[Senate Hearing 108-610]
[From the U.S. Government Publishing Office]
S. Hrg. 108-610
DOE CONTRACTING WITH SMALL BUSINESSES
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
to
RECEIVE TESTIMONY REGARDING DEPARTMENT OF ENERGY CONTRACTING WITH SMALL
BUSINESSES
__________
MAY 18, 2004
Printed for the use of the
Committee on Energy and Natural Resources
______
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee RON WYDEN, Oregon
LISA MURKOWSKI, Alaska TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana EVAN BAYH, Indiana
GORDON SMITH, Oregon DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky CHARLES E. SCHUMER, New York
JON KYL, Arizona MARIA CANTWELL, Washington
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Pete Lyons, Professional Staff Member
Jon Epstein, Fellow
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 7
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Kerry, Hon. John F., U.S. Senator from Massachusetts............. 2
McSlarrow, Kyle E., Deputy Secretary, Department of Energy....... 7
Nazzaro, Robin M., Director, Natural Resources and Environment,
Department of Energy........................................... 16
Snowe, Hon. Olympia J., U.S. Senator from Maine.................. 5
Sullivan, Ann, on Behalf of Women Impacting Public Policy........ 39
Thompson, Robert, Chairman, Energy Communities Alliance.......... 42
Woodard, Dr. Joan B., Executive Vice President and Deputy
Director, Sandia National Laboratories......................... 33
APPENDIXES
Appendix I
Responses to additional questions................................ 53
Appendix II
Additional material submitted for the record..................... 61
DOE CONTRACTING WITH SMALL BUSINESSES
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TUESDAY, MAY 18, 2004
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:15 a.m. in
room SD-366, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. We're going to try very hard to accommodate
the witnesses for the main principal issue that's before us.
But I would ask everybody that is a witness to keep their
statements brief, and try to make the point that they want to
make about this hearing.
This hearing of the Energy Committee on Small Business
Contracting at the Department is now in order. Prior to fiscal
year 2000 the Department of Energy reported its small business
contracting, the performance of that, by including the
performance of its labs, and the sites of its statistics.
In 2000 the DOE agreed with the Office of Federal
Procurement Policy of OMB to stop counting contracts issued by
the labs and sites in these statistics. This seemingly simple
change in accounting is having a very serious number of
effects. This hearing should help us understand the
implications of this change.
On the one hand no Senator has pushed as hard as I have for
DOE labs to excel in their small business contracting
performance. Frankly, aside from a few major issues with
reference to advance activities at Sandia I've spent as much
time with them, and with people in my state on small business
coming out of the laboratories, as any other issue.
I want small business to be used wherever it makes sense in
all the Department's activities. One of the purposes in holding
this hearing is to assure the small businesses are seeing real
growth in their opportunities throughout the Department
activities.
But when one of the consequences of this recent change is
to discourage labs from expanding their small business
contracting, and actually tell them to decrease their small
business contracting then I fear that something is going wrong.
That's not the only concern with the change. It would
encourage activities at a site to be run by lots of small
businesses all with separate DOE contracts. This would be a
major change for the single, overall, site management contract
that we have today. I have difficulty believing that it's wise
to rely on the Department to coordinate and integrate all these
small activities to assure that the Department's mission are
complied with maximum attention to safety and security.
I hope witnesses can address this complex issue in as
simple a way as possible, and we can better understand how to
optimize the use of small business in the Department.
Now I would yield to Senator Bingaman for opening remarks,
and then we'll have the Deputy Secretary of Energy as the first
witness.
Senator Bingaman.
[The prepared statements of Senators Kerry and Snowe
follow:]
Prepared Statement of Hon. John F. Kerry, U.S. Senator
From Massachusetts
Mr. Chairman, I would like to thank you for the opportunity to
address the issue raised today before the Senate Committee on Energy
and Natural Resources, the allocation of Federal prime contracts to
small businesses by the U.S. Department of Energy. As the Ranking
Member of the Senate Committee on Small Business and Entrepreneurship,
I have heard from many small businesses about the importance of
reserving prime contracts for small business participation and limiting
the practice of contract bundling. Contract bundling and the use of
super-sized contracts, such as those utilized in the Department of
Energy's maintenance and operation (M&O) contracts, have precluded many
small businesses from bidding on Federal contracts. This anti-
competitive structure cost this nation's small businesses approximately
$4 billion in contracts in FY2003.
Mr. Chairman, these are not ``mom and pop shops'' or corner stores.
These are successful businesses that have anywhere from 10 to 499
employees. These are businesses that create jobs, are more likely to
make new hires, more likely to invest in new technologies and capital
improvements, exactly what our nation's economy demands in order to
recover from our current downturn.
Lack of small business participation not only adversely affects the
success of those excluded small businesses, but eliminates the
diversity among suppliers of goods and services needed by the Federal
government. This increases long-term costs for the government, and
limits innovation and limits the development of new technologies.
Further, limiting the availability of competitive contracts to small
business is contrary to public law and the policies of the Federal
government.
The Small Business Act, 15 U.S.C. 631, et seq., states policy of
Federal government is to ``aid, counsel, assist, and protect, insofar
as is possible, the interests of small-business concerns in order to
preserve free competitive enterprise, to insure that a fair proportion
of the total purchases and contracts or subcontracts for property and
services for the Government (including but not limited to contracts or
subcontracts for maintenance, repair, and construction) be placed with
small business enterprises, to insure that a fair proportion of the
total sales of Government property be made to such enterprises . . .''
To ensure that small firms receive their fair share of Federal
contracts, the law creates specific goals for small business
utilization. Section 15(g) of the Small Business Act, 15 U.S.C. 644,
states, ``The Government-wide goal for participation by small business
concerns shall be established at not less than 23 percent of the total
value of all [prime contract] awards for each fiscal year.''
According to the most recent Small Business Administration annual
report on Small Business Utilization, the Department of Energy reported
that only 4.08 percent of all of its contracts were allocated to small
businesses as prime contractors in FY 2003, the lowest level of all
fifteen Executive Departments. This poor performance is greatly due to
the contracting structure in which multiple and diverse tasks and
duties are essentially bundled into one contract that is too large for
small businesses to bid on. According to recent GAO report, more than
80 percent, approximately $18.2 billion of the total $21.6 billion of
Department of Energy contract dollars, are spent on 37 large contracts
for the Management and Operation of DoE research facilities.
I applaud DoE Secretary Spencer Abraham, my former colleague on the
Senate Committee on Small Business and Entrepreneurship, for
implementing higher small business goals and for his leadership in
urging Offices within the Department to ``breakout'' portions of their
contracts capable of being performed by small firms. However, more work
still needs to be done to ensure that the Department of Energy makes
consistent progress towards full compliance with the Small Business Act
requirements.
In 1999, during the debate on the DoE's compliance with the 23
percent government-wide goal for small business contracting, then-
Chairman Kit Bond and I sent a letter to the Office of Federal
Procurement Policy encouraging the prime and subcontracting achievement
numbers to remain separate. I have enclosed a copy of this letter for
your review. In 1999, the Office of Federal Procurement Policy decided
that the Department of Energy's M&O, M&I and ERMC contractors should be
counted toward the Agency's small business subcontractor goals, not
their prime contracting goal. Mr. Chairman, I continue to believe that
that approach is best for small businesses and for the country and urge
the Department of Energy to continue and expand their efforts to fully
utilize small businesses as prime contractors.
The Department claims that its mission contains four main elements:
energy, nuclear weapons stockpile, environmental management and
science. In testimony before this Committee Dr. Martha Krebs, former
Director of the Office of Science at the Department of Energy stated,
``contractors for these Laboratories must have the capacity to attract
and lead the best scientific and engineering talent our nation can
muster.'' Mr. Chairman, that is why I urge the Department of Energy to
redouble its efforts to increase the number and dollar amount of prime
contracts made available for competition to small businesses. Mr.
Chairman, let us not lose sight of the fact that although the
Department does manage a great deal of sensitive research with nuclear
and national security implications, it is the second largest Agency in
the Federal government and requires the same support services needed by
all agencies to maintain day-to-day activities. There is no reason
these contracts should not be made available for small businesses to
compete.
In addition to the traditional goods and services provided by small
firms and utilized by every government body such as office supplies, IT
and telephony services, building maintenance, and landscaping,
successful programs such as the Small Business Innovation Research
(SBIR) and Small Business Technology Transfer programs have
demonstrated that small firms are important contributors of innovative
science research and technology, as well as environmental remediation.
According to the Science and Engineering Indicators released by the
National Science Foundation in 2004, the private, for-profit sector is
by far the largest provider of Science and Engineering employment. In
1999, approximately 73 percent of individuals working as scientists and
engineers who had bachelor's degrees and 62 percent of persons who had
master's degrees worked for private, for-profit companies.
Approximately one third of these individuals are employed in sectors
other than large firms or academics. The current M&O contracting
structure places a great emphasis on the relationship between research
institutions housed at prominent Universities and large corporations
responsible for the DoE's 37 laboratories, essentially ignoring one
third of the scientists and researchers that are housed in the nation's
innovative small firms.
The National Science Foundation has also reported that many of the
new technologies and industries seen as critical to the Nation's future
economical growth are closely identified with small business. The
Foundation describes biotechnology and computer software as industries
built around new technologies that were largely commercialized by small
business. The report on Science and Engineering Indicators specifically
states that ``small business retains certain advantages over large
businesses in commercial environments characterized by fast-moving
technologies and rapidly changing consumer needs.'' Among the
advantages that small businesses offer to the Federal government, and
specifically to the Department of Energy, are the kind of speedy,
innovative research, use of new technologies and cost savings that are
essential to ensure that this country remains at the forefront of
science and technology.
Similarly, in the area of environmental remediation, Mr. Chairman,
there are a number of small firms with a long history of successfully
performing such work for other Federal agencies, such as the Army Corps
of Engineers. These small firms should be afforded the opportunity to
compete for environmental management contracts at the DoE's 37 research
facilities.
One such example is a company located in California and working in
my home state of Massachusetts, Environmental Chemical Corporation
(ECC), the lead management contractor for the Massachusetts Military
Reservation on Cape Cod, one of the Army's highest profile and most
sensitive sites. ECC is a small firm that has been awarded repeat
business based on excellent performance. Small businesses also perform
challenging and high hazard work in D&D of Army ammunition plants
cheaper and faster than large business. The Army's largest
environmental contracts (the Total Environmental Restoration Contracts)
and the Navy's largest environmental contracts (Comprehensive Long Term
Environmental Actions-Navy) have been performed by small businesses.
The Army is not the only Federal agency that has confidence in the
abilities of small firms to perform sophisticated environmental
remediation projects. The Environmental Protection Agency allocated
approximately $155.5 million, over 13 percent of its overall prime
contracting dollars, to small businesses in FY 2003 environmental
consulting contracts. The DoE itself has sought competent environmental
remediation (ER) contractors over the past 18 months and has found that
there were highly qualified small business teams for each one: Los
Alamos ER, Portsmouth ER, Paducah ER, Portsmouth Site Services, Paducah
Site Services, Fast Flux Test Facility, Columbus Closure, and
Nationwide ER and Demolition and Decontamination (D&D). The expansion
of this effort throughout the Agency will dramatically increase the
share of contracts being made available for small firms as prime
contractors and help DoE attain their increasing small business goals.
Mr. Chairman, the Department also claims that allowing them to
count subcontracts allocated through a M&O contract toward their prime
contracting goal would simply return their practice to that permitted
by the Office of Federal Procurement Policy prior to its 1999 decision.
What gets lost in this argument, however, is the fact that this
reporting structure was implemented in 1991 on the grounds that M&O
contractors had a close relationship with the Department and were
subject to the protections and requirements described in the Federal
Acquisition Regulations (FAR). However, as the relationship between the
M&O contractors and DoE changed, the 1999 decision changing the policy
governing the counting of small business utilization became necessary.
M&O contractors are simply not that closely aligned with the policies
and procedural guarantees of the Department any more. While the
Department allows GAO protests by prime contractors, it does not allow
such protests to be made against an M&O contractor by a subcontractor.
While there are dispute resolution procedures available for prime
contractors, none exist within the DoE for disputes between M&O
contractors and their subcontractors. The DoE accepts no liability for
actions taken by an M&O contractor. Clearly, DoE and the M&O
contractors have not returned to their close, pre-1999 relationship, so
why should the small business utilization policy based upon that
relationship?
Mr. Chairman, I have been asked by many of my colleagues, ``why
does it matter if a small business receives a prime contract or a
subcontract? If the small firm gets the work, that is all that matters,
right?'' The answer to this question is no. There are three major
differences between prime contracts and subcontracts.
First, prime contractors maintain a greater level of oversight and
control over the performance of the contract, and therefore of their
own business. The harsh reality of today's subcontracting arena is that
the prime contractor makes the rules, and because the subcontractor
does not have a direct contract with the Agency, they are beholden to
the prime contracts. In the Senate-passed SBA Reauthorization
legislation, S. 1375, the Committee on Small Business and
Entrepreneurship addressed many of the issues affecting small business
subcontractors, including the practice of bait and switch and the
failure of prime contractors to promptly pay their subcontractors. Even
with these attempts to resolve the inequities faced by subcontractors,
it is clear that there is no substitute to being the prime contractor
and being in control of the performance of the contract.
Second, more often than not, Federal agencies receive a better
value by allowing small businesses to compete for prime contracts. When
a large business receives a contract and simply turns around and awards
subcontracts to small businesses to perform the tasks, they are
essentially charging a premium on top of the actual cost of
performance. As Federal contracts get larger and larger, fewer
businesses are able to compete for these contracts. This stifling of
competition eventually leads to higher prices and inadequate supplies.
Third, prime contractors receive a record of ``past performance''
with the agency with which it is doing business. This past performance
provides a record of the quality and timeliness of work performed under
a contract that is used to leverage other similar contracts with the
Federal government. When performing a subcontract, small businesses do
not receive this past performance record from the Federal government,
and regardless of the quality and timeliness of the service, a
subcontractor cannot leverage that service into additional contracts.
Mr. Chairman, I thank you for the opportunity to express my support
for small businesses and their desire that the Federal government use
them as prime contractors to the maximum extent possible. As Senator
Bond and I have expressed five years ago, the Department should fully
comply with the Small Business Act and therefore, should report its
contracting goals and achievements in the same manner and on the same
basis as all other agencies of the Government: prime contracts as prime
contracts and subcontracts as subcontracts. Enacting a policy contrary
to this would undermine the validity of the Government-wide statistics
used to monitor the Federal government's progress in small business
utilization. This would jeopardize the government's efforts to expand
its supplier base, to promote economic growth and innovation, and to
create jobs by fostering competition by small businesses.
Secretary Abraham has made some steps in the right direction on
these issues and I urge him to stay the course, and if possible, speed
up the projected twenty-year effort to reach the 23 percent goal. As
Ranking Member of the Senate Committee on Small Business and
Entrepreneurship, I offer the Secretary our Committee's support and
assistance in that effort, and I request that the Senate Committee on
Energy and Natural Resources do the same. By doing so, we will
simultaneously help DOE achieve its mission, encourage cost-
effectiveness and innovation, and foster the growth and success of
high-performing small businesses, our nation's biggest job creators.
Thank you.
______
Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator From Maine
Chairman Domenici, Ranking Member Bingaman, and Members of the
Committee, thank you for the opportunity to express my views as Chair
of the Senate Committee on Small Business and Entrepreneurship on the
vital subject of small business contracting at the Department of
Energy.
It is undisputed that government procurement is a core operational
function of the Department of Energy (DOE). With over 90% of its budget
spent on contracts, DOE is a leader among Cabinet departments in terms
of agency-wide contracting activity. In monetary terms, DOE prime
contract awards in FY03 amounted to over $19 billion. For these
reasons, whether small businesses have a fair and meaningful
opportunity to compete for the DOE contracting dollars is critical both
to the economic growth of this country and to the integrity of small
business policies adopted by Congress.
The DOE's small business contracting goals--a crucial indicator of
fair and meaningful access--are negotiated by the Department and the
Small Business Administration, and set forth in accordance with the
statutory requirements of the Small Business Act. Thus, small business
contracting goals are a matter under the jurisdiction of the Small
Business Committee. The specific application of these Small Business
Act goals at the Department of Energy has been a subject of my
Committee's continuing interest for a number of years.
It is worth noting that the DOE only recently began working towards
compliance with the small business goals. Originally, the Department
inherited its prime contracting model from peculiar World War II-era
arrangements concluded by President Harry Truman and a small group of
American industrialists and academics for the development of the atomic
bomb in wartime conditions. Under this model, the prime contractors
managed the laboratory research sites as surrogates for the government,
the prime contractors' procedures for subcontract awards had to conform
to the ``federal norm'' of acquisition laws, and subcontract awards
were protestable to the General Accounting Office (GAO). Citing that
unusual closeness between the government and the prime contractors,
also known as Management & Operating contractors, the Office of Federal
Procurement Policy (OFPP) permitted the DOE to exclude the M&O awards
from the Small Business Act goals.
In the mid-1990s, the legal relationship between the DOE and its
prime contractors fundamentally changed through a series of regulatory
amendments distancing the DOE prime contractors from the government. In
September 1999, Chair and the Ranking Member of the Small Business
Committee advised the OFPP that such changes no longer justified
counting subcontracts towards DOE's small business prime contracting
goal. Indeed, during the 1990s the American economy experienced an
explosive growth of knowledge- and service-based small business sectors
inconceivable during World War II. The OFPP accepted the Committee's
advice, and I believe that the Committee's analysis and the capacity of
America's small business remain sound today.
It must also be noted that the Department was able to negotiate a
20-year plan to reach the 23% goal in light of its unusual historical
contracting structure. Even though the DOE still has a long way to full
compliance, some have already questioned the necessity of such
compliance in light of various program management issues at the
Department. For example, concerns have been raised that the need to
compete and manage an increased number of prime contracts would
exacerbate the weaknesses of the DOE acquisition system. It has been
pointed out by the General Accounting Office (GAO) that the DOE
procurements may be vulnerable to waste, fraud, and abuse.
Consequently, the DOE's competence to handle additional contracting
work has been questioned. Some have also alleged that small businesses
cannot be trusted to keep our Nation's energy secrets or to be
effective team players with other contractors. Yet another concern has
been the weak accountability links between small businesses and the DOE
contracting officials in Washington, as well as the blurring of
accountability lines at the sites. Finally, it has been argued that
small businesses would prefer to deal with ``simplified''
subcontracting procedures of the large prime contractors rather than
immerse themselves into the highly regulated world of direct federal
procurement.
I agree that a number of these program management concerns deserve
Congressional attention and applaud the Energy and Natural Resources
Committee for convening the hearing to address them. However, as Chair
of the Small Business Committee, I am firmly convinced that small
business prime contractors are not a hindrance to good government and
sound management. Abandoning our commitments to open federal
procurement to small business is not the answer to the DOE's actual or
potential management woes. Instead, we should support the dedicated
acquisition professionals at the Department of Energy by providing
resources for additional training and hiring. If necessary, Congress
should also strengthen the capacity of the DOE's Offices of Small and
Disadvantaged Business Utilization and of Inspector General, as well as
to direct the GAO to assist the DOE with devising better acquisition
processes. It is altogether foreseeable that a sizable portion of
budgetary requirements for internal improvements of the Department's
procurement system could be realized from redirecting the expenditures
for overhead costs currently paid out by the Department to its prime
contractors for developing and administering their subcontracting
plans.
Any strain on the DOE could be further lessened by acquisition
tools and services widely used throughout the Federal government. Some
of these tools, such as the small business government-wide acquisition
contracts (GWACs) and the various acquisitions vehicles of the General
Services Administration, are designed precisely to reduce
administrative burdens on the buyers. Other tools, such as small
business teaming agreements, could be utilized to increase the ability
of small business to compete for contracts with higher dollar values.
The Small Business Committee stands ready to work with the Energy
Committee on improving the acquisition practices and procedures at the
DOE.
Moreover, the apprehensions that small businesses are not suitable
to work in operationally complex or security-sensitive environments do
not appear to be well-justified. Today's small businesses are
successfully competing for projects from the Advance Research Projects
Agencies at the Departments of Defense and Homeland Security, for
funding from the Technical Support Working Group, for work in support
of military operations overseas, and for a variety of services to
civilian agencies at home. The security needs of the Departments of
Defense and Homeland Security are at least as great as those of the
Energy Department. Yet, those agencies are far ahead of the DOE in
terms of compliance with the Small Business Act. The collective
experience of the DOD and the DHS teaches us that if appropriate prime
contracting opportunities appear at the DOE, qualified and responsible
contractors from the ranks of small, disadvantaged, women-owned,
HUBZone, or veteran-owned businesses would want to participate in the
bidding process. There seems to be little reason for allowing small
businesses to work on military bases or to develop countermeasures for
weapons of mass destruction while refusing small businesses the chance
to work at the government-owned DOE facilities.
Other concerns implicating contractor accountability and nationwide
contract administration may be addressed through a combination of
technology, special contract clauses, and reengineering of DOE
operations. Finally, ``simplified'' subcontracting awards made by prime
contractors are exempt from review through the debriefing process
established in the Federal Acquisition Regulation for competitive
procurements or through the bid protest process of the GAO and the U.S.
Court of Federal Claims. Thus, prime contractors are simply not
accountable to bidders for small business subcontracts in the way that
the DOE is accountable to bidders for prime contracts.
Indeed, the 23% prime contracting goal in the Small Business Act
was premised on the recognition that expanding competitive
opportunities for small, small disadvantaged, women-owned, HUBZone, or
veteran-owned businesses stands to provide multiple benefits to these
bidders, to the procurement system, and to the United States as a
whole. These benefits include strengthening of the industrial base,
increasing innovation, and greater accountability in the awards
process. The economics of competitive small business acquisitions would
generate better value and lower prices for the government's needs than
non-competitive subcontracting awards, and competitive forces reduce
the potential for improper favoritism or the appearance of improper
favoritism. At the same time, market forces would also ensure that the
work best performed locally is performed locally despite nationwide
advertising for small business prime contracts. As Chair of the Small
Business Committee, I look forward to examining the impact of DOE
contracting policies on small business and to collaborating with
Chairman Domenici and the Committee on Energy and Natural Resources on
solutions benefiting both good government and small business. For the
sake of American taxpayers and American jobs, Congress should continue
its work to provide small businesses with meaningful access to prime
contracting dollars at the Department of Energy.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you very much, Mr. Chairman. I
agree with you, I think we're all committed to small business
and to Federal efforts to promote small business. As I
understand it, the issue that this hearing is mainly focused on
is the question of how the Department of Energy small business
contracts, and those of its management and operations
contractors, count toward the goal that has been set. I think
that's the main issue, and how we should calculate the efforts
as progress toward that goal.
I know this is very important to small business, it's also
very important to the laboratories and affected communities,
and to the Department. So I look forward to hearing from the
witnesses, and I hope we can come up with a way to resolve the
issue.
Thank you.
The Chairman. Thank you very much.
Now we'll ask the Deputy Secretary. Your remarks, if you
have them, that are prepared will be made a part of the record.
Would you please proceed.
STATEMENT OF KYLE E. MCSLARROW, DEPUTY SECRETARY,
DEPARTMENT OF ENERGY
Mr. McSlarrow. Thank you, Mr. Chairman, Senator Bingaman,
I'm pleased to be here. I will briefly summarize these remarks.
The Department of Energy awards over $19 billion dollars in
prime contracts each year. Over 85 percent of that, or over $16
billion, goes to large facility management contractors who then
award approximately 50 percent of their subcontracts to small
business.
The prime contracts awarded to small business by the
Department currently represent about 5 percent, or nearly $800
million dollars of the total procurement dollars at the
Department.
In fiscal year 2003 the Department made awards to small
business totaling $783 million dollars in prime contracts, and
$3.5 billion dollars in subcontracts. This means that about 20
percent of our total contract funds are awarded to small
businesses.
Our success is the result of the Department's aggressive
efforts to provide opportunities for small business. We've been
very successful in getting Federal dollars into the small
business community, and promoting their full participation in
our contracting efforts.
And I know, Mr. Chairman, you mentioned Sandia. I also want
to echo what you said and applaud how well Sandia, which is
really a flagship laboratory, has done in promoting small
business in New Mexico.
Mr. Chairman, you specifically asked me to comment on the
changes made during the Clinton administration under which
subcontracts are no longer counted by the Small Business
Administration toward meeting our small business goals, even
though the funds go to small businesses and promote their
prosperity.
The Chairman. When was that change made?
Mr. McSlarrow. 1999.
The Chairman. And we've been living under that to this day?
Mr. McSlarrow. We have.
The Chairman. Proceed.
Mr. McSlarrow. First this change makes it appear, for
example, that only 4.1 percent of our contract funds go to
small businesses, when in reality 23 percent went to small
businesses through prime and subcontracts in fiscal year 2003.
Second, to comply with the law we will most likely have to
award, as prime contracts, some portion of the funds previously
awarded as subcontracts. This will require us to redirect
resources to contract administration in order to oversee the
increased number of contracts.
I would add that prime contracts are activities other than
M&O contracts total less than 20 percent of the Department's
total contracting dollars.
The Chairman. What does M&O mean?
Mr. McSlarrow. Management and operating contracts.
Thus even if we were to award all contracts for activities,
other than facility management, to small business we would not
reach the government-wide goal of 23 percent. We would have to
set aside parts of the facility management contracts for small
business. And the Department is evaluating whether, and to what
extent, doing so could entail certain risks and concerns,
especially with regard to program coherence and integrity in
our nuclear weapons laboratories and our major science research
facilities.
Nonetheless, Secretary Abraham and I remain firmly
committed to supporting small business. Small businesses are
the heart of the American economy, they are often the leaders
of innovation. Whatever scoring methodology is used to assess
our progress, we will continue to award a significant portion
of our funds to small businesses across America.
And Mr. Chairman, I'll stop there, and be happy to answer
any questions you might have.
[The prepared statement of Mr. McSlarrow follows:]
Prepared Statement of Kyle E. McSlarrow, Deputy Secretary,
U.S. Department of Energy
Mr. Chairman, Members of the Committee, I am pleased to be here
today to discuss the Department of Energy's efforts to support
opportunities for small business.
As President Bush said in his Proclamation of Small Business Week
last September, ``Small businesses create the majority of new jobs in
our Nation and account for more than half of the output of our economy.
They lead the way in generating new ideas and creating new
technologies, goods, and services for our country and for the world.''
In his Proclamation he reaffirmed the Administration's ``commitment to
helping more small business owners and their employees realize the
American Dream.''
Secretary Abraham and I are expanding opportunities for small
business and have taken numerous measures to promote and increase the
participation of small business in Department of Energy contracts.
Most of the Department's contracts are awarded to operate the
multi-billion dollar nuclear weapons laboratories complex and multi-
billion dollar environmental cleanup programs to resolve the legacy of
the Cold War and to build the Nation's repository for nuclear waste at
Yucca Mountain. Large contracts also are awarded for our advanced
scientific laboratories specializing in genomics, scientific
supercomputing, fusion energy and nanoscience.
The Department awards over $19 billion in prime contracts each
year. Over 85 percent of that (or over $16 billion) goes to large
facility management contractors who then award approximately 50 percent
of their subcontracts to small business. The prime contracts awarded to
small business by the Department currently represent about 5 percent
(or nearly $800 million) of the total procurement dollars at the
Department.
To promote the participation of small businesses, Secretary Abraham
issued a Policy Statement on ``Supporting Small Businesses in
Implementing DOE Missions'' on September 23, 2002. This DOE policy
directs all Departmental elements to examine and seek to expand their
grant and contract opportunities with small businesses. It also tasks
the Director of the Office of Small and Disadvantaged Business
Utilization to prepare a Department-wide comprehensive small business
strategy to ensure that small businesses are provided the maximum
practicable opportunity to participate in Departmental programs at the
prime contract level. Additionally, the Secretary directed the plan to
include a strategy to increase the level and expand the type of
subcontracts awarded to small businesses by the Department's facility
management contractors.
At the Department of Energy, our small business programs are ably
led by Theresa Alvillar Speake, Director of the Office of Economic
Impact and Diversity. This office, which directs all of the
Department's small business efforts, has developed a 20-year Strategic
Small Business Plan that includes 14 action items intended to increase
small business contracting at the Department. The plan establishes
processes by which the Department reviews each upcoming contract to
identify opportunities for small business. I would note that since
relatively few of our major contracts come up for consideration each
year, several years will be required for us to achieve our goal.
In accordance with that plan:
The Department launched a national marketing campaign to
inform small businesses about the contracting opportunities
available both at the prime and subcontract level. A highlight
of our recruiting effort is the annual small business
conference, which was held last year in New Mexico. I attended
and spoke there. The small business conference is scheduled
this year for July 7-9 in Philadelphia. This provides us an
excellent forum to present the various contracting
opportunities available at DOE.
DOE sets an annual corporate goal (including prime and
subcontracts). The goal for prime contracts has climbed from
3.7 percent in FY 2003 to 5.0 percent in FY 2004, and 5.5
percent in FY 2005.
Departmental elements are required to formulate a small
business goal for the work they will direct to small business.
Each element's progress in meeting its goal is rated on a
quarterly basis and reported to senior Department officials.
Each element is also responsible for insuring the success of
their prime contractors in meeting the subcontracting goals.
The Department promotes mentor-protege relationships between
large business and small business in order to increase the
number of small businesses that can successfully compete for
DOE awards.
We have established a small business advisory team, a group
consisting of small business trade associations, chambers of
commerce, and other federal agencies to provide advice and
guidance to our Small Business Office on small business
programs and activities.
DOE components sponsor meetings of small and large
businesses to discuss upcoming requests for proposals to
encourage the establishment of teams to combine the advantages
of small and large businesses, or combine the strengths of
several small businesses.
DOE components also conduct market research before issuing
an RFP to identify small businesses with capabilities in
specific areas.
We have created a database of interested small businesses
for reference in future contracts.
We have reduced the documentation that small businesses are
required to submit in response to RFPs.
Additionally, we review all of our large contracts to
identify opportunities to break out portions of the work for
small business.
In FY 2003, the Department made awards to small business totaling
$783 million in prime contracts and $3.5 billion in subcontracts; this
means that about 20 percent of our total contract funds are awarded to
small businesses. Our success is the result of the Department's
aggressive efforts to provide opportunities for small business. We have
been very successful in getting Federal dollars into the small business
community and promoting their full participation in our contracting
efforts.
You specifically asked me to comment on the recent changes under
which subcontracts are no longer counted by the Small Business
Administration toward meeting our small business goals, even though the
funds go to small businesses and promote their prosperity. The
statutory requirement is that only small business contracts awarded as
prime contracts count toward achieving small business goals with a
government-wide goal for small businesses set by law at 23 percent of
all contract dollars awarded. Between 1992 and 1999, DOE had an
excepted status granted by the Office of Federal Procurement Policy
which enabled us to count subcontracts toward achievement of the
statutory goal for prime contracts. Since 1999, DOE has not had that
exception. This has made it appear that only 4.1 percent of our
contract funds go to small businesses, when in Fiscal Year 2003, the
most recent year for which data is available, 23 percent went to small
businesses through prime and subcontracts. Second, to comply with the
law, we will most likely have to award as prime contracts some portion
of the funds previously awarded as subcontracts. This will require us
to redirect resources to contract administration in order to oversee
the increased number of contracts.
I would add that prime contracts for activities other than facility
management total less than 20 percent of the Department's total
contracting dollars. Thus, even if we were to award all contracts for
activities other than facility management to small business, we would
not reach the government-wide small business goal of 23 percent. We
would have to set aside parts of the facility management contracts for
small business, and the Department is evaluating whether and to what
extent doing so could entail certain risks and concerns, especially
with regard to program coherence and integrity in our nuclear weapons
laboratories and our major science research facilities.
Nonetheless, our commitment to small business is strong. We have a
Strategic Plan to increase small business participation. We are
continuing to reach out to both small and large businesses to encourage
them to work together. My office reviews contract awards and strongly
encourages making awards to small businesses. I personally review
quarterly performance reports that rate the success of departmental
components in achieving their small business goals. The Department's
Associate Deputy Secretary and Director, Office of Small and
Disadvantaged Business Utilization meet with any components that are
not meeting their goals and work with these components to make
improvements. We incentivize our senior executive program managers to
award contracts to small businesses by including standards on expanding
small business opportunities in their performance agreements. In
addition, in the Subcontracting Plans that we establish with our prime
contractors, we negotiate aggressive goals to utilize small businesses.
As a result of these actions, we anticipate that we will continue to be
successful in achieving our small business goals and provide greater
opportunities to small business.
On May 12, 2004, Secretary Abraham recognized the outstanding
achievements of 13 departmental elements and facility management
contractors for their success in expanding small business participation
at both the prime and subcontract levels. The Department's Office of
Fossil Energy received the ``Small Business Breakout Award'' for
breaking out the largest percentage of requirements from its existing
facility management contracts to provide prime contracting
opportunities for small business in the area of construction
management. Bechtel SAIC Company, LLC was presented with the ``Facility
Management Contractor Small Business Achievement Award'' for attaining
the highest percent increase in subcontract awards to small business
concerns from the previous year--from 39.5 percent in FY 2002 to 65.9
percent in FY 2003.
In summary, Secretary Abraham and I remain firmly committed to
supporting small business. Small businesses are the heart of the
American economy. They are often the leaders of innovation and the
creators of new technology, new products and improved business
processes. Whatever scoring methodology is used to assess our progress,
we will continue to award a significant portion of our funds to small
businesses across America.
Mr. Chairman, and Members of the Committee, this concludes my
prepared statement. I would be happy to answer any questions you may
have at this time.
The Chairman. Senator Bingaman.
Senator Bingaman. As I understand it, GAO has said that the
Department of Energy would need to increase its small business
contracting by about six fold in order to meet this 23 percent
goal if you don't count the contracting that is done by the M&O
contractors; is my understanding of that right?
Mr. McSlarrow. That sounds like the right figure.
Senator Bingaman. You've got to go from 4 percent to 23
percent----
Mr. McSlarrow. Twenty-three percent, and----
Senator Bingaman. Right. Is that a practical--I mean is
that achievable in your view? Does it make sense to try to have
that much of an increase, given the way DOE allocates its
funds?
Mr. McSlarrow. I'm not convinced it is achievable. And let
me just step back for a moment. I think it was in 2002, we
negotiated a goal, and a plan, with the Small Business
Administration. It was important to them that we have a plan
that arrived at 23 percent, which is the Government average
requirement under the law, at some point.
They wanted it in 10 years, we came back with twenty. I
frankly was more focused on the next 3 years, and what those
goals were, which are challenging enough.
But we agreed that we would reevaluate this on a year-by-
year basis. It was clear to me that we could make changes, and
some contracts that were currently part of M&O contracts could
be broken out. But it has never been clear to me, and I frankly
don't think we know enough today, to say that we could
definitely get to a 23 percent figure. That is an awfully large
figure given how we run our complex, if you're only counting
prime contracts.
Senator Bingaman. Is there some particular value--I mean as
long as the work goes to the small businesses, is there some
reason why having it do that through the M&O contractors is
less desirable than having it done directly by DOE?
Mr. McSlarrow. There's obviously a difference of opinion.
The small business community itself is divided on this point,
and I've heard from small businesses on either side. There are
many people who believe that it is important for small
businesses to serve as prime contractors with a direct
relationship to the Federal Government because that provides
them opportunities down the road in future contracting.
Others believe that it's unnecessarily administrative in
terms of the burdens that it puts on the complex. The Small
Business Administration, and the White House OMB office that
has the responsibility for this, I think also believes, and I
think there's some truth in this, that one of the differences
between subcontracting and prime for small businesses is that
you will tend to see small businesses around a complex in favor
of the subcontracting because that site will, in most cases,
not all, in most cases contract directly in that community. And
so there's obviously a lot of support there.
If you do a prime contract it's a national--unless it's a
set aside--it's a nationally advertised bid, and so you're
pulling from the Nation as a whole, and my view is that you
probably need some mixture. I mean you want to have strong
community-based support in small business, but there are
opportunities on occasion where it would make sense to have a
nationally bid prime contract.
Senator Bingaman. So if we wanted to accomplish the goal of
getting as much of the work done by DOE at laboratories to
small businesses in that community, your view is that that goal
is best served by having much of that contracting done through
the M&O contractors?
Mr. McSlarrow. I think if the M&O contractor is in turn
doing the contracting for small business I think in most cases,
other things being equal, they will tend to reach out to the
community, or the state, in which that site is located.
Senator Bingaman. And they'll do that to a greater extent
than the Department of Energy itself would be able to, if it
had to let a prime contract?
Mr. McSlarrow. I think that's correct.
Senator Bingaman. That's all I have, Mr. Chairman, thanks.
The Chairman. Thank you, Senator Bingaman. I think you made
a very good point.
Let me ask you a couple.
First, why did DOE agree to the changed accounting? In the
past DOE argued that the use of prime contracts for management
of their major facilities required them to incorporate small
business subcontracting for those facility managers in their
small business totals.
Now the DOE has agreed with SBA's guidance to change the
accounting practice.
Why did DOE change its view on this very key question? Did
DOE fully concur with guidance from the Office of Federal
Procurement Policy?
Mr. McSlarrow. Mr. Chairman, I don't know precisely,
because it happened when now Governor Richardson was Secretary
of Energy. My understanding is that there was a back and forth
on this point between DOE and the SBA, and the OFPP, the Office
of Federal Procurement Policy.
Ultimately the argument was that unlike in the past when
M&O contractors were thought to have stood in the shoes of the
Government such that the next contract would itself be a prime
contract. Some changes to how the Department did its M&O
contracts in the late 1990's allowed both the Small Business
Committee chairman, and ranking member, and the White House and
the SBA, to conclude that they were more properly categorized
as subcontracts, which would bring us in line with the rest of
the Government.
It was already a fait accompli by the time we came into
office, although we revisited it because we had some concerns
about it in 2001 and 2002, and the decision was to treat
everybody in government the same.
The Chairman. Well, look, I've spent about three decades in
the Senate encouraging New Mexico labs to increase their small
business contracting; you know that, and they know that. Yet
the GAO notes that the DOE takes steps--that as DOE takes steps
to increase its own small business prime contracting the
unintended consequences may be that the facility managers do
less small business contracting.
Sandia's testimony even points out that they're receiving
DOE guidance to reduce their small business contracting.
What confidence do you have that the net result of the
current DOE attempts to increase the DOE prime contracting with
small business will result in a net increase in small business
work?
Mr. McSlarrow. I think there are two issues. One in terms
of the net increase, I have no doubt there's a net increase. I
mean if you just look at the numbers over the last 3 years, the
total of the primes and the subcontracts, it's going up. And
it's gone up about 400 million over the last couple of years.
So we're proud of the total impact on small business. I don't
think the policy is hurting small business.
I do think there's a legitimate issue that was the second
point you made, Mr. Chairman, about whether or not we're
exulting form over substance, whether or not we're taking
something that might have been called a subcontract before, and
now just simply calling it a prime contact. We may not be, with
that move, adding to the small business pot. But all our other
policies, and our small business office that's generating
recruitment and all of those things, those are adding to the
pool of small business, and we very much want to continue doing
do that.
The Chairman. Well, following up on that, I've been
critical of the poor management at the Department. From the SSC
to the NIF concerns have been raised in the past about DOE's
ability to provide adequate management and oversight of its
contractors. Your Department has committed to increase small
business contracting by over $5 billion dollars. That's more
than the total contracts at Los Alamos and Sandia.
As a number of prime contracts with the DOE increase DOE
has to manage these contracts, and DOE must assure effective
integration of work at each site so that cost, mission, safety
and security are negatively impacted.
Does the Department have sufficient staff and skills
necessary to manage these contracts and oversee the work? And
what steps is the DOE planning to take to mitigate this
concern?
Mr. McSlarrow. I have no doubt that currently we have the
staff necessary to do what we have done in the last couple of
years, and for the goals in the next few years that are coming,
which are aggressive but achievable.
And for example, Mr. Chairman, we're talking about 5
percent of the procurement dollars for fiscal year 2004 would
be prime, and 50 percent of those subcontractor dollars would
go to small business.
The 23 percent number, just to repeat, that is not written
in stone, that is a negotiation that's going to take place
year-by-year between the Department and the SBA, and if need be
it will be resolved by the White House.
That's an important goal in terms of the Government-wide
average of 23 percent. But as I said before, I do have concerns
as to whether or not the administrative burden that would be
required to have that many small businesses managed by the
Federal Government actually makes sense.
The Chairman. Well I want to close with just a couple of
examples. The history of DOE is full of examples where poorly
specified contracts led to vast escalation. NIF and the
infamous SSC come to mind as examples. NIF is still ongoing, as
you know.
In some recent cases contractors are complaining that DOE
has not fully specified the work required, or the hazards that
will be encountered. PIT9 is a classic example of this sort of
problem, and there are others. GAO has listed ``contract
management'' in quotation marks, and ``high risk'' areas for
DOE for the past 14 years.
So as you break off more work for small business don't you
run a risk that unexpected problems may strain the capabilities
that a small business company can bear on the problem? And your
plans to issue subcontracts to handle the entire environmental
program at Paducah strike me as having some potential to start
another PIT9 fiasco, and to potentially strain the capabilities
of small business.
Do you worry that putting the complex contracts out to
small business from DOE may lead to a shortage in the type and
depth of talent that small business can bring to bear on
complex unforeseen problems that suddenly arise.
Mr. McSlarrow. Again, if you're talking about the
challenges that we have in the next couple of years, and the
very aggressive goals that we have set out with SBA, I'm
concerned about it, but I don't actually worry that there's not
the kind of talent in small businesses.
It is an interesting point to me that almost every one of
those fiascos, and I certainly take your point about contract
management, were large businesses. It is not obvious to me that
small businesses are inherently worse, and in some ways--and
particularly in the environmental clean-up arena, we believe
that actually allows us to be a little bit more nimble, that we
can cut costs and actually boost performance.
That's not going to be true in every instance, that's why
we examine case by case to see if it makes sense to go the
route of small businesses.
But I'm certainly not prepared to say across the board that
small businesses can't not only step up and do the job, but in
some ways do the job better than a big bureaucracy at a large
corporation.
The Chairman. Well, retirement and injury benefits have
haunted this committee, and what I'm going to ask you about is
not directly related to the program, and where it should be,
the argument about whether it should go to labor--I think
you're working on that Senator Bingaman, and we are too to try
to come up with an agreement that it would be shifted; is that
not right?
Senator Bingaman. That's right.
The Chairman. But this retirement and benefit system that
I'm talking about is where large companies serve as facility
managers. They can handle complex and costly retirement
systems; I wonder if they can is the question.
Similarly when workers are found eligible for past
workman's compensation large companies have the resources to
step forward. But just one example, in the Paducah field
hearings the DOE manager first testified that current large
contractors, Bechtel Jacobs, would handle workers' compensation
payments of past problems. They said the Paducah contract was
going to be re-competed only for small business.
Then when Senator Bunting asked Bechtel Jacobs if they had
been told they were required to cover past workers'
compensation payments at the same time that they are losing the
Paducah contract he added that no such discussion had occurred.
Discussions like this don't lead me to believe that the
Department has thought through the implication of massive
shifts to small business operating as facility managers. If you
break up portions of the facility management contracts into
smaller pieces how do you expect to handle retirement benefits,
or workers who continue on the site? How will we pay the
workers' compensation, how will it be handled? Will a small
business contractor take over these liabilities for large
firms?
I think that that won't work, and I'd like your
observation.
Mr. McSlarrow. In general no one who has to step forward,
who's a candidate for being awarded a contract like that, can
pass muster without having to make the case through the request
for proposal process, that they can do what's necessary on
pensions--whatever benefits are at issue.
That's true with the large or small businesses, they've got
to make that case, and we have to be satisfied. There's usually
a 5-year period I think in most of our contracts where the old
pension arrangement still stands, and the new person just pays
into it. And then after that there might be some changes.
But that's a concern, and a scrutiny, that we have to bring
to every awarded contract. I think the case in Paducah is
probably a unique one, and that I probably shouldn't get into
because there are so many issues related to the USEC
Privatization Act that may affect those answers. I'd be happy
to address that more specifically for the record if that would
be okay.
The Chairman. That would be all right.
I have about six additional questions which I will submit;
would you answer them--I know you're very busy--answer them as
soon as you can. They have to do with disagreements among
institutions and entities as to whether your policy will work,
and still maintain good jobs and safety and the like--good
workman-like jobs.
Okay. Anything else, Senator Bingaman?
Senator Bingaman. No.
The Chairman. Let's go to the next panel. You're excused.
Mr. McSlarrow. Thank you, Mr. Chairman.
The Chairman. All right, panel two. Just sit wherever you'd
like, and put your name plate up in front of you.
Dr. Joan Woodard, Deputy Director of Sandia. Thank you for
coming, sorry you have to come from so far away.
Robin Nazzaro, Director of Natural Resources and
Environment, the U.S. General Accounting Office.
Ann Sullivan, Federal legislative consultant, Women
Impacting Public Policy.
Councilmember Robert Thompson, Energy Communities Alliance
chairman, from Richland, Virginia.
Mr. Thompson. Richland, Washington actually, Senator.
The Chairman. Oh, I'm sorry, Richland, Washington. That's
where you should be from.
Mr. Thompson. As always.
The Chairman. We're going to start over here with you,
Robin, and move this way.
STATEMENT OF ROBIN M. NAZZARO, DIRECTOR, NATURAL RESOURCES AND
ENVIRONMENT, DEPARTMENT OF ENERGY
Ms. Nazzaro. Thank you, Mr. Chairman. I am pleased to be
here today to discuss the Department of Energy's efforts to
increase the direct contracting with small businesses.
Under the Small Business Reauthorization Act of 1997 the
Federal Government has a goal overall of awarding at least 23
percent of the prime contract, or direct contract, dollars to
small businesses each year.
DOE, like other Federal agencies, share in the
responsibility for meeting this goal. Before 1999, as was
mentioned earlier, DOE included in its calculations the small
business prime contracting achievements, the subcontracts
awarded to small businesses, and its facility management
contractors.
In 1999, however, the Office of Federal Procurement Policy
determined that to ensure consistent reporting across the
Federal Government DOE could no longer do so.
You asked us to examine what has happened as a result of
this policy change. My testimony will focus first on the effect
of the 1999 policy change on the amount of prime contracting
dollars that DOE will be required to direct to small
businesses.
Second, the steps that DOE has taken, or plans to take, to
achieve its small business contracting goals; and third, the
likely implications of DOE's program resulting from these
changes.
In summary, to achieve DOE's near term goals of
approximately 5 percent in fiscal years 2004 and 2005 DOE will
have to direct an additional couple hundred million dollars
above the $847 million dollars it directed to small businesses
in fiscal year 2003.
The long-term goal of 23 percent in small business prime
contracting represents a level significantly beyond what DOE
has ever achieved, about six times its current rate.
To address its near term small business prime contracting
goals DOE has improved its outreach to the small business
community, and has redirected to small businesses contract
dollars not associated with the facility management contracts.
DOE has also begun to review facility management contracts
to identify work that could be redirected to small business
prime contracts.
In the longer term it's less clear how DOE, or if DOE,
intends to achieve the eventual goal of 23 percent small
business prime contracting. In 2002 DOE's Office of Small and
Disadvantaged Business Utilization prepared a 20-year plan
outlining when and how the Department would achieve this 23
percent goal. However, the plan provides no details as to which
offices would provide these dollars.
DOE's three largest offices, the National Nuclear Security
Administration, Environmental Management and Science have
differing views as to how much of that work can be done by the
facility management contractors that can be directed to small
businesses without having a negative impact on the Department's
mission.
EM is in favor of doing so, if redirecting the work is
consistent with its overall strategy for clean up.
In contrast, however, officials at the two offices that
oversee DOE's research laboratories, NNSA and Science, said
that their programs are less able to redirect significant
segments of the work without jeopardizing critical research
missions.
DOE has not reconciled these differing views into a
consistent strategy for achieving its long-term goals.
DOE's efforts to increase the small business prime
contracting involve both potential benefits and risks. The
benefits include increasing the pool of possible contractors,
which could result in better competition and perhaps better
prices for the Government, finding new and innovative
approaches to conducting DOE's work, and providing experiences
to small businesses that could enhance their capacity to
compete for other Federal contracts.
On the other hand the potential risks include difficulties
integrating and coordinating the activities of a greater number
of prime contractors at a site to ensure safe, secure, and
effective operations, and having the adequate Federal resources
for effective contract management and oversight, two areas that
already pose significant challenges for DOE.
Furthermore DOE's efforts to increase small business prime
contracting, as you noted, could inadvertently result in less
total contracting dollars for the small business community.
Facility management contractors generally negotiate annually
the small business subcontracting goals with the Department. In
discussions with DOE, contractor officials, and small business
advocacy groups the concern was raised that if work is
redirected from a facility management contract the contractor
may negotiate lower subcontracting goals with the Department,
and then subcontract less of the remaining work to the small
businesses.
The Deputy Secretary mentioned that DOE is evaluating the
implications of this 1999 policy change, specifically the
effect on the facility management contracts. We have not seen
this work, but it's certainly a good idea for them to do such
an activity.
Mr. Chairman, this concludes my statement, and I would be
happy to respond to any questions you may have.
The Chairman. I assume your written statement has more than
you have talked about?
Ms. Nazzaro. Yes, and if that can be submitted for the
record?
The Chairman. Right, it will be done.
Ms. Nazzaro. Thank you.
[The prepared statement of Ms. Nazzaro follows:]
Prepared Statement of Robin M. Nazzaro, Director, Natural Resources and
Environment, Department of Energy
WHAT GAO FOUND
To meet its share of federal goals, DOE would need to direct
significantly,more prime contracting ,dollars to small businesses. If
it is to reach its near-term goals of 5.06 percent in fiscal year 2004,
and 5.50 percent in fiscal year 2005, DOE must direct to small
businesses an additional $226 million and $319 million, respectively,
over the $847 million it directed to small businesses in fiscal year
2003. Achieving a long-term goal of directing 23 percent of prime
contracting dollars to small businesses would require DOE to contract
with small businesses at about 6 times its current rate. Such an
increase is about equal to the combined annual budgets for Los Alamos
and Sandia--the two largest national laboratories.
To address its near-term small business prime contracting goals,
DOE has improved its outreach efforts and has redirected to small
businesses some contract dollars not associated with facility
management contracts. DOE has also begun to review facility management
contracts up for renewal to identify work that could be redirected to
small business prime contracts. Achieving a long-terns goal of 23
percent is much more problematic. Notably, DOE's three largest
offices--the National Nuclear Security Administration (NNSA),
Environmental Management (EM), and Science--have differing views as to
what extent facility management contract work can be redirected to
small businesses without having a negative impact on accomplishing
their missions. EM is in favor of doing so if redirecting the work is
consistent with its accelerated cleanup strategy. NNSA and Science
officials express concern that redirecting work now done by facility
management contractors could jeopardize critical research missions at
the laboratories.
DOE's efforts to increase small business prime contracting involve
both potential benefits and risks, which depend on the eventual goal
DOE attempts to achieve. The potential benefits to DOE of increased
small business prime contracting include increasing the pool of
potential contractors, which could result in better competition and
better prices for the government; finding new and innovative approaches
to the work developed by small businesses; and providing experiences to
small businesses to allow them to better compete for other federal
contracts. The potential risks include integrating and coordinating the
work of a greater number of contractors at a site in a safe, secure,
and effective manner, and having adequate federal resources for
effective contract management and oversight--areas that already pose
significant challenges for DOE. In addition, DOE's efforts to increase
small business prime contracting may cause its facility management
contractors to reduce the amount of subcontracting that they direct to
local and regional small businesses.
DOE largely agreed with the information in this testimony. However,
it disagreed with GAO's characterization of DOE's long-term small
business prime contracting goal and its strategy to achieve it. GAO
believes that both the longterm goal and DOE's strategy have been
accurately described.
______
Mr. Chairman and Members of the Committee, I am pleased to be here
today to discuss the Department of Energy's (DOE) efforts to increase
its direct contracting with small businesses. The Small Business Act,
as amended by the Small Business Reauthorization Act of 1997,
established a government-wide goal of directing at least 23 percent of
prime contracting dollars to small businesses each fiscal year.\1\ DOE,
like other federal agencies, shares in the responsibility for meeting
this goal. Contracting is particularly significant at DOE, which spends
more on contracting than any other civilian agency in the federal
government. More than 90 percent of DOE's total fiscal year 2003
budget, or $21.6 billion, was spent on prime contracts. The majority of
this amount--$18.2 billion, or more than 80 percent of the contracting
dollars--was spent on 37 large contracts for the management of DOE's
laboratories, production facilities, and environmental restoration
sites. As a group, these contracts are referred to as facility
management contracts. Under these facility management contracts, a
contractor is responsible for performing, managing, and integrating the
work at a DOE site, often subcontracting specific portions of the work
to other businesses.
---------------------------------------------------------------------------
\1\ Prime contracts are direct contracts between the government and
a contractor.
---------------------------------------------------------------------------
DOE's approach to reporting its small business prime contracting
dollars has been affected by a change in federal policy concerning
whether subcontracts with small businesses can in certain situations be
counted toward achieving small business prime contracting goals: For
most of the 1990s, DOE included in its calculations of small business
prime contracting achievements the subcontracts awarded to small
businesses by its facility management contractors. The Office of
Federal Procurement Policy had allowed DOE to include these
subcontracts because of DOE's unique reliance on facility management
contractors to operate its facilities and carry out its missions. In
1999, however, the Office of Federal Procurement Policy\2\ determined
that to ensure consistent reporting of achievements across the federal
government, DOE could no longer include the subcontracts under facility
management contracts when calculating the percentage of prime
contracting dollars awarded to small businesses.\3\
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\2\ The Office of Federal Procurement Policy within the Office of
Management and Budget, in addition to issuing policy letters, has the
responsibility for resolving any disagreements between the Small
Business Administration and another federal agency on small business
prime contracting goals. 15 U.S.C. Sec. 644(g)(2).
\3\ The Office of Federal Procurement Policy stated that for fiscal
year 2000 and beyond, contracts awarded by DOE's facility management
contractors should instead be counted toward DOE's small business
subcontracting goals.
---------------------------------------------------------------------------
You asked us to examine what has happened as a result of this
policy change. My testimony will discuss (1) the effect of the 1999
policy change on the amount of prime contracting dollars that DOE will
be required to direct to small businesses, (2) the steps that DOE has
taken or plans to take to achieve its small business contracting goals,
and (3) the likely implications for DOE's programs, if any, resulting
from these changes.
My testimony is based on a review of DOE small business contracting
goals and achievements from fiscal year 1990 through fiscal year 2003.
Our work included a review of DOE's plans to achieve its near-term
goals and the projected incremental increases needed to achieve long-
term goals. These goals were developed by DOE's Office of Small and
Disadvantaged Business Utilization (referred to in this testimony as
DOE's Small Business Office) within its Office of Economic Impact and
Diversity. We also reviewed documentation provided by DOE and the Small
Business Administration (SBA), and completed and current procurements
for new small business prime contracts.\4\ We interviewed DOE and
contractor officials at DOE headquarters and selected sites, as well as
national and regional small business associations and advocacy groups.
Our scope included DOE's three largest offices-the National Nuclear
Security Administration (NNSA),\5\ and the Offices of Environmental
Management (EM) and Science-that account for about 70 percent of DOE's
annual budget. We conducted our review from February 2004 through May
2004 in accordance with generally accepted government auditing
standards. Our review included a data reliability assessment on DOE's
small business prime contracting and subcontracting results for fiscal
years 1990 through 2003. These data are being used primarily for
context. Our assessment of DOE's prime contracting data determined that
the data are sufficiently reliable for the purposes of this testimony.
Although we are not as confident of the reliability of the
subcontracting data as reported to DOE by its facility management
contractors, we determined that these are the only data available and
they are sufficiently reliable for the observations presented in this
testimony.
---------------------------------------------------------------------------
\4\ DOE awards new small business contracts through a procurement
process that generally includes issuing a request for proposals,
evaluating those proposals, and selecting a contractor.
\5\ NNSA is a separately organized agency within DOE, with its own
procurement organization and program offices such as Defense Programs
and Defense Nuclear Nonproliferation. Program offices referred to iii
this testimony generally include NNSA and its program offices as well
as DOE's program offices of Environmental Management and Science.
---------------------------------------------------------------------------
In summary, we found the following:
To comply with the 1999 federal policy change and to achieve
federal small business prime contracting goals, DOE would need
to direct significantly more prime contracting dollars to small
businesses. To achieve DOE's near-term small business prime
contracting goals of 5.06 percent in fiscal year 2004, and 5.50
percent in fiscal year 2005, DOE will have to direct an
additional $226 million in fiscal year 2004, and $319 million
in fiscal year 2005, above the roughly four percent of prime
contracting dollars directed to small businesses in fiscal year
2003. The long-term goal of 23 percent in small business prime
contracting represents a level significantly beyond what DOE
has ever achieved--about 6 times the $847 million directed to
small businesses in fiscal year 2003. Placed in the context of
DOE's current contracting base, such an increase would
represent an amount approximately equal to the annual budgets
of the two largest laboratories-Los Alamos and Sandia National
Laboratories.
DOE has taken steps to increase its near-term small business
prime contracting, but has no consistent strategy for reaching
the eventual goal of directing 23 percent of its prime
contracting dollars to small businesses. To achieve the near-
term goals, DOE has focused primarily on improving outreach to
the small business community and directing additional contract
dollars to small businesses from procurements not associated
with facility management contracts. In addition, as certain
facility management contracts are due for renewal, DOE, and
especially EM, has begun identifying potential work that could
be redirected in the form of small business prime contracts. In
the longer term, it is less clear how, or if, DOE intends to
achieve an eventual goal of 23 percent small business prime
contracting. In 2002, DOE's Small Business Office prepared a
20-year plan outlining when and how the department would
achieve the 23 percent small business prime contracting goal.
Since DOE's facility management contracts represent, about 80
percent of its total contract dollars, the department cannot
mathematically achieve the 23 percent goal without redirecting
some of those dollars to small business prime contracts.
Although the 20-year plan proposed that eventually DOE would
redirect. about a fifth of its facility management contract
dollars to small business prime contracts, it provides no
details as to which offices would provide those dollars. DOE's
three largest offices have differing views as to how much of
the work that is done by facility management contractors can be
redirected to small businesses without jeopardizing the
department's missions. While the EM program has begun to move
work from its facility management contracts and redirect these
dollars to small business prime contracts, EM officials said
that doing so must be consistent with the overall strategy of
accelerating cleanup at DOE sites and must be at a level that
can be effectively managed by EM contract and project
management staff. In contrast, officials in the two offices
that oversee DOE's research laboratories--NNSA and Science--
said that their programs are less able to redirect, significant
segments of their work from facility management contracts to
small businesses without jeopardizing critical research
missions. DOE has not reconciled these differing views into a
consistent strategy for achieving its long-term small business
contracting goals.
The implications of increasing small business prime
contracts depend on the eventual goals that DOE attempts to
achieve. Given the contrasting views of DOE's three largest
offices, it is not clear if DOE as a whole will commit to the
incremental increases that would eventually lead to a 23
percent rate of prime contracting to small businesses.
Regardless of how far DOE moves in the direction of providing
more prime contracting dollars for small businesses, efforts to
increase small business prime contracting involve both
potential benefits and risks. In addition to helping the
federal government meet the overall goal of 23 percent prime
contracting, potential benefits include increasing the pool of
possible contractors, which could result in better competition
and perhaps better prices for the government; finding new and
innovative approaches developed by small businesses; and
providing experiences to small businesses that. could enhance
their capacity to compete for other federal contracts. The
potential risks associated with increasing the number of small
business prime contracts include difficulties integrating and
coordinating the activities of a greater number of prime
contractors at a site to ensure safe, secure, and effective
operations and having adequate federal resources for effective
contract management and oversight--two areas that, continue to
be a challenge for DOE. Furthermore, DOE's efforts to increase
small business prime contracting may cause facility management
contractors to reduce the amount of subcontracting dollars
that, they direct to local and regional small businesses.
We discussed a draft, of this testimony with DOE officials
representing DOE's Small Business Office, procurement organizations,
NNSA, EM, and Science. DOE officials generally agreed with the
information and observations presented in the testimony, with two
exceptions. First, DOE said that it disagreed with our statement that
DOE. has no consistent strategy for reaching an eventual goal of
directing 23 percent of its prime contracting dollars to small
businesses. DOE argued that its 20-year plan, its annual goal-setting
process with SBA, and the individual goal setting that occurs within
NNSA and the program offices collectively represented a consistent
strategy. We disagree. Although DOE has a 20-year plan that projects
incremental increases in small business prime contracting up to 23
percent by 2022, no strategy is in place that defines how DOE will
achieve this goal, identifies what the contributions of the various DOE
organizational components will be, or reconciles the differing views
within DOE as to what would be an appropriate level of small business
prime contracting. Second, DOE said that we have mischaracterized its
23 percent small business prime contracting goal as an eventual long-
term goal, while DOE views it as a goal that it may or may not agree,
to, based on its annual negotiations with SBA. We believe we have
appropriately described DOE's goal and we stated that it is not clear
if DOE will commit to the incremental increases that would lead to
achieving the goal. Finally, DOE suggested technical corrections, which
we incorporated as appropriate.
BACKGROUND
DOE has about 50 major sites around the country where the
department carries out its missions, including developing, maintaining,
and securing the nation's nuclear weapons capability; cleaning up the
nuclear and hazardous wastes resulting front more than 50 years of
weapons production; and conducting basic energy and scientific
research, such as mapping the human genome. This mission work is
carried out under the direction of NNSA and DOE's program offices.
With a workforce of 16,000 federal employees and more than 100,000
contractor employees, DOE relies primarily on contractors to manage and
operate its facilities and to accomplish its missions. In addition to
accomplishing DOE's core mission work, managing and operating the sites
involves a broad range of support activities, such as information
technology, safety, security, and purchase of products and services.
The Small Business Act, as amended by the Small Business
Reauthorization Act of 1997, directed the President to establish the
goal that not less than 23 percent of the federal government's prime
contracting dollars would be directed to small businesses each fiscal
year. SBA is charged with working with federal agencies to establish
agency small business contracting goals that, in the aggregate, meet or
exceed the 23 percent government-wide goal. SBA negotiates an annual
goal with each agency based on the overall amount of contracting in the
agency (contracting base) and the agency's past achievements.\6\ SBA
guidelines for setting individual agency goals specify that certain
types of federal spending should not be included in the contracting
base. These exclusions include items such as grants, purchases from
mandatory sources, or contracts for work done internationally for which
U.S. small businesses would not be competing. For fiscal year 2003,
excluding such items resulted in a DOE contracting base of about $21
billion subject to the small business prime contracting goal. As figure
1* shows, facility management contracts account for more than 80
percent of this amount.
---------------------------------------------------------------------------
\6\ Small Business Administration officials said that it is
important that the three largest federal contracting agencies--the
Department of Defense, the National Aeronautics and Space
Administration, and DOE--meet the 23 percent goal in order for the
government-wide goal to be achieved.
* Figures 1-3 have been retained in the committee files.
---------------------------------------------------------------------------
DOE's Small Business Office negotiates annual small business
contracting goals with SBA, coordinates outreach efforts with the small
business community, and works with NNSA and DOE's program offices to
establish and monitor annual goals for small business contracting.
DOE's Office of Procurement and Assistance Management and NNSA's Office
of Acquisition and Supply Management establish policies and guidance
for conducting procurements according to federal and departmental
regulations, and maintain the information systems on the department's
prime contracts, including annual dollars provided to each contract.
NNSA and DOE's program offices, such as EM and Science, are responsible
for identifying opportunities for small business contracting and
providing program oversight and direction to the contractors.
unprecedented levels of small business prime contracting necessary for
DOE TO MEET FUTURE GOALS
Since the 1999 federal policy change, DOE can no longer include
subcontracts of its facility management contractors when calculating
the department's small business prime contracting goals. As a result,
to achieve even its near-term small business prime contracting goals,
DOE will have to direct more prime contracting dollars to small
businesses than it ever has in the past. Further, meeting a long-term
goal of 23 percent small business prime contracting would represent an
achievement far beyond what DOE has ever reached--about 6 times the
$847 million that it directed to small businesses in fiscal year 2003.
Meeting Near-term Goals Requires More Small Business Prime Contracting
Dollars Than Previously Achieved
Now that DOE's facility management subcontracts can no longer be
counted toward achieving its small business prime contracting goals,
achieving its near-term goals for fiscal years 2004 and 2005, will
require DOE to expand the amount of prime contracting dollars it
provides directly to small businesses. The department has a goal of
directing to small business prime contracts 5.06 percent of its
contracting base in fiscal year 2004, and 5.50 percent of its
contracting base in fiscal year 2005. These goals surpass any of DOE's
small business prime contracting achievements prior to fiscal year
2004. As figure 2 shows, the percentage of prime contracting dollars
DOE directed to small businesses in any year since 1996 ranges from
2.68 percent to 3.99 percent. During 1991 through 1999, when DOE could
include in its achievements those dollars going to small business
subcontractors of facility management contractors, as well as dollars
going directly to small business prime contractors, DOE's reported
percentages of prime contracting dollars awarded to small businesses
ranged from 15.7 percent to 19.9 percent.\7\ However, most of the
reported achievements during those years came from facility management
subcontracting dollars going to small businesses. The remainder of the
reported achievements came from prime contracts to small businesses for
work not associated with facility management contracts.
---------------------------------------------------------------------------
\7\ See appendix I for information on DOE's prime and subcontract
dollars directed to small businesses between 1990 and 2003.
---------------------------------------------------------------------------
Meeting the small-business prime contracting goals in fiscal years
2004 and 2005 will require DOE to achieve a substantial increase over
the $847 million in prince contracting dollars that DOE provided
directly to small businesses in fiscal year 2003. To meet its fiscal
year 2004 goal, DOE will need to direct an additional $226 million, or
26.7 percent, over the 2003 amount. Meeting the department's 2005 goal
will require directing $319 million more than in 2003, an increase of
37.7 percent over 2003 levels.\8\
---------------------------------------------------------------------------
\8\ These estimates assume that the contracting base--or the amount
of contracting dollars used to calculate achievements--remains the same
for fiscal years 2004 and 2005 as it was in fiscal year 2003.
---------------------------------------------------------------------------
Meeting the Long-term Goal of 23 Percent Requires Huge Increases in
Small Business Prime Contracting
Although achieving DOE's near-term small business prime contracting
goals for fiscal years 2004 and 2005 will not be easy, the, long-term
goal of 23 percent would require an achievement far beyond what DOE has
accomplished in the past. SBA expects DOE to achieve a small business
prime contracting goal at least on par with the federal goal of 23
percent. DOE's response has been to formulate a plan for gradual
compliance. In 2002, DOE's Small Business Office submitted a plan to
SBA to. achieve the 23 percent goal in 20 years, by the year 2022.
According to this 20-year plan, DOE would increase its level of
small business prime contracting by about 1 percentage point per year
to achieve the 23 percent goal by 2022. To achieve this, goal, the
department would need to increase its small business prime contracting
to about $5 billion, or 6 times its 2003 achievement. Put in terms of
DOE's current contracting base, the additional amount of contracting
dollars necessary to achieve the 23 percent goal approximately equals
the combined annual budgets of the facility management contracts for
the two largest laboratories-Los Alamos and Sandia National
Laboratories.
Meeting the 23 percent goal under DOE's current contracting
approach means that a substantial portion of dollars now included in
facility management contracts would have to be redirected to small
business prime contracts, resulting in more prime contracts for DOE to
manage. Redirecting these dollars would be necessary because prime
contracts not associated with facility management, generally account
for less than 20 percent of DOE's total prime contract dollars.
Therefore, even if all the dollars not associated with facility
management contracts were directed to small businesses, the total
amount would be insufficient to meet the 23 percent small business
prime contracting goal.
DOE HAS NEAR-TERM PLANS BUT NO CONSISTENT STRATEGY FOR ACHIEVING LONG-
TERM SMALL BUSINESS CONTRACTING GOALS
Although DOE has an agreed upon organizational strategy to achieve
its near-term small business prime contracting goals, a consistent view
does not prevail within the department on whether or how to reach the
eventual goal of directing 23 percent of prime contracting dollars to
small businesses. To achieve the near-term goals of 5.06 of prime
contracting dollars to small businesses in fiscal year 2004, and 5.50
percent in fiscal year 2005, DOE has focused primarily on improving
outreach to the small business community, directing more of the dollars
not associated with facility management contracts toward small
businesses, and beginning to redirect selected facility management
contract activities to small business prime contracts. It is less
clear, however, how DOE intends to achieve the eventual long-term goal
of 23 percent small business prime contracting. DOE's Small Business
Office's 20-year plan calls for redirecting about 20 percent of
facility management contract dollars to small business prime contracts
but provides no details as to how NNSA and the program offices, such as
EM and Science, would implement the plan. Officials in these offices
have differing views as to how much of the work done by their facility
management contractors can be redirected to small businesses without
jeopardizing critical agency missions.
Near-Term Plans Focus Primarily on Increasing Awards of Non-Facility
Management Contracts to Small Businesses
DOE's plan for achieving its near-term small business prime
contracting goals focuses primarily on directing more of the dollars
not associated with facility management contracts to small businesses.
To increase the percentage of such dollars going to small businesses,
DOE has expanded its outreach to the small business community,
notifying small businesses of contracting opportunities and preparing
them to compete for these contracts. DOE's Small Business Office has
developed a variety of outreach and capacity-building activities
designed to assist small businesses in competing for DOE prime
contracts. For example, DOE's Small Business Office fosters mentor-
protege relationships between small businesses and DOE's large prime
contractors to help the small businesses expand their expertise. In
addition to these department-wide efforts, offices such as NNSA and EM
have also developed outreach activities, generally related to specific
prime contract opportunities (see table 1 for examples.)
Table 1.--EXAMPLES OF OUTREACH EFFORTS BY DOE'S SMALL BUSINESS OFFICE
AND PROGRAM OFFICES
------------------------------------------------------------------------
Approach Description
------------------------------------------------------------------------
Small Business Office efforts
------------------------------------------------------------------------
Marketing and outreach............ Educate and inform small businesses
about the contracting opportunities
at DOE.
Provide a listing of potential prime
and subcontracting opportunities
for the next 3 years. These
potential opportunities for small
businesses are organized by program
office or state and are posted on
the Small Business Office's Web
site.
Sponsor annual conferences,
workshops, procurement fairs, and
seminars for the small business
community.
------------------------------------------------------------------------
Mentor-protege relationship....... Foster long-term business
relationships between small
business entities and DOE prime
contractors in order to increase
the overall number of these small
business entities that can
successfully compete for DOE
contract and subcontract awards.
------------------------------------------------------------------------
Small business advisory team...... Established an advisory group
consisting of small business trade
associations, chambers of commerce,
and other federal agencies to
provide advice and guidance to the
Small Business Office on small
business programs and activities.
Purposes of the group include
identifying best practices and
exploring business models that
promote outreach and interaction
with the small business community.
------------------------------------------------------------------------
Program Office efforts
------------------------------------------------------------------------
Teaming workshops................. Sponsor meetings of small and large
businesses to discuss upcoming
requests for proposals to encourage
formation of teams that combine the
advantages of small and large
businesses, or combine the
different strengths of several
small businesses, for proposed new
prime contracts (NNSA and EM).
------------------------------------------------------------------------
Market research................... Conduct market research before
issuing a request for proposals for
a new contract not associated with
facility management to identify
whether small businesses exist with
capabilities in specific
performance areas (NNSA, EM, and
Science).
------------------------------------------------------------------------
Database of small businesses...... Build a database of interested small
businesses to identify highly
skilled small businesses that meet
program requirements (NNSA).
------------------------------------------------------------------------
Source: GAO analysis of DOE information.
In addition to its outreach efforts, DOE has taken steps in two
other major areas. First, it has established internal requirements that
it believes will help snake progress toward achieving its small
business prime contracting goals. These internal requirements were part
of a 14-item plan of action included in the 20-year plan. The plan of
action includes reviews of upcoming contracts to identify work
activities that could potentially be awarded to small businesses, and
regular monitoring of DOE program level and agency-wide achievements
toward DOE's annual goals. For example, each year DOE's Small Business
Office requires each program office to develop a small business plan
that reflects the program's goals for increasing prime contracts with
small businesses. These program plans arc used to develop DOE's overall
small business contracting goals, and DOE'S Small Business Office
tracks progress toward these goals quarterly. Second, DOE has modified
some of its procurement processes to eliminate certain barriers for
small businesses, such as bonding requirements, and to help small
businesses minimize the cost of developing proposals. For example, DOE
has limited the amount, of documentation that small businesses are
required to submit in response to a request for proposals to 50 pages
instead of volumes of supporting documentation.
To achieve the near-term small business prime contracting goals in
fiscal years 2004 and 2005, DOE is concentrating primarily on contracts
not associated with facility management, because doing so does not
involve significant changes in the way the department does business.
For contracts not associated with facility management, as new work is
identified or existing contracts come up for renewal, DOE sets them
aside for small businesses and awards them as small business prime
contracts whenever possible. For example, the information technology
support contract for DOE headquarters came up for renewal in, January
2002. DOE determined that this contract, which was held by a large
business, could be carried out by a small business. The new contract,
for a 5-year term with a total value of $409 million, was awarded in
January 2003, to a team that included a consortium of 10 small
businesses.
NNSA and the program offices have also focused primarily on
procurements not associated with their facility management contracts.
NNSA, EM, and Science officials issued policy letters stressing the
importance of directing contracts for activities not associated with
facility management to small businesses to the maximum extent possible.
For example, for any upcoming contract not associated with facility
management, program office personnel must first conduct market research
to determine if any small businesses are capable of performing all or
parts of the work and have the necessary qualifications to do so. If
the program office finds two small businesses capable of doing the
work, the policy requires the contract or parts of the contract to be
``set aside'' from unrestricted competition and instead generally be
made available for a more restricted competition among small
businesses. Any exceptions to this policy must be approved by the head
of the program office.
Although in the near term DOE is concentrating primarily on
contracts not associated with facility management, it has also begun to
look at certain facility management contracts as they come up for
renewal to identify potential work that could be made available to
small businesses. DOE's Offices of EM and Fossil Energy have identified
several specific activities that had been within a facility management
contractor's scope of work and have set those activities aside for
small business prime contracts. (See table 2 for examples.)
Table 2.--STATUS OF SELECTED PROCUREMENTS REDIRECTING FACILITY MANAGEMENT CONTRACT DOLLARS TO SMALL BUSINESS
PRIME CONTRACTS
----------------------------------------------------------------------------------------------------------------
Current facility
Program office/site Nature of work management Contract amount Status of
contractor procurement
----------------------------------------------------------------------------------------------------------------
Fossil Energy
----------------------------------------------------------------------------------------------------------------
Strategic Petroleum Reserve, Construction DynMcDermott...... $26.5 million for Contract awarded
Louisiana. management 2 years, plus November 2003
services. three 1-year
options.
----------------------------------------------------------------------------------------------------------------
Environmental Management
----------------------------------------------------------------------------------------------------------------
Fast Flux Test Facility......... Decontamination, Fluor Hanford..... $46.1 million per Request for
decommissioning, year, contract proposals closed
demolition, length not to March 2004
disposal of exceed 8 years.
reactor waste.
----------------------------------------------------------------------------------------------------------------
222-S Laboratory, Hanford, WA... Laboratory CH2M Hill......... $10 million per Request for
analysis of tank year for 5 years, proposals closed
waste samples. plus five March 2004
additional 1-year
options.
----------------------------------------------------------------------------------------------------------------
Portsmouth, OH.................. 1 contract for Bechtel Jacobs.... $273 million over Request for
environmental 5 years for proposals closed
remediation. remediation. March 2004
1 contract for $129 million over
infrastructure. 5 years for
infrastructure.
----------------------------------------------------------------------------------------------------------------
Paducah, KY..................... 1 contract for Bechtel Jacobs.... $377 million over Request for
environmental 5 years for proposals closed
remediation. remediation. March 2004
1 contract for $100 million over
infrastructure. 5 years for
infrastructure.
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of DOE information.
Of the examples shown in table 2, the procurement at the Strategic
Petroleum Reserve in Louisiana is the only one that DOE has completed
so far. According to DOE officials with the Office of Fossil Energy,
when the facility management contract was nearing the end of its term,
DOE's Small Business Office asked the program office to look for
opportunities for small business prime contracts. DOE officials at the
Strategic Petroleum Reserve said they identified a number of
construction projects that could be performed by small businesses, and
awarded several prime contracts to small businesses for this work. DOE
officials then decided to remove all the construction management work
from the facility management contract for the site so that a new small
business prime contractor for construction management could then award
and manage subcontracts for individual construction projects. According
to DOE's contracting officer at the Strategic Petroleum Reserve, having
the new prime contractor responsible for awarding and managing the
contracts will reduce the amount of additional work required by DOE
procurement and program personnel. The prime contract was awarded in
November 2003.
DOE's Small Business Office and Program Offices Have Different Views on
the
Extent to Which Facility Management Contract Dollars Can Be
Redirected to
Small Business
While DOE's Small Business Office and the three largest offices
have a consistent approach to their near-term goals--primarily focusing
on increasing small business prime contracting by using dollars not
associated with facility management contracts--a consistent view does
not prevail in the department on whether or how to achieve the eventual
goal of directing 23 percent of prime contracting dollars to small
businesses. DOE's Small Business Office's plan to achieve the long-term
small business prime contracting goals has two main components. The
first is to continue increasing the small business share of contract
dollars not associated with facility management contracts. For any new
contracts not associated with facility management, DOE has a stated
preference to set aside those contracts for small businesses where
possible. The three largest offices have been consistent in their
efforts to do so. However, even this portion of DOE's contracting base
(about 20 percent of total contract dollars) is not immediately
available for small business prime contracts. For example, many of the
contracts not associated with facility management cover multiple years,
so only a portion of these contracts are up for award or renewal in a
given year.\9\ In addition, some contracts for work not associated with
facility management may not be available for award to small businesses,
for example, if market research determines that there are not at least
two small businesses capable of performing all or parts of the work in
an upcoming procurement.
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\9\ Of the $3.4 billion in contracting dollars not associated with
facility management contracts in fiscal year 2003, only about $672
million, or 20 percent, was available to award as new contracts. The
remaining $2.7 billion was annual funding for existing contracts.
---------------------------------------------------------------------------
Because of the limited amount of contracting dollars for work not
associated with facility management, the second component of DOE's
Small Business Office's long-term plan is to redirect dollars now going
to facility management contracts to small business prime contracts.
DOE's 20-year plan calls for increasing dollars redirected from
facility management contracts to small business prime contracts from
less than 1 percent in 2003 to about 20 percent by 2022 (see figure 3).
Nevertheless, DOE does not have a consistent strategy in place to
accomplish its plan for redirecting dollars from its facility
management contracts to small business prime contracts. Officials in
NNSA, EM, and Science have considerably different views about the
feasibility of redirecting significant, amounts of funding from their
facility management contracts to small businesses. For example:
Both NNSA and Science officials are very concerned about the
implications of setting aside for small businesses significant
portions of the dollars now going to facility management
contractors that operate the weapons and research laboratories.
NNSA and Science officials' concerns stem from the large scale
of laboratory operations, the integrated nature of the mission
and mission support work, and the complexity and critical
importance of the laboratory missions. These officials said
that fragmenting mission activities among several contractors
at the research laboratories, whether the contractors were
large or small businesses, was inadvisable. Therefore,
according to NNSA's Director of Acquisition and Supply
Management and Science's Director of Grants and Contracts, NNSA
and Science may never achieve a 23 percent small business prime
contracting level because doing so would be inconsistent with
accomplishing their missions safely, securely, and effectively.
Despite the reluctance to fragment core mission activities,
NNSA and Science officials said they would explore
opportunities to contract separately with small businesses for
mission support functions at the laboratories if those mission
support functions were not closely integrated with the
laboratories' core missions.\10\ For example, NNSA is analyzing
its own purchases of goods and services, such as computer
hardware, software, and staffing services, as well as similar
purchases by its facility management contractors. NNSA is
assessing the feasibility of purchasing these items in bulk
under a prime contract, rather than multiple separate
contracts. An NNSA official said that NNSA is not trying to
increase its small business prime contracting numbers by
becoming a purchasing agent for its facility management
contractors, but rather combining similar requirements as a way
to possibly increase NNSA's level of prime contracting to small
business. On the basis of this analysis, NNSA is pursuing three
potential opportunities, valued at about $80 million, involving
technical services and services to provide temporary staff, and
is exploring other opportunities.
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\10\ Although the facility management contracts for the
laboratories distinguish between core mission work and mission support
functions, individual laboratories may differ from one another in the
extent to which a specific activity is regarded as an integral part of
accomplishing the mission. At some of DOE's laboratories, for example,
information technology provides a support function that could
potentially be separated from the facility management contract and
awarded to small business without jeopardizing the mission; such a
separation is being proposed at the Office of Science's Oak Ridge
National Laboratory in Tennessee. In contrast, NNSA officials have said
that information technology at NNSA's weapons laboratories represents
an integral part of simulated testing and certification of the nation's
nuclear weapons stockpile and cannot. be separated from the mission
work without jeopardizing the results.
---------------------------------------------------------------------------
By contrast, EM officials were more optimistic about the
potential role of small businesses in accomplishing its core
missions. The Assistant Secretary for EM said that part of its
initiative to accelerate the cleanup of DOE sites involves
greater use of alternatives to traditional facility management
contracts, including removing work from facility management
contracts and setting that work aside for small businesses. The
Assistant Secretary said that these small business procurements
are part of EM's overall strategy to clean up sites more
quickly and at a lower cost to the government, not just to
increase the amount of small business prime contracting.
EM is also developing a complex-wide contracting arrangement,
called indefinite delivery/indefinite quantity, which will
result in prime contracts with both large and small businesses
for smaller-scale cleanup activities. According to EM's
Director of Acquisition Management, the multiple contracts
awarded under this initiative will allow EM sites nationwide to
quickly purchase cleanup services from small and large
businesses without having to conduct a separate procurement,
which can take months to complete. Instead, either EM or the
facility management contractor will be able to simply write a
task order against these existing contracts.
Finally, it is unclear to what extent EM can expand its use of
small business prime contracts to accomplish its core missions.
According to the Assistant Secretary, the main constraint is
the ability of EM staff to effectively oversee those contracts,
not the availability of qualified small businesses to perform
the work. The Assistant Secretary said that EM is proceeding
carefully to ensure that effective management and oversight
will occur; that cost, schedule, and technical standards are
met; and that safety and security issues are adequately
addressed.
POTENTIAL BENEFITS AND RISKS OF INCREASED SMALL BUSINESS PRIME
CONTRACTING DEPEND ON THE GOAL THAT DOE TRIES TO ACHIEVE
Since DOE is in the early stages of implementing a long-term
strategy to redirect facility management contracting dollars to small
businesses, the implications of increased small business prime
contracting are still relatively uncertain. However, the implications
depend heavily on the extent to which DOE agrees, in its negotiations
with SBA, to meet. the 23 percent small business prime contracting
goal. Given the differences we heard in the approaches of the three
largest, offices, it is not, clear if DOE will commit to the
incremental increases that would eventually lead to a 2 percent rate of
prime contracting to small businesses, as detailed in the 20-year
schedule prepared by DOE's Small Business Office. Absent more specific
direction from Congress or the executive branch, DOE's eventual
commitment to a particular small business prime contracting goal
appears to rest heavily on whether the department will be willing to
change its approach to contracting for activities at the science and
weapons laboratories, its environmental cleanup work, or both.
Regardless of the extent to which DOE directs more prime contracting
dollars to small businesses, efforts to increase small business prime
contracting involve potential benefits as well as potential risks.
Potential Benefits of Increasing Small Business Prime Contracting
An overarching benefit of increasing small business prime
contracting is that DOE would be helping to carry out the President's
small business agenda and would be contributing to the federal
government's overall goal of directing 23 percent of prime contracting
dollars to small businesses. Beyond contributing to this overall
effort, DOE's Small Business Office and procurement officials explained
that the benefits included increased competition, greater innovation,
and enhanced small business capacity.
One example of increased competition can be seen in EM's program.
DOE's efforts to increase small business contracting have resulted in
new procurements with narrower scope. In the past, EM has been
concerned about the limited pool of potential contractors for large
cleanup projects, sometimes receiving only two proposals on
multibillion dollar procurements. By structuring the cleanup work into
smaller contracts and opening them to individual small businesses or
small business teams, EM expects to attract more potential bidders. One
of EM's current procurements is for cleanup work at the Fast Flux Test
Facility at the Hanford site in Washington state. Currently included in
a facility management contract, EM is in the process of redirecting
this work as a small business set-aside. EM officials said that in the
response to the request for proposals for this project, with an
estimated contract amount of $46 million per year for up to 8 years,
DOE received proposals from several small business teams. According to
EM officials, increased competition from a larger pool of potential
contractors could result in better prices for the government. However,
since the contracts for the current small business procurements have
not yet been awarded, it is too soon to tell whether better prices will
be realized.
In addition to increased competition, DOE procurement and program
office officials believe that small businesses may bring new ideas and
innovative approaches to the work. For example, as part of its
accelerated cleanup strategy, EM has been looking for better and faster
ways to accomplish cleanup at its sites and facilities. According to EM
officials, expanding the pool of potential contractors, for cleanup
projects may increase the potential for new technology and ideas.\11\
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\11\ To assist in the development of new technologies, EM as well
as other program offices with research and development programs provide
funding for two small business grant programs managed by the Office of
Science. The Small Business Innovation Research Program and the Small
Business Technology Transfer Program, with combined funding of more
than $100 million in fiscal year 2003, encourage the development of new
technologies, including those dealing with environmental cleanup.
---------------------------------------------------------------------------
Increasing small business prime contracting can also provide small
businesses with the experience necessary to compete for other federal
prime contracts. According to small business associations and advocacy
groups that we contacted, a direct contracting relationship with DOE
provides small businesses with more challenging work and better
opportunities to grow and expand their businesses. The use of mentor-
protege arrangements or teaming with other small or large businesses
also provides opportunities for growth and economic development. For
example, an owner of a small construction company in New Mexico told us
that his business had successfully teamed with a large construction
company for several projects and that his small company was now the
senior member of that team and was competing for DOE prime contracts.
Potential Risks of Increasing Small Business Prime Contracting
DOE's long-term strategy for achieving a 23-percent, small business
prime contracting goal includes redirecting a substantial amount of
facility management contract dollars to small business prime contracts.
DOE procurement and program officials acknowledge that doing so would
significantly increase the number of prime contracts DOE would have to
manage. Increasing DOE's number of prime contracts, whether these are
with small or large businesses, could create problems with integrating
and coordinating the efforts of more contractors at a site, as well as
create problems with contract management and oversight. In addition,
DOE's efforts to increase small business prime contracting could
inadvertently reduce the amount of small business subcontracting
directed to local and regional small businesses.
Increasing the number of prime contracts at a site raises concerns
about integration, coordination, and accountability. If a facility
management contractor has primary responsibility for accomplishing work
at the site, that contractor is also accountable for integrating the
efforts of multiple subcontractors to ensure that the mission work is
accomplished. In addition, the facility management contractor has the
responsibility for ensuring that all contractor and subcontractor
employees at the site comply with DOE safety and security standards. If
the work done by the facility management contractor becomes fragmented
and spread among multiple prime contracts, DOE may need to carry out
these integration functions, which places more oversight
responsibilities on federal program and project management personnel.
If the number of prime contractors at a site increases significantly,
the challenges associated with integrating and coordinating the
activities also increase. Both DOE and facility management contractor
officials have expressed concerns about successfully integrating and
coordinating the efforts of an increased number of prime contractors at
a site. Ensuring that all work is performed in accordance with DOE
safety and security standards is a significant concern, especially
given the continuing challenges that the department faces in these two
areas.\12\
---------------------------------------------------------------------------
\12\ For information on safety and security challenges, see U.S.
General Accounting Office, Major Management Challenges and Program
Risks: Department of Energy, GAO-03-100 (Washington, D.C.: Jan. 2003);
Department of Energy, Management Challenges at the Department of
Energy, DOE/IG-0626 (Washington, D.C.: Nov. 12, 2003); U.S. General
Accounting Office, Department of Energy: Mission Support Challenges
Remain at Los Alamos and Lawrence Livermore National Laboratories, GAO-
04-370 (Washington, D.C.: Feb. 27, 2004); and U.S. General Accounting
Office, Nuclear Security: DOE Must Address Significant Issues to Meet
the Requirements of the New Design Basis Threat, GAO-04-701T
(Washington, D.C.: Apr. 27, 2004).
---------------------------------------------------------------------------
To begin to address the constraint of having a limited number of
federal employees to perform coordination and integration functions,
DOE is considering awarding small business prime contracts but then
having the facility management contractors at the sites manage and
oversee the work. As some facility management contracts are extended or
awarded, DOE includes a provision that specifically allows the
department to identify and redirect work within the facility management
contract to a small business prime contract. The provision also allows
DOE to request the facility management contractor to manage and oversee
the work. Since the work that DOE would redirect is generally already
being done by a facility management subcontractor, the only actual
change is the contractual relationship. In fiscal year 2003, NNSA
started using this arrangement for facilities and infrastructure
restoration projects at the Sandia National Laboratory in New Mexico.
NNSA awarded prime contracts--$100,000 in fiscal year 2003 and an
estimated $3 million in fiscal year 2004)--to small businesses for some
of these projects. Although it is too soon to fully assess the
implications of thus arrangement, facility management contractor
officials at the Sandia laboratory, have expressed concern that it
could confuse the lines of authority and accountability at the site,
because the contractual relationship is not consistent with the daily
management and oversight of the activities being performed. In prior
work, we have also expressed concerns about confusing the lines of
authority, which can make it difficult to hold contractors accountable
for performance.\13\
---------------------------------------------------------------------------
\13\ U.S. General Accounting Office, Department of Energy:
Fundamental Reassessment Needed to Address Major Mission, Structure,
and Accountability Problems, GAO-02-51 (Washington, D.C.: Dec. 21,
2001).
---------------------------------------------------------------------------
Regarding contract management, and oversight, increasing the number
of prime contracts with DOE could place further strain on DOE's
procurement and program oversight personnel. DOE's reliance on
contractors to operate its facilities and early out its missions,
coupled with the department's history of inadequate contractor
management and oversight, led us in 1990 to designate DOE contract
management, as a high-risk area vulnerable to fraud, waste, abuse, and
mismanagement. This high-risk designation is still in effect. GAO and
others have stated that one of the contributing factors to DOE's
inadequate oversight of its contractors has been a shortage of
personnel with the right skills to perform these functions.
Although DOE has over the past several years made progress in
training and certifying its procurement and project management
personnel, DOE procurement and program officials said that the overall
number of available personnel has not grown, and has significantly
decreased in NNSA. More prime contracts would create additional work
for federal employees in two phases: managing the procurement process
by requesting and evaluating proposals to award a contract, and
overseeing the work of the contractor to ensure that performance is
acceptable. DOE officials at headquarters and at the sites we visited
expressed concerns that significantly increasing the number of prime
contracts could reduce the ability to adequately oversee and evaluate
contractor performance.
While headquarters and site office officials in the EM program
acknowledge the potential risks that additional prime contracts can
create in both integrating work activities at a site and contract
management and oversight, they are pursuing ways to mitigate those
risks. To address concerns about site-wide integration of safety and
security, DOE officials at Hanford plan to use contract language and
incentives to encourage the site's new small business prime contractors
and the facility management contractors to work together. To earn
potential incentive fees under this proposed arrangement, for example,
all prime contractors will have to cooperate in such areas as safety
and security. But, since these are new approaches and the small
business prime contracts have yet to be awarded, the extent to which
these steps will mitigate the potential risks is unknown. To lessen the
impact of additional prime contracts on procurement and program
personnel, EM officials said they intend to use a contract for small
business procurements that has a well-defined statement of work and
that ties incentive fees to accomplishing the contract's stated final'
goal rather than to interim steps. According to EM's Director of
Acquisition Management, administering such contracts generally may
require less federal involvement, although EM will also have to train
its staff on the most effective way to manage these contracts.
In addition to the potential risks discussed above, DOE and
contractor officials, as well as representatives of small business
advocacy groups, raised concerns about DOE's efforts to increase small
business prime contracting. One concern expressed was that such efforts
could inadvertently result in less total contracting dollars directed
to the small business community. Procurement regulations require that
all facility management contractors have a small business
subcontracting plan and facility management contractors must generally
negotiate annual small business subcontracting goals with the
department. However, if work is removed from a facility management
contract, the facility management contractor may negotiate lower
subcontracting goals with the department and then subcontract less of
the remaining work to small businesses. Since the efforts to redirect
facility management contract dollars to small businesses is in its
early stages, no data are yet available to validate this concern.
A related concern is that if DOE removes work from a facility
management contract and sets that work aside for a small business
procurement, there may be fewer contracting dollars available to local
and regional small businesses. This could occur because DOE's facility
management contractors generally are not required to follow federal
regulations in their procurements, but instead comply with ``best
business practices.'' In doing so, a facility management contractor can
restrict a competition for its subcontracts to the local small business
community. In contrast, DOE must generally open up its procurements to
nationwide competition, which may result in fewer contracts going to
local and regional small businesses. Again, no data are yet available
to validate this concern.
Finally, representatives of some small business advocacy groups
told us that some small businesses would rather have a subcontract with
a facility management contractor than a prime contract with DOE. This
is because facility management contractors generally have fewer
administrative requirements and a less burdensome and faster
procurement process.
It is not clear to what extent these potential risks will affect
DOE's ability to carry out its missions in a safe, secure, and
effective manner. The impact on DOE's missions of increasing small
business prime contracts will depend both on the total number of new
prime contracts awarded and on how well the department manages the
contractors and the work. The stakes are high as DOE attempts to
contribute to the federal. government's goal of increasing the prime
contracting dollars directed to the small business community, while
striving to accomplish its missions efficiently and effectively.
This concludes my testimony. I would be pleased to respond to any
questions that you may have.
CONTACTS AND ACKNOWLEDGMENTS
For further information on this testimony, please contact Ms. Robin
Nazzaro at (202) 512-3841. Individuals making key contributions to this
testimony included Carole Blackwell, Ellen W. Chu, Matt Coco, Doreen
Feldman, Jeff Rueckhaus, Stan Stenersen, and Bill Swick.
______
Appendix I.--Department of Energy (DOE) Contract Dollars Directed to Small Businesses, Fiscal Years 1990-2003
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
Contract type 1990 1991 1992 1993 1994
----------------------------------------------------------------------------------------------------------------
Contracting base\1\............................ $17,095.8 $18,628.6 $18,852.2 $18,392.5 $18,826.3
Facility management.......................... 13,790.2 15,592.5 15,798.2 14,970.0 15,788.0
All other prime contracts.................... 3,305.5 3,036.1 3,054.0 3,422.5 3,038.3
Contracts to small businesses.................. 3,047.2 3,211.8 3,162.3 3,578.8 3,616.2
Small business prime contracts............... 500.9 529.8 578.8 512.7 508.1
Small business subcontracts awarded by prime 2,546.3 2,682.0 2,583.5 3,066.1 3,108.2
contractors.................................
Small business subcontracts awarded by 2,402.4 2,464.0 2,374.8 2,772.3 2,795.6
facility management contractors...........
Small business subcontracts awarded by all 144.0 217.9 208.7 293.9 312.5
other prime contractors...................
Small and large business subcontracts awarded 5,617.8 6,300.1 5,653.5 6,458.5 6,347.3
by prime contracts............................
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Small business prime contracts\2\ \3\.......... 2.93 2.84 3.07 2.79 2.70
Small business prime contracts and facility N/A 16.07 15.67 17.86 17.55
management subcontracts\2\ \4\................
Small business prime and subcontracts\2\ \5\... 17.82 17.24 16.77 19.46 19.21
Small business subcontracts\2\ \6\............. 45.33 42.57 45.70 47.47 48.97
----------------------------------------------------------------------------------------------------------------
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
Contract type 1995 1996 1997 1998 1999
----------------------------------------------------------------------------------------------------------------
Contracting base\1\............................ $17,177.4 $16,213.2 $15,844.0 $15,117.5 $15,483.8
Facility management.......................... 14,240.1 13,127.7 13,844.4 13,266.6 13,487.8
All other prime contracts.................... 2,937.3 3,085.5 1,999.6 1,890.9 1,995.9
Contracts to small businesses.................. 3,441.8 3,001.1 3,173.4 3,033.5 3,225.3
Small business prime contracts............... 484.5 434.9 460.9 442.6 472.9
Small business subcontracts awarded by prime 2,957.3 2,566.2 2,712.5 2,591.0 2,752.4
contractors.................................
Small business subcontracts awarded by 2,699.3 2,328.1 2,156.7 2,037.3 2,608.7
facility management contractors...........
Small business subcontracts awarded by all 258.0 238.1 555.8 553.6 143.7
other prime contractors...................
Small and large business subcontracts awarded 5,870.3 5,055.1 5,223.4 5,684.5 5,547.1
by prime contracts............................
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Small business prime contracts\2\ \3\.......... 2.82 2.68 2.91 2.93 3.05
Small business prime contracts and facility 18.53 17.04 16.52 16.40 19.90
management subcontracts\2\ \4\................
Small business prime and subcontracts\2\ \5\... 20.04 18.51 20.03 20.07 20.83
Small business subcontracts\2\ \6\............. 50.38 50.76 51.93 45.58 49.62
----------------------------------------------------------------------------------------------------------------
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
Contract type 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Contracting base\1\......................................... $17,067.9 $18,551.2 $19,170.9 $21,210.0
Facility management....................................... 14,079.1 14,756.4 15,671.7 18,189.1
All other prime contracts................................. 2,988.8 3,794.7 3,499.2 3,020.9
Contracts to small businesses............................... 2,805.1 3,539.9 4,241.9 4,382.2
Small business prime contracts............................ 486.8 509.5 555.7 847.2
Small business subcontracts awarded by prime contractors.. 2,318.3 3,030.4 3,686.2 3,535.0
Small business subcontracts awarded by facility \7\ N/A \7\ N/A \7\ N/A \7\ N/A
management contractors.................................
Small business subcontracts awarded by all other prime \7\ N/A \7\ N/A \7\ N/A \7\ N/A
contractors............................................
Small and large business subcontracts awarded by prime 4,826.4 6,409.3 7,548.6 7,349.0
contracts..................................................
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Small business prime contracts\2\ \3\....................... 2.85 2.75 2.90 3.99
Small business prime contracts and facility management N/A N/A N/A N/A
subcontracts\2\ \4\........................................
Small business prime and subcontracts\2\ \5\................ 16.44 19.08 22.13 20.66
Small business subcontracts\2\ \6\.......................... 48.03 47.28 48.83 48.10
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of DOE data.
Note: Dollars in the table are expressed in current-year (unadjusted) dollars and include DOE prime contracts
valued at $25,000 or more that are tracked in DOE data systems. Prime contracts awarded by another federal
agency but funded by DOE are excluded from the table. Subcontract dollars are included only for contractors
who are required to report on their small business subcontracting activities.
\1\ DOE's contracting base includes dollars that can potentially be directed to U.S. small businesses,
excluding, under Small Business Administration (SBA) guidelines, dollars that cannot go to small business
prime contracts, such as grants and purchases from mandatory or foreign sources.
\2\ As a percentage of all subcontracts.
\3\ We calculated the percentage of DOE's contract dollars going to small business prime contracts by dividing
small business prime contract dollars (row 5) by the contracting base (row 1).
\4\ For fiscal years 1991 through 1999, DOE's annual small business prime contracting achievements, as reported
to SBA; included DOE subcontracts awarded to small businesses by its facility management contractors, as well
as prime contracts awarded directly to small businesses. To calculate small business prime contracting
achievements for these 9 years, we therefore added rows 5 and 7 and divided the sum by row 1. We did not do
this calculation for fiscal years 1990 and 2000 through 2003 because small business subcontracts from facility
management contractors did not ``count'' in those years toward small business achievement percentages.
\5\ We calculated the overall percentage of DOE's contract dollars going to small businesses-via both prime
contracts and subcontracts-by dividing DOE's contract dollars to small businesses (row 4) by the contracting
base (row 1).
\6\ We calculated the percentage of total subcontracting dollars going to small business by dividing small
business subcontract dollars from prime contractors (row 6) by total subcontract dollars going to small and
large businesses (row 9).
\7\ For fiscal years 2000 through 2003, DOE did not account separately for subcontract dollars going to small
businesses from facility management prime contractors versus those from all of its other prime contractors.
The Chairman. Dr. Woodard, from Sandia, good to have you
here. Will you make your testimony as brief as possible and
we'll put it in the record.
STATEMENT OF DR. JOAN B. WOODARD, EXECUTIVE VICE PRESIDENT AND
DEPUTY DIRECTOR, SANDIA NATIONAL LABORATORIES
Dr. Woodard. Thank you, Mr. Chairman.
Sandia, as you know, is a multi-program national laboratory
operated by Sandia Corporation, a wholly owned subsidiary of
Lockheed-Martin for the Department of Energy.
We at Sandia care very strongly about our small business
relationships and small business suppliers. They are vital to
our ability to achieve, and to deliver on our daily mission.
Sandia has an excellent track record in the small business
contracting area. We are pro-active with our small business
suppliers, and our small business development programs offer
mentoring, business training, and technical as well as business
assistance to the small businesses.
We usually meet, or exceed, the annual small business goals
that the Department has set for us. In fact in fiscal year 2003
we awarded $459 million dollars to small businesses, which was
53 percent of our total procurement commitment.
Every year Sandia places well over 50 percent of the
procurement dollars with small business----
The Chairman. What percent? Well over?
Dr. Woodard. Well over 50 percent. The new policy guidance
that prevents the Department from including subcontracts placed
by management and operating contractors in the Department's
small business performance totals presents many difficulties.
The national leadership--I'm sorry, the National Laboratory
Improvement Council, which represents all 16 DOE laboratories,
communicated these difficulties and concerns in a letter to the
Department in the year 2002, which is attached to my written
statement.
The Chairman. Dr. Woodard, excuse me for interrupting. The
whole issue we're arguing about is brought right in focus when
you testify about how much you're doing, because you are the
contractor doing it rather than the DOE doing it. You can do a
lot more because you're doing it.
But I want to ask you when you get as high as you are, and
I have no reason to know what the answer to this is except it
seems prudent that you wouldn't do it if it hurt, but are you
sure that--can you assure us that by offering such a large
percentage of subcontracts that your major goals, objectives,
and work load is in no way diminished or put upon by this large
percentage of small business? Do you do your job as well in
your opinion?
Dr. Woodard. Absolutely.
The Chairman. So this is not a detriment to go as high as
you are?
Dr. Woodard. No, it is not.
The Chairman. The second point seems to me that what's
wrong with the DOE's approach is not present in New Mexico or
other laboratories like Sandia, and that is how can the
subcontractor get in touch with entity its contracting with.
I think one of the shortcomings of DOE's approach is that
those subcontractors have to work with DOE when they have
problems. I would guess that that's a lot more difficult, a lot
less responsive, than if they work for you right in the same
city, they're right there for the most part in the same state.
Do you have an opinion on that?
Dr. Woodard. Yes, Mr. Chairman, we have found that for
small businesses that one tool that we offer, which is one-on-
one orientation to procurement process is very beneficial. And
so, again imagining that if you're doing that as the Department
of Energy nationwide it's very difficult to reach out and touch
day to day, everyday, the small business suppliers with these
one-on-one orientations and other assistance that we provide.
The Chairman. Now in New Mexico, and I assume in other
States, it's just that I'm not as familiar with it, it would
seem to me that there are certain subcontractors that qualify
that get very big. So, you know, we have subcontractors that
are little, and we have subcontractors that are very big. I
would assume that the subcontractors that are very big--I won't
mention them, but you know one in Albuquerque, they have a
building with their name on it, pretty successful--I would
assume they would like the DOE policy instead of yours; is that
correct? Big versus little?
Dr. Woodard. Let's see, I can't predict how they would do
that.
The Chairman. I don't blame you for not doing it if you
knew, I would think you shouldn't know.
[Laughter.]
The Chairman. But I think I know. If I were they I would--
the big ones--I would like to work with Washington; if I were
the little small ones or minorities or women's I would like
very much to work with you.
Would you proceed? I think I've made my point, so if you
would kind of hurry, it would be good.
Dr. Woodard. I will do that.
In my view there are three principle concerns. The new
policy creates a misleading measure of the total DOE true small
business performance.
Second, it is not clear that the new policy truly serves
the best interests of small business.
And three, DOE's plan to place directly contracts and then
to rotate or transfer those contracts back to the M&O is
problematic and creates concerns with regards to
accountability.
In general we believe that the DOE cannot dramatically
increase its small business contracts in its current
established business model, that in fact in order to meet the
total goal of 23 percent it will require breaking apart the M&O
contracts into smaller contractual units.
This is similar to if you were to build a house and assume
subcontractors would be directly contracting to you rather than
to a general contractor, and then asking that general
contractor to manage and integrate it all. It is not something
that many general contractors would step up to.
What is the solution? A course that we would prefer is to
in fact reinstate the earlier policy guidance that allows the
Department to include M&O contractors, small business
subcontract totals, in the Department's total. And if that is
not possible an exception should be made to the federally
funded research and development centers because the FFRDCs have
a special relationship to the government that is recognized----
The Chairman. What is FFRDCs?
Dr. Woodard. Federally funded research and development
centers.
The Chairman. I just came from a breakfast with the
military talking about Iraq, and we were trying to get the
Judge Advocate and the Generals to talk so we could understand.
And about every 5 minutes the Secretary of Defense would remind
somebody what they just said and ask them if they could just
please try very hard. And it's amazing, for about 5 minutes
they could do it, and then during the 6th minute they'd go back
to acronyms that we didn't understand.
So I'm sorry I had to ask you, but frankly----
Dr. Woodard. I apologize for my use of an acronym, an
abbreviation.
Because the FFRDC, the federally funded research and
development centers, have a special relationship with
government perhaps an exception could be made to include their
contracting, their subcontracts in the totals for all agencies.
Thank you, that concludes my remarks.
The Chairman. Thank you, your suggestions and analysis are
very good.
[The prepared statement of Dr. Woodard follows:]
Prepared Statement of Dr. Joan B. Woodard, Executive Vice President and
Deputy Director, Sandia National Laboratories
INTRODUCTION
Mr. Chairman and distinguished members of the committee, thank you
for the opportunity to testify. I am Joan Woodard, Executive Vice
President and Deputy Director of Sandia National Laboratories. Sandia
is a multiprogram national security laboratory managed and operated for
the National Nuclear Security Administration (NNSA) of the U.S.
Department of Energy (DOE) by Sandia Corporation, a subsidiary of the
Lockheed Martin Corporation.
The purpose of this hearing is to evaluate the implications of the
policy prohibiting DOE from including in the Department's small
business performance totals subcontracts placed by its Management and
Operating (M&O) contractors. This new policy reverses previous policy
articulated by the Office of Federal Procurement Policy (OFPP) in 1991.
In my view, the new policy results in a misleading representation of
DOE's true small business performance. I am also concerned that it has
the potential to negatively impact institutional management and mission
performance at DOE's Federally Funded Research and Development Centers
(FFRDCs).
We at Sandia National Laboratories care very strongly about the
small business community. They are vital partners in achieving our DOE
missions. Many of our small business suppliers are locally based and
contribute significantly to the economic well-being of our region. We
have been very innovative with programs to optimize their contracting
opportunities. And we do not believe the new policy truly serves the
interests of small businesses.
SMALL BUSINESS CONTRACTING AT SANDIA
Sandia National Laboratories has an excellent track record in small
business contracting. We are proactive in cultivating small suppliers.
We don't passively wait for small businesses to come to us. Our
supplier development programs offer mentoring, business training, and
technical as well as business assistance. Many of our executives and
procurement professionals are active in the small business community.
We seek out small, small disadvantaged, women-owned, HUB zone, veteran-
owned, and service-disabled veteran-owned suppliers to compete for our
contracts. Consequently, our small business programs yield good
results. (Sandia's small business programs and initiatives are
described in detail in Appendix A.)*
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* Appendixes A and B have been retained in the committee files.
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As required by law, Sandia National Laboratories' management and
operating contract includes a small business subcontracting plan.
Socioeconomic subcontracting goals are negotiated annually with NNSA/
DOE and become part of our M&O contract. DOE evaluates our actual
performance against those goals in its annual assessments of Sandia's
performance.
We usually meet or exceed the annual small business goals that DOE
sets for us. In fiscal year 2003 we awarded $459 million to small
businesses in 94,000 procurement actions--53 percent of our total
commitments of $866 million. We awarded $89 million to small
disadvantaged businesses, topping the goal at 10.2 percent of our
procurement budget. Women-owned commitments were $69 million or 7.9
percent, and in fiscal year 2004 we are on track to hit 10 percent.
Bottom line: every year, Sandia National Laboratories places well over
50 percent of its procurement dollars with small businesses.
IMPACT OF THE POLICY CHANGE
By excluding Sandia's excellent small business results (and those
of other M&O contractors), DOE's true small business performance is
grossly understated. In 1999, prior to the policy change, DOE met its
Small Business Administration (SBA) goal of 16.7 percent with 18
percent small-business participation. In 2000, when the change was
implemented, the figure dropped to around 3 percent. Although SBA
adjusted DOE's goal downward to 5 percent, DOE is now well short of its
target. And it is now in the unfair position of having to meet a goal
that is based on a percentage of the total value of its prime contracts
without being able to include the small business portion of all its
prime contracts.
Is this what the law intended? The language of 15 U.S.C. 644(g)
states that the ``goal for participation by small business concerns
shall be established at not less than 23 percent of the total value of
all prime contract awards for each fiscal year.'' Subcontracts do
indeed constitute ``participation by small business'' in the prime
contracts with which they are associated. You don't have to be the
prime contractor to participate in a prime contract. However, SBA's
interpretation of the statute is that only contracts awarded directly
by the agency may be counted toward the agency's assigned goal.
In order to comply with this policy, DOE is compelled to take small
business contracts that in the past would normally be placed by the M&O
contractors and award them directly from the agency. The plan is that
DOE will novate or assign the contracts back to the M&O contractors to
administer after they are signed.
The National Laboratories Improvement Council (NLIC)--a forum of
the sixteen DOE FFRDCs created to promote ``laboratory management
excellence for the U.S. Department of Energy''--raised objections to
this plan in 2002 in a letter to DOE's chief financial officer
[Appendix B]. NLIC identified several ``serious contract management and
operational problems'' with the novation concept, which I will
paraphrase:
Will the vendor's performance (good or bad) be imputed to
the M&O contractor in DOE's assessment process?
Will the M&O contractor be forced to bear the costs for
vendor claims and liabilities?
Can the M&O contractor (a private entity) administer
contracts that use federal teens and conditions in novated
contracts as opposed to industrial standard terms and
conditions?
Will the M&O contractor have the authority to execute
contract modifications and extensions, and if so, will the
socioeconomic credit accrue to DOE or to the M&O?
Will the M&O contractor be exposed to liability, fines,
penalties, etc. for work done under permits, regulatory
notices, and orders (including Price-Anderson) by the vendor?
In addition to these contract management issues identified by NLIC,
we are also concerned that the new policy may negatively impact mission
performance. One concern is timeliness: Federal agency procurements
take much longer to place. Mission performance may be delayed by the
longer procurement cycle. The M&Os' industrial/commercial terms and
conditions (as augmented by required flow-down clauses) permit faster
placement. Disputes and protests that can delay or stop a program are
handled more expeditiously as well.
Another concern is control over requirements: The M&O will have
less say in the formulation of the contract's scope of work and less
flexibility to adjust the scope of work to changing needs.
Consequently, the negotiated contract may not be, fully responsive to
mission requirements.
My biggest concern with the new policy is that it destroys the
chain of accountability for facility management performance. You can't
fairly hold the prime contractor accountable for the overall management
and operation of a facility--including security, safety, health, and
environmental compliance--when it does not have the hire-and-fire
authority over the subcontractors at the site. If we can't choose our
vendors, we can't be confident that we can control them.
Here's an analogy that illustrates the problem this situation
presents: If you were having a house built, you would almost certainly
work through a general contractor who would hire the subs, integrate
the work, resolve any difficulties along the way, and achieve the
result you envision. You would not presume to hire the subcontractors
yourself and then turn them over to him to supervise: Most general
contractors would not accept such an arrangement because it would
saddle them with accountability without control.
At Sandia, we have already seen problems emerge with implementation
of the new policy. Two of our procurements were transferred to DOE so
that they could get the benefit of the small business credit. This
created confusion with the contractors over whom they were really
working for and who was defining the deliverables.
Another contract posing difficulties involves the design of a water
system at Sandia National Laboratories' Tonopah Test Range in Nevada
under DOE's initiative to place Facilities and Infrastructure
Revitalization Project (FIRP) contracts. We provided the technical
requirements to DOE, and DOE negotiated the procurement. It took longer
to place than we would expect for a contract of that size and type. DOE
has not novated the contract to us, and we are not sure that they
intend to do so. Decisions are being made by DOE administrators rather
than our own facility engineers, who would normally work closely with
the Sandia procurement officer. DOE management of a construction
contract on assets under the management of the M&O creates authority
and accountability confusion with regard to environment, safety,
health, and security issues as well as performance and acceptance.
MEASURING TRUE SMALL BUSINESS PARTICIPATION
There is a major flaw in the contract-and-novate plan that falls
into the ``emperor's new clothes'' category: It is likely to be a zero-
sum game. When DOE awards a small-business contract that previously
would have been awarded to a small business anyway (by the M&O
contractor), there is no net gain for small businesses. Unless DOE is
able to convert a good portion of the M&O's large-business subcontracts
into small-business prime contracts, there will be little net gain for
the small business community. I doubt that there is much potential for
this, because the M&O contractors are already trying to maximize their
small business awards. Indeed, local and regional small businesses may
actually lose contracts because federal agencies are required to
conduct competitions on a nationwide scale. An existing supplier based
in New Mexico or a neighboring state could lose out to a small business
based thousands of miles away.
If the real goal is to increase small business's share of
contracting in DOE programs, then approaches other than the contract-
and-novate stratagem must be developed. We strongly support the federal
government's policy to optimize small business participation in federal
contracts. Elements of Sandia's outreach programs described in Appendix
A of this statement could be applied at other DOE locations, and even
by the agency itself, to increase small business participation across
the board. There is no reason the M&O contractors and the Department
can't work together to make true net gains for the small business
community, and in fact we are doing so.
But how will DOE know that it is making progress? A fundamental
management principle is that you must have valid metrics to know how
well you are doing. Unfortunately, we know that the new metric is a
misleading representation of small business participation. The small
business rate reported to SBA can rise without a real increase in net
small business contracting.
One alternative measure would be the total value of contracts
awarded to small businesses by DOE, the prime contractors, and
subcontractors. This would be a much more meaningful indicator. It
would show the volume of business actually received by small business
elements, not just the prime contract component. The difficulty with
this alternative is that the data get harder to collect the further
down the chain you go. Consequently, DOE would have to develop a better
data collection system and a reliable small business contract
information system.
Another alternative measure would be the use of econometric models
that quantify the economic impact of prime contract dollars in a given
geographical region. These models generally determine a multiplier that
can be applied to the prime contract value to yield the total economic
impact to the region. These models are somewhat complicated, due to the
multiplier differences in payroll dollars and dollars spent on
materials and other subcontracts, but they do provide a very direct
measure of the economic value to the communities in which DOE
operations reside. Several M&O contractors utilize these models
currently and periodically publish official reports.
An alternative measurement system for small business contracting
performance could be offered in parallel with the SBA-reported figure
as a means to offer a more accurate representation of small business
contracting performance for those who may be interested in that
information.
GOCO CONTRACT MODEL IN JEOPARDY
The new policy has the potential to weaken or even destroy the
Government-Owned, Contractor-Operated (GOCO) contracting model that has
been used by DOE and its predecessors for more than 50 years. There is
no mathematically possible way for DOE to meet the 23 percent target of
15 U.S.C. 644(g) without breaking the facility M&O contracts into
smaller pieces. Although the fiscal year 2004 goal for DOE is only 5.06
percent, we believe the intent is to make progress toward the 23
percent government-wide goal every year. DOE cannot approach the 23
percent target with its established business model.
If DOE ultimately breaks apart some or all of its facility M&O
contracts, it will have to assume the integrating role now performed by
the M&O contractors. It is hard to imagine that a reputable industrial
corporation or academic institution would accept the risk and
responsibility for managing and operating a facility as a whole when it
does not have general procurement authority for the goods and services
required for that mission. Returning to my analogy of building a house,
it would be as if you had to act as your own general contractor. Most
homeowners don't have the requisite knowledge of the building trades or
the management skills to do this successfully. Similarly, DOE does not
have the in-house technical and managerial expertise to run high-
technology multiprogram laboratories on its own. Realizing this, DOE's
predecessors wisely chose to contract for those responsibilities from
among the nation's leading industrial firms and research universities.
I suppose it would be possible for DOE to take the existing M&O
contracts for its FFRDCs and evolve them over time into suites of
smaller contracts awarded to unrelated entities, many of which would be
small businesses. But by doing so, it would destroy the existing
accountability structure. What will happen if there is a security
incident, or a safety problem, or misuse of government property, or an
environmental violation? Will DOE be able to hold anyone accountable,
or will the contractors trade accusations of blame? And more
importantly, who is going to develop the corporate policies and apply
the corporate discipline across the facility to prevent such incidents
from happening in the first place? DOE nuclear facilities are being
held to a much more rigorous Design Basis Threat (DBT) than they were
in the past. You need a single responsible and accountable contractor
with general authority if you want to address the DBT and other
security, safety, and environmental issues effectively.
The scenario I have outlined here is not so far-fetched as it might
sound. In fact, DOE is actively encouraging its program offices to
break out requirements from existing facility management contracts to
provide small-business prime contracting opportunities for the
Department. DOE has even created an annual ``Small Business Breakout
Award'' which it presents to the program office that pursues this most
aggressively.
RECOMMENDATIONS
My statement has described several troubling implications and
concerns regarding the new policy and its potential impact, many of
which I share with the managements of other DOE facilities as
represented through the National Laboratories Improvement Council
(NLIC). How to resolve these concerns is primarily a question for
Congress to decide; I offer the following recommendations for
consideration.
The National Laboratories Improvement Council (NLIC) urged
reinstatement of the earlier OFPP policy that allowed M&O
contractors' small business subcontracts to count toward the
Department's goal. We regard this recommendation as the
preferred solution.
If reinstatement of the earlier policy is denied, the
Department of Energy should develop an alternative measure of
small business contracting participation, based on a full
accounting of small business contracts and subcontracts, or on
an economic analysis of regional economic impact, or some other
legitimate method, to be published as supplementary
information.
DOE and its M&O contractors should continue to work together
to increase small business participation at all levels of
contracting through small business development and outreach
programs deployed throughout all Department elements.
the Federal Acquisition Regulations (Part 35.017) recognize
that Federally Funded Research and Development Centers (FFRDCs)
have a ``special relationship to the Government'' and enjoy
``access, beyond that which is common to the normal contractual
relationship, to Government and supplier data'' and to other
resources of the sponsoring agency. Consequently, ``the FFRDC
is required to conduct its business in a manner befitting its
special relationship with the Government.'' Because FFRDCs have
a unique, close, and long-term relationship with a federal
agency, it would seem appropriate to include their small
business contracting results with those of the sponsoring
agency. FFRDCs are a unique and very limited class; thus, any
exception to the new policy for them would not apply to M&O
contractors generally.
Alternatively, excluding FFRDCs from federal agencies'
procurement baselines, as the Small Business Administration
allowed NASA to do with its Jet Propulsion Laboratory prior to
1998, would also solve the problem. This would have the effect
of removing FFRDC management contracts from the denominator
when calculating an agency's small business prime contracting
rate.
Mr. Chairman, this concludes my statement.
The Chairman. Ann Sullivan. Let me ask you, I note what
your title is, but does that mean that you are and advocate for
women's businesses and contracting?
Ms. Sullivan. Yes, I represent Women Impacting Public
Policy in Washington. I'm actually a small business owner, I
have a little lobbying firm and I represent Women Impacting
Public Policy.
The Chairman. Yes, but you're here, but you represent the
women----
Ms. Sullivan. I represent them, yes.
The Chairman. Represent the women in my State?
Ms. Sullivan. Yes, I represent 500,000 nationwide.
The Chairman. I see.
STATEMENT OF ANN SULLIVAN, ON BEHALF OF
WOMEN IMPACTING PUBLIC POLICY
Ms. Sullivan. Mr. Chairman and members of the committee,
thank you for giving me the opportunity to speak on this
important issue.
I'm testifying today on behalf of Women Impacting Public
Policy, a bipartisan organization which represents 500,000
women in business nationwide.
In addition to its individual members it represents 30
small business organizations under its umbrella.
I represent WIPP on the Department of Energy Small Business
Advisory Council. While on the face of this, this is a dry
subject with interest only from a few bean counters, in reality
it has enormous implications for small business.
Government procurement policy and its commitment to meeting
those goals directly affects the ability of small businesses to
contract with the Federal Government.
We commend you for holding this hearing and letting us
speak.
Women-owned businesses number 10.6 million, accounting for
nearly half of all privately held firms. We generate $2.5
trillion in sales and employ 19.1 million people nationwide.
And yet government-wide we are awarded only 2.9 percent of all
prime contracts. At the DOE women-owned businesses possess .5
of the prime contracts.
We know that DOE has done its business the same way for 60
years with large primes holding the contracts and
subcontracting much of it to smaller businesses. But we would
argue that the Department will gain a better price and more
efficient service by contracting directly with small
businesses.
We believe the Government would realize savings by
eliminating the overhead built in to a large bundled contract.
With the duration of five plus years, and 85 percent of the
$19 billion in contracts awarded by DOE to is primes DOE's M&O
contracts are the embodiment of bundled contracts.
The Senate in its reauthorization last year of the Small
Business Administration spoke very clearly on its views on
bundled contracts. It requires the DOD to justify consolidation
of contracts in excess of $5 million, and requires all other
Federal agencies to justify bundled contracts that exceed $2
million. President Bush, as you know, also spoke about
mitigating the effects of contract bundling. And in October
2002 the Office of Federal Procurement Policy issued a
directive to Federal agencies to strengthen agency reviews on
bundled contracts. It found that for every $100 awarded under a
bundled contract there's a loss of $33 dollars to a small
business.
So why all the fuss? As you know, small business
participation is not a mandate, it's a goal. Thanks to many
members, like yourself and members of the Senate, the agencies
feel the pressure to meet those goals.
If Federal agencies are permitted to count subcontracts as
prime contracts as far as WIPP is concerned any incentive to
reach the goal of 23 percent for small business is removed.
Every other agency will be knocking at your door to get the
same exception, and in the end small businesses will lose.
I deal with small businesses nationwide every day, Mr.
Chairman. Small businesses prefer prime contracts over
subcontracts for the following reasons:
One, the profit margin on a prime versus a sub is higher.
That stands to reason because the overhead and the mark-up of
the prime is removed from the profit margin.
Two, government agencies, and even the commercial market
views the prime contract differently than a subcontract in
terms of past performance and the stature of the small business
itself.
Three, with regard to R&D many prime contractors require
the small business to give up its intellectual property in
order to be a subcontractor, and for that reason many small
businesses simply will not work as subs, only primes.
Four, payment directly from the government is generally
much more reliable and faster.
And five, if the Government enters into a prime agreement
the small business can be assured it will perform the work, and
when it is expected to perform it.
We would be remiss if we did not point out the efforts of
the Office of Small Disadvantaged Business Utilization at the
Department of Energy. Under the leadership of Theresa Speak DOE
is aggressively reaching out to small businesses and
encouraging them to consider doing business with DOE.
We applaud their efforts to increase the small business
contracting dollars, but outreach can only go so far, the
Department must have contracts to award.
In closing, our recommendation is really very simple: if a
contract is a prime contract call it a prime, if it is a
subcontract call it a subcontract.
Thank you for the opportunity to address this issue.
The Chairman. Well, I just want to say, Ma'am, and I'll go
right to Mr. Thompson, your last comment, if it's a prime call
it a prime, if it's a sub call it a sub, you know that's a
wonderful answer, but we're talking about what should be a
prime and what should be a sub, that's the issue. So we can
call it that, but before we call it that we've got to decide
which is which.
Sandia, by definition, is not the DOE, they're a contractor
of DOE. And so when they issue contracts they are, by
definition, small business subcontracts, not prime.
So I think your notion is right, but what we're arguing
about is how do we get there, and how do we achieve the
percentages.
Ms. Sullivan. I guess what we're saying is we think the way
they're currently counted is the proper way to count it, which
is if it's a prime it's a prime and if it's a sub it's a sub.
The Chairman. Okay, got you.
[The prepared statement of Ms. Sullivan follows:]
Prepared Statement of Ann Sullivan, on Behalf of
Women Impacting Public Policy
Mr. Chairman and Members of the Committee, thank you for giving me
the opportunity to speak on the issue of reporting of small business
contracts by the Department of Energy (DOE). I am testifying today on
behalf of Women Impacting Public Policy (WIPP), a bipartisan
organization which represents 500,000 women in business nationwide. In
addition to its individual members, it represents 30 small business
organizations under its umbrella. I represent WIPP on the Department of
Energy's small business advisory council.
While on the face of it, this is a dry subject with interest only
from a few bean counters, in reality, it has enormous implications for
small businesses. Government procurement policy and its commitment to
meeting small business goals, directly affects the ability of small
businesses to contract with the federal government. This is not just a
philosophical discussion-this has direct consequences for every small
business interested or already doing business with the federal
government. We commend the Committee for holding this hearing and for
considering its effect on small business.
The 25 million small businesses in this country are credited with
keeping this economy afloat in the recent economic downturn. Of those
small businesses, women-owned businesses number 10.6 million,
accounting for nearly half (48%) of all privately-held firms. These
firms generate $2.5 trillion in sales and employ 19.1 million people
nationwide. And yet, government-wide, we are awarded only 2.9% of prime
contracts. At the DOE, women owned businesses possess 0.5% of the prime
contracts. The government wide goal for women owned businesses is 5% of
the total 23% goal for small business.
We know that the Department of Energy (DOE) has done its
contracting the same way for 60 years with large primes holding the
contracts and subcontracting much of its work to smaller businesses.
But we would argue that the Department will gain a better price and
more efficient service by contracting directly with small businesses.
By allowing small businesses to perform services such as maintenance of
the facility, environmental remediation, event planning, administrative
support, construction, food services, and a host of other services
needed to run a large facility efficiently, we believe the government
would realize savings by eliminating the overhead built into a large,
bundled contract. With a duration of 5+ years and 85% of the $19
billion in contracts awarded by DOE to its primes, DOE's Maintenance
and Operation (M&O) contracts are the embodiment of ``bundled
contracts.''
The Senate, in its reauthorization of the Small Business
Administration (SBA), S. 1375 last year, spoke very clearly on its
views on bundled contracts. S. 1375 requires the Department of Defense
to justify consolidation of contracts in excess of $5 million and
requires all other federal agencies to justify bundled contracts that
exceed $2 million. Additional justifications by the agencies are
required for contracts that exceed $5 million or in the case of DOD, $7
million. Under S. 1375, agencies are required to assess the impediments
to small businesses as a result of the consolidation and provide action
plans designed to help small businesses with regard to the
consolidation.
President Bush and his Administration have also taken actions to
mitigate the effects of contract bundling on small businesses. On
October 29, 2002, the Office of Federal Procurement Policy (OFPP)
issued a directive to federal agencies to strengthen agency reviews on
bundled contracts. It found that for every $100 dollars awarded under a
bundled contract, there is a loss of $33 dollars to small business. The
Small Business Administration (SBA) issued proposed regulations to
implement these directives and proposed a review of a bundled contract
at $5 million for the DOE.
The issue before you today is not new. The DOE, in 1991, argued
that subcontracts in its M&O contracts should be counted toward its
small business goals and won. In 1999, the OFPPS reversed that decision
and ruled that DOE could not count its subcontracts as contracts for
goaling purposes. Both Senators Bond and Kerry worked diligently to
bring about that change.
So why all the fuss? As you know, small business participation is
not a mandate, it is a goal. Thanks to Members of the Senate and the
House who support the success of small businesses in the federal
contracting arena, the agencies feel the pressure to meet their goals.
If federal agencies are permitted to count subcontracts as prime
contracts, as far as WIPP is concerned, any incentive to reach the goal
of 23% for small business is removed. If DOE is permitted to count
subcontracts as prime contracts, every other agency will be knocking at
your door to get the same exemption and in the end, small business will
lose.
Mr. Chairman, I deal with small businesses nationwide everyday.
Small businesses prefer prime contracts over subcontracts' for the
following reasons: (1) the profit margin on a prime contract vs.
subcontract is higher. That stands to reason because the overhead and
markup of the prime is removed from the profit margin; (2) government
agencies and even the commercial market views a prime contract
differently than a subcontract in terms of past performance and stature
of the small business; (3) with regard to R&D, many prime contractors
require the small business to give up its intellectual property in
order to be a subcontractor. For that reason, many small businesses
will not work as subs, but only as primes; (4) payment directly from
the government is generally much more reliable and faster; and (5) if
the government enters into a prime agreement, the small business can be
assured it will perform the work and when it is expected to perform it.
Under a subcontracting plan, even though the subcontractor is listed,
it does not necessarily mean the prime will ever use them and
utilization of the subcontractor can be very unpredictable over the
life of a contract.
We would be remiss if we did not point out the efforts of the
Office of Small Disadvantaged Business Utilization (OSDBU) at the DOE.
Under the leadership of Theresa Speake, DOE is aggressively reaching
out to small businesses and encouraging them to consider doing business
with DOE. We applaud the OSDBU's efforts to increase the small business
contracting dollars. But outreach can only go so far-the Department
must have contracts to award.
In closing, our recommendation is really very simple. If a contract
is a prime contract, call it a prime. If it is a subcontract, call it a
subcontract.
Thank you for the opportunity to address this issue. I would be
happy to answer any questions.
STATEMENT OF ROBERT THOMPSON, CHAIRMAN,
ENERGY COMMUNITIES ALLIANCE
The Chairman. Would you like to proceed, councilman? It's
nice to have you. I guess I would ask why is a councilman here?
Mr. Thompson. Well, because I'm the chairman for the Energy
Communities Alliance, and I was the mayor of the city of
Richland up until the last term. So I was a 4-year mayor in the
city.
The Chairman. And you have a lot of DOE activities in and
around Richland?
Mr. Thompson. We think the Hanford site generates a lot of
revenue for our community, and a lot of work for the Department
of Energy for both the primes and the subcontractors.
And for the record, Senator, we do represent Edie County,
Espanola, Carlsbad, and Los Alamos in--I suppose it would be
your district. So we actually have some----
The Chairman. In my State?
Mr. Thompson. Definitely in your State, Senator.
The Chairman. I don't have a district.
Mr. Thompson. I appreciate the correction.
Senator, it's a--first off it's a pleasure to have an
opportunity for local government to come here and have an
opportunity to discuss what we look at policy that tremendously
impacts our community.
Traditionally when you're a small business man, and when
you're a small government like Richland, you have a tendency to
be on the receiving end, and we very seldom get the opportunity
to give some input.
And so I want to base my comments from a local community
perspective. And a lot of the concerns and questions that have
come forward are those--basically I would echo them.
It seems to me that nobody here is going to say anything
bad against small business. Certainly the Energy Community
Alliance, because it is our local businesses and the life load
of ourselves, support local businesses, small businesses.
The concern, and we have concerns, is that what has really
happened is there's kind of an counting shift, is what it seems
to me that's going on. And there are some potential unintended
consequences that have been echoed by some of the members, and
by Mr. McSlarrow himself, in regards to what the impact can be.
But one that has not been touched on that impacts us is the
idea of safety and security. What happens that hasn't been
addressed by anybody on the panel so far is the idea that we're
in the business of protecting our citizens, our constituents,
and anybody who's gone through a fire such as Los Alamos, or
what we had at Hanford, understands that there are concerns
being able to integrate that safety.
And the concern that we have if you break these contracts
up, take a prime and break it into several entities, the
ability to communicate, if past examples of working with the
Department of Energy with local government is of grave concerns
to us. We have concerns whether or not the new contractors if
they are broken apart would have the ability to communicate.
What we don't need is five separate law enforcement
agencies, five separate privately held fire departments trying
to integrate them. At least I can speak from personal
experience having the fire at Hanford, it is of tremendous
difficulty when you don't even have the same communication wave
length to communicate. And there is no guarantee, unless it's
provided within the contracts, to ensure that that occurs.
Some of the other concerns that we have is the idea of
integration. Now we've heard that touched on briefly here, but
the idea is that if you break a prime into several different
contracts the concern the local government has is what happens
if one of these subs is able to complete its duties, where the
other one has to wait because these are so integrated? I mean
it's like a circulatory system, if there's a part that goes
wrong here it has impacts somewhere else in the system.
The concern that we have is what is truly the mechanism to
integrate these, and candidly the Department of Energy perhaps
has not managed contracts in a way that we think was as
successful as we might have liked. We can only imagine the
opportunity for the Department of Energy to increase the number
of its employees to try to manage several other contracts, let
alone our integration with them from a local government
perspective.
It can be a struggle communicating with the Department of
Energy on certain levels. It can be a struggle communicating
with the prime contractor. If you break it apart integrating
the whole and making it a unified force might be very, very
difficult.
Part of what we have concerns about, Senator, is the
regionalism, and Mr. McSlarrow touched on that.
The Chairman. Well, we'll see here. We're going to have 10
minutes left for all of you, so let's assume it is, so talk
fast.
Mr. Thompson. I'll do that.
The regional question. Mr. McSlarrow touched on that, and
the issue from our perspective is simply this: we want local
businesses to exceed because local businesses have a tendency
to stay in your community and expand. If we open it up to a
nationwide or an international playing field we have concerns
whether some of the local businesses would be able to stay in
operation. And that is a grave concern.
Senator, you've already touched on the pension questions.
We really would have serious concerns from an employee
standpoint, which again I understand, that's the life blood of
our communities are these individuals, and suddenly that their
pension plan has become in jeopardy because you have a sub.
Although I fear the language the ability of subs of a certain
size to be able to take care of the pension, and the union
concerns that are--can be as big as they can be at the Hanford
site, give us grave, grave concerns, Senator. And I think that
any potential change really needs to be evaluated.
You know, ultimately we're in this together. At the Hanford
site we're in it to clean up, and we don't want to take
advantage of the taxpayers in doing so. That hasn't always been
the framework that my community might have suggested to you.
But I will tell the Senator, and the committee, that it is
important to give every dollar, and that the taxpayers get a
bang for that buck.
And the concern that we have is that if you start
overlaying all sorts of overhead on top of each other, and Ms.
Sullivan talked about the idea of the profit margin ends, as
you start to break these things up you start to end up getting
layering on profit margins as well. And we have a very
difficult time thinking that somehow is going to benefit the
taxpayers of the United States. And that is a concern of us
all.
We want to have things have cleaned up. We think that the
traditional method of bundling--I've heard that word for the
first time, but the original M and I contracts make sense.
If you want to make changes make it specific language to
support small business in the contracts. Breaking it up and
having additional DOE oversight has not worked in the past, we
doubt whether it will happen in the future.
[The prepared statement of Mr. Thompson follows:]
Prepared Statement of Robert Thompson, Chairman,
Energy Communities Alliance
Mr. Chairman and Members of the Committee, I thank you for inviting
me to testify on the subject of Small Business Contracting by the
United States Department of Energy (``DOE'' or ``Department'').
energy communities alliance supports small business contracting
As a small business owner and a leader in my community, I fully
support the general idea of increasing small business opportunities in
DOE contracts. However, in practice, the change in the Department's
reporting of small business contracting with the idea of breaking up
the Department's Management and Operating contracts and Management and
Integration contracts (``Prime Contracts'') into several small business
contracts creates several unintended consequences that may adversely
impact local communities and workers at DOE sites and impede the
ability to complete the DOE mission in a safe and effective manner.
DOE's system of awarding large Prime Contracts to contractors
(``Prime Contractors'') at sites and including small business
contracting goals within such contracts is the best method of ensuring
small business involvement in DOE contracts. As the organization of
local governments that are most affected by the Department's weapons
complex activities, Energy Communities Alliance (``ECA'') has an
interest in ensuring the effective and efficient implementation of DOE
contracts. ECA is committed to making sure that the DOE contracting
system works.
ECA is the organization of local governments that are adjacent to
or impacted by DOE activities. Our mission is to bring together local
government officials in DOE impacted communities to share information,
establish policy positions, and advocate community interests in order
to effectively address an increasingly complex set of constituent,
environmental, regulatory, and economic development needs.
CHANGING THE METHOD OF COUNTING SMALL BUSINESS INVOLVEMENT
DOES NOT MAKE SENSE
ECA has seen an evolution in the way the Department contracts for
services. Many of the changes have made sense because they have as
their goal focusing on the missions at the sites and ensuring that the
U.S. taxpayer benefits. The Department has for the past several years
evaluated small business contracts by measuring the amount of small
business contracts the Department's Prime Contractors utilize to meet
its statutory small business contracting goals.\1\ A recent change by
which the number of small business contracts issued directly by the
Department increases while the number of Prime Contracts issued
decreases is being met with skepticism among the local governments
around the DOE facilities. The best explanation the Department has
provided to local governments is that the change is required by the
Office of Management and Budget (``OMB'') to ensure that more contracts
go directly to small businesses--a change that alters the method by
which small business involvement is counted.
---------------------------------------------------------------------------
\1\ The Small Business Act, as amended by.the Small Business
Reauthorization Act of 1997, set a federal government goal of 23
percent of prime contracting with small businesses.
---------------------------------------------------------------------------
In the past, the Department has informed local governments that
changes in contracting have been made in order to make contractors more
accountable, assist DOE in obtaining better pricing, improve contract
effectiveness, and provide better incentives to ensure that contractors
focus on DOE's mission. This latest explanation as to why the system
should change--to meet OMB contracting goals--will have unintended
negative consequences on a complex system and does not further DOE's
mission.
Is the Department gaining a more efficient contract? A more
effective contractor? The reality is that the Department is meeting an
OMB goal of small business contracting--a goal ECA believes the
Department achieved by setting small business contracting goals and
small business contract reporting requirements in its Prime Contracts.
If the Department wants to ensure more small business contracting, add
the incentive to new contracts. The Department should not change a
system based upon an internal administrative technicality--DOE
contracts impact jobs, safety and the ability to complete a difficult
job at the DOE facilities.
DOE's contracts that it is looking to directly offer to small
businesses are not simple. In fact, they are complicated and require
highly specialized work that is not necessarily within the area of
expertise of most large or small contractors. Some of the Department's
missions are as follows.
Take environmentally contaminated sites that are not clearly
characterized and remove and remediate hazardous and
radioactive waste within a specific budget that relies upon
regulatory review and approval to accomplish the cleanup.
Provide security for Nuclear Weapons Facilities.
Disassemble nuclear reactors.
Demolish and remove buildings that contain radioactive and
hazardous substance contamination.
UNINTENDED CONSEQUENCES
Prior to my testifying before this Committee, I contacted several
local government officials around the country to discuss the impact of
small business contracting changes at DOE facilities. The following are
some of the unintended consequences that local governments have
highlighted:
1. DOE Oversight. The Department plans to divide the functions of
some of the Prime Contracts into several different contracts at
specific sites. DOE would become the contract integrator for the site.
DOE's record on overseeing one contractor at a site has rarely been
identified as exemplary, as is clear from reading GAO reports and
reviewing Congressional hearings. The Department must address how it
expects to manage multiple contracts at a site utilizing a decreasing
number of DOE employees to oversee the contracts.
2. Putting Regional Small Businesses Out of Work. Another
consequence of dividing up the Prime Contracts is to put regional small
businesses that currently work for the Prime Contractors out of
business. The current system allows the Prime Contractors to solicit
small businesses from a regional area. DOE's new contracting scheme
advertises small business contracting nationally. Hence, DOE's change
in policy removes the focus on regional small business hiring. Further,
several small businesses in my community are concerned that the new
small businesses that are hired under these contracts will no longer
have an incentive in the contract to hire regional small businesses
that currently work for Prime Contractors in the communities. These
small businesses have created numerous jobs and new opportunities in my
community and similar communities like mine around the country. I have
been told by ECA members in Paducah, Kentucky that several small
businesses with good performance records are being forced to leave the
area or shut down entirely because they cannot take on the risk of
bidding on the new Prime Contracts that are being set aside for small
businesses. These small businesses have worked hard to create new jobs
and new opportunities that the new contracting scheme may not take into
account.
3. Integration. DOE believes that it will gain certain efficiencies
by becoming the integrator of all of the contractors at a site.
Currently, the Prime Contractor at the site undertakes this difficult
job. Integrating building demolition and environmental cleanup sounds
simple but it is a technically difficult process. The process involves
radioactive contamination and hazardous waste storage, removal,
transportation, and disposal of the contamination within a site and
preparation of some of the material for shipment to receiver sites.
DOE, once again with the same number of employees, is responsible for
dealing with additional contractors, workers, unions, additional
paperwork and oversight, and additional resolution of issues. In
addition, DOE will create duplication of functions; for example, each
contractor will need safety officers, emergency response personnel, and
security officers. At the Paducah, Kentucky site the local DOE office
has been abolished except for a few employees, and DOE is preparing to
award at least two small business set-aside contracts that were managed
under a Primary Contract. This small business contractor will now need
to figure out how to coordinate among at least four different
contractors at the site, and no DOE office will be on site to referee
the daily interface between the contractors. DOE will now need to
schedule each contractor's activities since each contractor is
dependent upon the other to complete its job. If one contractor does
not complete its job on schedule, the other may not be able to
undertake its job. With one Primary Contract, DOE can hold one
contractor accountable and responsible for all of the work at the site.
4. Safety and Security. Safety and security are among the most
important issues on which the Department and local governments. around
the sites have focused. Currently, the Department uses overhead
expenses from the large contractors to pay for certain activities,
including emergency response capabilities. The Department also
considered subcontracting site security force activities directly to
small businesses, which we now understand has been revoked. However,
the idea that a small contractor with little experience needs to hire a
large Prime Contractor in order to implement a small business set-aside
contract does not make sense. If the Department hires multiple small
businesses at a site, and the Department integrates the activities, who
will pay for and conduct the emergency response actions? In addition,
which one of the contractors will be responsible for implementing the
emergency response activities, and if there are multiple contractors
that are responsible for the same activity such as emergency response,
how will they coordinate with responders that are outside the fence in
the case of an emergency? All of these issues greatly impact not only
the safety and security of the DOE site, but also the communities
directly adjacent to the DOE site. At Hanford and Oak Ridge, DOE
manages several Prime Contracts on the sites, and at both sites there
have been challenges to DOE integration. In emergency response
exercises there are multiple emergency response personnel with
different ways of performing their jobs--how they communicate, react
and work together impacts lives and the safety of my community. The
same issues cut across environmental remediation, security, and
performance of other jobs on-site.
5. Support for Local Communities. DOE's good Prime Contractors work
closely with the local governments around the DOE facilities. These
contractors provide an important interface between the Department and
the local governments. In addition, many of these contractors support
economic development activities and local organizations, such as
schools and charities. In a May 6, 2004 letter the Department's
Environmental Management program clearly stated to local governments
that it will not assist the local governments with any of these
activities in its contracting process and DOE does not believe that it
should be assisting our communities through the contracting process,
even though in most cases the local government has been instrumental in
mediating disagreements between state regulators and DOE that would
otherwise have prevented DOE from progressing with its cleanup. The
good local Prime Contractors have filled this void and work with local
governments by using their corporate resources to assist local
communities and have ensured that close partnerships exist that support
the local economy and fabric of our communities. Because of DOE's
recent deletion of the requirement for contractors to work with local
communities on economic issues, only one small business has indicated
support for local government programs during its bid process. By
switching to multiple small business contractors, we are concerned that
this assistance will be lost which will impact the quality of life for
DOE workers and other citizens living in our communities and may lead
to a decrease in support for DOE's missions.
6. Additional Costs. The minimal number of small business contracts
that the Department has put out for bid clearly indicates that although
the Department believes it is hiring a small business contractor, the
reality is that in order to perform this complicated work, small
business contractors must retain large contractors in order to
implement these activities. As a result, we are creating a small
business contract face that subcontracts to the larger contractors who
may have worked on the site and possess the experience and expertise to
conduct the work which can increase administrative and other costs.
Additionally, control and ultimate responsibility rest with the small
contractor that may not have the experience, financial wherewithal or
the ability to access corporate resources needed to address complicated
issues that arise. Contracting with DOE is not simple, especially when
a contractor needs to purchase surety bonds or environmental and other
insurance products.
7. Pension Plans. The Prime Contractors provide pension plans,
which are critical in ensuring that current workers are incentivized to
remain working at the sites and that retired employees retain health
and other benefits. Maintaining a pension plan is difficult and
complicated and not likely something that a small business can take on
at a site--either the small business contractor would need to hire a
larger Primary Contractor to run the pension plan or DOE would need to
hire a new outside contractor to run the pension plan.
8. Change for the Sake of Change. A significant concern for local
governments is that at several sites, a contractor may be performing
well but, since the Department has decided that it intends to break up
several of the large contracts into smaller contracts, it does not
consider past performance when deciding how to re-bid a contract. For
example, at one site you may have a contractor who has performed well,
hired an exemplary amount of small business contractors, and earned all
of its incentives but then not be eligible to bid on a contract for an
additional period. The message that it sends to contractors is to only
look at the short-term and that regardless of performance the
contractor may not be eligible to continue its work.
CONCLUSION
DOE's past small business contracting system worked. The system
included incentives for Prime Contractors to hire small businesses and
to work with local governments. DOE has told ECA that OMB wanted direct
contracting with small businesses, so it is changing the way it does
business. The concept of contracting highly technical, complicated
large projects to small businesses that may not have the workforce or
expertise unless they partner with large contractors is not sensible or
efficient.
DOE should focus on using the best contracting methods to implement
its mission. Use incentives at the sites for Prime Contractors to hire
small qualified businesses where it makes sense. Breaking up large
Prime Contracts has unintended consequences that negatively impact
local communities (especially where the Department deletes any
requirements to work with a local community), decreases management
accountability, increases costs and potentially impacts safety and
security at DOE sites. If DOE wants to promote small business
contracting, additional incentives and requirements for the Prime
Contractors in the contracts must be created.
That concludes my prepared remarks. I applaud your efforts to
ensure that the Department of Energy utilizes the best tools available
to implement its mission. It is an issue that is vital to the success
of the DOE activities in my community and communities throughout the
country. I will be happy to provide you with any additional information
that you desire and I would be pleased to answer any questions that you
may have.
The Chairman. Well, we don't start our vote until 11:15 so
we have a little bit of time.
Let me say, sir, your discussion here about your community
and the area surrounding it, and how devoted and dedicated you
are to using the taxpayers' dollars prudently, let me suggest
that through no fault of yours the taxpayers' dollars have been
thrown at your problems like we had all the money in the world,
and then some more.
We've had years and contracts where we have paid out our
money and the achievement at the end of the time is nothing.
Whatever millions we paid out you go in and say what happened?
And the answer is: nothing, because we have had no agreement
from the local communities as to goals that are going to be
achieved, and when. And you know that.
In fact we are a money machine to about three areas in the
country. And it is not to be fathomed by some of them that this
is a job that's supposed to run out. You know that. That's not
it, it is a job where we're going to be here forever, and the
checks are going to paint these walls forever.
So anything that legitimately says we're going to spend
less money I take very, very seriously. But I think the most
serious one to save money is the current requirement by the
Department of Energy that all clean-up sites sign an agreement
as to the time table and achievable goals before they get the
new allocation of substantial clean-up money.
Now I assume you know that you all have done that; isn't
that right?
Mr. Thompson. The State of Washington certainly has in the
tri-party agreement.
The Chairman. Is that current?
Mr. Thompson. It is. We are--you know, there may be a few
lawsuits that are involved over that.
The Chairman. I mean, is that a very recent agreement?
Mr. Thompson. Oh, I think we've had that agreement in place
for about the last 3 or 4 years, Senator. There is a question
of interpretation in all contracts, and I think that you'll
find that the State of Washington is advocating rather strongly
through its Attorney General, Ms. Gregour (phonetic), their
position in regards to clean up and milestones.
The Chairman. Well I can tell you in the State of New
Mexico, and Dr. Woodard knows about it, it didn't happen to her
lab but it happened to Los Alamos, they had a very large $42
million dollar addition that was going to be paid to them for
environmental clean up, and the State of New Mexico decided
that they wouldn't sign an agreement as to goals and achievable
time table. And as a matter of fact they didn't get the money
until they did.
Now of course they claimed victory, but we got an
agreement, where they wanted the money without it.
So I accept your concerns and your recommendations, but I
just want you to know that we're fully aware that we've got to
get on with the business of cleaning up, not with the business
of having good agreements with subcontractors or general
contractors, or whatever it is.
Let me move now to both Robin Nazzaro and Dr. Woodard, and
any other of you that have an idea.
The DOE is asking a facility manager to manage small
business doing the work they used to do. Testimony from both
GAO and Sandia states that one action DOE is considering is to
expand its small business prime contracting to identify an
activity already subcontracted by a facility manager to a small
business.
Two, to remove that activity from the facilities manager's
contract.
Three, to enter into a prime contract with small business
for the same service, and Four, then require that the facility
management contractor to administer the activity that they just
lost control of.
This strikes me as encouraging the same lack of
accountability that led me and my colleagues to create a
separate National Security Administration because we were
disgusted with the lack of accountability that was rampant in
the Department of Energy.
I don't know if you have a view, if my question was
intelligible, or too long, but let's ask you first, Ms.
Nazzaro.
Ms. Nazzaro. Mr. Chairman, this appears to us to be an
example of where a good policy leads to a bad practice. The
intent was to reduce the effects of more prime contracts, you
know, as far as the limited resources that DOE has for
oversight and management. We certainly share your concern about
the potential lack of accountability, it will blur those lines
of accountability and authority, definitely a step in the wrong
direction for NNSA.
Both NNSA and the contractor at Sandia have used this on a
limited basis and have raised concerns.
The Chairman. Dr. Woodard.
Dr. Woodard. I share your concern too, Mr. Chairman.
In this particular case by transferring the contracts back
to the facility manager you create significant problems with
the accountability chain, and you separate the accountability
and authority, or at least create confusion about
accountability and authority in order to achieve the work in
the contract successfully.
The Chairman. Councilman, have you got a comment?
Mr. Thompson. No, I agree.
The Chairman. Thank you very much, you're helping me along
nicely.
How about Small Business Advocate, do you have something?
Ms. Sullivan. I guess I would just say that if I, you know,
if I had 85 percent of the business I wouldn't want any changes
either, and I would talk about how mine was the best way to
achieve the way it's run.
I'm interested to hear that the reason given for not
wanting to do things a little bit differently is the
incompetence of the Department. I don't now that the small
business law allows for that to be a criteria not to award
contracts to small businesses.
The Chairman. That the DOE is incompetent?
Ms. Sullivan. Well, I mean that's what I'm hearing is don't
give it to small businesses because DOE can't manage itself, it
can't even manage the big guys so how can it manage small guys.
And I'm just saying well, that's kind of an interesting--to me
I don't believe the law allows that that's a reason not to
subcontract or to contract.
The Chairman. Well it may be interesting for you, but it
may also be true. Some of us believe it. I would have told that
to the Deputy Secretary but he escaped already.
Let me talk to you, Dr. Woodard. I'm concerned about your
point that the DOE could not possibly approach the 23 percent
government-wide goal with its current business model, a
government owned, government operated GOGO model. You and GAO
noted that the DOE will have to break some of their facility
M&O contracts into collections of smaller contracts.
Let me ask you, if DOE were to progressively break off
pieces at Sandia under their M&O contract, and award them to
different companies, presumably identified as small business,
would there come a point when Lockheed Martin could reasonably
say we can't manage this way, this isn't worth it? The risk is
too high, we're no longer interested in being an M&O
contractor?
Dr. Woodard. Mr. Chairman, I think the likelihood of them
walking away is small, but real. More likely in future
competitions for the M&O contracts at these facilities the
caliber of corporations like Lockheed Martin, and our top
research universities, would think again about the risks and
the liabilities they make be taking on.
The Chairman. I think that's a good observation. And we're
coming up with one soon.
You suggest in your statement that federally funded
research and development centers, as you remember you called
those FFRDCs, like Sandia National Laboratories, have unique
relationship with the Government, and an exception to the small
business policy should be made for them because of this close
relationship.
In my own experience I know that labs like Sandia are
performing functions that are sometimes described as inherently
governmental. In your view what makes an FFRDC closer or more
special to a Federal agency than Federal contractors?
Dr. Woodard. In the Federal acquisition regulation that
describes these federally funded research and development
centers it talks about the special relationship and the
establishment of these centers to address a special research
and development need of that agency. The FFRDC, if I might use
that acronym, acts as if it owns in fact the mission of that
agency, the agency entrusts to the FFRDC special access to data
and information to government facilities, and to employees. So
there is very much of a special relationship and a sense of
ownership of the mission by the FFRDC.
The Chairman. This is my last question and I'll submit some
for you in writing. This can be either--I guess it would be Ms.
Nazzaro; can DOE reach the 23 percent? Your testimony makes it
clear that having a long term goal directing 23 percent of
DOE's contracting base the small business prime contracts would
be a very challenging thing for DOE to do.
That might be putting it mildly.
Why is it so difficult for DOE to expand its prime
contracting with small business?
Ms. Nazzaro. To reach this goal would require a significant
redirection of the dollars to the small businesses. DOE is
limited to a degree to the extent to which it can tap into
these dollars as they come up for award, or renewal.
DOE's programs also, as we mentioned, disagree on whether
they can ever really reach a goal, particularly of 23 percent,
and how much of those dollars can be redirected.
Neither NNSA nor the program offices that we talk to could
provide us an estimate of what was reasonable, or what they
could attain. While we said EM is a little more optimistic they
do plan to proceed cautiously toward this goal. And NNSA and
Science said they will never be able to reach the 23 percent
goal, and while performing their mission safely and securely
this would not be an option.
The Chairman. Do you agree with that? Do either of you have
an opinion on that?
Ms. Sullivan. Well the DOE negotiated that 20-year plan
with the SBA, so clearly there are people on both sides who
think they can reach it.
The Chairman. Okay. I want to thank all of you, I will
submit some questions to each of you, and we had a very full
day, but we didn't know we were going to. So we set you up when
I'm in the middle of five other things, and most Senators are.
But I think we made our point, and I think the DOE understands
that we are concerned, and they certainly should know that
we're not trying to force upon them a policy that we dream up,
but we think some of the things they're recommending are not
very practical and will probably have a negative impact on
small business and the laboratories, which I don't think any of
us here want to see, and certainly most Senators don't want.
We stand in recess.
[Whereupon, at 11:15 a.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Department of Energy,
Congressional and Intergovernmental Affairs,
Washington, DC, August 23, 2004.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.On May 18, 2004, Kyle McSlarrow, Deputy
Secretary, testified regarding the implications of a recent
change in reporting of small business contracts by the
Department of Energy.
Enclosed are the answers to 14 questions that were submitted by
Senators Bingaman, Thomas, and Bunning for the hearing record. The one
remaining answer is being prepared and will be forwarded to you as soon
as possible.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
Sincerely,
Rick A. Dearborn,
Assistant Secretary.
[Enclosures.]
Questions From Senator Bingaman
Question 1. In order to meet the 23 percent small business prime
contracting goal, DOE would need to separate out some of the small
business subcontracts awarded by M&O contractors and award them as
prime contracts. However, your testimony states that the ``Department
is evaluating whether and to what extent doing so would entail certain
risks and concerns, especially with regard to program coherence and
integrity . . .'' It seems to me that the outcome of this evaluation is
essential to determining what DOE can actually achieve. Can you tell us
when this evaluation will be complete?
Answer. The evaluations are being completed on a case-by-case basis
as the M&O contracts come up for bid. The Department has commissioned
studies that will assist in identifying the work that would potentially
be broken out given the nature of the work. These studies are to
identify ``critical services'' that are integrated and cannot be broken
out from those ``supportive services'' that can be broken out. The
individual program office responsible for the M&O contract is the
office that will determine which portion of the work could be
redirected without jeopardizing ``program coherence and integrity.''
There is not a department-wide determination for what could/will be
broken out of the individual M&O contracts.
Question 2. GAO's report states that DOE has ``no strategy in place
that defines how DOE will achieve (the 23 percent) goal, identifies
what the contributions of the various DOE organizational components
will be, or reconciles the differing views within DOE as to what would
be an appropriate level . . .'' Would you agree that more work needs to
be done at DOE to determine whether the 23 percent goal is achievable-
the evaluation of M&O contracts needs to be completed, the
determination of an achievable goal, and further detailing of a Plan of
Action that would have proper support within the Department?
Answer. DOE agrees that, should there be a requirement that DOE
achieve a 23 percent goal, more work will need to be done to determine
whether the 23 percent goal is achievable. In FY 2003, based on a
request from SBA (during the negotiations for the FY 2003 goal) as to
when DOE might possibly achieve a 23 percent goal, DOE submitted a 20-
year plan to SBA.
Currently DOE has a 5.06 percent goal for FY 2004 and FY 2005. That
goal was negotiated with SBA pursuant to Section 15(g) of the Small
Business Act that allows each Agency to ``establish realistic goals for
the award of the contracts to small business.'' DOE does not currently
have a 23 percent goal and may never have a 23 percent goal. DOE
establishes its annual small business goals based on the identification
of new contracting opportunities, extensive small business outreach,
development of a customized small business database, and past
performance by each of the offices within DOE. Under this approach, we
have been taking realistic steps in increasing our small business prime
contract goals from 3.7 percent in FY 2002 and 4.6 percent in FY 2003,
to 5.06 percent for FY 2004 and FY 2005 and will continue to do so.
One of the ways in which we are identifying new contracting
opportunities is through the conduct of studies of all the M&O
contracts for the ability to break out work for small business. Such
studies are conducted prior to the award of any new contract and are
provided to the office in charge of that M&O contract for their
determination as to what portion of the work (if any) they will pull
out for direct contracting with small business.
Question 3. If it becomes clear that DOE cannot achieve the 23
percent goal without unacceptable risks and unintended consequences, do
you think the applicability of this goal to DOE should be changed, or
should it just be accepted that it is a performance ``goal'' and not a
mandate?
Answer. The 23 percent goal is a government-wide goal. Agency goals
and government-wide goals are not necessarily identical. The Small
Business Act states ``Notwithstanding the government-wide goal, each
agency shall have an annual goal that presents, for that agency, the
maximum practical opportunity for small business concerns . . .'' (15
U.S.C. 644 Section 15(g)(1)). The DOE goal for FY 2004 and FY 2005 is
5.06%. DOE should never find itself in the position of having a mandate
that has ``unacceptable risks and unintended consequences''--but,
rather a goal established in consultation with SBA given the
Department's procurement needs.
Question 4. GAO has said that DOE would need to increase its small
business contracting by about six fold (4 percent to 23 percent) in
order to meet the goal. Do you have an estimate of how much DOE's staff
and budget would need to be increased in order to handle the additional
contract processing and management, and whether the savings from the
avoided M&O contractor profit and overhead costs would yield a net
savings to DOE?
Answer. The Department has not performed the analysis needed to
estimate potential savings.
Questions From Senator Thomas
Question 1. How does DOE ensure that Maintenance & Operations (M&O)
contractors comply with their subcontract plans?
Answer. Every M&O contract contains a clause based on the Federal
Acquisition Regulation (FAR) 52.219.9, for ``Small, Small Disadvantaged
and Women Owned Small Business Subcontracting Plans''. All subcontract
plans are made a material part of each contract.
Additionally, Contracting Officers, in consultation with Small
Business Program Managers, are required to meet periodically with
directors of contractor purchasing to review the status of the
contractor's performance against its small business subcontracting
plan. (DOE Acquisition Letter 2004-03)
This year the U.S. Small Business Administration (SBA) advised DOE
that it would Conduct ``surveillance reviews'' on two of its
facilities: the Los Alamos National Laboratory and the Richland
Operations Office. DOE is cooperating with SBA in these reviews which
are scheduled to determine if the buying activity made every reasonable
effort to maximize contract opportunities for small business concerns.
Since these facilities are operated by prime contractors, the review
will basically address their subcontracting efforts.
Finally, the DOE Office of Small and Disadvantaged Business
Utilization (OSDBU) this year initiated a pilot subcontract review
process of several M&O contractors. Notice of the study and the
application of the SBA negotiated small business subcontract goals was
provided to all departmental elements and contracting activities
(Exhibit A--2 memos dated 12/17/03 and 1 memo dated 12/19/03).
The subcontracting review process itself will consist of (1)
determining whether the subcontracting plan meets the requirements of
the FAR, (2) whether the subcontracting reports submitted by the M&O
contractors are in compliance with their subcontracting plans and (3)
whether the M&O contractors have the required files to back up reported
small business awards. (Exhibit B--Evaluation Review Form and Exhibit
C--Subcontracting Plan Checklist). Compliance with subcontracting
plans/goals will be used as an evaluation factor in future RFPs for
work at DOE.
Question 2. Have liquidated damages ever been imposed on non-
compliant M&O contractors? If not, why not?
A2. The Department has never found any of its M&O contractors to
have willfully or intentionally failed to carry out the provisions of
their subcontract plans, nor has the Department found any such
contractor to be taking any action to willfully or intentionally
frustrate its subcontracting plan. Therefore, no liquidated damages
have been imposed on an M&O contractor under FAR 52.219.16--Liquidated
Damages--Subcontractor Plan.
Question 3. Does DOE participate in the Small Business
Competitiveness Demonstration Program?
Answer. Yes. The Department has participated in this small business
set aside program since its inception in 1999. Every year the
Department reviews the list of Designated Industry Groups (DIGS)
identified by the Small Business Administration for participation in
the program and if/when 40% of the obligations in a specific DIG is
awarded to Small Business, we remove the set aside requirement.
Question 4. If DOE is allowed to count prime and subcontracts
toward a single overall goal, how would DOE ensure that small
businesses obtain prime contracts where appropriate?
Answer. The DOE has an aggressive outreach program to ensure that
small business become aware of contracting opportunities available at
DOE. This process includes one-on-one counseling sessions, meetings
between small business and program/procurement representatives,
establishment of a small business database available to all program/
procurement staff to help identify small business in whatever field of
work they are seeking goods and/or services, establishment of a
Forecast of Contracting Opportunities updated semi-annually,
participation in workshops and conferences targeted to small business
such as the SBA Matchmaker Missions and conduct of an Annual DOE Small
Business conference that attracts between one and two thousand
attendees every year. DOE will continue with this outreach effort.
Question 5. Why is DOE different than DOD with its large
sophisticated contracts, yet it is able to meet (or come close) to its
23% prime contract goal?
Answer. DOE has a unique structure whereby its facilities and
laboratories have been, for over fifty years, operated through
management and operations (M&O) contracts with the private sector,
rather than federal employees. These contracts have traditionally been
executed with large corporate entities or universities. This process
has resulted in very large, complex and long term contracts that have
not been accessible by small business. These M&O contractors currently
receive between 85 percent and 90 percent of DOE's procurement dollars
leaving approximately 10 percent potentially available to all other
firms (large and small). DOE would need to change or modify its
approach to contracting in order to meet (or come close to meeting) the
23 percent goal established by Congress as a small business goal for
all procurement dollars awarded government-wide.
The 23 percent goal does not (necessarily) apply to each department
but is required in statute as a government-wide goal. The SBA has been
given authority to establish individual goals with each agency/
department of the Government based on Section 15(g) of the Small
Business Act that requires that each agency ``establish realistic goals
for the award of contracts to small business'' and that the head of
each Federal agency make consistent efforts to annually expand
participation by small business concerns.
The Department of Energy has negotiated a 5.06 percent goal with
the SBA for FY 2004 and FY 2005.
Questions From Senator Bunning
Question 1. The Department of Energy introduced the ``Rocky Flats''
model as the way to achieve successful accelerated site cleanup. This
model seems to be working. However, after concurrence by many states,
including Kentucky, to support this approach, DOE has now decided to
use small business contracts at DOE sites to achieve this accelerated
cleanup.
Why has the DOE chosen to do this and move away from large business
contacts? Will this affect any of the accelerated cleanup plans at
Paducah? What effects will adding a small business prime contract to
Paducah have on the pace of the cleanup work already underway?
Answer. The ``Rocky Flats'' model is a cost-plus-incentive-fee
(CPIF) contract with a clearly defined scope of work and end states for
the project. The contractor can earn fee by safely completing the full
scope of work, with additional cost and schedule incentives, and
penalties, based on performance. At more and more of our Environmental
Management sites, where we can clearly define the scope of work and
articulate the end state condition of the site, or a project, we
believe the CPIF model can be applied. However, this model is not
limited strictly to large businesses or large contracts. Recent
responses to competitive small business set-aside solicitations
indicate that small businesses, as well as large businesses, can
provide more cost-effective and efficient cleanup by using the CPIF
model. It is not our intention to slow the pace of cleanup underway at
Paducah, or any other EM site. We believe the CPIF contract model, when
applied correctly, can impart significant cost and schedule benefits
for the EM cleanup program.
Question 2. Why does the DOE believe that Paducah is a good site to
test using a small business contract for a large cleanup project?
Answer. We successfully awarded small business contracts for the
Columbus Cleanup Project and for the construction of a Glass Waste
Storage Building at Savannah River. Additionally, we are completing
evaluations of a small business contract for the Fast Flux Test
Facility cleanup work at Hanford, the environmental remediation of the
Portsmouth site, and laboratory services at Hanford. We believe Paducah
has similar attributes to these work sites for a small business
contract.
As you probably are aware, the Paducah site has two small business
set-side competitive procurements under evaluation by the Department.
The Site Services and Infrastructure contract is a cost-plus-award fee
contract that provides the necessary infrastructure to support the
ongoing cleanup mission. The Environmental Remediation contract will be
a cost-plus-incentive-fee contract with cost and schedule incentives to
complete the cleanup work at Paducah safely.
Question 3. In order to meet SBA requirements, DOE is allowing for
small businesses to bid on large contracts. In many cases, these small
businesses in turn need to partner with a large business in order to do
the necessary work. Do you think this translates into meaningful small
business participation compared to the same number of small businesses
working as a subcontractor of the larger project?
Answer. We believe this approach does translate to meaningful small
business participation. The small business is accountable as the prime
contractor and is provided the stimulus to expand its capabilities and
experience in DOE cleanup activities. Under previous DOE contracts,
goals had been set for small business participation, which may or may
not be accomplished through the execution period of the contract. We
believe having the set-asides will ensure meaningful small business
participation.
Question 4. It is my understanding that Bechtel Jacobs has been
asked to continue to handle the pensions for the Paducah plant because
there is concern that a small business would not be able to handle
them. Do you foresee the small business that wins the Paducah cleanup
to eventually takeover the pensions at the plant?
Answer. At this point, we do not anticipate that the successful
small business contractor would take over the pension plan. The
successful small business contractor will become a co-sponsor and
participant in the plan administered by Bechtel Jacobs. Bechtel Jacobs
will remain the prime sponsor of the plan.
Question 5. What mechanisms will DOE put in place in either the
Lexington office or assign to particular contractors to assure there is
an ``integrator'' to manage workforce transition between the various
prime contractors and subcontractors at Paducah and Portsmouth in order
to minimize employment disruptions and assure seamless benefits
arrangement?
Answer. The Lexington Office will be responsible for contract
administration and oversight of all four infrastructure and
environmental remediation contracts at Portsmouth and Paducah. The
Lexington office will closely coordinate the transition of the current
Bechtel Jacobs Company (BJC) contract to the new contractors as well as
the Oak Ridge Operations Office with DOE Headquarters providing
whatever assistance is needed to facilitate the transition. The
Department understands the unique nature of this transition and is
already working with the incumbent contractor (BJC) to plan the
transition. Although many issues will be dealt with as part of the
transition, our goal is to make it as seamless as possible for the
workforce and project performance.
______
Department of Energy,
Congressional and Intergovernmental Affairs,
Washington, DC, September 16, 2004.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: On May 18, 2004, Kyle McSlarrow, Deputy
Secretary, testified regarding the implications of a recent change in
reporting of small business contracts by the Department of Energy. On
August 23, 2004, we sent you the answers to 14 questions for this
hearing.
Enclosed is the answer to the one remaining question that was
submitted by Senator Bingaman for the hearing record.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
Sincerely,
Rick A. Dearborn,
Assistant Secretary.
[Enclosure.]
QUESTION FROM SENATOR JEFF BINGAMAN
Question 5. Dr. Woodward has suggested that the pre-2000 policy of
counting subcontracts as prime contracts should be allowed in the case
of Federally Funded Research and Development Centers (FFRDCs). What is
your reaction to this suggestion? How much of DOE's funding currently
goes to FFRDCs, and what total value of subcontracts would be allowed
to be counted as prime contracts if this policy were adopted?
Answer. The Department is currently counting its subcontracts based
on the direction given it by SBA and the Office of the Federal
Procurement Policy in FY 99. That directive requires that all
subcontracting achievements be reported as subcontracts, not as prime
contracts. On several occasions, the Department has taken the position
that it will continue its compliance with such directives. On two
separate occasions, Secretary Abraham has informed Senator Christopher
Bond that he remains committed to ``directed changes in the methodology
used for reporting our small business goals and achievements'' and that
he has directed that, as the M&O contracts came up for renewal or
recompete, ``they receive a focused review for any potential small
business prime contracting opportunities.'' Unless the OFPP and SBA
make changes in the methodology for goaling and counting small business
achievements, DOE will continue to count its subcontracts as
subcontracts and its prime contracts as prime contracts ``like all
other federal agencies''.
In FY 2003, DOE obligated $10.1 billion to the 15 FFRDCs sponsored
by DOE. In that same fiscal year, these FFRDC's subcontracted $2.9
billion, of which $1.4 billion was awarded to small business.
______
Women Impacting Public Policy,
Washington, DC, July 15, 2004.
Hon. Pete Domenici,
Chairman, Senate Energy and Natural resources Committee, U.S. Senate,
Washington, DC.
Dear Senator Domenici: Thank you for giving us the opportunity to
testify before your Committee on reporting of small business contracts.
Attached are responses to questions submitted for the record.
Sincerely,
Ann Sullivan,
Federal Legislative Consultant.
[Enclosures.]
Questions From Senator Bingaman
Question 1. Do you believe that DOE can achieve the 23 percent goal
as set forth in their Plan of Action?
Answer. WIPP has to believe that the DOE will do what it says it
can do. They laid out a 20 year plan to achieve their small business
goals and small businesses and the Congress should hold them to their
commitment to reach small business goals.
Question 2. If it becomes clear that DOE can't meet this goal, do
you think it's applicability to DOE should be changed, or should it
just be accepted that this is a goal, not a mandate?
Answer. As this Committee knows, Congress sets the small business
goals. We do not believe that agencies should receive different goals
based on their past performance. For example, HUD will far exceed its
goal of 23% this year. If DOE or any other agency is exempted from its
goal of 23% due to failure to meet it, HUD would have no incentive to
continue its good work in exceeding its small business goals. The
contracting system DOE has used for many years is heavily weighted
against working directly with small businesses. We believe what needs
to be changed is the way DOE does business with small businesses,
rather than a change in how it counts its small business numbers.
Question 3. Do you agree with the statement by GAO that shifting
M&O small business subcontracts to DOE prime small business contracts
will have the effect of shifting contracts away from local and regional
small businesses?
Answer. Based on the feedback from our membership, shifting to
prime contracts rather than as subs, will have the opposite effect.
Larger contracts mean more local presence, since a rule of doing
business with the government is having a presence close to its
facility. Certainly that is the case with large businesses-if they have
a sizable contract, key personnel servicing the contract will be
located close to the facility. Small businesses of any size follow the
same principle of business. Although we do not claim to be familiar
with the terms of the subcontracting plans by the labs, we are not
aware of any current subcontracting plan that requires all small
businesses who subcontract to the labs are limited to local and
regional businesses.
______
Responses of Dr. Joan B. Woodard to Questions From Senator Bingaman
Question 1. You state that DOE's practice of breaking out elements
of existing M&O contracts in order to provide prime small business
contracts ``may ultimately destroy the existing accountability
structure that holds a single integrating M&O contractor responsible.''
Do you think that DOE, with a 5 percent target for prime small business
contracting next year, is already near the point of destroying the
accountability structure, or do you believe that significant
opportunities still exist to expand prime small business contracting?
Answer. My statement cautioned that the practice of breaking out
requirements from existing facility management contracts in order to
provide small-business prime contracting opportunities for DOE could
ultimately destroy the existing accountability structure that holds a
single integrating M&O contractor responsible. We are not at that point
yet. However, it is my opinion that an erosion of accountability has
already begun and will accelerate if DOE progressively breaks out more
requirements from M&O contracts and awards pieces of operational
responsibility to multiple small-business contractors.
DOE's target for small business prime contracts of 5 percent next
year may seem insignificant. However, the GAO testimony points out that
DOE has a plan for ramping up to 23 percent over 20 years. Even today,
DOE is scrambling to achieve its 5 percent goal by removing
procurements from the M&O contractors and letting the contracts
themselves in order to get credit for the 5 percent goal. The result is
that the Department is merely awarding small business contracts that
the M&O contractor was already planning to award to small business.
Small businesses are not benefiting from this approach.
The M&O contractors are already doing their best to maximize small
business opportunities, so it is doubtful that DOE would be successful
in increasing small business contract awards above what the M&O
managers are already achieving (in excess of 50 percent). I do not
believe that significant opportunities exist for breaking out
requirements from the M&O contracts without eroding, damaging, and
ultimately destroying the accountability structure.
Question 2. Do you agree with the statement by GAO that shifting
M&O small business subcontracts to DOE prime small business contracts
will have the effect of shifting contracts away from local and regional
small businesses and, if so, can you estimate this impact for Sandia?
Answer. We agree with GAO's statement that ``DOE's efforts to
increase small business prime contracting may cause its facility
management contractors to reduce the amount of subcontracting that they
direct to local and regional small businesses.'' Whereas M&O
contractors can restrict competition to the local small business
community, DOE is required to competitively bid requirements on a
nationwide basis.
There is evidence that the rate of participation in government
contracts by local small businesses would decline. For example, in
fiscal year 2003, 32 percent of Sandia's total contract payments were
paid to New Mexico businesses. However, contract payments made by
procurement card purchases (which allow an employee to buy small items
directly) resulted in only 22 percent New Mexico participation. Based
on our experience with procurement card purchases, approximately one-
half of the purchases that would normally be placed in the local or
regional area have been placed nationally. If this factor were to hold
true for small business contracts placed directly by DOE, then the loss
experienced by the local small business community would be
approximately one-half of the value of DOE-awarded contracts. In fiscal
year 2003, Sandia's contract commitments with local small businesses
totaled almost $300 million. If DOE took over contracting
responsibility for half of that, the local small business community
could perhaps lose about $75 million per year, assuming the small-
business loss rate experienced with procurement cards holds true for
DOE contract awards.
Appendix II
Additional Material Submitted for the Record
----------
Small Environmental Business Action Coalition,
Washington, DC, June 1, 2004.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Re: SEBAC Response to Verbal Testimony at the Senate Energy and Natural
Resources Committee Hearing on DOE Small Business Contracting, May 18,
2004
Dear Senator Domenici: The Small Environmental Business Action
Coalition (SEBAC) is the premier industry representative for small
businesses performing environmental remediation and waste management
services for the DOE and other federal agencies. SEBAC membership
includes Small, Small Disadvantaged, 8(a), Women-Owned, Veteran-Owned,
HubZone and Native American-Owned businesses that perform environmental
investigations, design, engineering, remediation, operations and
maintenance, and ordnance and explosives work with federal agencies. We
truly represent the interests of all types and sizes of small
businesses in the environmental industry. SEBAC is concerned with the
potential ramifications of the testimony given at the Senate Energy and
Natural Resources Committee May 18, 2004 hearing concerning the
Department of Energy's (DOE) small business contracting practices.
SEBAC believes that the Committee seeks to support small business
while ensuring safe and successful execution of the DOE mission.
However, SEBAC is very concerned that small business views were
inadequately represented during the hearing. The testimony had a bias
in favor of large business, and the Committee appeared to conclude that
DOE contracts with small business endangered national safety and
security and that only large business could perform virtually all of
DOE contracts. The Committee appeared to plan on recommending that
subcontracts to small business from DOE's large business contractors be
counted toward DOE's small business subcontracting goal.
This apparent recommendation has the potential to be extremely
detrimental to small business. DOE has only started a meaningful small
business program in the past year after years of contracting only two
or three percent to small business as opposed to the government's 23
percent goal. The Committee and any other parties having influence over
the Committee's recommendation must hear balanced views on the issues
affecting DOE subcontracting to small business.
SEBAC has attempted to provide such a balanced view. SEBAC prepared
written testimony (attached) which was requested by the Committee, but
was denied the opportunity to testify verbally. SEBAC requests an
opportunity to discuss its views and provide the Committee with a
clearer understanding of the situation.
Both the DOE and DOE's large business contractors are major
customers for our members. SEBAC's membership is comprised of many
companies that participated in DOE's small business set-aside
contracts, including the awardee on the most recent small business
environmental management contract award, the Columbus Closure Project.
Therefore, SEBAC members have an in depth of knowledge of both the DOE
and its large business contractors' small business contracting
practices. There are very substantial differences in small business
contracting directly to DOE rather than to DOE's large business prime
contractors.
SEBAC believes that the testimony of all parties missed the point
of what DOE is doing with small business contracting and
subcontracting. DOE, SBA and the small business community have never
recommended any actions that would compromise the safety, security or
mission of DOE facilities. DOE has taken a common sense approach to
small business contracting with input-and support of both small and
large businesses. DOE is implementing a plan to achieve a modest goal
of five percent of all prime contract dollars awarded to small
businesses, combined with a more robust small business subcontracting
requirement for its large prime contractors. The 2004 and 2205 goal of
5 percent is eminently achievable, and increasing that goal in future
years is not only possible, but beneficial to DOE and taxpayers. For
virtually all small business prime contracts, DOE has identified
appropriate opportunities and has conducted sources sought evaluations.
Technical and management experts in DOE reviewed small businesses'
responses to the sources sought to insure that small businesses could
perform. The evaluation was conducted prior to any determination that
small business set-asides were appropriate. Some of DOE's largest
contractors supported small businesses in these sources sought and
resulting proposal efforts. The Paducah Environmental Restoration
Project is among the contracts for which sources sought were completed
and large businesses aggressively sought to team with small businesses.
DOE reportedly is very pleased with the proposals and performance
results to date.
DOE has correctly judged that small business has strong
capabilities in environmental management as a result of small business
having had substantial prime contracting experience with DOD agencies.
If DOD had limited small business to a subcontractor role, this
capability never would have developed. DOE Office of Environmental
Management (DOE EM) sees that small business can be a valuable tool in
continuing its push for performance improvement and positive cultural
change within DOE. Congress should support DOE EM's efforts as a part
of a common sense approach to small business prime contracting that
maximizes appropriately selected small business prime contracts
complimented by a larger role for small business subcontracts.
We address below, some of the specific misconceptions discussed at
the hearing:
1. DOE cannot reach the federal government's 23 percent goal--DOE's
goal for 2004 and 2005 is approximately five percent. The goal is
reviewed and negotiated annually between DOE and the SBA. The goal is
not 23 percent. The 23 percent goal is government wide and is not the
issue. The issue is five percent and whatever increases can be achieved
in the future. DOE is doing what makes sense: identifying areas in
which small businesses are strong and can perform as prime contractors
without compromising DOE's mission. DOE may not be able to reach 23
percent, but it must continue to appropriately increase small business
prime contracting for the reasons outlined in SEBAC's original
testimony. These include the increase in competition with resulting
benefit to DOE and the taxpayer, and the government's mandate to
support the development of small business. It is evident that five
percent is an extremely modest goal, and it is hard to believe that
there is opposition to a five percent goal.
2. Small business prime contracts threaten safety, security,
mission performance and cost control--DOE has appropriately identified
small business opportunities which do not compromise these areas. DOE
has not broken up any M&O contracts in a way that degrades the ability
of the M&Os to perform critical functions. DOE has sought contracts
that can be separated from the M&O contracts in accordance with
government policy on--bundling and has identified environmental
restoration at closing facilities (or at closing parts of operating
facilities) as a primary target for small business contracting.
3. Small businesses prefer to work for the DOE large business prime
contractors as opposed to working for DOE--Nothing could be further
from the truth. Perhaps Sandia does a fine job, but many others operate
in a way that appears oriented to causing small businesses to go out of
business. DOE's large business contractors take advantage of small
business to mitigate risk and enhance their own profits. Large
businesses use many forms of coercion to injure small business
subcontractors as outlined in SEBAC's original testimony. DOE follows
the Federal Acquisition Regulations and could not and would not behave
in the manner of many of its large business contractors.
4. Small business subcontracts will be reduced as a result of the
increase in prime contracts--This is not DOE's plan. SEBAC's
understanding is that DOE intends to increase the small business
subcontracting requirements for its large business contractors. SEBAC
has recommended further improvements such as giving preference to teams
comprised of all small businesses and setting dollar rather than
percentage subcontract goals.
5. DOE's small business contracting plans will dilute the market
for local companies at DOE sites--The DOE market is inherently a local
market for both large and small businesses. DOE's sites are remote and
require local offices, local hires and local expenditure of salaries to
support the local economy. Large business has the same issues as small
business in this regard, except for the fact that small businesses are
more likely to use their local offices supporting DOE to grow their
companies. For large businesses, these DOE site offices are stand-alone
offices performing only the DOE contract. For small business, the DOE
site offices represent a substantial percentage of their business and
capability. Small businesses have to work to grow and diversify these
offices on other projects to support the company's growth.
6. DOE cannot manage the increased number of small business
contracts--SEBAC recognizes that this is a concern; however, DOE EM has
taken very impressive steps to solve this by creating an EM-focused
acquisition management group. This can be funded by the money DOE will
save by eliminating the exorbitant G&A markup that its M&Os charge on
top of their subcontracts. Also, the example of Pit 9 was raised by
Senator Domenici as an example of a DOE management problem. When the
approach to Pit 9 was proposed, a small business which reviewed the
plans for DOE-ID found significant flaws in the approach, design, and
cost estimate. DOE chose to push the project forward with its large
business contractor against the advice of the small business. Perhaps
if DOE had listened to the small business, the Pit 9 fiasco could have
been avoided.
7. Small business may increase competitiveness--This issue was
glossed over in the hearing, but it is very significant. DOE typically
gets three or fewer proposals in response to its unrestricted
contracts. Tens of billions of dollars are awarded on limited
competition. The market is controlled to a large extent by three
companies. (And the management focus of these companies has shifted
from DOE to Iraq.) On small business procurements, DOE has seen
increased competition. All small business RFPs have had at least five
responses, with the Nationwide EM contract reportedly receiving
approximately 90 proposals.
8. DOE plans to novate contracts to M&O contractors--This had been
discussed as a possibility, but SEBAC is unaware that it has become DOE
policy. If it is DOE policy, SEBAC agrees with testimony that it could
impair accountability for M&O contractors. However, if DOE continues to
choose non-mission critical work for small business primes, this will
not be an issue.
9. Small business cannot handle the retirement and benefits
issues--Again, the important issue is for DOE to select appropriate
small business contracts. Even with large business on closure contracts
such as the Mound Closure Contract, DOE has taken the responsibility
for workers not retained by the winning bidder.
10. DOE's plan benefits only the larger small businesses--Since DOE
plans to award prime contracts and increase subcontracts, the
opportunities will grow for all small businesses. The smaller
businesses can also find competitive teaming arrangements with other
small business. SEBAC members frequently team for proposals and
contracts. Again, SEBAC recommends that preference be given to teams
comprised of all small business, thereby increasing opportunities for
all types of small business.
11. DOE prime contracts with small businesses will increase costs
to the taxpayer--DOE has already seen substantial savings by small
business contracting. The Columbus Closure Project was awarded for
approximately 60 percent of the government estimate after nine
proposals were received from small business. Other EM small business
contracts have allowed DOE to avoid as much as 40 percent in G&A
charges that would have been added to the work by an M&O. Also, the
small business subcontractors do not recreate and duplicate the federal
bureaucracy on a cost-plus basis on their contracts.
In summary, SEBAC believes that DOE has embarked on a very
productive and sensible approach to small business contracting. DOE has
done a fine job of increasing small business contracting while saving
money and improving performance. SEBAC believes that we can help
explain this situation to the Committee and to Congress in a balanced
way that has not been previously presented. We request the opportunity
to meet with you to discuss this matter.
Very truly yours,
Pamela J. Mazza,
General Counsel.
[Enclosure.]
______
Statement of the Small Environmental Business Action Coalition
This statement is being submitted for the Committee hearing record
on behalf of the members of the Small Environmental Business Action
Coalition (``SEBAC'').
SEBAC is the premier industry representative for small businesses
performing environmental remediation and waste management services for
the Department of Energy (DOE or ``the Department'') and other federal
agencies.
SEBAC membership includes Small, Small Disadvantaged, 8(a), Women-
Owned, Veteran-Owned, HubZone and Native American-Owned businesses that
perform environmental investigations, design, engineering, remediation,
operations and maintenance, and ordnance and explosives work with
federal agencies. We truly represent the interests of all types and
sizes of small businesses in the environmental industry. Both the DOE
and the Department's large business contractors are major customers for
our members. SEBAC members have an intimate knowledge of both the DOE
and its large business contractors' small business contracting
practices. We also understand that there are very substantial
differences in small business contracting for the Department as opposed
to its contractors. SEBAC's membership is comprised of many companies
that participated in the Department's small business set-aside
contracts, including the awardee on the most recent small business
environmental management contract award, the Columbus Closure Project.
I. INTRODUCTION
SEBAC's position on DOE small business subcontracting is that the
DOE market currently has an appropriate mix of direct small business
contracts with DOE and small business subcontracts with DOE's large
business contractors. SEBAC supports DOE's plans to increase small
business opportunities under both direct contracts and subcontracts.
DOE's expansion of small business contracting has had, and will
continue to have, a beneficial effect on DOE and taxpayers. Any
recommendations to limit DOE direct contracting will have a detrimental
effect on DOE, taxpayers and small business, while potentially limiting
competition for billions of dollars in DOE contracts to only a few very
large companies. For these reasons and the reasons set forth below,
SEBAC strongly disagrees with proposals to limit DOE direct contracting
to small businesses.
The federal government's goal is to issue small business prime
contract awards equal to 23% of federal contracting dollars. However,
the DOE has continuously fallen well below that goal with direct
contracts only reaching approximately:
3% in FY 2001
3.7% in FY 2002
3.7% in FY 2003
5% in FY 2004 (goal)
5% in FY 2005 (goal)
Despite this disappointing track record, DOE has shown some
improvement in its direct contracting to small businesses. In FY 2003
and FY 2004 DOE has made significant strides in small business
contracting, as discussed more fully below.
The federal government's mission is to encourage, promote, and
foster the U.S. marketplace and remove barriers that impede capitalism.
This is the reason for the government's emphasis on small business
contracting. Our country's history demonstrates that, in many
instances, in order to ensure our marketplace does not convert into a
monopoly or oligopoly, regulations and rules are required to keep
capitalism and competition alive. Consequently, the bundling of federal
contracts and the past preference for large business contractors by DOE
has had a consolidation effect. Therefore, it is the obligation of the
government to maximize capitalism, stimulate competition, and allow
small businesses to flourish in order to ensure pricing of services,
quality, and execution are provided to the federal government by all
contractors, regardless of size. DOE should continue to make progress
in its small business contracting practices.
Some large businesses and small businesses contend that DOE's
approach to small business subcontracting benefits a few small business
contractors while excluding others and limiting the market for most
small businesses. They believe that DOE's direct small business
contracting plans will detract from the small business subcontracting
available from large businesses. In fact, SEBAC understands that the
opposite is the case. We understand that DOE seeks not only to increase
direct small business contracting, but also to require more and higher
quality subcontract opportunities. SEBAC, as a representative of all
sizes of small business, believes that the DOE market has been moving
in a healthy direction in which significant prime contracting
opportunities exist along with the potential to increase subcontracting
opportunities to DOE's large business contractors.
SEBAC provides below a more detailed discussion of its position and
makes recommendations to improve the system for DOE, the taxpayers, and
small businesses working as prime or subcontractors. The large
businesses that work productively with small business will be
unaffected by the adoption of SEBAC's recommendations.
II. DISCUSSION
DOE Improvement in Small Business Contracting
In FY 2003 and 2004 DOE has made great strides in increasing its
small business participation, specifically through 2003-2004 small
business set asides competed within the past year under NAICS 562910,
Environmental Remediation. Congratulations are in order for those who
have sought to break with old habits.
Specifically, DOE Environmental Management (``EM'') has improved
the numbers of competitive small business contracts in the past year
with several very large small business contracts. The first step was to
request a Sources Sought from interested small businesses to ascertain
if they have the technical capability to perform the work. Under the
Rule of Two, after reviewing the results of the Sources Sought, if DOE
determines there are at least two credible small businesses, then the
procurement is set-aside for small business. On each of the following,
DOE should be proud of its accomplishment in following the Small
Business Administration (``SBA'') guidelines and the Rule of Two:
Columbus Closure Project, Reactor D&D;
Fast Flux Test Facility (FFTF);
Portsmouth Environmental Remediation;
Paducah Environmental Remediation;
National Environmental Remediation and D&D Contracts.
DOE has correctly identified EM as an area in which there is
substantial small business capability that can improve EM performance
as well as help to expand DOE small business subcontracting. DOE has
performed sources sought announcements on several large procurements
and potential procurements that have demonstrated to DOE that small
businesses have the capability to perform the contracts to be set-
aside. SEBAC and the media have learned that DOE is extremely satisfied
with the level of competition and the quality of proposals received
from small businesses.
In addition, EM and Office of Small and Disadvantaged Business
Utilization (``OSDBU'') have worked to understand the issues that small
businesses face and have offered substantial outreach and education to
small businesses seeking to contract with DOE. EM and OSDBU have
conducted seminars and established websites to help small businesses
pursue work with DOE. By seeking input from small businesses on the
issues confronting them when working with DOE, DOE has been able to
better address these issues in its RFPs and business practices. The
OSDBU has also established a small business advisory board that serves
as a sounding board and reviewer of DOE plans. The board is comprised
of representatives of industry associations representing all types of
small business from virtually every industry supporting DOE. The
advisory board also provides DOE with an excellent tool for outreach
and communication to the members of the associations that comprise the
board.
Despite these commendable efforts, DOE has maintained a culture of
comfort with large businesses, and a number of issues remain on which
performance could improve. While the small business contracting
percentages have improved in recent years, there is still an obligation
to reach a goal closer to the government goal of 23%. Other large
federal agencies have similar missions and have had a commendable track
record in incorporating meaningful and substantial small business
opportunities into their yearly acquisitions. Clearly, DOE can continue
to identify appropriate small business opportunities as their other
sister agencies have done, while continuing to build on the progress
DOE has made.
For example, EM can increase the amount of subcontracting
opportunities well beyond the 5% targets that have been established. EM
can continue to break small business contracts out of large
procurements currently under consideration. There are significant DOE
requirements that have been rolled (bundled) into M&O's and M&I
contracts as a matter of convenience that do not affect the primary
mission of DOE. These areas include those already identified by DOE,
such as EM and information technology. This approach can also have the
advantage of breaking out discrete scopes of work for performance based
contracts, instead of having this work bundled into larger contracts
where projects do not get appropriate management attention and suffer
delays in implementation and associated cost increases.
Additional Benefits of Direct Small Business Contracts to DOE
A decision to allow DOE to count dollars subcontracted to small
business by large businesses under contract to DOE as contributing to
DOE's small business subcontracting goal would be extremely detrimental
to small business. A subcontract to a DOE large business contractor
does not provide the same growth and development opportunity to small
businesses as a prime contract with DOE. For example, the prime
contractors determine what scope of work is provided, which may be a
``rent a person.'' In contrast, when a small business serves as the
prime contractor, the small business is in a position to make that
choice, thus truly developing skills and experience. Part of the
government's mission is to foster the growth and development of small
business. This can only be realized through prime contracts for small
business with government agencies such as DOE.
Further, the marketplace for large contractors within DOE has very
limited competition. Major unrestricted procurements attract three or
fewer bidders. Small business prime contracts provide DOE with greater
competition, as evidenced by the small business set-aside Columbus
Closure Project, which attracted 9 bidders. In addition, the largest
DOE contractors tend to team together to further restrict competition.
Finally, when small businesses subcontract to DOE large business
contractors, the small business invoices are marked up by as much as
40% to cover large business overhead cost, thereby significantly
increasing costs to taxpayers. In sum, the expansion of small business
contracting by DOE reduces costs and enhances competition.
The federal government's mission is to encourage, promote and
foster the US market place and remove barriers that impede capitalism.
This is the reason for the government's emphasis on small business
contracting. Our history shows that in many instances, to ensure that
our market place does not convert into a monopoly or oligopoly,
regulations and rules are required to keep capitalism and competition
alive. The bundling of Federal contracts and the past preference for
large business contractors by DOE has had a consolidation effect. It is
the obligation of the government to maximize capitalism, stimulate
competition, and allow small businesses to flourish to ensure best
value, quality and execution are provided to the Federal government by
all contractors, regardless of whether it is small business or large
business. Indeed, DOE has already seen the competitive benefits of
small business contracting on the small business set-asides competed
within the past year, specifically the 2003-2004 small business set
asides discussed above.
For the Columbus Closure Project, DOE received 9 proposals. For the
Portsmouth and Paducah Environmental Remediation contracts, we
understand that DOE received more than 5 proposals for each. For the
FFTF project, DOE received 5 proposals. For a recent unrestricted
procurement of similar scope at the Mound, OH facility, DOE received
only three proposals. The award was made to a team comprised of three
of DOE's largest contractors who chose to team with each other as
opposed to competing with each other. For an upcoming $4 billion
procurement at River Corridor, SEBAC understands that DOE may see only
one or two proposals, based on the contacts made by large business with
SEBAC members relative to potential subcontracting. That is a huge
amount of taxpayer dollars to award on such limited competition.
DOE is well aware of the economic advantage of direct
subcontracting with small business, simply by eliminating the G&A
markup applied by large business. By using the nationwide 8(a)
Indefinite Delivery/Indefinite Quantity Environmental Restoration
contracts recently awarded, DOE believes it has realized significant
savings. At one site, two 8(a) contractors have performed projects,
which would have been otherwise subject to a 40% G&A markup. DOE (and
NNSA) have said that the companies have performed well and are clearly
dedicated and focused on the work.
DOE reaps additional benefits when contracting with small business:
Company management is focused on project performance; each
project is of significant importance to the company;
Decision-making is rapid and focused on the needs of the
project as opposed to satisfying internal and public
shareholder demands;
Small business embodies the entrepreneurial mindset to
support EM's drive to improve performance and make cultural
changes to a performance-based organization;
The contract planning, teaming, staffing and execution approaches
are not significantly different for a small business than a large
business. However, the client focus and decision-making of a small
business can be advantageous to DOE.
Detriments to Small Business From Proposal to Allow DOE to Obtain
Credit Toward Its Small Business Goals From Large Business'
Subcontracting to Small Business
A subcontract to a large business does not provide the same
benefits to small businesses that are provided by a direct contract
with DOE. Much of this has to do with the subcontracting procedures of
the DOE large business contractors.
A. FAR Disputes Clause does not apply to subcontracts--The small
business must often go to civil court to seek relief. The large
business prime contractors are therefore not motivated to be as fair
and reasonable in their treatment of small business contractors as is
the federal government. The small business contractors also have a fear
of reprisal by the large business if they seek to resolve a dispute.
For example, a small business may have a significant portion of its
revenue under one contract with a large business at a DOE facility. If
the small business disputes unfair treatment, then the large business
can withhold work, thus threatening the existence of the company.
B. Large Businesses Use Small Business to Mitigate Risk--Large
businesses require contract terms from small businesses that are not
required of large businesses by the government. For example, firm fixed
price subcontracts are used (under a large business cost plus contract)
for work that should be performed on a cost plus basis. Work
subcontracted to small business often constitutes the riskier portions
of the prime contractor's scope of work.
C. Subcontracts Often Provide Little Opportunity for Development of
Management and Technical Capability--The scope of subcontracts is often
focused on lower-level tasks and does not allow for small businesses to
play a role in contract management. Large businesses often meet their
subcontracting goals with non-technical support services. Large
businesses also achieve small business goals by ``leasing'' employees
from small business in a way that provides no experiential benefit to
the small business. In contrast, when the small business is the prime
contractor, the small business has the opportunity to develop
meaningful experience and skills that can be translated to other
contracts, consistent with the government's goal of promoting the
growth and development of small businesses.
D. Large Businesses Prefer to Self-Perform Work Under DOE
Contracts--Existing DOE contracts to large businesses do not provide
incentives for the use of small business, but often do provide
incentives for large businesses to retain work in-house. This is a
stated policy of many large DOE contractors. RFPs may require
percentage goals for small business subcontracts, but they do not
define the type of work or total dollars to be subcontracted.
E. DOE's Large Business Subcontractors Use Small Businesses for
Labor Load Leveling--Large businesses hire small businesses to address
surges in workload and eliminate or reduce subcontracts when budgets
decrease (or when the large business overuses its budget). Small
businesses cannot absorb these changes in workload as easily as large
businesses.
F. Large businesses establish staffing and performance requirements
from small businesses, and then fail to provide adequate workflow to
support demands--For example, one DOE large business contractor
required the establishment and staffing of a site office based on a
forecast of approximately $1.2 million/year in funding for the small
business contract. After the office was established, the large business
contractor elected to keep work in-house and contracted only $365,000,
causing significant losses for the small business.
G. Large Business Contractors Hire Key Staff from Small Business--
Large businesses have a common) practice of hiring key personnel away
from subcontractors; along with the reduction of the small business
scope of work that person was performing. As a result, the small
business suffers twice--first by losing a valued employee, second by
seeing a reduction in work. As an example, a small woman-owned business
performing health physics and nuclear safety work lost four of its
seven employees to its large business client within a period of one
month. How would a large business react if its client took 57% of its
workload away?
H. Reporting of Subcontract Dollars is Often Inaccurate--DOD audits
have shown that large business contractors often report subcontract
percentages in excess of actuals. Reporting also involves tiered
subcontractors, causing double or triple counting of the same dollar.
No Negative Impact on National Security
Providing prime contracting opportunities to small businesses does
not constitute a threat to national security. DOE has done an excellent
job of identifying the areas in which small businesses have strength
and which are considered to be outside of the critical mission areas of
the DOE sites. For example, the environmental closure of an excess
facility cannot, by definition, endanger national security: it is a
facility that the government decided is no longer needed.
As evidence that this concern is baseless, the Department of
Defense (``DOD''), which has the nation's primary role for national
security, has contracted an average of 21% of its direct contracts to
small business for FYs 2000, 2001, and 2002. This performance was
achieved during wartime, both in Afghanistan and Iraq. Much of this
work was accomplished at active military installations in the U.S. and
overseas, which were participating in the war effort. One SEBAC
contractor was performing construction work on an active flight line
and had to manage its work in coordination with the war effort. Other
small businesses support the high tech end of critical mission items
for DOD, including, among other things, information systems, combat
planning and management software. SEBAC's view is that the work of
small business contributed positively to national security for DOD.
Within the DOE market, the Department has accurately identified
areas in which DOD experience strengthened small businesses so that
they could take on the challenges of DOE work. These companies are not
learning on the job. They have done the job for DOD and now seek the
opportunity to do so for DOE. Indeed, many employees of small
businesses have come from large businesses, and were relied on for
critical mission support while they were employees of a large business.
These employees did not lose their capabilities or competence when they
joined a small business.
SEBAC further notes that procedural mechanisms exist to ensure that
businesses with access to sensitive information obtain the appropriate
security clearances. For example, small businesses have DOE ``L'' and
``Q'' clearances. Small businesses also have secret and top secret
clearances for DOD, as well as secure facilities for handling
classified documents.
At the same time, we understand that not all of DOE's large
business contractors have performed as well as they might in relation
to security issues. For these reasons, the argument that small
businesses somehow pose a threat to national security is without merit.
Recommendations for DOE Small Business Contracting
DOE has been working hard to improve its small business performance
and should be congratulated on the notable improvements it has made.
DOE should continue the trend of increasing non-mission critical small
business contracting and should continue to evaluate all large
contracts to determine whether there are components that can be set
aside for small business. If it does so, DOE will increasingly
recognize the competitive and performance benefits discussed above.
In addition, DOE small business prime contract solicitations should
be structured to significantly favor teams comprised entirely of small
businesses. This will, in effect, increase the amount of small business
participation and experience in DOE procurements. It also raises the
level of competition on future procurements and lowers the barriers for
small businesses to enter into the DOE market.
Recommendations for DOE-Driven Changes in Small Business Subcontracting
by DOE's Large Business Contractors
Whether or not the Committee makes recommendations to change DOE's
small business contracting program, SEBAC believes it is necessary to
make changes in the subcontracting approaches by DOE concerning large
business contractors. As such, SEBAC submits the following additional
recommendations for DOE-directed changes in small business
subcontracting by DOE's large business contractors.
A. Large businesses should increase small business contracting--In
order to compensate for the lack of small business prime and
subcontracting utilization, DOE should modify its subcontracting
program until such time as its small business prime contracting
statistics meet the President's goal of 23%. Large contracts, such as
M&O's, should be required to subcontract at least 30% of the total
contract to small businesses, when it is determined to be in the
government's best interest.
B. Large business goals should be dollar goals--Large business
goals should be translated from the percentage goal to a committed
dollar goal. DOE should establish disincentives for large businesses
that retain an excessive amount of work in-house.
C. DOE should allow small businesses to receive their fee separate
from the large business fee pool--One significant disincentive to large
businesses subcontracting to small businesses is when DOE's contract
terms allow only one fee pool for all companies working under the
contract. Large businesses believe that small business should be able
to receive a fee for their work that does not detract from the large
business' potential earnings if the large business prime contractor
performs well. SEBAC understands that this is appropriately addressed
in the upcoming River Corridor procurement and applauds DOE for
listening to both large and small businesses on this issue. SEBAC
encourages DOE to continue this practice for all future procurements.
D. Only SBA rules on small business programs should be allowed for
subcontracting--This will, effectively eliminate the loopholes and
place the SBA in an honest broker position.
E. Contracts should prohibit hiring of subcontractor personnel--
This is common in many circumstances, but DOE's large business primes
will not currently accept this language in a contract.
F. The FAR disputes clause should be included in subcontracts.
G. DOE should audit large business subcontracting and establish fee
incentives--DOE should more carefully monitor large business
subcontracting to ensure that small businesses have meaningful roles on
the contract, have an opportunity to participate in management, and
subcontract according to a committed plan.
CONCLUSION
We thank the Committee for its consideration of this statement.
______
Statement of Henry T. Wilfong, Jr., President, National Association of
Small Disadvantaged Businesses
Mr. Chairman and Members of the Committee, we were not invited to
appear in person, so we take this vehicle to address this issue which
is most crucial to the small and disadvantaged business community. It
is even more crucial due to evidence that portends the virtual dropping
of ``disadvantaged businesses'' from the prominent position of
Congressional assistance intent that it once held.
The National Association of Small Disadvantaged Businesses was
formed back in 1987 as a result of P.L. 99-661. We started with a group
of 10 SDBs, intending to facilitate the implementation of the law and
to monitor that implementation. NASDB has grown from that 10 to nearly
300 firms, now. Our constituency is made up of all segments of the SDB
Community. However, the overwhelming bulk of our firms are Aerospace/
Defense/Energy related firms.
We hear that there's a move floating around to combine Prime
Contract numbers and Subcontracting numbers. Bad idea, bad idea. Oh,
the combining of numbers is not, in and of itself, bad. It's neutral.
But what is the purpose for doing it? Now, that's where the problem
comes in.
We don't really know the reason folk want to combine the numbers.
So, why, you ask, do we conclude, without knowing, that it's a bad
idea? Human nature, that's why. We've gotten used to seeing them
separate. We trust that separateness. It makes it easier for us to
assess responsibility. So, any change in that is gonna cause us some
reason to ``notice'', if not to be ``concerned''. Knowing the nature of
other human beings, we then become concerned about a number of things.
We wonder about a number of things. And, we suspect . . .
We suspect that some are desirous of making these ``numbers'' look
good. The mere combining of the figures will, of course, make the
``numbers'' look better. But, will the mere combining of the numbers
cause an additional benefit to the SDBs involved? Not one bit.
Measuring the betterment of the SDBs involved is the purpose of
keeping these numbers. Tracking contracting with firms owned by
socially and economically disadvantaged persons, enables a better
assessing of accountability of Government agencies in complying with
the Laws, as regards to maximum practicable inclusion of small and
disadvantaged businesses in the business of America? Of course that's
the purpose.
So, why the desire to change the way the agencies keep these
``numbers''? We suspect the answer is, rather than increase the
numbers, and thus better the involvement, they want to simply change
the way of accounting and thus camouflage the failure to improve the
involvement.
We suspect that many are now discovering the futility of trying to
increase prime contracts, without ``goring somebody's ox''. Facing the
fact that the United States Government has dramatically changed the way
it procures goods and services, there's simply no other reasonable
alternative. The ``Bigs'' are gonna have to give up some of the pie
they consider their proprietary realm.
Why not face the fact that there simply are not as many prime
contracts going out in the first place? Why not face the fact, then,
that these contracts are going more and more to a smaller group of
Behemoth firms? There simply is not that much left to be primed out to
the little folk.
We, in the small and disadvantaged business community, don't like
that situation. We sincerely wish you'd change the way things are being
done. Don't try to deceive us by some sleight of hand, or innovative,
creative accounting. Tell us what's doable, and what's not. If
subcontracting is what we're gonna be stuck with, tell us that. Teach
us how to make a fair and equitable profit, and how to make our
disadvantaged firms economically viable.
And, while we're talking about teaching, someone needs to do some
heavy teaching on what ``maximum practicable utilization'' really means
. . .
Combining prime contracts and subcontracting numbers--that dog
won't hunt.
______
Statement of Jacqueline W. Sales, President and Owner, HAZMED, Inc.
Thank you for inviting me and giving me the opportunity to share my
views and present my written testimony today before the Senate Energy
Full Committee hearing on the Department of Energy's Small Business
Contracting. I want to commend the Committee for pushing forward on
this very critical issue for small businesses. I believe we are at a
point where it is imperative for the U.S. Congress to set the tone and
the framework for moving forward on this issue.
On May 7, 2003, Ms. Angela B. Styles, the Office of Management &
Budget, (OMB), the Administrator for Federal Procurement Policy,
presented testimony before the U.S. House of Representatives Committee
on Small Business, to discuss the critical issue of ``whether larger
businesses are improperly receiving contracting opportunities intended
for small businesses.''
The OMB Administrator stressed the Administration's efforts and
hard work ``to create an environment where small businesses can
flourish and apply their talents to the many pressing needs facing our
governments.''
Moreover, the OMB's study to the President revealed that ``not only
is substantially fewer small businesses receiving federal contracts . .
. but that the pool of small business contractors receiving new
contract awards declined considerably.''
Mr. Chairman and Committee Members, my company, HAZMED, Inc. has a
16-year record of excellent service provided to the Federal government,
and has been awarded contracts from the U.S. Department of Energy. We
have also been consistently ranked as an excellent contractor and
provider of services from DOE and the U.S. Small Business
Administration. Our experience has been that there are a finite number
of contracts that DOE rotates to small businesses, this is evidenced by
the fact that most of our contract awards from the DOE were in the
early stages of our small business development. Our experience has
shown that after we have per formed excellently and received
recognition, the opportunity is rotated to the next emerging small
business. What we are asking DOE is to provide larger opportunities for
small businesses, like ours, who have demonstrated a capability to
perform.
DOE's past practices rely on large contractors to disseminate work
to small businesses after award. The fact is that large businesses
often report their small business participation against their entire
company, not against the specific DOE contract. Therefore, there is no
measure of small business participation attributable to the specific
DOE award. Often large businesses will offer small business less
desirable work. We want credible work that adds to our capabilities and
fosters continued growth.
We believe that large businesses view increased small business
capabilities as yet another competitive threat. It is our experience
that some do not see it their advantage to support DOE Small Business
Initiatives.
Mr. Chairman, I appreciate having the opportunity to share my views
with the Committee members this morning, and we hope that DOE and the
large contractors will understand that as small businesses get larger
contracts, more and more jobs can be created for the American people;
and that many large businesses started out themselves as small
businesses.
Thank you Mr. Chairman.
______
Statement of the American Council of Engineering Companies
ACEC represents over 6,000 engineering firms across the country,
most of which have fewer than 35 employees. ACEC promotes the business
interests of the engineering industry to Congress, federal agencies,
and international organizations. Our members provide engineering
expertise to the Federal Government, state, local, and municipal
entities, and the private sector for engineering projects of all types.
Many of our firms are engaged in work for the Department of Energy
(DOE), particularly in the area of Environmental Management.
ACEC supports DOE's initiatives to increase the amount of small
business participation in DOE work. We recommend, in carrying out this
initiative, that DOE:
Create small business prime contracting opportunities that
are designed more appropriately for the size of the company
that is expected to perform the work, taking into account the
potential risks to the small business, to the project schedule
and budget, and to the general health and safety.
Require that prime contractors include in their small
business reports the actual amount of work given to small
business subcontractors, as opposed to the value of
subcontracts, which may or may not be fulfilled.
DOE legacy site cleanup projects are unique in their size, scope,
degree of complexity, and risk. These sites include unprecedented
amounts of contaminated waste, water, and soil, and a vast number of
contaminated structures that will remain radioactive for thousands of
years. The environmental remediation of the nuclear weapons complex
encompasses radiological and non-radiological hazards, vast volumes of
contaminated water and soil, and over 7,000 contaminated structures.
DOE must characterize, treat, and dispose of hazardous and radioactive
wastes that have been accumulating for more than 60 years at 120 sites
in 36 states and territories.
Management of DOE legacy sites also differs from management of
Department of Defense (DoD) environmental clean up projects, in another
very important aspect: overall management of DoD projects is performed
by DoD, while DOE sites are managed by contractors, who are responsible
for the contract management and coordination of hundreds of complex
interrelated tasks.
Due to the unprecedented complexity and risk associated with DOE's
Environmental Management projects, it is very difficult to effectively
divide large contracts into smaller contracts for small businesses
without undermining the interests of the project. Separating such
contracts could increase the potential of not meeting critical
regulatory and milestone drivers, and thus incurring fines and
penalties and risking public and worker health and safety.
However, using large contracts for small business set-asides can
also be problematic. The Small Business Administration small business
size standard for environmental remediation services is 500 employees,
which generally translates to roughly $50 million in annual revenue
(which includes all of the firms projects). A DOE small business
opportunity could be equal to this amount or more (a small business
setaside of $500 million over several years was recently awarded),
potentially putting undue stress on the company and its resources, and
potentially increasing the risk of inefficient and/or ineffective
performance. These firms typically do not have the depth of staff or
the breadth of staff to accomplish the vast managerial effort required
to carry out this work effectively.
Compounding this are the affiliation rules, which require the small
business prime to not only perform at least 51% of the contract work,
but also be responsible for at least 51% of the proposal preparation
and costs. Large businesses could offer this support, eliminating some
of the burden, while providing learning, mentoring and growth
opportunities.
Opportunities for prime set-asides for small businesses should be
sized appropriately for the scope of work and the size of the company
or companies that are expected to perform the work. However, in so
doing, DOE should avoid dividing up large, complex managerial functions
best suited for larger businesses given their internal infrastructure,
project management, monetary strength and manpower. Additionally,
procurements targeted for small business set asides should have clearly
defined scopes of work and contract values that fit within the
parameters of the NAICS codes for those opportunities.
Prime contractors are contractually required by DOE to make a good
faith effort to provide opportunities for small businesses to compete
for subcontracts and purchases. The reason that the requirement is for
a good faith effort towards meeting the goals, as opposed to the actual
realization of the goals, is that the prime contractor does not control
many of the circumstances that enter into how much small business
contracting can be accomplished. These factors include: (1) the prime
contractor may not receive enough work under an ID/IQ contract to
create a need for subcontracts; (2) there may not be enough firms
qualified under the particular goal (e.g., veteran disabled owned small
businesses) available to bid on the type of work or services needed; or
(3) there may not be enough qualified firms located in a close
geographical proximity to the site location to compete from a price
standpoint (applies most often when mobilization of equipment and field
crews are required).
The prime contractor's good faith efforts are best judged by
examining how the subcontracting is managed, including: (1) the number
of companies meeting the small business qualifications that are
included on the source list; (2) the time given to bidders to submit
their bids (small businesses often need more time); (3) whether small
business set-asides were used, limiting the competition to small
businesses; (4) whether small businesses are included on teams; and (5)
whether real work is given to those small business team members.
Of these factors, we believe the last has the greatest potential
for increasing the amount of work that small businesses perform on DOE
Environmental Management projects. Currently, prime contractors report
the total value of contracts that they enter into with subcontractors,
which may or may not be realized. Small business subcontractors have
little control over the amount of work that they actually perform under
these contracts, and in some cases, may actually not perform any work.
ACEC believes that if the prime contractor were required, as part of
its demonstration of a good faith effort towards meeting small business
goals, to report actual real work performed by its small business
subcontractors, more actual work would go to the small business firms.
It should be noted that the number of different small businesses
that perform work on DOE Environmental Management projects is greater
when a large business prime contractor subcontracts work to small
businesses, as compared to when small business prime contract set
asides are utilized. An example is the Portsmouth/Paducah environmental
procurements, for which 2 to 3 small businesses joined to perform the
work as prime, and these are the only small businesses involved.
Contrast Portsmouth/Paducah to a typical large business prime, who
would typically subcontract with several times as many small
businesses.
Finally, we believe that DOE could obtain a more accurate
accounting of actual small business participation, and at the same time
benefit small firms, by accounting for small business subcontracts and
joint ventures towards an overall small business goal. We would
recommend, however, that if such an approach were taken, that it be
limited to DOE contracts because of the unparalleled size and
complexity of DOE's program as discussed above. A corresponding
increase to DOE's small business contracting goal, which reflects the
total amount of DOE work to small business, including subcontractors
and joint ventures, and includes an aggressive small business
objective, would be appropriate.
ACEC thanks the Committee for the opportunity to submit comments.
______
Statement of Jenny Freeman, Executive Director, East Tennessee
Environmental Business Association
On behalf of the 125 companies that are members of the East
Tennessee Environmental Business Association (ETEBA), I thank you for
the opportunity to submit comments to the Senate Committee on Energy
and Natural Resources regarding the U.S. Department of Energy (DOE) and
direct contracting to small businesses. ETEBA's member companies
include large and small businesses based in East Tennessee that provide
technical services to DOE and its prime contractors. ETEBA companies
employ approximately 6,000 people and provide an annual income to the
region of about $500 million.
ETEBA applauds the hard work DOE has done over the last year to
develop procurements directly bid to small businesses. In four months,
beginning last October, DOE has held at least six major small business
procurements, each worth hundreds of millions of dollars. ETEBA is in
the process of evaluating the impacts of this intense bidding on the
subcontracting community and will share our results with DOE soon in an
ongoing effort to improve the opportunities for our companies, and in
light of DOE's interest in doing the same for small businesses. DOE, we
are sure, will be interested in the impacts on the subcontracting
community of the release of so many large procurements in a very short
timeframe.
The direct small business bidding has created new opportunities for
small businesses after years of mainly large business participation at
the first tier of DOE's work. It has created new mentoring
relationships between large and small businesses; it has given small
businesses the opportunity to obtain contracts at values far beyond
what is available to them in the second-tier market; and it has given
them the chance to perform ``meaningful'' work that will allow them to
grow. We believe this was the hope of DOE Secretary Abraham when he
stated in June 2003, ``Making contract opportunities available to the
small business community is one of the department's top priorities.''
So, the issue is not the small business direct contracting goal,
today set at 23 percent of DOE's budget; rather, the issue is
implementation of that goal. There are four major impediments to
realistic participation by small businesses in DOE work at the scale
reflected in these recent procurements. They are:
1. Small Business Administration (SBA) rules governing size
standards are flawed. The way the North American Industry
Classification System (NAICS) codes are set up now, particularly the.
size standard for NAICS Code 562910 (Environmental Remediation), true
small businesses cannot compete successfully on DOE remediation
projects. A small company goes from competing against $6 million and
under companies to competing against the large companies with a 500-
employee size standard that are still ``small'' under SBA rules. This
gives an unfair advantage to those large small businesses and
effectively keeps the smaller small businesses from winning work and
growing.
Recommendation: Create a size standard for small businesses for the
Environmental Remediation category that allows the true small
businesses to enter into the market on a competitive standing.
2. Scopes of work in procurements targeted for small businesses are
not clearly defined and contract values do not fit within the
parameters of the NAICS codes for those opportunities. Larger small
businesses often must either forego small business opportunities or
transition to a large business classification where they find
themselves competing against companies with 10,000 or more employees.
This essentially means that the government will be selecting a
different small business each time they have a procurement of this
magnitude, negating the opportunity for companies to apply lessons
learned from one project to the next. Current SBA rules are pushing
competent and qualified small businesses into the large business arena
with one win when they are forced to inherit an incumbent workforce.
Forming a Limited Liability Corporation (LLC) does not alleviate the
allocation of employees because each member of the LLC is required to
count all employees, regardless of their level of participation in the
LLC. Additionally, SBA rules force the small business prime to not only
perform at least 51 percent of the contract work, but also be
responsible for at least 51 percent of the proposal preparation and
costs. This puts tremendous cost burdens on small business primes and
prevents their large business subcontractors from providing essential
support.
Recommendation: Congress and DOE must encourage the SBA to review
the small business size standards, which have been in effect since the
early 1980s. The SBA is currently reviewing the standards, but they are
only replacing revenue standards with employee standards, not modifying
the size of classifications. The current standards no longer apply to
today's marketplace when procurements are being conducted as small
business set asides even with annual funding levels significantly
greater than the standard itself. The current standards are actually
working against the SBA's small business constituency. Size standards
should be developed for phased growth, and then DOE should carefully
and systematically review its small business procurements to ensure the
correct size standard is applied.
3. DOE large business procurements have no teeth for enforcing
small business subcontracting, leading to ``business as usual.''
Although Requests for Proposals (RFPs) require certain percentages of
small business participation, consistent, across-the-board enforcement
of small business subcontracting does not exist. Requiring 50 percent
small business participation has little value if the prime chooses to
self-perform the majority of the work. Existing requirements also do
little to ensure that small business goals are met by making
``meaningful'' work available, meaning that small businesses are often
given opportunities only to perform work which the large businesses do
not want to perform themselves. Additionally, the shared fee pool
concept leads large businesses to self-performance. Large businesses
are able to claim that since DOE is requiring that the small business
subcontractors are part of the fee pool, they will not be included as
real teaming partners in the bid. Many large businesses legitimately
would like to include small business teaming partners, but do not,
believing that it is unfair that they share in the fee pool when they
are unlikely to share proportionately in the risk of performance. In
other words, it is basically the prime's name that is ``on the line''
for performance.
Recommendation: DOE should require small business plans in its
large business procurements and then hold the large business prime
accountable for implementing the plans. DOE needs to include hefty
subcontracting requirements for small business subcontracting in these
procurements, with required definition of meaningful subcontract roles
for the small business, and with incentives and penalties for meeting
or not meeting those goals built into the procurements. The plans
should be included in the evaluation criteria.
4. It is not the goal that matters. The issue lies in how DOE
achieves the set goal. The inflexibility in the current interpretation
of how DOE can only count direct contracting toward accomplishment of
its 23 percent goal instead of being able to count its prime
contractors' actual small business subcontracts as part of its own is
unrealistic. The goal of 23 percent direct contracting for DOE,
particularly in Environmental Management, is unlikely given that DOE's
annual budget is around $20 billion, translating into what would be
around $4.5 billion in small business awards per year. In addition,
most DOE work is not amenable to unbundling. One reason is because its
high-risk cleanup projects have critical regulatory drivers and
milestones, and unbundling such projects could increase the potential
of missing these drivers and incurring fines and penalties.
Additionally, without significant DOE oversight, the unbundling of
complex cleanup activities creates a substantial health and safety
risk. However, DOE should never be allowed to go back to achieving its
small business goals primarily through its prime contractors. Most
importantly, DOE has spent years reducing its cost to the taxpayers by
changing the way it does procurements, by creating larger contracts and
by contracting management of DOE installations. To successfully meet
the 23 percent goal, DOE will have to significantly increase its staff
in order to generate enough procurement activity to directly spend the
$4.5 billion.
Recommendation: Allow DOE and large businesses to be able take dual
credit for a large business prime contractor's small business
subcontracting. Without this ability, DOE and its large business primes
are essentially competing for the same limited pool of small business
resources. If a single award has the risk of putting a small business
out of the small business size category, they will choose their
opportunities very carefully.
While DOE direct work potentially offers good opportunities for
small businesses, DOE's traditional delays in procurements and the
complexity of RFPs result in bid costs that are an order of magnitude
higher than for comparable opportunities with first-tier prime
contractors. Many small businesses simply cannot afford to play in that
game and will forego DOE opportunities for lower cost procurements in
the private sector. Those that do respond to these large procurements
take on excessive financial risk that may be difficult to recover from,
particularly if they do not win the contract. This is counterproductive
to DOE's goal of making small businesses successful.
To ensure that the first tier large businesses make meaningful
opportunities available to small business, require DOE to impose an
especially high small business subcontracting threshold, similar to the
conditions of the Hanford River Corridor Draft RFP that incentivizes
large businesses to meet their goals.
ETEBA represents those companies, large and small, that actually
perform DOE's work on the ground and in the field. These companies are
innovative, creative, and have great ideas about ways to perform work
that safely result in savings to the government and ultimately the
taxpayers. We have many more recommendations that come out of our
experience with DOE projects, and we look forward to sharing them with
DOE and this Committee in the future. Until then, we appreciate the
opportunity to enter these comments into the public record.
______
Statement of the Coalition of Minority Business trade Associations
This statement is being submitted for the Committee hearing record
on behalf the Coalition of Minority Business Trade Associations
(Coalition) which includes the New Mexico 8(a) and Minority Business
Association (NM 8(a)), the U.S. Hispanic Chamber of Commerce (USHCC),
The National 8(a) Council (National 8(a)), and the Latin American
Management Association (LAMA).
The Coalition represents thousands of small, minority businesses
throughout the United States. Our membership includes minority 8(a),
SDB, HUBZone, and Veteran Owned companies that are contractors with the
Federal Government, the Department of Energy (DOE), DOE's large prime
contractors, M&O Contractors (National Laboratories) and other large
institutional buyers. Our members have an intimate knowledge of doing
business with DOE and its large prime contractors. Our membership also
participates in DOE's small and minority business set-aside contracts,
both as prime contractors as well as subcontractors. Many of the
individual business owners, the officers of our constituent trade
organizations, and the business advocates that constitute our Coalition
have been recognized nationally in the fields of government
contracting, small business advocacy, and federal small business
legislation. Our constituents have also previously served on various
task forces and committees that have undertaken rigorous examination of
the procurement practices of Federal Agencies, M&O contractors, and
other large other Prime Contractors to the federal government.
I. INTRODUCTION
Our portfolio of 8(a) and Socially Disadvantaged Businesses (SDBs)
have been the benefactors of DOE's aggressive initiative to increase
direct contracting and subcontracting opportunities for fiscal year
2003 and 2004. Our membership congratulates DOE for the improvements in
its direct contracting to small and 8(a) businesses. We support DOE
increasing non-mission critical small business contracting by
determining the viability of breaking the contract out for small and
8(a) set asides.
The Coalition is making recommendations that meet both the needs of
DOE as well as the needs of the small and 8(a) minority contracting
community. These recommendations will be based on re-emphasizing the
``development'' portion of the business development process for 8(a)
firms. We strongly suggest to this committee and to the Department of
Energy that the success of the business development process needs to be
measured not only in the total dollars contracted to small business,
but also in the number of 8(a) businesses that survive, and are strong
enough to graduate from small business to large business.
II. RECOMMENDATIONS
The recommendations respectfully presented to this committee
include the following--
1. DOE must not count the dollars spent by large prime contractors
towards DOE's small business contracting goals.
2. DOE must increase the number of prime contracts awarded to small
and 8(a) businesses.
3. DOE must continue to define its mission-critical and
supplemental activities in order to develop more prime contracting
opportunities available to small and 8(a) businesses.
4. DOE must encourage the development of 8(a) business by using the
SBA's Mentor-Protege Program.
5. DOE must increase small business opportunities by strengthening
the subcontracting process between large prime contractors and small
minority subcontractors.
III. DISCUSSION
DOE must not count the dollars spent by large prime contractors towards
DOE's small business contracting goals.
If DOE is allowed to re-define what gets included in its small
business numbers then in effect nothing has changed except the way
small business contracts are counted. This is a nonproductive
accounting exercise that does not increase the pool of capable small
and minority businesses. The Coalition is focused on initiatives
devoted to capacity building of small and minority businesses.
Our Coalition has discussed this issue with members of the Small
Environmental Business Action Coalition (SEBAC) and other small and
minority trade associations and we concur that small business will be
negatively impacted if DOE is allowed to count its large prime
contractors' small business subcontracts as part of DOE's small
business goals.
A subcontract to a large business does not provide the same
benefits to small businesses that are provided by a direct contract
with DOE. Much of this has to do with the subcontracting procedures of
the DOE large business contractors.
1. FAR Disputes Clause does not apply to subcontracts.
2. Large Businesses Use Small Business to Mitigate Risk.
3. Subcontracts Often Provide Little Opportunity for Development of
Management and Technical Capability.
4. Large Businesses Prefer to Self-Perform Work Under DOE
Contracts.
5. DOE's Large Business Subcontractors Use Small Businesses for
Labor Load Leveling.
6. Large businesses establish staffing and performance requirements
from small businesses, and then fail to provide adequate workflow to
support demands.
7. Large Business Contractors Hire Key Staff from Small Business.
8. Reporting of Subcontract Dollars is Often Inaccurate.
For a thorough examination of the issues above, please refer to
SEBAC's written testimony also submitted to this committee.
DOE must increase the number of prime contracts awarded to small and
8(a) businesses.
Because subcontracts do not provide the same growth and development
opportunities to small and minority businesses as do prime contracts
with DOE, it is imperative that DOE make every effort to increase the
total amount of its contracts with small businesses. In addition to
increasing the total amount of contracts, DOE must raise the individual
contract amount for each project awarded to small and minority owned
companies. DOE must also increase the complexity of scope for these
small business projects. By increasing the dollar amount and the scope
of contracts to small and minority businesses, DOE will increase small
and minority business' technical, administrative, and financial
capacity. This in turn will increase a small firm's prospects of
survival after graduating from the SBA's 8(a) program as well as its
ability to become a large prime contractor to DOE.
Some critics of this approach may mistakenly argue that small
businesses do not in general have the capacity or ability to perform on
larger and more complex projects and to provide the same value to the
Federal Government. However, this common misconception is proved
erroneous by the fact the (1) Large prime contractors typically
subcontract to small and minority businesses and add significant
overhead mark-ups to their charge to DOE and (2) the success of DOE's
recent efforts to award projects of significant size and scope to teams
of small environmental firms (refer to SEBAC testimony).
DOE must continue to define its mission-critical and supplemental
activities in order to develop more prime contracting
opportunities available to small and minority owned businesses.
In order to award more contracts with higher dollar value and more
complex scopes of work to small and 8(a) businesses and teams of small
and 8(a) businesses, DOE must continue to redefine its procurement
process into critical and non-critical (supplemental) activities to
determine breakout opportunities for small and 8(a) companies.
Another related issue concerns the recent trend towards bundling of
small contracts at site offices into large national contracts. These
bundled national contracts keep business out of the hands of small
contractors and limit competition to a handful of large national firms.
The large firms typically subcontract to small firms and then markup
their costs to the government. Furthermore, many large firms who choose
to self-perform on these contracts will hire employees away from the
small incumbent firms that initially performed the work, and therefore
further tend to erode the strength of this country's small business
community.
DOE must encourage the development of small business by using the SBA's
Mentor--Protege process between large companies and small
companies.
The SBA developed the Mentor-Protege Program to accelerate capacity
building of 8(a) firms by allowing a large prime contractor to mentor a
small 8(a) protege company.
The mentor-protege process allows the DOE to award large and
complex projects to an 8(a) joint venture. Furthermore, the risk of
technical or financial failure of the small company is mitigated by the
experience and resources of the large mentoring firm. The problems that
a small firm faces when subcontracting with a large prime contractor
are eliminated because the small firm is no longer relegated to a
subcontractor status, but is instead given the role of ``managing
partner'' in the joint venture. Because the Mentor-Protege program
requires that the larger firm share technical know-how, quality
systems, safety processes, accounting systems, and financial resources
with the smaller company, the mentor-protege process is truly an 8(a)
small business development process. A mutually beneficial relationship
is established between the protege and the mentor, the former receives
the transfer of technical, financial and managerial expertise, and the
latter shares in a market that would otherwise be unavailable.
DOE must increase small business opportunities by strengthening the
subcontracting process between large prime contractors and
small minority subcontractors.
For the sake of brevity we respectfully refer this Committee to the
testimony of our colleagues from SEBAC concerning the recommendations
for expanding and strengthening the subcontracting process at DOE.
Previously, in our first recommendation that DOE not be allowed to
count the small business dollars of their prime contractors in DOE's
small business goals, we showed that small businesses are at a great
disadvantage when in the role of subcontractor. We listed eight
negative consequences of being a subcontractor as opposed to a prime
contractor to DOE. Below we list several the actions that we recommend
the DOE take to strengthen their subcontracting plan.
1. Large businesses should increase small business contracting
2. DOE must revise prime contracts small business subcontracting
plans.
3. Only SBA rules on small business programs should be allowed for
subcontracting--This will, effectively eliminate the loopholes and
place the SBA in an honest broker position.
4. Contracts should prohibit hiring of subcontractor personnel
5. The FAR disputes clause should be included in subcontracts.
6. DOE should audit large business subcontracting and establish fee
incentives for success and liquidated damages for failure to meet
stated goals.
IV. CONCLUSION
We thank the Committee for its consideration of this statement.
______
Statement of Robert Kingsbury, President and Chief Operating Officer,
Los Alamos Technical Associates, Inc.
Mr. Chairman and distinguished Members, I am Bob Kingsbury,
President of Los Alamos Technical Associates, Inc. (LATA), a Service
Disabled Veteran Owned Small Business, headquartered in Los Alamos, New
Mexico. LATA has provided engineering, environmental, and information
technology services to the Department of Energy (DOE) complex for the
past 28 years.
The recent change in DOE's reporting of small business contract
volume, and the actions that DOE has taken to ``unbundle'' significant
work scopes and to set aside large scopes of work for small business in
response to this change, will benefit both DOE and the business
community. The benefits to DOE include an increased industrial base,
higher quality competition, direct access to small business' top
executive talent, and direct access to companies that have demonstrated
a high degree of technical innovation coupled with a highly developed
safety culture. The benefits to a broader business community that-
includes small business comprise opportunities to demonstrate
management skills, develop track records as prime contractors, grow,
and compete successfully as large businesses as well as the opportunity
to retain and attract key technical and management talent.
I have been associated with the DOE and its predecessor agencies
since 1967. During this period, I have seen a number of premier
companies, such as General Electric, DuPont, and AT&T, leave the DOE
market. DOE must be able to call upon the broadest possible industrial
base of qualified companies available to perform its operations. By
setting aside large scopes of work for small business, as DOE has been
doing for the past year, DOE is increasing this industrial base. The
small businesses that perform the setaside contracts will be a part of
the next generation of large businesses in DOE's industrial base, and
DOE will realize broader and higher quality competition for its future
procurements.
Our experience on DOE's significant small business set-aside
procurements to date has shown that small business is proposing company
elders to lead these projects. Company founders, CEOs, members of
Boards of Directors, and senior executives with both large and small
business backgrounds are being proposed as key personnel for these
projects. DOE is clearly getting the ``captains of industry,'' as
characterized by one DOE official, on these small business set-aside
procurements. As contracts for these set-aside projects are awarded,
DOE will find that top management in the successful companies will be
focussed on performance and customer objectives as never before,
because the success of these contracts is vital to the future of these
small businesses.
By setting aside large scopes of work for small businesses, DOE is
gaining direct access to a greatly increased number of companies that
have significant experience in DOE operations and commercial nuclear
power operations. These companies have gained experience as
subcontractors to DOE's Management and Operations contractors and DOE's
Closure contractors. They are responsible for many of the successes
achieved by large business prime contractors at DOE sites, and they
have demonstrated technical innovation while maintaining outstanding
safety records.
DOE's recent practice of setting aside large scopes of work for
performance by small business benefits small business in ways that are
totally aligned with the benefits of this practice to DOE. It is a win-
win situation. LATA's experience with DOE's small business contracting,
which I believe is typical of the small business community's
experience, illustrates these benefits.
Prior to OMB's decision that DOE could credit only contracts that
it awards directly to small business, nearly all of LATA's DOE program
business was performed as a subcontractor to large business prime
contractors. Over the past year LATA has participated as prime
contractor or as a member of a small business joint venture prime
contractor in procurements for the Columbus Closure Project, the FFTF
Closure Project, the Nationwide ER/WM and DD&R (FOCUS) contract, and
the Portsmouth Remediation contract. Experience in performing projects
such as these as a prime contractor is significantly more valuable to a
small business than experience gained in a subcontract role to a large
business.
As a prime contractor, we will have the total responsibility for
all aspects of project performance, including technical, budget, and
schedule performance. This responsibility allows us to demonstrate the
value of our business systems and our management personnel. Successful
performance as a prime contractor builds our corporate track record and
puts us in the position to successfully compete for future projects. In
contrast, performance as a subcontractor to a large business leaves us
in a supporting role, often limited to supplying technical resources
that are directed by the prime contractor, or performing work that is
not central to the scope of the contract. The track record that we can
establish as subcontractors to large businesses supports only our
credentials to operate in the same subordinate role in future
procurements. Small businesses thus tend to remain small and cannot
easily emerge to contribute to the diversity, robustness, and growth of
the economy as a whole.
The opportunity to compete for projects that are set,aside for
small business helps us to retain our most talented key personnel and
to attract new personnel who aspire to manage significant projects.
LATA has served as a subcontractor on many large business-led
contractor teams that were awarded Management and Operations and
Closure contracts by DOE. Many of these teams' proposals included LATA
employees as key personnel. Typically LATA's key personnel have served
as functional unit managers reporting to the General Manager's office
on these contracts, while employees of the large business prime
contractor served in the General Manager and Deputy General Manager
positions. A number of our employees, while serving in functional unit
manager positions on these teams, have been offered employment as
Deputy General Manager or General Manager by the large business prime
contractors. In some cases they have accepted these offers because they
believed that they could only achieve their professional objectives by
joining a large business. Since DOE began setting aside significant
projects for small business, we have seen a reversal of this trend. A
number of key personnel with site management experience and credentials
have left large companies to join small businesses.
In summary, DOE's recent practice of contracting directly with
small business for large scopes of work, driven by the change in
reporting of small business contract volume, yields significant
benefits to DOE, to the small business community, and to the healthy
diversification of the economy overall. These benefits are not realized
through small business subcontracting by DOE's large prime contractors.
The recent change in reporting of small business contracts by DOE
should be sustained in order to encourage DOE's continued contracting
of large scopes of work directly to small business.
Thank you for allowing me to present this testimony.