[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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                     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

                              ----------                              


                        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.

                                  
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