Contract Management: Small Businesses Continue to Win		 
Construction Contracts (29-JUN-01, GAO-01-746). 		 
								 
The Congress appropriates billions of dollars annually to fund	 
the construction of buildings and other facilities to support	 
military training and operations. Small business 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. GAO examined the contract bundling of  
military construction requirements. GAO determined 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. 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.	 
Small Business Administration reviewed and approved of DOD's plan
to take steps to determine whether the construction work being	 
performed could accommodate smaller contractors. Small businesses
were able to compete for the remaining contracts.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-746 					        
    ACCNO:   A01150						        
  TITLE:     Contract Management: Small Businesses Continue to Win    
             Construction Contracts                                           
     DATE:   06/29/2001 
  SUBJECT:   Contract disputes					 
	     Contracts						 
	     Federal agencies					 
	     Government contracts				 
	     Independent agencies				 
	     Federal Acquisition Streamlining Act		 

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GAO-01-746
     
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 2001
1 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
database 2 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 businesses 3 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 businesses 4 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 1996 7 -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
4year 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

(120002)

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