[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000 deg.
ARE BIG BUSINESSES RECEIVING CONTRACTS THAT WERE INTENDED FOR SMALL
BUSINESSES?
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, MAY 7, 2003
__________
Serial No. 108-12
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia CHARLES GONZALEZ, Texas
TODD AKIN, Missouri GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan
J. Matthew Szymanski, Chief of Staff and Chief Counsel
Phil Eskeland, Policy Director
Michael Day, Minority Staff Director
(ii)
C O N T E N T S
----------
Witnesses
Page
Styles, Angela B., Office of Federal Procurement Policy.......... 4
Chapman, Lloyd, Microcomputer Industry Suppliers Association..... 13
Armendariz, Fred C., Small Business Administration............... 15
Mendoza, Felipe, U.S. General Services Administration............ 17
Robinson, Kenneth W., KENROB & Associates, Inc................... 19
Schooner, Steven, George Washington University Law School........ 20
Cooper, David E., U.S. General Accounting Office................. 23
Appendix
Opening statements:
Manzullo, Hon. Donald A...................................... 39
Velazquez, Hon. Nydia M...................................... 41
Prepared statements:
Styles, Angela B............................................. 43
Chapman, Lloyd............................................... 51
Armendariz, Fred C........................................... 75
Mendoza, Felipe.............................................. 83
Robinson, Kenneth W.......................................... 90
Schooner, Steven............................................. 94
Cooper, David E.............................................. 104
InfoPro Group, Inc........................................... 118
Capuano, Joseph A., Jr., U.S. Department of Transportation... 120
(iii)
ARE BIG BUSINESSES BEING AWARDED CONTRACTS INTENDED FOR SMALL
BUSINESSES?
----------
WEDNESDAY, MAY 7, 2003
House of Representatives,
Committee on Small Business
Washington, D.C.
The Committee met, pursuant to call, at 2:02 p.m. in Room
2360, Rayburn House Office Building, Hon. Donald Manzullo
presiding.
Present: Representatives Manzullo, Velazquez, Bartlett,
Graves, Schrock, Akin, Shuster, Musgrave, Ballance, Napolitano,
Case, Majette, Sanchez, and Miller.
Also Present: Representative Lynn Woolsey.
Chairman Manzullo. Good afternoon and welcome to this
hearing on the Committee on Small Business, and a special
welcome to those who have come some distance to participate and
to attend.
Is there a scandal going on in the federal procurement
arena? Are big businesses being awarded contracts that were
intended to be awarded to small businesses? A recent article in
the L.A. Times would indicate that this is the case. The
article states that ``large companies are improperly getting
billions of dollars in government contracts meant for small
businesses.''
It is imperative that this Committee look into what is
going on and investigate the truth of these allegations. We
have asked GAO to investigate this matter, and they have agreed
to testify here today.
To answer these allegations, we have invited as witnesses
the highest official in the administration responsible for
federal procurement policy, the investigative arm of Congress,
the United States General Accounting Office, persons in the
private sector, and members of the Executive Branch responsible
for seeing that small businesses are fairly treated in the
federal procurement process.
At the end of this hearing, it is my hope that we will have
an answer to this question: Are big businesses receiving
contracts intended for small businesses? It is my understanding
that some agencies have already taken steps to correct the
situation, and we will find out today.
One recommendation is that small businesses be required to
certify their size annually. The Committee is willing to work
with the SBA and propose regulations to that effect and changes
to statutory law, if necessary, and obviously we welcome SBA's
input on that.
The bottom line is that this Committee is very much
concerned with faulty information that results in an agency
awarding to a big business a contract intended for a small
business. This Committee is equally concerned with the accuracy
of the data by which Congress evaluates agencies' performance
against established, small business procurement goals. This
Committee intends that the benefits of small business laws go
to real-life, small business owners and employees, not to large
companies.
Sometime in the fall, this Committee intends to revisit
this issue to evaluate the conclusion raised in the GAO's final
report.
As a matter of procedure here, the Honorable Angela Styles
will be able to stay for a part of the questioning, but then
she has to run off to another meeting. So, obviously, you would
be excused whenever you have to leave, and we appreciate your
coming here.
I now yield for an opening statement by my good friend and
colleague, the Ranking Member, Ms. Velazquez of New York.
[Mr. Manzullo's statement may be found in the appendix.]
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Chairman, I
would like to take two seconds to introduce our newest member,
Mr. Brad Miller from North Carolina's 13th Congressional
District. In his short tenure in Congress, he has already
demonstrated a dedication to improving the economic environment
of our nation's small businesses. He also serves on the
Committee on Financial Services. I know that Mr. Miller will
quickly become an active member of this Committee.
Welcome.
Chairman Manzullo. Welcome to our Committee. Glad to have
you here.
Ms. Velazquez. Thank you, Mr. Chairman. With the economy in
a slump, small businesses need all the help they can get. A
good way for small businesses to grow is to have the federal
government as a customer. What small businesses may not realize
is their biggest marketplace is not overseas but right here in
their own back yard.
The federal government spends approximately $220 billion on
goods and services each year, from food and uniforms to
airplanes and artillery, yet this billion-dollar marketplace
remains largely closed to small businesses. Even though the
United States Government is the largest customer in the world,
small businesses find they have no luck when making sales calls
to federal agencies. In fact, for the last two years, our
government has failed to meet its small business goals, costing
small firms an estimated $12.4 billion in lost opportunities.
To make matters worse, today, we find yet another reason
why federal agencies are unable to meet their small business
goal. If contract bundling, poor oversight, and lack of
accountability weren't big enough obstacles, now small
businesses are losing out on even more contracts intended for
them because they are going to large businesses instead. This
is yet another example of how the federal procurement system is
fraught with inequities.
Shortly after these allegations were brought to our
attention, this Committee directed the GAO to investigate the
situation. During this hearing, we will learn the findings of
the General Accounting Office report and what actions federal
agencies with oversight responsibilities are doing to address
this issue.
Not only is it wrong and unfair that large businesses win
small business contracts, but it also inflates the federal
government's track record for achieving its small business
goals. In 2001, the most recent year data was available on
contracts awarded, the federal government missed its small
business goal of 23 percent. Now, with the latest General
Accounting Office findings, we will learn that the government
didn't just miss the small business mark, but it missed it by
more than what we had originally thought since, the large
business contracts were miscounted and misrepresented as small
ones.
The truth is, large businesses receiving contracts intended
for small businesses is just part of a larger, more prevalent
problem. What we have here is a federal procurement system that
is fatally flawed. It is riddled with practices of contract
bundling, weak oversight, no real appeal process, and little
commitment to small businesses from top agency heads and other
officials.
Small businesses lose out, but so do the American taxpayers
because, in effect, what the government buys may not be the
best quality at the best price. Even the president acknowledges
that there is a problem. More than a year ago, President Bush
unveiled his five-point small business agenda. Along with
health care, tax incentives, and regulatory relief, opening
opportunities in federal contracting for small businesses
topped his list.
The rhetoric coming out of the White House is definitely
pro-small business, but the reality is that little action has
been taken to deliver on the promises made to help this
nation's entrepreneurs. The administration did outline its
contracting strategy last fall, but it was just like the
rhetoric: empty. Unfortunately, it will become clear today that
it will take more than the minor regulatory changes and
increased reporting requirements contained in the
administration proposal to bring about any real change.
I can tell you what we need to bring about some real
change: a complete and comprehensive overhaul of the entire
federal procurement system. We need to start with strengthening
the appeals process and empowering small businesses to fight
and actually win when they are treated unfairly. We need to put
in place a regulatory body that can truly police federal
agencies. We need to hold these agencies accountable. It is
only then that we will see small businesses get their fair
shake and their fair piece of the $220 billion procurement pie.
The General Accounting Office report is yet another symptom
of our ailing federal procurement process. Small businesses all
over this nation can provide the federal government with
quality goods and services at competitive prices. Agencies need
to understand and embrace this. If they refuse to, which is
usually the case, then safeguards will have to be put in place
to protect small businesses, and more power will have to be
given to those responsible for enforcing the law, which
mandates that the federal government work with small
businesses.
It is the American way, and small businesses are the
backbone of this economy. They deserve fairness and equity,
especially from their own government. Thank you, Mr. Chairman.
[Ms. Velazquez's statement may be found in the appendix.]
Chairman Manzullo. Thank you for that excellent statement.
Our first witness is the Honorable Angela Styles,
administrator, Office of Federal Procurement Policy. We have a
clock right there. When it gets to yellow, you have got a
minute, and when it gets to red, you are supposed to stop. And
if you could pull the microphone as close to your mouth as
possible, we would appreciate it. I look forward to your
testimony.
STATEMENT OF ANGELA B. STYLES, ADMINISTRATOR, OFFICE OF FEDERAL
PROCUREMENT POLICY
Ms. Styles. Thank you, Chairman Manzullo and Congresswoman
Velazquez and members of the Committee. I am pleased to be here
today to discuss why the large businesses are improperly
receiving contracting opportunities intended for small
businesses. This issue is of great concern, particularly at a
time when this administration is working hard to create an
environment where small business can flourish.
We share your interest in making sure that small businesses
do, in fact, have access to federal contracting opportunities.
When small businesses are excluded from federal opportunities,
our agencies, small businesses, and the taxpayers lose. With
this in mind, the administration is taking steps to ensure that
large businesses are not improperly receiving contracting
opportunities intended for small businesses.
We have heard of instances where large businesses are
taking advantage of contracting opportunities intended for
small businesses. While we do not have hard evidence that this
is happening, we want to make sure that the various actions the
administration is taking do, in fact, increase small business
access to contracting opportunities. We are particularly
concerned about larger contractors masquerading as small
businesses in large, long-term contracts, thus depriving small
businesses of significant opportunities to compete against
their peers.
We welcome SBA's recent issuance of a proposed rule to
amend its regulations on small business size status. SBA has
proposed amendments to make sure that large businesses do not
take advantage of opportunities intended for small businesses.
This action should help protect against misrepresentation of
small business status.
In the meantime, there are other protective measures we can
and should take. I understand that GAO has found that in some
cases agencies are relying on inaccurate or misleading data to
make decisions about small business contract awards. If that is
the case, we need to take corrective action.
We want to make sure that small businesses do, in fact,
have access to contracting opportunities intended for their
benefit. In particular, my office is taking steps to prevent
misrepresentations under government-wide acquisition contracts
for information technology, known by their acronym as
``GWACs.'' GWACs are awarded by executive agents designed by
OMB under the Clinger-Cohen Act. Typically structured as
multiple-award contracts, GWACs are popular vehicles for
satisfying agency needs, in large part because they provide
quick access to the marketplace and can save customers the cost
and burden of establishing their own separate contracts.
Today, four agencies serve as executive agents: the General
Services Administration, the Department of Commerce, the
National Aeronautics and Space Administration, and the National
Institutes of Health. These agencies maintain a total of 15
GWACs: GSA has 10, NIH has three, and the other two agencies
have one each.
On February 11th of this year, we advised our four
executive agents, whose designations were up for renewal in
April, of our intention to require that they obtain annual
certifications from their contractors regarding small business
status. We believe GWACs, like other multiple-award contracts,
and GSA's supply schedules may be vulnerable to
misrepresentation because they are typically large and long
term. Their structure allows a prequalified contractor to
receive sizable work orders from agencies over the course of
many years, often in millions and occasionally even in hundreds
of millions. For this reason, we use the OMB executive agent
renewal process to provide temporary protection from possible
misrepresentation of small business status.
Under OMB's designations, the executive agents are required
to develop schedules identifying when their small business GWAC
contractors will begin annual certification of their size
status. Our intent is not to disrupt contract performance by
requiring termination of contracts with businesses who are
small but became large during contract performance. Also, we
want to be flexible in considering ways to implement the
certification requirement prospectively so that we do not have
unintended consequences.
However, we expect our executive agents and their customer
agencies to identify this change in business status in the
normal course of their reporting to the Federal Procurement
Data System. For example, after a change of status from
``small'' to ``other than small'' occurs and is reflected in
the change in an annual certification, agencies are expected to
report that orders under the GWACs were awarded to a large
rather than a small business. Departments and agencies can then
use this information to more accurately account for their small
business contracting activities and make appropriate
adjustments to their contracting practices to ensure small
businesses have access to contracting opportunities.
Our office will continue to work closely with SBA, this
Committee, and major procuring agencies to increase small
business access to contracting and subcontracting opportunities
and to help guard against instances where small businesses are
excluded from federal opportunities by fraud,
misrepresentation, or otherwise. By doing so, we are helping to
ensure that our citizens reap the full benefit of a robust
supplier base.
This concludes my prepared remarks, but I am happy to
answer any questions you may have.
[Ms. Styles' statement may be found in the appendix.]
Chairman Manzullo. Thank you very much. Our next witness,
Lloyd Chapman, will be introduced by his member. What we are
going to do is I am going to have Congresswoman Woolsey
introduce her witness, and then I am going to allow the members
of the Committee to ask questions of Angela Styles so she will
have time to answer those questions.
Ms. Styles. Mr. Chairman, it is perfectly all right with me
to wait.
Chairman Manzullo. No. What I would suggest, Lynn, is that
you go ahead and introduce Mr. Chapman----
Ms. Woolsey. All right.
Chairman Manzullo [continuing]. And then we will go to Ms.
Styles. And then he will be able to testify. Please go ahead.
Ms. Woolsey. Thank you for the honor of being able to do
this.
Chairman Manzullo. We welcome you to our Committee. We are
glad to see you here.
Ms. Woolsey. You are talking about things that don't make
sense to me, actually. And thank you, Ranking Member Velazquez,
for letting me do this.
It is an honor to join you today to introduce one of my
favorite constituents from Novato, California, Lloyd Chapman,
and I am confident that Mr. Chapman's testimony will prove
insightful. He has been an outspoken advocate for small
business people in our North Bay community--we are right across
the Golden Gate Bridge from San Francisco--and he has been an
advocate for small business people throughout the country for
over 17 years.
He founded and is currently president of the Microcomputer
Industry Suppliers Association, MISA, which represents the
interests of microcomputer and technology suppliers.
Lloyd's tireless efforts have led government purchasing
agencies to review their small business-certification processes
to ensure that contract set-asides for small businesses truly
go to small businesses. There is no doubt that Mr. Chapman
shares this Committee's commitment to the mission and goals of
the Small Business Act, and I am pleased that he will be able
to share his experiences with you today. With that, I am
pleased to welcome Lloyd Chapman to Capitol Hill.
Chairman Manzullo. Thank you very much. Ms. Velazquez, you
have questions of Ms. Styles.
Ms. Velazquez. Thank you, Mr. Chairman. Ms. Styles, thank
you for your testimony.
In your written testimony, more than half of it is on the
President's bundling contract. Here, we are today to discuss
and comment on the General Accounting Office report. I don't
think you did that. But I would like to pursue your discuss
regarding the President's bundling plan.
It seems to me that what is missing in the President's
bundling plan is accountability. The report includes the word,
``accountability,'' seven times and the word,
``responsibility,'' 12 times but doesn't include any true
measures of accountability.
The first quarterly status report, which barely half of the
agencies responded to on time, speaks volumes regarding the
commitment to the President's plan. Worse, what you asked for
in this status report isn't going to provide one indicator as
to whether opportunities for small businesses have increased.
Why didn't you ask agencies to provide you with the number
of bundled contracts reviews? How are you going to know if you
have reduced the effect of contract bundling on small
businesses if you are not even asking agencies to provide you
with the impact of their bundled contracts on small businesses.
And did you ask agencies to provide you with the number of
small businesses that benefited from agencies' action to
unbundle.
Ms. Styles. We actually do recognize that accountability is
a key piece of this. I think, when we went to talk to small
businesses in this arena, trying to implement what the
President wanted, the one thing we heard was what was needed
was accountability and leadership. More than changes in the
regulation, which we have proposed, and we did propose on time,
more than statutory changes is what they were looking for was
accountability and leadership.
We came out with the proposed regulations on time. We have
gone to the agencies, first, in December with a draft report,
quarterly report, which included a great deal of data elements.
For the first report, based on our discussions with the
agencies, we realized it was almost impossible for them to be
able to collect the data for the first report. We will be going
out with a very extensive data call in the next report. We are
working actively with GAO to make sure that it is a data call
that we will be able to measure success or if it is not
successful. So we do recognize that we need that data in order
to measure where we are, where we are going, and whether the
course that we are taking is successful or not.
Ms. Velazquez. Ms. Styles, can you please answer to me why
didn't you ask agencies to provide you with the number of
bundled contracts reviews?
Ms. Styles. We are asking for that information, and the
first one we went out to, we believed it was almost impossible,
in the two-week period we gave them to get back to us, to
actually be able to collect the information.
Ms. Velazquez. So in the next report, you are going to be
asking the question for the agency because the only way we can
measure whether or not people are unbundling contracts is if
they review those contracts.
Ms. Styles. Yes, yes. We are asking for detailed
information on the number of reviews, the dollar value, et
cetera, and we are working with GAO to try and make sure that
we are asking the right questions. We don't want to just rely
on our ability to ask the right questions. We want to work with
you. We want to work with other people. We are very happy to
share what we are asking with you, with the Senate, to make
sure that we are getting the data and we are getting the
information.
So I am very happy to work with you to make sure that we
understand what are the right questions, what data you want,
what data we want, so we can understand exactly where we are
and exactly where we are going.
Ms. Velazquez. In the proposed bundling rule, small
business specialists are required to notify ASDABUs if an
agency's contract strategy involves contract bundling that is
unnecessary or unjustified. My question to you is, what will
the ASDABU be able to do? They have no authority.
Ms. Styles. They are required to notify both, I believe,
the ASDABU and the procurement center representatives, both of
whom--certainly the procurement center representatives should
have authority to stop the contract, is my understanding, and I
think the ASDABUs, in their position with the agencies, should
be able to work with the agency to work through the issues.
That is why they are embedded within the agency.
Ms. Velazquez. Can you explain that to me again? I don't
think that they have the authority to stop the contract.
Ms. Styles. I do not believe they have the authority to
stop the contract, but they are within the agencies, and it may
be useful to ask some of the ASDABUs here, to help the agency
understand the issues in a facilitated environment before you
get to a controversial environment, or one that is more like
litigation with a procurement center representative.
Ms. Velazquez. Would you support ASDABU having the
authority to stop a contract that did not include adequate
small business participation?
Ms. Styles. I think you have to ask the ASDABUs that. If
the ASDABUs say that that authority is required for them to do
their job, I would certainly be willing to consider it. I can't
say that I know enough about their day-to-day activities to be
able to make that determination right now.
Chairman Manzullo. Let me go to Mr. Schrock.
Mr. Schrock. Thank you, Mr. Chairman. Let me lock arms with
what Mrs. Velazquez said. I know that the subject of contract
bundling is a touchy one. I represent the Second Congressional
District of Virginia, which includes eight major military bases
and 385 military commands, and there is a lot of construction,
and there is a lot of business that goes on there, and I have
contractors, I have small businesses in that district who could
do the job perfectly, but because they bundle it, may go to
somebody in another state, and then they subcontract it to the
guy that is going to do it anyhow, and that is not right.
I think, you know, if all of us have people in the
districts that can do it, it should go to them. I look at
contract bundling as just the lazy way out, do one contract and
let somebody else do the rest of the work, and I don't agree
with that. I think that is wrong, and I think, as Mrs.
Velazquez says, that is really sticking it to small business,
and that is not a good thing.
And one thing I think that Mrs. Velazquez said, that the
administration has said these things that they want to do to
support small businesses, but it is only words, it is only
rhetoric, and I am getting to the point, I agree with that. You
know, you said there is accountability. Who is holding these
agencies accountable?
Ms. Styles. The President's management council and the
President himself. The accountability is through the deputy
secretaries of each agency. That is why we set it up to go
through the leadership of these agencies. I have met with the
President's management council at least three times in the past
six months to discuss contract bundling, to discuss how
important this is to the President, and to make sure people
understand that.
I believe our political leadership does understand it, but
it takes a while to make cultural changes, and our contracting
people don't have a lot of resources at this point. We really
have to make some fundamental changes and make sure people from
the top down recognize how important this issue is.
Mr. Schrock. I know things take a long time, but I am
getting old, and I don't have much time, and I want to see some
of this stuff before I leave Congress one of these days, and if
it is typical government, they will out-wait me. When I was in
the military, they could out-wait me because they knew I would
get transferred somewhere. It is the same thing here. We have
got to get this thing working because our small businesses are
the ones that are suffering, and I agree with Mrs. Velazquez
that we just need to hold somebody's feet to the fire to get
this done and get it done quickly.
I understand what you are saying, that things move slowly.
That is no excuse. Just because it has always been done that
way, I, frankly, don't think that is the way it should be done.
I didn't come here to do business as usual. If that is the
case, my constituents need to send me home. So we just really
need to work on this.
Ms. Styles. I agree with you. I think we all need to work
on it. I think our agencies, with the help of this Committee,
need to understand how important this issue is, and it is hard
to move a bureaucracy, but I certainly am committed to trying
to make it move.
Mr. Schrock. Great. I appreciate that. Thank you, Mr.
Chairman.
Chairman Manzullo. We are also joined by Mrs. Sanchez.
Welcome to our Committee. Glad to have you here.
Ms. Sanchez. Thank you.
Chairman Manzullo. Mr. Miller, do you have any questions?
Mr. Miller. Just one or two, Mr. Chairman.
I think all of the questioning so far has been about
bundling to get above the ceiling of the Small Business Act.
There is also evidence, apparently, of unbundling or
disaggregating purchases to fall below the floor. What, if
anything, is your agency doing about that? How can that be
addressed?
Ms. Styles. We have taken a very hard look at purchase card
practices. You are talking about the floor generally being the
micro-purchase threshold of $2,500. It certainly has been a
concern to us that we don't have proper management controls at
the agencies in place, whether that is to prevent fraud and
abuse, or whether that is to make sure that there are
appropriate opportunities available for small businesses.
We have been pushing both the agencies and the credit card
companies to make more data available so we can measure what is
going to small businesses below that micro-purchase threshold
because I think it hampers our ability to make assessments of
whether $2,500 is too high or too low if we don't know how much
of that is going to small businesses or not.
Mr. Miller. One additional question. I understand there are
also subcontracting requirements, and either the statute or
contracts provide for liquidated damages as an enforcement
mechanism. Can you cite instances in which liquidated damages
have been used?
Ms. Styles. I know of no instance where that has been used,
although I do think the subcontracting environment is one that
has been ignored and is difficult for small businesses as well
as prime contractors. We are working on putting together a
small, interagency group to assess many of the subcontracting
issues, whether it is forms, whether it is understanding
whether a company is certified for one procurement but not for
another as a small business, to really make the subcontracting
environment better and more attractive for companies. I think
we recognize that there are a lot of issues that have just been
ignored in subcontracting for a while.
Mr. Miller. Why has the enforcement mechanism of liquidated
damages not been used, and do you intend to use that more in
the future?
Ms. Styles. I will have to answer that question for the
record for you because I don't know much about liquidated-
damages provisions in subcontracting arrangements.
Chairman Manzullo. Mr. Bartlett?
Mr. Bartlett. Thank you very much. I am now involved with a
constituent in a problem. This is a small business that
responded to an RFP that was a set-aside, as I understand it,
for small businesses. When the contract award was made, it was
made to a business that they say is clearly not a small
business. By no measure are they a small business. They have
far more than the 500 employees and so forth.
They have taken what they felt was the only course of
action available to them. They have filed a protest. So now,
with that in adjudication, we can't talk about that. So what I
want to talk about is a generic situation. Are there
circumstances under which a business which is clearly today not
a small business, are there circumstances under which they
could compete for a small business contract and be within our
regulations, and if that is true, what can we do about that?
Ms. Styles. I think that is the situation, and I think my
office, over the contracts that I have control over, and the
Small Business Administration are both taking steps to change
that.
Mr. Bartlett. What are the circumstances under which they
could clearly not be a small business and still compete for a
small business contract?
Ms. Styles. We have a system that allows people to
prequalify on a contract, whether it is a GSA schedule or
another type of multiple-award contract. So you essentially get
a hunting license. You are a contractor. You get on to this
contract. That doesn't mean you are going to get any business.
At the time, Year 1, when you get onto that contract, you are a
small business. These can be contracts as long as 20 years. In
Year 2, maybe they become a large business. For the next 18
years under our rules, that person will continue to be counted
as a small business.
Mr. Bartlett. Is Bill Gates' Microsoft still a small
business? I think he was 20 years ago, wasn't he?
Ms. Styles. We recognize that there is a problem here. GSA
has taken steps, the SBA has taken steps, and my office----.
Mr. Bartlett. What are you going to do about it?
Ms. Styles. We have a couple of options here. We have a
rule. SBA has a rule out right now that is looking at several
of the options. They run the gamut from at option year renewal,
which would be about every five years--I, personally, think
that is too long to wait--we have an option of recertifying
when your size changes. We have an option of annual
recertification, or you have an option of every task or
delivery order. So you could have a 20-year contract, and once
an agency has a need and goes to buy, then the recertification
has to take place at that point in time.
The question is, what is the best for our agencies, and
what is the best for small business? A lot of small businesses
don't want it to be one year. They want a little bit more of a
cushion because they can be up and down on that margin of what
is small in a several month period, and so on Day 5, you could
be small, but the next day you are not. So we do need a little
bit of smoothing in there, and the question is, is that a year?
Is that two years? Is that three years? Is it every task and
delivery order?
Mr. Bartlett. What will be your proposal?
Ms. Styles. My office has taken the position that annual
recertification is appropriate, but we have heard from a lot of
small businesses that think that that might be too frequent for
some of the businesses, that they might need a little more
leveling from year to year. There are some small businesses
that have come in and asked us to look at two or three years or
when size status changes, which is why you saw the SBA rule go
out with one option identified in the rule but seeking comments
on several of the other options, so we understand what the
effect on small business is.
We don't want a small business, because they hire one more
employee one day and then fir them the next, to be up and down
on our scale. I think that could have some unintended
consequences.
Mr. Bartlett. For people who are now caught in this, there
is no recourse?
Ms. Styles. No. An agency can ask, on a task- or delivery-
order basis, for a particular business to recertify, is my
understanding.
Mr. Bartlett. Okay. Could that happen under a protest?
Ms. Styles. I don't know the answer to that question. I
don't know, but I can find out for you.
Mr. Bartlett. I appreciate that. Thank you very much. Thank
you, Mr. Chairman.
Chairman Manzullo. Mrs. Sanchez?
Ms. Sanchez. Thank you, Mr. Chairman. I don't have any
questions at this time.
Chairman Manzullo. Let us see. Ms. Majette, do you have any
questions?
Ms. Majette. No.
Chairman Manzullo. Okay. Anybody else? Okay. I would yield
the balance of my time to Mrs. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Mendoza?
Mr. Mendoza. Yes.
Ms. Velazquez. Thank you. Ms. Styles said that if ASDABUs
wanted the authority to be able to be able to stop a contract
that did not have adequate small business protection, she will
consider supporting this. Do you think providing that authority
is a good idea?
Mr. Mendoza. I think so, Madam Velazquez. Yes, ma'am, I do.
Ms. Velazquez. Would you support it?
Ms. Styles. I would like to talk to all of the ASDABUs. I
think the vehicle for that is the new, SBA Small Business
Procurement Advisory Council, but I am very happy to follow
through with them. I think they are meeting June 1st or second,
and I would be very happy to follow through with them and get
their ideas on this, particularly since we are in the middle of
a rulemaking right now, and we are assessing the comments. We
have got a draft rule. We will be coming out with a final. If
this is something that needs to be taken into consideration, we
will talk to them and consider it.
Ms. Velazquez. Thank you. Ms. Styles, in the President's
bundling plan, you create significant new requirements for the
SBA's procurement center representatives. They will now be
required to review contracts not set aside for small businesses
and identify alternative strategies to increase small business
participation, review a position within 30 days of the agency
issuing the solicitation, work with agencies' small business
specialists, review agency position strategies and analyses,
review agencies' oversight of agency subcontracting programs,
review agencies' assessment of contractor compliance with
subcontracting plans, and revise agency acquisition strategies
to increase small business teaming.
This is in addition to their other duties of working
directly with small business to counsel them on the federal
marketplace, identifying agency sources for small business
products and services, now conducting agency surveillance
reviews, acting as part-time commercial marketing
representatives. However, no additional resources are provided,
either in the form of travel dollars or money to hire
additional staff.
This is exactly the same strategy used by the
administration for the SEC: tough talk about enforcement but
not dollars to address the problem. How do you think that they
could do their job? How could you think they could do a good
job without the resources that they need?
Ms. Styles. I think you have fairly identified one of the
most difficult parts of the report. I think we recognize the
need for procurement center representatives, as well as our
ASDABUs, to do more with less in an environment of limited
resources. I think we have asked them to do a lot without
allocating additional resources.
I do think you have identified a very difficult point. I
would certainly ask you to talk to SBA as well on their
allocation of resources for PCRs. We certainly try to increase
the responsibilities for ASDABUs where we think there is a
little bit more capacity to reallocate resources to look at
things, but I do agree with you that there is an issue there.
Ms. Velazquez. And I guess that you are aware that there is
not even one PCR per state.
Ms. Styles. It is less than 50, yes.
Ms. Velazquez. So would you support doubling that?
Ms. Styles. Pardon?
Ms. Velazquez. Would you support doubling the number of
PCRs?
Ms. Styles. I am not from the budget side of the house, but
OMB does not support doubling those resources.
Ms. Velazquez. Ms. Styles, I think that if we are honest
and serious about tackling the problem of small businesses
through contract bundling, we have to put the numbers and the
resources that we need in order for them to do their job;
otherwise, it is empty rhetoric.
Thank you, Mr. Chairman.
Chairman Manzullo. We have got a series of votes. Did
somebody hear five votes? Is that what it said? Wonderful.
Ms. Styles, you are excused. We are going to be back. It
could be as long as 45 minutes. Does anybody here have an
airplane that they have to catch to get back home? Okay.
Ms. Velazquez. Mr. Chairman, I would like to ask a request
for Ms. Styles.
Chairman Manzullo. Sure.
Ms. Velazquez. If you could please provide within the next
10 days a list of the top 25 buying activities and of those
which have a PCR covering them exclusively and which don't.
Ms. Styles. Okay. I think I can work with SBA to get that
information. They are SBA's people, so I will certainly work
with them to get that information.
Ms. Velazquez. Thank you.
Chairman Manzullo. Okay. Fine. Well, let us go vote, guys.
[Whereupon, at 2:37 p.m., a brief recess was taken.]
Chairman Manzullo. Well, we are back at it again, folks,
after an exciting series of half-a-dozen votes, including the
use of the Capitol grounds for the soap box derby. That was a
tough vote, wasn't it, Ms. Velazquez? Okay. You think are they
necessary, aren't they?
Ms. Velazquez. I don't know, but I am not in control.
Chairman Manzullo. Okay. We look forward to, Mr. Chapman,
your testimony. I am glad I encouraged your member of Congress
to introduce you way back then. Okay? I look forward to your
testimony. You know the story on the lights. When it gets to
yellow, you have one minute, and when it gets to red, you
should stop. Okay?
Mr. Chapman. All right.
Chairman Manzullo. The written testimony of all of the
witnesses and any members of Congress will be made part of the
official record without objection, and anybody else in the
audience that wants to submit a written statement, not to
exceed two pages, no attachments, of a type that is not less
than 12 point, single spaced; you got that? You are welcome to
do that. You have 10 days to get that in to Mr. Crouther. Mr.
Chapman.
STATEMENT OF LLOYD CHAPMAN, PRESIDENT, MICROCOMPUTER INDUSTRY
SUPPLIERS ASSOCIATION (MISA), NOVATO, CALIFORNIA
Mr. Chapman. I want to thank Chairman Manzullo and Ranking
Member Velazquez and the distinguished members of the Committee
for their attention to this critically important problem to
small businesses.
According to information available from the SBA,
approximately $85 billion in prime contracts and subcontracts
are being shown as awards to small businesses. I believe,
during the course of the hearing, you will find that number is
dramatically overstated. The billions of dollars in federal
small business contracts and subcontracts that are going to
large businesses are the direct result of policies, regulations
specifically written historically by the SBA, OMB, and GSA.
If we want to find out who is responsible for this problem,
we simply have to ask ourselves, who created contract bundling?
Who wrote federal policies that allowed large businesses to
receive small business contracts for up to 20 years? Who
created small business size standards up to 3,000 percent
higher than the average small business?
I am concerned that the SBA and OMB and GSA will attempt to
convince this Committee that the staggering deficiencies in
small business contracting and subcontracting are mainly the
result of bad data and out-of-date information.
In August of 2002, I will begin to compare the information
that companies have posted on PRO-Net and CCR against the
information on our Web sites. I found dozens of examples where
firms had blatantly misrepresented their number of employees,
NAICS codes, and their affiliations with large businesses.
Subsidiaries of Fortune 1000 companies in international firms
were common. Some of the firms had up to 44,000 employees and
annual revenues of up to $12 billion. In 2001, a Dutch firm
with 26,000 employees received over $60 million in small
business contracts through two subsidiaries. Although still
listed on PRO-Net, a major government supplier of IT products
reported in their 1999 annual report to stockholders that they
no longer qualified as a small business after February of 1998.
Based on the information that I began providing the SBA in
2002, the SBA has acknowledged removing over 600 firms from
PRO-Net after determining that they were large businesses.
Since the SBA has declined MISA's request that the SBA notify
agents of these findings, it is my understanding that these 600
firms can continue to receive small business contracts and
subcontracts.
Regulation 16(d) of the Small Business Act states that
misrepresenting a firm as a small business is punishable by
cancellation of contracts, debarment, fines of up to $500,000,
and imprisonment up to 10 years. The SBA Office of the
Inspector General has indicated no firm has been penalized
during the last 15 years for misrepresenting themselves as a
small business.
Based upon the magnitude of the discrepancies in small
business contracting numbers, I have to question the
effectiveness of current protest procedures the SBA has in
place. The SBA has acknowledged dismissing hundreds of small
business protests in recent years by claiming the acquisitions
in question were no small business set-asides. The SBA's
apparent policy of dismissing non-set-aside protests is
inconsistent with Regulation 16(d) that makes no
differentiation between misrepresentations or set-asides, non-
set-asides, prime contractor subcontracts. Some of these
dismissed protests were filed against the very companies that
the SBA has ultimately removed from PRO-Net.
When the Small Business Act was passed more than 50 years
ago, it called for a fair portion of government contracts be
awarded to small businesses. This is obviously not happening. I
believe the Small Business Act was a win/win, economic-stimulus
package designed to direct federal contracts and subcontracts
to the small businesses that account for 98 percent of U.S.
firms and over 50 percent of the American work force.
To achieve this goal, I would like to see a GAO
investigation into the accuracy of subcontracting reports.
Current policies allowing large businesses to receive small
business contracts should be modified or eliminated. In
addition, more effective protest procedures are needed, with
the strict enforcement of Regulation 16(d) regarding small
business misrepresentation. A full and accurate implementation
of the Small Business Act will have a powerful impact on our
nation's economy and the millions of American small businesses.
This concludes my remarks, and I will be glad to answer any
questions that you may have at this time.
[Mr. Chapman's statement may be found in the appendix.]
Chairman Manzullo. Thank you very much. Our next witness is
Fred Armendariz, associate deputy administrator of the SBA. I
look forward to your testimony.
STATEMENT OF FRED C. ARMENDARIZ, ASSOCIATE DEPUTY ADMINISTRATOR
FOR GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL
BUSINESS ADMINISTRATION
Mr. Armendariz. Good afternoon, Chairman Manzullo and
Ranking Member Velazquez and distinguished members of this
Committee. Thank you for inviting me here today to discuss
concerns regarding large businesses obtaining federal contracts
intended for small businesses and the accuracy of the small
business information contained in databases maintained by the
U.S. Small Business Administration (SBA) and the General
Services Administration (GSA).
Part of this concern is related to a number of large
businesses inappropriately included in the Procurement
Marketing and Access Network, or PRO-Net, a small business
database administered by the SBA. The SBA developed PRO-Net as
a self-certified database of small businesses. Presently, PRO-
Net holds records of more than 150,000 small businesses. In
December of 2002, the SBA partnered with the Department of
Defense to integrate PRO-Net and the Central Contractor
Registration, or CCR, systems to create a single point of
vendor registration.
PRO-Net is a marketing tool that is designed to assist
small businesses with presenting their capabilities to federal
agencies and other organizations as a potential source of goods
and services. It is not intended or designed to validate the
small business eligibility of a registrant, except for firms
certified by SBA under the 8(a) Business Development, HUBZone,
and small disadvantaged business programs.
For each federal procurement solicitation, a bidder must
represent in good faith that it is a small business at the time
it submits its initial bid. A contracting officer shall accept
a bidder's small business representation unless a size protest
is received from other bidders or if other information causes
the contracting officer to question the bidder's small business
representation. A contracting officer cannot assume, nor is
their guidance that suggests, that a business listed on PRO-Net
is an eligible small business for a specific procurement.
The SBA has a well-established process for resolving
questions concerning the small business eligibility of a bidder
on a federal procurement. In most cases, the SBA makes a
decision within 10 working days. If a business is determined to
be other than small, a contracting officer cannot award the
contract to that business. A business determined to be other
than small as a result of a formal size determination is
notified that it cannot represent itself as a small business on
future procurements which specify a size standard at or below
the size standard cited in the determination.
In addition, the business is notified that the Small
Business Act prescribes severe penalties for misrepresenting
itself as small.
In Fiscal Year 2003, the SBA received 193 size protests. Of
these, 68 businesses were determined not to be small. During
Fiscal Year 2002, the SBA received 383 size protests. Of these,
110 were dismissed on procedural grounds. Of the cases accepted
for review, 85 firms were found to be other than small.
In cases where SBA has evidence that a business knowingly
misrepresents itself as a small business, the SBA refers the
case to the Office of the Inspector General. Because of the
burden of proof required by law in establishing fraudulent
intent, a relatively few number of cases have been referred to
the OIG.
The SBA takes very seriously its responsibility for
ensuring that only small businesses obtain federal contracts
and other federal assistance intended for small businesses. Our
responsibility is one of providing a sound process to review
protests, not to police small business representations. In
federal contracting, the SBA must rely on contracting officers
and other interested parties to bring these challenges to SBA
for resolution.
We are aware that some businesses previously listed on PRO-
Net do not meet the SBA criteria for small business status. As
described in my written testimony, the SBA is undertaking a
number of actions to identify and remove large businesses from
PRO-Net. Over the past six months, more than 600 businesses
have been removed from PRO-Net because they are other than
small.
A major source of complaints involves awards made through
GSA Multiple Award Schedule (MAS) program, including Federal
Supply Schedule (FSS) or other multiple-award and Government-
wide Acquisition Contracts (GWACs). Under the SBA regulations,
a business that obtains a contract as a small business remains
classified as a small business for the duration of the
contract. On MAS and other multiple-award, GWAC contracts, this
can last anywhere from five to 20 years.
The SBA, GSA, and the Office of Management and Budget have
been working together to develop a new policy which will
require recertification of small business status during the
term of MAS, FSS, and GWAC contracts. On April 25, 2003, the
SBA published a proposed rule to require annual recertification
of small business status on these types of contracts. We
encourage the Committee and the public to assist us by
reviewing the proposed rule and providing us with comments on
the feasibility of the proposed and alternative approaches.
The SBA is committed to the President's small business
agenda and his proposals to create jobs and growth through the
small business sector. We must ensure that small businesses
receive their fair share of contract opportunities. Since small
businesses are the engine that drives the economy, increased
opportunities for these small businesses will result in savings
to the taxpayer, a stronger economy, and a stronger America.
This concludes my remarks, and I will be able to answer any
questions you may have.
[Mr. Armendariz's statement may be found in the appendix.]
Chairman Manzullo. Thank you very much. Our next witness is
Felipe Mendoza, associate administrator of the General Services
Administration. We look forward to your testimony.
STATEMENT OF FELIPE MENDOZA, ASSOCIATE ADMINISTRATOR, OFFICE OF
SMALL BUSINESS UTILIZATION, U.S. GENERAL SERVICES
ADMINISTRATION
Mr. Mendoza. Thank you, Mr. Chairman. Good afternoon,
Chairman Manzullo and Ranking Member Velazquez, members of the
Committee. Thank you for inviting me to appear before you today
to discuss a matter of great concern to all of us: businesses
classified as ``other than small'' obtaining federal contracts
intended for small businesses and the accuracy of the data
contained in the Federal Procurement Data System that
specifically identifies or verifies the size status of a
business.
Before I begin my testimony, I would like to introduce a
distinguished member of the General Services Administration
acquisition team who is here with me today, Mr. Dave Drabkin,
who is sitting right behind me. He is the deputy associate
administrator for acquisition policy and GSA's senior
procurement executive.
In GSA, we know that small businesses are the engine of our
national economy and that they, more often than not, bring to
the market new and innovative solutions to vexing government
problems.
Let me begin by stating that GSA is aware of and shares
your concern that contracts intended for small businesses are
sometimes winding up with larger firms. I will explain what we
are doing to address this situation in just a moment.
Increasing procurement opportunities for small businesses
is a major initiative of the Bush administration, and it is an
issue to which I have devoted a majority of my time and energy
since joining GSA last year, seven months ago.
As you are aware, the government-wide goal for contracting
with small businesses is 23 percent. GSA's goal for the past
several years has been 40 percent. The preliminary figures for
Fiscal Year 2002 indicate that GSA spent $13.1 billion in
procurement goods and services. Of that amount, a full 40.6
percent, almost $5.3 billion, went to small businesses. Nearly
$900 million of that was awarded to small, disadvantaged
businesses. In addition, GSA did nearly $650 million in
contracting with women-owned, small businesses in 2002. GSA
aims high in its goals and achievements because we want
everyone in the agency to know that we recognize the
statutorily mandated goals to be the floor and not the ceiling.
In addition to our agency-specific procurement
opportunities, GSA manages the Federal Supply Schedules
program. The schedules program is a simplified procurement
process whereby contracts are established with commercial firms
for commonly used supplies and services. Of the 11,000
scheduled contracts issued to date, three-quarters have been
awarded to small businesses.
I would like to address the issue of small business re-
representation; that is, where small businesses are required to
reconfirm their status as small businesses. GSA realizes that a
major source of complaints pertaining to large businesses
receiving federal contracts intended for small businesses
involve awards made through multiple-award-type vehicles such
as the schedules program and the Government-wide Acquisition
contracts, or GWAC. Under these vehicles, a contract's entire
term, including the initial contract, as stated by Mr. Fred
Armendariz, periods and subsequent options can range from five
to 20 years. Because the SBA regulations state that businesses
that obtain contracts as small businesses will remain
classified as such for the duration of the contract, some
medium-to-large businesses are classified as small businesses
for FPDS purposes.
G.S.A. was the first agency to step forward and take
aggressive measures to close the loophole regarding this re-
representation. We acted as soon as possible once it became
apparent that current procurement policy was hindering
opportunities for small businesses. We contacted SBA and worked
with the Office of Federal Procurement Policy to come up with a
solution that made sense and complied with the spirit, as well
as the letter, of the Small Business Act.
On March 1, 2003, we implemented a new policy throughout
GSA that requires re-representation of business status at
contract renewal, i.e., prior to exercise of the contract
option period.
Let me make our policy clear. For multiple-award schedule
contracts and other multiple-award contracts that contain
option periods, GSA contracting officers must require
contractors to re-represent their size status prior to
exercising an option period.
One final point I would like to make with regard to the
General Accounting Office's preliminary report that is at the
center of today's hearing and pertains to the FPDS system. The
FPDS is not a reliable source for determining a contractor's
size. FPDS is a central repository of statistical information
on federal contracting opportunities that identifies detailed
information on contract actions. Contracting officers should
not check FPDS to determine the size status of a contractor.
For this reason, FPDS is not used as a source of information as
to whether a company is small today, but, rather, it is used to
determine whether, at the time of the award, we awarded the
contract to a small business.
As this Committee knows, GSA recently ran a competition for
a replacement for FPDS. After a full and open competition, a
contract was awarded to a small business, Global Computer
Enterprises of Maryland. FPDS-Next Generation, ``NG'' as we
call it, will give us more accurate and timely information.
In closing, I would like to state that the General Services
Administration is fully committed to the President's small
business agenda and his efforts to strengthen the
sustainability of the 25 million small businesses in America.
This concludes my remarks, and I will be happy to respond
to any questions that you may have. Thank you.
[Mr. Mendoza's statement may be found in the appendix.]
Chairman Manzullo. Well, thank you very much. Our next
witness is Kenneth W. Robinson, president and CEO of KENROB and
Associates out of Leesburg, Virginia. I look forward to your
testimony, Mr. Robinson.
STATEMENT OF KENNETH W. ROBINSON, OWNER, PRESIDENT, AND CEO,
KENROB AND ASSOCIATES, INC.
Mr. Robinson. Thank you. Mr. Chairman, Congressman
Velazquez, and other honorable members, I wish to first say I
view my participation here today as a privilege and an
opportunity to share my personal opinion and experience
relative to many of the problems and critical issues
surrounding small business equity within the federal contract
arena.
There is a failure by government program and procurement
officials to grasp the magnitude of the problems relative to
the plight of small business vying for federal contract
dollars. The procurement system, especially relative to small
business, is severely ``broken'' and must be quickly fixed.
Accountability, compliance, and enforcement of existing rules,
policies, and regulations pertaining to small business
utilization are being ignored and, in many instances, carefully
circumvented by both government and large business.
In general, the entire concept of small business
participation and sharing in federal contract dollars is a
well-managed system of omission and deception, which is
carefully camouflaged with misinformation and cooked numbers
and statistics. This environment thrives only because there
exists no viable federal government system of enforcement
vested with the appropriate authority and mandated to enforce
compliance and accountability by government procurement
officials and large business contract management.
Stronger measures are required to force government
procurement officials and large, government prime contractors
into compliance. Prime contractors and government procurement
managers are not committed to compliance or enforcing rules and
regulations that currently exist. Particularly, when there is
no anticipated consequence of substance or penalty for
noncompliance, it is unreasonable to expect that retrofitted
rules that are currently being developed will result in
significant change in current practice without also inclusion
of strict accountability and penalties for noncompliance.
Over the years, I have observed large business and
procurement officials, in every way imaginable, undermine small
business in the government-contract arena. Loopholes and
practices by which small businesses get shortchanged by both
large business and government must be eliminated.
I have teamed with large businesses on major contract
initiatives as the mandatory, small business participant, only
to be denied the work share promised me after the contract was
awarded.
Concepts such as contract bundling and evergreen contracts
are killing off small business. I wish to repeat: killing off
small business. This is a huge problem, with wide-ranging
dynamics. Multiple agencies, be it GSA, SBA, and others, are
each focused on different aspects of the problem. I implore
this Committee to take the leadership and initiative to
influence measures that will lead to comprehensive, effective,
procurement reform. Again, we need small business contractor
utilization enforcement with teeth. We need rules and
regulations that are enforceable and cannot be ignored by large
business and government procurement managers.
Much attention has been given to bundling and size
classification. The issues surrounding bundling and annual size
certification are obviously at the top of the list of reform
priorities. However, they only represent a tip of the small
business iceberg of problems and inequities which prohibit the
so-called ``level playing field'' in the small business
government-contracting arena.
Speaking as a small business owner who has fought the
equity battle for 20 years, I encourage meaningful procurement
reform that effectively addresses the plight of small business
and includes mandated rules and enforcement provisions that
assure small business participation and equity.
In closing, the following represent areas of concern that I
feel must thoroughly be considered with regard to the impact of
small business on any significant reform. All future
procurement-reform initiatives must be comprehensively and
thoroughly thought out and crafted prior to implementation.
Part of the existing problems exist because that hasn't been
done.
Accountability and compliance regarding small business
utilization should be mandated and enforced at all levels of
government procurement. Penalties should be leveled for breach
of teaming agreements and subcontract terms and conditions by
large businesses when subcontracting to small businesses.
Eliminating the practice of large business prime
contractors of limiting small business subcontractors to low-
tech services and ``body shop'' providers. Level-of-effort caps
should be placed on large businesses performing as a
subcontractor to small businesses where procurements is a small
business set-aside. Disallowing small business utilization
credits achieved through mentor-protege arrangements that are
primarily used by large businesses to win contracts but do not
result in actual mentorship of the small business.
Mandatory flow-down provisions of contract clauses that
mandate utilization of small business subcontractors; and,
finally, a revisiting of the size-standard definition for small
businesses and mid-sized businesses. Currently there exists
much confusion between revenue level versus head-count levels.
I thank you for allowing me to share with you some of the
critical small business issues that I feel must be dealt with
effectively if any meaningful federal procurement reform is to
come about. In closing, I encourage this Committee to
vigorously support small business equity in the federal
government contracts arena. I thank you. I will entertain any
questions, as appropriate.
[Mr. Robinson's statement may be found in the appendix.]
Chairman Manzullo. Thank you. Our next witness is Professor
Steven Schooner from the George Washington University Law
School. We look forward to your testimony.
STATEMENT OF STEVEN L. SCHOONER, PROFESSOR, THE GEORGE
WASHINGTON UNIVERSITY LAW SCHOOL
Mr. Schooner. Chairman Manzullo, Ranking Member Velazquez,
and members of the Committee, I appreciate the opportunity to
discuss small business participation in the federal procurement
process.
I will address four issues. First, small business continues
to thrive in the federal government marketplace. Second, as the
government turns its attention to management and control of the
purchase card program, the small business community must not
squander this window of opportunity. Third, while I encourage
efforts to better manage small business awards under multiple-
award contracts, I urge caution in imposing remedial measures.
And, finally, I will attempt to interject a dose of pragmatism
into the bundling debate.
First, the outlook for small businesses pursuing federal
government contracts is bright. Despite isolated problems, the
small business share of federal procurement dollars remains
remarkably high. As the chart in my statement demonstrates,
Fiscal Year 2001 was a terrific year for small business. Small
businesses received an additional $5.3 billion in contract
awards, an increase of more than 12 percent. While the rather
recent, 23 percent goal has not been met for the last two
years, the small business share has remained above the
longstanding 20 percent threshold.
Returning to the chart, let me draw your attention to the
purchase card statistics, where the picture looks less rosy for
small business. Purchase card transactions now exceed five
percent of procurement spending. As the government's purchase
card use has grown, small businesses have struggled to maintain
their ability to sell to the government below the $2,500 micro-
purchase threshold.
For nearly 25 million transactions, law, policy, and
practice all too often permit purchase card users to ignore
normal procurement rules and procedures. To the extent that
regulations may require efforts to rotate purchases among
vendors or encourage the use of small business, this guidance
is routinely ignored. Anecdotal evidence suggests that buyers
frequently disaggregate their requirements to take advantage of
the streamlined, micro-purchasing regime.
Recent attention, however, from GAO, the Congress, OMB, and
the IG community has altered the trend and sparked initiatives
to rein in irresponsible purchase card usage, insufficient
purchase card management and oversight, and inadequate
purchaser training. The small business community can ill afford
to relax during this window of opportunity. The time is now to
demand insight into purchase card usage trends and appropriate
controls on their use.
One of the concerns that animates this hearing derives from
reports that certain small business opportunities end up in the
hands of large businesses, formerly small businesses that have
graduated, or small businesses that, during the course of
contract performance, grew out of their previously certified
size status.
The worst aspects of this problem are avoidable.
Contractors that fraudulently certify their size status should
be prosecuted. For multi-year, multiple-award, task order or
delivery contracts, where individual tasks or delivery awards
are, in effect, new contracting actions, it seems eminently
reasonable to require annual recertification of size status,
but caution is appropriate. Size standards are, at best,
artificial and, at worst, arbitrary. It is disingenuous to
bemoan advantages bestowed upon contractors that recently
pierced these arbitrary thresholds. Obsessive compliance could
elevate form over substance.
In a vibrant marketplace, some small firms will merge or
acquire other small firms. They will be acquired by large
firms, or they will quickly develop business that will
disqualify them from future small business opportunities. None
of that is inherently nefarious, nor should it interrupt the
government's contractual relationships.
Changing the longstanding policy which treats companies as
small for the duration of contract performance would be
unnecessarily chaotic. Accordingly, a high degree of precision,
coupled with carefully calibrated flexibility, is required in
any legislative solution.
Turning to bundling, while I am sympathetic to the
antibundling movement, I remain troubled by the disconnect
between aspiration and reality. There are costs associated with
unbundling, and the current debate fails to acknowledge them.
Quite simply, demanding that an overworked, acquisition work
force aggressively unbundled its contracts is akin to trying to
squeeze blood from a stone. If the government wants its
contracts unbundled, we must have a meaningful discussion about
how to pay for the additional effort. Any unbundling initiative
otherwise is an unfunded mandate, burdening and already
strained acquisition process.
More contracts are bundled today because our acquisition
personnel must buy more goods and services with ever-decreasing
acquisition resources. Let us be frank. There are simply not
enough qualified professionals left in the federal government
to conduct appropriate market resource, properly plan
acquisitions, maximize competition, comply with a plethora of
congressionally imposed social policies, administer contracts
to assure quality control and guarantee contract compliance,
resolve pending protests and disputes, and close out contracts.
Moreover, due to the administration's emphasis on
competitive sourcing, we will continue to see growth in service
contracting. Service contracts are difficult to draft, and they
require significant resources to administer. Asking the current
work force, without additional resources, to unbundle
requirements is unrealistic and fiscally irresponsible.
Demanding that buyers do more with less is good theater,
but it is not responsible leadership. No matter how well
intended OFPP's recently proposed, antibundling rules will
increase burdens on procurement managers, but no investment
will be made to facilitate the efforts.
At the same time, I applaud OFPP's initiative to mitigate
the effects of bundling by strengthening compliance with
subcontracting plans. In today's environment, it makes sense to
shift to the private sector responsibilities and functions that
the government is unable or unwilling to support with its own
resources. If the government is unwilling to devote resources
to identification, nurturing, selection, and management of
small businesses through prime contracts, the government can
more aggressively enlist its larger prime contractors to help
achieve the same ends.
Increasing subcontracting plan compliance will require
answers to difficult questions, specifically, what personnel
will be deemed responsible for monitoring contract compliance
with subcontracting----.
Chairman Manzullo. How are you doing, Professor? You are
over.
Mr. Schooner. I am done. That concludes my testimony. Thank
you for the opportunity to share this information. I would be
pleased to answer any questions.
[Mr. Schooner's statement may be found in the appendix.]
Chairman Manzullo. I wonder if you were really done.
Mr. Schooner. Was I done?
Chairman Manzullo. Okay. All right. That is fine. Thank
you.
Our last witness is David E. Cooper, contracting issues
director at the U.S. General Accounting Office. I look forward
to your testimony.
STATEMENT OF DAVID E. COOPER, DIRECTOR, ACQUISITION SOURCING
MANAGEMENT, GSA; ACCOMPANIED BY DAVID DRABKIN, DEPUTY ASSOCIATE
ADMINISTRATOR FOR ACQUISITION POLICY, U.S. GENERAL ACCOUNTING
OFFICE
Mr. Cooper. Thank you. Chairman Manzullo, Ranking Member
Velazquez, and members of the Committee, it is a pleasure to be
here again before your Committee to discuss a very important
topic. At your request and a similar request from the Senate
Small Business Committee, we reviewed contracts placed with
large companies to determine why contracting officers were
treating those awards as going to small companies, small
businesses, and reported in the Federal Procurement Data System
as such.
According to the Federal Procurement Data System, the five
companies that we looked at received federal contracts totaling
almost $1.1 billion in Fiscal Year 2001. Four hundred and sixty
million dollars of that amount was reported as small business
awards in the FPDS.
To understand why contracting officers were reporting
awards like that, we selected 131 individual contract actions
and went to four buying activities, four federal buying
activities, where we talked to contracting officials that
placed those orders. We found that the primary reason for the
misreporting of small business achievements is that the federal
regulations currently permit a company to be considered small
over the life of the contract they have won, even if the
company grows into a large business, mergers with another
company, or is acquired by a large company.
Given that the term of a contract in today's federal
acquisition environment can extend for many years, and we have
heard several witnesses talk about up to 20 years, it is not
surprising to see some companies grow from being a small
business and, therefore, no longer qualified to enjoy the
benefits that a small business enjoys. However, despite changes
in their sizes, contracting officials continued to report those
contracts as if they were small business contracts. One hundred
and fourteen of the contract actions we reviewed were
misreported for that reason. The other 17 actions that we
looked at were misreported because contracting officials relied
on data systems that contain conflicting and incorrect
information about the size of the companies.
Page seven of my statement shows what can happen when
contracting officials rely on bad data. In the situation that
is described on page seven, an order was placed on a NASA,
government-wide-acquisition contract. The company receiving the
order had clearly certified itself as a large business.
However, when reporting the order to FPDS, the contracting
official used information in its own agency's database that
showed the company was a small business. Therefore, it was
reported incorrectly and inflates the achievements reported
annually by the FPDS.
While our results cannot be projected to all contract
actions reported in FPDS, they raise serious questions about
relying on the systems data to measure federal agency efforts
to meet the government's 23 percent annual goal. The General
Services Administration, the Office of Federal Procurement
Policy, and the Small Business Administration, as you have
heard already, have undertaken a number of actions or proposed
actions to address this problem.
Generally, the actions would require small businesses
holding long-term government contracts to recertify annually
that they are, in fact, small businesses. When the proposed
changes are implemented, companies will no longer be permitted
to retain their small business status. Considering the duration
of current federal contracts, we believe it is reasonable to
require a recertification.
On April 25th, the Small Business Administration published
proposed rules in the Federal Register for comment. Comments
are due to SBA by June 24th. In addition to the recertification
issue, we believe further efforts are needed to ensure federal
databases contain accurate and reliable information so that
contracting officials know the size of the company they are
doing business with.
That concludes my statement. I will be glad to answer any
questions.
[Mr. Cooper's statement may be found in the appendix.]
Chairman Manzullo. Thank you very much. With regard to
these databases, I am a little bit confused. On page two of Mr.
Armendariz's statement, it says: ``PRO-Net is not designed or
intended to validate the small business eligibility of a
registrant.'' And then on page five of Mr. Mendoza's statement,
it says: ``Contracting officers do not check FPDS to determine
the size status of a contractor.'' But in the last testimony of
Mr. Cooper, even though a company had self-certified itself as
a large corporation on one database, that agency checked its
internal database and found out that it was small. And then on
page four of Mr. Chapman's testimony--you guys didn't think I
was listening, did you?
[Laughter.]
Chairman Manzullo. It states that he had sent a letter to
the SBA. MISA attorneys--what is ``MISA''?
Mr. Schooner. The Microcomputer Industry Suppliers
Association.
Chairman Manzullo. Your association, okay, sent a letter to
the SBA asking that they notify all federal agencies and prime
contractors of the firms that have been removed from PRO-Net
CCR. In the SBA's March 21, 2000 response to MISA's attorneys,
the SBA refused to notify agencies and prime contractors that
the firms had been removed.
My first question is, does the SBA have any obligation to
notify any agencies or prime contractors that the firms have
been removed as a small business?
Mr. Armendariz. The SBA conducts informal size
determinations and, therefore, doesn't report that data to the
agencies.
Chairman Manzullo. Well, why not?
Mr. Armendariz. There are no grounds for it because it is
an informal review. Only if there is a protest, and the protest
determines that that company is and, in fact, through a formal
size determination, other than small we report that back to the
agency.
Chairman Manzullo. Well, then this is former Congresswoman
Helen Bentley's problem, where a company that she is trying to
help out, Rayloid--this is what is involved in a protest. You
have to hire a law firm to file these formal court documents.
I would think this is pretty simple, to determine whether
or not somebody is large or small, and I don't understand the
complexity--before the Office of Appeals of the U.S. Small
Business Administration. These little guys are literally thrown
into court against these big guys, and this stuff goes on and
on. Your answer probably is that Congress is the one that
mandated this appeals process. Would that be correct, Mr.
Armendariz? Is this part of a federal review process?
Mr. Armendariz. The initial size determination is done at
the staff level, and then from there, what you are discussing
here is an appeal of that determination.
Chairman Manzullo. There is an appeal level on it?
Mr. Armendariz. Yes.
Chairman Manzullo. Okay. Then how long does the appeal
level take? Any clue? Is it three months? six months? a year?
Does anybody----.
Mr. Armendariz. They are relatively quick. We do the
initial ones typically within 10 to 15 days.
Chairman Manzullo. You mean the in-house.
Mr. Armendariz. Correct.
Chairman Manzullo. And then the appeals?
Mr. Armendariz. It depends on the complexity of the issue.
To back up even further, I think one of the main problems
in regards to why there is so much confusion is the size-
standard system itself. You know, currently, we have 32
different size standards. Some of them are employee based, some
of them are revenue based.
Chairman Manzullo. Well, we are going to address all of
those. This thing is getting to the point where, in the
reauthorization of the SBA, we might just make a determination
ourselves and say that is it. You have three people on staff
that do size determinations, and I know they wrestle with it on
a continuous basis.
Mr. Armendariz. And I wrestle with it personally. People
ask me, ``I do X for a living. Am I small?'' and I literally
have to go to the NAISC codes and figure out exactly what they
do to understand if they are small. I go back to my own
personal business experience when I was a small business person
in California, and I found out afterwards, I was not a small
business because I had one too many employees.
Chairman Manzullo. What I would like, if there is anything
that you think can be done in the reauthorization that would
simplify this, and I would address this to all interested
parties, too, let Mr. Crouther know, again, not to exceed two
pages, single spaced, 12-point type, sufficient margins to make
notes on each side. But we are really interested in trying to
make that an easier standard on that. I would appreciate that.
Mr. Armendariz. We currently have a task force that has met
now three times in the past month that is working on this issue
exclusively, and the contributing parties are DoD, OMB, and
SBA. So we, too, would love to gather information and input
from the general public as well as the Committee.
Chairman Manzullo. The related question on there is, an
agency, a federal agency, would go to PRO-Net or would go to--
Mr. Mendoza, what is the name of your----.
Mr. Mendoza. The Federal Procurement Data System.
Chairman Manzullo. Okay. Both of you state that what is
stated in there is not to be a statement of the agency as to
the verification of the size. Is that correct? Is that correct?
Mr. Armendariz. Well, FPDS is not a database that the SBA
manages. We manage the PRO-Net database, and the PRO-Net
database was established primarily with a focus of a tool that
small business could utilize to market themselves to agencies.
The only aspects of that that are filtered through our
processing in our office for approval in regards to which
certifications they hold are the 8(a) certification, the
HUBZone certification, and the SDB certification.
Chairman Manzullo. Those are the ones that you monitor
before they go up on the PRO-Net.
Mr. Armendariz. We trigger those ourselves. All of the
certifications are self-certified, and we also make sure that
the agencies understand that. We go over that time and time
again, that the agencies must do the verification at the time
of the award.
Chairman Manzullo. Mr. Mendoza, your answer would be the
same. Is that correct?
Mr. Mendoza. That is correct.
Chairman Manzullo. Well, then where does the agency go to
determine the size? Mr. Cooper, could you help?
Mr. Cooper. Yes. Can I elaborate on that? First, I want to
make one thing clear. When we talk about databases, we are not
talking about the FPDS. The FPDS is a collection system. It is
not a system you go to to check a small business size. The
systems I am talking about are PRO-Net, the Central Contractor
Registration System that is now being expanded to include not
just Department of Defense contractors but all federal
contractors, and I am talking about the individual agency
systems that have grown up over time and are being used by the
people placing these orders.
And the problem that we identified, again, going back to
that page seven, when that contracting official went and placed
that order on that NASA GWAC, clearly the company they placed
the order with had self-certified when they got the GWAC that
it was a large company. It wasn't trying to misrepresent itself
or anything else. But when the contracting official entered the
information into the form that goes to FPDS, its agency system
is set up and had recognized that company as a small business.
Chairman Manzullo. That didn't raise a red flag with that
bureaucrat?
Mr. Cooper. Not a bit.
Chairman Manzullo. Wonderful.
Mr. Cooper. And that is the problem of a lot of different
databases being used. Sometimes contracting officers just using
their knowledge of the size of the company----.
Chairman Manzullo. One of the things that I am going to
suggest--in fact, we might put it into the reauthorization--is
that any company that certifies itself as a small business and
gets a contract and gets money from that will result in a
forfeiture of every dime that they have received as a result of
misstating the size----.
Mr. Cooper. I think that is the way the regulations are
written today, Mr. Chairman.
Chairman Manzullo. Has that ever happened?
Mr. Cooper. Yes.
Chairman Manzullo. It has?
Mr. Cooper. Yes.
Chairman Manzullo. Does anyone want to elaborate on that?
Mr. Cooper. We did a protest on the size of a company
probably in the last four months, and we sustained the protest
because the company was a large company and should not have
gotten the award, and they didn't get the award.
Chairman Manzullo. But that was before the award was given.
Mr. Cooper. During the process of the award.
Chairman Manzullo. Professor?
Mr. Schooner. Historically, if you factor in the False
Claims Act and the fact that the small business certifies its
size status, once they receive the contract, if they submit
invoices, which they do in order to become paid, they have
falsely certified, and so every invoice, for purposes of the
False Claims Act, is counted against them. There are monetary
penalties and, ultimately, criminal penalties.
One reported decision that would be an interesting one to
look at historically is the Jets case, where you had a small
business that had falsely certified its size status. There were
criminal prosecutions, staggering penalties. It is a very, very
risky approach for a large business to take, and the
government's arsenal to fight that, if it is identified, is a
powerful one.
Chairman Manzullo. Yes, but they are doing it all the time.
Mr. Schooner. But if I could respond, Mr. Chairman.
Chairman Manzullo. Yes.
Mr. Schooner. The problem still comes down to resources and
enforcement. As I suggested in my written testimony, this is a
classic case where there aren't enough government employees--
--.
Chairman Manzullo. There are 28,000 procurement officers in
the Department of Defense. How many more do we need?
Mr. Schooner. You need significantly more, Mr. Chairman,
because they were cut dramatically during the 1990's. There was
no empirical evidence whatsoever to justify the cuts. There is
a terrific report out by the General Accounting Office, just in
the last couple of weeks, talking about the dramatic cuts that
were made for purposes of just literally arbitrary downsizing.
And so the problem still comes down to who is going to enforce.
This is a classic situation where third-party oversight is
appropriate, the key TAM provisions that empower competitors.
The competitor is in the best situation to know when an other
than small business gets a small business contract. So let us
empower these people and have the enforcement mechanisms work.
Chairman Manzullo. So that would allow somebody who had
been bumped the right to sue in court.
Mr. Schooner. Indeed.
Chairman Manzullo. Ms. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Armendariz, you
said in your testimony that over the past six months more than
600 businesses have been removed from PRO-Net because they are
not small businesses, according to the SBA size standards. Are
you now convinced that there are no large businesses in PRO-
Net?
Mr. Armendariz. Absolutely not. I believe that, at any
given time, that we can identify businesses that either are
erroneously or mistakenly placed on PRO-Net or purposely placed
on PRO-Net.
Ms. Velazquez. Well, as far as I can tell you, the PRO-Net
still lacks integrity. You also state in your testimony that
the SBA will request a registrant in PRO-Net to verify the
accuracy of the submitted business-size information and
acknowledge that it understand the penalties associated with
falsely certifying as a small business on government contracts
and subcontracts.
What about false statements, as far as PRO-Net regulation?
Will you be including certifications in PRO-Net to ensure
information submitted for regulation in PRO-Net is true and
accurate?
Mr. Armendariz. I am not sure if I understand the question,
ma'am.
Ms. Velazquez. Don't you recall that there was a
recommendation from your inspector general to include false
statement, as far as PRO-Net regulation?
Mr. Armendariz. Yes, ma'am.
Ms. Velazquez. Why you didn't include it?
Mr. Armendariz. We are working on that as we speak. We are
fully implementing all of the IG's recommendations in regards
to PRO-Net.
Ms. Velazquez. Will you be including regulations on
penalties in making false statements in all PRO-Net
certifications?
Mr. Armendariz. We refer all irregularities to the IG.
Ms. Velazquez. Will you please answer me, yes or not? I am
asking you if you are going to be including regulations on
penalties in making false statements in all PRO-Net.
Okay. So let us make it short and sweet. For the record,
are you going to implement your inspector general's
recommendations?
Mr. Armendariz. Yes.
Ms. Velazquez. Okay. Let us move to the next question.
Mr. Cooper, shortly, the administration will come out with
data that is supposed to tell us what the small business share
of federal contracting is. Will the contract awards to large
businesses coded as small business awards cause an inflation in
the numbers reported for small business awards?
Mr. Cooper. As I stated in my testimony, we have serious
concerns about relying on any of that data to measure small
business achievements.
Ms. Velazquez. In your opinion, does this bring the
credibility of these numbers into question?
Mr. Cooper. Yes. Based on the work we have done and the
reporting that we have seen, it is not right.
Ms. Velazquez. Are there adequate measures of
accountability in the President's bundling plan?
Mr. Cooper. I testified on March 18th over on the Senate
side, and I raised questions at that point about whether there
would be good data to measure whether, in fact, the strategy
will achieve the outcomes, that is, more opportunities for
small businesses.
Ms. Styles mentioned today, we are going to be working with
them to try to come up with some real, statistical measures so
that we can see. There are a number of provisions like actions
taken to mitigate the consequences of bundling, teaming of
small businesses, and we are going to be trying to come up with
some measures in order to be able to measure whether those
things are, in fact, happening or not.
Ms. Velazquez. In your opinion, will the President's
bundling plan cause a significant change in the current federal
procurement environment for small businesses?
Mr. Cooper. I think that remains to be seen.
Ms. Velazquez. Thank you. Mr. Schooner, would you agree
with Mr. Cooper that the administration's bundling plan
includes no accountability measurements?
Mr. Schooner. Yes.
Ms. Velazquez. Would you agree that without resources and
accountability--I think that you answered the question before,
but I just want to be on record asking you the question--would
you agree that without resources and accountability, the
President's plan will not succeed?
Mr. Schooner. Yes. I think the only real target of
opportunity in the President's plan as stated is with regard to
the subcontracting plans and basically shifting the
responsibility for identifying subcontractors to the large,
prime contractors.
Ms. Velazquez. Mr. Cooper, in regulations proposed on April
25th, the SBA suggests that an annual certification of all
small businesses seems to be the answer. That seems to be very
burdensome on small companies. In fact, the SBA's own analysis
suggests that only six to 12 businesses will be impacted.
Doesn't it make sense to have only those small businesses whose
business changed from small to other than small provide notice
to relevant agencies that their size has changed?
Mr. Cooper. I think the SBA, when it sits down and looks at
all of the comments it is going to receive, I would be highly
surprised if it doesn't get that issue. And I think instead of
burdening 6,000 small businesses--I think that was the number
they had in that regulation--maybe we need to deal with the
exceptions, and if it is only six to 12, that is a lot of
burden that you are not going to place on a lot of companies,
so that could be a very reasonable approach to take.
Ms. Velazquez. Thank you. Mr. Armendariz, we do not expect
Ms. Styles' office, the GSA, or any other agency to ensure that
small businesses are treated fairly. That is the job of the
SBA.
What concerns me is when small businesses' own advocate
sells them out. Time and time again, rather than assuming your
role, which can, in some cases, be adversarial because you are
supposed to be holding people accountable, the SBA caves in, to
the detriment of small businesses. You have yet to break up any
big contracts, and I would like to bring up a case in point
that highlights SBA's outrageous actions.
On the GSA FPDS-NG contract, small businesses objected and
went to the SBA to let you know that they had been shut out.
Your own PCR said the same thing. At that time, you told this
Committee that GSA said there were not small businesses to
perform this contract, and you believed GSA over the concerns
of small businesses and your own employee. Those two factors
should have caused you to support an appeal action to the
agency on this contract, but you didn't. Instead, you took the
easy way out and did exactly what the agency wanted.
It turns out that the small businesses and your PCR were
right. Out of 27 bidders, 20 were small, far more than the two
required to restrict this project to only small businesses, as
Congress intended. With all of this, do you think you pursued
the correct course of action?
Mr. Armendariz. Well, in retrospect, there obviously was a
small business that was able to handle this procurement. At the
time, we consulted with GSA quite extensively, over a course of
many meetings, and it was our opinion at the time, and we stand
by that opinion, that it was the prudent thing to do, to allow
GSA to offer that full and open.
I will applaud the small business community, though, and
the specific contractor that was awarded this contract. It just
proves to us and proves to the balance of the agencies that
small business can compete full and open when it has to, but we
would have liked to have seen it gone as a small business set-
aside, and at the time----.
Ms. Velazquez. I can tell you that your actions on this
specific contract really impacted the credibility of SBA
regarding increasing opportunities for small businesses. You
know, a small business got the contract in spite of what you
did, in spite of your actions.
Chairman Manzullo. Mrs. Napolitano?
Ms. Napolitano. Thank you, Mr. Chairman. There are a number
of questions, and I am not quite sure where to start.
The SBA office in my area has been very helpful to some of
my businesses, but there still, nonetheless, remains the fact
that a lot of the small businesses that I have have contacted
me, and I visit one at least every weekend that I get home, and
have made it quite clear to me that they are not able to crack
the SBA nut, so to speak. And it kind of bothers me because we
have been on contract bundling for how long now? At least, I
have been here four years, four and a half, whatever. But there
seems to be an issue with you stating you have 33 definitions
for small business.
Mr. Armendariz. Yes, ma'am.
Ms. Napolitano. How do we put it in balance so that we are
able to identify the truly small businesses and the ones that
are really giving our economy the boost it needs and not the
major contractors that can afford to be able to do the major
contracting? That is a very, very troubling question for me.
Mr. Mendoza, does the GSA keep track of the awards made to
schedule contract holders, and, if so, would you please provide
this Committee, within the next 10 days, if possible, of the
awards made to schedule holders for the past five years,
separated out by small, small disadvantaged business, women-
owned business, and the 8(a) firms, including both number and
dollar of task orders?
The reason for that, for me, is to individually determine
whether or not we are really getting small businesses, the
disadvantaged, the women-owned, if they are being successful
and how successful the 8(a) firms are in being able to get
there.
The second question would be, does the GSA get small
business gold credit for the schedule contract holders, or do
individual agencies, or both of them, get credit for this? It
is my understanding that GSA codes all of its schedule holders
into the FPDS. Part of the problem for the DEERs is that when
an award is made to one of these companies, the system defaults
to the size that the firm was for purposes of the GSA schedule,
thereby showing an award to a small business when the award was
actually to a larger business. Will the FPDS-NG correct this
error? Would you reply?
Mr. Mendoza. Yes, ma'am. Let me refer that question, the
answer, to Mr. Dave Drabkin, who is my senior procurement
analyst at GSA. He has been there the longest, and he is the
senior procurement specialist. He can answer that question for
you.
Chairman Manzullo. Do you want to scoot up to the table,
please? Why don't you come over to the end over here, and if
you could state your name into the record and spell the last,
please. Thank you.
Mr. Drabkin. My name is David Drabkin, D-R-A-B-K-I-N. I am
the senior procurement executive at GSA.
Chairman Manzullo. You have to talk into the mike. Thank
you.
Mr. Drabkin. All contract awards above $25,000 are reported
individually into the Federal Procurement Data Center,
regardless of where they are made, by whom they are made, or
against what vehicle they are made. So every time a schedule
order with a value of $25,000 or more is placed, it is recorded
in the database. The database gives credit for the small
business category to the agency that places the award. We have
that for small businesses generally. We have that now for
women-owned businesses, I believe, and we are working on 8(a)
and HUBZone businesses as well. So the agency that actually is
buying the work gets the credit for their contract dollars.
It is true that the schedules are placed into the FPDS
database, and at the time of the award, their size status is
determined. That is based upon a rule from the Small Business
Administration, which, at the time the rule was made, it kind
of made sense. At the time the rule was made, many years ago,
the average government contract was for one year and had four
one-year options, and it really didn't make sense to interrupt
that relationship, particularly since small businesses have a
habit of growing and sometimes contracting.
Of course, we like them to grow; that is the whole purpose
of the program. And it wouldn't make sense that a small
business that might grow one year because it gets a little
extra business and then contract the next year would go into a
category one year of other than small and the next year as
small again.
However, our rules changed on the schedules in the mid-
1990's, and we created something called the Evergreen program,
which essentially created a 20-year contract: a five-year base
period with three five-year options for the schedule contracts
themselves. At the time we changed our rules, we did go talk to
SBA because we realized that that didn't make sense anymore.
Five years might make sense for keeping a small business small
for reporting purposes, but going to 20 years just didn't make
any sense, and it took us a number of years to work that out.
We had to make a decision because we were about to award
two new GWAC contracts, one for 8(a)'s and one for HUBZones,
and we wanted to make sure that at the time we awarded those
contracts that the rules were clear that we would, at least at
the end of the option period, require a re-representation of
the size status of the company.
I didn't write down your whole question. Have I answered it
all?
Ms. Napolitano. You answered part of it, I believe. What
about the 8(a) firms?
Mr. Drabkin. We keep all of the statistics. I don't believe
we give 8(a) credit for schedule awards to the agency that
placed the order. I believe, right now, that is reported as a
GSA credit, but I can clear that up when we submit the written
answers to your questions.
Ms. Napolitano. Well, okay, then. How do you determine if
that business that you had--I am sorry, Mr. Manzullo, if I may
finish the trend--if the company, as you say, has started off
small business has gone and become a large business because of
the order and then comes back down, if that company goes out of
that small business slot, how do you determine it? Do they have
to reapply? Do you make the determination based on what?
Mr. Drabkin. Under the current SBA rule, the rule in
effect, the rule says that you remain whatever size you are on
the day we award you the contract for the length of the
contract. Like I said, at the time the rule was made, it was a
great rule, but times have changed, and how we manage
procurements has changed.
So the answer to your question is, under our rules, except
for in GSA, where I issued a deviation to the SBA rule so I
could change that rule for our GWACs, under the other rules
that exist in the government, the size you are on the day you
sign the contract until the day that the contract closes, no
matter how long the contract is, and no matter what happens to
your size status or your other small business status, but that
is a rule. I mean, that is not a factor of anybody doing
anything nefarious. That is a rule that is in place.
Ms. Napolitano. One more question. How many GSA employees
are charged with marketing the schedules program?
Mr. Drabkin. We will have to send you the number. I don't
know.
Ms. Napolitano. Okay.
Mr. Drabkin. I am in charge of the procurement people. I
can tell you how many there are.
Ms. Napolitano. Okay, because apparently small businesses
have experienced consolidation of the contracts into schedule
programs, and it would be nice to know, and, if so, does GSA
encourage this?
Mr. Drabkin. I am sorry. Encourage what, ma'am?
Ms. Napolitano. Well, the experienced consolidation of the
contracts into schedule programs, and is GSA encouraging this
consolidation?
Mr. Drabkin. There is something called the Corporate
Contracting Initiative, which is an effort to get companies
that are on multiple schedules into a single contract to reduce
the cost of administration to the company and the cost of
administration to the government. The program is in its
infancy. It began about two years ago. It is not receiving a
lot of support from the private sector. There are small and
large businesses who are participating in that program, mostly
large because they tend to have multiple contracts in multiple,
different areas because they tend to have different types of
work.
Ms. Napolitano. Thank you, Mr. Chair.
Chairman Manzullo. Mr. Case?
Mr. Case. Thank you, Mr. Chair. I am trying to sort this
through myself, and listening to the panel, it strikes me that
there is one person on the panel that has been in the field,
and that is you, Mr. Robinson. You have a nice poker face, but
a lot has to be going through your head.
I want to give you kind of the floor here. I want to listen
to what you think about the other testimony because I am sure
that is what is running through your mind is, well, that is
true, and that is not true, and that is not really how it works
when you are out in the field, and it is nice to talk about it
in principle, but that is not really what is going on, and
maybe they don't know what is really going on.
Tell me what you thought about what you heard. Where are
the problems in the field, on the front lines, where you live?
Mr. Robinson. Well, I think that the problem is far greater
than it has been represented here, generally. A lot of the
focus here has been on the process of small business evolving
into big business. That is only the tip of the iceberg, as I
said earlier. A lot of this whole concern with respect to small
business equity deals with big business that unwillingly share
and, in many instances, mistreat small business, and I don't
think that is being addressed to a great extent here. We are
concerned with those instances that have gotten a lot of press
recently where small business has received awards, and, in
fact, they have grown into big business.
So I think the breadth of the problems that exist here is
far greater than bundling and size classification. There are
many, many other issues that need to be addressed across the
global terrain here.
Mr. Chase. Mr. Chapman gave us a list of 10--I think there
were 10--areas, fairly specific. You heard his testimony.
Mr. Robinson. Yes.
Mr. Chase. Do you agree with his testimony?
Mr. Robinson. Absolutely.
Mr. Chase. How much of the tip of the iceberg is that? Are
we down to half of the iceberg yet?
Mr. Robinson. It is a big chunk. It is a big chunk of it.
Mr. Chase. Were there any things that were left off of his
list that you thought, oh, you should have put that on the
list?
Mr. Robinson. Well, I am sure he did not cover all of the
concerns that not only I have but many other of my fellow small
businesses have. I think there has to be greater dialogue.
Earlier today--I can't recall now--maybe it was Administrator
Styles indicated that there had been an effort to open dialogue
with small businesses. I really wish I had been included.
I am not certain how that group of small businesses were
identified or who participated, but I don't think that the full
breadth of the problem was conveyed, and I think that there
needs to be more of that sort of thing, more dialogue with
small businesses, with companies such as myself, who are down
there in the trenches and who experience the kinds of
misrepresentation of the fact.
I have had tremendously bad experiences with teaming with
big businesses, for instance. We participate very eagerly and
energetically in assisting big businesses to win huge
contracts. They usually come to us because we represent a slice
of the technology or a small area of expertise that they cannot
support out of their own arenas. However, there seems to be a
systematic way that, when it is all said and done, we, the
small business, end up being shortchanged, either with work or
promises of work that eventually is kept in house for the large
business or sent offshore or whatever. This is a growing,
growing problem that no one seems to be addressing, at least,
in my opinion.
Mr. Case. Mr. Chapman, any observations as well from the
testimony you have heard? Are we getting to the bottom of
anything here?
Mr. Chapman. I don't think so. I would like to make a
couple of points.
When the gentlemen here that work for the government talk
about small businesses, here is one of them, AT&T Wireless--it
is on PRO-Net, updated about four or five days ago--with 20,000
employees and $5 billion in sales. That is on PRO-Net right now
while we are sitting here.
Mr. Cooper talked about the survey that they did, and I am
assuming that their survey was fairly representative, and based
on my calculations here, it sounds like it was about 45 percent
of the awards that they showed that were going to small
business that were actually large businesses. If you look at
the SBA's number of $85 billion and apply Mr. Cooper's numbers,
that is $35 billion a year, and these guys are talking like it
is a little, minor, bookkeeping problem. That is $35 million a
year.
I saw on the news the other day that 1.9 million Americans
have been out of work for six months or more, and 40,000 people
lost their jobs in April. That is a big deal. Thirty-five
billion dollars a year is amazing. I don't know this gentleman,
but he said something that just blew me away. He said, at one
point in time, we realized that letting people keep small
business contracts for 20 years wasn't a good idea.
When was that a good idea? When was that ever a good idea,
to let someone keep a small business contract for 20 years? And
what concerns me is those are the people that we are looking to
for solutions, the people who thought that was a good idea to
let some small business keep that for 20 years.
One gentleman said small businesses are thriving. Remember,
they are talking about, you know, billion-dollar companies.
They are talking about the biggest companies in the world.
Today, as we sit here, you know, some of the biggest companies
that are household names that any 10-year-old kid would
understand are on PRO-Net, and I am just completely floored,
you know, that they don't think that is a problem.
But, again, I would like to ask one thing of the Committee.
Can we get rid of the term, ``other than small''? When they
abbreviate it, it shows ``OTHR small business,'' and people
think it means ``other small business.'' That is like calling
people that are dead ``other than alive.'' There is large, and
there is small, and I personally think that the concept,
``other than small,'' is indicative of the type of terminology
that you see----.
Chairman Manzullo. Mr. Case, would you yield on that?
Mr. Case. Yes.
Chairman Manzullo. Would anybody here like to answer that
question as to why ``other than small'' appears?
Mr. Armendariz. Well, I would like to answer several of the
statements that Mr. Chapman made, and I think he misheard what
you said earlier, if I may. I believe what GSA said was that
when the regulation was in place, we never envisioned having
20-year contracts. At that time, the regulation made sense.
Times have changed. We need to change regulations, and we have
got a proposed regulation right now out to the public. So that
is issue number one.
Issue number two is that companies like AT&T--I fully agree
that AT&T should not be listed in PRO-Net, but there is a
reason. We researched how AT&T got placed on PRO-Net. When we
merged CCR and PRO-Net several months ago, about six months
ago, there were several large companies that leaked on. I
guarantee you that there is not an executive over at AT&T that
went on and put themselves on PRO-Net. It happened via the
merger.
So we are concerned. This is a huge issue for us. We live
and breathe this issue every single day. The small business
community is the reason we came to the SBA. We believe it, deep
down in our soul, and we are coming up with creative and
innovative solutions to address the problems. We commend Mr.
Chapman. We need more Mr. Chapmans out there because he is
helping us solve the problem, but we can do it together, not
unilaterally.
Mr. Case. Thank you.
Chairman Manzullo. You know, there is something wrong here,
and we are going to get to the bottom of this thing, if I have
to spend an entire day issuing subpoenas to bring large
companies before this Committee, and I will examine them
personally to see if they are large or small, and I will raise
so much Cain doing that, that they will pull themselves out of
the system.
Let me tell you what happened in Los Alamos. We were
invited to go down there by Congressman Tom Udall, who is a
member of our Committee, and he said, You would not believe
what is happening down there to the local Indian tribes and
others, the Los Alamoses, you know. What a mess down there. And
we went down there, and almost had to issue subpoenas to bring
in officials from the lab, and held a field hearing down there.
This is some of the crap that was taking place. I guess I
did say that word. An Hispanic was given a contract as a
minority, and Los Alamos put out a press release that said that
so-and-so was given an award of up to $100,000 for computer
repair. And that young man--do you remember that nonsense?--he
said he had gotten not one nickel of work from Los Alamos. Now,
some clown down there was taking credit for engaging a minority
firm that did absolutely nothing.
Then I asked the classic question: Where do you buy your
pens and pencils? And the answer was, Well, we have just
entered into a five-year contract with a ma-and-pa small
business store to fulfill all of the--Mr. Cooper knows what
happened, and somebody should go to prison over that--to
fulfill all of the stationery requirements, an office supplier
for Los Alamos. Now, Los Alamos has what, two to 3,000
employees down there, something like that?
That was the answer that came from the official there.
Right after the hearing, someone came up to me and said, Did
you know that just after that contract was signed that Boise-
Cascade bought that store? Now, that is the type of stuff that
Mr. Robinson and Mr. Chapman have been living in that
environment.
And I am going to serve notice right here. If any of those
big companies think they are going to get away with this stuff,
they are going to have to come before this Committee, and I
will put them under oath, and if they take the Fifth Amendment,
I am going to request the SBA to remove them and the GSA, and
those companies will have no further set-asides. I want to deal
with them, one on one, if necessary, because somebody has to
set an example. But the first thing we have got to do is get
rid of the lobbying efforts that go into determine the size of
these companies.
Let me give you an example. If you are regular
manufacturing, you are 500 employees. If you are aerospace, you
are 1,500. Now, nobody can defend, nobody can defend, that
discrepancy in sizes of companies except maybe somebody wanted
to come in and say, Well, aerospace should be treated
differently. Is it Mr. Williams who is in charge, the gentleman
at SBA? Fred, what is his name, the fellow that has the
terrible task of determining size at SBA?
Mr. Armendariz. Gary Jackson.
Chairman Manzullo. Mr. Jackson. That is correct. Sorry. Mr.
Jackson, and we had him testify, and, I mean, you just pulled
your hair out when you had to go through this thing. But here
is the fallacy in the size standards, and this is what Mrs.
Velazquez and I found out and why we had to have a horrible
hearing where we almost had to lock the doors to get something
done when it came the time for those emergency loans for the
travel agencies. I think it is irrelevant of the issue to
determine market penetration as to whether or not a company is
large or small. Okay? This is where you get into the problem
with it.
As it turned out, all of the travel agencies mostly were
excluded. You have got things where if you are a law firm, it
is $5 million in gross sales, if you are an accounting firm, I
think it is $6 million, and I think what has happened is that
the system of classification has become so complicated that the
big boys are conning the system. That is exactly what is going
to happen.
So I am going to put into the reauthorization one size
standard for manufacturing, and no one knows manufacturing more
than I do in this Congress. We are going to put it at 500. It
is going to be an arbitrary thing. We are going to put it at
500. We are going to try to go through some other things.
Congress is going to take that decision away and make life a
little bit easier for Mr. Jackson. Some of these areas that are
causing a lot of heartburn, and I think manufacturing--Mr.
Chapman, Mr. Robinson, is that a big area in there where the
size standards are being tossed all over the place?
Mr. Robinson. Well, I think one of the recommendations that
I made at the closing of my statement involved the need to
review this whole concept of size standards.
Chairman Manzullo. They are doing that. The SBA and the GSA
are doing that.
Mr. Robinson. A case in point: My organization is an
information and technology support services company. Typically,
the size standard that determines large and small is $21
million for three consecutive years of revenue. I have recently
participated in procurements where so-called ``small
business,'' with up to 1,500 employee head count, has been
allowed to effectively bid on opportunities that----.
Chairman Manzullo. In IT?
Mr. Robinson. Absolutely.
Chairman Manzullo. Okay, okay. Well, that is the whole
problem, and the market-penetration approach does not work in
all cases because in the travel agency no one qualified. They
had a $1 million size standard on that, and it took eight
months in order to increase that size standard to be eligible
for the loans on it. But the size standards; these are also
used for getting the 7(a) and the 504's. Is that correct?
Mr. Robinson. Yes, sir.
Chairman Manzullo. Maybe we shouldn't have a one-size-fits-
all. Maybe there should be a different standard for a small
business loan as opposed to qualifying for a set-aside. We are
willing to take a look at all of this stuff. We are going to
try to reauthorize this bill at the end of June, and I really
want to see a tremendous amount of input and would like Mr.
Armendariz to continue working with our staff on it.
We need to come to a solution on this thing, and perhaps it
might not be done by the time we go into the House, and perhaps
it will have to done in time for a conference on it. But I
think this is what is causing all of the angst, and there are
only three people in that size department. Is that correct?
There are four people in that size department----
Mr. Armendariz. Including myself.
Chairman Manzullo [continuing]. Including yourself, and you
continue to wrestle with that all of the time.
Well, listen, this has been good. Every witness has been
exquisitely prepared. I really appreciate that.
Ms. Velazquez. Mr. Chairman.
Chairman Manzullo. Yes, Mrs. Velazquez?
Ms. Velazquez. I have one last question.
Chairman Manzullo. Yes.
Ms. Velazquez. I just want to take the opportunity that Mr.
Armendariz is here. When are you going to get the women's
procurement program up and running?
Mr. Armendariz. Well, the women's procurement program is up
and running. We have our CAWBO (Office of Federal Contract
Assistance for Women Business Owners) office. It has been in
place for about 18, 24 months now.
Ms. Velazquez. Is that the Restrictive Competition program?
Mr. Armendariz. Are you talking about the set-aside
program?
Ms. Velazquez. Yes.
Mr. Armendariz. Currently, we have commissioned a company
to look at the study we had done so it will stand up to
judicial muster.
Ms. Velazquez. But I have been hearing the same excuse for
the last year. Can you give me, like, a more concrete answer?
Is it going to take 30 days, 60 days, or never?
Mr. Armendariz. Well, we didn't have a budget until just
recently. Once we received our budget, we let the contract out
for competition. We have a company that now has the contract--
it just was recently awarded--and they have told us it will
take 90 to 180 days to review the study and tell us where we
are deficient and where we need to shore up.
Ms. Velazquez. It shows our commitment to women-owned
businesses.
Chairman Manzullo. Thank you very much. This hearing is
adjourned.
[Whereupon, at 5:08 p.m., the Committee was adjourned.]
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