Contract bundling was supposed to save taxpayers money and streamline the slow, bureaucratic way the U.S. government awards more than $200 billion in contracts each year. Now, the practice -- whereby many small procurement contracts are combined into one, larger one -- is coming under attack from the Small Business Administration. The SBA says bundling has unnecessarily put many projects out of reach of small companies, squashing competition and hurting U.S. taxpayers in the process.

The SBA is proposing new rules that would allow it to challenge federal agencies' use of bundled contracts. The regulations, which are not yet finalized, would give the SBA authority to break up a bundled contract or demand that portions of a larger contract be designated small-business "set- asides" in still-to-be-determined circumstances. The SBA contends that bundled contracts unfairly exclude small bidders who lack the manpower, technical resources, or cash flow to sustain an extended or multisite project.

There's little business or economic rationale to bundling, says SBA spokesman D.J. Caulfield, because many new bundled contracts "arbitrarily lump together dissimilar requirements." Officials at government procurement offices, which have been shrinking for much of the decade, are "doing it for their own personal convenience," he says. That, argues Caulfield, has unfair affects on small businesses.

Critics argue that because fewer companies can compete for bundled contracts, the remaining bidders drive up prices. "It has inflated costs," says Randall Litchfield, publisher of Bidline.com, an electronic procurement service. Bundled-contract winners may end up subcontracting, sharing some of the government largesse with other, presumably, smaller companies. But, he points out, "they build in their own 20%."

"The jury is still out in terms of the overall cost-benefit to the taxpayer," says Paul Murphy, president of Eagle Eye Publishers Inc., a Fairfax City (Va.) company that studies government procurement. "By making the process more efficient, it has saved the government more money," adds Murphy. "But many contracts wind up with larger contractors, and that comes with larger overhead costs and presumably larger salaries."

HARDEST HIT. The SBA's initiative is welcome news for Baltimore's Ardene Welty, whose 12-employee company, Quality Utility Construction Inc., installs gas pipelines. "If they expect me to handle a $200,000 job instead of a $50,000 job, I couldn't do it," she says. Lately, Welty has been hit hard by larger competitors, whom she claims take a loss on price, hoping to drive her and other small contractors out of business. "Then they have that much more in their pockets," she gripes.

Bundling has been common practice since 1990. And many small businesses have recently been shed from federal contract rolls, according to a 1995 SBA study, the most current available. It found the number of small businesses awarded contracts fell by 7,000 from 1990 to 1995. It also showed that 48% of federal contracts were worth more than $100,000 in 1995, vs. 40% in 1994. Another measure of contract size -- so-called actions per contract, or number of tasks in a given project -- increased 16% in that same period.

The story has been much the same since the middle of the decade, says Murphy, whose company conducted the 1995 study and is now updating it. "Consolidation is continuing, and contract size appears to be growing," he adds, with some exceptions for more competitive fields such as computer hardware.

The proposed rules would also give small companies a better crack at bundled contracts by making it easier to band together when bidding on them. Under the old regulations, that was allowed in only certain cases.

"With contract bundling, the government thought it found a clever way of outsourcing the 'fairness to small business' responsibility to the big private contractors," says Bidline.com's Litchfield. "It didn't consider some of the ramifications." If the SBA has its way, the onus to be fair should swing back where it belongs -- on the government.

By Dennis Berman in New York
dennis_berman@businessweek.com

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