unjustified bundling of contract requirements that pre­cludes small business par­ticipation in pro­cure­ments as prime con­trac­tors.

15 U.S.C. § 631. This statutory preference is implemented with the following provisions:

(e) Procurement strategies; contract bundling.

(1) In general. To the max­i­mum ex­tent prac­ti­ca­ble, pro­cure­ment strat­e­gies used by the vari­ous agen­cies hav­ing con­trac­ting au­thor­ity shall faci­li­tate the maxi­mum par­ti­ci­pa­tion of small busi­ness con­cerns as prime con­trac­tors, sub­con­trac­tors, and sup­pliers.

(2) Market research.

(A) In general. Be­fore pro­ceed­ing with an ac­qui­si­tion strat­egy that could lead to a con­tract containing con­so­li­dat­ed pro­cure­ment re­quire­ments, the head of an agen­cy shall con­duct mar­ket re­sear­ch to de­ter­mine whet­her con­so­li­da­tion of the re­quire­ments is ne­ces­sary and jus­ti­fied.

(B) Factors. For purposes of subparagraph (A), con­so­li­da­tion of the re­quire­ments may be de­ter­min­ed as being ne­ces­sary and jus­ti­fied if, as compared to the ben­e­fits that would be de­riv­ed from con­trac­ting to meet those re­quire­ments if not con­so­li­dated, the Fed­er­al Gov­ern­ment would derive from the con­sol­i­da­tion mea­sur­ably sub­stan­tial bene­fits, in­clud­ing any com­bi­na­tion of ben­e­fits that, in com­bi­na­tion, are mea­sur­ab­ly sub­stan­tial. Ben­e­fits des­crib­ed in the pre­ced­ing sen­ten­ce may in­clude the following:

(i) Cost savings.

(ii) Qual­ity im­prove­ments.

(iii) Reduc­tion in ac­qui­si­tion cycle times.

(iv) Better terms and con­di­tions.

(v) Any other ben­e­fits.

(C) Reduction of costs not de­ter­min­ative. The re­duc­tion of ad­min­i­stra­tive or per­son­nel costs alone shall not be a jus­ti­fi­ca­tion for bund­ling of con­tract re­quire­ments un­less the cost sav­ings are ex­pec­ted to be sub­stan­tial in re­la­tion to the dol­lar value of the pro­cure­ment re­quire­ments to be consolidated.

(3)  Strategy specifications. If the head of a con­trac­ting agen­cy de­ter­min­es that a pro­pos­ed pro­cure­ment stra­te­gy for a pro­cure­ment in­vol­ves a sub­stan­tial bund­ling of con­tract re­quire­ments, the pro­pos­ed pro­cure­ment strat­egy shall—

(A) identify spe­cif­i­cal­ly the bene­fits an­ti­ci­pat­ed to be de­riv­ed from the bund­ling of con­tract re­quire­ments;

(B) set forth an as­ses­s­ment of the spe­ci­fic im­ped­i­ments to par­ti­ci­pa­tion by small busi­ness con­cerns as prime con­trac­tors that result from the bund­ling of con­tract re­quire­ments and spe­cify ac­tions de­sign­ed to maxi­mize small busi­ness par­ti­ci­pa­tion as sub­con­trac­tors (in­clud­ing sup­pli­ers) at vari­ous tiers un­der the con­tract or con­tracts that are award­ed to meet the re­quire­ments; and

(C) include a spe­cif­ic de­ter­mi­na­tion that the an­ti­ci­pated ben­e­fits of the pro­pos­ed bund­led con­tract jus­tify its use.

(4) Contract teaming. In the case of a solicitation of offers for a bund­led con­tract that is is­sued by the head of an agen­cy, a small busi­ness con­cern may sub­mit an of­fer that pro­vides for use of a par­tic­u­lar team of sub­con­trac­tors for the per­form­ance of the con­tract. The head of the agen­cy shall eval­uate the of­fer in the same man­ner as oth­er of­fers, with due con­sid­er­ation to the capa­bil­i­ties of all of the pro­pos­ed sub­con­trac­tors. If a small bus­i­ness con­cern teams under this para­graph, it shall not af­fect its stat­us as a small busi­ness con­cern for any other purpose.

15 U.S.C. § 644. This preference and its implementing provisions be­came effective October 1^st, 1997. Small Business Re­aut­hor­i­za­tion Act of 1997, Pub. L. No. 105-135, § 3, 111 Stat. 2592, 2593 (1997).

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The exceptions to the statutory preference, the “mea­sur­ably sub­stan­tial ben­e­fits” re­quired to be doc­u­ment­ed for a con­so­li­dated ac­qui­si­tion, gen­er­al­ly fol­low de­cis­ions of the United States Gen­er­al Ac­count­ing Office. Con­trast Mc­Swain & As­so­cia­tes, Inc.; Shel-Ken Prop­er­ties, Inc.; and Elaine Dunn Real­ty, B-271071 et al., May 20, 1996, at 3 (“agen­cy here sim­ply did not con­duct an ade­quate re­view of the po­ten­tial small bus­i­ness mar­ket”) with Build­ing Sys­tems Con­trac­tors, Inc., B-266180, B-266184, Jan. 23, 1996, at 4 (con­so­li­dated pro­cure­ment of en­er­gy man­age­ment con­trol sys­tem and heat­ing, ven­ti­la­ting, and air con­di­tion­ing im­prove­ments en­sur­ing full in­te­gra­tion and re­du­cing co­or­di­na­tion ef­forts and cost).

Difficulties with the ex­cep­tions to the stat­u­tory prefer­en­ce for un­bund­led ac­qui­si­tions are that the ex­cept­ions are: (1) bare, eas­ily ar­tic­u­lated “com­mon sen­se” con­cerns sup­port­ing con­sol­i­dated pro­cure­ment, and (2) ven­dors are usu­al­ly not able to in­tel­li­gent­ly cri­tiq­ue these ex­cept­ions to the stat­u­tory preference.

One example is The Ur­ban Group, Inc.; Mc­Swain and As­so­ciates, Inc., B-281­352, B-281­353, Jan. 28, 1999, at 10-12 (ven­dor could not pro­pose a “rea­son­able al­ter­na­tive . . . that would pro­vide sim­i­lar ben­e­fits” to a pro­posed con­sol­i­dated five-state con­tract for man­age­ment and mar­ket­ing of sin­gle fam­ily prop­er­ties). An­other is S&K Elec­tron­ics, B-282­167, June 10, 1999, at 5-6 (ven­dor could not show agen­cy “had no rea­son­able ex­pec­ta­tion of achiev­ing sub­stan­tial tech­ni­cal ben­e­fits” from on­sol­i­dated re­quire­ments for desk­top micro­com­pu­ters, oper­at­ing sys­tem, and ap­pli­ca­tions software).

The statutory pref­er­ence for un­bundl­ed ac­qui­si­tions en­act­ed with sec­tion 413 of the Small Bus­i­ness Re­aut­ho­ri­za­tion Act was im­ple­ment­ed with in­ter­im rules ef­fec­tive Oct­o­ber 25^th, 1999. 64 Fed. Reg. 57366 (1999).

Both the in­ter­im rules and the fi­nal rules tight­en the ex­cep­tions to the stat­u­tory prefer­ence for un­bundl­ed ac­qui­si­tions—there is a means for ven­dors to iden­ti­fy bundl­ed ac­qui­si­tions (“the con­sol­i­da­tion of two or more pro­cure­ment re­quire­ments for goods or serv­ices prev­ious­ly pro­vid­ed or per­formed un­der sep­ar­ate smal­ler con­tracts,” 13 C.F.R. § 125.2­(d)­(1)), agen­cies must now mon­e­tize the ben­e­fits of a bundl­ed pro­cure­ment, and there are rules for the mon­e­tary calculation.

Under the fi­nal rules, agen­cies must doc­u­ment ben­e­fits equiv­a­lent to at least 10 per­cent of the con­tract value for es­ti­mat­ed bundl­ed re­quire­ments less than $75 million, 13 C.F.R. § 125.2­(d)­(5)­(i)­(A), or equiv­al­ent to 5 per­cent of the con­tract val­ue for esti­mated bundl­ed re­quire­ments ex­ceed­ing $75 mil­lion, or $7.5 mil­lion, which­ever is great­er, 13 C.F.R. § 125.2­(d)­(5)­(i)­(B). Ex­cept­ions may be u­thor­i­zed, but only on a non-dele­ga­ble ba­sis, and at very high lev­els with­in the agen­cies. 13 C.F.R. § 125.2­(d)(5)(ii).

Here are explicit re­quire­ments for the mon­e­tary calculation:

In assessing whether cost savings and/or a price re­duc­tion would be achiev­ed through bundl­ing, the pro­cur­ing agen­cy and SBA must com­pare the price that has been charged by small busi­nes­ses for the work that they have per­formed and, where avail­able, the price that could have been or could be charged by small busi­nes­ses for the work not pre­vious­ly per­formed by small business.

13 C.F.R. § 125.2(d)(5)(iv).

Demanding ex­pli­cit an­aly­sis of eas­ily ar­tic­u­lated “com­mon sense” con­cerns sup­port­ing con­sol­i­dated pro­cure­ment is a good ap­proach short of an ab­so­lute prefer­en­ce for un­bundl­ed ac­qui­si­tions. This sort of thing en­ables re­view of agen­cy action.

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Consider Win­star Com­mu­ni­ca­tions, Inc. v. United States, 41 Fed. Cl. 748 (1998), a case con­cern­ing a challenge to a con­sol­i­dated pro­cure­ment of tele­com­mu­ni­ca­tions re­quire­ments un­der a stat­ute sim­ilar to the stat­u­tory pref­er­ence for un­bund­led ac­qui­si­tions, 15 U.S.C. § 631­(j)­(3), this one re­quir­ing mul­ti­ple awards un­der so­li­ci­ta­tions for task and de­liv­ery or­der con­tracts, 10 U.S.C. § 2304­a­(d)­(3); 41 U.S.C. § 253­h­(d)­(3).

The Win­star agen­cy did lit­tle more than mouth the “com­mon sen­se” con­cerns. For­tu­nate­ly for the plain­tiff, this was not enough:

The final two factors relied on by the CO are char­ac­ter­i­zed by the gov­ern­ment as “com­mon sen­se” con­cerns. First, the CO re­lied on econ­o­mies of scale which pur­port­ed­ly would re­sult from a sin­gle award. There are ap­prox­i­mat­e­ly 22,000 gov­ern­ment lines in the New York area. Ac­cord­ing to de­fen­dant, the CO rea­son­ed that “if the Gov­ern­ment need­ed 22,000 lines, it would re­ceive a bet­ter rate if those lines were pro­vid­ed by one of­fer­or in­stead of sev­er­al.” Def.’s Reply 23-24. This con­clu­sion was not based on any study or evi­dence. Barber Dep. 38-39. In­stead, it is sup­port­ed by “the same com­mon sen­se which un­der­lies all bulk buy­ing, whet­her it is tele­co­m­mu­ni­ca­tions serv­ices, pa­per prod­ucts, or mil­i­tary air­craft.” Def.’s Reply 19. Sec­ond, the CO relied on “the com­mon sen­se real­i­za­tion that it is more dif­fi­cult to co­or­di­nate the ef­forts of sev­er­al pro­vid­ers than it is to co­or­di­nate the ef­forts of one” and reas­on­ed that “mul­ti­ple awards, by ne­ces­sity, in­crease ad­min­i­stra­tive costs.” Def.’s Reply 23-24. Again, no anal­y­sis was con­duc­ted to es­ti­mate how much d­min­i­stra­tive costs would in­crease if mul­ti­ple con­tracts were awarded. Barber Dep. 57.

  These “com­mon sen­se” con­cerns do not pro­vide a rea­son­able ba­sis for over­rid­ing the Con­gres­sion­al pref­er­ence for mul­ti­ple awards. The pref­er­ence would be rend­er­ed mean­ing­less if it could be over­come simp­ly by point­ing to such gen­er­al con­cerns which ap­ply to every pro­cure­ment. Im­pli­cit in Con­gress’ deci­sion to es­tab­lish a pref­er­ence for mul­ti­ple awards is the con­clu­sion that the ben­e­fits gen­er­al­ly out­weigh the “com­mon sen­se” costs. See S. Rep. No. 103-258, at 15-16 (1994), re­print­ed in 1994 U.S.C.C.A.N. 2561, 2576 (ba­sis of pref­er­ence for mul­ti­ple awards is find­ing that, gen­er­al­ly, mul­ti­ple awards pro­vide ben­e­fits not achiev­ed by a single award “with­out sig­ni­fi­cant­ly bur­den­ing the pro­cure­ment system”). Fur­ther­more, one can­not rea­son­ab­ly con­clu­de that a sing­le award is in the gov­ern­ment’s best in­ter­ests bas­ed on the in­her­ent costs of mul­ti­ple awards un­less those costs are weigh­ed again­st the pre­sum­ed ben­e­fits un­der­ly­ing the pref­er­ence. Since the CO did not con­sid­er those ben­e­fits or ex­plain why they would not en­sue if mul­ti­ple con­tracts were award­ed un­der the New York RFP, the anal­y­sis is one-sid­ed and incomplete.

Id., 41 Fed. Cl., at 762.

Augmenting the pro­vis­ions de­mand­ing ex­pli­cit, doc­u­ment­ed analy­ses of other­wise “com­mon sen­se” con­cerns sup­port­ing bundl­ed ac­qui­si­tions, with: (1) a def­i­ni­tion of bundl­ed re­quire­ments, (2) re­quire­ments for a mon­e­tary xam­i­na­tion, and (3) cal­cu­la­tion ru­les, ought to make it eas­ier to cri­tiq­ue agen­cies’ ex­cep­tions to the stat­u­tory pref­er­ence for un­bund­led ac­qui­si­tions. Time, and a new round of de­cis­ions, will tell.

— Cy Phillips

Copyright © 2000 Cyrus E. Phillips, IV. All rights reserved.

Republished from Government Contractor Insights, Volume 7, Number 1, Summer 2000.

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