Capitulating to Congress, the General Services Administration yesterday decided to divide the government's telecommunications business between two companies and to require the firms to compete again periodically by offering cheaper or better service.

The contracts will be worth $5 billion to $10 billion over the next 10 years and will put in place a vast new telecommunications network to handle calls, data and video transmissions.

"We will get the best technology available, competetively procured, and significantly cheaper" than the current Federal Telecommunications System, said GSA administrator Terrence C. Golden.

The largest civilian contract ever awarded will be split between two bidders, with 60 percent of the business going to the winner and 40 percent to the runner-up.

GSA's decision will mean that three-fifths of the government's 320 million phone calls each year will be made on one system, and two-fifth's on the other.

The split will be by agency, so that each agency or department will use the same system, but long distance traffic between agencies may require the use of an extra digit to gain access to the other government system, Golden said.

The two companies will recompete after four years and again after seven years for a chance to take away 40 percent of the other firm's business. Decisions will be made not only on price but quality as well, according to GSA.

The decision to split the work among two consortia -- only three are expected to bid, at most -- is likely to delay the installation of the new telecommunications system for at least a year.

Bids were scheduled to be opened last August when Rep. Jack Brooks (D-Tex.) sent a letter to three potential bidders -- teams made up of American Telephone & Telegraph Co. and Boeing Co.; Martin Marietta Corp. and MCI Communications Corp., and U.S. Sprint -- raising questions about the GSA's plan to award the contract to a single bidder.

After the award was delayed twice, GSA gave up on the single bidder approach, saying the procurement would not succeed without Brooks' support.

Asked whether he felt this was congressional micromanagement, Brooks said yesterday, "I just suggested they have two contracts. I didn't think that one company ought to have a contract that might be worth $25 billion. After we talked it over they agreed with me."

GSA estimates the government's present phone service costs $100 million a year more than it should.

When GSA asked telephone companies to compete to provide technical switching services recently, the agency estimated that the competition cut costs by almost a third.

Final contract awards are scheduled to be made next September, with the new system being phased in beginning as early as 1989.

Golden said the government was going to purchase two "first-class, high quality" systems "with all the services that are available to the private sector."

Companies will be asked to bid on both the larger and smaller contracts, and offer a fixed price per minute of service.

The two winners will be guaranteed a minimum of $450 million -- the government's estimated 3- to 4-year phone bill.

The firms will not be able to raise their prices over the 10-year life of the contracts, according to a GSA procurement outline.

The losing bidder will be shut out of government phone work for 10 years, Golden said, which is designed to insure rigorous initial competition.

When asked if he would stay to award the contract personally, Golden said, "I would expect so."