Trends in Defense Sole Sourcing Reflect a Shift toward Modular Contracting

Back in June, the Government Accountability Office (GAO) released a report on trends in the Department of Defense’s award of 8(a) sole source contracts worth more than $20 million dollars. Using a sample of such contracts awarded from fiscal 2006 to fiscal 2015, the GAO found that DoD’s sole sourcing to 8(a) firms reached a high of more than 40 awards in fiscal 2008. Thereafter, the award of such contracts began to decline precipitously, reaching a low point of zero in fiscal 2014, with only a small number awarded afterward in fiscal 2015 (see GAO chart below).

In a parallel trend, the GAO also found that at around the same time that the DoD was reducing the award of 8(a) sole source contracts worth more than $20 million, it was also competing more contracts above the $20 million threshold among 8(a) firms. Fiscal 2008 again proved to be the pinnacle of this activity, with the number of competed +$20 million 8(a) contracts reaching a high of roughly 150. The DoD attained this high once again in fiscal 2015.

When interviewed about why they are no longer awarding sole source contracts worth more than $20 million to 8(a) firms, Defense contracting officers from 14 different contracting shops cited a number of causes, including an increased emphasis on competition and a decline in contracting budgets. More importantly, perhaps, these offices also reported a decline in the value of the requirements being competed to less than $20 million, rendering the 8(a) justification inapplicable.

Do these explanations for the contracting trends identified by the GAO hold water? Of the three rationale cited, falling contracting budgets probably have the least impact. It costs more in man-hours to compete a contract than it does to award it sole source, particularly to an 8(a) firm, as there is a socioeconomic justification to fall back on. Similarly, the number of competed contracts rose in fiscal 2008 as well, when the Pentagon was not under the same level of financial pressure it is now, so the argument that an increased emphasis on competition is driving fewer +$20 million 8(a) sole source contract awards is dubious.

The most likely cause found by the GAO influencing the 8(a) contracting trend is a decline in the value of the requirements. To quote the report: “In fiscal year 2006, the average period of performance for a sole-source 8(a) contract was 4.8 years, yet starting in 2012 the average period of performance—which was 3.7 years—began to decline. By fiscal year 2015, the average period of performance was 2.1 years. For competed contracts 8(a) over $20 million, the contract length has consistently averaged between 4 and 5 years since 2007.”

Clearly, the advent of Better Buying Power and the DoD’s adoption of modular contracting is translating into the award of contracts with more limited scopes of work and shorter durations. This shift in contracting is intended to better align program management best practices with the contracts that support DoD’s program efforts, a trend that ultimately affects many firms in government contracting, not just those that are 8(a).