[Federal Register: July 26, 2000 (Volume 65, Number 144)]
[Rules and Regulations]               
[Page 45831-45835]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jy00-1]                         


SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121 and 125

 
Government Contracting Programs

AGENCY: Small Business Administration.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Small Business Administration (SBA) is finalizing its 
regulations to address contract bundling due to changes set forth in 
the Small Business Reauthorization Act of 1997. This rule implements 
the statutory amendments that recognize that the consolidation of 
contract requirements may be necessary and justified, in some cases. It 
also implements the statutory requirement that each Federal agency, to 
the maximum extent practicable, take steps to avoid unnecessary and 
unjustified bundling of contract requirements that precludes small 
business participation as prime contractors as well as to eliminate 
obstacles to small business participation as prime contractors. In 
addition, this rule restates SBA's current authority to appeal to the 
head of a procuring agency decisions made by the agency that SBA 
believes to adversely affect small businesses.

DATES: This rule is effective July 26, 2000.

FOR FURTHER INFORMATION CONTACT: Anthony Robinson, Office of Government 
Contracting, (202) 205-6465.

SUPPLEMENTARY INFORMATION: Section 15(a) of the Small Business Act, 15 
U.S.C. 644(a), authorizes SBA to appeal to the head of a procuring 
agency certain decisions made by the agency that SBA believes adversely 
affects small businesses, including proposed procurements that include 
``goods or services currently being performed by a small business'' and 
which are in a ``quantity or estimated dollar value the magnitude of 
which renders small business prime contract participation unlikely.'' 
Section 413(b)(1) of Public Law 105-135 added an appeal right to 
section 15(a) of the Small Business Act for ``an unnecessary or 
unjustified bundling of contract requirements.'' It left intact, 
however, SBA's current appeal rights. In this regard, the Joint 
Explanatory Statement of the bundling provisions contained in Public 
Law 105-135 as set forth in the Congressional Record specifically 
provided that ``[n]othing in [the bundling amendments] is intended to 
amend or change in any way the existing obligations imposed on a 
procuring activity or the authority granted to the Small Business 
Administration under section 15(a) of the Small Business Act.'' 143 
Cong. Rec. S11522, S11526 (daily ed. Oct. 31, 1997).
    On October 25, 1999, SBA published an interim rule with request for 
comments in the Federal Register requesting public comments on 
implementation of Sections 411-417 of the Small Business 
Reauthorization Act of 1997 (Public Law 105-135, 111 Stat. 2617). See 
64 FR 57366, October 25, 1999. The statutory amendments recognize that 
the consolidation of contract requirements may be necessary and 
justified, in some cases. The rule requires that each Federal agency, 
to the maximum extent practicable, take steps to avoid unnecessary and 
unjustified bundling of contract requirements that preclude small 
business participation as prime contractors. The rule also requires 
each agency to eliminate obstacles to small business participation as 
prime contractors.
    The comment period for the interim rule (64 FR 57366) closed on 
December 27, 1999. Consistent with the statutory amendments, the 
interim rule defined ``bundling,'' identified the circumstances under 
which such ``bundling'' may be necessary and justified, and permitted 
SBA to appeal bundling actions that it believes to be unnecessary and 
unjustified to the head of the procuring agency. The rule also restated 
SBA's current authority to appeal to the head of an agency other 
procurement decisions made by procuring activities that SBA believes 
will adversely affect small business. SBA received 19 comments in 
response to the interim rule. The comments are comprised of three from 
Government agencies, four from trade associations, ten from small 
businesses, and two from members of Congress.
    Most of the comments, particularly those from small business, did 
not offer specific changes to the rule, but rather strongly endorsed 
the government taking action against contract bundling. Since these 
comments offered no specific changes, SBA responds by noting the strong 
opposition to contract bundling by the small business community.
    The four comments from trade associations focused on the impact of 
bundling requirements on the architect and engineering industry. 
Specifically, these comments were concerned with the consolidation of 
architect and engineering services with requirements from other 
industries. The bundling statute and SBA's rule permit various contract 
requirements to be consolidated provided that the consolidation results 
in substantial benefits. The statute does not limit the scope and 
diversity of consolidated contracts. As long as there are measurably 
substantial benefits, a procuring agency is authorized to consolidate 
or bundle contract requirements. Thus, this rule also does not limit 
the scope and diversity of consolidated contracts.
    When a procuring activity intends to proceed with a ``bundled'' 
requirement, it must document that the bundling is necessary and 
justified. If it cannot do so, the procuring activity cannot go forward 
with the intended consolidation. In order for bundling to be necessary 
and justified, the consolidation must achieve ``measurably substantial 
benefits.'' In finalizing this rule, SBA again examined the interim 
rule's two-tier approach to determining what constitutes measurably 
substantial benefits. SBA continues to believe that the two-tier 
approach represents a reasonable application of determining what 
``measurably substantial benefits'' means. Pursuant to the statutory 
language, benefits must be ``substantial.'' SBA believes that benefits 
equivalent to 10% of the contract value (including options) is a 
substantial benefit relative to the amount of the contract where the 
contract value is $75 million or less. Similarly, SBA believes that 
benefits equivalent to at least $7.5

[[Page 45832]]

million or 5% of the contract value (including options) is a 
substantial benefit in absolute dollars where the contract value 
exceeds $75 million. SBA notes that most bundled requirements that SBA 
has reviewed over the past four years have had a contract value 
(including options) that was less than $75 million. Thus, most bundled 
contracts will be subject to a 10% savings test. The remainder of the 
contracts will be subject to a minimum absolute savings of $7.5 
million.
    This final rule clarifies the two-tier approach to achieve this 
result of a minimum savings for contracts having a value (including 
options) between $75 million and $150 million. The interim rule 
required agencies to achieve a benefit equivalent to at least 5% of the 
contract value (including options) for any contract having a value 
exceeding $75 million, but without specifying a minimum savings of $7.5 
million. Under the interim rule, for contracts having a value between 
$75 million and $150 million, the required benefits could have ranged 
from $3.25 million to $7.5 million. Thus, contracts having a value 
between $75 million and $150 million required less of a benefit than 
contracts having a value between $32.5 million and $75 million. For 
example, an agency needed to demonstrate a $6 million benefit for a 
contract having a $60 million value, while it had to show only a $4 
million benefit for a contract having a value of $80 million. SBA 
believes that this result would have been illogical. As such, SBA has 
amended this provision to require that an agency must show a benefit of 
5% or $7.5 million, whichever is greater, for any bundled contract 
having a value that exceeds $75 million. Contracts awarded in reliance 
on the interim rule which met the 5% benefits test but would not 
satisfy this minimum savings test will be unaffected by this final 
rule.
    One commenter suggested that the ``critical to the agency's mission 
success'' exemption (125.2(d)(3)(iii)(B)) could be subject to abuse. 
SBA does not agree. SBA believes that because these exemptions are made 
at the agency's highest procurement levels, abuses of this authority 
are unlikely.
    The interim final rule included a provision addressing the 
application of the regulation to procurements that are awarded in 
accordance with a cost comparison conducted under OMB Circular A-76 
(``Performance of Commercial Functions''). We did not receive any 
comments on this provision. The final rule retains the provision, with 
clarifying revisions.
    Circular A-76 establishes a cost-comparison process for evaluating 
whether a commercial activity that is conducted by a Federal agency 
should be performed in-house or by contract. This process compares the 
estimated cost of in-house performance by the ``Most Efficient 
Organization'' (MEO) with the cost of contract performance as 
determined by offers that are submitted in response to an A-76 
solicitation. Under the Circular, the simple fact that contract 
performance is found to be less costly than in-house performance by the 
MEO is not sufficient to justify a conversion from in-house to contract 
performance. Instead, an activity will not be converted to contract 
performance (i.e., it will be retained in-house) unless the savings 
will exceed 10 percent or $10 million over the performance period, 
whichever is less.
    Under the A-76 cost-comparison process, the required MEO (which is 
also required by statute at 10 U.S.C. 2461 for the Department of 
Defense) may include a mix of Federal employees and contract support. 
In other words, the scope of an A-76 cost comparison, the solicitation, 
and the in-house MEO may consist of a workload performed by Federal 
employees and one or more existing contractors. Thus, it is possible 
under an A-76 cost comparison process that activities that have been 
performed by Federal employees (along with activities performed under 
two or more small business contracts) will be converted to performance 
under one contract awarded to a large business. In such cases, the 
methodology of the A-76 process will have ensured that the Federal 
Government will derive ``measurably substantial benefits'' from the 
conversion. This occurs in two ways. First, through the agency's 
development of a management plan and the in-house MEO (which concludes 
in the MEO's written ``certification''), significant and measurable 
savings and performance enhancements can be achieved even before 
competing with any private offeror. Second, through the cost comparison 
itself, measurable savings and performance enhancements are quantified, 
and a decision to convert requires substantial savings (10 percent or 
$10 million over the performance period, whichever is less).
    SBA has added clarifying language to the rule so that it is clear 
that a bundling analysis is not required when an agency conducts a 
similar analysis under an A-76 study.

Compliance With Executive Orders 13132, 12988 and 12866, the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and the 
Paperwork Reduction Act (44 U.S.C. Chapter 3501 et seq.)

    The Office of Management and Budget reviewed this rule as a 
``significant'' regulatory action under Executive Order 12866.
    SBA has determined that this final rule may have a significant 
beneficial economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act, 5 U.S.C. SS 601-
612. The rule can potentially apply to all small businesses that are 
performing or may want to perform on the prime contract opportunities 
of the Federal Government. While there is no precise estimate of the 
number of small entities or the extent of the economic impact, SBA 
believes that a significant number of small businesses would be 
affected. SBA has submitted a complete Final Regulatory Flexibility 
Analysis of this final rule to the Chief Counsel for Advocacy of the 
Small Business Administration. For a copy of this analysis, please 
contact Anthony Robinson at (202) 205-6465.
    For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, 
SBA certifies that this rule would not impose new reporting or record 
keeping requirements.
    For purposes of Executive Order 13132, SBA certifies that this rule 
does not have any federalism implications warranting the preparation of 
a Federalism Assessment.
    For purposes of Executive Order 12978, SBA certifies that this rule 
is drafted, to the extent practicable, in accordance with the standards 
set forth in section 2 of this order.

List of Subjects

13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Individuals with 
disabilities, Loan programs--business, Reporting and recordkeeping 
requirements, Small businesses.

13 CFR Part 125

    Government contracts, Government procurement, Reporting and 
recordkeeping requirements, Small businesses, Technical assistance.

    For the reasons stated in the preamble, SBA adopts the interim rule 
amending 13 CFR parts 121 and 125 which was published at 64 FR 57366 on 
October 25, 1999, as final with the following changes:

[[Page 45833]]

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for 13 CFR part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and 
662(5); and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.

    2. In 121.103 currently in effect, revise paragraph (f)(3)(i).


Sec. 121.103  What is affiliation?

* * * * *
    (f) * * *
    (3) * * * (i) A joint venture or teaming arrangement of two or more 
business concerns may submit an offer as a small business for a Federal 
procurement without regard to affiliation under this paragraph (f) so 
long as each concern is small under the size standard corresponding to 
the SIC code assigned to the contract, provided:
    (A) The procurement qualifies as a ``bundled'' requirement, at any 
dollar value, within the meaning of Sec. 125.2(d)(1)(i) of this 
chapter; or
    (B) The procurement is other than a ``bundled'' requirement within 
the meaning of Sec. 125.2(d)(1)(i) of this chapter, and:
    (1) For a procurement having a revenue-based size standard, the 
dollar value of the procurement, including options, exceeds half the 
size standard corresponding to the SIC code assigned to the contract; 
or
    (2) For a procurement having an employee-based size standard, the 
dollar value of the procurement, including options, exceeds $10 
million.
* * * * *

PART 125--GOVERNMENT CONTRACTING PROGRAMS

    1. The authority citation for 13 CFR part 125 continues to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), 637 and 644; 31 U.S.C. 9701, 
9702.


    2. In Sec. 125.2, revise paragraphs (a), (b) and (d) to read as 
follows:


Sec. 125.2  Prime contracting assistance.

    (a) General. Small business concerns must receive any award or 
contract, or any contract for the sale of Government property, that SBA 
and the procuring or disposal agency determine to be in the interest 
of:
    (1) Maintaining or mobilizing the Nation's full productive 
capacity;
    (2) War or national defense programs;
    (3) Assuring that a fair proportion of the total purchases and 
contracts for property, services and construction for the Government in 
each industry category are placed with small business concerns; or
    (4) Assuring that a fair proportion of the total sales of 
Government property is made to small business concerns.
    (b) PCR and procuring activity responsibilities. (1) SBA 
Procurement Center Representatives (PCRs) are generally located at 
Federal agencies and buying activities which have major contracting 
programs. PCRs review all acquisitions not set-aside for small 
businesses to determine whether a set-aside is appropriate.
    (2) A procuring activity must provide a copy of a proposed 
acquisition strategy (e.g., Department of Defense Form 2579, or 
equivalent) to the applicable PCR (or to the SBA Office of Government 
Contracting Area Office serving the area in which the buying activity 
is located if a PCR is not assigned to the procuring activity) at least 
30 days prior to a solicitation's issuance whenever a proposed 
acquisition strategy:
    (i) Includes in its description goods or services currently being 
performed by a small business and the magnitude of the quantity or 
estimated dollar value of the proposed procurement would render small 
business prime contract participation unlikely;
    (ii) Seeks to package or consolidate discrete construction 
projects; or
    (iii) Meets the definition of a bundled requirement as defined in 
paragraph (d)(1)(i) of this section.
    (3) Whenever any of the circumstances identified in paragraph 
(b)(2) of this section exist, the procuring activity must also submit 
to the applicable PCR (or to the SBA Office of Government Contracting 
Area Office serving the area in which the buying activity is located if 
a PCR is not assigned to the procuring activity) a written statement 
explaining why:
    (i) If the proposed acquisition strategy involves a bundled 
requirement, the procuring activity believes that the bundled 
requirement is necessary and justified under the analysis required by 
paragraph (d)(3)(iii) of this section; or
    (ii) If the description of the requirement includes goods or 
services currently being performed by a small business and the 
magnitude of the quantity or estimated dollar value of the proposed 
procurement would render small business prime contract participation 
unlikely, or if a proposed procurement for construction seeks to 
package or consolidate discrete construction projects:
    (A) The proposed acquisition cannot be divided into reasonably 
small lots to permit offers on quantities less than the total 
requirement;
    (B) Delivery schedules cannot be established on a basis that will 
encourage small business participation;
    (C) The proposed acquisition cannot be offered so as to make small 
business participation likely; or
    (D) Construction cannot be procured as separate discrete projects.
    (4) In conjunction with their duties to promote the set-aside of 
procurements for small business, PCRs will identify small businesses 
that are capable of performing particular requirements, including teams 
of small business concerns for larger or bundled requirements (see 
Sec. 121.103(f)(3) of this chapter).
    (5)(i) If a PCR believes that a proposed procurement will render 
small business prime contract participation unlikely, or if a PCR does 
not believe a bundled requirement to be necessary and justified, the 
PCR shall recommend to the procurement activity alternative procurement 
methods which would increase small business prime contract 
participation. Such alternatives may include:
    (A) Breaking up the procurement into smaller discrete procurements;
    (B) Breaking out one or more discrete components, for which a small 
business set-aside may be appropriate; and
    (C) Reserving one or more awards for small companies when issuing 
multiple awards under task order contracts.
    (ii) Where bundling is necessary and justified, the PCR will work 
with the procuring activity to tailor a strategy that preserves small 
business prime contract participation to the maximum extent 
practicable.
    (iii) The PCR will also work to ensure that small business 
participation is maximized through subcontracting opportunities. This 
may include:
    (A) Recommending that the solicitation and resultant contract 
specifically state the small business subcontracting goals which are 
expected of the contractor awardee; and
    (B) Recommending that the small business subcontracting goals be 
based on total contract dollars instead of subcontract dollars.
    (6) In cases where there is disagreement between a PCR and the 
contracting officer over the suitability of a particular acquisition 
for a small business set-aside, whether or not the acquisition is a 
bundled or substantially bundled requirement within the meaning of 
paragraph (d) of this section, the PCR may initiate an appeal to the 
head of the contracting activity. If the head of the contracting 
activity agrees with the contracting officer, SBA may appeal the matter 
to the secretary of the department or head of the agency. The

[[Page 45834]]

time limits for such appeals are set forth in 19.505 of the Federal 
Acquisition Regulation (FAR) (48 CFR 19.505).
    (7) PCRs will work with a procuring activity's Small Business 
Specialist (SBS) to identify proposed solicitations that involve 
bundling, and with the agency acquisition officials to revise the 
acquisition strategies for such proposed solicitations, where 
appropriate, to increase the probability of participation by small 
businesses, including small business contract teams, as prime 
contractors. If small business participation as prime contractors 
appears unlikely, the SBS and PCR will facilitate small business 
participation as subcontractors or suppliers.
* * * * *
    (d) Contract bundling--(1) Definitions--(i) Bundled requirement or 
bundling. The term bundled requirement or bundling refers to the 
consolidation of two or 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 due to:
    (A) The diversity, size, or specialized nature of the elements of 
the performance specified;
    (B) The aggregate dollar value of the anticipated award;
    (C) The geographical dispersion of the contract performance sites; 
or
    (D) Any combination of the factors described in paragraphs 
(d)(1)(i) (A), (B), and (C) of this section.
    (ii) Separate smaller contract. A separate smaller contract is a 
contract that has previously been performed by one or more small 
business concerns or was suitable for award to one or more small 
business concerns.
    (iii) Substantial bundling. Substantial bundling is any contract 
consolidation, which results in an award whose average annual value is 
$10 million or more.
    (2) Requirement to foster small business participation. The Small 
Business Act requires each Federal agency to foster the participation 
of small business concerns as prime contractors, subcontractors, and 
suppliers in the contracting opportunities of the Government. To comply 
with this requirement, agency acquisition planners must:
    (i) Structure procurement requirements to facilitate competition by 
and among small business concerns, including small disadvantaged, 8(a) 
and women-owned business concerns; and
    (ii) Avoid unnecessary and unjustified bundling of contract 
requirements that inhibits or precludes small business participation in 
procurements as prime contractors.
    (3) Requirement for market research. In addition to the 
requirements of paragraph (b)(2) of this section and before proceeding 
with an acquisition strategy that could lead to a contract containing 
bundled or substantially bundled requirements, an agency must conduct 
market research to determine whether bundling of the requirements is 
necessary and justified. During the market research phase, the 
acquisition team should consult with the applicable PCR (or if a PCR is 
not assigned to the procuring activity, the SBA Office of Government 
Contracting Area Office serving the area in which the buying activity 
is located).
    (4) Requirement to notify current small business contractors of 
intent to bundle. The procuring activity must notify each small 
business which is performing a contract that it intends to bundle that 
requirement with one or more other requirements at least 30 days prior 
to the issuance of the solicitation for the bundled or substantially 
bundled requirement. The procuring activity, at that time, should also 
provide to the small business the name, phone number and address of the 
applicable SBA PCR (or if a PCR is not assigned to the procuring 
activity, the SBA Office of Government Contracting Area Office serving 
the area in which the buying activity is located).
    (5) Determining requirements to be necessary and justified. When 
the procuring activity intends to proceed with an acquisition involving 
bundled or substantially bundled procurement requirements, it must 
document the acquisition strategy to include a determination that the 
bundling is necessary and justified, when compared to the benefits that 
could be derived from meeting the agency's requirements through 
separate smaller contracts.
    (i) The procuring activity may determine a consolidated requirement 
to be necessary and justified if, as compared to the benefits that it 
would derive from contracting to meet those requirements if not 
consolidated, it would derive measurably substantial benefits. The 
procuring activity must quantify the identified benefits and explain 
how their impact would be measurably substantial. The benefits may 
include cost savings and/or price reduction, quality improvements that 
will save time or improve or enhance performance or efficiency, 
reduction in acquisition cycle times, better terms and conditions, and 
any other benefits that individually, in combination, or in the 
aggregate would lead to:
    (A) Benefits equivalent to 10 percent of the contract value 
(including options) where the contract value is $75 million or less; or
    (B) Benefits equivalent to 5 percent of the contract value 
(including options) or $7.5 million, whichever is greater, where the 
contract value exceeds $75 million.
    (ii) Notwithstanding paragraph (d)(5)(i) of this section, the 
Assistant Secretaries with responsibility for acquisition matters 
(Service Acquisition Executives) or the Under Secretary of Defense for 
Acquisition and Technology (for other Defense Agencies) in the 
Department of Defense and the Deputy Secretary or equivalent in 
civilian agencies may, on a non-delegable basis determine that a 
consolidated requirement is necessary and justified when:
    (A) There are benefits that do not meet the thresholds set forth in 
paragraph (d)(5)(i) of this section but, in the aggregate, are critical 
to the agency's mission success; and
    (B) Procurement strategy provides for maximum practicable 
participation by small business.
    (iii) The reduction of administrative or personnel costs alone 
shall not be a justification for bundling of contract requirements 
unless the administrative or personnel cost savings are expected to be 
substantial, in relation to the dollar value of the procurement to be 
consolidated (including options). To be substantial, such cost savings 
must be at least 10 percent of the contract value (including options).
    (iv) In assessing whether cost savings and/or a price reduction 
would be achieved through bundling, the procuring activity 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.
    (6) OMB Circular A-76 Cost Comparison Analysis. The substantial 
benefit analysis set forth in paragraph (d)(5)(i) of this section is 
not required where a requirement is subject to a Cost Comparison 
Analysis under OMB Circular A-76 (See 5 CFR 1310.3 for availability).
    (7) Substantial bundling. Where a proposed procurement strategy 
involves a substantial bundling of contract requirements, the procuring 
agency must, in the documentation of that strategy, include a 
determination that the anticipated benefits of the proposed bundled 
contract justify its use, and must include, at a minimum:

[[Page 45835]]

    (i) The analysis for bundled requirements set forth in paragraph 
(d)(5)(i) of this section;
    (ii) An assessment of the specific impediments to participation by 
small business concerns as prime contractors that will result from the 
substantial bundling;
    (iii) Actions designed to maximize small business participation as 
prime contractors, including provisions that encourage small business 
teaming for the substantially bundled requirement; and
    (iv) Actions designed to maximize small business participation as 
subcontractors (including suppliers) at any tier under the contract or 
contracts that may be awarded to meet the requirements.
    (8) Significant subcontracting opportunity. (i) Where a bundled or 
substantially bundled requirement offers a significant opportunity for 
subcontracting, the procuring agency must designate the following 
factors as significant factors in evaluating offers:
    (A) A factor that is based on the rate of participation provided 
under the subcontracting plan for small business in the performance of 
the contract; and
    (B) For the evaluation of past performance of an offeror, a factor 
that is based on the extent to which the offeror attained applicable 
goals for small business participation in the performance of contracts.
    (ii) Where the offeror for such a bundled contract qualifies as a 
small business concern, the procuring agency must give to the offeror 
the highest score possible for the evaluation factors identified in 
paragraph (d)(5)(i) of this section.
    5. In Sec. 125.6, revise paragraph (g) to read as follows:


Sec. 125.6  Prime contractor performance requirements (limitations on 
subcontracting).

* * * * *
    (g) Where an offeror is exempt from affiliation under 
Sec. 121.103(f)(3) of this chapter and qualifies as a small business 
concern, the performance of work requirements set forth in this section 
apply to the cooperative effort of the team or joint venture, not its 
individual members.

    Dated: June 20, 2000.
Aida Alvarez,
Administrator.
[FR Doc. 00-18795 Filed 7-25-00; 8:45 am]
BILLING CODE 8025-01-U