Shrinking Competition in the Federal Marketplace – Veterans Affairs
In February 2022, the Under Secretary of Defense for Acquisition and Sustainment reported that the number of small businesses in the Defense Industrial Base shrunk by over 40% over the past decade. According to Deputy Secretary of Defense Kathleen Hicks,?“if the Defense Industrial Base continues along the same trend, DoD could lose an additional 15,000 suppliers over the next 10 years. This downward trend is a national security and economic risk to the nation…”
In May, GAO highlighted yet another example of the shrinking supplier base in the Federal marketplace. This time it was the Department of Veterans Affairs where we saw contracts getting larger and taxpayer dollars being spent increasing, while the number of contracts awarded and the number of contractors in the supplier base were declining.
IT modernization initiatives and COVID-19 pandemic response drove the growth in IT contract obligations. Large technology modernization initiatives included electronic health records modernization and replacement of VA’s legacy financial management system.
If you take the anomaly of the $2B spent on the COVID-19 response out of scope, there is still a consistent and significant decrease in competition at VA. While the amount of dollars being spent on IT continues to increase, there has been a decrease in contractors despite rising obligations from FY2017-FY2-21. During this time, the average total contract size and order value of new awards almost tripled, but the number of new IT contracts awarded and orders issued fell by more than half.
How is this possible? Because the Department has been extending existing contracts and issuing new tasks under existing contract vehicles to the same contractors that were already dominating the procurement space. The VA has made a concerted effort to consolidate IT requirements, resulting in fewer, but larger, IT procurements. So, instead of competing tasks, which would bring better prices. More innovation and new vendors to the marketplace, the Department made modifications adding funding to existing contracts and orders, compared with those made via new contracts and orders.
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The SBA recently announced that the Federal government awarded a record $169.2 billion in contracts to small businesses in FY2022. However, the overall number of prime small business contractors continues to shrink, with just 62,670 in FY2022, down more than 4% from the 65,428 reported in FY2021. The GAO found that similar overall trends were mirrored in VA’s IT contracting with service-disabled veteran-owned or veteran-owned small businesses.
“While obligations to these businesses increased almost 30 percent, the number of such contractors fell by more than 10 percent. We also found an increasing concentration of obligations to a small group of contractors.”
The proportion of contract dollars awarded to the 10 contractors with the most IT obligations in any given year grew from 45 percent in fiscal year 2017 to 56 percent in fiscal year 2021. In fact, during this 4-year period reviewed by GAO, just 30 contractors received approximately 75 percent of all VA IT contract dollars.
It is clear that the government must do a better job recruiting more firms
Innovative, niche firms need to find ways to merge or be acquired to expand their capacity and increase their ability to capture these larger contracts. If the procurement trend continues, the only way for agencies like VA to benefit from greater competition in its supplier base is through the elevation of these newer, “other than small,” firms.