(This story is part one of Federal News Radio’s special report, The Small Business Dilemma.)

For the federal government to finally hit its 23 percent small business goal, the Defense Department will have to step up its efforts to contract with small firms. But the nature of DoD’s large contracts often leave out small companies.

In four of the last five years, if DoD had made its small business contracting goal, the federal government would have hit its overall goal. In fiscal 2011, the government fell $5.4 billion short. The Defense Department, with a goal of 22.28 percent for small business contracting that year, missed its mark by $7.2 billion. Each agency negotiates with the Small Business Administration its own small business prime-contracting goal.

Defense contracts make up two-thirds of the entire government’s contracting expenditures. DoD is best known for buying planes, tanks and ships — often products and services out of the scope of small companies. Last year, for example, DoD spent tens of billions of dollars across 11 product codes that included everything from guided space missiles to space vehicles. Of that, less than 1 percent went to small businesses.

That doesn’t mean the Pentagon is abdicating its influence or responsibility. DoD is finding ways of carving out a space for small firms on large contracts and targeting businesses for certain industries, but it has been a challenging endeavor for the agency.

Small business contracting challenges

Budget uncertainties in recent years have created extra hurdles for small businesses. The continuing resolution was “the single largest negative impact to us” in fiscal 2011, said Andre Gudger, the director of DoD’s Office of Small Business Programs.

The uncertainty cuts the time agencies have for doing acquisition forecasting that can help identify small business opportunities.

“It’s critical for us as a department to modernize and enhance our industrial base to make sure we have enough capable companies to deliver what we want to buy.”

— Andre Gudger,
Director of DoD’s Office of Small Business Programs

Additionally, Recovery Act funds — more than 30 percent of which went to small businesses — expired last year.

A more long-term challenge is DoD’s need to buy large weapons systems, leaving less procurement dollars available for small business contracts.

These large weapons systems contracts potentially could be broken down into small contracts, “but it takes a lot of effort and it takes a lot of time” on the part of the acquisition workforce, said Linda Hillmer, chairwoman of the Small Business Division of the National Defense Industrial Association.

The department — like the rest of the federal government — has struggled with maintaining a well-trained acquisition workforce, especially with new employees expected to enter the workforce in coming years. A 2008 Government Accountability Office report found 55 percent of the acquisition workforce will be eligible to retire in 2018.

“The acquisition workforce, their job is to get those contracts out and to get them out according to law. For them to find small businesses and try to hunt down small businesses and then qualify small businesses — it takes a lot of time,” Hillmer said. “Traditionally, the Department of Defense has not rewarded that kind of effort. I think things are changing now throughout the federal government and they are trying to reward small business contracts, but there’s a long way to go.”

The department has made up the shortcoming in weapons systems by devoting more small business dollars to other areas, such as facilities management and research and development.

But this scenario puts DoD in the position of “defining the market space,” said Stan Soloway, president of the Professional Services Council.

“If I’m a larger company … that has an expertise in facilities maintenance, that market is slowly but surely closed off to any other-than-small or very large facilities contract,” Soloway said.

Opportunities in subcontracting

The department has had more success in subcontracting to small businesses. In 2010 and 2011, DoD exceeded its subcontracting goal of 31.7 percent — hitting 35.2 percent in fiscal 2011 and 37.3 percent in fiscal 2010.

“[Being a subcontractor], you generally don’t get to meet with the client yourself, so you don’t get to form that very important relationship that in the future could result in a prime contract directly to the small business.”

— Linda Hillmer,
Chairwoman, Small Business Division, National Defense Industrial Association

DoD’s Gudger said the department looks at small business contracting “holistically,” and that includes ensuring small businesses benefit from subcontracting.

“We look at our prime contracting goals and we look at our subcontracting goals. And if you were to add them together, we would’ve exceeded the goal set forth, dollarwise,” Gudger said. “So the department has done extremely well to continue to flow record number of dollars over the past three years to small businesses.”

However, for SBA’s evaluation of an agency’s small business contracting, prime contracts count for 80 percent of the overall rating, with subcontracting counting for 10 percent and other success factors counting for 10 percent.

What’s more, from the small firm’s perspective, “Life as a subcontractor is not always pleasant,” Soloway said.

Even if a small contractor is involved in the bid process, the prime contractor could use another small business or do the work themselves once the contract is awarded. The Small Business Administration is trying to address these “bait and switch” tactics with a proposed rule last year that would require prime contractors to notify agencies in writing when they do not use a subcontractor listed in a subcontracting plan.

“The question is, how do we keep prime contractors accountable to the subcontracting plans that they put in their proposals?” said John Shoraka, associate administrator at the Small Business Administration. “What kind of monitoring can be done and what kind of teeth do we have to make sure the contractors keep to the subcontracting plan?”

SBA expects to issue its final rule early next year, Shoraka said.

Another potential pitfall for subcontractors is late payments. The proposed rule issued last year requires prime contractors to notify contracting officers when a subcontractor payment is reduced or more than 90 days late. Also, in June, the Office of Management and Budget called for a change in the Federal Acquisition Regulations to require prime contractors to promptly pay small business contractors.

Although circumstances may be improving for subcontractors, one of the key factors to winning more government contracts — connections — is absent in a subcontracting relationship, said Hillmer of the National Defense Industrial Association.

“You generally don’t get to meet with the client yourself, so you don’t get to form that very important relationship that in the future could result in a prime contract directly to the small business,” Hillmer said.

Expanding small biz contracting

The Pentagon’s efforts to grow small business contracting have come in the form of directives, increased accountability and — less tangible — the trickle-down effect these changes have had on the acquisition culture.

Across the services, DoD is taking a targeted outreach approach to identifying small firms. DoD continues to recruit small companies through its Small Business Innovation Research and Small Business Technology Transfer programs.

Another industry DoD is reaching out to is manufacturing. Last year, DoD launched the program Connecting American Manufacturing (CAM) to find qualified small manufacturers.

“I think the majority of the industrial base in America, they don’t try for Department of Defense work because maybe they have tried or they’ve heard stories about how daunting it is,” said Mitch Free, president of MFG.com, one of the three companies working on CAM to connect DoD with these small firms.

“What we try to do is give [small businesses] as much information as we can to help them understand what our business is because if you as a small business … can understand where you may fill a particular niche, then that gives you an edge in your competition.”

— Rear Adm. Sean Crean,
Director, Navy’s Office of Small Business Programs

MFG.com is an online marketplace for the manufacturing industry, currently with about 30,000 members, Free said. Part of the company’s job is to translate DoD’s requirements into a language that the businesses can understand and then, when small firms want to submit a proposal, helping them translate that bid into a format DoD requires.

“The clearer and more articulate anything is when [the businesses] get ready to quote on it, to bid on it … the better the pricing is … so a lot of the efficiencies [DoD] is getting is just by making things clearer,” Free said.

The Navy is also targeting specific small firms — those owned by service-disabled veterans (SDVs). Since Sean Crean, the director of the Navy’s Office of Small Business Programs, took his position 2-1/2 years ago, the service has doubled the percentage of contract dollars to SDVs, from 0.8 percent to 1.6 percent for fiscal 2012. Market research played a key role in reaching this category of small firms, Crean said. He expects the service to hit its 3 percent goal in the next few years.

The Navy also holds hundreds of general small business events throughout the country each year. At all of these events, the aim is to communicate the Navy’s needs and find the right match with small firms.

“What we try to do is give them as much information as we can to help them understand what our business is because if you as a small business … can understand where you may fill a particular niche, then that gives you an edge in your competition,” Crean said.

DoD also has put in place an accountability measure. Senior Executive Service members now have a small business contracting goal attached to their performance evaluations. SES members’ “bonuses are directly affected … That was a very big step forward,” Hillmer said.

Department acquisition leaders also have directed the acquisition workforce to use existing tools to increase small business contracting. A memo issued in July reiterated an interim Federal Acquisition Regulation rule last year that stated contracting officers should set aside task orders under multiple-award contract vehicles for small businesses unless the agency believes it can’t get at least two offers. This is known as the “rule of two.” Another memo, co-signed by Gudger, said contracting officers should set aside contracts under $150,000 — or the simplified acquisition threshold (SAT) — for small businesses.

The Army Contracting Command, which does about 60 percent of the Army’s procurement, is aiming to contract 90 percent of SAT acquisitions with small businesses, said Alice Williams, the associate director of the Office of Small Business at the Army Contracting Command.

“We’re giving ourselves self-imposed goals to make sure we achieve as much as possible,” Williams said.

Gudger said these memos and other directives from top officials help instill a small business contracting mindset in the department’s culture.

“Everyone knows our leader is looking at how we buy things and how we gain capability. They respond very well to it. I think that some of it is not necessarily measured by the number of memos or documents that have gone out but just the commitment. And I’m seeing our leaders from across the board…are all more engaged in the value that small businesses can bring,” Gudger said.

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