[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
CONTRACT BUNDLING OVERSIGHT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
of the
COMMITTEE ON VETERANS' AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JULY 26, 2007
__________
Serial No. 110-39
__________
Printed for the use of the Committee on Veterans' Affairs
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37-477 PDF WASHINGTON DC: 2008
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COMMITTEE ON VETERANS' AFFAIRS
BOB FILNER, California, Chairman
CORRINE BROWN, Florida STEVE BUYER, Indiana, Ranking
VIC SNYDER, Arkansas CLIFF STEARNS, Florida
MICHAEL H. MICHAUD, Maine JERRY MORAN, Kansas
STEPHANIE HERSETH SANDLIN, South RICHARD H. BAKER, Louisiana
Dakota HENRY E. BROWN, Jr., South
HARRY E. MITCHELL, Arizona Carolina
JOHN J. HALL, New York JEFF MILLER, Florida
PHIL HARE, Illinois JOHN BOOZMAN, Arkansas
MICHAEL F. DOYLE, Pennsylvania GINNY BROWN-WAITE, Florida
SHELLEY BERKLEY, Nevada MICHAEL R. TURNER, Ohio
JOHN T. SALAZAR, Colorado BRIAN P. BILBRAY, California
CIRO D. RODRIGUEZ, Texas DOUG LAMBORN, Colorado
JOE DONNELLY, Indiana GUS M. BILIRAKIS, Florida
JERRY McNERNEY, California VERN BUCHANAN, Florida
ZACHARY T. SPACE, Ohio
TIMOTHY J. WALZ, Minnesota
Malcom A. Shorter, Staff Director
______
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
STEPHANIE HERSETH SANDLIN, South Dakota, Chairwoman
JOE DONNELLY, Indiana JOHN BOOZMAN, Arkansas, Ranking
JERRY McNERNEY, California RICHARD H. BAKER, Louisiana
JOHN J. HALL, New York JERRY MORAN, Kansas
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Veterans' Affairs are also
published in electronic form. The printed hearing record remains the
official version. Because electronic submissions are used to prepare
both printed and electronic versions of the hearing record, the process
of converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
July 26, 2007
Page
Contract Bundling Oversight...................................... 1
OPENING STATEMENTS
Chairwoman Stephanie Herseth Sandlin............................. 1
Prepared statement of Chairwoman Herseth Sandlin............. 40
Hon. John Boozman, Ranking Republican Member..................... 2
Prepared statement of Congressman Boozman.................... 40
WITNESSES
U.S. Small Business Administration, Calvin Jenkins, Deputy
Associate Administrator, Office of Government Contracting and
Business Development........................................... 23
Prepared statement of Mr. Jenkins............................ 52
U.S. Department of Defense:
Lieutenant Colonel James A. Blanco, Assistant to the
Director, Office of Small Business Programs, Department of
the Army................................................... 26
Prepared statement of Lieutenant Colonel Blanco.......... 55
Anthony R. Martoccia, Director, Office of Small Business
Programs, Acquisition, Technology and Logistics............ 28
Prepared statement of Mr. Martoccia...................... 56
U.S. Department of Veterans Affairs, Scott F. Denniston,
Director, Office of Small and Disadvantaged Business
Utilization.................................................... 29
Prepared statement of Mr. Denniston.......................... 59
______
CSSS.NET, Bellevue, NE, Lisa N. Wolford, President and Chief
Executive Officer.............................................. 7
Prepared statement of Ms. Wolford............................ 49
MCB Lighting and Electrical, Owings, MD, Charles Maurice Baker,
President and Chief Executive Officer.......................... 3
Prepared statement of Mr. Baker.............................. 41
MicroTech, LLC, Vienna, VA, Anthony R. Jimenez, President and
Chief Executive Officer........................................ 5
Prepared statement of Mr. Jimenez............................ 45
SUBMISSION FOR THE RECORD
Veteran Corps of America, John R. Wheeler, Executive Vice
President, statement........................................... 62
MATERIAL SUBMITTED FOR THE RECORD
Post-Hearing Questions and Responses for the Record:
Hon. Stephanie Herseth Sandlin, Chairwoman, Subcommittee on
Economic Opportunity, Committee on Veterans' Affairs, to
Anthony R. Martoccia, Director, Office of Small Business
Programs, Acquisition, Technology and Logistics, U.S.
Department of Defense, letter dated October 30, 2007, and
DOD responses.............................................. 63
CONTRACT BUNDLING OVERSIGHT
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THURSDAY, JULY 26, 2007
U.S. House of Representatives,
Committee on Veterans' Affairs,
Subcommittee on Economic Opportunity,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:03 p.m., in
Room 334, Cannon House Office Building, Hon. Stephanie Herseth
Sandlin [Chairwoman of the Subcommittee] presiding.
Present: Representatives Herseth Sandlin, Donnelly, Hall,
Boozman.
OPENING STATEMENT OF CHAIRWOMAN HERSETH SANDLIN
Ms. Herseth Sandlin. Ladies and gentlemen, the Committee on
Veterans' Affairs Subcommittee on Economic Opportunity hearing
will now come to order on Contract Bundling.
Before I begin with my opening statement, I would like to
call your attention to the fact that Mr. John Wheeler,
Executive Vice President of the Veteran Corps of America, has
asked to submit a written statement for the record. If there is
no objection, I ask for unanimous consent that his statement be
entered for the record. Hearing no objection, so entered.
[The statement of Mr. Wheeler appears on p. 62.]
Some of the panelists and those of you in the audience
today may recall that we had a hearing in May on the subject of
veterans' entrepreneurship and self-employment and then an
additional hearing earlier this month on Federal procurement
and the three-percent set-aside rule. During these hearings,
many of our panelists expressed several concerns, such as the
failure of Federal agencies to meet the three-percent set-aside
for service-disabled veteran-owned businesses (SDVOBs) and a
lack of knowledge on current laws on the part of many
contracting officers. While this is discouraging to me, I am
pleased to hear that some agencies are moving ahead to address
some of these concerns.
Veterans of our armed forces have been, and continue to be,
a vital part of securing our Nation's economic prosperity and
development. When given the opportunity to start and manage
their own small businesses, these brave men and women add
tremendous value to the success of our economy as they strive
to lead a successful life back in the civilian workforce. Time
and time again, we have seen these veterans, many disabled,
return home to live out this American dream that they so
bravely fought to protect.
With over 17,000 veteran-owned small businesses back in my
State of South Dakota, I am concerned that we are not able to
give veteran entrepreneurs the proper assistance to expand
their enterprises. I am also concerned that we are not giving
them enough opportunities to compete for more contracts with
the Federal Government.
I applaud the efforts of the Federal agencies to address
the needs of our veterans while trying to secure goods and
services from competitive suppliers. I know that, if given the
opportunity, our veterans can compete, as they do every day.
I appreciate the opportunity to work with Ranking Member
Boozman and the distinguished Members of the Subcommittee as we
continue to work in a strong bipartisan effort to meet the
needs of our Nation's veterans and the challenges they face. I
look forward to hearing from our panelists and to discussing
ways to mitigate the negative effects of contract bundling on
small businesses.
I now recognize our Ranking Member, Mr. Boozman, for any
opening remarks he may have.
[The prepared statement of Chairwoman Herseth Sandlin
appears on p. 40.]
OPENING STATEMENT OF HON. JOHN BOOZMAN
Mr. Boozman. Thank you, Madam Chair. It is important that
contracting processes promote small business development,
especially those owned by veterans and service-disabled
veterans. In the 109th Congress, you and I passed what may be
called landmark legislation that improved opportunities for
veteran and service-disabled veteran-owned businesses at the
U.S. Department of Veterans Affairs (VA).
This hearing is certainly not about bashing large
businesses. In fact, I suspect the goal of most entrepreneurs
is to be successful and outgrow their small business status.
Large companies have capabilities vital to the national economy
that cannot be replicated by small business. But also, small
businesses provide a significant portion of the Nation's jobs.
In fact, they are the backbone of our economy in creative
thinking and that is certainly very vital to our economy.
I believe Ms. Wolford's testimony provides a good snapshot
of that contribution. I want to hear from the witnesses,
especially those representing the government, how we can ensure
that our veteran entrepreneurs get their fair share of the
Federal procurement pie. Based on their written testimony, I
believe we will need to tighten up the procurement changes we
made in P.L. 109-461 and I would like to work with you, Madam
Chair and staff, to see if we can make that happen.
There is also another serious problem facing small business
and that is the diversion of dollars meant for small business
to companies that are often very large corporations. While
there are sometimes valid reasons such as a company outgrowing
its small business status over the period of the long contract,
a recent article in the July 16th issue of Defense News states
that 37 percent of small business set-aside dollars, about
$11.9 billion, went to the Nation's largest companies.
What we will hear today will be valuable to our work with
VA, but also I urge you to present this case to the Small
Business Committee and other Committees with jurisdiction over
the Federal agencies.
Thank you, Madam Chair.
[The prepared statement of Congressman Boozman appears on
p. 40.]
Ms. Herseth Sandlin. Thank you, Mr. Boozman.
I now would like to invite our first panel of witnesses to
the table, and as I do so, I will introduce you to the rest of
the folks that are here today. Joining us we have Mr. Charles
Baker, President and Chief Executive Officer of MCB Lighting
and Electrical, Mr. Anthony Jimenez, President and Chief
Executive Officer of MicroTech, LLC, and Ms. Lisa Wolford,
President and Chief Executive Officer of CSSS.NET. Welcome, and
we look forward to your testimony.
Mr. Baker, we will start with you, and just a reminder, as
in prior hearings, your entire written statement and testimony
has been made part of the record. If you could summarize that
and share other views with the Subcommittee in the five minutes
you have availabe, we can get to questions as quickly as
possible and engage in a discussion that way. You are
recognized, Mr. Baker, for five minutes.
STATEMENTS OF CHARLES MAURICE BAKER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MCB LIGHTING AND ELECTRICAL, OWINGS, MD;
ANTHONY R. JIMENEZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
MICROTECH, LLC, VIENNA, VA; AND LISA N. WOLFORD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, CSSS.NET, BELLEVUE, NE
STATEMENT OF CHARLES MAURICE BAKER
Mr. Baker. Good afternoon, Madam Chair and Ranking Member--
--
Ms. Herseth Sandlin. Can you make sure that the microphone
is on and pulled pretty close to you there?
Mr. Baker. Can you hear me now?
Ms. Herseth Sandlin. I am not sure that it is----
Mr. Baker. How about now? Okay. Good afternoon, Madam
Chairwoman, Ranking Members of Congress, other Members of the
Subcommittee, veterans.
I would like to take this opportunity to--sorry about that.
I would like to take this opportunity to talk about bundling.
As a 20-year veteran who, in 20 years of working in the Federal
Government, I had a lot of experience with the mission of the
military and bundling contracts. So I would just like to talk
about my personal experience with bundling, first of all. And
then I want to focus on more of the solutions I look at versus,
you know, like Mr. Boozman said about bashing big businesses. I
think it is more important that we look at how do we move
forward and how do we correct some of the issues that are
affected by bundling, instead of looking back at the problems
that bundling caused.
So basically, one of the biggest issues that I experienced
with bundling as a member of the military and as a private
business, the main thing was, we had a lot of procurements that
were under $100,000 that when you go between $2,500 and
$100,000, it becomes a big problem in Federal procurement,
okay, and a big problem for the government customers.
We end up spending a lot of money and a lot of time trying
to make procurements under $100,000. Now, what Defense
Logistics Agency (DLA), which is an agency within the U.S.
Department of Defense (DoD) did, they went and combined for
MRO, which is Maintenance Repair and Operations type
facilities, they went and combined all of the requirements that
were under $100,000 and they put all of these requirements
under one, under like five regional contracts. They were all
half a billion dollar contracts.
Now, these were all types of requirements that were
normally going to small businesses and this had a very, very
bad effect on the local businesses, and on myself, as even a
person who, as a government, a person who was responsible--I am
a retired Chief of Facilities for Andrews Air Force Base. So
when I would need something that costs $4,000, instead of me
being able to readily get it, I would have to go to DLA and pay
a 20-percent surcharge to be able to get this. This would--and
none of these things ever went through base contracting or
anything like that. The issue was that it was about convenience
and getting the things done, or using the procurement system.
And what we had to do was get the job done, because if I
had the base and half the water was down to the base, I
couldn't worry about how much it cost. I had to worry about I
needed it now. Okay? And this bundled contract was the vehicle
for me to be able to get it. But let's keep in mind, it would
cost me an additional 20 percent for me to be able to do this.
Now, like I said, it is not about being negative and
knocking what is going on. It is about how do we look at
instituting a corrective solution to this problem. Okay? And
this is where I believe that we have to look at bundling as a
whole and whether it is really in the best interest of the
government, because I believe that all procurement decisions
should be based on what is in the best interest of the
government, okay, not what is more convenient for a contracting
officer, you know, not that there is a big company that has a
lot of influence, not that, you know, anything. It is the
mission that comes first. And we have to make sure that we
focus on the mission and when we focus on the mission, we have
to take the customer into consideration. We have to take the
industry into consideration, and we have to also take the
contract into consideration.
And it is my opinion that we should have a joint input. If
we want to really solve the problem, we need to have all three
involved. We need to have the synergistic approach to being
able to resolve the problems. It is going to take input from
the customer, it is going to take input from contracting, and
it is going to take input from industry. If we want to resolve
bundling, we are going to have to put our heads together and
work together as a team to be able to see how we can satisfy
the mission in a better method. Okay?
And I will reserve the rest of my time for questions.
[The prepared statement of Mr. Baker appears on p. 41.]
Ms. Herseth Sandlin. Thank you very much.
Mr. Jimenez, you are now recognized.
STATEMENT OF ANTHONY R. JIMENEZ
Mr. Jimenez. Good afternoon, Chairwoman Herseth Sandlin,
Ranking Member Boozman, distinguished Members of this
Subcommittee and distinguished guests. It is a privilege to be
here today and I want to thank the Subcommittee for once again
allowing me to share my thoughts, this time regarding contract
bundling.
My name is Tony Jimenez and I am the Founder and Chief
Executive Officer and President of MicroTech, LLC. We are a
Hispanic-owned and service-disabled veteran-owned small
business and we are located in Vienna, Virginia. I retired from
the Army in 2003 and after serving 24 years on active duty, I
started MicroTech, LLC in 2004. Today, I employ over 50 people,
have become a powerful job creation engine and a force for
economic development in my community and in my State.
MicroTech has over 20 prime contracts with the Federal
Government, at least as many subcontracts, and many of those
contracts that we support as either a prime or a subcontractor
are contracts that were at one time bundled. And many are still
bundled. That is, that these contracts were previously
satisfied by two or more contractors and were combined to
achieve cost savings, price reduction, quality improvements,
enhanced performance or better terms and conditions for the
government.
I personally think that makes sense for the taxpayers and
for the government. Some of those bundled contracts have done
exactly what they were intended to do and in addition, they
have also been able to provide service-disabled veteran small
businesses such as mine with great growth and opportunity.
Others, unfortunately, have not.
As a former contracting officer for the Federal Government,
I was involved in a number of contract consolidation
initiatives, or bundling. Many of those initiatives start off
as great plans and took all of the procurement management
factors into consideration. We established, during the initial
phase, very aggressive small business goals that we believe
could reasonably be met if they were given the proper attention
and effort. Those plans included all of the steps I have talked
about, cost savings, quality improvement.
However, in many of those cases, the initiatives, which
eventually become requests for proposals, RFP's, had been
stripped of many of their socioeconomic small business goals.
On many of them there was no mention whatsoever of
subcontracting initiatives for service-disabled veterans or
veteran small businesses, even though they were in the original
documentation.
The normal procedures for contract bundling requires
agencies to provide justification. The problem with the
procedure is that the decision is oftentimes made in a vacuum
and small business have no means to be able to object to the
bundling decisions and are at the mercy oftentimes of the
decisionmakers. Perhaps the most overlooked contracting
bundling problem for small business is the myth that big
businesses who receive very large bundled contracts will make
it up to the small businesses who receive a portion of the
subcontract under the subcontracting plan.
Large businesses are almost, in every instance I know of,
required to provide small business plans as part of their bid.
These plans are supposed to match the small business goals laid
out in the Federal Acquisition Regulation (FAR), which in most
instances is 23 percent. However, in a number of cases, small
business goals are never reached.
Today, there is no current status by which large businesses
are measured or graded with respect to their actual
subcontracting plan or goals and no one looks at the type of
work that the big businesses are giving to the small businesses
that are part of that subcontracting plan.
In addition, when they fail to meet the standard, I
personally know of no case where liquidated damages have ever
been assessed against a large business for failing to make, and
I use the word good faith effort to comply with the
subcontracting plan. And that is what is required in the FAR, a
good faith effort. Many of the contracting officers I know and
have worked with feel that any effort to penalize a large
business for, and this is a quote, ``failure to make a good
faith effort to comply with the subcontracting plan as required
in FAR 52-219-16,'' would be a waste of time. What is a good
faith effort? How do you establish whether a good faith effort
was made? If you are a contracting officer with more time than
you have, or more work than you have time, are you really
interested in fighting a battle that you can't win with
ammunition like good faith?
The objective of the government should be to find ways to
use the power of procurement reform to help small businesses,
while at the same time seeking out ways to perform services and
purchase products more efficiently and for a lower price. One
of the unbundling strategies for the U.S. Small Business
Administration (SBA) is to collect and disseminate examples of
successful strategies for maximizing small business
opportunities.
I think some of the solutions are consolidating contracts
so small businesses can share on the benefits of bundling. What
that means is, give some of those bundle opportunities to small
businesses. I think orders should be placed under small
business governmentwide Government Wide Acquisition Contracts
(GWACs), such as Veterans Technology Services (VETS), such as
Solutions for Enterprise Wide Procurement (SEWP). Those are the
only two large indefinite delivery/indefinite quantity (IDIQ)-
type GWACs, bundled contract type of capabilities that I know
of where service-disabled veterans are primes.
I think that the government should solicit quotes for U.S.
General Services Administration (GSA) Federal supply schedule
orders from small businesses or other socioeconomic small
groups. Even though the Federal supply center is not allowed to
set aside business, they are allowed to limit consideration on
small business and socioeconomic small business. Once again,
the U.S. Department of Affairs has done an outstanding job of
using this vehicle and have limited consideration to service-
disabled veteran-owned small businesses on numerous occasions.
Create a small business participation enforcement team.
Consider taking a portion of the savings realized through
contract bundling and implement a small business plan
enforcement team that enforces small business participation in
accordance with the request for proposal.
Consider hybrid contract bundling, teaming such as what GSA
uses, called contract teaming arrangement. And last,
establishing a Mentor Protege Program at the Small Business
Administration for veteran and service-disabled veteran-owned
small businesses. The benefits of establishing a service-
disabled veteran Mentor Protege Program at SBA that mirrors the
8(a) program is numerous.
I also believe that a proliferation of long-term indefinite
delivery and indefinite quantity contract vehicles has also
become a serious problem. There are a number of IDIQs that have
very, very little small business participation, and put the
goals of the military, in some cases, and the goals of other
small business or, rather, agencies that wish to give business
to small businesses at risk.
It is difficult to set aside contracts for service-disabled
veterans, 8(a), women-owned, HUBZone small businesses when the
prime contracts are all going to the large businesses or a very
small number of small businesses.
Other than VETS and SEWP, there have been very few large
IDIQ contracts for service-disabled veterans.
I am going to jump ahead because I am running out of time.
So I want to thank you, Madam Chairwoman, distinguished
Subcommittee Members. I appreciate the time you and other
Members of the Committee on Veterans' Affairs have spent on
this and other topics concerning veteran entrepreneurship.
I think I speak for all veteran entrepreneurs when I say
how very proud we are of this Committee and the hard work you
and your staff members do for veterans. Thank you for helping
to level the playingfield, for believing in us and our ability
as business men and women to give back to the Nation that has
given us so much.
This concludes my testimony and I would be happy to answer
any questions you have.
[The prepared statement of Mr. Jimenez appears on p. 45.]
Ms. Herseth Sandlin. Thank you, Mr. Jimenez. We appreciate
your testimony and your written statement, some of which you
didn't get a chance to get to, but we will want to visit in
some of the questions that we will pose.
Ms. Wolford, we would now like to recognize you.
STATEMENT OF LISA N. WOLFORD
Ms. Wolford. Thank you. I want to thank the Subcommittee
for the opportunity to speak today on this critically important
issue of contract bundling and its impact on the SDVOB
community.
I have been in business for over ten years and the last six
years exclusively with the Federal Government. I have never
worked on the Federal Government side other than my Marine
Corps time, so I am not like these two gentlemen. I am a
veteran of the Marine Corps and my firm is a SDVOB women-owned
business 8(a) small disadvantaged business. We provide
information technology (IT) engineering systems and solutions
to the Federal Government, both in DoD and civilian agencies.
Therefore, the majority of my testimony will regard contract
bundling concentrating on the IT sector.
We have an excellent record of past performance and yet
even with this, my firm has been dramatically impacted
personally by the issue of contract bundling. I would like to
remind each of you that veterans have vested into their
citizenship rights in a way that no other group has through the
service in our country.
Small businesses do not have access to the money or the
access to PACs or lobbyists that the large businesses have.
Consequently, many laws and modifications to regulations make
it into the FAR and business practices of the government that
favor large business and are harmful to small business. And as
you know, the economic preference for SDVOBs is fairly new to
the Federal market, and therefore, the impact to SDVOBs, I
believe, is greater to the average small business.
I synopsized my oral testimony, but my full written
testimony has other detailed facts in it that I won't go
through at this time regarding small businesses and contract
bundling.
In 2001, the Army had a record of contracting 27.2 percent
prime contracting dollars with small businesses and 35 percent
of that was through the Army Corps of Engineers. Now that all
IT service contracts have been bundled, their achievements will
go down substantially and that has just happened this year just
recently.
It is a known fact that the majority of contract bundling
occurs within the DoD environment and I consider this
particularly reprehensible since if anyone in the Federal
Government bears a greater responsibility of veteran business
centers, I think DoD and the VA should be held to a higher
standard in culpability. I can say that I have a great deal of
respect for the substantial challenges and changes that Mr.
Scott Denniston has faced and wrought in the VA. And by the
way, I wrote that in there before I knew he was appearing
today.
Multiple work contracts are another issue and they are
subject to FAR clauses that require the contracting office to
allow all awardees fair opportunity to compete on the
individual task orders. This means that small businesses have
to compete head to head with the largest of Federal
contractors. This is another form of Federal contract bundling,
although it doesn't get measured as such, and therefore, has
the same negative impact on the small business community.
Another abuse of the small business community is the way
GSA scheduled contract buys occur that are not set-aside
opportunities. If a contracting officer sends out an
opportunity to bid only to a particular socioeconomic group,
say on a schedule 70, they can count the entire award as a
small business award. However, since it is not a set-aside,
work share rules of 51 percent do not apply. So the small
business can do as little as zero percent, but the agency will
get a hundred percent credit. This practice is legal currently
through the rules of the FAR and GSA contracting and these
rules must be modified to prevent such atrocities.
My firm has been regularly asked to bid on such
opportunities by multiple Federal agencies. It is the standard
practice across the Federal Government. Since IT purchases
represent such a large portion of the Federal budget, I think
it is particularly imperative that attention is paid to this
sector. In Nebraska, where I am from, United States Strategic
Command (STRATCOM) is one of the largest commands. It is the
joint forces command. As you are probably aware, there is a
contract that was bundled called ITCC that is about $550
million over ten years. That contract used to be a lot of small
business contracts. It has effectively shut out all
opportunities for small businesses in that area because between
STRATCOM and the Corps of Engineers, that was the Federal
opportunities in Nebraska for IT services.
Some solutions I have written down that I would like to
suggest is don't allow contract bundling if it will prevent a
command or an agency in a particular geographical region from
meeting its small business prime contracting goals. Do not
allow contract bundling if it will bundle all requirements for
a particular North American Industry Classification System
(NAICS) code at that command or agency in a particular
geographical region. Some people want to talk about, you know,
a particular agency and only talk about what has happened in
Washington, DC. And probably not all of us here are from DC. So
I think it is really important to look at the geographical
regions because that does directly impact our veterans wherever
they are starting their businesses.
Require GSA schedule buys that are not set-asides to only
allow the government to count toward their small business goals
that percentage of the business that the small business
actually executed versus their large business subcontractor.
Charge FAR part 16 to allow awardees under a Multiple Award
Contract (MAC) to have restricted small business competitions
for any reason post-award of the blanket purchase agreement,
which is what the issue is. Implement the findings, the full
findings from the Office of Management and Budget (OMB) report
titled ``A Strategy for Increasing Federal Contracting
Opportunities for Small Businesses'' that was dated October 29,
2002.
I appreciate your holding this hearing today and I thank
you for giving me the opportunity to speak and share my
experience with you. I am glad this hearing is being held and I
hope that my testimony will help you to develop some real
solutions to this critical issue. And I would happy to answer
any questions you may have.
[The prepared statement of Ms. Wolford appears on p. 49.]
Ms. Herseth Sandlin. Thank you very much, Ms. Wolford.
I appreciate the testimony of all three of our witnesses. I
am going to start with one or two questions and then turn it
over to the Ranking Member and then to Mr. Hall. Then we will
come back to explore some other areas.
Mr. Boozman and I were talking as you spoke, Mr. Baker,
because you mentioned the 20-percent surcharge that you would
have to go through after you described that MROs under $100,000
all got combined into five regional bundled contracts that were
about a half a billion dollars apiece. Is that what you
testified to? Then you had to go through DLA to have your needs
met at your particular installation and that didn't meet the
needs often in your case at the installation, as well as the
local small business needs.
Could you tell us more about where the 20-percent surcharge
is coming from? Just explain with a little more detail what you
mean by that.
Mr. Baker. First of all, the 20-percent surcharge, I
believe the maximum that can be charged is 23 and a half
percent. And traditionally, the prime contractor gets about 16
and a half percent and then DLA gets 3.9 percent on the DLA
contract. Okay? So that is where you come up with the 20
percent. But the real issue is that what we run into, you know,
being in the military and having to perform the mission, when
we need, what we need to perform our mission, we need to have
choices and when you are between--and this micropurchase
threshold got changed to $3,000. So it is $3,000 to $100,000
now.
But the problem is, is that when you go between $3,000 and
$100,000, there is like no way for you to get anything quick. I
mean, I had situations where I had no water and I would have to
spend another $20,000 to make a repair on something that costs
$4,000, because even though under urgent and compelling needs I
could actually get the product that I need. The problem was,
the problem was it would take an enormous amount of time for us
to be able to get through the contracting process for a simple
procurement that would wind up costing $4,000 to buy a $4,000
part.
Now, what I suggest, and I have talked to some people in
DoD, that what we needed to do is, we need to create a
innovative method where we can actually take the procurements
that are under $100,000 which are exclusively reserved for
small business, and I don't know why my phone won't cut off.
Excuse me about that. What we need to do is make sure that when
we develop a plan, that we can, number one, make sure all that
business is going to small business. That is the first thing.
Ms. Herseth Sandlin. So let me----
Mr. Baker. Go ahead.
Ms. Herseth Sandlin. I want you to describe that further in
terms of your conversations in that plan. In what you
described, when you have a consolidation into five regional
contracts----
Mr. Baker. Yes, ma'am.
Ms. Herseth Sandlin [continuing]. All of those contracts
are required to submit a plan for subcontracting to small
businesses?
Mr. Baker. That is one hundred percent correct, yes.
Ms. Herseth Sandlin. Did they?
Mr. Baker. Well----
Ms. Herseth Sandlin. Did you have options at the local
level?
Mr. Baker. Well, I am sure that the plans are submitted.
The problem is, what happens--this is the reality. And I am
talking about this from when I was a government employee, not
as a businessowner. What I found that was happening was that
what they would do is, they would get the contract and then if
I told them I wanted a part that cost $4,000, what they would
do is they would go to the manufacturer. They would circumvent
the local supplier. They would go straight to the manufacturer
so they could make more profit, because basically what we had
to do to make sure that we get the best value for our buck, was
we would have to go out and negotiate the best price that we
could find in the local market--and let's say the valve cost
$5,000. Well, we would have to tell them we want you to buy
this valve for $5,000 from this place and this is the phone
number. We don't want you to go out and find anything any
higher, okay, because we would come back--sometimes they come
back with a $12,000 valve and it is the same valve and we are
like woah, woah, woah.
So we would have to go out and basically do the market
research and come back and tell them, this is what we found,
this is what we want. It is right here. It is local. But
because of the system, we would have to go through DLA and pay
20 percent instead of being able to get this through local
contracting. And see, a lot of local contracting people aren't
even aware that this is happening. And this is happening to the
tune of $2 million per Air Force Base. I can't speak about any
other military. But on average, you spend about $2 million on
MRO-type items under $100,000.
And the problem with this is that this destroys the
creation of small businesses and the whole problem that we are
having with the lack of capacity is all based on the fact that
if we don't have some type of system where you can get constant
work and where you can get work that you can handle when you
are small companies, then how are you going to ever grow into
being small--into a big business? How are you going to ever
become a viable sustainable competitive business? It is almost
impossible. You know, so by having all of these requirements
under the $100,000 bundled and then taken away from small
business, it really cripples the whole small business market.
Ms. Herseth Sandlin. Okay. Very compelling testimony and I
want to come back in a little bit to pursue more of the
discussions you had had about the solution. It sounds to me
like the primary justification for contract bundling, which is
to save taxpayers dollars, in many instances isn't even being
realized due to a lack of monitoring to ensure that
subcontracts go to local small businesses. I think that is what
you're saying in some cases.
Mr. Baker. That is one hundred percent correct. It is my
belief that I could look at those contracts that are bundled,
that are supposed to save ten percent, and I think they could
save more. You could save ten percent by reversing it and doing
it the way it was done or doing a different approach. I mean,
this is what I am saying about how we need to take industry and
the customer and contracting and we need to brainstorm on how
this process works, because if you look at it from a
contracting standpoint, and like Tony, I have contracting
experience, too. If you look at it strictly from a contracting
standpoint, you don't understand the mission. Okay. So you have
to take the mission into consideration, because that is the
most important element.
The problem is that now the customer, who understands the
mission, you need to now understand industry. Okay. And the
whole problem is, is no one understands--there is no synergy.
There is no synergistic relationship between everybody. And
that is what needs to happen. If we really want to, you know,
mitigate bundling, we have got to have creative ways where we
can really mitigate, you know, the effects of bundling.
Ms. Herseth Sandlin. Thank you.
Mr. Boozman.
Mr. Boozman. Let me start with Mr. Baker. And again, I want
all of you all to comment on this. I guess I am trying to
really sort this out as far as the bundling. You bundle for
different reasons. I think everyone understands that it is the
will of Congress to try and make more room for small business.
And yet, we toughen those things up. I guess I would like for
you all to comment about with the bundling, how much of that is
the result of increased bundling because we have tightened
things up as a way to avoid parsing out to small business and
being favorable to large business. And yet there is other cases
where bundling, I am sure, is appropriate. And then there is
other cases where perhaps we just don't have as many
procurement officers as we need and this is a very convenient
way of doing things, for them to get their job done, and again,
stay out of jail in doing that.
So can you all comment about that, as to where you see--and
again, we have got a couple guys that have kind of played that
game somewhat. And then Ms. Wolford is here and kind of seeing
it in a different light. What is your gut feeling as to what is
going on in relation to those three? Does that make sense?
Go ahead, Ms. Wolford.
Ms. Wolford. I think--my opinion is there are a lot of
different reasons that contract bundling is done. One is, I
think, plain and simple, it is easier in some regards and there
is not a lot of rules against it really. Once--my SBA reps have
told me that so long as the government runs through the right
hoops, they can bundle pretty much anything that they want to.
And they do use a justification that will be cheaper to the
government because they will have less procurement officers
that have to watch over the contract.
However, like what I said with the ITCC program and the
Corps of Engineers impact on the State of Nebraska, those have
both been bundled, I think, for ten-year life spans definitely
on ITCC and I think the Corps of Engineers almost ten years as
well. What effectively that does, is it completely prevents any
small business from entering that market if they are not
currently on that contract, because if you aren't a part of
that team when that is being bid, you don't get on later. That
is it. It is over.
So for ten years those opportunities are gone in that
geographical region. So maybe it is cheaper. But the long-term
impact in the actual cost to the government by the loss of the
innovation that you get from the small business community is
huge and you can't even measure that.
Mr. Boozman. No. I understand. I guess the thing is for us
to figure it out. There is kind of a core deal as to if we need
more procurement officers, if we need to toughen up the law. It
doesn't do a whole lot to toughen up the law if you don't have
the underlying infrastructure to support the need. You kind of
need to figure out was this done in an effort to exclude small
business in favor of a specific big business, or was it done
because the amount of staff that was there. It was just easier
to get it done that way, or they had some deal that perhaps
they felt like in doing that, it was more cost effectively
truly, and more whatever to do it. Does that make sense?
Ms. Wolford. Yeah. I mean I think that it is true that they
can use less procurement officers to manage it and to do the
competition in the long run, especially when it is a ten-year
life cycle versus multiple five-year contracts, for instance.
So yes, obviously, that requires less people to do that, and
therefore, it is less expensive. Okay?
So I think those are obviously true and I think it is a
very easy case to prove that. I don't know that--I think it is
a fallacy personally to use it as an argument for contract
bundling.
Mr. Boozman. No. I agree. I guess what I am saying though,
is if we want to unbundle these things, then we also would need
to put in place a mechanism where we had more procurement
officers. See, that is what I am saying, is you can't----
Ms. Wolford. Yes.
Mr. Boozman. I am trying to figure out if you can do one
without the other.
Ms. Wolford. I think you can if you do like what we were
talking about with the multiple work contract vehicles. For
instance, if you had a multiple work contract vehicle and you
allowed an on-ramp for new small business during the lifespan
of that contract which allows new businesses that are entering
that market to come in, okay, that is what the on-ramp is for.
And this is currently done in different agencies on different
IDIQs. And so then you have that ability to add new companies
in and then you can do separate procurements. And a classic one
actually is a C Port E contract with the Navy. That is a Navy
MAC multiple work contract. They do do small business
competitions on those contracts. But the problem with MACs
today is you can't say that--you have to specify the rules on
the front end of a MAC about how that is going to be competed.
You can't just one day say I want to have this piece of work
competed only in the SDVOB market. Okay. You have to--that rule
had to have been set up with the MAC was originally being
competed. Does that make sense?
Mr. Boozman. Yes.
Ms. Wolford. So that is one of the barriers. So there are
ways to do that, it is just not--that is not what is being
done.
Mr. Boozman. Mr. Jimenez.
Thank you. Thank you, Ms. Wolford.
Mr. Jimenez. Congressman Boozman, I think that what we are
all trying to say is that there are instances where the
government could do a better job of instituting contract policy
and procedures. Contract bundling--and frankly, I have been a
contracting officer and spent a large amount of my life in the
military. I saw distinct advantages to having contracts
bundled. It provided efficiencies that I desperately needed as
a contracting officer because of the resources that I didn't
have that I desperately needed. So it was a combination of
both.
I think where the Federal Government falls short is that
there either are not enough IDIQs, contract bundling, MACs or
other contract vehicles that provide prime opportunities to
socioeconomic groups. They are all--for some reason, people
think bundling means big. They don't understand that I have a
contract bundle right now that I do for VA and my subs are
Microsoft and Insight and they are great companies.
And originally, the thought was give it to one of those big
companies. The concern, obviously, for us, not necessarily with
that contract, but with anybody who is doing it, is bigger is
better. And bigger is not better. Bigger may sometimes be
easier and less risk, which is normally what is driving a lot
of these two the large businesses is if I give this to a large
company I have got less risk.
And the fact is, the big company gives it to the small
company. The small company does it and then much of the quality
work is kept for the larger prime. And the fact of the matter,
sir, is prime is king in this business. When you are the person
negotiating with the government, you control your destiny. The
sub gets the flow down. You get what is left and you say thank
you very much. And oftentimes it is not the kind of
opportunities that I or anybody else in the business need to
become that prime. And you can't afford to say no in this
business.
One of the other examples, I think, are many of these large
IDIQs that are being put out--one in particular that comes to
mind is ITEST, great, great contract vehicle, $20 billion IDIQ.
It has got 16 primes. Two of them are small business. Four
originally were small business, and all the socioeconomic
groups are participants. However, it has got to be aggressively
managed.
If somebody isn't up there looking at the large primes,
which are 14 of the 16, that $20 billion is not going to filter
down to the service-disabled veterans or the 8(a)s or the
women-owned or the HUBZone or any of the other small
businesses. And more importantly, the quality of work that is
going to flow down that is going to enable those small business
to ultimately some day be a big business isn't going to flow
down, because, sir, there is profitable business on every
contract and there is business that is not very profitable. And
I can guarantee you that when you are the prime, you are not
giving away the profitable to the guys you are subbing to. You
are looking for somebody who can come in and help you out on a
dime.
Ms. Herseth Sandlin. Thank you, Mr. Boozman.
Mr. Hall, do you have questions for the panel?
Mr. Hall. Thank you, Madam Chair and Ranking Member Boozman
and thank you to our panelists.
Mr. Jimenez, you stated that by the time an initiative
becomes a request for proposal, it is frequently stripped of
all socioeconomic small business goals, including veteran and
service-disabled small businesses. How often does this happen
in your estimation and can it be avoided?
Mr. Jimenez. Sir, I am not sure that I am equipped to
answer that question in the sense that I honestly don't know. I
know that being on the receiving end, it happens more than I
want it to happen because I would like to be able to be the
recipient of some of those opportunities and be able to
compete. So obviously, my view is tainted being on the
receiving end. I think it happens every day, but I don't know
that that is realistic.
I think that what happens is, is that it is a hard job for
the folks who work in the small business offices because their
job is to remind procurement officials, contracting officers,
think small business, think socioeconomic groups, think
service-disabled, think 8(a), think woman-owned, think HUBZone,
think about all the people that we are trying to turn into big
businesses that can come in and provide competition, which is a
great thing. And there are not enough of those folks to get
around to all the contracting officers that need to be reminded
that there are small business goals that need to be met.
So that is a challenge and sometimes some organizations do
a better job. It doesn't happen in every instance and it is
getting better for service-disabled veterans. But we are not
there yet.
Mr. Hall. Okay. Thank you. And I think, I was going to ask
you, while you said it is a myth that big businesses who
receive these very large contracts will make it up to the small
businesses in their subcontracting plans, I think you just kind
of answered that question a minute ago.
And Ms. Wolford, I wanted to--first of all, I thought your
goals--your bulleted goals here look very thoughtful and worthy
of consideration, in particular the ones that require GSA
schedule buys that are not set-asides, to only allow the
government to count toward their small business goals that
percentage of the business that small business actually
executed versus their large business subcontractor.
Ms. Wolford. Thank you.
Mr. Hall. I think that is something that we might want to
take a look at codifying. But you mentioned in your written
testimony that Federal agencies is only acting on negotiations
with prime contractors and not with subcontractors. If the
contracting officers communicated with subcontractors more,
would this increase subcontractor participation?
Ms. Wolford. Subcontractors can communicate all day long
but it has no value because we don't have privity of contract
with the government as a subcontractor. The contract is only
between the government and the prime contractor entity that is
a part of the FAR. And so that is just the rules of the road of
contracting. The subcontractor has no standing on the contract.
You can go talk to the contracting officer, certainly, and most
of them are nice people and will talk to you, but it won't--it
doesn't change anything at the end of the day because you are
not privy to the contract.
Mr. Hall. Should--and this is still to you, Ms. Wolford.
Should multiple award contracts subject to Federal acquisition
regulations regulate what size companies compete with each
other?
Ms. Wolford. Well, the point with that is, is FAR part 16
currently what happens on a MAC is you go through the
competition. If they didn't set up the rules on the front end
of the MAC for the blanket purchase agreement (BPA) that is
going to be awarded out of the multiple award contract, if they
didn't set up the rules on the front end of how competitions
for small business in different socioeconomic categories can
happen, then they can't do it later on. Okay? They can't hold
small business competitions at all.
So it is not an issue of setting size standards. It is
allowing the contracting officer the latitude to be able to
hold a small business competition for any reason post-award of
a BPA. Okay? Does that make more sense?
Mr. Hall. Yes, it does. Thank you.
And Mr. Baker, I just wondered how you know that six major
defense contractors are receiving approximately 30 percent of
the defense budget and 40 percent of their contracts are sole
sourced? And can anyone else offer the services offered by
those six major defense contractors?
Mr. Baker. Well, sir, I will tell you that that information
was obtained from--I will get back to you to make sure, but I
believe it was Eagle Outsource was the source for that. But I
have seen it in numerous, numerous different publications and
stuff.
And why do I feel like small business can actually obtain
it? It is my belief that, first of all, if the government
really wants to obtain three percent for service-disabled
veterans, the first thing we have to do is, you have to have
what I call an attainment strategy. Okay? You can't just say
give me three percent and throw it up against the wall and you
have got three percent. Okay?
If you look at the Federal procurement data, 2005 Federal
procurement data, which is the latest data, and if you go to
each category, you can tell how much was spent with serviced
disabled vet, women, whatever. I believe if the government--
let's use the very first one in the category, which is aircraft
charter. I believe that the government set aside three percent
for aircraft chartering. Then, even if I didn't do aircraft
chartering and you guaranteed me that I was going to get three
percent over the next ten years and nobody else did it, I would
go to aircraft chartering.
And I believe if you go down the whole system like that, if
you just take every category, whether it is a category or
whether it is a service, and you actually put money on the
table for veterans, service-disabled veterans, 8(a)s, you
actually develop a plan like that, you will--we lack--I am not
going to say the capacity is there now. But the capacity can be
created. And what comes first, the chicken or the egg? You
know, put the money on the table. I guarantee you we will be
able to go and create what we need through teaming, you know,
joint ventures (JV's), mentor proteges, you know.
If you put us in the driver's seat, I think this is what,
you know, Tony and Lisa were saying. The problem is, we are in
the backseat. If you put us in the driver's seat, we can Do
some great things.
Mr. Hall. Thank you. The last hearing that we had on this
topic, I threw out the idea of only using this three percent of
whatever budget it is for these particular small businesses and
fencing it off, or sequestering it so it couldn't be used for
other businesses that weren't veteran-owned or disabled
veteran, or women-owned and so on. And there wasn't--there
didn't seem to be any support for the idea. But it sounds to me
like your--is that what you are saying roughly is that----
Mr. Baker. We are going to tag-team you on this one, so he
is going to----
Mr. Jimenez. Sir, I was actually here on May the 17th when
you brought that up and I thought it was a stupendous idea. It
did not gather much support from the government officials
because it is extra work. I think that if I, as a former
contracting officer, and I, as a small businessowner, am being
told that you now have this money set aside, and I, as a
contracting officer, know that I have my standard pot of money
and I have this money over here that I can apply to service-
disabled veterans, I would be incentivized to make sure I don't
leave any money on the table.
Mr. Hall. Right. And if you don't come up with a service-
disabled veterans' business, you lose the money.
Mr. Jimenez. Correct, sir. My only concern about that is
one that I voiced, I think it was on the same day, May the
17th, is that, sir, that is a floor. I don't want to have
anybody in the government and I have never had that impression
when I was in the government that that is the ceiling. That is
where we need to begin giving service-disabled----
Mr. Hall. I understand.
Mr. Jimenez [continuing]. Veterans opportunity. And my only
concern would be setting three percent aside would tell every
contracting officer----
Mr. Hall. That is all you have to do.
Mr. Jimenez [continuing]. In the Federal Government that is
all you get for service-disabled veterans. And the goal is that
the greater the small business engine is in this country, the
greater this country is going to be----
Mr. Hall. Excuse me, for running over time----
Mr. Jimenez [continuing]. For more opportunity----
Mr. Hall [continuing]. Madam Chair. It may be that we need
a temporary thing to get us to where we want to be and that
might be a----
Mr. Baker. But can I make a comment on this tag-team and
back? The goal is really something called maximum practical
utilization, okay, which is much different than three percent.
Mr. Hall. But we are not at three percent yet though.
Mr. Baker. But it is still maximum practical utilization.
If you shoot here, you are going to wind up there.
Mr. Hall. Right. Okay.
Ms. Wolford. And let me just add something here. What I
have always found in life is that if I impact somebody's
financial, personal financial impact, meaning I impact your
personal checkbook, you suddenly get a lot more interested in
things. Okay? So if you and all of your review boards show that
you are not meeting your three-percent goal as a minimum,
suddenly your personal check, maybe your bonus check, whatever
gets impacted, you suddenly get a lot more interested in making
that three percent happen.
Mr. Hall. Thank you, Madam Chair.
Ms. Herseth Sandlin. Thank you, Mr. Hall.
Let me approach this from a different angle. I appreciated,
Mr. Jimenez, how you talked with us about the issue of smaller
companies being the primes in the contracts. I want to explore
that a little bit further. What is the differential? Large
companies are required to submit a plan when they make a bid
that demonstrates how they are going to subcontract out to
small businesses.
There is no monitoring to make sure everything is followed
through there. The testimony that we have taken from you today
and in the past, intimates that they may use that and they are
required to submit that plan, but there is no designated entity
to assure that those plans are fulfilled. Right?
Mr. Jimenez. Ma'am, not in every instance. It really is
dependent on the contracting officer, the organization. It is
an instance--there are many instances where good contracting
officers within good agencies understand, develop the matrix,
track it and it happens the way it is supposed to. But that is
not----
Ms. Herseth Sandlin. There is no third party validator----
Mr. Jimenez. Exactly.
Ms. Herseth Sandlin [continuing]. To make sure that the
plan is fulfilled. There is no oversight.
Mr. Jimenez. There is supposed to be, but unfortunately,
ma'am----
Ms. Herseth Sandlin. There is supposed to be, but in your
experience as contracting officers----
Mr. Jimenez. Difficult.
Ms. Herseth Sandlin. Okay.
Mr. Jimenez. The resources just aren't there. The
contracting officer is already overworked, and in addition, he
or she has to go out and manage and monitor subcontracting
plans. So once a year, if they are fortunate and they are
managing it right, the contractor, the prime comes in, lays out
the small business plan, shows how they have met it. If they
didn't meet it, they get a slap on the hand. They are told
don't do this again. We will see you next year.
Ms. Herseth Sandlin. Are there instances that you know of
where liquidated damages were imposed?
Mr. Baker. Never.
Mr. Jimenez. Good faith effort, ma'am. They made a good
faith--they called one subcontractor and I am exaggerating,
obviously, said, hey, how are you doing? I have got some work
for you. They didn't show up. They didn't give it to them. So
it really is tough to manage that good faith--what is a good
faith effort?
Ms. Herseth Sandlin. What is the threshold here for a large
company versus smaller company in bidding to be the prime on a
contract? Was your company required to submit a plan for how
you were going to work with smaller companies?
Mr. Jimenez. No, ma'am. I am a small business and the goal
is that----
Ms. Herseth Sandlin. Is it the designation we have always
worked with? There is----
Mr. Jimenez. Yes, ma'am.
Ms. Herseth Sandlin. If----
Mr. Jimenez. The large are required----
Ms. Herseth Sandlin [continuing]. You don't have the small
business designation, do you have to submit that plan?
Mr. Jimenez. Yes, ma'am. The large are required to submit
it as a general rule. I have seen instances where it was not
required in RFP's and small as a general rule are not required.
However, I have had small business RFP's that I have had to
develop a small business plan to cover the other socioeconomic
groups, women-owned, 8(a), HUBZone, that I was not in that
particular instance.
Ms. Herseth Sandlin. Okay.
Mr. Baker. And if I may comment on the subcontracting
issue. I think the real problem that we have with
subcontracting, ma'am, is this. After you get beyond the first
tier, subcontracting, the goal doesn't count toward it. So if
you are second or third--if you are following what I am saying,
like let's say Lockheed Martin--let's use them for example--is
the prime and let's say that Northrop Grumman is the first tier
prime. Well, unless Northrop Grumman has done a JV or something
else with somebody else, it is not going to count. It only
counts at the first tier. The second tier, third tier, fourth
tier subcontracting, even though there is a flow down
requirement, it doesn't count toward the goal.
So if you don't have an incentive to actually get credit
for what you do, then maybe you are not going to do it. So I
think, and I think H.R. 1378, I believe is trying to correct
that, counting second, third and fourth tier subcontracting. So
I believe that that is a very big benefit that the big business
needs. Sometimes they need to carry it and it is just like, you
know, one of our kids going to school and get A's and they
don't count. You know, so I think that is part of the problem,
myself.
Ms. Wolford. I need to disagree with that. I will say that
first tier prime contractors have no punishment, for instance,
of not meeting their goals, their subcontracting small business
plan goals. So there is no retribution. They just said, Tony
just said they get a slap on the hand. Oh well, that is okay.
They have got all the profit. They can come back next year and
get another slap on the hand. Nobody takes away their contract.
It doesn't get recompeted. They don't have any financial
penalties, you know. So that is the real issue.
The issue with counting sub-tier contracting toward the
prime contractor's goals is it takes away their incentive to
work with the firm that they initially teamed with, which might
be my firm, or it might make that subcontractor get to bid
against me and drive down my profit even further, making my
ability to survive even harder. And that is a very real issue.
Mr. Jimenez. Ma'am, if I might, one of the issues I think
that is critical about this is that the government has taken
steps to try and provide those opportunities to small business.
VETS is a perfect example. It is an IDIQ contract where bundled
contracts do have the availability to come to service-disabled
veterans who can compete. SEWP is another perfect example,
service-disabled veteran primes on a level playingfield with
large primes.
However, having said that, other agencies we have talked
to, and we have gone into and pitched about the benefits of
that, just don't--they start out okay but, unfortunately, they
don't get there. We recently experienced that when we went into
the Department of Interior. We were asked to come in, provided
a great opportunity to be able to bid, bid it. It was a
wonderful, wonderful experience for us right up until two years
later, two years from the time we started working on it, 18
months from the time we bid it, almost $50,000 in my personal
cost, this IDIQ was canceled, pulled right out from underneath
me and just yesterday we saw a solicitation put out by the
Department of Interior that could have gone on this vehicle
that now the vehicle doesn't exist.
The large businesses that I convinced to support me on this
bundled contract where a service-disabled veteran was not going
to be the prime are not interested in going down this road
again with guys like myself for the simple reason that it
happens to them, but not as frequently as it seems to happen to
small business. And there is no recourse now. Now this vehicle
that would not have cost the government a dime to put into
place is not there anymore after the resources I expended, my
partner expended, as well as the Federal Government.
And the real shame here is that the person who put that
into place and was so eager to help us, the minute he left the
job, we lost support. And a new contracting officer came in
who, unfortunately, was not able to support us. And it didn't
just happen to me. There were numerous other bidders on this
same vehicle.
Ms. Herseth Sandlin. Okay. I think I understood what you
were saying--the IDIQ was pulled 18 months after you bid on it
and the motivation for that action was the fact that the
contracting officer left the agency?
Mr. Jimenez. Well, the contracting officer, the new
contracting officer stated to us that this need could be
satisfied through another vehicle. The Department of Interior
has no other service-disabled veteran small business vehicle,
unless they are planning on taking it to one of only two I know
of in the Federal Government.
Ms. Herseth Sandlin. Okay.
Mr. Jimenez. Two, where they can take this, unless they
take it to GSA or someplace else. But the fact of the matter
is, is that it is another instance of service-disabled
veterans, we want you. We need you. Our goals are not where
they need to be. Come in, bid one, bid all. Put lots of money
into this. Put lots of effort. We are going to down-select,
which now they are calling competitive range. We are going to
determine who is in the competitive range. We are going to get
you going. And oh, by the way, we expect you to keep those
people you bid on the bench because you can't change those
people out or you are no longer a valid entity on this
contract. So we want you to spend money keeping those people
around for 18 months while we decide that we are not really,
you know, just kidding.
I equate it to running a marathon and at the 25th mile
being told, sorry, the marathon is canceled. You don't get to
say you finish. You get to say you almost participated. And 18
months in source selection is crazy.
Ms. Herseth Sandlin. You say that this happens far more
frequently when the service-disabled veteran-owned business is
bidding as the prime than in other cases? How do we monitor
that? Are those statistics readily available to us?
Mr. Jimenez. Unfortunately, no, ma'am. They are not. And my
experience, I guess, is probably more of an accurate statement.
I don't have facts. However, the common sense that I am--the
only thing that I am able to apply in that instance is that the
common sense of that is that I can upset a Micro-Tech. I can
upset a small business by doing this and his or her recourse
are not as aggressive as if I did that to a large business.
Ms. Herseth Sandlin. Okay.
Mr. Jimenez. If a large business invested a significant
amount in a proposal and it was to get pulled, ma'am, you would
probably hear about it if they were from your State. And the
fact is, is that I write my Congressman and I write my Senator.
But so did the thousands of other small businesses. And the
fact is, is that I am one of millions of entrepreneurs in this
Nation. And I also don't want to be the squeaky wheel. I need
to be very, very careful about how much I ask for assistance,
because when I really need it, it might not be there.
Ms. Herseth Sandlin. I understand.
Mr. Boozman or Mr. Hall, do you have any further questions?
Mr. Boozman. Just very quickly, Madam Chair, I know we need
to move on.
But Mr. Baker, there has been a little bit of disagreement
as far as the rule of two.
Mr. Baker. Yes.
Mr. Boozman. Some people feel like doing away with the rule
of two would create more competition. Others feel like doing
away with it would actually make it such that those in the
system would be more likely to stay in the system, and create
less competition. Does that make sense?
Mr. Baker. Well, could you say it one more time?
Mr. Boozman. Well----
Mr. Baker. The last part was the part I didn't catch.
Mr. Boozman. The rule of two----
Mr. Baker. I am familiar.
Mr. Boozman [continuing]. Does it create more competition
or less in the sense that if you did away with it, then it is
easier in one respect, but also, if you did away, it is easier
for those that are already in the system to remain in the
system? Does it make sense, that the procurement officer, is
just real convenient to stay with that guy rather than having
to have to look at somebody else?
Mr. Baker. Okay. Now----
Mr. Boozman. Do you see what I am saying?
Mr. Baker. Yes, yes, yes, I know what you are talking about
now. You are talking about--and this was one of the things
that--I will put my government hat on again. This was one of
the things where you are comfortable with the person that is
actually doing the job now. So what you are saying is that you
don't have an opportunity to get other people to come in, for
them to be able to get an opportunity.
Mr. Boozman. To realize that that other group is out there.
Mr. Baker. Right.
Mr. Boozman. And maybe it is not even comfortable. You are
just busy, and you don't--it is just convenient not to--see
what I am saying?
Mr. Baker. I think most of it is the comfort level.
Mr. Boozman. Okay.
Mr. Baker. I think you get very comfortable with the
contractor that you are dealing with and then you get a little
uncomfortable with the person that might be coming. But let me
really clarify what I consider to be the problem with rule of
two. Okay? And the problem is, is that the service-disabled
veteran, okay, needs--we need business development. Okay? We
don't have business development. Okay?
We need to increase our capacity by having a steady flow of
work. Any companies can grow if you have a steady flow of work.
If we want to have goal attainment with the three percent, then
we need to have a vehicle where we can get a steady flow of
work so we can develop into competitive, viable, sustainable
businesses that can make an immediate demonstrative impact on
the government procurement. If we get a steady flow of work,
there is nothing that we can't do. We can develop--and another
thing that we need to do is, we need--and I don't want to bash
any programs or whatever.
But one of the things that I find as being a problem is we
need to have people, whether we utilize systems like utilizing
the Nation's college systems or whatever, where we can
integrate a system, where we can use the best business minds in
the country, to be able to help us with strategies, with, you
know, business plans, with whatever we need within our
community.
But the thing that we need, I call it a farm system. Okay?
We need to have a farm system just like the Motor Vehicle
Administration and the National Football League and everybody
else. If we had a farm system where we could develop companies
from incubators, the young guys coming back from Iraq. You see,
a lot of the focus in government procurement is what are you
doing? What have you done? You know, you have got to be a big
company that has been around for a long time.
The bottom line when you are talking about--you have a lot
of service-disabled veterans that we keep talking about we are
trying to help that are at a very young age. So you need to be
able to go into a system where you can become developed. Okay?
Mr. Boozman. Right.
Mr. Baker. And I think the rule of two, having the
noncompetitive vehicle within the rule of two will allow the
service-disabled veteran community to be able to be developed.
I mean this is the program you have. In the 8(a) program it is
the noncompetitive vehicle so you are able to get----
Mr. Jimenez. Yeah. I would like to attempt to answer that.
The answer is, no, sir, I don't like the rule of two. And will
it stifle competition? Yes, sir, to a certain extent, it will.
However, if it is properly managed, once again, much like the
8(a) program, that will not be a factor. And in order to
prevent the company from going back to the well over and over
and over again and preventing other people from getting there
during it, it has to be managed at a threshold. And that means
not only can the limit on the contract and must it be imposed,
but the size standard for who you can give and do that with
should be established.
Many times it is 23 million, sometimes it can be six and a
half million. Where contracting officers attempt to get around
that is there they use a nix code that is a large nix code of
15,000 people for small business and that happens. And that
means they can start giving it to me when I am six and a half
million in size and until I am at 15,000 people, they can
continue to give me sole-source opportunities.
It needs to be done in a manner so that it incubates and
starts new business and allows those people who are new to get
their start and be able to do it, and once you grow out of a
certain size standard, you are not allowed to do it anymore.
Ms. Wolford. I would like to comment on the rule of two.
The rule of two doesn't exist within the 8(a) program and my
firm is also an 8(a), so I am familiar with that. And the rule
of two prevents direct awards, okay, is what it really does.
And it doesn't--I don't believe it really stifles competition.
Most contracting officers I know like competition. But in order
to encourage and grow a local, small business, they want to be
able to do direct awards and they would like to be able to do
that through the SDVOB program, but they can't right now
because of the rule of two. And you will actually grow other
businesses by creating those opportunities rather than stifling
them, which is what the rule of two does.
Mr. Boozman. Okay. Thank you all very much.
Ms. Herseth Sandlin. Thank you very much. I appreciate the
Ranking Member coming back and exploring the rule of two issue
and each of our witnesses' response to that. We will continue
to work on this issue together. Thank you all for your
testimony. Thank you for your service to the country.
Mr. Jimenez. Thank you, ma'am.
Ms. Herseth Sandlin. Best of luck to all of you. We may be
seeing you again soon.
Ms. Wolford. Thank you.
Ms. Herseth Sandlin. I would now like to invite our second
panel to join us at the front table. Our second panel of
witnesses is Mr. Calvin Jenkins, Deputy Associate Administrator
of the Office of Government Contracting and Business
Development for the U.S. Small Business Administration,
Lieutenant Colonel James Blanco, Assistant to the Director for
the Office of Small Business Programs of the Office of the
Secretary of the Army, Mr. Anthony Martoccia, Director of the
Office of Small Business Programs for the U.S. Department of
Defense, and Mr. Scott Denniston, Director of the Office of
Small and Disadvantaged Business Utilization for the U.S.
Department of Veterans Affairs.
Gentlemen, welcome to the Subcommittee. We appreciate your
testimony. Your full written statement will be made part of the
record, so if you could summarize your testimony.
Mr. Jenkins, we will begin with you. You are recognized for
five minutes.
STATEMENTS OF CALVIN JENKINS, DEPUTY ASSOCIATE ADMINISTRATOR,
OFFICE OF GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S.
SMALL BUSINESS ADMINISTRATION; LIEUTENANT COLONEL JAMES A.
BLANCO, ASSISTANT TO THE DIRECTOR, OFFICE OF SMALL BUSINESS
PROGRAMS, DEPARTMENT OF THE ARMY, U.S. DEPARTMENT OF DEFENSE;
ANTHONY R. MARTOCCIA, DIRECTOR, OFFICE OF SMALL BUSINESS
PROGRAMS, ACQUISITION, TECHNOLOGY AND LOGISTICS, U.S.
DEPARTMENT OF DEFENSE; AND SCOTT F. DENNISTON, DIRECTOR, OFFICE
OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION,
U.S. DEPARTMENT OF VETERANS AFFAIRS
STATEMENT OF CALVIN JENKINS
Mr. Jenkins. Great. Good afternoon. Chairwoman Sandlin and
Ranking Member Boozman, and distinguished Members, thank you
for inviting me here today to discuss contract bundling and its
impact on veteran-owned small businesses. I would like to begin
with a brief background and then discuss what the
administration, SBA and Federal agencies are doing to mitigate
the effects of bundling and how that, in turn, has increased
the ability of all small businesses, including veteran-owned
small businesses to compete for and be awarded prime Federal
and subcontractors.
The Small Business Act defines bundling of contract
requirements as consolidating two or more procurement
requirements for goods or services previously provided or
performed under separate, small contracts into solicitations of
offers for a single contract that is likely to be unsuitable
for award to a small business concern due to diversity, size,
specialized nature of the elements of the performance
specified, the aggregate dollar value of the anticipated award,
geographically dispersions of contract performance sites, or
any combination of these factors.
In addition, the Small Business Act specifically directs
each Federal agency, to the maximum extent practical, to foster
the participation of small business concerns as prime
subcontractors and suppliers; structure its contracting
requirements to facilitate competition by small among
competition by and among small businesses concerns taking all
reasonable steps to eliminate obstacles to their participation;
and avoid unnecessary and unjustified bundling of contract
requirements that preclude small business participation and
procurements as prime contractors.
When justified, bundling or consolidating contract
requirements are an acceptable practice for Federal agencies.
However, the key is for agencies to document and justify their
actions by demonstrating that there are measurably substantial
benefits. The benefits may include cost savings or price
reductions, quality improvements that will save time or improve
or enhance performance or efficiencies, reduction in
acquisition cycle time, better terms and conditions, and any
other benefit that individually, in combination or in aggregate
would lead to benefits equal to ten percent of the contract or
order value where the order is $86 million or less, or $8.6
million where the order or contract exceeds $86 million.
Contracting agencies must balance the need to obtain goods
and services with the needs to keep the playingfield as level
as possible to maximize contracting and subcontracting
opportunities for small businesses by adhering to the mandate
of Congress as promulgated in the Small Business Act and
Federal procurement regulations.
Early in his Administration, the President recognized that
contract bundling posed a serious impediment for small business
in the Federal procurement arena and their ability to compete
for and be awarded Federal contracts. As a result, the
President's 2002 Small Business Agenda directed the Office of
Management and Budget to develop a strategy for unbundling
contracts as a means of expanding small business access to
Federal procurement.
In response, the Office of Federal Procurement Policy,
within OMB, issued the October 2002 Bundling Report, providing
a nine-point action plan to hold agencies accountable for
eliminating unnecessary contract bundling and for mitigating
the effects of unnecessary contract bundling. Five of the nine
action items specifically call for regularly implementation.
They were: clarify the definition of contract bundling to
require bundling review of task and delivery orders under
multi-award contract vehicles, bundled review of agency
acquisitions above specific thresholds, mandating the
identification of alternative acquisition strategies and
justification for bundling procurements about established
thresholds, requiring measures to strengthen compliance with
subcontracting plans of large business prime contracts, and
measures to facilitate small business teaming arrangements.
In October of 2003, SBA issued final regulations to
implement those five action item points.
SBA assists small business in obtaining a large share of
Federal procurements through a variety of programs and
services. The prime and subcontract programs benefit small
business by assisting them to obtain procurement opportunities.
In fiscal year 2005, Federal agencies spent about $477 billion
in prime contract awards to small business and in fiscal year
2003, the most recent year data is available, about $45.4
billion in subcontract awards to small business.
We estimate that each $133,500 spent supports one small
business job. Thus, for fiscal year 2005, Federal prime
contract dollars awarded to small businesses supported
approximately 590,000 jobs and subcontract dollars awarded to
small businesses by Federal prime contractors supported about
340,000 small business jobs. From fiscal year 2001 to 2005,
contract dollars to service-disabled small business increased
from $550 million to more than $1.9 billion.
Through the prime and subcontract programs, SBA provides
policy direction and guidance to Federal agencies and works
with them to develop acquisition strategies that will help to
increase opportunities for small business in Federal
procurement. As an example, we recently submitted a request to
the Federal Acquisition Regulation Council to revise Federal
procurement regulations to address the parity among SBA's
HUBZone, 8(a), and service-disabled veteran-owned small
business concern programs.
The revisions are intended to give agencies direction in
structuring procurements, permit a balanced approach to meeting
small business goals, and will enhance Federal contract
participation for small business eligible to participate in
each of these programs.
SBA headquarters staff also negotiates prime contracting
and subcontracting goals with Federal agencies, monitors
progress and submits reports to the President and Congress.
Additionally, our responsibilities include providing contract
assistance to small businesses, including service-disabled
veteran-owned small businesses, managing the Natural Resource
Sales Assistance Program, performing formal size determinations
on firms in connection with Federal Government prime contracts,
and administering the Certificate of Competency Program that
allows an apparent successful small business to demonstrate
that it has the capability to perform a specific Federal prime
contract.
Our staff of procurement center representatives located at
major Federal buying activities are responsible for reviewing
all unrestricted and bundled procurements and assisting small
businesses to participate in Federal procurements as both prime
contractors and subcontractors. Procurement Center
Representatives work with the buying activities to mitigate the
effects of contract bundling and work with Federal buying
activities to help identify small business program participants
such as service-disabled veteran-owned small businesses so
agencies can conduct set-aside procurements.
We also have a staff of commercial marketing
representatives located in the Office of government Contracting
area offices that implement the subcontracting assistance
programs by conducting compliance reviews of large business
prime contractors and various other activities, such as
counseling small businesses and matchmaking. Our CMR's monitor
the large business prime contractors to ensure that they are
meeting the small business goals in their subcontracting plans
and make recommendations to prime contractors on how to
strengthen their small business programs.
SBA has highlighted the Department of Defense Benefits
Analysis Guidebook, a reference to assisting Department of
Defense acquisition strategy teams in performing a benefit
analysis before bundled contract requirements as a Federal
agency source reference for best practices for mitigating the
effects of contract bundling and as a guide on how to perform
and document measurable substantial benefits to justify
contracting bundling. This guidebook is available on SBA's
Internet Web site.
SBA continues to work with Federal procuring agencies'
small business directors to identify unnecessary contract
bundling and develop acquisition strategies that will provide
maximum opportunity for small businesses. We are expanding use
of technology to help provide broader coverage of our resources
to identify increased procurement opportunities for small
business.
Ms. Herseth Sandlin. Mr. Jenkins, I will have to ask you to
summarize your testimony.
Mr. Jenkins. Oh, sure.
Ms. Herseth Sandlin. Okay.
Mr. Jenkins. In conclusion, SBA is committed to the
President's Small Business Agenda and his proposal to create
jobs and growth through the small business sector. We must
ensure that small businesses, including service-disabled
veteran small businesses' own concerns, receive their fair
share of contract opportunities. Increased opportunities for
firms will result in savings to the taxpayer, a strong economy,
and a strong America.
This concludes my remarks and I will be happy to answer any
questions you have.
[The prepared statement of Mr. Jenkins appears on p. 52.]
Ms. Herseth Sandlin. Thank you, Mr. Jenkins.
Lieutenant Colonel Blanco, you are recognized for five
minutes.
STATEMENT OF LIEUTENANT COLONEL JAMES A. BLANCO
Lieutenant Colonel Blanco. Madam Chairwoman and
distinguished Members of the Committee, on behalf of the
Department of the Army, thank you for the opportunity to appear
before your Subcommittee to talk about the Army's service-
disabled veteran-owned small business program and to provide
testimony on the impact of contract bundling.
The Army Office of Small Business Programs, who I represent
here today, has responsibility under the Small Business Act to
promote contracting opportunities for all small businesses.
Bundling policy is not the responsibility of our office;
however, we play a key role in recommending acquisition
strategies that mitigate the impact of contract bundling on
small businesses.
We are an Army at war and the Army leadership is committed
to supporting soldiers, their families, our wounded warriors
and all veterans who have served in defense of our Nation.
Consistent with that commitment, the Army is dedicated to
developing a service-disabled veteran procurement program that
not only meets, but exceeds the three-percent mandated goal.
Our primary objective is to increase the number of capable
service-disabled owned companies doing business with the Army
to deliver best value solutions to our war fighter.
Since the implementation of Public Law 108-183 in May of
2004, the Army has awarded the highest number of contracts and
dollars to service-disabled owned businesses in the general
government, increasing from $100 million to $691 million
annually. As a further commitment to the program, we recently
published a forecast of over $1.7 billion in potential set-
asides for service-disabled vets.
The Army faces unique challenges in meeting the three-
percent goal for awards to service-disabled owned companies.
Although the dollars awarded to small business have increased
exponentially over the years, the Army's contracting base is
also increasing. Much of this increase is attributable to the
purchase of high dollar military hardware and services in
support of the Global War on Terrorism.
Bundling also impacts awards to service-disabled owned
small businesses and is an overall concern to the small
business community. To provide direction for avoiding or
mitigating the impact of bundling, our office published a
policy letter related to contract bundling and consolidation.
The policy outlines the criteria for bundling and the required
review procedures. More importantly, it requires the
identification of alternate acquisition strategies to the
proposed bundling of contracts. To verify compliance with these
procedures, our office conducts program reviews of all of our
buying activities.
When bundling is justified, we take proactive measures to
advocate the interest of small business participation by
facilitating partnering and teaming among small business
contractors to compete for potentially bundled contracts. The
teaming strategy proved successful for unbundling a requirement
for ammunition when a small business team was awarded a $1.5
billion contract, representing the largest small business set-
aside in the history of the program. Successful practices such
as this are documented and shared during small business
training and on the Army Small Business Program Web site. Our
office has also identified teaming and partnering as a major
component of the Army service-disabled veteran-owned small
business program strategic plan.
In acquisitions where bundling is deemed necessary and the
requirement is not likely to be awarded to a small business
prime contractor, our office advocates aggressive
subcontracting procedures. Subcontracting requirements are
incorporated into the source selection plan and evaluated as a
factor for award. Many contracts include incentives, both
monetary and increased contract length, for meeting
subcontracting goals.
While bundling may continue to occur, please be assured
that our office will enforce established policy to ensure
compliance with regulations justifying bundling. We will also
continue to be proactive in recommending acquisition strategies
that mitigate the impact of bundling on small businesses.
In conclusion, the men and women who have served in uniform
and sacrificed on behalf of our Nation deserve the opportunity
to do business with the Army, Department of Defense, and the
Federal Government. Important to the Army, these businessowners
bring unique skills and leadership vital to our success in
winning the Global War on Terrorism. The Army is committed to
leveraging these vital resources and remains dedicated to
meeting the three-percent goal for companies owned by service-
disabled veterans.
Thank you for your time and I look forward to working with
the Subcommittee in advancing opportunities for veteran-owned
and service-disabled-owned veteran businesses. Thank you.
[The prepared statement of Lieutenant Colonel Blanco
appears on p. 55.]
Ms. Herseth Sandlin. Thank you very much, Colonel.
Mr. Martoccia, you are now recognized for five minutes.
Thank you for being here.
STATEMENT OF ANTHONY R. MARTOCCIA
Mr. Martoccia. Thank you. Good afternoon. Chairwoman
Sandlin, Ranking Member Boozman and distinguished Committee
Member, I welcome the opportunity to speak with you concerning
service-disabled veteran-owned small businesses.
The Department of Defense is greatly indebted to the men
and women who have bravely served this country to preserve the
freedom of this Nation. As loyal supporters of the veterans'
community, DoD is thoroughly committed to achieving the
government-wide three-percent prime and subcontracting goals
for service-disabled veterans. We are taking all reasonable
steps to identify and enhance procurement opportunities and to
remove obstacles hindering the participation--their
participation in DoD acquisitions.
In the mid-1990's, Congress passed several statutes
requiring the government to buy products and services more
efficiently. At the same time, the Federal Workforce
Restructuring Act led to an unprecedented downsizing of the DoD
acquisition workforce. As a result, DoD acquisition
professionals became adept at leveraging the immense buying
power of the military to enable prudent stewardship of public
funds with fewer internal resources. The consolidation of
several requirements into a single contract to save money and
gain other benefits is one such methodology.
Any acquisition strategy that contemplates consolidating
must undergo an extremely rigorous justification and approval
process prior to the action being taken. Only when the
department has determined it will drive measurable and
substantial benefit can this type of acquisition strategy be
used. If small business prime contracting opportunities are not
available, DoD acquisition professionals are obliged to develop
strategies that set aggressive small business subcontracting
goals, including methods for ensuring that the goals are
achieved.
The department has been monitoring data to determine the
full effect of bundling and consolidation for several years.
This has led us to several conclusions. The data must be
accurate. The acquisition workforce needs training on
consolidation. Tools are needed to assist the acquisition
workforce, as well as small businesses. Small business
participation must be a primary consideration in strategic
planning and consolidation.
The Office of Small Business Programs is working with the
department and with other Federal agencies to ensure data
systems are programmed with built in edits that will, to the
degree possible, prevent the most common miscoding errors.
Accurate recordkeeping is paramount. It is difficult to
understand the full effect of bundling and consolidation if we
cannot rely on our ability to obtain accurate data.
DoD has established a small business training program as a
joint initiative between the Office of Small Business Programs
and the Defense Acquisition University. The department has
placed emphasis on educating the acquisition workforce in the
areas of bundling and consolidation. In fiscal year 2006, we
presented a live webcast on bundling and consolidation which is
still available for viewing online. The Air Force has also
developed an online bundling course that is also available on
their Web site. Additionally, we have provided train-the-
trainer sessions at many conferences throughout the past two
years. We plan to continue an aggressive training program in
this area.
The department is working to provide tools that would
assist the acquisition workforce, further ensuring that
requirements are not improperly consolidated. One such tool is
what Cal mentioned, the Benefits Analysis Guidebook. We are
currently updating the book and it will be posted on our Web
site.
In 2007, the department identified services as the primary
targets to benefit from strategic sourcing. Today, services
represent over 50 percent of DoD's total spending. The
department is working to ensure that strategic sourcing does
not result in lost opportunities for small businesses. Each
strategic sourcing action must include a small business
advocate that seeks to increase, rather than decrease,
achievement of socioeconomic goals.
Today I gave you a brief overview of contract bundling and
the efforts taken by the department to eliminate or lessen its
effects on all small business, particularly service-disabled
veteran-owned small businesses. The department is developing
new training and guidance and implementing acquisition
strategies to provide the maximum contracting and
subcontracting opportunities for small business.
I will close by stating that the achievement of not less
than three-percent contracting for primes and subs for
SDVOSB's, service-disabled veteran-owned small businesses, has
become a focus area within the department and the department's
Office of Small Business, as well as the entire departmental
acquisition workforce. DoD is working aggressively to fulfill
our obligations to service-disabled veterans and I welcome your
questions and any comments you might have. Thank you.
[The prepared statement of Mr. Martoccia appears on p. 56.]
Ms. Herseth Sandlin. Thank you.
Mr. Denniston, welcome back to the Subcommittee. You are
recognized now.
STATEMENT OF SCOTT F. DENNISTON
Mr. Denniston. Madam Chair, Ranking Member, distinguished
Subcommittee Members, thank you for convening the hearing on
contract bundling.
As you know, VA puts veterans first. We work hard to ensure
that not only veteran-owned, but all small businesses can
participate in VA's procurement programs.
VA's Office of Small Business plays a vital role in
fulfilling President Bush's commitment to the small business
community and the unbundling of contracts. This commitment was
reinforced when VA implemented the nine action items provided
in the October 30th, 2002, Office of Federal Procurement and
Policy's report on contract bundling.
Recognizing the potential impact contract bundling has on
small businesses, VA took the extraordinary step of lowering
its contract bundling review threshold to one-half of the $2
million required by the Federal Acquisition Regulations for
civilian agencies. In reviewing all acquisitions equal to or
greater than $1 million, we have greatly increased the number
of acquisitions subject to review, which therefore, provides
more opportunity to scrutinize acquisitions and reduce
bundling.
Contract bundling may be necessary and justified if an
agency derives measurably substantial benefits. VA's justified
and necessary contract bundling requirements have included
eyeglasses, medical equipment, prescription medicine,
professional services and prosthetic devices.
Since fiscal year 2004, VA's Office of Small and
Disadvantaged Business Utilization received over 1,000
acquisitions for contract bundling and small business program
reviews. Of this number, 200 acquisitions were determined to be
bundled. Approximately 36 acquisitions were determined to be
necessary and justified. The remaining 164 actions which we
received had inadequate justification to support contract
bundling. In these cases, the acquisitions were returned to the
acquisition professionals after our review in those instances
indicated we could provide assistance in developing alternative
strategies that provided opportunities for small businesses.
VA's Office of Small and Disadvantaged Business
Utilizations Prime Contracts Team conducts contract bundling
reviews and recommends appropriate strategies such as small
business teaming, joint venturing and partnering agreements,
and also multiple awards on a line item or a facility basis.
The majority of the requirements determined to be necessary and
justified were based upon cost savings exceeding ten percent
and quality improvements of care to veteran patients. Reduction
in acquisition cycle time and better terms and conditions were
cited less often as the basis for justifying contract bundling.
The prime contracts team takes a proactive role in making
recommendations to VA procurement professionals to increase
awards for small businesses, particularly when a bundled
requirement is deemed necessary and justified. As an example,
in a collaborative effort between VA's Office of Small and
Disadvantaged Business Utilization and the contracting team, a
waiver for the non-manufacturer rule was obtained from SBA when
market research demonstrated that no small
businessmanufacturers existed for desktop and laptop computers
and peripheral equipment under VA's PCHS-3 solicitation. The
PCHS-3 solicitation was subsequently canceled.
However, the waiver created a partial service-disabled
veteran-owned small business setaside for the recompetition of
IT hardware and software. As a result of this waiver, a
government-wide Solutions for Enterprise Wide Procurement, SEWP
IV, contract was awarded by the National Aerospace and Space
Administration on June 1st, 2007. SEWP IV resulted in six
service-disabled veteran-owned small businesses and three
additional veteran-owned small businesses receiving contract
awards.
VA's contract bundling review process also considers
subcontracting. Our subcontract team plays an important role in
ensuring that prime contractors' subcontracting plans are in
compliance with the FAR. The team reviews subcontracting plans
from VA contracting activities, reviews large solicitations to
ensure subcontracting opportunities exist, and recommends that
small business subcontracting goals be based on the amount of
the dollars to be subcontracted. In addition, the team provides
subcontract training to VA procurement professionals and prime
contractors.
As an example, in support of VA's Loan Guaranty Program,
our subcontracting team partnered with program officials to
coordinate outreach sessions around the country for potential
small businesses interested in subcontracting. A contract
valued at $90 million was awarded to Ocwen Federal, F.S.B., to
manage all of VA's real estate owned properties throughout the
United States.
Since the inception of this contract, Ocwen has shown
progressive improvement in three socioeconomic categories. In
FY 2006, Ocwen subcontracted 100 percent to small business. The
goal for veteran-owned small business was seven percent and
they attained 9.6 percent. Also, Ocwen surpassed the three-
percent goal for service-disabled veteran-owned small
businesses by attaining 3.3 percent.
We also believe that outreach and training are critical,
since it provides guidance, information and training to small
businesses in the veteran community. Our outreach/training team
conducts monthly face-to-face vendor counseling sessions as
well as attends a wide variety of trade shows and conferences
to provide outreach assistance to small business. VA also
conducts unique events for specific contract opportunities.
These industry day events are acquisition specific conferences
and are conducted to disseminate information to small
businesses. Examples of industry days are VA's Procurement of
Computer Hardware and Software-3 and VA's Vocational
Rehabilitation and Employment Services acquisition for
counseling services.
We believe these efforts pay dividends as evidenced by the
increases in VA's socioeconomic accomplishments. We appreciate
your interest and your efforts in holding this hearing and look
forward to working closely with you. Thank you.
[The prepared statement of Mr. Denniston appears on p. 59.]
Ms. Herseth Sandlin. Thank you, Mr. Denniston.
Thank you all for your testimony today. I will now
recognize Mr. Boozman for questions he may have for the panel.
Mr. Boozman. Thank you, Madam Chair. Lieutenant Colonel
Blanco, you have done a very good job of moving forward in this
area and we really do appreciate it. I guess I don't want to
put you on the spot, but it looks to me like the only
difference in you and some of your cohorts is you have got the
same resources basically and stuff as commitment. Is that fair
to say?
Lieutenant Colonel Blanco. The commitment as far as----
Mr. Boozman. As far as commitment to the process of
actually getting this done, or do you have some unique
resources that we don't know about?
Lieutenant Colonel Blanco. Well, no, I think--we don't have
unique resources, but I think that we have the leadership
behind it. Secretary Harvey in 2005 submitted a letter, signed
a letter in support of the program. So that is from the top on
down. We just put together a training video for senior leader
training.
But I think probably the reason why we have worked well and
I think the other services are doing well also, and the other
Federal agencies, is we share resources. That is one of the
things we think is absolutely critical in making this process
work. And a great example is the National Veterans Conference,
third annual, we just had in June. The Army founded that
conference three years ago and DoD came on board with us. And
what that has grown into from, you know, we thought about 300
people to over 1,300 and 12 Federal agencies participating in
it. And what you get there is one, the participants get to meet
with all those different Federal agencies. But at the same time
we are sharing resources, government resources. And I think
that is absolutely critical to it.
Mr. Boozman. Good.
Lieutenant Colonel Blanco. The other part is, you know, we
are an Army at war and I think we are really taking care of our
war fighters and not only are we looking at present situations,
but also the wounded warriors. We put together a Wounded
Warrior Entrepreneurship Program hopefully to, you know,
continue the program and get to our three percent.
Mr. Boozman. Thank you, sir.
Lieutenant Colonel Blanco. Yes, sir.
Mr. Boozman. Mr. Jenkins, you stated that SBA has
recommended the FAR council revise the regulations to provide
parity among the various set-aside groups. Can you explain the
FAR council process to us and when do you anticipate that they
will issue the suggested changes to the FAR?
Mr. Jenkins. Okay. Yes. The process that normally takes
place is when SBA sends a request for a change in the Federal
acquisition regulation, the council members meet and discuss
how to develop implementation regulations, how it will actually
work for the contracting officer. That process can generally
take upward six months or possibly more, depending on the
various issues they are working with or any concerns they have
with it.
Mr. Boozman. Mr. Denniston, your tan is still good from the
last time we saw you. You are holding up well.
Mr. Denniston. And if you want to go back with me on
Monday, you are more than welcome.
Mr. Boozman. Oh, great. Is VA contracting centralized? That
is, does the Office of Acquisition and Materiel Management have
authority over all VA contracting? Or to put it another way, do
the heads of procurement for the Veterans Health Administration
(VHA), the Veterans Benefits Administration (VBA) and the
National Cemetery Administration (NCA) report directly to the
Assistant Secretary for Acquisition and Materiel Management, or
are we kind of spread out all over the place?
Mr. Denniston. No, sir. There is no direct line authority
from the Chief Acquisition Officer to the VHA and VBA and NCA.
However, the Chief Acquisition Officer does exert control over
those folks, because in order to be a contracting officer in
the government, you need to be warranted. And the Chief
Acquisition Official does hold the ability to grant and take
away warrants.
Mr. Boozman. We had good testimony from the first panel and
was there anything that you all didn't agree with what they
were saying or the gist of what they were saying?
Mr. Denniston. I can't say that I disagree with anything
that the first panel said. However, I would say that perhaps
they are not aware of the some of the efforts internally that
we do to deal with some of the issues that they talked about,.
As an example, the subcontracting and how we monitor the
subcontracting plans of the large businesses and how we use
subcontracting proposed plans and past history as an evaluation
criteria for future award. So I think we are doing more
internally than perhaps they are aware of.
I would also say that it is a constant battle because, as
Tony Martoccia mentioned, the whole issue of the shrinking
procurement workforce and how we mitigate the effects of
bundling on small businesses is a constant challenge because I
think all of us are faced with that same issue.
Mr. Boozman. How do you monitor the subcontractors?
Mr. Denniston. Depending on the type of subcontracting plan
the prime contractors have, they report to us either on a six-
month basis or a yearly basis. And for VA, we review all of
those plans. And then we will use those as evaluation criteria
for future awards. We have had cases where, quite frankly, the
prime contractors haven't made much progress and I will write a
letter to the senior contracting official at that facility and
say in our opinion, this company is ineligible for award
because of a lack of good faith effort to subcontract to small
businesses.
What that does is get the attention of the company and it
is amazing what happens. Large businesses are smart. They do
what is important to their customers. So I think what is
important from our perspective, as a government agency, is to
let them know subcontracting accomplishments are important to
us.
Mr. Boozman. Have you all got any other things or----
Mr. Martoccia. No. I agree with Scott. You know, when the
contracting officer negotiates a subcontracting plan,
everything is negotiable, including if he is going to adhere to
it. And at DoD, we are implementing a reporting system with the
contractor. We report directly every six months the results of
how they are implementing and meeting the goals of the
subcontracting plan. So we are looking for more oversight, more
direct involvement of the acquisition people, talking to their
primes, like Scott mentioned. Tell them it is important. Tell
them it is going to be a factor in their performance, or even
put a penalty in that, you know, everything is negotiable. So I
think we are going to take some actions so those plans are
adhered to.
Lieutenant Colonel Blanco. Just to follow up on what Tony
said, yeah, we also look at positive means of incentivizing the
contractor through war fee and also through war term, so money
if you meet it, additional time in the contract if you meet it.
And we talk to major primes and a lot of times they say hey,
you are beating us with a stick. Why don't you give us a
carrot? So we try to use a combination of both.
Mr. Jenkins. And I guess from the SBA's perspective, we
have what we call commercial marketing representatives. They
are responsible for evaluating the large business primes to
investigate if there is small business concerns that a
particular large business is not putting forth a good effort,
we have the ability to go into that large business prime either
solo, by ourselves, or with the various agency officials. We
commonly go in with the Department of Defense folks to review
their plans and to look at what the concerns of the small
businesses and then coordinate that back with the Federal
agency.
Mr. Boozman. Thank you.
Thank you, Madam Chair.
Ms. Herseth Sandlin. Thank you, Mr. Boozman.
I just need some clarification here. Mr. Martoccia, you
said that when the contract is bid on and awarded, everything
is negotiable.
Mr. Martoccia. No, before it is awarded. During negotiation
and the solicitation, you could put an advanced understanding
that the government expects that the contractor will comply
with their subcontracting plan and that will be a factor in the
evaluation and the selection, you know, how much subcontracting
opportunities are available. So those are the critical issues
that the acquisition team has to address when they put together
the procurement plans.
Ms. Herseth Sandlin. Okay. Although the large companies are
required to submit the plan and----
Mr. Martoccia. But not the percentages. They are recorded--
they can submit a plan with zero subcontracting opportunities.
I mean so they submit a plan so the idea is to get the most
opportunities that are reasonable to the small businesses that
are veteran-owned companies.
Ms. Herseth Sandlin. Are you aware of any cases in which
liquidated damages have been imposed?
Mr. Martoccia. I don't think in the government there has
been one case. No, because it is not written into the contract.
I mean----
Ms. Herseth Sandlin. Even though the FAR includes a
mechanism for enforcement called liquidated damages?
Mr. Martoccia. If it is appropriate, but usually it goes to
performance on the job and not necessarily to the
accomplishment of subcontracting goals.
Ms. Herseth Sandlin. What was the Department of Defense's
percentage in reaching the set-aside in 2005 and in 2006?
Mr. Martoccia. For veterans?
Ms. Herseth Sandlin. Yes.
Mr. Martoccia. In 2005, it was about a half a percent. In
2006, we came up to .7 of one percent, although it is .7 of one
percent I think is over one and a half billion dollars and we
have come a long way in the last five years, although
obviously, we have a lot of work to do.
Ms. Herseth Sandlin. I would agree.
Mr. Denniston. If I could just add from a VA perspective.
We have a policy that we don't accept a subcontracting plan
from a large business that doesn't meet the statutory goals.
And if it doesn't meet the statutory goals, there has to be
some justification in the submission of the plan as to why they
can't meet the statutory goals.
Ms. Herseth Sandlin. Okay.
Lieutenant Colonel Blanco. Ma'am, if I may also, to
clarify. On the subcontracting for contracts over $550,000, up
to $550,000, the subcontracting plan is required. And our
subcontractor, our small business specialists work with all of
the contracting officers to put those goals in place prior to
the contract being awarded.
Ms. Herseth Sandlin. I appreciate the additional comments
on what different agencies and offices are doing. I do have to
come back to Mr. Martoccia, however.
The first panel raised the issue of favoritism toward large
companies over small businesses as prime on the contract and
noted that there may be this sense that bigger is better. How
many total contracts were awarded, how many of those are
bundled contracts, and then how many of those bundled contracts
were awarded to small businesses as prime? If you dont have the
information available you can supply it to the Subcommittee
after the hearing.
Mr. Martoccia. Okay. There is some, you know, issue. I
think the small businesspeople, when they talk about bundling,
they are pretty much talking about consolidated large
contracts. They are talking about indefinite quantity multiple
award. They are talking about these massive contracts that are
being awarded that are not necessarily bundled where a small
business was displaced. They are talking about consolidating
requirements that have been going on and maybe recompeted over
the last 20 years. So they have already been consolidated and
there is no way for them to get in. So----
Ms. Herseth Sandlin. There is no way for them to get in.
There is no on ramp.
Mr. Martoccia. No. No. They are ten-year contracts. They
have already been----
Ms. Herseth Sandlin. Do you think there should be an on
ramp?
Mr. Martoccia. Well, that is why we have our small business
specialists. Every time a requirement comes up, once the
contract is completed, that they work with the program officer
and the contracting officer to try to make available
opportunity to maybe break apart a very large requirement so
that the small businesses can participate as primes.
Ms. Herseth Sandlin. Okay. Whether it is a consolidated
contract, an IDIQ, a MAC, or contract bundling, do you feel the
Department of Defense should have a similar approach? Maybe you
and the Colonel have already indicated that there is, given
what Mr. Denniston said. Should there be a requirement that if
the prime on those contracts is a large company they must
submit and fulfill plan for small businesses?
Mr. Martoccia. I agree with that, and that is what we are
going to be looking at.
Ms. Herseth Sandlin. That is where you are headed. That is
where it has become a focus area within----
Mr. Martoccia. Yes. And I think the approach that the VA
uses to use the statutory goals as subcontracting minimums is a
good idea, I mean to the extent practicable.
[The information was provided in the response to the post-
hearing questions for the record from Mr. Martoccia, which
appears on p. 63.]
Ms. Herseth Sandlin. Mr. Boozman, do you have a followup?
Okay.
Let me recognize Mr. Hall, if he has any questions.
Mr. Hall. Thank you, Madam Chair, just a couple of quick
ones.
And thank you to our panelists. I forgot to say thank you
for our first panel. Thank you to you, also.
And Mr. Denniston, I would acknowledge the truth in your
statement that there is a lot that you are doing that we don't
see here that perhaps the contractors don't see from the
procurement side. Everybody is working to try to solve this----
Mr. Denniston. Thank you.
Mr. Hall [continuing]. Problem and only see that part of it
that they are directly involved with and I appreciate that and
the complicated nature of it. You testified that the nine
action items provided in the October 30, 2002, Office of
Federal Procurement and Policy Report included ensuring
accountability of senior agency management for improvement
contracting opportunities for small businesses. Could you
outline for us what steps the VA has taken to meet this
standard of accountability?
Mr. Denniston. Every month when the Deputy Secretary hosts
the VA senior managers meeting, one of the first topics is VA's
accomplishment toward all the small business goals. Obviously,
the one that the Deputy Secretary is the most interested in is
how are we doing in the service-disabled and veteran-owned
small business categories. That brings the visibility to the
program and then for those offices that from month to month may
not be meeting the goal, the Deputy Secretary requests an
action plan, so how are you going to meet the goal by the end
of the year?
So that management focus, in my opinion, is huge. And as
you know, as we talked at the last hearing, when it comes to
the service-disabled veteran-owned small business and veteran-
owned small business goals, the accomplishments of those goals
are in the performance plans of all of the people that touch
the acquisition process within VA and we think that that is a
huge motivator.
Mr. Hall. Thank you.
Colonel Blanco, if a small business is doing less than 51
percent of the work on a contract, is that contract still
classified as a small business award?
Lieutenant Colonel Blanco. Well, under FAR part 19, they
are required to do 51 percent of the work, if it is under FAR
part 19 set-aside. That is what I said. FAR part 19 covers set-
asides.
Mr. Hall. Okay. Thank you.
And Mr. Jenkins, I just wanted to ask what actions can a
commercial market representative take when the prime contractor
fails or refuses to implement their small business plan?
Mr. Jenkins. Yeah. The primary action would be that the CMR
would recommend to the contracting officer that the large
business be found to be in material breach of the contract.
Mr. Hall. Has any prime contractor loss their contract in
recent memory because of failing to implement their small
business plan?
Mr. Jenkins. Not to my knowledge. What we try to do is work
with the primes. I think someone had mentioned earlier, there
has to be a partnership between the various groups to look at
the various strategies that are out there. One of the things
that the SBA is attempting to do is identify the firms that can
perform the subcontracts and contracts that either the prime
need or that the government need. And so, we are currently
involved in an initiative at the SBA to coordinate better with
the agencies so that when we counsel and train small businesses
to go into the Federal procurement arena, we are sort of
channeling them into the right direction in terms of here is
what this particular agency buys, here is what this particular
prime buys, and not take a shotgun approach.
Mr. Hall. So, and I guess this could be to you or the
Colonel or to anybody. How effective have proactive measures
like that been in reality when the Army is meeting a quarter of
the set-aside goal from 2003 to 2006? Do you think that perhaps
there needs to be more of the stick as well as the carrots? I
mean it sounds to me like what you told me in answer to the
last question is that the primes don't lose their contracts.
They are just taught how they should proceed to increase that
percentage. But we are still not getting there very fast. So
the question is, should somebody lose the contract or should
there be some kind of penalty or should there be some kind of
set-asides?
Mr. Jenkins. Sure. Well, I mean, I think you have to weigh
it in certain respects, that the primary purpose of the
contract is for the government to get the product of services
that they are intending to purchase. Now, certainly going
forward, if a prime does not meet their commitment to award
subcontracts to small business in the various socioeconomic
categories, then it should be used as a factor for possible
future procurements in terms of evaluating their success on a
previous plan and weigh that against new contracts in some kind
of evaluation factor for future contracts.
Mr. Hall. Thank you.
Thank you, Madam Chair. That is all. I yield back.
Ms. Herseth Sandlin. Thank you, Mr. Hall.
We have been joined on the Subcommittee by Mr. Donnelly of
Indiana and I know that we all have had other hearings and
things going on. We appreciate him being here as we wrap up the
second panel.
Mr. Boozman, did you have any further questions?
I have just a few more. Mr. Denniston, Mr. Martoccia and
Lieutenant Colonel Blanco, do you have enforcement authority?
If your recommendations and suggestions are not followed, maybe
deliberately ignored by contracting officers, can you stop a
contract from being awarded? What is your enforcement
authority?
Mr. Martoccia. We don't have any enforcement authority. But
I think Scott, you know, hit a couple good points. I think
accountability in performance plans is something we are looking
at really strongly for the decisionmakers and communication
with the contractors. These big companies, they are very
receptive to the customer and if you give them a call, you talk
to your program person and say hey, you know, they can do the
job and they can do it well and you get a call from the
customer, they are going to react. But it is just attention to
the needs of the small business community.
Ms. Herseth Sandlin. Okay. Do either of the other two of
you want to address the issue of accountability for the
decisionmakers? Who has the power to stop the contract? Once
the contracting officer determines that there is justification
for a contract to be bundled, who reviews it? Who is the final
decisionmaker there? Who can stop a contract from being awarded
if they have concerns about the small business plan and the
follow through, or the track record of the large company as to
how they have treated small companies in the subcontracting
process?
Mr. Denniston. We are sort of mixing two different things
here. If we are talking about the bundling issue itself, we, in
the Office of Small and Disadvantaged Business Utilization, in
conjunction with the contracting officer, we review that
because that is part of the OMB policy that says the office
will do that. When it comes to the subcontracting, no, we don't
have the authority to stop the contract from being awarded. But
what we do, is go to someone higher in the chain of command of
the contracting officer, because that person can do it.
And quite frankly, what it gets down to, it is an issue of
leverage and I will give you two examples. If we are buying
pharmaceuticals and it is a drug which has a patent which most
of them do, those drug companies know that we need their drugs
to treat our veteran patients. So we don't have a lot of
leverage with them, just like we don't have a lot of leverage
with utility companies who we buy electricity, natural gas, and
those things, because they are almost monopolies.
Where we have leverage is in things like construction,
things like IT services and IT equipment. There we have a lot
of leverage because the competitive field that we are working
in allows us to have that. So what we find in those areas is
that we get subcontract plans that have more aggressive goals
and we have companies that are much more willing to work with
us than we do in those instances where the companies, you know,
they have got a monopoly.
Ms. Herseth Sandlin. Okay. IT services has been mentioned a
lot in this testimony and Mr. Jimenez indicated that Microsoft
is a sub in a bundled contract he got with the VA. How often in
sole-source contracting in the VA for IT services is Microsoft
the prime?
Mr. Denniston. Well, I couldn't answer that offhand. I
think though, that what happened in Mr. Jimenez's case is a
perfect example of using the flexibilities and creativities
that contracting officers have, because what happened in the
instant case was, the contracting officers decided to use the
Federal supply schedules or GSA because it was a preferred
source and it was an easy way to do it. But what we did was, we
limited competition on the Federal supply schedules only to
service-disabled veteran-owned small businesses, and that is
how we were to support them, as opposed to doing a formal
service-disabled veteran-owned small businesses set-aside.
Ms. Herseth Sandlin. Okay. We may have additional questions
to submit to you. We have just under ten minutes to get to
votes. I want to thank all of you. It is an interesting area
with a lot of progress still to be made. I think you all have
acknowledged that, and I think you all have made some great
recommendations and would like to see more being done.
We are going to continue to work on the Subcommittee to
assist you and improve the process by which people act more
aggressively on your recommendations. We will continue to get
input from business owners and determine what their experience
has been. Hopefully that continues to improve.
I want to thank Colonel Blanco in particular. I understand
you are going to be retiring at the beginning of next year and
we thank you for your service. Perhaps we will try to make a
point of getting you back here before February 1st of 2008 so
that we can----
Lieutenant Colonel Blanco. Quite welcome. Yes, ma'am.
Ms. Herseth Sandlin [continuing]. Wish you well.
Lieutenant Colonel Blanco. My pleasure.
Ms. Herseth Sandlin. I want to thank my fellow Subcommittee
Members and all of our witnesses on both panels today. Thank
you for your insights.
Mr. Donnelly, thank you again for making it over here and
for your service on the Subcommittee.
Mr. Donnelly. I apologize. I was at the Financial Services
Committee where there were votes and a markup and got over here
as quickly as I could.
Ms. Herseth Sandlin. Very good. Thank you very much. I am
going to now make sure that we haven't missed anything. I want
to thank staff on both sides as well. We are giving particular
attention to this for a number of reasons. As we do that, we
rely heavily on the hard work and the working relationships
that they share with all of you. I want to thank Juan Lara and
Mike Brinck and those on both sides for helping us with these
hearings and the follow-up that is always so important
following the hearings.
Thank you again, and the hearing stands adjourned.
[Whereupon, at 4:04 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Prepared Statement of Hon. Stephanie Herseth Sandlin,
Chairwoman, Subcommittee on Economic Opportunity
Some of the panelists may recall a hearing we held in May on the
subject of veterans' entrepreneurship and self-employment, and an
additional hearing held earlier this month on Federal procurement and
the three percent set-aside. During these hearings, many of our
panelists expressed several concerns such as the failure of Federal
agencies to meet the three percent set-aside for service-disabled small
businesses, and lack of knowledge on current laws by many contracting
officers. While this is discouraging to me, I am pleased to hear that
some agencies are moving ahead to address these concerns.
Veterans of our armed forces have been and continue to be a vital
part to securing our Nation's economic prosperity and development. When
given the opportunity to start and manage their own small businesses,
these brave men and women add tremendous value to the success of our
economy, as they strive to lead a successful life back in the civilian
workforce. Time and time again, we have seen these veterans, many
disabled, return home to live out this American dream that they so
bravely fought to protect.
With over 17,000 veteran-owned small businesses back in my home
State of South Dakota, I am concerned that we are not able to give
veteran entrepreneurs the proper assistance to expand their
enterprises. I am also concerned that we are not giving them enough
opportunities to compete for more contracts with the federal
government.
I applaud the efforts of the Federal agencies to address the needs
of our veterans while trying to secure goods and services from
competitive suppliers. I know that, if given the opportunity, our
veterans can compete as they do so every day.
I appreciate the opportunity to work with Ranking Member Boozman
and the distinguished Members of this Subcommittee as we continue to
work in a strong bipartisan effort to meet the needs of our nation's
veterans and the challenges that they face. I look forward to hearing
from our panelists and to discussing ways to mitigate the negative
effects of contract bundling on small businesses.
While we, in this subcommittee, have been working diligently to
ensure that the voices of our veteran-owned small businesses are being
heard, I feel it is important to note that I look forward to working
with our colleagues in the Committee on Small Business so that we may
focus our energy on addressing the needs of our veteran community while
meeting the demands placed upon the Federal Government.
Prepared Statement of Hon. John Boozman,
Ranking Republican Member, Subcommittee on Economic Opportunity
Madame Chairwoman, it is important that contracting processes
promote small business development, especially those owned by veterans
and service-disabled veterans. In the 109th Congress, you and I passed
what may be called landmark legislation that improved opportunities for
veteran and service-disabled veteran-owned business at the Department
of Veterans Affairs.
This hearing is not about bashing large businesses--in fact, I
suspect the goal of most entrepreneurs is to be successful and outgrow
their small business status. Large companies have capabilities vital to
the national economy that cannot be replicated by small business. But
small business also provides a significant portion of the Nation's jobs
and creative thinking and that too is vital to our economy. I believe
Ms. Wolford's testimony provides a good snapshot of that contribution.
I want to hear from the witnesses, especially those representing
the government, how we can ensure that our veteran entrepreneurs get
their fair share of the Federal procurement pie. Based on their written
testimony, I believe we will need to tighten up the procurement changes
we made in P.L. 109-461 and I would like to work with you, Madame
Chairwoman, to make that happen.
There is also another serious problem facing small business and
that is the diversion of dollars meant for small businesses to
companies that are often mega-corporations. While there are sometimes
valid reasons such as a company outgrowing its small business status
over the period of a long contract, an article in the July 16 issue of
Defense News states that 37% of small business set-aside dollars, about
$11.9 billion, went to the Nation's largest companies.
What we will hear today will be valuable to our work with VA, but I
urge you to present their case to the Small Business Committee and
other Committees with jurisdiction over Federal agencies.
I yield back.
Prepared Statement of Charles Maurice Baker, President and
Chief Executive Officer, MCB Lighting and Electrical, Owings, MD
Broken Spirit / Unrealized Dreams
Executive Summary
The laws for small businesses to participate in our economy were
created to help provide governance to those in the Federal Government
involved in awarding contracts.
The 8(a) program for example was created to help socially
disadvantaged businesses grow and develop into viable, sustainable and
competitive businesses. The spirit of the law was to make a
demonstrative impact on procurement by giving it the tools it needed to
provide the maximum practicable utilization of opportunities to 8(a)
participants. The same intent and principles of the laws apply to other
socioeconomic groups such as women-owned, HUBZone, service-disabled
veterans and small disadvantaged businesses.
As we will discuss today, somewhere and somehow along the way we
have become disconnected with this spirit and the intent of the law. We
have lost our passion to ensure that there is economic opportunities
for all as was envisioned when our laws were enacted. We have set-aside
our commitments to support and embrace our socioeconomic companies
instead of setting aside business opportunities for them. Results of
this broken spirit are more and more unrealized dreams.
Our presentation will focus on some of the major issues
contributing to challenges faced by small and socioeconomic businesses.
The primary issues are contract bundling, sole source contracts, the
rule of two and inconsistent interpretation and application of the
rules.
Contract Bundling
The Small Business Reauthorization Act of 1997 defines contract
bundling as consolidating two or more procurement requirements for
goods or services previously provided or performed under separate,
smaller contracts into a solicitation of offers for a single contract
that is unlikely to be suitable for award to a small business concern.
Contract bundling is one of the biggest obstacles to small business
growth and creates a lack of capacity reducing competition. By
combining several smaller contracts into one huge package results in
jobs too big for small and minority-owned companies to handle. In a
decade-long, David-and-Goliath struggle, small companies are receiving
fewer and fewer contracting opportunities. In fact, a smaller number of
government contracts are being awarded to small businesses and when
combining this effect with increased government spending it is clear
evidence that contract bundling is on the rise. Moreover, consolidating
multiple government contracts into single contracts limits the
participation of small businesses as prime contractors and it is more
difficult for small businesses to compete for multiple service
contracts due to the high cost of preparing proposals and the low
probability of winning against large businesses.
Sole Source Contracts
There is a disparity in contract law for sole sourcing arrangements
for large and small businesses. Large businesses can be awarded sole
source contracts without competition while small businesses have to
compete for contracts under what is commonly known as the rule of two.
The rule of two specifies that a requirement may be set-aside for
small business, within the applicable dollar thresholds, as long as
there are two or more companies that can satisfy the requirement.
However, if there is only one company available with the capability and
capacity the contracting officer may award the contract as sole source
as long as the contracting officer first advertises the requirement.
Obviously the playing field is not level based on the rule of two.
The rule of two along with contract bundling contribute to the
proliferation of sole source contracts for large businesses while
closing the door for small businesses.
In 2006, according to a Federal Times article, sole source contract
spending reached an all time high of $207 billion--up from $145 billion
(or 45%) in 2005. At $207 billion, sole source contracts account for
50% of total procurement spending. The growth is even more staggering
if we compare 2006 to 2000. Sole source contract spending in 2000 was
$67 billion and has increased $140 billion (or 209%) in six years.
While small businesses have the hurdle of the rule of two, big
businesses run their races without any obstructions and benefit at
significant dollar amounts.
The result of growing sole source spending among large business is
the death sentence for small businesses. We have seen from above that
contract bundling has had a profound negative effect on small business
contracts. Sole source is having the same negative effect. At the end
of the day, small businesses will become less economically viable at
the Federal level.
Past Vision
The Bush Administration made it a priority in 2002 to address the
inequities of contract bundling by tasking the Office of Management and
Budget (OMB) to prepare a strategy for unbundling contracts. OMB, in
late March 2002, through its Office of Federal Procurement Policy
(OFPP), created an interagency working group to develop strategies for
unbundling contracts. The strategies are intended to reintroduce
competition in contracting.
Contract bundling inevitably leads to sole source contracts as the
intent of consolidating products and services into ``bundles'' reduces
the number of companies that have the capability and capacity to
compete. This was clearly understood by the task force and their agenda
was based on this premise.
Current Reality
Let us fast forward to 2007. The data shows that the landscape and
appetite for bundling have not been decreased rather it has increased
where from 2004 to 2005 contract bundling increased 16%.
Over the past five years, total government contracting has
increased by 60 percent, while the number of small business contracts
has decreased by 65 percent. Not only are substantially fewer small
businesses receiving Federal contracts, but also the Federal Government
is suffering from a reduced supplier base. We constantly hear about
competition all the time, yet this is only big businesses propaganda as
they look to limit competition further.
In order to increase competition the Federal Government has to
increase its supplier base with different supplier and service codes
and provide set-asides for small businesses and promote and fund
business development programs. If small businesses are not developed
and allowed to grow, eventually there will be limited or no
competition. This lack of competition resulted in $145 billion of sole
source contracts in 2005 and $207 billion in 2006. The sole source
spending is not the noncompetitive vehicle provisions in the 8(a),
HUBZone or SDVOB programs as some would like us to believe.
There are several reasons for the lack of competition:
Contract bundling.
Sole source contracts.
Lack of small business development.
Competition must be increased in the large business arena and small
businesses have to play a major role in that competition. Competition
can be increased if bundled contracts are ``unbundled'' so that small
businesses have a viable opportunity to compete. By competing, small
businesses will have access and funding to further develop their
businesses and bring back much needed dollars to support their
communities. Right now there appears to be a gap in the balance of
commerce for small businesses with its tax base. Taxes are being
removed from small business neighborhoods but revenues are not coming
back through business opportunities. Small businesses continue to
contribute their fair share of tax dollars to Federal spending yet have
never received their fair share of the money in Federal contracting.
What the Law Says
The basic premise of the law is to shape the programs it addresses
for the benefits of the groups included. It is the intent of the law
that is important as well as the underlying enforcement guidelines that
sets out governance rules and mandates compliance.
The Small Business Reauthorization Act of 1997 lists several
factors that might cause unsuitability for award to a small business.
The Act requires each Federal department and agency, to the maximum
extent practicable, to: (1) structure contracting requirements to
facilitate competition by and among small business concerns, taking all
reasonable steps to eliminate obstacles to their participation; and (2)
avoid unnecessary and unjustified bundling of contract requirements
that may preclude small business participation in procurements as prime
contractors.
Prior to bundling any contracts, agencies are required to conduct
market research to determine whether contract bundling is necessary and
justified. To justify contract bundling, agencies must demonstrate
``measurably substantial benefits,'' such as cost savings, quality
improvements, reduction in acquisition cycle times, or better terms and
conditions. The Small Business Administration's implementing
regulations further define ``measurably substantial benefits'' by
requiring agencies to demonstrate--for contracts of $75 million or
less--benefits equivalent to 10 percent of contract value (including
options), or contracts over $75 million--benefits equivalent to 5
percent of contract value (including options) or $7.5 million,
whichever is greater.
How the Law is Applied
Much latitude has been taken by the procurement community to
interpret the rules and regulations to support their procurement
decisions.
The law is being ignored.
What is Wrong With the Way the Law is Applied
According to a report prepared for SBA's Office of Advocacy, for
every 100 ``bundled'' contracts, 106 individual contracts are no longer
available to small businesses. For every $100 awarded on a ``bundled''
contract, there is a $33 decrease to small businesses. Because these
types of contracts ``run longer and encompass a greater scope,
competition is reduced in terms of frequency and the number of
opportunities.''
The Impact of Big Business
If we had spent the increase in Federal procurement in the small
business community our economy would be thriving instead we have a few
top defense companies with record profits. The war is not about oil, or
securing stability in a region, it's really about the defense industry
who contributes 10 times more dollars than big oil to its causes. We
have CEOs profiting off the veterans yet they are not providing the
maximum practical utilization of SDVOB in their subcontracting plans
because there is no penalty for them not doing it and they see or
understand the benefits of providing this requirement in a good faith
effort its all about how to maximize their profits.
Currently, we have about six major defense contractors receiving
approximately 30% of the defense budget, and 40% of these contracts are
sole sourced!!!!
Lockheed Martin, Boeing, Northrop Grumman, Raytheon, General
Dynamics and United Technologies--the Defense Department's six largest
contractors get over $100B in defense contracts, mostly on a sole
source basis. Yet small businesses, like service-disabled veterans, can
not sole source unless there are two or more small business competing.
We have already talked above about the rule of two principle.
No-bid contracts have accounted for more than 40 percent of
Pentagon contracting since 1998, which amounts to some $362 billion in
taxpayer money to companies without competitive bidding. We discovered
that out of the top ten contractors, only one--Science Applications
International Corp., or SAIC--won more than half it's dollars through
full and open competition. All the others won most of their Federal
funds through sole source and other no-bid contracts.
Indeed, these are good times for defense contractors. From fiscal
year 1998 through 2003, the Pentagon's overall dollars to contractors
has risen up 59 percent, from $129 billion in 1998 to $219 billion in
2003. The biggest defense contractors the past six years (1998-2003)
have been Lockheed Martin ($94 billion); Boeing ($81.6 billion);
Raytheon ($39.9 billion); Northrop Grumman ($33.8 billion); General
Dynamics ($33.3 billion); United Technologies ($17.9 billion); General
Electric ($10.6 billion); SAIC ($10.6 billion); Carlyle Group ($9.3
billion); and Newport News Shipbuilding ($8.85 billion). These totals
do not include the extra billions of dollars these companies collected
as partners in joint ventures. Halliburton ($6.8 billion) came in 14th
on our list of the biggest 100. These biggest contractors also received
the most money in no-bid contracts.
Over 737 companies, including several thousand of their
subsidiaries and affiliates have received at least $100 million in
contracts over the past six years, with breakdowns of each company's
total contract dollars, the types of contracts they won, the
competition they faced, a list of their key subsidiaries, analysis of
their lobbying and campaign contributions, and a list of the chief
products and services they sold to the Pentagon is available on the
Internet.
CEOs at the biggest defense contractors are personally profiting
from the war in Iraq: Military contractor CEOs received a 200 percent
raise since 9/11.
Right now defense contractors are profiting on the deaths and
disabilities of our soldiers, and they appear unwilling to provide
subcontracting opportunities to the very soldiers who have risked their
lives for democracy and a safe America.
Effects of Contract Bundling
Contract bundling creates a decline in new contract awards to small
businesses.
The lack of competition has pushed sole source contracts from $67
billion in 2000 to a staggering $207 billion in 2006. This represents a
218% increase. The effect of this shift from competitive contracting to
sole source contracting has resulted in less participation by small
businesses in the overall economy.
While overall spending has increased 16%, small business
contracting actions have decline 65%.
According to data captured in the Federal Procurement Data System--
Next Generation (FPDS-NG), the Federal Government spent over $417
billion in Fiscal Year (FY) 2006, but only 43 contracts over $5 million
were reported to GAO as bundled and accounted for $5.7 billion. The
number of bundled contracts is closer to 928.
For 2005, the SBA's FPDS showed the Department of Defense with
970,009 small business contract actions. Of these, 57,376 were actually
awarded to companies that are not small. Therefore, the Department's
actual number of small business contract actions was 912,633--a decline
of 65 percent from 2004. This should be contrasted with the
Department's increase in total contracting dollars of 13 percent from
2004 to 2005. The increase in contracting dollars, compared to the
decrease in small business contract actions, is indicative of contract
bundling. Let's also not forget the $12B in miscoding of big business
as small business.
And How Do We Fix the Procurement System
On July 12, I gave testimony to this Committee on how I believe the
procurement system should be fixed. I will reiterate that we must
follow the existing laws, rules and regulations and we must comply with
the intent of the laws. We advocate that creativity and innovation
within the rules are in the best interest of the government and not in
the best interests of big business. Our procurement system has migrated
toward bundled contracts as the cure for all of its ills created by
reduced staff and increased workloads. Somehow we let the people with
the gold (money) and political influence change all the rules in their
favor. This is why we don't have competition in contracting and sole
source contracts have increased 115% over the last 5 years to $145B.
Until Congressman Waxman is successful in implementing additional
staffing through his 1% initiative, the procurement workforce needs to
begin an intense training regimen, the laws and rules on the books
today needs to be followed and enforced and we need to seek out more
inclusion of the Service Disabled community for their experience and
expertise.
Resolution to Contract Bundling
We have created a logical plan for DoD to use immediately to assist
it in reaching its 3% goal.
Currently DoD spending with SDVOB companies is at 0.49% with a goal
of 3.0%. In its second year strategic plan, DoD is committed to meeting
its statutory 3.0 target. Unfortunately DoD does not elaborate on the
specifics of achieving the goal. Our experience is that this goal is
similar to the analogy of ``covering the waterfront'' which past
history has demonstrated does not work for the Federal Government
because other preference goals have never been met because they never
had a logical analytical plan to follow. There has to be a strategy
with meaningful targets set with milestones and timelines attached.
Our plan creates an implementation strategy based on the historical
data of SDVOB procurements with DoD from the most current Fiscal Year
2005 data in the Federal Procurement Data System-NG.
Our plan is a goal attainment strategy based on actual data which
clearly demonstrates the immediate possibility of delivering 3% using a
simple logical thought process using product or service categories
where SDVOB companies have the most potential for success. The process
identifies product or service categories for all DoD procurement
requirements. DoD can use this process to specifically target product
and service categories where there is little or no participation
currently for SDVOB companies. Our plan is very effective for program
managers and contracting officers. Each product or service code is
assigned a percentage target for SDVOB participation. The percentage
target is based on dollar volume spending in Fiscal Year 2005. There is
a tiered percentage scale that is used. The scale is dollar volume
driven with the percentage declining the higher the spending. The
percentage scale is as follows:
Up to $100 million--6%
Up to $500 million--5%
Up to $1 billion--4%
Up to $10 billion--3%
Over $10 billion--2.5%
Our vision is to have DoD implement our plan immediately so that it
can contribute to helping SDVOB companies become sustainable,
competitive and viable businesses as well as satisfy its goal of 3%.
Our plan was created by MCB Lighting & Electrical of Owings, MD POC
Charles Baker 301-812-2591 and Mazyck and Associates of Sacramento, CA
POC Edward V. Mazyck, Jr. 650-465-6403. MCB INC. at the request of CEO
Charles M. Baker worked with Mazyck & Associates to develop this goal
attainment strategy.
How can we fix some of the procurement problems that we are facing
today?
We can start by making good management decisions. One decision is
considering shifting over a taxing workload to an innovative program
that we have.
Over 90% of all procurement transactions are under the $100K
threshold and represent only 10% of the total procurement dollars. A
significant amount of time and effort is consumed by the procurement
workforce processing small dollar transactions. We think this is
wasting limited, valuable resources and time. These resources and the
associated time can be better focused on the real money and the real
acquisition issues.
The time involved in processing smaller transactions not only is
burdensome to the acquisition workforce but it's equally time consuming
and a nightmare for customers also. I speak with 20 years of
frustration of dealing with Federal procurement and trying to
accomplish the mission as a government employee. As the ex-chief of
facilities for Andrews AFB I can tell you horror stories of having HVAC
units broken for weeks and sometimes months for a $5K part my people
went and put their hands on but could not fix the units for several
months because of the slow procurement process. After all was said and
done the procurement rules in the name of competition cost the
taxpayers enormously as the administrative cost would some times even
exceed the cost of the parts. In addition, the cost of a temporary
solution would some times triple the purchase cost of the item ordered.
Conclusion
And finally, we believe that by working together we can all share
in the success of our efforts and achieve great things.
Thank you for the opportunity to share some of our thoughts with
you today and we hope that it has been informative, educational and
helpful.
Prepared Statement of Anthony R. Jimenez,
President and Chief Executive Officer, MicroTech, LLC, Vienna, VA
Good afternoon, Chairwoman Herseth Sandlin, Ranking Member Boozman,
distinguished Members of this Committee and distinguished guests. It is
a privilege to be here today testifying and I want to thank the
Committee for allowing me to share my thoughts regarding contract
bundling and its effect on Veteran-Owned Small Business and Service-
Disabled Veteran-Owned Small Business opportunities in the Federal
Government.
My name is Anthony (Tony) Jimenez. I am the Founder and Chief
Executive Officer of MicroTech, LLC, a Hispanic-Owned and Service-
Disabled Veteran-Owned Small Business (SDVOSB) located in Vienna,
Virginia. I retired from the Army in 2003 after serving 24 years on
active duty and started MicroTech, LLC in 2004. Today I employ over 50
people and have become a powerful job creation engine and force for
economic development in my community and in my State.
MicroTech has over 20 prime contracts with the Federal Government
and at least as many subcontracts. Many of the contracts we support as
either a prime contractor or a subcontractor are contracts that were
``bundled.'' That is, the contracts were previously satisfied by two or
more contractors and were combined to achieve cost savings, price
reduction, quality improvements, enhanced performance, or better terms
and conditions for the government. Some of these bundled contracts have
done exactly what they were intended to do, and have also provided our
SDVOSB with great growth and opportunity; others have not, and were not
good candidates for consolidation.
Contract bundling can occur for a variety of different reasons and
can provide a range of benefits to both the government and contracting
organizations. One common motivation for contract bundling is that
requirements on two or more different contracts become so similar that
it doesn't make sense to have multiple contracts supporting the same
requirements. Contract bundling in this situation can save the
government money and eliminate unneeded effort and redundant management
oversight by the government. Other substantial benefits that can be
realized when contracts are bundled in these circumstances may include
cost savings or price reduction, quality improvements that will save
time or improve or enhance performance or efficiency, reductions in
acquisition cycle times, and better terms and conditions for both the
government and the contractor (a win-win). When contract bundling is
done for these reasons, I think it makes sense.
The problems occur when contract bundling is done for other
reasons, it is not properly managed, requirements are poorly defined,
the plan for capturing performance/cost savings are not properly
documented in the procurement strategy or small business goals are not
considered.
As a former Contracting Officer for the Federal Government, I was
involved in a number of contract consolidation initiatives. Many of
those initiatives started off as great plans that took all the
procurement management factors into consideration and established
aggressive small business goals that could reasonably be met with
appropriate effort and attention. Those plans included steps for cost
savings, quality improvements, reductions in acquisition cycle times,
and better terms and conditions. However, in many cases, by the time
these initiatives became a Request for Proposal (RFP) they had been
stripped of all socioeconomic small business goals and there was no
mention of any requirement to subcontract to Veteran or Service-
Disabled Veteran Small Business.
The normal procedures for contract bundling requires agencies to
provide justification for bundling decisions and have the decisions
reviewed at higher levels. The problem with this procedure is that the
decision is often made in a vacuum and the affected small businesses
have no means to object to a bundling decision and are at the mercy of
the decisionmaker. In most of these cases the small businesses do not
even know the decision is being made. Instead, most of the time the
small businesses don't find out their contract has been bundled with a
larger requirement until just before the RFP comes out. By then is too
late to do anything except agree with the decision and figure out how
to stay involved in the bid.
The argument in support of contract bundling and strategic sourcing
is that it saves the government money in the end. That may be true some
of the time, but not in every case. It has been my experience that
while contract bundling may save the Contracting Officers time and
effort and reduce government overhead; those dollars are often offset
by the higher costs that can be associated with large businesses. This
is especially true when you consider the added costs associated with
large businesses when it becomes necessary for them to subcontract work
that is more difficult to staff or perform to small business, which
regularly happens on large complex contracts requiring diverse skill
sets to perform.
Perhaps the most overlooked contract bundling problem for small
businesses is the myth that big businesses who receive these very large
bundled contracts will make it up to the small businesses in their
subcontracting plans. Large businesses are almost always required to
provide small business subcontracting plans as part of any bid they
submit. These plans are supposed to match the small business goals laid
out in the FAR: twenty-three percent (23%) for small business divided
among the different socioeconomic categories. So far, so good. However,
in a number of cases, these small business goals are not reached.
Even in instances where the small business subcontracting plan is
in place and small business is getting 23% or more of the work, the
question remains to be asked: what type of work are they doing? Is it
work that will allow the small business to grow its workforce, develop
its capabilities and one day prime a contract of the same scope and
magnitude themselves?
Today, there is no current standard by which large businesses are
measured and graded with respect to their actual subcontracting plan or
goals and I know of no case where liquidated damages have ever been
assessed against a large business for failing to make a good faith
effort to comply with its subcontracting plans in accordance with
Federal Acquisition Regulation (FAR) 52-219-16.
Many of the Contracting Officers I have worked with and know feel
that any effort to penalize a large business for ``Failure to make a
good faith effort to comply with the subcontracting plan'' as required
in FAR 52-219-16 would be a waste of time. What is a good faith effort?
How do you establish whether a good faith effort was made? If you are a
Contracting Officer with more work than time, are you interested in
fighting a battle you cannot win?
The objective for the government should be to find ways to use the
power of procurement reforms to help small businesses while at the same
time seeking out way to perform services and purchase products more
efficiently and for a lower price. One of the unbundling strategies
calls for the Small Business Administration (SBA) to collect and
disseminate examples of successful strategies for maximizing small
business opportunities. I think possible solutions are:
Consolidate contracts so small businesses can share the
benefits of bundling. This allows the government to continue to take
advantage of cost savings, price reductions, quality improvements (that
will save time or improve or enhance performance or efficiency),
reduced acquisition cycle times, and better terms and conditions for
both the government and the contractor. Make a fair portion of these
bundled contracts small business opportunities and don't assume that
because it has been bundled that it has to be a large business
opportunity. In most cases, making it an SDVOSB opportunity will get
you the same team as a full and open opportunity, but when it is made
an SDVOSB opportunity the government gets a better distribution of the
work among the small and large businesses, SDVOSBs are guaranteed a
fair portion of the work, and SDVOSBs will have the ability to grow and
someday compete at the large business level.
Place orders under a small business GWAC. The Veteran
Technology Services (VETS) Governmentwide Acquisition Contract (GWAC)
and the Solutions for Enterprise-Wide Procurement (SEWP) GWAC are two
excellent examples of Governmentwide Acquisition Contracts (GWACs) that
offers multiple award contracts with highly qualified Veteran-Owned
Small Businesses and Service-Disabled Veteran-Owned Small Businesses.
U.S. Department of Veteran Affairs (VA) has done an outstanding job of
using both of these GWACs. VA's policies for using GWACs with Veteran-
Owned and Service-Disabled Veteran-Owned Small Business primes (such as
VETS and SEWP) is an outstanding example of their commitment to
Veteran-Owned and Service-Disabled Veteran-Owned Small Businesses. This
approach should be duplicated throughout the Federal Government.
Solicit quotes for GSA Federal Supply Service orders only
from small businesses, or socioeconomic small business groups. Small
business set-asides are not authorized under Federal Supply Schedule,
but it is permissible to limit consideration for an order to small
businesses and socioeconomic small businesses (SDVOSB, 8(a), WOSB,
HUBZone, etc.). Once again, the U.S. Department of Veteran Affairs (VA)
has done an outstanding job using GSA's Federal Supply Service and
limiting consideration to Service-Disabled Veteran-Owned Small
Businesses.
Create a small business participation enforcement team.
Consider taking a portion of the savings realized through contract
bundling and implement a small business plan enforcement team that
enforces small business participation in accordance with the Request
for Proposal (RFP).
Consider hybrid contract bundling. Small businesses could
partner with large businesses using a Contractor Teaming Arrangement
(CTA), similar to those used by GSA. The terms and conditions of the
CTA are defined up front, payment goes into an escrow account, and
disbursements are made based on the agreement in the CTA (51% small
business and 49% large business).
Establish a Mentor Protege program at the Small Business
Administration (SBA) for Veteran-Owned and Service-Disabled Veteran-
Owned Small Businesses. The benefits of establishing a program at SBA
that mirrors the 8(a) Mentor Protege program are:
A mentor and protege could joint venture as a small
business for any government procurement, including procurements less
than half the size standard corresponding to the assigned SIC code and
sole source contracts, provided both the mentor and the protege qualify
as small for the procurement and, for purposes of sole source
requirements, the protege has not reached the dollar limit.
Notwithstanding the requirements, in order to raise
capital for the protege firm, the mentor could own an equity interest
of up to 40% in the protege firm.
Notwithstanding the mentor/protege relationship, a
protege firm could qualify for other assistance as a small business,
including SBA financial assistance.
No determination of affiliation or control may be found
between a protege firm and its mentor based on the mentor/protege
agreement or any assistance provided pursuant to the agreement.
The Federal Acquisition Regulation (FAR) already includes
provisions intended to help small business in the event that bundling
occurs. The FAR does not include enforcement mechanisms nor does it
include reward or punishment mechanisms. If the FAR or Code of Federal
Regulations (CFR) were as to include mandatory enforcement, that would
go a long way toward assisting small business. When it comes to the FAR
requirements for contract bundling, the FAR makes a good start but
fails to follow through with the most important part. Bundled contracts
are often made so complex that small businesses are precluded from
competing for them. FAR Part 7 addresses contract bundling and the
requirements for how and when it may be done.
FAR 7.103 states that when considering a bundled acquisition the
head of an agency must
``Structure contract requirements to facilitate competition
by and among small business concerns; and [a]void unnecessary
and unjustified bundling that precludes small business
participation as contractors.''
That is much harder done than said. Any time either disparate
services are bundled or two or more requirements are combined
Contracting Officers make it more difficult for small businesses to
compete.
FAR 7.107(c)(2) states that when bundling contracts agency
officials must assure, ``[t]he acquisition strategy provides for
maximum practicable participation by small business concerns.'' Again,
this is nice in theory, but who is ensuring that the strategy becomes
certainty?
The proliferation of long-term indefinite-delivery, indefinite-
quantity (IDIQ) contract vehicles has also been a serious determent to
many small businesses. More and more Federal procurement dollars are
being spent through pre-competed IDIQs. These large business IDIQs have
the same effect as contract bundling. For example the Army's
Information Technology Enterprise Solutions 2 Services (ITES-2S)
contract is an IDIQ contract with sixteen (16) primes. This is the
Army's premier IT services contract. Yet, when the Army competed this
contract it did not provide any prime opportunities for Service-
Disabled Veteran-Owned Small Businesses, 8(a)s, Women-owned, or HUBZone
small businesses. Originally, awards were made to twelve (12) large
business primes and four (4) small business primes. In the last year,
two of those small business primes have been acquired. Now only two (2)
of the sixteen (16) primes contractors are small businesses and both
are likely to be large businesses before the contract ends.
ITES-2s is a great contract that is doing what it was intended to
do--reduce prices, produce cost savings, improve quality, reduce
acquisition cycle times, and provide better terms and conditions. ITES-
2s happens to have a great deal of small business participation through
subcontracting. My company, MicroTech, enjoys a great relationship with
General Dynamics who has provided us with a great deal of opportunity
on ITES, but because of it's size and the length of the contract (a
nine-year, $20 billion IDIQ) this contract has to be aggressively
managed to ensure that all the primes do as good a job of
subcontracting to SDVOSBs as General Dynamics is doing and that small
business goals are met and that the right opportunities are provided to
Veteran and Service-Disabled Veteran-Owned Small Businesses.
Other than Veteran Technology Services (VETS) and Solutions for
Enterprise-Wide Procurement (SEWP), there have been very few large
indefinite-delivery, indefinite-quantity (IDIQ) contract opportunities
for SDVOSBs. The additional few that the government released were very
complex and required a very large investment by the small business to
cover the bid and proposal costs, but numerous SDVOSBs still bid.
My company, MicroTech, recently experienced an unfortunate example
of this type of solicitation. Tuesday July 17, 2007 MicroTech, was
notified that an IDIQ from GovWorks, a Federal Acquisition Center under
the Department of the Interior (DOI), had canceled an IDIQ solicitation
that was set aside for 8(a) companies with a preference for Service-
Disabled Veteran-Owned Small Businesses. This is not unusual and
normally something like this would not be worth mentioning, but this
IDIQ contract was canceled 18 months after it was submitted for
evaluation, and over one year after it was supposed to be awarded. The
bid and proposal costs to prepare our proposal and ensure it was fully
responsive and compliant with the instructions in the RFP were
significant--over $50,000 for our firm, plus the costs borne by our
partners. Our SDVOSB team spent hours preparing and responding to
numerous exchanges with the Contracting Officer and his staff.
The contract (General IT Services solicitation 1406-04-06-RP-60576)
was an IDIQ with a $1B limit. It was an 8(a) set-aside that we
(MicroTech) worked very hard to ensure included SDVOSBs (additional
evaluation preference was given if the 8(a) was also a SDVOSB). The
solicitation came out in Nov 2005 and was the first significant step
toward identifying an opportunity at Department of Interior (DOI) that
would allow SDVOSBs to compete and provide IT services to GovWorks
customers and DOI organizations.
Prior to release of the solicitation my Business Development Staff,
my Chief Technology Officer and I made several trips to DOI and met
with several people in an attempt to open the doors for SDVOSBs and to
identify potential opportunities for SDVOSBs. This solicitation was the
perfect opportunity and would have provided a desperately needed
contracting vehicle for everyone (including VA and DoD) using GovWorks.
Our proposal was submitted in Jan 2006. It was a complex bid, over
100 pages in length, and containing over 200 separately priced labor
categories. Our team developed a complete position description and
pricing rationale for each labor category. Since then it was reviewed
numerous times and was determined to be in the competitive range twice.
Now, after 18 months of evaluation, two months of proposal
preparation, and six months of business development and partner teaming
coordination (over two years of hard work) GovWorks and DOI have
decided to cancel the solicitation because other contracting vehicles
satisfy this requirement. This strikes me as a poor use of both the
government's resources as well as small business resources.
We cannot understand why DOI would cancel a solicitation like the
General IT Services Solicitation when they are having so much trouble
meeting their SDVOSB goals. Wouldn't it stand to reason that awarding
an IDIQ to qualified 8(a) small businesses who are also SDVOSBs could
help them achieve their small business goals quicker, especially when
you consider that the cost to put this contracting vehicle in place has
already been spent?
Madame Chairwoman and distinguished Committee Members, I appreciate
the time you and the other Members of the Committee on Veterans'
Affairs have spent on this and other topics concerning Veteran
Entrepreneurship. I think I speak for all the Veteran Entrepreneurs
when I say how very proud we are of this Committee and the hard work
you and your staff members do for Veterans. Thank you for helping to
level the playing field and for believing in us and our ability as
business men and women to give back to a Nation that has given us so
much. This concludes my testimony and I would be happy to answer any
questions you may have.
Prepared Statement of Lisa N. Wolford,
President and Chief Executive Officer, CSSS.NET, Bellevue, NE
I would like to thank all the Members of the Committee for the
opportunity to speak today on this critically important issue of
contract bundling and it's impact on Service Disabled Veteran Owned
Businesses. I have been in business for over ten years now and the last
six years exclusively with the Federal Government. I am a veteran of
the United States Marine Corps and my firm is a SDVOSB, WOB and 8(a)/
SDB. My firm provides information technology engineering systems and
solutions to the Federal Government and therefore the majority of my
testimony regarding contract bundling will concentrate on that sector.
My firm has an excellent record of past performance and yet even with
this my firm has been dramatically impacted by the issue of contract
bundling.
Therefore, I submit to you that new firms owned by SDVOSBs that
have returned or will return from Iraq or Afghanistan will have an even
greater struggles since they are newer in the marketplace. I would also
like to remind you that veterans have vested into their citizenship
rights in a way that no other group has through the sacrifices we have
made in the service of our country. SDVOSBs are owned by people from
both genders and any race you can think of, therefore we are both
diverse in characteristics and united in our history. Small businesses
do not have access or money for PACs and/or lobbyists. Instead we spend
180% of our energy in growing and maintaining our businesses.
Consequently, many laws and modifications to regulations make it into
the FAR and business practices of the government that favor large
business and are harmful to small businesses.
Fact-finding related to the impact of contract bundling on SDVOSBS
is difficult to attain since the majority of the data is related to the
small business market in general. As a result, I will speak to you
regarding the issue as it relates to small businesses in general.
However, please remember, the economic preference for SDVOSBs is fairly
new to the Federal market and therefore the impact to SDVOSBS is even
greater than the average small business.
The U.S. Government has an economic interest and responsibility to
enable and encourage the growth of small businesses. Small businesses
are the economic engine that fuels the growth of our economy.
Therefore, if the government wants a healthy economy and job market
they have a fiduciary responsibility to grow small businesses. The fact
that the government has goals of only 23% of prime contracting dollars
to go to small businesses is actually a travesty of justice to our
American economy. Small businesses generate two thirds of net new jobs
and over 50% of the private sector output. If the goal of this
administration is to build an even stronger economy, the government
should tie the goals of prime contracting dollars to the percentage of
growth of our economy that small businesses are responsible for
creating.
Some of the facts that I would like to remind you of in respect to
contract bundling are:
Small businesses employee over half of all private sector
workers
Small businesses generate more than half of private
sector output
Small businesses create more than two-thirds of net new
jobs
Information Technology services and technology purchases
represent the largest portion of the Federal budget
Bundled contracts represented 16.4 percent of all prime
contracts in 2001 and 51 percent of all reported contract spending
Majority of bundled contracts occurs in defense
contracting
Over the past five years, total government contracting
has increased by 60 percent, while the number of small business
contracts has decreased by 55 percent (1)
Total prime contract obligations solicited by the Federal
Government in FY 06 88 percent obtained by large businesses (1)
Increasing subcontracting goals for large prime
contractors winning a bundled contract is not a sufficient mitigation
or solution
Multiple Award Contracts (MAC) are a tool that are
increasingly used to bundle contracts but are not viewed as contract
bundling (2)(3)
Use of GSA contract vehicles to use small businesses as
pass throughs by Federal agencies
As a result of reviewing these facts I ask you: Why do firms that
generate only one third of new jobs get 88% of the total prime
contracts obligations? Why are small business prime contracting goals
overall not 50% or greater? Would that not be more equitable to the
firms that are responsible for the growth of the country? Would that
not spur greater economic growth across our great country? If you think
that number is out of range, consider HUD whose small business prime
contracting goal is 45% and they regularly exceed it? The Army has a
record of 27.2 % of prime awards to small businesses, exceeding their
small business prime contracting goals. In 2001, 35% of that was
through the Army Corps of Engineers and now that all Information
Technology services contracts have been bundled their achievements will
go down substantially. It is a known fact that the majority of contract
bundling occurs within DoD and I consider this particularly
reprehensible, since if anyone in the Federal Government bears a
greater responsibility to veteran businessowners I think DoD and the
Veterans Administration should be held to a higher standard and
culpability. I can say that I have great respect for the substantial
challenges and changes that Mr. Scott Denniston has wrought in the
Veteran's Administration.
Instead, due to contract bundling we have seen a market decrease in
the number of small businesses effectively competing in the Federal
marketplace. Federal agencies continue to deny that contract bundling
is an issue; however, the decreased opportunity for prime contracts for
small businesses inhibits their growth. Federal agencies have felt that
increased subcontracting goals on bundled contracts mitigates the
damage to the small business market and relieves them from the
responsibility of prime contracting with small businesses. When small
businesses are relegated primarily to the role of subcontractors, they
do not have the opportunity to control their own destiny or truly add
innovation to the Federal marketplace. This is because the Federal
Government's contract is only with the prime contractor, they do not
have privity of contract with the subcontractor.
Small businesses are responsible for innovation and research much
more frequently than large businesses, and as a result of contract
bundling those opportunities are decreased and the entire Nation, as
well as the Federal Government suffers.
Multiple Award Contracts (MACs) are subject to FAR clauses that
require the contracting officer to allow all awardees fair opportunity
to compete on the individual task orders. (2) The problem with this is
that it means that small businesses have to compete head to head with
the largest of the Federal contractors. This is just another form of
contract bundling although it doesn't get measured as contract bundling
and therefore, has the same negative impact on the small business
community. Forcing a small business to compete toe to toe with large
businesses is in direct contradiction with small business contracting
rules and standard operating practices.
Another abuse of the small business community is the way GSA
schedule contract buys occur that are not set-asides. If a contracting
officer sends out an opportunity to be bid to only SDVOSBs on a
Schedule 70, they can count the entire award as 100% to a small
business. Now on the surface that sounds great, but since it is not a
set-aside the 51% rule doesn't apply. So the way the game is typically
played is that the contracting officer sends out the opportunity to
three to four small businesses with the schedule and the socioeconomic
credits they want. They notify the incumbent contractor of who they
have sent the opportunity to, they also let them know that it is NOT a
set-aside and, therefore, set-aside prime contracting workshare rules
do not apply. What then happens is the incumbent contractor negotiates
with each of the possible bidders and gets the largest workshare they
can, up to 100% and also they set the rules about what type of rates
can be billed to the government. This then sets the small business up
to be used as a pass through, the small business can do as little as 0%
and still the agency will get credit for 100% of the work as small
business. If the contract goes south the firm that gets debarred from
government contracting is the prime contractor even though the prime
has no control over the contract and they have been put into a squeeze
play between the incumbent large and the government. Is this really the
way we should be treating SDVOSBs and other small businesses? This
practice is legal through the rules of the FAR and GSA contracting,
these rules must be modified to prevent such atrocities. My firm has
regularly been asked to bid on such opportunities by multiple Federal
agencies.
Since Information Technology purchases represents such a large
portion of the Federal budget it is particularly imperative that
attention is paid to this sector. This represents an area for great
improvement in the Federal budget for achievement of small business
goals. Unfortunately it also represents an area that is particularly
prone to contract bundling.
Examples of contract bundling:
ITCC contract at USSTRATCOM in Nebraska bundled all
Information Technology maintenance contracts, many of which had
previously been held by small businesses. The contract value total is a
minimum of $550 million over a period of ten years. Effectively
shutting out all opportunities for small business prime contracts in
the Information Technology sector at that base for ten years. In this
geographic region, Offutt Air Force Base and the Corps of Engineers are
the only Federal agencies that use Information Technology contractors.
Therefore, the impact to small business functioning in this area
effectively wipes out all opportunities for prime contracts.
Corps of Engineers has bundled all of their Information
Technology Services contracts. The net effect of this effort is that
all Corps of Engineers I/T opportunities nationwide have shut out
thousands of small businesses across the Nation.
Solutions:
Do not allow contract bundling if it will prevent a
command or agency in a particular geographical region from meeting its
small business prime contracting goals.
Do not allow contract bundling if it will bundle all
requirements for a particular NAICS code at that command or agency in a
particular geographical region.
Require GSA schedule buys that are not set-asides to only
allow the government to count toward their small business goals that
percentage of the business that the small business actually executed
vice their large business subcontractor.
Change FAR part 16 to allow awardees under a MAC to have
restricted small business competitions for any reason post award of the
BPA. Also allow the contracting officer to do direct awards to any
small business awardee under the MAC subject to the limitation on small
business direct award amounts.
Implement the findings from the OMB report titled ``A
Strategy for Increasing Federal Contracting Opportunities for Small
Business'' dated October 29, 2002.
Thank you for holding this hearing today and thank you for giving
me the opportunity to share my knowledge and experience with you today.
I am glad that this hearing is being held and I hope that my testimony
will help you to develop real solutions to this critical issue. I
appreciate your willingness to listen and receive input from the
frontlines of small businesses that are dealing with this issue on a
daily basis. I would be happy to answer any questions this Committee
may have.
Appendix A
1. Fernando V. Galaviz Testimony Before Senate Committee on Small
Business and Entrepreneurship, 22 May 2007.
2. FAR--Part 16.
DFARS 216
(a) All multiple award contractors shall be provided a fair
opportunity to be considered for each order in excess of the micro-
purchase threshold as defined in FAR 2.101.
3. OMB report titled ``A Strategy for Increasing Federal Contracting
Opportunities for Small Business'' dated October 29, 2002.
4. Audit of the Contract Bundling Process, Audit Report Number 5-20,
dtd May 20, 2005 from SBA--Office of Inspector General.
5. Government Executive, ``Bush Advocates Reduction in Contract
Bundling,'' Amelia Gruber, dtd October 14, 2004.
6. SBA Small Business Research Summary, ``The Impact of Contract
Bundling on Small Business, FY 1992-FY 2001 #221,'' Eagle Eye
Publishers.
7. Office of Advocacy, SBA, News release, ``Federal Contract Bundling
Increases to the Detriment of Small Business,'' SBA Number: 02-36 ADVO,
John McDowell, dated October 2, 2002.
Prepared Statement of Calvin Jenkins, Deputy Associate Administrator,
Office of Government Contracting and Business Development
U.S. Small Business Administration
Chairwoman Sandlin and Ranking Member Boozman and distinguished
Members of the Committee, thank you for inviting me here today to
discuss contract bundling and its impact on veteran-owned small
businesses. Contract bundling affects the ability of all small
businesses to compete in the Federal procurement arena. I'd like to
begin with a brief background and then discuss what the Administration,
SBA and Federal agencies are doing to mitigate the effects of bundling
and how that, in turn, has increased the ability of all small
businesses, including veteran-owned small businesses to compete for and
be awarded prime Federal contracts and subcontracts. Mitigation of
unnecessary contract bundling creates and helps sustain jobs in the
small business community.
The Small Business Act defines ``bundling of contract
requirements'' as: ``. . . consolidating two or more procurement
requirements for goods or services previously provided or performed
under separate small contracts into a solicitation of offers for a
single contract that is likely to be unsuitable for award to a small
business concern due to--diversity, size or specialized nature of the
elements of the performance specified; the aggregate dollar value of
the anticipated award; the geographical dispersion of the contract
performance sites; or any combination of these factors.''
In addition, the Small Business Act specifically directs each
Federal agency, to the maximum extent practicable, ``. . . to foster
the participation of small business concerns as prime contractors,
subcontractors, and suppliers; structure its contracting requirements
to facilitate competition by and among small business concerns taking
all reasonable steps to eliminate obstacles to their participation; and
avoid unnecessary and unjustified bundling of contract requirements
that precludes small business participation in procurements as prime
contractors.''
When justified, bundling or consolidating contract requirements are
an acceptable practice for Federal agencies. However, the key is for
agencies to document and justify their actions by demonstrating that
there are measurably substantial benefits. The benefits may include
cost savings and/or price reduction, quality improvements that will
save time or improve or enhance performance or efficiency, reduction in
acquisition cycle times, better terms and conditions, and any other
benefits that individually, in combination or in aggregate would lead
to benefits equivalent to 10 percent of the contract or order value
where the order is $86 million, or less or $8.6 million where the order
or contract exceeds $86 million.
Contracting agencies must balance the need to obtain goods and
services with the need to keep the playingfield as level as possible to
maximize contracting and subcontracting opportunities for small
businesses by adhering to the mandate of Congress as promulgated in the
Small Business Act and Federal procurement regulations.
Early in his Administration, the President recognized that contract
bundling posed a serious impediment for small businesses in the Federal
procurement arena with their ability to compete for and be awarded
Federal contracts. As a result, the President's 2002 Small Business
Agenda directed the Office of Management and Budget (OMB) to develop a
strategy for unbundling contracts as a means of expanding small
business access to Federal procurements.
In response, the Office of Federal Procurement Policy (OFPP),
within OMB, issued the October 2002 Bundling Report, providing a nine-
point action plan to hold agencies accountable for eliminating
unnecessary contract bundling and for mitigating the effects of
necessary contract bundling. Five of the nine action items specifically
called for regulatory implementation. They were: (1) clarifying the
definition of contract bundling to require bundling reviews of task and
delivery orders under multiple award contract vehicles; (2) bundling
reviews of agency acquisitions above specific dollar thresholds; (3)
mandating the identification of alternative acquisition strategies and
justification for bundled procurements above established thresholds;
(4) requiring measures to strengthen compliance with subcontracting
plans of large business prime contractors; and (5) measures to
facilitate small business teaming arrangements.
On January 31, 2003, SBA published a proposed rule to revise its
bundling regulations to solicit comments on implementing several
recommendations included in OFPPs October 2002 report. SBA published
final regulations on October 20, 2003. The regulations, among other
things:
Revises the definition of contract bundling to include
multiple award contract vehicles and task and delivery orders competed
against those vehicles.
Requires contract bundling reviews for contracts and
orders under multiple award contracts above established thresholds for
unnecessary and unjustified bundling ($7 million for DoD, $5 million
for GSA, NASA, and DoE, and $2 million for all other agencies).
Requires procuring activities to coordinate with their
small business specialist proposed acquisition strategies for contracts
and orders above the established thresholds. Require the small business
specialist to coordinate with the OSDBU when those strategies include
bundling that is unnecessary and unjustified or not identified.
Reduces the threshold for substantial bundling (from $10
million annually) to the above established thresholds and revise the
documentation to the agency OSDBU.
Requires agencies to identify alternative strategies that
involve less bundling when they contemplate a bundled contract.
Requires agencies to strengthen compliance with
subcontracting plans.
Requires the Agency Offices of Small and Disadvantaged
Business Utilization to perform certain oversight functions and submit
a report annually to the Agency Head and the SBA Administrator and
conduct periodic reviews to assess:
the extent to which small businesses are receiving
their fair share of Federal procurement;
the adequacy of contract bundling documentation and
justification; and
the adequacy of actions taken to mitigate the effects
of necessary contract bundling on small business (e.g. Review agency
oversight of prime contractor subcontracting plan compliance).
SBA assist small businesses in obtaining a larger share of Federal
procurements through a variety of programs and services. The prime and
subcontracting programs benefit small businesses by assisting them to
obtain procurement opportunities. In Fiscal Year 2005, Federal agencies
spend about $77 billion in prime contract awards to small businesses
and in Fiscal Year 2003, the most recent year data is available, about
$45.4 billion in subcontracting awards to small businesses. We estimate
that each $133,500 spent supports one small business job. Thus, for
fiscal year 2005, Federal prime contract dollars awarded to small
businesses supported approximately 590,000 jobs and subcontract dollars
awarded to small businesses by Federal prime contractors supported
approximately 340,000 small business jobs. From Fiscal Year 2001 to
2005, contract dollars to service-disabled small businesses increased
from $550 Million to more than $1.9 Billion.
Through the prime and subcontracting programs, SBA provides policy
direction and guidance to Federal agencies and works with them to
develop acquisition strategies that will help to increase opportunities
for small businesses in Federal procurement. As an example, we recently
submitted a request to the Federal Acquisition Regulatory Council to
revise Federal procurement regulations to address ``parity'' among
SBA's HUBZone, 8(a) and SDVOSBC programs. The revisions are intended to
give agencies discretion in structuring procurements, permit a balanced
approach to meeting small business goals, and will enhance Federal
contract participation for small businesses eligible to participate in
each of those programs.
SBA Headquarters staff also negotiates prime contracting and
subcontracting goals with Federal agencies, monitors progress and
submits reports to the President and Congress. Additionally our
responsibilities include providing contract assistance to small
businesses, including service-disabled veteran-owned small businesses;
managing the Natural Resources Sales Assistance Program; performing
formal size determinations on firms in connection with Federal
Government prime contracts; and administering the Certificate of
Competency Program that allows an apparent successful small business to
demonstrate that it has the capability to perform on a specific Federal
prime government contract.
Our staff of Procurement Center Representatives (PCRs), located at
major Federal buying activities are responsible for reviewing all
unrestricted and bundled procurements and assisting small businesses to
participate in Federal procurements as both prime contractors and
subcontractors. PCRs work with the buying activities to mitigate the
effects of contract bundling and work with Federal buying activities to
help identify small business program participants, such as Service-
Disabled Veteran-Owned Small Businesses, so agencies can conduct set-
aside procurements. We also have a staff of Commercial Market
Representatives (CMRs) located in the GC Area Offices, that implement
the Subcontracting Assistance Program by conducting compliance reviews
of large business prime contractors and various other activities, such
as counseling small businesses and matchmaking. CMRs monitor the large
prime contractors to ensure that they are meeting the small business
goals in their subcontracting plans, and make recommendations to prime
contractors on how to strengthen their small business programs.
I'd like to bring to the Committee's attention to three of the many
instances where our PCRs were successful in recommending Federal
agencies set-aside procurements for Service-Disabled Veteran-Owned
Small Businesses:
The Veterans Administration Boston Healthcare System, Boston, MA,
set-aside a procurement for the Replacement of Steam Piping for Service
Disabled Veterans. The Contracting Officer agreed with the PCR's
recommendation and issued a solicitation for a SDVOSB set-aside. It has
an estimated cost of $1 Million.
Our Philadelphia PCR was successful in convincing the Naval
Inventory Control Point in Mechanicsburg, PA, to convert an
unrestricted procurement to a Service-Disabled Veteran-Owned Small
Business set-aside. The 5-year contract is estimated to be worth $2.7
million.
Our PCR in Philadelphia, PA was successful in convincing a Defense
Logistics Agency buying activity to partially set-aside a requirement
for Marine Corps Sweat Shirts and Sweat Pants for Service Disabled
Veteran Owned (SDVO) firms. The total requirement is estimated at $7.7
million and will be 60% set-aside for small business and 40% set-aside
for SDVO firms.
SBA has highlighted the Department of Defense's ``Benefit Analysis
Guidebook, A Reference to Assist Department of Defense Acquisition
Strategy Teams in Performing a
Benefit Analysis before Bundling Contract Requirements'' as an
Federal agency source reference for Best Practices for mitigating the
effects of contract bundling and as a guide on how to perform and
document measurably substantial benefits to justify contract bundling.
This guidebook is available on SBA's Internet homepage.
SBA continues to work with Federal procuring agencies' small
business directors to identify unnecessary contract bundling and
develop acquisition strategies that will provide maximum opportunities
for small businesses. We are expanding use of technology to help
provide broader coverage of our resources to identify increase
procurement opportunities for small business.
In conclusion, SBA is committed to the President's Small Business
Agenda and his proposals to create jobs and growth through the small
business sector. We must ensure that small businesses including Service
Disabled Veteran-Owned Small Business Concerns and Veteran Owned Small
Business Concerns receive their fair share of contract opportunities.
Increased opportunities for firms will result in savings to the
taxpayers, a stronger economy, and a stronger America. This concludes
my remarks, and I will be happy to respond to any questions that you
may have.
Thank you.
Prepared Statement of Lieutenant Colonel James A. Blanco,
Assistant to the Director, Office of Small Business Programs,
Department of the Army, U.S. Department of Defense
Chairwoman Herseth Sandlin, Ranking Member Boozman and
distinguished Members of the Committee: on behalf of Department of the
Army, thank you for the opportunity to appear before you to talk about
the Army's Service-Disabled Veteran-Owned Small Business (SDVOSB)
Program and to provide testimony on the impact of contract bundling.
The Army Office of Small Business Programs (OSBP), whom I represent
here today, has responsibility under the Small Business Act to promote
contracting opportunities for all small businesses. The Director, Ms.
Tracey L. Pinson, reports directly to the Secretary of the Army.
Bundling policy is not the responsibility of our office; however, we
play a key role in recommending acquisition strategies that mitigate
the impact of contract bundling on small businesses.
We are an Army at war and the Army leadership is committed to
supporting our soldiers, their families, our wounded warriors, and all
Veterans who have served in defense of our Nation. Consistent with that
commitment, the Army is dedicated to developing an SDVOSB procurement
program that not only meets, but exceeds the three percent goal
mandated by Public Law 106-50. Since Public Law 108-183 was implemented
through the Federal Acquisition Regulation in May of 2004, the Army has
awarded the highest number of contracts and dollars to SDVOSBs in the
Federal Government. Between FY2003 and FY2006, the dollar amount
awarded annually to SDVOSBs by the Army increased from $100 million to
$691 million (preliminary). As a further commitment to the program, the
Army OSBP recently published a forecast of over $1.7 billion in
potential set-asides for SDVOSBs.
Our strategy is to significantly increase the number of capable
SDVOSBs doing business with the Army, through a proactive Business
Development Program delivered both virtually and by our over 250 full-
time and part-time small business specialists located throughout the
Army. Identifying and growing SDVOSBs that possess core capabilities to
meet Army requirements is the most important factor in reaching the
three percent goal. Our office also invests in meaningful training and
focused outreach to educate both the Army acquisition community and
SDVOSBs to maximize opportunities for SDVOSBs while delivering ``best
value'' solutions to the warfighter.
We are proud of our accomplishments in support of the SDVOSB
Program. The Army was the first Department of Defense (DoD) agency to
approve a Mentor-Protege agreement with an SDVOSB, between Oak Grove
Technologies and SAIC. This relationship received the Nunn-Perry Award
for excellence in the program. Three years ago, the Army founded the
National Veteran Small Business Conference, which has become the
largest Veteran Entrepreneur Conference in the Nation attracting more
than 1300 attendees. This year the conference was cosponsored by 11
other Federal and DoD agencies, including our major partner the
Department of Veterans Affairs. In an effort to train the Army
leadership on the value of utilizing SDVOSBs, we recently released a
senior leader training video that provides guidance on the SDVOSB
procurement program and solicits their support for the program.
The Army faces unique challenges in meeting the three percent goal
for awards to SDVOSBs. Although the dollars awarded to SDVOSBs and
other small businesses have increased exponentially over the years, the
Army's contracting base is also increasing. Much of this increase is
attributable to the purchase of high dollar military hardware and
services in support of the Global War on Terrorism. Also, in some
instances where the Army provides direct support of domestic disaster
relief missions, such as Hurricane Katrina, awards to SDVOSBs are
impacted by statutory requirements to use local businesses.
Additionally, mandated small business market research is forfeited for
expediency to support mission requirements.
Bundling does impact contract awards to SDVOSBs and is an overall
concern to the small business community. Bundling is the practice of
consolidating two or more requirements for supplies or services,
previously provided or performed under separate contracts by small
business, into a single contract requirement likely to be unsuitable
for a small business award. The potential adverse impact of this
practice is significant. Due to the negative impact of bundling on
small business, the Army OSBP generally opposes this practice.
While the Army has taken a proactive approach to mitigate the
impact of bundling on small business, we believe that the dollar amount
of realized savings required to justify bundling is unrealistically
low. For example, to justify bundling a contracting officer must
demonstrate a realized savings of ten percent of the estimated contract
or order value if the value is $86 million or less; or five percent of
the estimated contract value if the contract value exceeds $86 million.
The DoD Benefit Analysis Guidebook provides direction for avoiding
or mitigating the impact of bundling, and how to a conduct benefit
analysis. To supplement the DoD Benefit Analysis Guidebook, the Army
OSBP published a policy letter providing direction and guidance to
ensure compliance related to contract bundling and consolidation. The
policy outlines the criteria for bundling and the required review
procedures. It mandates coordination with the assigned small business
specialist and the Small Business Administration Procurement Center
Representative for review of the proposed acquisition strategy and
bundling justification. More importantly, it requires the
identification of alternative acquisition strategies to the proposed
bundling of contracts. Written justifications are required when
alternative strategies are not adopted. To verify compliance with these
procedures, Army OSBP conducts program reviews of all of our buying
commands. Findings are communicated and reported through Command
channels for corrective action if appropriate.
When bundling is justified in accordance with the Federal
Acquisition Regulation, Army OSBP takes proactive measures to advocate
the interest of small business participation by facilitating partnering
and teaming among small business contractors to compete for bundled
contracts. The teaming strategy proved successful for a bundled
requirement for ammunition when a small business team was awarded a
$1.5 billion contract representing the largest small business set-aside
in the history of our program. Successful practices such as this are
documented and shared during small business training and on the Army
OSBP website. The Army OSBP has identified teaming and partnering as a
major component of the Army SDVOSB strategic plan.
In acquisitions where bundling is deemed necessary and the
requirement is not likely to be awarded to a small business prime
contractor, Army OSBP advocates aggressive subcontracting procedures to
ensure that small businesses are provided a fair and equitable
opportunity to participate in the performance of the contract. The Army
OSBP reviews acquisition strategies and makes recommendations on
subcontracting goals based on market research. Subcontracting
requirements are incorporated into the source selection plan and
evaluated as a factor for award. Many contracts include incentives,
both monetary and increased contract length, for meeting subcontracting
goals. These concepts have proved successful in terms of accountability
and enforcement of subcontracting requirements.
Overall, while there are instances where bundling occurs and will
probably continue to occur, the Army OSBP takes the necessary action to
ensure that there is compliance with regulations justifying bundling.
We are proactive in recommending acquisition strategies that mitigate
the impact of bundling on small businesses. We are an advocate for
small business and we work very closely with the acquisition community
responsible for awarding contracts, to accomplish our statutory goals.
The Army believes that this is a healthy relationship and the main
reason why a considerable amount of requirements are committed to the
small business program.
In conclusion, men and women who have served in uniform and
sacrificed on behalf of our Nation deserve the opportunity to do
business with the Army, Department of Defense and the Federal
Government. Important to the Army, these businessowners bring unique
skills and leadership vital to our success in winning the Global War on
Terrorism. The Army is committed to leveraging these vital resources
and remains dedicated to meeting the three percent goal for companies
owned by service-disabled Veterans.
Prepared Statement of Anthony R. Martoccia,
Director, Office of Small Business Programs,
Acquisition, Technology and Logistics, U.S. Department of Defense
Chairwoman Sandlin, and distinguished Committee Members, I welcome
the opportunity to speak with you concerning Service-Disabled Veteran-
Owned Small Business (SDVOSB). The Department of Defense (DoD) is
greatly indebted to the men and women who have served so valiantly to
preserve the freedom of this Nation. As loyal supporters of the SDVOSB
community, DoD is thoroughly committed to achieving the government-wide
3% SDVOSB prime and contracting goals. We are taking all reasonable
steps to identify and enhance procurement opportunities for SDVOSBs,
and to remove obstacles hindering their participation in DoD
acquisitions.
You have asked me to speak to you about how contract bundling
affects SDVOSB. We believe that the impact of bundling on SDVOSB is the
same as that of all the other subcategories. Thus my testimony today
about contract bundling applies to SDVOSBs and applies equally to other
small businesses.
When I testified recently before the Senate Committee on Small
Business and Entrepreneurship, I realized, based upon the testimony of
some of the other panelists, that there is a great deal of confusion
about consolidation and bundling. The definitions have changed a number
of times leading to this confusion. Let me take time to explain the
basics of the current definitions of these concepts.
Contract Bundling and Contract Consolidation
In the mid-1990's, Congress passed several statutes requiring the
government to buy products and services more efficiently. At the same
time the Federal Workforce Restructuring Act led to an unprecedented
downsizing of DoD acquisition personnel. As a result, DoD acquisition
professionals became adept at leveraging the immense buying power of
the government to enable prudent stewardship of public funds with fewer
internal resources. The consolidation of several requirements into a
single contract to save money and gain other benefits is one such
methodology. Consolidation occurs when requirements previously
performed by either large business or small business under two or more
separate, smaller contracts are combined into one contract or order.
Benefits of such consolidated actions must be documented, justified,
and approved prior to such action being taken. Although consolidation
reduces the number of available contract opportunities, consolidated
actions are awarded to a small business and may even be awarded under
one of the special target small business set-aside or sole source
authorities. If the requirement is awarded to a small business, it is a
consolidated, but not a bundled action.
Contract bundling occurs when requirements that previously were, or
could have been, performed by small business are consolidated into a
single procurement, resulting in an acquisition that is unsuitable for
award to small business. The bundled action may be unsuitable for award
to a small business due to its dollar value, geographic dispersion,
technical diversity, size or specialized nature, or any combination
thereof. Bundled actions not only reduce the number of available
contract opportunities but displace small business as well.
Analysis When a Contract is Bundled or Consolidated
Due to its negative impact on small business, DoD has long
discouraged the practice of contract bundling. Any acquisition strategy
that contemplates bundling or consolidation must undergo an extremely
rigorous justification and approval process prior to the action being
taken. Only when the Department has determined it will derive a
measurable and substantial benefit can this type of acquisition
strategy be used.
The Department requires analysis of alternatives including methods
for mitigating the impact on small business, even if the bundling or
consolidation can be justified by its anticipated benefits. If small
business prime contracting opportunities are not available, DoD
acquisition professionals are obliged to develop strategies that set
aggressive small business subcontracting goals, including methods for
ensuring that the goals are achieved.
Things Essential for Dealing With Bundling
The Department has been monitoring data to determine the full
effect of bundling and consolidation for several years. This has led us
to several conclusions: (1) data must be accurate; (2) the acquisition
workforce needs training on the consolidation and bundling concepts;
(3) tools are needed to assist the acquisition workforce, as well as
small business; and (4) small business participation must be a primary
consideration in strategic sourcing. I will discuss our progress as we
are attempting to address each of these areas.
Data Accuracy
The Office of Small Business Programs is working within the
Department and with other Federal agencies to ensure data systems are
programmed with built-in edits that will, to the degree possible,
prevent the most common miscoding errors. Accurate recordkeeping is
paramount. It is difficult to understand the full effect of bundling
and consolidation if we cannot rely on our ability to obtain accurate
data. In May of 2007 the Under Secretary of Defense for Acquisition,
Technology, and Logistics issued a memorandum to the Administrator,
Office of Federal Procurement Policy, Office of Management and Budget,
affirming the Department's commitment to the establishment of
infrastructure, policies and processes to ensure continuous improvement
of data quality. DoD has dedicated a significant number of resources to
ensure the successful transition into Federal Procurement Data System--
Next Generation (FPDS-NG). Additionally, the DoD Office of Small
Business Programs is currently developing a ``Data Monitoring and
Analysis Plan.'' The intent of the Plan is to ensure small business
data is reviewed for anomalies and to perform analysis of the data.
We can already see that our Monitoring Plan will help us find and
solve data problems early. For example, as a result of this initiative,
OSBP recently discovered 2,066 actions in FY 2007 that were coded as
bundled by one DoD agency. Further investigation revealed that all
2,066 of these actions had been miscoded as a result of issues related
to migration of data into the FPDS-NG. We were pleased to facilitate a
prompt correction of the data. We are encouraged by this example which
demonstrates the usefulness of our Monitoring Plan even though it is
still in its development stages.
Training
DoD has established a small business training program as a joint
initiative between the DoD Office of Small Business Programs and the
Defense Acquisition University. The Department has placed emphasis on
educating the acquisition workforce in the area of bundling and
consolidation during the past year and a half. In fiscal year 2006, we
presented a live webcast on bundling and consolidation still available
for viewing online. The Air Force has also developed an online bundling
course that is available on their Web site. Additionally, we have
provided train-the-trainer sessions at many conferences throughout the
past two years. We plan to continue an aggressive training program in
this area.
Tools
The Department is working to provide tools that will assist the
acquisition workforce, further ensuring that requirements are not
improperly consolidated or bundled. One such tool is the Benefit
Analysis Guidebook which the DoD Office of Small Business Programs
developed and posted online in 2002 to assist DoD acquisition personnel
with the justification and analysis requirements necessary prior to
bundling or consolidating. We are in the final stages of revising this
Guidebook and will post it online soon. Additionally, OSBP is
developing a Teaming/Joint Venture Guidebook as well as training to
assist small businesses in pursuing larger procurements. This Guidebook
and training will be available by the end of the year.
Thanks to the Small Business Administration's regulations, the DoD
veteran-owned small business program is able to count the SDVOSB prime
contractor work-share and also SDVOSB subcontractor work-share in the
limitations in subcontracting requirement on service-disabled veteran-
owned small business set-asides. For example, on a service or supply
acquisition, a prime SDVOSB contractor may perform 35% of the work in-
house and subcontract to several SDVOSBs who perform a total of 25% of
the work, with the 40% balance of the work going to other small
businesses or other-than-small businesses. The action remains a SDVOSB
contract since at least 50% of the cost of personnel for contract
performance (in this case 60%) is spent for employees of SDVOSB
concerns. Similarly, a provision exists for the Historically
Underutilized Business Zone (HUBZone) small business program. This
encourages the use of SDVOSB and HUBZone set-asides on larger contracts
and still preserves the integrity of the statute through support of
SDVOSBs and HUBZone small business concerns.
Size Standards
The Department is optimistic that adjustment of the small business
size standards will improve SDVOSBs ability to take on an even greater
role in DoD procurement. The Defense Department believes that a number
of size standards in critical Defense industries have not kept pace
with the U.S. economy. DoD would favor the adjustment of small business
size standards as needed to keep them in line with the dynamics of the
U.S. economy and the U.S. military. Earlier this year DoD OSBP met with
representatives from the Small Business Administration (SBA) and the
Office of Federal Procurement Policy, Office of Management and Budget.
All parties agreed that a comprehensive review of the size standards is
needed.
Strategic Sourcing
Strategic sourcing initiatives began in the late nineties within
Military Departments (MILDEPs) and Defense Agencies. Strategic sourcing
is a collaborative and structured process of critically analyzing an
organization's spending and using this information to make business
decisions about acquiring commodities and services more effectively and
efficiently. Centralization of strategic sourcing efforts began in 2004
when the Office of the Secretary of Defense created the Strategic
Sourcing Directors Board (SSDB), an organization to champion defense-
wide strategic sourcing efforts. In May of 2005 the Office of
Management and Budget directed agency heads to identify no fewer than
three commodities that could be purchased more effectively and
efficiently through the application of strategic sourcing.
In 2007, the Department identified ``services'' as primary targets
to benefit from strategic sourcing due to the growth in spend and other
factors (e.g., the number of suppliers and types of commodities).
Today, ``services'' represent over 50% of DoD's total spend. The
Department is working to ensure that strategic sourcing does not result
in bundling; however, it can many times result in consolidation. Each
strategic sourcing action includes a small business advocate and seeks
to increase, rather than decrease, achievement of socioeconomic goals.
One such example is the Department of Navy, Clerical Support
Services contracts awarded October 13, 2006. The solicitation limited
competition to 8(a) small disadvantaged businesses, Historically
Underutilized Business Zone (HUBZone) small business concerns, and
service-disabled veteran-owned small businesses. Over 100 proposals
were received and evaluated and nine contracts were awarded. Contracts
were awarded to one service-disabled veteran-owned small business, one
service-disabled veteran-owned small business who is also a
Historically Underutilized Business Zone concern, one service-disabled
veteran-owned small business who is also a woman-owned small business,
one Historically Underutilized Business Zone small business who is also
a veteran-owned small business, one 8(a) small disadvantaged business
who is also a veteran-owned small business, three 8(a) small
disadvantaged businesses who are also woman owned small businesses, and
one 8(a) small disadvantaged business.
Conclusion
Today I have given a brief overview of contract bundling and the
efforts taken by the Department to eliminate or lessen its effects on
all small business, particularly, SDVOSBs. The Department is developing
new training and guidance and implementing acquisition strategies to
provide the maximum contracting and subcontracting opportunities for
small business.
I will close by stating that the achievement of the 3% contracting
goal for SDVOSBs has become a focus area within the DoD Office of Small
Business Programs as well as the entire Departmental acquisition
workforce. DoD is working aggressively to fulfill its obligation to
SDVOSBs.
I welcome your questions and any comments you may have that will
guide us toward working more effectively with this important segment of
the small business community.
Thank you.
Prepared Statement of Scott F. Denniston, Director,
Office of Small and Disadvantaged Business Utilization,
U.S. Department of Veterans Affairs
Madame Chairwoman and Committee Members, thank you for convening
this hearing on Contract Bundling Oversight. I am honored to represent
Secretary Nicholson, Deputy Secretary Mansfield and the dedicated
employees throughout the Department of Veterans Affairs who serve our
veterans daily.
As you know, VA puts Veterans first! We work to ensure not only
veteran-owned small businesses, but all small businesses receive the
maximum practicable opportunity to participate in VA's procurement
program. This approach is an important goal of VA. To demonstrate our
level of commitment we have issued a number of directives,
Informational Letters (IL) and memoranda to improve opportunities for
small businesses and to encourage all VA procurement officials to
consider small businesses whenever possible. For example, on December
28, 2005, IL # 049-06-1, Increasing Opportunities for Awards to
Veteran-Owned Small Business (VOSB) and Service Disabled Veteran-Owned
Small Businesses (SDVOSB) was issued to provide guidance to contracting
officers on awarding contracts to small business concerns owned and
controlled by veterans and service-disabled veterans. Additionally,
most recently, IL #049-07-08, Veterans First Contracting Program was
issued to provide guidance to contracting officers concerning the award
of contracts to VOSB and SDVOSB under Public Law 109-461, Veterans
Benefits, Health Care, and Information Technology Act of 2006.
VA's Office of Small and Disadvantaged Business Utilization (OSDBU)
plays a vital role in fulfilling President Bush's strong commitment to
the small business community and the unbundling of contracts. This
commitment was reinforced when VA's OSDBU and the Office of Acquisition
and Materiel Management (OA&MM) implemented the nine action items
provided in the October 30, 2002, Office of Federal Procurement and
Policy's report, ``Contract Bundling, a Strategy for Increasing Federal
Opportunities for Small Business,'' as follows:
1. Ensure accountability of senior agency management for improving
contracting opportunities for small business.
2. Ensure timely and accurate reporting of contract bundling
information through the President's Management Council.
3. Require contract bundling reviews for task and delivery orders
under multiple award contract vehicles.
4. Require agency review of proposed acquisitions above specified
thresholds for unnecessary and unjustified contract bundling.
5. Require identification of alternative acquisition strategies
for the proposed bundling of contracts above specific thresholds and
written justification when alternatives involving less bundling are not
used.
6. Mitigate the effects of contract bundling by strengthening
compliance with subcontracting plans.
7. Mitigate the effects of contract bundling by facilitating the
development of small business teams and joint ventures.
8. Identify best practices for maximizing small business
opportunities.
9. Dedicate agency OSDBU's to the President's Small Business
Agenda.
Recognizing the potential impact contract bundling has on small
businesses, VA took the extraordinary step of lowering its contract
bundling review threshold to one half of the $2 million threshold
required by the Federal Acquisition Regulation (FAR) for civilian
agencies. In reviewing all acquisitions equal to or greater than $1
million, VA's OSDBU greatly increases the number of acquisitions
subject to review, which provides more opportunities to scrutinize
acquisitions and reduces contract bundling. A lower review threshold in
VA signals a serious commitment to mitigating the effects of contract
bundling on small and veteran-owned small businesses.
Contract bundling may be necessary and justified if an agency would
derive a measurably substantial benefit. Measurable substantial
benefits include cost savings (10% of the estimated contract, quality
improvement), that will save time or enhance performance, reduction in
acquisition cycle times, better terms and conditions and any other
benefits. VA's justified and necessary contract bundling requirements
have included eyeglasses, medical equipment, prescription medicine,
professional services and prosthetic devices.
Much progress has been made since the commencement of VA's OSDBU
contract bundling reviews in March 2004. Since that time, IL #049-05,
Contract Bundling and Contract Bundling Reviews was issued to provide
guidance on the FAR final rule for implementing contract initiatives in
the VA. In response, VA's OSDBU has considered and recommended various
strategies to mitigate the scope of necessary and justified contract
bundling.
Since Fiscal Year (FY) 2004, VA's OSDBU has received over 1,000
acquisitions for contract bundling/small business program review. Of
this number about 800 actions were determined not to be bundled
actions. Approximately 36 acquisitions were determined to be necessary
and justified contract bundling. The remaining 164 actions were
received with inadequate justification to support contract bundling. In
such cases, the acquisitions were returned to the acquisition
professional after OSDBU provided assistance in developing an
alternative acquisition solution that will provide maximum
participation for small businesses. VA's OSDBU addressed contract
bundling through three program initiatives: prime contracting reviews,
subcontracting development and outreach/training.
Our prime contracting team conducts contract bundling reviews and
recommends appropriate strategies such as: small business teaming,
joint ventures and partnering agreements, and multiple awards on a line
item and or facility basis, which may include an award by a facility.
The VA Prime Vendor and Standardization Programs are cited most often
as the basis for the consolidation and contract bundling. The
overwhelming majority of requirements determined to be necessary and
justified were based upon cost saving exceeding 10% and quality
improvement of care to veteran patients. Reduction in acquisition cycle
time and better terms and conditions were cited less often, as the
basis for justifying contract bundling.
The prime contracts team takes a proactive role in making
recommendations to VA procurement professionals to increase awards for
small businesses particularly when a bundled requirement is deemed
necessary and justified. For example, in a collaborative effort between
VA's OSDBU and a contracting officer, a waiver for the non-manufacturer
rule was obtained when market research demonstrated that no small
businessmanufacturers existed for desktop and lap computers and
peripheral equipment under VA's Procurement of Computer Hardware and
Software (PCHS-3) solicitation. The PCHS-3 solicitation was
subsequently canceled. However, this wavier created a partial SDVOSB
set-aside for the re-competed Information Technology (IT) hardware and
software acquisition, where in it's the absence, none would have
existed. As a result of this wavier, a government-wide Solutions for
Enterprise Wide Procurement (SEWP IV) contract was awarded by the
National Aeronautics and Space Administration (NASA) on June 1, 2007.
SEWP IV resulted in six SDVOSBs and three additional VOSBs receiving
contracts. We review, modify and add to our list of recommendations of
various strategies to mitigate the adverse effects of necessary and
justified contract bundling.
VA's contract bundling review process also considers subcontracting
when opportunities exist. Our subcontracts team plays an important role
in ensuring that prime contractors' subcontracting plans are in
compliance with the subcontracting program. The team reviews
subcontracting plans from VA contracting activities, reviews large
solicitations to ensure subcontracting opportunities exist, and
recommends that small business subcontract goals be based the amount of
dollars to be subcontracted. In addition, the team provides subcontract
training to VA procurement professionals and prime contractors on a
continual basis, requests conference calls and meetings with large
prime contractors, assists prime contractors in locating various small
business concerns and provides large businesses with electronic tools
such as our Vendor Information Page (VIP) to locate VOSB and SDVOSB.
This team also provides information to large businesses about where
they can advertise subcontracting opportunities.
As an example, in support of VA's Loan Guaranty Program our
subcontracting team partnered with program officials to coordinate
outreach sessions around the country for potential small businesses
interested in subcontracting. Our subcontracts team was instrumental in
providing small business concerns assistance with subcontracting
opportunities for this acquisition by posting information about these
outreach sessions on VA's website. A contract valued at $90 million was
awarded to Ocwen to manage all VA's Real Estate Owned Properties (REO)
throughout the United States, and its territories for the life of the
contract.
Since the inception of the REO contract with VA, Ocwen has shown
progressive improvement in 3 socioeconomic categories. In FY 2006,
alone Ocwen subcontracted 100% or $75.4 million to small businesses.
The goal for veteran-owned small business was 7% and they attained
9.62% or $7.2 million. Also, Ocwen surpassed the 3% goal by attaining
3.32% or 2.5 million for subcontracting with SDVOSB.
Outreach/training is critical since it provides guidance,
information and training to small business and the veteran's community.
Our outreach/training team conducts monthly face-to-face vendor
counseling sessions as well as attends a wide variety of tradeshows and
conferences to provide outreach assistance to small businesses.
Additionally, OSDBU works with local VA procurement professionals to
ensure coverage at conferences in the local areas and provides
educational material to assist small businesses who contact us by
letter, electronically, or telephonically. Also, VA conducts unique
events for specific contract opportunities. These industry day events
are acquisition specific conferences and are conducted to disseminate
information to small businesses. Examples of industry days are: VA's
PCHS-3 and VA's Vocational Rehabilitation and Employment Services
acquisition. I have included a chart with the results of the industry
events as an attachment to my statement for the record.
We believe these efforts are starting to pay dividends as evidenced
by increases in VA's FY 2006 socioeconomic accomplishments in nearly
all small business categories. VA was successful in achieving and
exceeding all of the statutory goals as well as VA Secretary's Small
Business Program Goals for FY 2006 to Small Business, Small
Disadvantaged Business, Women-Owned Small Business, Service Disabled
Veteran-Owned Small Business and HUBZone. A chart highlighting VA's
socioeconomic accomplishments for FY 2003-2006 is provided as an
attachment, to my written statement for the record.
Madame Chairwoman, let me say that I appreciate what each of you on
this Subcommittee is doing to improve economic opportunities for ALL
VOSBs. Thank you again for convening today's hearing. I will submit my
written statement for the record. I welcome your interest and I am
prepared to answer any questions that you or the Members may have.
__________
VA's Socioeconomic Accomplishments
FY 2003-2006
Abbreviations
FY = Fiscal Year, SB = Small Business, SDB = Small Disadvantaged
Business, WOSB = Women-Owned Small Business, VOSB = Veteran-Owned Small
Business, SDVOSB= Service-Disabled Veteran-Owned Small Business
----------------------------------------------------------------------------------------------------------------
FY SB SDB WOSB VOSB SDVOSB HUBZone
----------------------------------------------------------------------------------------------------------------
2003 31.83% 8.55% 3.83% 3.08% 0.49% 3.00%
----------------------------------------------------------------------------------------------------------------
2004 28.53 9.27 4.48 4.13 1.25 3.10
----------------------------------------------------------------------------------------------------------------
2005 27.82 9.49 5.29 4.92 2.09 3.59
----------------------------------------------------------------------------------------------------------------
2006 29.45 8.85 5.00 6.49 3.39 3.28
----------------------------------------------------------------------------------------------------------------
FY 2003 accomplishments collected from the OSDBU's final report of 12/
8/2003.
FY 2004 accomplishments collected from the OSDBU's final report of 2/2/
2005.
FY 2005 accomplishments collected from the OSDBU's final report of 1/
12/2006.
FY 2006 accomplishments collected from the OSDBU's final report of 3/9/
2007.
Statement of John R. Wheeler,
Executive Vice President, Veteran Corps of America
Chairwoman Sandlin, Ranking Member Boozman and distinguished
Members of the Subcommittee, I am pleased to have the opportunity to
make this statement regarding contract bundling as it relates to the so
called ``rule of two'' and the impact that it has on Service Disabled
Veteran Owned Small Businesses (SDVOSB).
Under the sole source provisions of FAR 19.14, The Service-
Disabled, Veteran-Owned Small Business Procurement Program, a contract
can only be awarded to an SDVO company without competition if, ``two or
more SDVO SBCs are not likely to submit offers,'' and then only if the
requirement is valued at less than $3M for services and $5M for
products. While some mistakenly believe that this requirement is good
for SDVOs because it gives them the ability to compete on any SDVO
requirement and thus promotes competition, in practice the effect of
the ?rule of two' is to require the time and cost of a full competitive
procurement process, even if limited to SDVO companies, and includes
the potential of a lengthy bid protest and delay in delivery of goods
or services to the end user.
The 8(a) Program does not have a similar `rule of two' requirement
and thus a Contracting Officer's first choice will be to make a sole
source award to an 8(a) company as procedurally it helps them perform
their function faster and more efficiently where contracting with an
SDVO company does not. Therefore, in reality, the ``rule of two'' does
not promote competition as most likely a contract under the $3M/$5M
thresholds will be awarded without competition to an 8(a) firm and no
SDVO will have the opportunity to compete or participate.
The ability to award sole source contracts has been the cornerstone
of the government's success in developing a supplier base of socially
and economically disadvantaged companies and exceeding their
contracting goals with 8(a) firms. The program is successful because
these businesses are able to more quickly gain the resources necessary
to develop and maintain corporate infrastructure and capability. SDVO
firms deserve at least the same procurement advantages that others
enjoy in the Federal Procurement System.
On June 20, 2007 Public Law 109-461, the Veterans Benefits, Health
Care and Information Technology Act of 2006 became effective. This
legislation gave the Department of Veterans Affairs additional
procurement tools to enable them to much more easily contract with
service-disabled veterans. Simply stated, at the VA service-disabled
and veteran-owned companies are now at the top of the contracting
ladder and the ``rule of two'' has been eliminated. Now, if an SDVO can
perform a requirement under $5M it can easily be sole sourced to them
if they are a responsible contractor and propose a fair and reasonable
price.
I thank you again for this opportunity to appear before you today.
This concludes my testimony and I welcome your questions today or in
the future.
POST-HEARING QUESTIONS AND RESPONSES FOR THE RECORD
Committee on Veterans' Affairs
Subcommittee on Economic Opportunity
Washington, DC
October 30, 2007
Anthony R. Martoccia
Director of the Office of Small Business Programs
U.S. Department of Defense
Crystal Gateway North
Suite 406--West Tower
201 12th Street South
Arlington, VA 22202
Dear Mr. Martoccia:
Please review and respond to the enclosed hearing questions by the
close of business on November 30, 2007. These questions are in
reference to our House Committee on Veterans' Affairs Subcommittee on
Economic Opportunity oversight hearing on ``Contract Bundling'' on July
26, 2007.
In an effort to reduce printing costs, the Committee on Veterans'
Affairs, in cooperation with the Joint Committee on Printing, is
implementing some formatting changes for material for all Full
Committee and Subcommittee hearings. Therefore, it would be appreciated
if you could provide your answers consecutively on letter size paper,
single-spaced. In addition, please restate the question in its entirety
before the answer.
Please provide your response to Ms. Orfa Torres by fax at (202)
225-2034. If you have any questions, please call (202) 225-3608.
Sincerely,
Stephanie Herseth Sandlin
Chairwoman
__________
Questions from Hon. Stephanie Herseth Sandlin, Chairwoman,
Subcommittee on Economic Opportunity, Committee on Veterans' Affairs,
to Anthony R. Martoccia, Director, Office of Small Business Programs,
Acquisition, Technology and Logistics, U.S. Department of Defense
Question #1: Total Contracts Awarded
Question: What is the number of the total contracts awarded to
small businesses?
Answer: A total of 238,040 basic contracting actions were awarded
by the Department to small businesses in FY06. Specifically, DoD
reported the award of 13,842 indefinite delivery vehicles (which
include indefinite delivery/indefinite quantity contracts, basic
ordering agreements and blanket purchase agreements); 13,371 definitive
contracts; and 210,827 purchase orders to small businesses.
The specific number of subcontract awards can not be ascertained
from existing Federal databases or systems. The Federal Funding
Accountability and Transparency Act of 2006 (FFATA), Public Law 109-
282, directs the Office of Management and Budget to oversee the
creation of a single comprehensive searchable Web site that will
provide public access to information about Federal expenditures. In
September of 2007, FFATA was amended to establish a pilot program to
test the collection and accession of subcontract award data. This pilot
program will end January 1, 2009. It is our belief that once the pilot
program has ended and the new data retrieval system becomes
operational, information regarding the specific number of subcontract
awards can be obtained at that point, in conformance with FFATA.
Question #2: Prime Contracts
Question: How many prime contracts have been awarded to small
businesses?
Answer: A total of 238,040 basic contracting actions were awarded
by the Department to small businesses in FY06. Specifically, DoD
reported the award of 13,842 indefinite delivery vehicles (which
include indefinite delivery/indefinite quantity contracts, basic
ordering agreements, and blanket purchase agreements); 13,371
definitive contracts; and 210,827 purchase orders to small businesses.