At a time when Pentagon officials are stressing the importance of small business
participation in defense contracts, there is widespread discontent among executives
as a result of what they call a detrimental business environment.
Among the problems cited by small business officials are tight labor markets,
slow payments for contracts and the increasingly common practice of "bundling"
multiple projects into a single contract award.
To address some of this issues, the U.S. Army Materiel Command hosted a conference
with small business leaders in McLean, Va. Officials from both government and
industry generally agreed that communications between the two sectors must improve.
Executives also conceded that they need to become more aggressive in pursuing
new business opportunities in defense-related work. Army officials, meanwhile,
outlined the service's strategy for working with small businesses in the future
and offered suggestions on how to better take advantage of so-called small business
In Fiscal Year 1999, the Army achieved its preliminary goals in prime contracting
with small and small disadvantaged businesses. The service, which allocated
approximately $27.4 billion to U.S. prime contractors for procurement, spent
$7.2 billion or 26.4 percent on small businesses after setting an initial goal
of 26 percent. It gave small disadvantaged firms $2.5 billion or 9.2 percent,
crushing its goal of 5 percent. The Army, however, failed to achieve its goal
of 5 percent in business from woman-owned small businesses with $856 million
or 3.1 percent, according to figures presented by Tracey Pinson, director of
the Army's Office of Small and Disadvantaged Business Utilization.
The Army, which spent $1.4 billion on subcontract procurements, exceeded all
three of its subcontracting goals in fiscal 1999. As of March 1999, small businesses
had received $887 million or 62.8 percent of the service's U.S. procurement
dollars with a goal of 50 percent. Small disadvantaged businesses collected
$134 million or 9.5 percent with a goal of 5 percent, and woman-owned small
businesses cashed in at $119 million or 8.4 percent, also with a goal of 5 percent.
In fiscal 2000, said Pinson, the Army is committed to turning former proteges
into mentors in the Graduated 8(a) Mentor-Protege Pilot program, enhancing participation
of small businesses in competitive sourcing opportunities, increasing military
installations involvement in Historically Underutilized Business Zones (HUBZones)
and assisting small businesses in establishing good past performance records.
"We must take advantage of joint venturing," said Pinson.
The mentor-protege program provides incentives to prime contractors that train
small disadvantaged businesses to perform as suppliers. As of November 1999,
the Army had 17 mentors and 24 proteges. The Army works with graduated 8(a)
companies, encouraging them to become mentors to current 8(a) firms. In November,
the service had authorized 10 mentor-protege teams and approved five under the
Graduate 8(a) Program.
Prime contractors who take on subcontractors as proteges may be entitled to
labor cost reimbursements or credit costs toward subcontracting goals, said
The mentor-protege program helps the Army gain access to a wider base of suppliers.
Participating businesses gain valuable knowledge of how to compete for government
The Army also hopes to court small businesses located in HUBZones, areas that
range from 2,000 to 8,000 in population. In order for a small business to qualify
for HUBZone contacts, it must be located in that particular zone and at least
35 percent of its employees must reside there.
Another factor that helps firms win contracts is past performance. If a contractor
has a positive track record in dealing with the Defense Department, it is more
likely to receive additional contract awards. The Army has worked to educate
small businesses on how to benefit from past performance evaluation.
But despite efforts by the Defense Department to increase small business participation,
some industry officials are not seeing rainbows.
"I asked the question [to the Small Business Administration], 'what is
the single greatest problem facing small businesses today?'" said Nancy
E. Archuleta, chairperson and chief executive officer of MEVATEC Corporation,
a woman-owned small business headquartered in Huntsville, Ala. MEVATEC, a technical
service provider, has been an active supplier to the Army. "Usually, the
answer that I get is access to capital, the ability to find contracting opportunities,
contract bundling," she continued. "But in this particular case, the
answer that I got was the tight labor market. Small businesses are finding it
very difficult to compete with larger businesses and with the mega Goliaths
for good quality people."
Archuleta said that small businesses need to look at and evaluate how they train
and retain personnel. "I think that from a procurement side as far as the
Army is concerned," she said, "I would say when you look at proposals,
look at how innovative businesses are about how they attract people. What are
they willing to do in terms of training their workforce and maintaining their
workforce? I think that is really important."
One method that can help small businesses improve training is using the Job
Training Partnership Act (JTPA), said Archuleta. The JTPA was established by
the federal government in 1982 to provide localized job training for skilled
workers who are seeking employment.
Before companies can fill their staffs, however, they need to know their potential
customer's needs, officials said.
Pinson said, "In order to do business with [the Army], it is imperative
to know what direction we are going in."
Slow Contractor Payments
But small businesses may not have enough backup assets to stay afloat if the
Pentagon continues to struggle in paying contractors on time, complained Archuleta.
She gave an account of a protege that went from $2 million to $4 million in
revenues in one year, but failed to receive half of its payments on time. "That
can literally put a business under," she said. "We all have to work
together to address [slow contractor payments]."
Archuleta also expressed concern over prime contractors' payments to subcontractors.
"Previously, once [prime contractors] billed the government, they were
able to pay the subcontractor," she said. "Under recent regulatory
changes, the prime contractors no longer are required to pay subcontractors
prior to their billing the government for their services. This is definitely
going to slow the process for small businesses or subcontractors, quite frankly,
large and small."
The government is bound by the Prompt Payment Act, which entitles contractors
to interest if their payments are not made on time. The act, however, has been
scrutinized because it is not strict enough.
"The Prompt Payment Act that requires the government to pay the contractor
interest on late payments should be applicable to all contracts and payments.
That's our recommendation," said Archuleta. "Let's start putting some
teeth into the enforcement here. The current Prompt Payment Act says that no
accountability exists for the customer to make timely payments. We have to get
accountability in this system some way."
The Business Executives for National Security (BENS) Tail-to-Tooth Commission
believes the act has been by and large successful but still has some snags.
BENS is a national, nonpartisan organization of business leaders committed to
national security. "The basic components of the Prompt Payment Act have
worked fairly well," said a report by the commission. "However, the
act addressed more than just late payment. It also sought to encourage contractors
to offer price discounts for early payments and to require government agencies
to push for these discounts. As the General Accounting Office (GAO) noted, this
part of the Prompt Payment Act shows some serious shortcomings.
"Discount payments-which are standard in the business community-turn on
a question of trust when the federal government is involved. Many vendors, wary
of the government's past performance, do not believe they can count on quick
payment, so they have been unwilling to offer deep discounts. This trust can
be developed, but only if government agencies improve their prompt payment performance."
The GAO, in 1999, filed a report that said the Pentagon is in danger of overpaying
contractors under the Prompt Payment Act.
"Unless the Pentagon gains control over its payment process, it will continue
to risk erroneously paying contractors hundreds of millions of dollars and perpetuating
other financial management and accounting control problems," said the report.
"Improving the efficiency of the payment process could save millions of
dollars each year. Although the Defense Department is trying to improve its
payment process and controls, it will likely take many years before [the department]
gets its payment problems under control."
The report suggested that the Pentagon make better use of technology when it
comes to making payments. This would streamline and simplify the process.
The report also recommended raising the minimum dollar amount required by the
Prompt Payment Act. "The Defense Finance and Accounting Service now sends
out interest payments whose processing costs total more than the face value
of checks," said the report.
Also, contractors are not required to inform the government when they are overpaid,
and the GAO suggested that this should change.
Archuleta, however, believes there is something to be gained from these shortcomings.
She said the challenge gives small businesses the opportunity to learn how the
legislative system works and to become a player in the process.
Another challenge that has impeded the small business market, officials claim,
is contract bundling.
Contract bundling occurs when a series of contracts are packaged and awarded
to a prime contractor. Supporters claim this saves time and money. Bundling
has been criticized for jeopardizing competition.
Archuleta recommended that government agencies use purchasing schedules provided
by the General Services Administration (GSA), which would speed up time and
labor rates. GSA schedules, she said, provide a simplified tool for suppliers
and customers. She also said that if agencies limit their competition to small
businesses, small disadvantaged businesses, woman-owned small businesses and
HUBZones, they will have more chance to achieve their small business goals.
"Contract bundling is going to stay," said Archuleta. "As a
mentor, some of the things that we notice are that if you are not up to speed
in your pricing and how you do your proposal efforts, you really have to make
an investment in that area."
Another problem that occurs is when disadvantaged businesses, particularly
Native American tribal-owned companies, fail to help out other disadvantaged
firms, she said. Government agencies receive incentives for partnering with
such firms. These companies are usually large firms that do not traditionally
team with other companies, large or small, said Archuleta. "We are flip-flopping
this thing around."
She told government representatives at the conference to become aware of the
situation and work with their small disadvantaged business utilization offices
to assure that small businesses are given a level playing field.
"To survive, compete and become successful in this environment, companies
must be bold, innovative, creative, adaptable and prepared," said Archuleta.
"Just doing a good job is not good enough. You have to do an extraordinary