Unpacking ED’s New PCA Subcontracting Requirements

On December 11^th, The Department of Education (ED) cancelled one solicitation that started in July of 2013 and, a mere fourteen minutes later, replaced it with a new one that asks Private Collection Agencies (PCAs) to subcontract out at least 31% of total contract value to small businesses, more than double what the original bid required and a new high for PCAs. In doing so, ED suddenly shifted hundreds of millions of dollars in federal contracting fees to many to-be-determined small businesses.

The agency also put interested agencies on-notice that they will need to scramble to name their selected subcontractors in documents to ED due Monday, February 29^th, a week later than other documents due as a part of offers Monday. PCAs must comply or face possible disqualification from the bid process.

Of course, ED itself has attempted, without success, to pick its own PCAs over the course of nearly two and one-half years. But now, the agency expects bidders to pick their PCA subcontractors and fully vet those subcontractors in a fraction of that time with the holidays falling within that window.

The Details

The new solicitation asks for two separate commitments.  First, it asks bidders to commit to a specific “percentage of the Offeror’s account transfers received from FSA that will be subcontracted to small business.” This number must be over 5% in order for it to be considered acceptable as a part of the bidder’s response to the solicitation. This requirement is industry-specific.

Second, it asks bidders to complete a subcontracting plan as required on most large Federal contracts as outlined in the Federal Acquisition Regulation Subpart 52.219-9. See here. Within that plan bidders are expected to meet the Federal Student Aid (FSA) goal of 31% of total contract value and make individual spending commitments to small firms with special socioeconomic designations to include small disadvantaged (5%), woman-owned (5%), service-disabled veteran owned (3%), and certified HUBZone (3%) firms.  Those expenditures are part of the overall commitment.

ED is not specifically asking PCAs to subcontract 31% of total contract value to small business collection agencies only.  Federal contractors must spend dollars with small businesses generally, and those expenditures can include any product or service that supports contract operations. So if a PCA proposes to subcontract, for example, 6% of accounts to small collection agencies (assuming that translates to 6% of revenue, which it may not) and to spend another 25% on other products and services, including all subcategories above, then it will have submitted an offer that is acceptable within the rules of the procurement, if not good enough to win. However, the average PCA will likely struggle to find ways to spend 25% or so on products and services other than collection subcontractors, so, a firm that proposes such a commitment and wins may find itself increasing that 6% figure many times over in order to meet the 31% overall small business spending goal during the term of the contract.

A Catch-22

PCAs are caught in a classic catch-22 as a result of the new requirements. In an effort to ensure optimal performance and reduce risk, some PCAs have targeted firms with revenue over $10 million per year as potential subcontractors, or intend to use only one or two firms to meet the spending requirements.  However, this strategy ultimately may not work, because the sheer volume of business will push up revenue past the  “small” designation as soon as a firm exceeds the current size threshold of $15 million in revenue or once the firm’s revenue from the PCA rises above 60% to 70%, due to SBA Affiliation Regulations.

Similarly, in asking PCAs to spend 5% of revenue with SDBs, PCAs must engage firms with modest levels of net worth in order to qualify for the designation—when access to capital is one of main indicators of likely success in the first place.

PCAs will also have to view small business subcontracting as yet another area of regulatory compliance to manage under the contract. Subcontracting is one of only three criteria evaluated in the current bid process and bidders can be disqualified if they have “a history of failing to honor subcontract agreements.” The most recent revision to the solicitation calls for “enforceable commitments” to subcontractors and encourages offerors to explain the “complexity and variety of the work” subcontractors will be allowed to perform. ED wants PCAs to let subcontractors do as much of this work as possible, without withholding parts that a prime contractor considers too difficult for a small firm to manage.

By contrast, small business prime contractors awarded contracts in the fall of 2014, some of which began working accounts last November,  did not have to develop a comprehensive subcontracting plan per the unrestricted solicitation, although some of them have grown into de-facto large businesses already and, what’s more, the contracts themselves call for it. They have been able to get by with much smaller commitments made with their bid submissions in 2014. Sources indicate that small business prime contractors may receive as much as 50% of all placements once both contracts are running concurrently – a parity never before seen.

Small businesses have generally been able to meet the stringent demands of PCAs and ED. Numerous subcontractors performed with very little turnover on 2009 contracts now winding down, a few of those won their own small business contracts in September of 2014, and several others already awarded small business contracts that started back in 2009 are now vying to move up into the pool of large businesses.

“Since 99% of all companies in America are small businesses, including most in the ARM industry, we can appreciate what ED is trying to do here,” says Leah Wilson Conger of the Fed Cetera network, a business development organization serving the PCA community. “We think it’s a good strategy to entrust the top-performing, best-run bidders with strong compliance records in this area to make this happen.”

Taken together, all of these factors make clear the strategy: ED appears to be trying its best to let large businesses continue to work on the PCA contract.

Related: Last August we published a primer on ED small business utilization entitled: Dept. of Education PCA Program Still a Driver of Small Business Growth.”

The insideARM Perspective

ED has taken plenty of time picking PCAs for the next contract and has extended its own deadlines several times. Unfortunately, the agency has no plans to extend equally generous deadlines to the industry. Asking PCAs to vet subcontractors in a matter of weeks is not particularly fair, or necessarily advisable, but agencies who want in on what has been the most lucrative contract in the ARM industry will have to manage. Some might say that, if selected in the RFP, it is was a “high class” problem that was worth the effort to solve.