[Senate Hearing 110-335]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-335
 
  INCREASING GOVERNMENT ACCOUNTABILTY AND ENSURING FAIRNESS IN SMALL 
                          BUSINESS CONTRACTING

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP



                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 18, 2007

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


 Available via the World Wide Web: http://www.access.gpo/gov/congress/
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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 OLYMPIA J. SNOWE, Maine,
TOM HARKIN, Iowa                     CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana             DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana                   JOHN THUNE, South Dakota
MARK PRYOR, Arkansas                 BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         MICHAEL B. ENZI, Wyoming
JON TESTER, Montana                  JOHNNY ISAKSON, Georgia

                 Naomi Baum, Democratic Staff Director
                Wallace Hsueh, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                                                                   Page

                           Opening Statements

Kerry, The Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachucetts..................................................     1
Snowe, The Honorable Olmphia J., a United States Senator from 
  Maine..........................................................     3
Dole, The Honorable Elizabeth, a United States Senator from North 
  Carolina.......................................................     6
Isakson, The Honorable Johnny, a United States Senator from 
  Georgia........................................................     7

                               Testimony

Hsu, Paul, Associate Administrator, Office of Government 
  Contracting and Business Development, U.S. Small Business 
  Administration, Washington, DC.................................     8
Martoccia, Anthony, Director, Office of Small Business Programs, 
  U.S. Department of Defense, Arlington, Virginia................    15
McCracken, Todd, president, National Small Business Association, 
  Washington, DC.................................................    36
Rice, Patricia, director, Maine Procurement Technical Assistance 
  Center, Bangor, Maine..........................................    45
Silva, Magdalah, chief executive officer, DMS International, 
  Inc., Silver Spring, Maryland, on behalf of Women Impacting 
  Public Policy..................................................    49
Newlan, Ronald, president and chairman, HUBZone Contractors 
  National Council, Rockville, Maryland..........................    55

          Alphabetical Listing and Appendix Material Submitted

Bond, The Honorable Christopher S.
    Prepared statement...........................................    88
    Post-hearing questions posed to Ronald Newland and subsequent 

      responses..................................................    90
Dole, The Honorable Elizabeth
    Opening statement............................................     6
Hsu, Paul
    Testimony....................................................     8
    Prepared statement...........................................    11
    Response to post-hearing questions from:
        Senator Kerry............................................    90
        Senator Lieberman........................................    90
        Senator Snowe............................................    91
Isakson, The Honorable Johnny
    Opening statement............................................     7
Kerry, The Honorable John F.
    Opening statement............................................     1
    Post-hearing questions posed to Ronald Newland and subsequent 

      responses..................................................    90
    Post-hearing questions posed to Paul Hsu and subsequent 
      responses..................................................    90
    Post-hearing questions posed to Anthony Martoccia and 
      subsequent 
      responses..................................................    93
Lieberman, The Honorable Joseph I.
    Post-hearing questions posed to Ronald Newland and subsequent 

      responses..................................................    90
    Post-hearing questions posed to Paul Hsu and subsequent 
      responses..................................................    90
    Post-hearing questions posed to Anthony Martoccia and 
      subsequent 
      responses..................................................    94
Martoccia, Anthony
    Testimony....................................................    15
    Prepared statement...........................................    18
    Response to post-hearing questions from:
        Senator Kerry............................................    93
        Senator Lieberman........................................    94
        Senator Snowe............................................    96
McCracken, Todd
    Testimony....................................................    36
    Prepared statement...........................................    39
Newlan, Ronald
    Testimony....................................................    55
    Prepared statement...........................................    58
    Maps depicting HUBZones for various States...................    61
    Response to post-hearing questions from Senator Bond.........    90
Rice, Patricia
    Testimony....................................................    45
    Prepared statement...........................................    47
Silva, Magdalah
    Testimony....................................................    49
    Prepared statement...........................................    51
Snowe, The Honorable Olmphia J.
    Opening statement............................................     3
    Post-hearing questions posed to Paul Hsu and subsequent 
      responses..................................................    91
    Post-hearing questions posed to Anthony Martoccia and 
      subsequent 
      responses..................................................    96
Supplementary charts and graphs:
    Small Federal Vendors in FY 2005 (shows at least 6 of the top 
      30 small vendors as large companies).......................    99
    Complete List of Excluded Items, FY 2005.....................   100
    Total Government and Small Business Procurement Without 
      Exclusions, FY 2006........................................   101
    Exclusions Spending Summary, FY 2006.........................   102

                        Comments for the Record

Dorfman, Margot, CEO, U.S. Women's Chamber of Commerce...........   104
Young, Cris, president, National Procurement Council.............   106


  INCREASING GOVERNMENT ACCOUNTABILITY AND ENSURING FAIRNESS IN SMALL 
                          BUSINESS CONTRACTING

                              ----------                              


                        WEDNESDAY, JULY 18, 2007

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:08 p.m., in 
room 428-A, Russell Senate Office Building, the Honorable John 
F. Kerry (Chairman of the Committee) presiding.
    Present: Senators Kerry, Snowe, Dole, and Isakson.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A 
            UNITED STATES SENATOR FROM MASSACHUSETTS

    Chairman Kerry. We are already in order. The hearing will 
be opened. I apologize for being a little late. A lot of things 
were running a little late here today, except for Senator 
Isakson and Senator Dole.
    [Laughter.]
    Chairman Kerry. I congratulate them.
    Good afternoon and welcome. I know Senator Snowe is out in 
the corridor. She will be in in a moment. We appreciate your 
attending this hearing today to examine the state of Federal 
contracting. All of us know that we have made a long and strong 
commitment here in the Congress to try to maximize small 
business's ability to access the enormous amount of Federal 
dollars that are part of our procurement and contracting 
process. We also want to look at the role that small businesses 
play and, frankly, look at the Administration's record with 
respect to giving small businesses a fair opportunity to 
compete for Federal contracts.
    I am disappointed that Administrator Preston is not able to 
be here today. We consider this a very important topic. We know 
he is working hard and we certainly respect a lot of the things 
that he is trying to do, but we would like him to be a part of 
this dialogue, and while Associate Administrator Hsu is here, I 
hope he will let him know that we really do hope that we can 
arrange to have him come up here at some time to sort of put 
the full imprimatur, if you will, of the Administrator's 
approval or disapproval on the things that we are trying to 
achieve, and we think that is important. There will be more 
hearings on this. I know that he did promise us in the 
nominating process to be available and I don't think we have 
been excessive in our requests, so I hope that we can make that 
happen.
    I am also concerned that Ms. Doan of the GSA pulled out of 
the hearing at the last minute. I am concerned about that, and 
I want to have a chance with Senator Snowe to dialogue and see 
how we might get them to participate in a subsequent follow-up.
    As we all know, it is repetitive, I suppose, and to the 
point of exhaustion that small businesses drive our economy. 
There are somewhere between 98 to 99 percent of all the firms 
in the country, half of our GDP and two-thirds of all new 
American jobs are created by small businesses. So they are very 
important to the growth of our economy, to the high-paying jobs 
that workers depend on to be able to meet increasing costs of 
living, and to take advantage of the better opportunities of 
the economy which are in those kinds of new jobs, particularly 
important to the new prospects for women and minorities and for 
innovative cutting-edge products.
    Twenty-three percent of Federal contracting dollars are 
supposed to go to small businesses. It is not supposed to go as 
a matter of nice, maybe we will do this. It is a matter of the 
law. That is what is supposed to be happening. That is 
required. But the claims that that goal has been met in most 
people's judgment takes pretty creative math and selective 
contracting analysis in order to arrive at that conclusion.
    According to Eagle Eye publishers, the Federal Government 
spent more than $412 billion in 2006. Only 20 percent of that 
total, under some calculation, went to small businesses. That 
means that more than $12 billion that was supposed to could 
have gone to small businesses that didn't, and $12 billion is a 
lot of money to small businesses.
    Moreover, small businesses are challenged by a maze of 
complicated laws, regulations, that many have judged make it 
difficult for them to be able to succeed in that arena. Those 
barriers include contract bundling, size standards with 
loopholes for big businesses, a lack of protections for 
subcontractors, and a difficult-to-navigate GSA schedule.
    When a Federal agency bundles contracts, it limits a small 
business's ability to bid for the contract. It reduces 
competition and it leaves the taxpayers to pick up the tab for 
the increased costs that occur over time, and they do.
    Size standards are also a very important issue. As you all 
know, the size standard is, in most cases, the highest gross 
income that a business can have and still be considered a small 
business. There has been no serious update to size standards in 
years. So we need to update them. We can update them, but we 
should do it in a way that doesn't harm small businesses. 
Moreover, reevaluating size standards is critical as agencies 
promote larger and larger contracts. Small businesses shouldn't 
be restricted to just subcontracting due to their size, which 
is increasingly becoming the case as the contract amounts get 
bigger and they are held to their size and the bundling takes 
place.
    Current regulations allow large businesses to retain small 
business contracts. In 2005, 6 clearly-identifiable large 
businesses were counted as among the top 30 small businesses in 
Federal procurement. How can that work? I know that SBA has 
implemented a new rule that will give a business a 5-year grace 
period, but why should we allow big businesses to get small 
business set-aside contracts for 1 day, let alone for 5 years? 
I think that we can do better, and I think the Members of this 
Committee believe we can.
    I have heard from a number of small business owners that 
they have waited many months to get paid after they have 
completed their subcontracting work for a prime contractor, so 
the prime contractor winds up squeezing them, and the result 
is, if you are a small business and you have done a 
subcontract, it usually puts you in pretty tough straits.
    Many small businesses have also partnered with large 
businesses to bid on projects, so they become part of the 
empowerment of the large contractor to get the job by being 
part of the bid as a small business, and then guess what, they 
never hear from the large business again once the contract has 
been won. I would like to know where the Administration has 
been and why that is going on, because it is a form of sham 
transaction. It is fraud and it is inappropriate.
    Last but not least, many small business owners have 
expressed their frustration that it is tough and expensive to 
get on the GSA's schedule, not to mention a nightmare to 
navigate for a small firm with very few resources. They are 
thrown into a pool with many other businesses, some the largest 
in the world, and they are told, you are on your own, and that 
has proven to be very difficult for them.
    We made a good attempt last year to legislate on a number 
of these issues as part of last year's comprehensive small 
business reauthorization bill led by Senator Snowe, so this is 
not ground that is being tilled because there has been a change 
here in the Congress. This is not Democrat or Republican 
ground; it is small business interest ground, and it is 
bipartisan in the way in which we need to till it.
    So although there were many good provisions in that bill 
last year, we weren't able to get it through the Senate, so we 
are prepared to try to rework it, compromise, do the things 
necessary to address concerns, and I hope we can make that bill 
move this year.
    We are certainly not interested in putting a lot of 
provisions in that bill that make people unhappy and then have 
a bill that can't get out of the Senate. We are not interested 
in wasting the Committee's time or anybody else's. So we hope 
to do something that is measured and has a chance to succeed. 
It won't be perfect, but I think it can be a good start and 
that is why we are here today, to hear from the Administration 
and from small business. Tell us what is working, what is not, 
and help us to understand how we can deal with these issues.
    Senator Snowe.

 OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, A UNITED 
                   STATES SENATOR FROM MAINE

    Senator Snowe. Yes, thank you, Mr. Chairman. I certainly 
appreciate your holding today's hearing on such a vital matter 
to small business and clearly a contentious issue, one that has 
been challenging and difficult. It remains one of the single 
greatest impediments for small business, to access Federal 
contracts in the Federal agencies. This is a critical hearing 
and hopefully, as we have in so many of the other issues and 
the disaster-related bill that is on the floor, we can work on 
a bipartisan basis to move this forward and to correct many of 
the deficiencies and barriers to success for small business in 
accessing to the Federal contracting opportunities that exist 
government-wide.
    I welcome all of our panelists here today, the 
Administration officials, from the Small Business 
Administration and the Department of Defense. Most especially, 
I welcome Patricia Rice, who is testifying today from Bangor, 
Maine. Patricia is the director of Maine's Procurement 
Technical Assistance Center, which last year assisted Maine's 
small businesses to gain more than $123 million in Government 
contracts and helped create and sustain more than 2,857 jobs. 
So Patricia, I am very pleased that you are able to be here 
today and appreciate all that you have done.
    As Ranking Member of this Committee, I am dismayed by the 
myriad ways that Government agencies have time and again 
egregiously failed to meet most of their small business 
statutory goaling requirements. This afternoon, I am looking 
forward to hearing from the Administration on specific and 
realistic solutions for finally achieving contracting goals for 
small business. I am alarmed that only one Federal small 
business contracting program, the Small and Disadvantaged 
Business Program, has met its statutory goal and that the three 
other small business goaling programs have all fallen 
drastically short.
    For example, in fiscal year 2005, women-owned small 
business only achieved 3.3 percent, failed to meet its 5 
percent small business goal, while the Historically Under-
Utilized Business Zones, the HUBZone Program, met only 1.9 
percent of its 3-percent goal. Most troubling of all, our 
Nation's service-disabled veteran-owned small businesses 
received a government-wide paltry total of only 0.6 percent of 
its 3 percent small business goal. Shockingly, the Department 
of Defense granted an abysmal 0.49 percent to service-disabled 
veteran-owned small businesses. This is no way to treat those 
who have given all for their country and who seek to contribute 
more through business.
    The Federal Government can and must provide more to our 
country's small businesses. This afternoon, I intend to explore 
what actions Federal agencies are taking to confront contract 
bundling, which takes contracting opportunities out of the 
hands of small business. Other issues I want to probe include 
subcontracting, inaccurate small business size determinations, 
flawed reporting data, under-utilization, and the litany goes 
on and on.
    As the Chairman is well aware, these problems are not new 
and this Committee has held countless hearings on various 
contracting concerns. Business opportunities through Federal 
contracts provide vital economic benefits for small business. 
This is why last year, the Small Business Administration 
reauthorization bill that the Chairman referred, which to 
passed out of this Committee unanimously, contained a robust 
package of small business contracting initiatives.
    The President's 2002 nine-point anti-bundling initiative 
directly addresses the challenges small businesses confront, 
but unfortunately for our Nation's small businesses, the 
President's initiative has yet to be followed agency-wide. I 
would like to ask our panel of Administration witnesses a 
simple question. Why? Our Government cannot claim to be serious 
about contracting opportunities for small businesses if the 
laws are not followed and goaling deficiencies of this 
magnitude are allowed to continue. Now is the time for actions, 
not words.
    That is why, last month, Chairman Kerry and I requested 
that the Government Services Administration refrain from 
terminating its Office Supply Stock Program, at least until the 
Government Accountability Office conducts a report on the 
economic impacts that this potential termination will bear on 
hundreds of small businesses across this country, and so that 
is why I, too, am extremely disappointed that Lurita Doan, 
Administrator of the GSA, was unable to testify before the 
Committee today. I was looking forward to pressing the 
Administrator on why the GSA continues to take actions, 
including the bundling of contracts, that are detrimental to 
small businesses.
    And so I specifically wanted to press the GSA on its 
decision last year not to set aside a $500 million government-
wide acquisition contract task order for HUBZone small 
businesses. According to SBA and industry estimates, this set-
aside would have created over 3,700 jobs in HUBZones across 
this country and over 350 jobs combined in Oxford, Franklin, 
Somerset, Piscataquis, Arostook, and Washington counties in my 
State of Maine.
    And finally, I have been a longstanding champion of small 
business programs such as the HUBZone program. In my home State 
of Maine, only 118 of 41,026 small businesses are qualified 
HUBZone businesses. HUBZones represent a tremendous tool for 
replacing lost jobs for our Nation's declining manufacturing 
and industrial sectors. Clearly, this program should be better 
utilized. And towards that end and earlier this week, I 
requested with Senator Bond that the GAO investigate how the 
Federal Government can increase the use of the HUBZone 
Programs.
    Today, I intend to find out again, what can we do to 
further increase the use of all small business contracting 
programs, including the HUBZone, the women-owned business, 
service-disabled veteran-owned small businesses, and, of 
course, the small business disadvantaged programs. So I look 
forward to working with you, Chairman Kerry, and Members of the 
Committee in developing a bipartisan approach to these 
contracting programs.
    I think it is frustrating, frankly, that we have been 
unable to overcome these major handicaps to small business 
accessing Federal contracting opportunities when you think of 
the more than $300 billion of Federal contracts that are issued 
every year. For some reason, Federal agencies are totally 
resistant to including small businesses in those prime 
opportunities. So hopefully, we can reverse that direction 
through the course of legislative initiatives and can build 
upon what we did last year and any other ideas. But clearly, 
the time has come to address these inequities and deficiencies.
    Thank you, Mr. Chairman.
    Chairman Kerry. Thank you very much, Senator Snowe, for an 
important and candid statement. I hope the record will 
adequately be reflected to the Administrator that the Chairman 
was easier on you than the Ranking Member.
    [Laughter.]
    Chairman Kerry. Senator Dole.

  OPENING STATEMENT OF THE HORORABLE ELIZABETH DOLE, A UNITED 
               STATES SENATOR FROM NORTH CAROLINA

    Senator Dole. Thank you, Mr. Chairman, Ranking Member 
Snowe, for convening this afternoon's hearing on critical 
issues of importance facing our small businesses, and thank you 
to the panelists for sharing your expertise and time with us.
    For many folks, starting and growing a business is the 
means to achieving the American dream. There are many programs 
in place at the Small Business Administration to assist along 
the way, such as the special contracting program which affords 
small businesses owned by socially- and economically-
disadvantaged individuals, women, and service-disabled veterans 
the opportunity to compete for Government contracts.
    While all of the groups served by the special contracting 
program are well represented in my home State of North 
Carolina, I want to focus today on our service-disabled 
veterans. Too many of our servicemembers are coming home from 
service overseas with a disability, and small business 
ownership is a viable option for many of them, especially when 
entering the general workforce is not. Federal contracting 
opportunities for these individuals' businesses should be 
enhanced.
    As Ranking Member Snowe noted in her opening remarks, it is 
simply unacceptable that in fiscal year 2005, the most recent 
numbers available, only 0.6 percent of all Federal contracts 
were awarded to service-disabled veterans. In fact, they were 
awarded just 0.49 percent of Department of Defense contracts.
    When these individuals return to civilian life and take on 
the responsibilities and challenges of running their own 
business, they certainly deserve every opportunity to succeed. 
The Federal goal that at least 3 percent of contracts be 
awarded to service-disabled veteran-owned small businesses must 
at least be met and should be exceeded.
    In North Carolina, SBA's assistance to small businesses 
owned by service-disabled veterans is especially important, as 
our State has a very large military and veteran presence. In 
fact, more than 125,000 men and women are stationed at our 
numerous military installations in North Carolina. According to 
the SBA, there are approximately 1,000 service-disabled 
veteran-owned businesses in North Carolina. This number will 
very, very likely continue to increase, given our State's 
growing military and veteran population and the rigors of the 
ongoing war against terror. I would expect the same could be 
said for many other States.
    Again, thank you, Mr. Chairman, for holding this important 
hearing, and I certainly look forward to working with my 
colleagues and the various agencies represented by the panel to 
ensure that service-disabled veterans and other special 
contractors be given fair opportunities to do business with the 
Government. Thank you.
    Chairman Kerry. Thank you very much, Senator Dole, and 
thank you particularly for that focus on disabled veterans, 
which is critical, needless to say, and we appreciate it very 
much.
    Senator Isakson.

  OPENING STATEMENT OF THE HONORABLE JOHNNY ISAKSON, A UNITED 
                  STATES SENATOR FROM GEORGIA

    Senator Isakson. Well, thank you very much, Mr. Chairman. I 
want to at the outset associate myself with your remarks with 
regards to subcontracting and small business by the larger 
contractors. The last meeting I had in Atlanta before I left to 
come here on Monday was with an award-winning travel agency 
subcontractor who had been a part of a bigger contractor's bid 
that was procured and the business never materialized. The cost 
of meeting the compliance of the larger contractor was greater 
than the revenue from the small business contract. So that is a 
problem, and Senator Snowe was right on target in terms of the 
bundling issue and I associate myself completely with both 
those remarks.
    I have read some of the testimony which is going to talk 
about the importance of transparency of information from the 
agencies, and that is important, but it is not only the 
transparency of the information, it is that we need better 
information.
    I have heard horror stories from small businesses who try 
to use GSA's Federal Procurement Data System Next Generation. 
Many complain of the system producing a ``busy'' error any time 
one goes up to access it during the work day, leaving many 
small businesses with no choice but to go online on weekends or 
late at night. In fact, there are even stories of for-profit 
firms actually doing the search and then selling it to the 
small business contractors for whom it was originally intended.
    My point is, transparency is key, but only if the data is 
user-friendly, and I think the Government must be user-friendly 
to those small businesses we seek to provide with portions of 
these Government contracts. I believe we must make the Next 
Generation system far more user-friendly in order to benefit 
small business.
    And on that subject, I think GSA must also work to keep its 
schedule Web site updated. GSA keeps meticulous records on all 
purchases made through the Federal Supply Schedule because, as 
I understand, that is the way they collect their fee on each 
transaction. But you wouldn't know it when you review theie 
online records. I have also heard from constituents in Georgia 
who complain that there are huge gaps in the posted schedule of 
contract awards. This, too, is unacceptable because it prevents 
businesses from conducting basic market research and from 
finding potential subcontracting opportunities.
    As for SBA, I feel it must do a better job in small 
business community advocacy. Keep in mind I am not saying SBA 
has to build a new Web site, develop a new program, or hire new 
personnel, but SBA must simply make better use of its existing 
resources. I think SBA's Business Opportunity Specialists 
should do more to ask agencies for set-asides once a reasonable 
expectation of adequate competition among small businesses has 
been determined. Small businesses would get an edge on many 
more contracts if the SBA did a better job of implementing its 
advocacy on their behalf. A push to be more proactive instead 
of reacting could make a huge difference in the number of 
contracts awarded to small businesses.
    So in conclusion, we must address the current challenges 
facing small businesses trying to win contracts by targeting 
selected areas and improving on these, making transparency 
real, and SBA a user-friendly organization. I once again thank 
the Chairman and Ranking Member for making this valuable 
hearing available to us today.
    Chairman Kerry. Senator, thank you. Thanks for your 
participation and contribution.
    So we will now hear from our first panel. I ask all the 
witnesses if you would summarize your testimony. Your full 
testimony will be placed in the record as if read in full. If 
you could do the summary within 5 minutes, it would help the 
Committee to focus on questions.
    First, we'll hear from Mr. Paul Hsu, the Associate 
Administrator of the SBA's Office of Government Contracting and 
Business Development, and then from Mr. Anthony Martoccia, 
Director of the Office of Small Business Programs in the 
Department of Defense. Thank you for being here.

   STATEMENT OF PAUL HSU, ASSOCIATE ADMINISTRATOR, OFFICE OF 
  GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL 
            BUSINESS ADMINISTRATION, WASHINGTON, DC

    Mr. Hsu. Chairman Kerry, Ranking Member Snowe, and Members 
of the Committee, I know Administrator Preston is looking 
forward to his testimony next week before this Committee. My 
name is Paul Hsu. I am the Associate Administrator for 
Government Contracting and Business Development. I appreciate 
the opportunity to testify today on behalf of Administrator 
Preston regarding the operation and success of SBA's Government 
Contracting Program and our continuous effort to ensure greater 
transparency and accountability throughout the Federal 
Government process, especially in terms of increasing the 
opportunity for small businesses.
    As a first-generation immigrant myself, in 1984, I started 
my first high-tech company. After my company won the first 
contract, we needed working capital, money to buy parts and 
material. Fortunately, I was able to find the finance I needed 
with the help of an SBA loan guarantee, and this was how I 
first came to know the agency. Later, my company was certified 
to participate in SBA's 8(a) Program. My company is an example 
of the power of this program to give businesses opportunity to 
grow.
    SBA helped me to develop a successful business. It provided 
me with the access to capital, training, the development 
experience and solid competitive opportunities. Simply put, 
without the agency, I could not have come this far. So it is 
absolutely an honor and privilege, Mr. Chairman, for me to join 
an agency that I truly, truly believe in.
    Government contracting dollars to the small business have 
grown significantly since fiscal year 2000. There were $30.6 
billion more in small business prime contracts in fiscal year 
2005 than fiscal year 2000, supporting an estimated 235,000 new 
jobs.
    SBA recognized the need for improving our Government 
Contracting Program and is taking the lead, along with the 
Office of Federal Procurement Policy, to carry out a number of 
initiatives, including working with agencies to ensure their 
reporting is accurate. The integrity of the data reported to 
the Congress and the public is crucial to instill the 
confidence in the Federal contracting system. Along with the 
Administrator of the Office of Federal Procurement Policy, 
Administrator Preston issued a memorandum to all Federal 
agencies requiring them to review their procurement data and 
identify any necessary changes to help resolve the apparent 
discrepancy in the Federal Procurement Data System, which is as 
we call it FPDS-NG.
    Under Administrator Preston's leadership, SBA has taken a 
number of steps to make contracting data more transparent and 
accurate. Just last month, all Federal agencies completed the 
final review of fiscal year 2006 data in the Federal 
Procurement Data System. We expect to publish an official Small 
Business Goaling Report for fiscal year 2006 very shortly and 
also a reissued fiscal year 2005 report. These reports may not 
be flawless, but there will be a substantial improvement in the 
quality of the small business procurement information.
    SBA also will publish the first Small Business Procurement 
Scorecard this month. This scorecard is a method of ensuring 
the Federal agencies provide the maximum opportunity for small 
business in the Federal marketplace. It reflects the current 
performance and the progress in improving such performance. The 
new scorecard aligned with President Bush's Management Agenda 
and the data integrity is the key element of it. The scorecard, 
along with the advances made in the FPDS-NG, are a significant 
step in adding transparency to the goaling process.
    The way to increase competition further is to decrease the 
practices like contracting bundling and the long-term sole 
source contracting, which can be done with a strong commitment 
to procurement planning and changing the way agencies approach 
the contracting. The Administration, through the SBA Small 
Business Procurement Scorecard, will encourage agencies to meet 
all small business goals and give them credit for progress. 
Each scorecard will be tailored to individual procurement 
characteristics to the agencies and SBA will work with each 
agency to establish its milestones and measure it against its 
own achievement. We have developed a simple, straightforward, 
and measurable criteria for the government-wide small business 
procurement scorecard.
    Also, SBA is in the process to implement the new size 
recertification rules. This regulation requires all small 
businesses to recertify their size status on long-term 
contracts at the end of the first 5 years and whenever the 
contract option is exercised. Recertification is also required 
for short-term contracts when a small business is purchased or 
merged with another business. This will assure the data is more 
accurately reflected and further support our effort to help the 
small businesses receive prime contracts throughout the Federal 
Government.
    Additionally, SBA asked over 1,000 large prime contractors 
to review any small business contract they may hold in order to 
more accurately report a small business award to Congress. This 
is another step to providing more accurate and transparent 
contracting data that will lead to more opportunities for small 
business to compete in the Federal marketplace.
    SBA is also focused on a number of other initiatives within 
the Government contracting arena. This includes Administrator 
Preston's initiative to expand opportunity for small business 
in the under-served markets, such as women-owned small 
business, HUBZone certified firms, and service disabled 
veteran-owned small businesses.
    SBA's fiscal year 2008 budget includes a request for 
$500,000 to examine how best to serve the 8(a), HUBZone, and 
SDB communities, as well as the women-owned and service 
disabled veteran-owned small businesses.
    Furthermore, SBA already committed to and is in the process 
of bringing on-board additional Procurement Center 
Representatives with a proposal in the fiscal year 2008 budget 
and requests an additional five PCRs. To better serve small 
businesses who do business with the Government, SBA redefined 
rules and responsibilities so the PCRs can devote more time to 
finding opportunities for small business while the district 
offices and the resources partner will be devoting more time 
and on getting small business ready to do business.
    Mr. Chairman, this concludes my testimony and I am looking 
forward to your questions.
    [The prepared statement of Mr. Hsu follows:]

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    Chairman Kerry. Thank you very much, Mr. Hsu.
    Mr. Martoccia.

   STATEMENT OF ANTHONY MARTOCCIA, DIRECTOR, OFFICE OF SMALL 
   BUSINESS PROGRAMS, U.S. DEPARTMENT OF DEFENSE, ARLINGTON, 
                            VIRGINIA

    Mr. Martoccia. Thank you. Good afternoon. Chairman Kerry, 
Ranking Member Senator Snowe, distinguished Committee Members, 
it is my pleasure to testify before you today about small 
business contracting at the Department of Defense. I will read 
a condensed version of my written testimony submitted for you.
    Small businesses have proven time and again to be a 
wellspring of initiative, ingenuity, and tireless dedication to 
the mission of the Department. For this and many other reasons, 
DOD is a loyal supporter of the small business community. My 
testimony today will focus on contract bundling, small business 
size standards, subcontracting opportunities, and payments to 
small businesses.
    In the mid-1990s, Congress passed several statutes 
requiring the Government to buy products and services more 
efficiently. Federal acquisition professionals became adept at 
leveraging the immense buying power of the Government to enable 
prudent stewardship of public funds and fewer internal 
resources. The consolidation of several requirements into a 
single contract to save money and gain other benefits is one 
such methodology. Consolidation and bundling may not be used 
without first taking into account the effect it may have on 
small businesses. Even if bundling and consolidation can be 
justified by its anticipated benefits, contracting 
professionals must develop acquisition strategies to mitigate 
the impact on small businesses.
    With regard to size standards, the Department is concerned 
that unrealistically low small business size standards will 
have a negative impact on the Defense small business supplier 
base. The Defense Department believes that a number of size 
standards representing critical defense industries have not 
kept pace with the U.S. economy. For example, the size and 
complexity of engineering, professional, and information 
technology services within the Department have increased 
dramatically over the last decade.
    DOD would favor the adjustment of size standards as needed 
to keep them in line with the dynamics of the U.S. economy and 
the U.S. military. My office has met with representatives of 
SBA and the Office of Federal Procurement Policy in March 2007. 
All parties agreed that a comprehensive review of the size 
standards is needed. Last month, the SBA advised that they 
would proceed with the review, focusing on size standards 
associated with military systems and engineering services. The 
Department is optimistic that resolution of the size standards 
issues will enable small businesses to take on an even greater 
role in the competitive playing field.
    Subcontracting opportunities--military departments and 
agencies use various techniques to encourage prime contractors 
to subcontract and team with small businesses. Contractual 
incentives that reward prime contractors for exceptional 
subcontract performance is one technique. In addition, we are 
increasingly using proposed subcontracting performance for 
small businesses as a source selection factor. When a 
contractor fails to make a good faith effort to achieve its 
subcontracting goals, contracting officials will note this 
information in the contractor's official past performance 
record. Past performance information is maintained in the 
government-wide Past Performance Information Retrieval System.
    One subcontractor initiative that we are using in the 
Defense Department is the Comprehensive Subcontracting Plan, 
and the purpose of this plan is to determine whether the 
negotiation and administration of comprehensive small business 
subcontracting plans on a corporate, division, or plant-wide 
basis increases subcontracting opportunities for small 
businesses while reducing the administrative burdens on 
contractors.
    Under the Comprehensive Subcontracting Test Program, 
eligible contractors establish annual Comprehensive Small 
Business Subcontracting Plans that cover their entire business 
operation in support of all DOD contracts and subcontracts. 
There are currently 14 firms participating in the programs.
    And finally, payments to small businesses. It is the 
Department's policy to assist small business concerns in 
obtaining payments under their prime contracts, late payments, 
interest penalties, or information on contractual payment 
provisions. With regard to prime contractor payments to their 
small business subcontractors, it is the policy of DOD to 
ensure that prime contractors establish procedures for the 
timely payment of amounts due pursuant to the terms of their 
subcontracts.
    Although DOD does not have priority of contracts with 
subcontractors, a DOD Contracting Officer that determines a 
prime contractor's certification of payment to be inaccurate in 
any material respect must investigate the matter. Depending on 
the contract type, the Contracting Officers will encourage the 
prime contractors to make timely payments to subcontractors or 
the Contracting Officer may reduce or suspend progress payments 
until the contractor applies. Failure of prime contractors to 
pay their subcontractors in a timely manner is negative past 
performance and will be recorded in their Past Performance 
Rating System.
    In conclusion, the small business community plays a 
prominent role in the acquisition of the materials, supplies, 
and services needed by men and women in uniform. DOD is 
committed to providing maximum opportunities for small 
businesses in both the prime and subcontracting areas. They are 
an integral part of the success of the armed forces, and it is 
DOD's obligation to afford small businesses every opportunity 
for contracting.
    Today, I have given a brief overview of our four critical 
issues as they relate to small businesses and I look forward to 
any questions or comments.
    Thank you.
    [The prepared statement of Mr. Martoccia follows:]

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    Chairman Kerry. Thank you very much, Mr. Martoccia.
    Let me just raise right off the bat the issue that Senator 
Dole raised about disabled veteran contracting. This is 
something that the Committee has heard some testimony on 
previously. Why is the record of DOD so poor with respect to 
its base constituency, its fundamental constituency? It just 
seems extraordinary to me, particularly in the time of Iraq and 
Afghanistan.
    Mr. Martoccia. We agree that it is too low and----
    Chairman Kerry. Why is it too low? I am asking you, why?
    Mr. Martoccia. Well, the trend has a significant increase, 
but we are changing the way we do business with veterans. We 
are making it a priority.
    Chairman Kerry. Is it safe to say it hasn't been a 
priority?
    Mr. Martoccia. No, it has been a priority, but it is being 
made more of a priority.
    Chairman Kerry. Why are you making it a priority? Are you 
making it more of a priority?
    Mr. Martoccia. That is correct, and we are focusing on 
getting the decision makers to look at and conduct sources 
sought to find capable veteran disabled-owned companies that 
can perform the work.
    Chairman Kerry. When you say, to find the capable disabled 
veteran company, for a lot of veterans who have been disabled, 
they may not know what they are capable of yet. Don't you think 
there ought to be a proactive, you can do it, we are going to 
help you set up, here is the kind of thing you can do, effort?
    Mr. Martoccia. Yes. We have representatives from----
    Chairman Kerry. If you just go out and look for people who 
have already started a business, you are not going to find a 
lot of people, probably.
    Mr. Martoccia. Obviously, training, and our PTACs, we have 
a representative here from Maine who will be talking about it, 
will help small businesses learn about how to do business with 
the Government. It is a complicated process and SBA helps in 
the training. Our small business specialists, we have many 
resources throughout all departments----
    Chairman Kerry. Let me stop you there for a minute.
    Mr. Martoccia. OK.
    Chairman Kerry. Why does it have to be so complicated? What 
is inherent about it that makes it so complicated? I mean, this 
is what drives citizens crazy, is the notion that you do 
business with the Government and it is complicated. It makes 
them jump through hoops unlike anything else.
    Mr. Martoccia. Obviously, it has to be fair. It has to be 
competitive. It has to be fully evaluated. So it does take 
time.
    Chairman Kerry. Does that, by definition, have to be 
complicated?
    Mr. Martoccia. Not necessarily, but it does take time. It 
does take a lot of resources. It takes a lot of effort by the 
companies who put in proposals to the Government to make sure 
that they are proper and they address all the issues required 
in the solicitation.
    Chairman Kerry. But everybody else does that in any normal 
set of subcontracting and contracting process. It seems to me 
that when a business comes along, if there is work to be done, 
you can let it out in the appropriate way. Requests for 
proposals go out. You review the proposals and you let the 
business. But somehow, it gets super convoluted according to 
everybody I talk to.
    Mr. Martoccia. Well, I was a Contracting Officer for 30-
some-odd years. It does take effort and they have to learn how 
to put a proposal together to address specific Government 
requirements, and that is the challenge. They have to have a 
financial system that can record costs. That is a governmental 
accounting system that is required to make sure the taxpayers' 
dollars are spent appropriately. So those are the----
    Chairman Kerry. But aren't all of those conditions 
precedent to being able to actually apply? I mean, don't you 
say that, don't bother applying if you don't have the following 
in place, boom, boom, boom, and then they either apply or they 
don't. I mean, that is a pretty quick elimination process.
    Mr. Martoccia. Correct. Again, the resources have been 
reduced over the last 10 years.
    Chairman Kerry. Who reduced the resources?
    Mr. Martoccia. The agencies reduced the resources in the 
1102 Series. We have fewer contracting professionals to conduct 
the procurements.
    Chairman Kerry. Well, let me ask you about that for a 
minute, because Senator Snowe and I have certainly been 
fighting that significantly. I think that as of March 2006, 
there were only 43 full-time Procurement Center Representatives 
and a total of 58 total employees with PCR duties. Mr. Hsu, 
this goes to your testimony also. You said that SBA has 
requested fiscal year 2008 funding for an additional nine 
Procurement Center Representatives.
    Mr. Hsu. Yes, sir.
    Chairman Kerry. Senator Snowe and I have pushed for 100, so 
that is a big difference, a mighty big difference. In 2005, the 
Inspector General found that SBA didn't have enough Procurement 
Center Representatives to review bundled contracts, with a 
survey that SBA had not reviewed 87 percent of bundled 
contracts. So how are we possibly supposed to hold out the 
promise to people that the system is going to be fair and 
accountable and enforced if you are not asking for the right 
numbers of people to do the job?
    Mr. Hsu. Well, Mr. Chairman, from an SBA point of view, 
this is really nothing new to us. Almost a year ago, we 
realized the Government has not historically met the social-
economic Government goals, including HUBZone and especially the 
service disabled veterans.
    The PCRs, we are scheduled to hire five more this year, but 
my personal----
    Chairman Kerry. How do you say five more? You have only 
requested funding for an additional nine, so are you down from 
the 43 slots?
    Mr. Hsu. Oh, no, no, no. We are going to--I think before 
the end of the fiscal year, we are going to hire five more, and 
then I think the first part of next year, we are going to hire 
four more. So the total will be nine.
    We are looking at the PCRs very closely, sir. We refocused 
our PCRs to work primarily with the Federal Procurement Office 
to help the agency to meet their goal and there are many ways 
that we can help the PCRs. The technology is there. We provide 
the tools, such as Quick Market Search, to help the agencies to 
conduct a market search very quickly, very easily, and----
    Chairman Kerry. Let me just interrupt you for a minute.
    Mr. Hsu. Yes, sir.
    Chairman Kerry. How long have you been over there?
    Mr. Hsu. A little over 3 months, sir.
    Chairman Kerry. And you are talking about things that you 
are going to do. But we are here to look at what has been done 
and what you are doing and can do. I mean, I have been through 
years and years now of sitting at this table listening to 
people say, well, we are going to do this, we are going to do 
that, we are going to do this. But it doesn't happen, number 
one, and number two, the statutory requirements year after year 
don't get met. Now, tell me how nine additional PCRs are going 
to review $300 billion worth of contracts.
    Mr. Hsu. Well, because we are introducing a lot of high 
technology, like a quick market search, sir. That information 
is right there. They don't really have to be physically----
    Chairman Kerry. Let me--fill that out for me.
    Mr. Hsu. OK. The Quick Market Search is a tool that will 
provide the agencies or contracting officers, if any new 
requirement is happening, this information is right there, 
right in front of their screen.
    Chairman Kerry. What is? What is right in front of them?
    Mr. Hsu. It is the information of the contractors, the 
service disabled veterans. How many of them are in your area? 
How many of them are in your State? How many of them are in 
your region?
    Chairman Kerry. I am talking about a bundling of a 
contract, the reviewing of a bundled contract. How are you 
going to review the bundled contract?
    Mr. Hsu. Well, we have--in addition to the PCRs, we have 
our field services people. We have----
    Chairman Kerry. Why is it not happening today? Why do 87 
percent of the contracts go unreviewed? Eighty-seven percent--
that means you are doing about 13 percent. Do you realize the 
impact of that and the implications of it?
    Mr. Hsu. We do not like the bundling of contracts at all, 
sir. We are trying to stop----
    Chairman Kerry. I know you don't like it, but how do you 
stop it----
    Mr. Hsu [continuing]. Each and every one of them.
    Chairman Kerry. If you can't review it and you don't review 
it----
    Mr. Hsu. We are working----
    Chairman Kerry. [continuing]. And you don't enforce it?
    Mr. Hsu. We are working very closely with the DOD, which is 
the primary----
    Chairman Kerry. Working very closely----
    Mr. Hsu. Because we provide the guidance. We provide even 
the oversight about each and every procurement to prevent any 
kind of----
    Chairman Kerry. What guidance have you provided? Mr. 
Martoccia, what guidance have you been provided?
    Mr. Martoccia. Well, they have provided guidance to us----
    Chairman Kerry. To do what?
    Mr. Martoccia. Well, you have to remember, sir, that we do 
have in each of the departments the procurement activity 
contract specialists that help SBA and the PCRs look at every 
requirement, especially the large requirements, the 
consolidated, those contracts that are bundled or have been 
bundled 20 years ago to see if there are more opportunities 
available to small businesses. So there are resources and they 
are being utilized and they are being effective in breaking out 
some of these large contracts so small businesses can bid on 
them.
    Chairman Kerry. Do you believe that it is adequate to have 
87 percent of bundled contracts not reviewed?
    Mr. Martoccia. I don't think that is a correct number 
myself. I mean----
    Chairman Kerry. Do you have a correct number to offer the 
Committee?
    Mr. Martoccia. No. I can go by experience, but my 
experience says----
    Chairman Kerry. I am just going by the numbers that the 
Inspector General found. You disagree with the Inspector 
General?
    Mr. Martoccia. Well, maybe the PCRs have a lower level. But 
as I said, there are a number of small business resources that 
every department has that will help SBA look at every 
requirement for small business opportunities. Now, I don't know 
what the----
    Chairman Kerry. Honestly, I am not trying to be difficult, 
but I honestly don't know what that means in the context of 
what I am asking.
    Mr. Martoccia. Well, they have expertise in contracting 
with small----
    Chairman Kerry. Where are they applying it? What are they 
doing?
    Mr. Martoccia. They are looking at the procurement 
requirements. They are looking at the procurement strategies. 
They are looking at the forecast. They are working with the 
program offices and the contracting officers to look at large 
contractors--large contracts that are consolidated, that are 
task orders----
    Chairman Kerry. Why do you think the Inspector General came 
to the conclusion the Inspector General came to? Is the 
Inspector General wrong, in your judgment?
    Mr. Martoccia. I think he is talking about the PCRs, not 
our total small business workforce.
    Chairman Kerry. The PCR-reviewed bundled contracts?
    Mr. Martoccia. Correct.
    Chairman Kerry. As opposed to?
    Mr. Martoccia. We have, in the Department of Defense, I 
don't know the exact number, but close to 500 part-time or 
full-time small business specialists that look----
    Chairman Kerry. What percentage of your contracts are 
reviewed for the bundling, do you think?
    Mr. Martoccia. I would hope all of them.
    Chairman Kerry. Now, why should we have--I mean, help me to 
understand why I should have confidence in what you are saying 
when, in essence, you claim to have met the goal of small 
business contracting, correct?
    Mr. Martoccia. The latest data is not out.
    Chairman Kerry. But previously----
    Mr. Martoccia. Right.
    Chairman Kerry [continuing]. In the last round of data, you 
claim to have met it, I believe with a 24.6 percent claim.
    Mr. Martoccia. That is correct.
    Chairman Kerry. But you don't include any overseas 
contracting.
    Mr. Martoccia. That is not in the base, I don't believe.
    Chairman Kerry. It is. You don't include overseas 
contracting. What percentage is overseas contracting of 
Pentagon contracts?
    Mr. Martoccia. I would have to get back to you with that 
number. I know it is significant.
    Chairman Kerry. I know it is very significant, too. So, in 
effect, when you include overseas and do the proper math of the 
money spent by the Federal Government, you are way below 22 
percent. You are not at 24 percent, so it is a false claim.
    Mr. Martoccia. But I think the statute is based upon the 
available opportunity for small businesses.
    Chairman Kerry. And you are saying there is no available 
opportunity?
    Mr. Martoccia. No, I am not saying that. I am looking----
    Chairman Kerry. What is that?
    Mr. Martoccia. I am not saying that, sir. I am looking at 
the base of those contracts eligible to be set aside for small 
businesses. That is what we base our numbers on, and that is--
--
    Chairman Kerry. Well, I would sure like to look at that, 
and we will look at that. I would like the Committee staff to 
take a look at this question of eligibility and see where we 
come out on that. And I would be very surprised--I am prepared 
to be, but I would be very surprised if it gets you over the 
required percentage.
    Let me cede to Senator Snowe, if she is ready, and then I 
will come back to a couple of other things.
    Senator Snowe. Thank you, Mr. Chairman.
    If you can sense our frustration, it is only because we 
seem to confront repeatedly the same problems, the same 
resistance, and the same inability to get these contracting 
programs right and administer them on behalf of the small 
business community. It is truly a challenging problem and it is 
hard to understand why. The Department of Defense obviously is 
a major agency when it comes to issuing contracts and the 
ability for small business to access many of those procurement 
contracts, and yet you fall far short.
    We held a hearing in January of this year on the service 
disabled veteran-owned small business, and as the Chairman 
indicated, we are clearly woefully short of the 3 percent goal. 
These businesses receive 0.6 percent out of a 3 percent 
statutory goal, and yet the Department of Defense accounts for 
more than half of all procurement contracts issued by the 
Federal Government and nearly $220 billion were spent in 
contracts in fiscal year 2005, but issued less than all the 
other agencies government-wide at an egregious 0.4 percent.
    So I think the question is why, Mr. Martoccia, as to why 
the Department of Defense is woefully deficient when it comes 
to ensuring their service disabled-owned small businesses have 
the opportunity to have access to these contracting 
opportunities. I mean, this isn't the first year. It has just 
been going on year after year.
    Mr. Martoccia. I understand. I have been in the job 2 
months and I can tell you, as----
    Chairman Kerry. Is this--can I just interrupt for a minute? 
We habitually get people sent up here who have been in a job 
for 2 months and 3 months.
    Mr. Martoccia. Right.
    Chairman Kerry. Is this part of the calculation, or----
    [Laughter.]
    Mr. Martoccia. I was in Paul's job previously, so I am in 
this job, so I do know the program.
    Chairman Kerry. What do they do, ask you all to raise your 
hand, who has been here the least time?
    [Laughter.]
    Chairman Kerry. Who has the least answers? We will serve 
you up tomorrow to the United States Senate.
    [Laughter.]
    Mr. Martoccia. But you can be assured, Senator Snowe, that 
the Department and Secretary Gates and my boss are totally 
committed. I have been there, like I said, a couple of months, 
and I have never seen such effort that is being made to make 
the opportunities available to service disabled veteran-owned 
companies. It is going down from the top to the bottom, and the 
decision makers understand the need to improve those numbers.
    Senator Snowe. Well, you should have been here for that 
hearing in January. It is a sad commentary on our Government, 
and most especially the Defense Department, to hear from these 
service disabled veterans coming back, struggling to make a 
transition after serving our country and sacrificing so much 
and the Government lets them down. We heard tragic stories. I 
just cannot understand why there is such resistance and 
intransigence. Obviously, it is bureaucratic resistance and 
intransigence, and it is just stonewalling this process.
    Mr. Martoccia. Well, I don't think it is a lack of effort. 
I mean, we have had a good trend. We are up, but we are only at 
4.9. It is not good enough, and we are going to make every 
effort to get to those businesses. We are going to do sources 
sought. The Army alone has come up with $1.7 billion in the 
next fiscal year of those requirements that they have already 
identified that they want to set aside for service disabled 
veterans. So we are going to do sources sought. We are going to 
make it a priority.
    Senator Snowe. And how will you do that? I mean, if you 
think about the amount of defense spending with respect to 
Iraq, Afghanistan, worldwide, it is obviously astronomical--
    Mr. Martoccia. And we have----
    Senator Snowe [continuing]. So it is really hard to 
comprehend as to why this constituency, the most deserving for 
providing selfless sacrifice to this Nation and not even being 
able to participate to help them make this transition. We owe 
them no less.
    Mr. Martoccia. I agree, and we at DOD have a special 
relationship with the veterans' community and we are doing and 
we will continue to do all we can do to make those numbers 
better quicker rather than later.
    Senator Snowe. Well, you are talking about $220 billion for 
DOD contracting and $1 billion for service disabled veterans, 
$1 billion out of $220 billion. That is just really abysmal. It 
is paltry.
    Mr. Martoccia. It is a factor of 6 below what we would like 
to call the floor of 3 percent.
    Chairman Kerry. Could I just interrupt for 1 second? It is 
not 4.9 percent.
    Mr. Martoccia. I mean, .49 percent. I misspoke.
    Senator Snowe. Yes. And so how quickly can we expect a 
turnaround? More importantly, how quickly can the service 
disabled veterans expect a turnaround, a different response?
    Mr. Martoccia. Very soon. I would think that--I think they 
are at the right place at the right time to do Government 
contracting. There is going to be a major effort, and there is 
currently a major effort ongoing to get those opportunities out 
and improve the 0.49 of 1 percent so we can get closer to 3 in 
a shorter amount of time than most people think.
    Senator Snowe. Yes. If you think of $220 billion and $1 
billion, it really is incredulous to think that we are making 
such a minimal effort. It really is hard to believe, and those 
are the 2005 numbers. I hate to think what they are today.
    Mr. Martoccia. Again, Senator Snowe, it is not because of 
lack of effort.
    Senator Snowe. I know. It just is, the question is, it is 
getting beyond the effort and it is getting it done. It is 
achieving real results on behalf of this most deserving group 
of individuals serving our Nation. What does it say about our 
country if we can't help the Nation's veterans----
    Mr. Martoccia. I agree.
    Senator Snowe [continuing]. And those who have been 
disabled as a result of their service? So I really hope that we 
can turn this around. Make it your legacy. Make it the 
Department of Defense's legacy. This problem just didn't 
develop today, but we are at a very difficult and challenging 
point in our own country's history with respect to the war in 
Iraq and the War on Terror in Afghanistan, so we should make a 
special extraordinary effort to send the right message to those 
who are serving our Nation that we understand what they have 
contributed and that we are prepared to do everything we can to 
move heaven and earth to serve them as they have served our 
country.
    So I hope we can get this right sooner, because really, it 
requires a major initiative, energy, and the drive to make it 
happen; and you are in the position to do it.
    Mr. Hsu, in all the contracting programs other than the 
Small Business Disadvantaged Contracting Program, all the other 
goals of the programs have not been met, as I cited earlier, 
women-owned business, obviously the service disabled veteran-
owned, have not met the goals. HUBZone has never met their 
goals since the inception of the program. The same is true for 
women business-owned contracting. That has never been met. It 
has never been accomplished. When can we expect a different 
record of experience with respect to these programs?
    Mr. Hsu. Well, Senator, we recognize that. That is the 
reason why almost a year ago, the agency started the 
initiative, to me, it is the initiative increasing the 
opportunities for American small business. We have all the 
different things that we want to do, and in particular Senator 
Kerry mentioned about the PCRs.
    We are implementing a new tool that is called EPCR. EPCR 
stands for Electronic Procurement Center Representative. It 
will provide a very effective and efficient tool for PCRs and 
the Federal agencies to review all these requirements for set-
asides under the procurement program to ensure the opportunity 
for all small businesses. This year, we will implement the 
initiative, and so all----
    Senator Snowe. What is the goal of SBA with respect to 
making sure that these programs meet their statutory 
requirements?
    Mr. Hsu. Our goal is going to be 23 percent of small 
business, 5 percent of women, 3 percent of service disabled----
    Senator Snowe. But by which deadline, though, would this be 
accomplished? What is the agency setting for a deadline to meet 
this goal----
    Mr. Hsu. Well, we want to do it as soon as possible----
    Senator Snowe [continuing]. These goals? What?
    Mr. Hsu. We want to do it as soon as possible, ma'am.
    Senator Snowe. Yes, but is that going to take a matter of 
months or the rest of the year? I mean, how long is it going to 
take? You must have some estimate, because obviously that is 
the standard of measurement that you would use in order to make 
sure you have the right program in place to have it 
accomplished.
    Mr. Hsu. Well, we anticipate--take the Women-Owned Small 
Business Federal Contracting Assistance Program, for example. 
We anticipate the program will be implemented the end of this 
fiscal year. It is--I have to admit, though, we thought it 
could be very easy to identify the industries in which the 
women-owned small businesses are, quote, ``under-represented,'' 
but as it turned out, it was more complicated than we expected. 
And also, for the government-wide set-aside program based on 
gender, this is very new to us. It is really a new concept, so 
we want to make sure that all these withstand the 
constitutional scrutiny.
    But again, we are committed to increase the number of 
contracts made for small business for women, for HUBZone, for 
service disabled, and--
    Senator Snowe. Yes, but you see, like the women's 
contracting program has been in place for 6\1/2\ years, so how 
long do you think it will take?
    Mr. Hsu. Well, ma'am, we did our first study in 2001, which 
is less than 10 months after the Congress passed the law. But 
unfortunately, the National Academy of Science did not agree 
with our study, so that is the reason why in 2006, we 
contracted with RAND Corporation to do another study, and----
    Senator Snowe. Yes, I know, but we are talking 6\1/2\ 
years. Two-thousand-one--we are in 2007.
    Mr. Hsu. Yes, ma'am, but the study completed----
    Senator Snowe. What?
    Mr. Hsu. The study completed. The RAND Corporation did a 
study and the study completed and we are moving very quickly to 
publish the final rule, and this, like I said----
    Senator Snowe. Is it going to address the problem?
    Mr. Hsu. It will, ma'am, if we--yes.
    Senator Snowe. So how long will that process take? What can 
you tell the Committee? What can we expect----
    Mr. Hsu. We will----
    Senator Snowe [continuing]. So that we don't have to repeat 
this process? At least get it implemented for the first time in 
the history of the program.
    Mr. Hsu. Yes, ma'am. We will implement the Women-Owned 
Small Business Federal Contract Assistance Program by the end 
of this fiscal year.
    Senator Snowe. OK. And so now how about HUBZones?
    Mr. Hsu. Yes, HUBZones----
    Senator Snowe. That is since 1999.
    Mr. Hsu. OK. The HUBZone Program is a place-based, race-
neutral program. We understand you stimulate the economic 
development and create jobs in the Historically Under-Utilized 
Business Zone. We are going to put effort under my watch. This 
is my program, Senator. This is my program. We will put more 
effort in marketing to the contracting agencies. We will put 
PCRs, like I was just mentioning, and also we let all the 
contracting officers understand there is a ``rule of two.'' In 
other words, if there are two HUBZone companies that can 
provide these services, this requirement will be and can be set 
aside for HUBZone.
    We continue the Fed-Biz Op electronic monitoring systems. 
In other words, we will remind the Contracting Officer that the 
three percent statutory goal. And most importantly, we will 
proceed with the HUBZone set-aside letter system. This means an 
e-mail message will go to the Contracting Officer automatically 
and formally requesting that the future requirements can be and 
will be----
    Senator Snowe. When is that system going to be up and 
running?
    Mr. Hsu. It will be----
    Senator Snowe. We have been told since 2005----
    Mr. Hsu. No. I think under my watch, it will be by the end 
of this fiscal year, ma'am.
    Senator Snowe. The same is true for the HUBZones?
    Mr. Hsu. Yes, ma'am.
    Chairman Kerry. By the end of this fiscal year? In other 
words, by this October?
    Mr. Hsu. Uh--yes.
    Senator Snowe. Mr. Martoccia, one other question. I have 
many, but more one for this round. I sent a letter on March 21 
to Peter Gehren, who is the Secretary of the Department of 
Army, requesting documents, work performed by small businesses, 
small business contracts at Walter Reed, and I had asked for a 
response by April 5. Now, when could I expect this report, do 
you think, since it has been 3 months?
    Mr. Martoccia. I don't know the answer to that, Senator----
    Senator Snowe. Well, because I am concerned that some of 
these contractors could have contributed to the substandard and 
disgraceful work at Walter Reed that we are all familiar with 
now, and so I wrote a letter back in mid-March.
    Mr. Martoccia. I don't think my particular office was 
involved in it, but I will look into it when I get back.
    Senator Snowe. OK, would you?
    Mr. Martoccia. Yes, ma'am.
    Senator Snowe. I would appreciate a response to that.
    Mr. Martoccia. OK.
    Senator Snowe. Thank you. Thank you, Mr. Chairman.
    Chairman Kerry. Thank you, Senator Snowe.
    We have another panel and I don't want to prolong this too 
long because we need to get the other panel in, but Mr. 
Martoccia, in answer to Senator Snowe about this question of 
disabled veteran procurement, you said, and I will quote you, 
``that it is not because of a lack of effort.'' I want to 
respectfully disagree with you, because I think when the 
military commits itself to something, those within the 
Pentagon, they usually get it done.
    I think it is a lack of effort. I don't think that there 
has been a real commitment to it. I don't think there has been 
a real awareness of it. And I am confident that if there had 
been a sufficient effort, you would be here saying that we have 
reached out to X-number of places. We have put the following 
proactive marketing efforts in place. We have reached out to 
the following numbers of people and here is what we have run up 
against, and you would define it much more specifically than 
you have.
    So, I mean, I hate to say that, but I really think it has 
just been off the radar screen, for whatever reasons.
    Mr. Martoccia. In all due respect, Senator Kerry, I have 
been there 2 months and I have never seen in my contracting 
background the effort and the commitment----
    Chairman Kerry. Oh, yes. I understand that----
    Mr. Martoccia. No, in the actions----
    Chairman Kerry [continuing]. Because this issue got burning 
in January.
    Mr. Martoccia. In the actions----
    Chairman Kerry. You have been there for 2 months. It is now 
July.
    Mr. Martoccia. We have----
    Chairman Kerry. The fact is that long before you got there, 
this Committee lit a few burners on the issue on a bipartisan 
basis, and even before that, there were a lot of questions 
being raised about it, and particularly with Walter Reed and 
other things that have happened, there is now an understanding. 
And I will grant this, I think Secretary Gates is aware of it 
and it committed to it and I think he is the kind of person who 
will get the job done ultimately. But I don't think there has 
been the effort to date.
    Mr. Martoccia. Well, going forward, you can be assured----
    Chairman Kerry. If there has been, then shame on whoever 
has been making that effort, because it is inadequate. You 
know, the Army, as you know, says they never leave any of their 
wounded behind and the Marines don't leave their dead and the 
military is famous for committing never to leave anybody 
behind, but these folks, as we have seen, have been grievously 
left behind.
    Mr. Martoccia. Well, during my stay there, and hopefully it 
will be until the end of the Administration, I will see to it 
that it is a priority and there are actions taken and people 
held accountable to get the job done.
    Chairman Kerry. Well, we are going to obviously stay right 
on this, and I know that Patty Murray and the Veterans Affairs 
folks are going to be staying on it. I may even raise with the 
Majority Leader the idea of having some kind of special 
oversight effort that really keeps the spotlight on this and 
makes certain that we are all in pursuit of this, so that by 
the end of the year, there is just no possibility of having 
overlooked any way of making this happen.
    Mr. Martoccia. Well, we have a number of initiatives 
ongoing that I can't talk about right now that I think you will 
be pleased with with regard to the veterans----
    Chairman Kerry. Helping disabled veterans is top secret?
    Mr. Martoccia. No, it is not----
    [Laughter.]
    Mr. Martoccia. No, it is not. We are going to bring in 
groups on a regular basis to discuss issues, to get their 
feedback, to get their advice, small business, disabled 
business, veterans' businesses, stakeholders----
    Chairman Kerry. Well, we will look for all of it. That 
sounds to me like real effort, and obviously we will welcome it 
and we look forward to it.
    Let me just ask you very quickly, both of you, Mr. Hsu, if 
you are able to, can you share with us this question of size of 
businesses? We hear from a lot of small businesses that they 
repeatedly bump up against the size standards. For example, a 
certified public accountant has a size standard that is around 
$6.5 million, but then you get the four big accounting firms 
and they are somewhere up around the $25 billion level in 
revenue. So how does a small firm compete against that? You can 
run down the list of different things.
    Mr. Hsu. Yes, sir. The SBA----
    Chairman Kerry. Should the size standards be changed?
    Mr. Hsu. It will. We----
    Chairman Kerry. By the end of this fiscal year?
    Mr. Hsu. No. This is going to take about 18 to 24 months, 
and here is why. We have a size standard for every private 
sector industry in the U.S. economy. We use the NAICS code to 
identify the industry. So we use either the number of employees 
or the average annual receipt for the size standard. For 
example, manufacturing, we use 500 people. In the professional 
services, we use $6.5 million.
    The size standard, like you said, sir, represents the 
largest size that a business may be to remain as a small 
business in the Federal Contracting Program, so we know that is 
so important. We are, sir, we are conducting a comprehensive 
study under the Administrator's leadership to reevaluate the 
size standard for all industries.
    Chairman Kerry. Are you doing them one at a time, or----
    Mr. Hsu. We are doing two to three sectors at a time. So it 
will take about 3 months for us to complete the two to three 
sectors, and then the effort will be ongoing. So overall, this 
is probably going be about 18 to 24 months' effort. But toward 
the end, we will complete our comprehensive study for the 
entire economy----
    Chairman Kerry. I may want to pick up on some of these 
questions with the Administrator when we have him here, and I 
appreciate your being here certainly. But if you see these 
lists of items up here, Mr. Martoccia, these are the excluded 
items and they are excluded both statutorily and by regulation. 
I think there is a very legitimate question as to whether they 
are appropriately excluded.
    [The list of excluded items referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T0408.050
    
    Mr. Martoccia. I agree.
    Chairman Kerry. OK. So maybe we can work at seeing whether 
or not we broaden this base a little more effectively, and we 
will certainly continue to do that.
    In the interest of time, not because we don't have more 
questions, I am going to leave the record open for 2 weeks so 
that Committee Members can submit questions in writing. But I 
do need to move to the next panel in the interest of time. So 
we are grateful to you for being here today and we look forward 
to following up and working with you on this issue.
    If I could ask the second panel to come right up, we will 
try to move with a minimum amount of disruption.
    Can we stay in order, please? I would like to get folks 
seated as fast as possible with minimal disruption. Thank you 
very much.
    We have a variety of accomplished witnesses in the second 
panel today and we are very grateful to you for your patience. 
First, we are going to hear from Mr. Todd McCracken, president 
of the National Small Business Association. Then we will hear 
from Ms. Patricia Rice, the director of the Maine Procurement 
Technical Assistance Center. Our third witness on this panel is 
Ms. Magdalah Silva, the chief executive officer of DMS 
International, Inc., and testifying on behalf of Women 
Impacting Public Policy. And finally, we will hear from Mr. 
Ronald Newlan, president and chairman of the HUBZone 
Contractors National Council.
    Thank you again, all of you, for taking time to be here. I 
know there was a little question mark about how we might meet 
and so forth. I appreciate your patience, and Ms. Rice, 
especially. I know you were questioning whether, I think, 
either to be here or to go home or whatever, but we are glad we 
could make it work for our neighbors from down East and we are 
glad to have you here.
    So if we could start, Mr. McCracken, please, first. Thanks.

STATEMENT OF TODD McCRACKEN, PRESIDENT, NATIONAL SMALL BUSINESS 
                  ASSOCIATION, WASHINGTON, DC

    Mr. McCracken. Thank you very much for having me. Again, my 
name is Todd McCracken. I am the president of the National 
Small Business Association. We are the largest national--excuse 
me, the oldest national small business organization. I 
appreciate the opportunity to be here on behalf of all of our 
members, most especially those that are engaged or trying to be 
engaged, as it were, in Federal contracting.
    You have done, I think, a pretty fine job of outlining what 
many of the problems are, so with your indulgence, I am going 
to summarize my statement and not continue to belabor points 
that have been made and just try to focus----
    Chairman Kerry. Can I just interrupt you for 1 minute?
    Mr. McCracken. Absolutely.
    Chairman Kerry. Is Mr. Martoccia still here? Yes, he is. 
Good. And Mr. Hsu is here. Thank you, because I want you to be 
able to hear some of the testimony. Thank you. Mr. McCracken?
    Mr. McCracken. Thank you. We believe that we need to 
increase the small business goal. Twenty-three percent, we 
think, looked at appropriately, still isn't being met, but even 
23 percent is not representative of the role that small 
business plays in the economy and we think that it needs to be 
higher than, in fact, the 23 percent. We also think we need to 
look at goals by agency and that each agency should be required 
to meet the minimum Federal goal on an agency-by-agency basis.
    We are also in complete agreement with some remarks that 
have already been made today that the base, as it were, needs 
to be increased. We specifically think that overseas contracts 
should be included in the calculation of small business goals, 
but it doesn't necessarily stop there. There are a lot of items 
that are excluded and we think it should be looked at very 
carefully. There are probably some that are appropriately 
excluded, but not everything, we don't think.
    Bundling--clearly, there has been a huge move toward 
bundled contracts in this arena. Unfortunately, one of the 
biggest problems is that the Federal definition of bundling 
isn't sufficient. What we all think of as bundling often 
doesn't meet the Federal definition for what is bundling to be 
reviewed in the first place. And so we think that definition 
needs to be changed to include a much broader range of 
contracts and not just the narrow definition that currently is 
in play.
    When it comes to fraud and the inclusion--the definition of 
which small business are getting the contracts, there has been 
a very serious problem there, obviously, and it has been 
exacerbated by the trend in recent years of larger companies 
buying smaller contractors, which has been happening at a much 
greater pace than it had been in the past. So now you have, as 
your previous chart showed, very large defense contractors 
being listed as small business, or their subsidiaries as small 
business contractors, which clearly is not the case.
    In the last month, the SBA has put into place some new 
regulations which should, we think, help a great deal on this. 
They may need to go further, we there is, we recognize here, a 
difficult line because clearly many businesses may grow during 
the course of a contract and may no longer be small businesses. 
While we want to make sure that the goals really do help small 
businesses get contracts, we also don't want to discourage that 
small business growth at the same time. We don't want them to 
be counted as small business contracts once they have grown 
beyond small businesses, but it is important not to disrupt 
those relationships so the businesses will be able to plan, as 
well.
    Subcontracting is a huge, huge issue for small companies. 
We talked ad nauseam about prime contracts at these hearings 
and other fora, but subcontracting is critically important to 
many, many small companies across the country and there are a 
whole host of issues there, some of which have been talked 
about already, the case where a small company may never, in 
fact, get the business that was promised by a larger business 
when that larger business gets the prime contract and we think 
there needs to be some additional accountability there with 
those larger companies.
    Secondarily, there is the question of payment, which has 
been a perennial issue for small subcontractors. They often are 
not paid in a timely fashion and we think that there is a very 
significant potential role for the agencies to hold those prime 
contractors' feet to the fire a little bit better than it has 
in the last number of years. That clearly should be a prime 
criteria that agencies use in evaluating those companies for 
the awarding of prime contracts.
    I think I will stop there and save time for questions. I 
see my time is up anyway. Thank you very much.
    [The prepared statement of Mr. McCracken follows:]

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    Chairman Kerry. Thank you very much.
    Ms. Rice from Bangor?

    STATEMENT OF PATRICIA RICE, DIRECTOR, MAINE PROCUREMENT 
           TECHNICAL ASSISTANCE CENTER, BANGOR, MAINE

    Ms. Rice. From Bangor, yes. Mr. Chairman, Senator Snowe, 
thank you for your support for the Nation's small businesses. I 
am honored to be here. As was mentioned, I am the director of 
the Maine Procurement Technical Assistance Center, often 
referred to as the Maine PTAC. The Maine PTAC is part of the 
Procurement Technical Assistance Program that has 93 centers 
nationwide, funded through the Defense Logistics Agency.
    The Government funding provided by the program allows the 
Maine PTAC to offer what I consider the most important service, 
and that is one-on-one counseling with the professionals 
knowledgeable in Government contracting. This personalized 
counseling benefits the business because they can find reliable 
and timely answers to their Government contracting questions. 
But our center also offers a bid match service, information on 
past procurements, contracting workshops and training on 
Government contracting, matchmaker events held in conjunction 
with other New England PTAC Programs.
    At this time, I would like to talk about some of the 
challenges that have already been mentioned before. Top among 
them would be contract bundling. I would like to give a Maine 
example.
    After pursuing Government contracts for more than a year 
and then getting some small contracts, a Maine machine shop was 
awarded a 5-year multi-million-dollar contract to make 
precision parts for the U.S. Army Tank Automotive and Armaments 
Command. That is TACOM. The small business ramped up, hired 
people, filled orders, and then about 18 months later, the 
machine parts that he was supplying to TACOM were wrapped into 
a large bundled contract that ultimately went to a large prime 
contractor. The company was unable to recover many of the costs 
of ramping up and now is not actively looking for Government 
contracts.
    Contract bundling is promoted as making the contract 
process more streamlined and providing cost savings to the 
Government. However, nearly always, it impacts small business, 
resulting in diminishing opportunities for a small business in 
Government contracting. And if it is happening in Maine, it is 
happening in other States.
    Another pesky problem is the International Traffic and Arms 
Regulations, ITAR. It presents a burden that is particularly 
hard because of the registration and the high fee associated 
with the--imposed upon by the Directorate of Defense Trade 
Controls. In separate cases, two small Maine businesses who 
supply a small part or component to a prime contractor found 
out that the small part is for a weapons system. The businesses 
received a letter informing them of the DDTC registration 
requirement and the $1,750 annual fee in order to come into 
compliance. One such company was a woman-owned small business 
of four people supplying a $49 component.
    The HUBZone Program, although it is not a hurdle and I 
believe that the HUBZone Program has been a benefit to small 
businesses, there are some areas that I see in need of 
improvement. I see there are a lot of small businesses that 
could be considered located in an economically-depressed area 
of Maine, but are not eligible for HUBZone certification 
because of how the HUBZones are defined. Some economically-
depressed, sparsely-populated sectors get overlooked by the 
program because they get counted in with larger surrounding 
areas that are more affluent or doing well.
    So in conclusion, while I think small businesses face 
hurdles in Government contracts, I don't think the process is 
broken, only strained. The Maine PTAC works with businesses 
every day to provide them with the tools that they need to 
benefit from the Government opportunities, and nationally, the 
figures for the PTAC Program are impressive. Nationwide, the 
PTAC program has assistted 55,000 clients, generated over $14 
billion in Government contracts, and creating or retaining over 
300,000 jobs. So although the PTAC Program is small, it does 
work.
    I greatly appreciate the Committee leadership in assisting 
small and medium-sized businesses and its focus today on 
Government contracting. I thank you also for your support of 
the PTAC Program and for the honor and opportunity to testify 
today.
    [The prepared statement of Ms. Rice follows:]

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    Chairman Kerry. Thank you so much for taking time to come 
down here and be with us. We appreciate it.
    Ms. Silva.

   STATEMENT OF MAGDALAH SILVA, CHIEF EXECUTIVE OFFICER, DMS 
  INTERNATIONAL, INC., SILVER SPRING, MARYLAND, ON BEHALF OF 
                 WOMEN IMPACTING PUBLIC POLICY

    Ms. Silva. Chairman Kerry, Ranking Member Snowe, thank you 
for the opportunity to be here today. I applaud your passion 
and commitment to the development of small business. My name is 
Magdalah Silva, president and chief executive efficer of DMS 
International, a management and technology consulting firm 
located in Silver Spring, Maryland. DMS is a woman-owned 
company established in 1994 and has been providing information 
assurance, software development, statistical reporting, as well 
as instructor and Web-based training to both the defense and 
civilian agencies. Our primary Federal customers include the 
Department of Defense, Army, Navy, and Air Force, as well as 
the U.S. Department of State and the Department of Housing and 
Urban Development. Thank you for inviting me to testify today.
    My testimony today is on behalf of Women Impacting Public 
Policy. Women Impacting Public Policy is a bipartisan, 
nonprofit organization that represents well over half-a-million 
women in businesses nationwide and 46 small business 
associations. The title of this hearing adequately reflects our 
overall concerns on Federal contracting, ``Ensuring Fairness in 
Small Business Contracting.''
    As Senator Snowe observed, the Government failed to meet it 
goals for contracting with women-owned businesses. In fiscal 
year 2005, only 3.3 percent of Federal contracts were awarded 
to women-owned businesses. That represents billions of dollars 
left on the table and hundreds of qualified companies without 
opportunity.
    Furthermore, WIPP members believe that the small business 
contracting goals should be increased. We strongly agree with 
the H.R. 1873 passed by the House, which raises the overall 
small business goal from 23 percent to 30 percent and raises 
the women-owned goal from 5 percent to 8 percent.
    We have said for a long time that since WIPP's existence, 
that Pub.L. 106-554, the law authorizing the Women-Owned Small 
Business Federal Contract Assistance Program, must be 
implemented in order to meet the 5-percent goal for women-owned 
businesses passed by Congress. For 7 long years, women have 
waited for the SBA to implement this program. It is our 
understanding that the proposed regulations are in the process 
of being formulated and we ask Congress to continue to press 
SBA for those proposed regulations.
    Contract bundling continues to pose a real threat to small 
business contracting. Despite the President's initiative in 
2002 which clearly stated that unbundling of contracts was a 
priority of the Administration, we see the trend in Government 
contracting toward larger bundled contracts. The Office of 
Management and Budget reported that for every $100 awarded on a 
bundled contract, there is a $33 decrease to small businesses.
    Despite strong evidence that bundling is not good for small 
business or for the Government, for that matter, a 2004 GAO 
report shows that Federal agencies remain confused about what 
actually constitutes contract bundling, which results in poor 
accountability and disparity in reporting. We urge the 
Committee to clear up the confusion for the agencies by putting 
into place concise language to define what triggers a bundling 
review.
    As Federal contracts get larger, subcontracting integrity 
becomes more important. With regard to subcontracting, we 
continue to believe that if you list us, use us. The Committee 
language last year required that prime contractors utilize the 
small businesses included in their subcontracting plan unless 
the small businesses could no longer meet the requirements. It 
also included penalties for violating the subcontracting plans.
    Prompt payment from the prime contractors to the 
subcontractors also continues to be an issue for small 
business. Currently, the Government does not have the authority 
to intervene because its relationship is with the prime 
contractor, not with the subcontractor. Nevertheless, we 
continue to hear stories from our members that this is an 
ongoing problem. WIPP recommends that the Government withhold 
further payments to prime contractors who are not paying their 
subcontractors in a timely manner.
    Another issue for small businesses is the current size 
standards administered by the Small Business Administration. 
WIPP members tell us that as the Government contracts get 
larger, the small business size standards must be adjusted to 
reflect that trend. In some cases, the size standard limit 
restricts an award to very small companies instead of small 
companies. This inhibits the ability of our small businesses to 
compete in the Federal market and has the counter-effect of 
ensuring that women- and minority-owned companies, in effect, 
stay small.
    One example which is particularly in my case is the size 
standard for IT services. One commonly used code by the agency 
for administrative IT services is capped at $6.5 million. 
According to our members who have IT companies, this is simply 
too low. The effect of having a size standard too low is that 
very small firms will be selected and will require a major 
integrator behind them to successfully execute the contract. If 
the size standard is higher, a small business will be able to 
successfully perform at least 100 percent of the work and 
ultimately grow their business.
    While we are not advocating a wholesale reworking of the 
size standards, we are suggesting that for the problematic 
ones, SBA should be willing to review them. This is critical 
not just for the Federal Government procurement, but also 
because States and cities look to the SBA size standards on 
which to base their own programs.
    Thank you for this opportunity to speak on behalf of a 
number of important issues to WIPP members and many small 
businesses. We look forward to working with the Committee on 
changes to contracting laws and regulations to ensure continued 
small business growth in the Federal sector. I will be happy to 
answer any questions that you may have. Thank you.
    [The prepared statement of Ms. Silva follows:]

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    Chairman Kerry. Thank you very much, Ms. Silva.
    Mr. Newlan.

  STATEMENT OF RONALD NEWLAN, PRESIDENT AND CHAIRMAN, HUBZONE 
       CONTRACTORS NATIONAL COUNCIL, ROCKVILLE, MARYLAND

    Mr. Newlan. Chairman Kerry, Ranking Member Snowe, 
distinguished Members of the Committee, thank you for inviting 
me here today. For those I have not met, I am Ron Newlan, 
chairman of the HUBZone Contractors National Council. Our 
council is the only national trade association that focuses 
exclusively on expanding the implementation of the Federal 
HUBZone contracting program.
    A HUBZone is an area of our Nation that has high 
unemployment or low household income. Today, 37 million 
Americans live in poverty. There is a strong correlation 
between the locations of our HUBZones and the locations where 
these 37 million impoverished Americans live.
    This program was designed to create jobs where America 
needs jobs the most. The program creates these jobs by offering 
competitively-awarded Federal contract opportunities to small 
businesses that locate in a HUBZone and hire employees who live 
in these HUBZones.
    Awarding Federal procurements to HUBZone firms is good 
public policy for several reasons. First, awards under the 
program are almost always based on competition, so the 
Government receives the advantages of competitive pricing.
    Second, each HUBZone firm must have its largest office in a 
HUBZone. This stimulates the economic development of these 
zones of poverty.
    Third, at least 35 percent of each HUBZone firm's employees 
must live in a HUBZone. In many instances, these employees, 
before being hired by a HUBZone firm, were drawing unemployment 
and/or welfare, so it is a double win as we move the unemployed 
or the welfare recipient back to the roles of a productive tax-
paying employee.
    The HUBZone Program was very well designed and I thank all 
of the Members of this Committee who were here 10 years ago, 
particularly former Chairman Senator Bond for his sponsorship 
and leadership in creating the program.
    Today, there are 13,000 HUBZone firms. Their collective 
annual revenues exceed $25 billion. If they were collectively 
ranked, they would be ranked number 90 on the Fortune 500 list, 
larger than General Dynamics or Coca-Cola. Our resources as a 
community are vast. In Massachusetts, there are 110 HUBZone 
firms and their annual revenues exceed $370 million. In Maine, 
we have 118 HUBZone firms whose collective annual revenues are 
approximately $410 million.
    Unfortunately, this well-designed program has been very 
poorly implemented by the Federal agencies that buy America's 
goods and services. The HUBZone statute sets forth a goal for 
HUBZone contracting at three percent of total Federal 
contracting dollars. Despite the large size of our HUBZone 
contractor community, the Federal Government has never come 
close to meeting this level. In fiscal year 2005, the 
Government achieved 1.94 percent, and this was by far the best 
year ever. If I could just repeat your opening statement, 
Chairman Kerry, it is not about being nice. It is a matter of 
it is the law, the 3 percent goal and all the other goals in 
the Small Business Act.
    If I had to attribute the program's lack of success to one 
thing, I would attribute it to the procurement community's 
reluctance to change their methods of doing business. For every 
1 HUBZone set-aside competition conducted in 2005, there were 
78 small business set-aside competitions conducted. Yet the 
statutes and regulations are clear that the HUBZone Program is 
a higher priority program than the small business set-aside 
program.
    Now to make matters even worse, the House of 
Representatives has passed a bill, H.R. 1873, and sent it to 
the Senate. One aspect of this bill is to increase the 
contracting goals for small disadvantaged business and women-
owned business to 8 percent annually. The House completely 
ignored increasing the HUBZone goal to 8 percent. If H.R. 1873 
was to become law, this would increase the emphasis on the SDB 
and the women-contracting program at the expense of the HUBZone 
Program.
    It is time for the Federal procurement community to follow 
the law. For the past 10 years, far too many procurement 
officials have ignored the HUBZone statute. For 37 million 
Americans who live below the poverty level, the time for action 
has arrived.
    I ask this Committee to, one, convey to all senior 
officials and Federal procurement officials that the HUBZone 
rule of two means what it says. When there are two or more 
qualified HUBZone firms, make the procurement a HUBZone set-
aside.
    Two, reemphasize that the HUBZone Program has priority over 
the small business set-aside program. There should never again 
be 78 small business set-asides for every 1 HUBZone set-aside.
    Three, ensure the SBA headquarters HUBZone Program regains 
its budget line item status and appropriate no less than $15 
million annually so this hard-working SBA staff can create the 
tools required to ensure the Federal departments give the 
program the emphasis that it deserves. For every dollar spent 
on this SBA budget line item, the return to the taxpayers is 
many-fold in reduced welfare payments, reduced unemployment 
payments, and increased income taxes.
    Four, increase the oversight of any department that fails 
to meet the HUBZone minimum level set by Congress.
    And five, increase all small business goals to 8 percent or 
do not increase any of them. The HUBZone Program goal cannot be 
ignored.
    In closing, I would like to salute the departments and 
agencies who have proven that achieving HUBZone contracting 
goals is possible when senior leaders commit to the task and 
their procurement communities focus on goal accomplishment. The 
Departments of Agriculture and Interior each achieved 9 
percent. The Department of Army achieved their 3 percent goal. 
HUD achieved 4 percent, and GSA achieved 4 percent.
    Thank you for the opportunity to bring these urgent matters 
to your attention. I would like to just add that I have brought 
some color-coded maps of each State represented on this 
Committee, so if the staff would like to pick them up, there 
are packets here. I will leave them in these orange folders. 
But color-coded maps of where the HUBZones are in every one of 
your States. Thank you.
    [The prepared statement of Mr. Newlan follows with 
attachments:]

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    Chairman Kerry. That would be terrific. That is very 
helpful and we will collect them and we will put them to good 
use.
    While we are on the subject of HUBZones, let me just ask 
you very quickly, in May of this year, the Inspector General, 
SBA's Inspector General, released a report showing a very high 
level of decertification of people who had been previously 
certified, and I think that the IG found that in fiscal year 
2005, a 3-year certification review found that more than 81 
percent of the firms that were initially approved as HUBZones 
were decertified or recommended for decertification. What is 
going on here and what needs to be done to guarantee a higher 
level of accountability for the HUBZone process?
    Mr. Newlan. I think the number one component for the 
decertifications or the dropping out of the program is it costs 
extra money oftentimes to run your company in a HUBZone. You 
hire employees that live in a HUBZone that you might not 
necessarily hire, and then when you don't get any payback with 
winning and be awarded Federal contracts, firms are just 
walking away from the program. It is not----
    Chairman Kerry. The lack of follow-through on procurement 
is, you are saying, a very significant mark in the failure 
rate.
    Mr. Newlan. Yes, sir.
    Chairman Kerry. What do you think--Ms. Silva, also, I 
wanted you to weigh in. I want everybody or anybody who wants 
to weigh in on this. This is essentially the heart of your 
testimony. We have both of our Government witnesses here and 
listening to you, so you have an opportunity both with the 
Defense Department and the SBA to kind of put it on the line as 
directly as you can. I am grateful to both of you for staying 
here to hear this because it is important. It is valuable, I 
think.
    But, Ms. Silva, in your judgment, what is the biggest 
restraint on the ability of women, but also these other 
entities to be able to get the procurement that you have talked 
about? What happens, in your judgment?
    Ms. Silva. Well, I think accountability, first and 
foremost, and I will just give you a quick story of having a 
conversation with a Contracting Officer--well, actually not a 
Contracting Officer, a small business representative for one of 
the major agencies. I went to see him and actually talked about 
the fact that what happens to you if you don't meet your goals, 
and he told me that actually what happens is he walks around 
the other side of the table and he gives himself a stern 
talking to. That, I think in a nutshell, represents what 
happens with the goals. I mean, we have objectives that are 
set. We have goals in some instances----
    Chairman Kerry. But nobody is enforcing it.
    Ms. Silva [continuing.] But nobody is enforcing it and 
there is no accountability.
    Chairman Kerry. You are nodding.
    Mr. Newlan. I couldn't agree more. Procurement officials 
throughout the country are breaking your statute, the statute 
that started HUBZones, started in this Committee, and, of 
course, all the goals are overseen by this Committee and they 
break them on a yearly basis and they get away with it.
    Chairman Kerry. Do you think there is something inherent in 
the procurement process that drives a procurement officer to 
not do it because it is bothersome, because it is more of a 
hassle, because you don't get the bang for the buck? What are 
the ingredients of sitting there saying, I am not going to pay 
attention to this? It is easier for me to go off and do it 
here. Anybody. Mr. McCracken, you represent a large number of 
businesses in that regard----
    Mr. McCracken. Well, I think that is--my view is that is 
exactly it. I mean, we are talking about a very large 
population of people, obviously, and so they are all going to 
have different motivations. But I think at the end of the day, 
it is easier to go to one company that can do a lot of things 
for you than to put out a number of smaller contracts, whereas 
those may be more efficient, they may save more money, but if 
it is only looked at as most efficient from the Contracting 
Officer's perspective, from their own lives as opposed to what 
is most efficient for the American taxpayer or the overall----
    Chairman Kerry. To what degree is that a balance? I mean, 
to what degree does the taxpayer get a better return in that 
regard? Can you make the argument appropriately, as we always 
have here, and we try to, that there is a return to the 
taxpayer in broadening the base and in increasing the numbers 
of jobs and in sharing that wealth that it may not be recorded 
in the same way as the quick and easy 1-year return on, wow, we 
got the whole job done with one contract and here is what it 
cost us. I mean, is that the relationship that has to be better 
defined, or what?
    Mr. McCracken. I think it does, and unfortunately, when we 
were moving primarily back in the 1990s toward much greater 
bundling of contracts, when that whole argument was going on 
effectively in Congress and in the Administration, the case was 
really only looked at, I thought at that time, from the 
perspective of what is most efficient for Government 
bureaucrats who are doing contracting. The whole rest of the 
balance wasn't really looked at.
    Chairman Kerry. You were going to add to that, Ms. Silva, 
and then----
    Ms. Silva. No, I was just going to say that you eloquently 
pointed out, Senator Kerry, that basically what everyone knows, 
that the small businesses drive innovation, and whether it is 
the Federal Government or whether it is the private sector, we 
want the best quality for the best price, and when you tend to 
be focused on a kind of a single contractor and not opening up 
the opportunities for small business, you really limit the 
amount of innovation opportunity and advancement overall for 
the country in terms of being able to draw resources from pools 
of businesses that have a wide area of expertise but don't have 
accessibility or don't have visibility and don't have 
opportunity.
    Chairman Kerry. Mr. Newlan.
    Mr. Newlan. Mr. Chairman, one thing that has probably never 
been said at this Committee before, but I think customer 
service is getting in the way. If you think the way the 
Government is typically organized, you have a program office 
that has a need and funding and you have a procurement office 
whose job it is to make the award for the needs and services of 
that program office. And I have heard time and time again when 
I go to a contracting office or procurement shop and say, why 
wasn't this a HUBZone set-aside?
    Their answer is, we are in the customer service business. 
The program office is our customer and if we don't give them 
what they want, they are going to take this requirement to 
another contracting shop down the road or in another agency 
through an interagency government-wide acquisition contract and 
they will get what they want down there. So how can I give you, 
the HUBZone community, what you want, and I would like to give 
it to you, but I am going to lose the business. They are going 
to go down the street and it is going to be an unrestricted 
procurement down the street. So we have got procurement shops 
that want to do the right thing, i.e., customer service, and 
they fail to hit their goals because of it.
    Chairman Kerry. Ms. Rice, you are at the real delivery 
level there.
    Ms. Rice. Yes, I am.
    Chairman Kerry. You see it where the rubber meets the road.
    Ms. Rice. I see it a little differently. I think that 
Federal agencies and large prime contractors are risk-adverse 
and they don't want to take on new contractors, especially 
small businesses, if they don't know. So it is very, very 
difficult for the small business to break into Government 
contracting because of this risk-adverse attitude out there in 
Federal agencies----
    Chairman Kerry. For the agency itself?
    Ms. Rice. Federal agencies and----
    Chairman Kerry. So you think there is a fear factor in 
terms of accountability? There is a reverse accountability. It 
is not just the accountability for meeting the standard, but 
there is accountability for meeting the goal of the procurement 
itself and they have a fear that somebody smaller isn't going 
to do that.
    Ms. Rice. For performing the job. In a contract, they want 
the existing contractor to perform the job. They are very 
comfortable----
    Chairman Kerry. Why? What is the reason, just comfort?
    Ms. Rice. Comfort. They are comfortable with the status 
quo, with the current contractor, and if that is a large 
contractor, they are very risk-adverse to initiate change.
    Chairman Kerry. Well, isn't the key to this--this is my 
last question and then I will turn to Senator Snowe--the 
accountability issue? I mean, don't you need somebody there? It 
is like any office anywhere. If somebody isn't saying, have you 
met your goal----
    Ms. Rice. Oh, absolutely.
    Chairman Kerry. Are you on top of this? When are you going 
to meet it?
    Ms. Rice. Oh, I agree with all the panelists here----
    Chairman Kerry. If you don't meet it, you are not going to 
work here anymore. It is a pretty simple equation, isn't it?
    Ms. Rice. Absolutely, Mr. Chairman. I believe that with all 
the panelists here, we think that there is accountability that 
needs to be there at the Federal Contracting Officer level and 
the oversight that is needed by SBA.
    Chairman Kerry. Senator Snowe.
    Senator Snowe. Thank you all for your great testimony. It 
is very helpful, given the wide array of problems and 
challenges that exist with the variety of programs that could 
so well serve small businesses in creating jobs, helping so 
many communities across this country, and particularly rural 
areas, as Ms. Rice and I know. In the State of Maine, the 
HUBZone Program, for example, is a prime illustration, very 
little money, because the Federal Government is going to be 
spending this money anyway through the contracting process and 
through procurement that to allow these small businesses in 
areas that are impoverished, under-employment, or major closure 
of a facility to help boost the economy in a particular region.
    But I am just mystified to the extent to which it is such 
an under-utilized program. As you might recall, Ms. Rice, the 
Committee and I conducted forums in the counties in my State 
that are obviously designated as HUBZone eligible. I mean, 
roughly two-thirds of the State of Maine is designated as such, 
but it is only 118 companies as I mentioned earlier that are 
HUBZone eligible. And this is also true nationwide.
    I am just wondering what steps you think that the Committee 
could take to improve this program. First of all, there are 
very few people aware of the program. That is what I discovered 
in conducting these forums across the State and through the 
counties. There is very little awareness about the existence of 
the program. They might have a different experience as you go 
around, Ms. Rice, but I think given the fact it is so under-
utilized, that is obviously the case.
    Now, second, could it be the process? I know you lend great 
assistance in helping people apply so they will become 
designated as eligible. Is the application process burdensome? 
What is your experience, and is there anything we can do to 
make it easier?
    Ms. Rice. I don't really think the application process is 
that burdensome. There are steps that the small business has to 
go through in order to get certified by SBA, but if we are 
knowledgeable about that, the company trying to apply for 
certification, we will help them through the entire process.
    What I have found is sometimes the small business sometimes 
doesn't follow through enough on getting certified. That was 
one of the things that--and lack of opportunity. Once they do 
get certified, they don't see the opportunity out there and to 
get recertified, they might not have that interest anymore in 
pursuing Federal contracts because they don't see--
    Senator Snowe. How often do they have to get recertified?
    Ms. Rice. I think there is a recertification every 3 years 
or so that is looked at by the SBA, I believe.
    Senator Snowe. I would imagine on the recertification 
process overall.
    Ms. Rice. I don't think--I am not that familiar with the 
recertification process.
    Senator Snowe. I see. Ok. I could just say, though, if you 
are running a small business, it is very difficult to find the 
time. You don't have the resources. You have to travel, the 
expense. It seems overwhelming, I mean, the bureaucracies and 
the paperwork.
    Ms. Rice. It does----
    Senator Snowe. There is nothing there that is appealing, 
frankly, in order to go through that process and just in 
talking to businesses. They think, OK, this is going to be 
complex and difficult. So I think that is part of the issue. We 
have to simplify it in some way to make it user-friendly.
    Ms. Rice. I think that the small business does see it as a 
complicated process.
    Senator Snowe. That is what I heard in comments, is just 
that, where are you going to find the time to just work their 
way through the maze. Your office is terrific and once you can 
get them there and hook them up with you, it is great. But it 
is getting to that point and many of these businesses are 
located in very rural areas. So I think it makes it especially 
difficult.
    So if you have any suggestions you think that we can 
improve upon that process in some way that might also get the 
message out, I think that is the other issue. I just don't 
sense that this is widely known across the country. Do you, Mr. 
Newlan? I mean, what is your--
    Mr. Newlan. I think that is the issue, Senator Snowe. It is 
getting the message out to the firms and then getting the 
message out to the Government procurement offices that we are 
serious and 3 percent means 3 percent.
    The certification and recertification process is not very 
complicated as Government programs go. It is a completely 
online system. It is Internet-based, should take less than 30 
minutes to apply and then 30 minutes to update the data every 3 
years. So it is not a particularly burdensome administrative 
process, but the word has to get out to the community that 
there are benefits to being located in this HUBZone, Federal 
procurement benefits, and then to the procurement people.
    What is it you don't understand about 3 percent as a floor? 
That is the message that has to get out. I am not sure how the 
SBA HUBZone Program Office would spend the $15 million if the 
Congress were to appropriate it, but I am sure some of it would 
go to getting the message out.
    Senator Snowe. So you think that that would be one way of 
doing it, of helping?
    Mr. Newlan. Oh, absolutely. Yes.
    Senator Snowe. You think that would advance the program in 
some way?
    Mr. Newlan. Absolutely.
    Senator Snowe. Yes.
    Mr. Newlan. Absolutely.
    Senator Snowe. You mentioned HUBZone goals not being met, 
and you talked about that earlier. Back in 2001, I referred to 
the GAO report. It cited a number of issues Federal contracting 
offices provided for not using the HUBZone Program. One was the 
relatively small number of certified HUBZone firms; two, the 
difficulty of identifying certified HUBZone firms that provide 
particular goods and services; and three, SBA guidance and 
internal policies that favored the 8(a) Program over the 
HUBZone Program. As I said, Senator Bond had sent a letter to 
the GAO requesting a follow-up on the 2001 GAO report detailing 
all these barriers. Do you think that those are the same 
problems that exist today as they did back in 2001?
    Mr. Newlan. Oh, no. Those problems have all been fixed.
    Senator Snowe. OK. So we have a new set of them?
    Mr. Newlan. The small community issue is the HUBZone 
community is the second-largest specialty small business 
program in the Federal Government. The women-owned program is a 
larger program. There are more women-owned firms than there are 
HUBZone, but there are more HUBZone firms than there are 
service disabled veteran firms, veteran-owned firms, SDBs, or 
8(a)s. So the community is large. It is getting the word out 
and having HUBZone set-asides created by the executive branch. 
That is the key.
    Senator Snowe. That is the key.
    Mr. Newlan. The good thing about a HUBZone set-aside is you 
are guaranteed a HUBZone firm will win, and that will count 
towards the 3-percent goal.
    Senator Snowe. I see. Yes. There is much more incentive and 
it is probably more attractive, a guarantee that there is going 
to be that sort of--
    Mr. Newlan. Some HUBZone firm is going to get it.
    Senator Snowe. Yes, exactly, rather than being in a pool.
    Mr. McCracken, talking about expanding subcontracting 
opportunities, what do you think should be done in that regard? 
We talked earlier, and I know Mr. Hsu was talking about their 
whole certification process, especially to examine the larger 
companies that do the bait and switch.
    Mr. McCracken. Right.
    Senator Snowe. They front as small businesses and the next 
thing you know, they take over the contracts, as we have heard. 
So one of the issues that I think is important is that, really, 
the SBA doesn't have any strong authority to enforce any 
penalties with respect to those violators of these provisions. 
Do you think that that would be an effective approach?
    Mr. McCracken. I think it could be, yes. We certainly think 
there needs to be some additional enforcement in those areas. 
We have to make sure that the primes, when they don't use the 
firms that were included in their subcontracting plans, are 
very specific in reporting back to what their reasons for that 
were, and we have to make sure that we are very clear those are 
valid reasons, that there was a significant change in the 
contract or there is a significant change in the ability of 
that small firm to do the work. If there isn't what will be 
deemed a valid reason, then there should be some significant 
penalties, because--
    Senator Snowe. Do you think the lack of penalty, the lack 
of enforcement authority, is a detriment to preventing this 
kind of abuse, because we have seen a number of violators. 
Obviously, it has been pervasive. It is not a minimal problem.
    Mr. McCracken. It is not a small problem at all. When we 
get a group of small companies together in a room that do 
contracting and do subcontracting work, I would probably say 
that the most common story I hear, is that we have been used by 
these companies again and again. Many of them have just stopped 
working with some of these larger companies. The large 
companies will reach out to them. They are not campaigning, 
necessarily. The large companies will come to them and say, 
hey, we have this great opportunity. They will put in a great 
deal of time and effort in working with the company and the 
company gets the contract and they never hear from them again. 
It happens again and again.
    Senator Snowe. One of the provisions I had in last year's 
reauthorization--and hopefully we can include it at some 
point--is the disbarment of those who violate the requirements. 
Do you think that would be helpful? Do you think that would be 
a disincentive?
    Mr. McCracken. It would certainly be a disincentive.
    [Laughter.]
    Mr. McCracken. I think we would tend to support that. We 
would have to make clear that, you know, it is a pretty severe 
penalty, so you have to make sure that there are clear 
definitions in place. But if it can clearly be shown that 
companies are doing what we described, then absolutely.
    Senator Snowe. Yes. Given what has happened out there, it 
seems to me that we need to do something. I mean, we hear about 
it consistently before this Committee.
    Ms. Rice, you spoke to that question, as well.
    Ms. Rice. With regard to subcontracting?
    Senator Snowe. Yes, well, and to the Maine company, the 
machine tool company.
    Ms. Rice. Yes. It did not become a subcontractor of that 
prime for various reasons. But I do think there should be an 
enforcement of goals. Prime contractors often do not attain 
those goals. There should be some oversight by SBA and 
enforcement of why the prime is not attaining those goals.
    Senator Snowe. Ms. Silva, what do you think should be the 
primary focus of our priorities, given your experience with 
small business and the varying contracting procedures? Should 
it be size regulations? What do you think we should focus on?
    Ms. Silva. Well, I think that you have identified the major 
obstacle to the programs that exist currently is enforceability 
and accountability. Before we actually go further in creating 
more programs and expanding programs, we need to make sure that 
the programs that are in place-the goals that are in place--
that there are repercussions, whether you are talking about 
disbarment or whether you are talking about any kind of 
repercussions at the prime level for non-use of subcontractors, 
or whether it is a 3 percent or 5 percent goal. But what 
happens when those goals aren't met? So I think it is really a 
question of accountability. As a priority, it is 
accountability.
    Senator Snowe. Would you all agree with that, in terms of 
that?
    OK. Thank you, Mr. Chairman. Thank you all.
    Chairman Kerry. Thank you, Senator Snowe. Accountability, 
accountability seems to be leaking out here. It is just a 
question of leadership.
    Senator Snowe. Yes.
    Chairman Kerry. We are certainly going to, in this 
Committee, do our best to try to achieve that accountability 
and watch what is happening.
    I do have some questions that I am going to submit in 
writing, pursuant to the 2-week period for other colleagues, 
also.
    We really want to thank you for your contribution here. I 
think it has been very helpful to understanding the challenge.
    Just one very quick question I might ask. Mr. McCracken, 
you suggested that the goal needs to be higher than the 23 
percent. In fact, you suggested, I think, a third. So you are 
looking at 33 percent. Which, in your judgment, is more 
important, since we are not meeting the goal now of the 23 
percent? Is it going up to the higher percentage or the 
enforcement and achieve the 23?
    Mr. McCracken. If we were forced to choose between one or 
the other, I think enforcement of the current system, we think 
would be probably----
    Chairman Kerry. But you think, in fact, both ought to 
happen.
    Mr. McCracken. But we think both ought to happen. I don't 
think that they ought to be mutually exclusive goals.
    Chairman Kerry. Fair enough. Not necessarily. I am not sure 
if that is the right level or not. That is something we have to 
look at. But I appreciate the thought. Some of the questions I 
want to pursue in writing, would be sort of what the 
appropriate level is, how you achieve that, and so forth.
    Is there anything anybody felt they really had to say that 
they didn't have a chance to say, especially Ms. Rice? You 
traveled that distance. I want to make sure you are fully on 
record.
    Senator Snowe. I do have a question, one more question.
    Chairman Kerry. Go ahead.
    Senator Snowe. We talked about a redefinition of HUBZone, 
because in Penobscot County, for example, they are a 
metropolitan area.
    [Laughter.]
    Chairman Kerry. Boy, that is a stretch.
    Senator Snowe. Some of the areas are excluded as HUBZones, 
so we wanted to redefine for HUBZone eligibility. Do you agree 
with that?
    Ms. Rice. Yes. In fact, that is what I was hinting at in my 
testimony was that very fact. Penobscot County is a very large, 
long county and very depressed areas are not defined as 
HUBZones because they got counted with larger more prosperous 
areas. Thus, any small business in that area can't be certified 
as a HUBZone company, disqualifying them from participation in 
the program. So looking at that, how you define HUBZone areas, 
should be part of the Committee's oversight and--yes, I think 
that is something that should be looked at.
    Senator Snowe. I appreciate that. Mr. Newlan, do you agree?
    Mr. Newlan. I completely agree, yes.
    Senator Snowe. OK. Thank you very much. Thank you again for 
being here today.
    Chairman Kerry. Ms. Rice, thank you. How come you don't 
talk like some of those folks out there?
    [Laughter.]
    Chairman Kerry. Anyway, we are glad to have you here. Thank 
you all very much.
    We stand adjourned. Thanks.
    [Whereupon, at 4:12 p.m., the Committee was adjourned.]

                      APPENDIX MATERIAL SUBMITTED

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   Response by Ronald Newland to Written Questions fron Senator Bond

    Question. I noted in your testimony your recommendation to 
fund the SBA HUBZone Office at the $15 million level. Would you 
please elaborate on that. Thank you.
    Answer. I believe that the SBA Headquarters HUBZone Program 
Office should be funded at the annual level of $15 million and 
they should have their own line item to accomplish the 
following tasks:
      Train procurement personnel throughout the 
Government on the HUBZone Program
      Work closely with any Department that does not 
achieve their 3 percent annual HUBZone Program goal
      Work with the SBA PCRs to ensure HUBZone 
contracting meets the 3 percent contracting level
      Build the systems to facilitate enhancing HUBZone 
contracting
      Provide adequate staffing to manage the Program
      Allow for increased HUBZone Program re-
examination
      Provide the resources to SBA so they can 
encourage state governments to utilize the SBA-certified firms 
for state contracting
      Add a business development component to assist 
the less experienced HUBZone firms
    Thank you for your interest in this matter.
                              ----------                              


      Response by Paul Hsu to Written Questions from Senator Kerry

    Question 1. What plan does the SBA have to increase the 
number of PCRs beyond the nine slated to be hired in the next 2 
years?
    Answer. At this juncture, we believe that a full complement 
of sixty-six procurement center representatives (PCRs) will be 
sufficient to support attainment of statutory small business 
and socioeconomic procurement preference program goals. We 
believe that this number will be adequate given the systemic 
steps that we are now taking to increase contracting 
opportunities for small businesses, women owned small 
businesses, service disabled veteran owned small businesses and 
HUBZone small businesses. These measures are described in our 
response to Senator Snowe's first question, below.

    Question 2. Will the SBA release its updated size standards 
on a rolling basis as they are completed or all at once of the 
end of the 24-month time period?
    SBA plans to publish a series of proposed rules during a 
24-month period. During that time, SBA will evaluate a specific 
group of related industries and issue proposed rules to revise 
size standards as appropriate. Upon completion of a group of 
industries, an evaluation of another group of industries will 
begin. This process will continue until all industry size 
standards have been evaluated.
                                ------                                


    Response by Paul Hsu to Written Questions from Senator Lieberman

    Question 1. Mr. Hsu: The SBA has asked 1000 prime 
contractors to review voluntarily their status as small 
business contractors with regards to size. Has the SBA set my 
guidelines for penalties if such firms do not comply with this 
request?
    Answer. The letter requested voluntary action on the part 
of prime contractors, beyond that required under the newly 
implemented regulations, to accelerate improvement of the 
contracting data base regarding characterization of awards as 
having been made to small firms. In essence, the letter sought 
cooperation and collaboration with large prime contractors. 
Because the letter requested voluntary action on the part of 
vendors, it contemplated no adverse action for failure to act. 
Indeed, threat of adverse action would have undermined the 
intent and objective of the letter.

    Question 2. Mr. Hsu: In your testimony, you stated that 
there may be some ``constitutional'' considerations for small 
business programs based upon gender. Can you elaborate on these 
concerns? Why would there be constitutional restrictions for a 
program to assist women-owned businesses in securing Federal 
contracts? Does the SBA support such an effort?
    Answer. The Equal Protection Clause of the United States 
Constitution and court cases interpreting that clause require a 
heightened scrutiny analysis for gender-based set-aside 
programs. For that reason, SBA and the Department of Justice 
are working together to ensure compliance with this 
constitutional standard.

    Question 3. Mr. Hsu and Mr. Martoccia: The San Diego based 
company, SAIC, is a multibillion dollar firm with more than 
44,000 employees worldwide. But last year, SAIC received over 
$512 million in Government based small business contracts with 
the Defense Department. Lockheed Martin and General Dynamics 
also boasted high numbers for small business contracts with the 
Defense Department. I understand that the Small Business 
Administration has different definitions for what constitutes a 
``small business'' in its regulations, but I'm fairly certain 
that none of these large companies fits the bill. How will the 
SBA address this problem? Are current contracts being reviewed? 
What will be the penalty for the failure of a firm to recertify 
as a small business?
    Answer. The SBA has, and is addressing this issue through a 
number of measures. On November 15, 2006, the Agency published 
regulations requiring periodic recertification of size on long-
term contracts to ensure greater accuracy in reporting, and to 
encourage agencies to pursue new small business sources. On 
July 5, 2007, a companion change to the Federal Acquisition 
Regulation (FAR) was issued. The SBA's regulation, and the 
change to the FAR, are effective June 30, 2007. The regulations 
may apply to existing contracts and acquisitions and mergers of 
companies that occurred before June 30, 2007, rather than 
merely applying prospectively. This makes them much more 
meaningful and effective.
    Over the last eighteen months, SBA has worked very closely 
with acquisition agencies and the Integrated Acquisition 
Environment (IAE) to `perfect the electronic records' in 
contracting data base, `scrub' data, and to make systemic 
changes to reduce the possibility that vendors that are `other 
than small' are miscoded as `small.'
    During the summer of 2006, some $12 billion of fiscal year 
2005 contract awards, characterized as having been made to 
small businesses, was challenged. In September 2006, the 
Administrators of the Office of Federal Procurement Policy 
(OFPP) and SBA required agencies to review their 2005 
procurement data, identify discrepancies, and correct the 
records, as necessary. This process was completed in March of 
2007.
    In April 2007, SBA required that agencies review fiscal 
year 2006 contracting data by June 30, 2007, and IAE deployed 
an analytical `tool' and issued a battery of `exception' 
reports to assist in data cleansing, On June 30, 2007, IAE 
`locked down' the contracting data base, and on August 17, 
2007, SBA issued the fiscal year 2006 Small Business Goaling 
Report, and re-issued the fiscal year 2005 Small Business 
Goaling Report.
    On August 17, 2007, SBA issued the first Small Business 
Procurement Scorecard. The Scorecard is modeled after the one 
used to track the President's Management Agenda. It provides 
for a `current' status rating, based on actual performance, and 
a `progress' rating based on what agencies have done, and are 
planning to do, to improve performance. Notably, the scorecard 
includes an element addressing agencies efforts to ensure data 
integrity.
    We also note that in March 2007, OFPP began requiring that 
the Chief Acquisition Officers of agencies establish 
comprehensive, statistically-valid contracting data 
verification and validation procedures, and that they certify 
data accuracy and completeness to the General Services 
Administration (GSA), the `owner' of FPDS-NG, each year. The 
first statement of data verification and validation must be 
submitted by December 15, 2007.
    Collectively, these measures will yield quantum improvement 
in contracting data integrity. It may take fifteen to eighteen 
months for the fill benefits of these improvements to accrue. 
But, we believe that fiscal year 2006 data is substantially 
more reliable than that of prior years, and that the quality of 
data will increase measurably each year, well into the future.
                                ------                                


      Response by Paul Hsu to Written Questions from Senator Snowe

    Question 1. You referred to an `initiative increasing 
opportunities for American small bussiness .  .  . different 
things we want to do.' Beside the Electronic Procurement Center 
Representative, what does this initiative entail?
    Answer. The initiative referenced is intended to assist 
small businesses in securing more Federal procurement 
opportunities, by concentrating on areas in which the Federal 
Government has failed to meet contracting goals--HUBZone, 
Service Disabled Veteran Owned Small Business, and Women Owned 
Small Business Programs. The initiative includes implementation 
of an enhancement to the Central Contractor Registration (CCR)/ 
Dynamic Small Business Search engine called Quick Market 
Search. This tool will allow procurement officials to conduct 
market searches quickly and easily to find firms that can 
perform Federal contracts.
    Under this initiative, Procurement Center Representatives' 
(PCRs') efforts will be geared more fully to assisting Federal 
buying activities in meeting their goals. Up until now, 
requirement coordination between SBA and procuring agencies was 
essentially limited to review and appeal of unrestricted 
requirements for possible small business set aside. Under this 
initiative, requirement coordination will extend to review and 
appeal of requirements for set-asides under HUBZone, Service 
Disabled Veteran Owned Small Businesses, and Women Owned Small 
Business Programs. Specifically, PCRs will review existing 
unrestricted requirements, and new requirements, restricted and 
unrestricted, for appropriateness of possible set-aside under 
not only small business program, but also under above noted 
programs. Further, SBA will exercise formal authority to appeal 
decisions not to set-aside requirements under not only small 
business program, but also under above noted programs.

    Question 2. You [Dr. Hsu] stated, ``We will implement the 
Women-Owned Small Business Contract Program by the end of this 
fiscal year.'' Does that mean by October 1, 2007, certain 
contracts will be set-aside for women-owned small business; 
please explain this situation?
    Answer. At this juncture, our draft final rule has been 
sent to OMB and remains in interagency clearance. The 
regulation will set forth an effective date which will define 
when requirements in eligible industries may be set-aside for 
competition under the program.

    Question 3. What is SBA 's specific plan and timetable for 
ensuring the governmentwide service disabled, women owned, and 
HUBZune goals are met?
    Answer. Please reference our answer to Senator Snowe's 
question 1., above. At this time, we cannot reliably estimate 
when the each of the socioeconomic preference goals will be met 
governmentwide. However, it is our intention to work with 
acquisition agencies, at national and buying office levels, to 
develop and implement strategies that will yield increased 
opportunities for small businesses under these programs that 
will be reflected in higher levels of goal accomplishment.

    Question 4. Prime and subcontracting data are equally 
important. Data is presently unavailable for subcontracting 
goaling by agency. Please provide these Government-wide 
statistics for years FY 04, FY 05, and including your most 
recent data.
    Answer. Government-wide data for fiscal years 2004, 2005, 
and 2006 has been posted to our website, and can be found at 
the following address: http://www.sba/gov/aboutsba/sbaprograms/
goals/SBGR 2006 SCGR.html.

    Question 5. What are the ramifications SBA proposes for 
corporations that do not follow Administrator Preston's letter 
on July 3, 2007, requesting hundreds of larger corporations to 
identify and report by September 30, 2007, to the SBA, any 
small business contracts that their corporation or subsidiaries 
presently hold?
    Answer. The letter requested voluntary action on the part 
of prime contractors, beyond that required under the newly 
implemented regulations, to accelerate improvement of the 
contracting data base regarding characterization of awards as 
having been made to small firms. In essence, the letter sought 
cooperation and collaboration with large prime contractors. 
Because the letter requested voluntary action on the part of 
vendors, it contemplated no adverse action for failure to act. 
Indeed, threat of adverse action would have undermined the 
intent and objective of the letter.

    Question 6. Following my recent GAO request for an overall 
review of HUBZone underutilization, what are the effects of 
decertification on HUBZone firms? Why are firms being 
decertified? What can be done to increase HUBZone 
certification?
    Answer. HUBZone firms that no longer meet the basic 
eligibility criteria and therefore need to be decertified must 
remain out of the program for a full year from the date of 
decertification.
    The underlying cause for failure to recertify firms under 
the HUBZone program, pursuant to program examinations, is 
substantially non-responsiveness. For those firms expressing a 
reason for not responding to a request for continuing 
eligibility information, most often cited is limited 
opportunity to compete for contracts set-aside under the 
HUBZone program. This may suggest that firms that have 
committed resources to secure HUBZone status, see limited 
direct benefit to continuing in the program.
    We believe that increasing set-aside of requirements under 
the HUBZone program will increase interest in entering the 
program, and remaining in it. As noted above, increasing set-
aside of requirements and award of contracts under the HUBZone, 
Women Owned Small Business and Service Disabled Veteran Owned 
Business programs are key objective of the Agency, and the 
focus of its principle government contracting initiative for 
the foreseeable future.
                              ----------                              


 Response by Anthony Martoccia to Written Questions from Senator Kerry

    Question 1. What is the Department of Defense doing to 
protect small business sub-contractors who are not getting paid 
in a timely fashion by their prime contractors?
    Answer. The Department's policy is to assist small business 
concerns, particularly small disadvantaged business firms in 
obtaining payments under their prime contracts, late payment, 
interest penalties, or information on contractual payment 
provisions. Pursuant with the Government Accountability 
Office's recommendation, Wide Area Work Flow--Receipts and 
Acceptance (WAWF-RA) will soon be updated to include a small 
business indicator flag to alert Department of Defense (DoD) 
payment officials when an invoice is from a small business and 
to process the invoice expeditiously.
    The DoD follows the policy in Part 32 of the Federal 
Acquisition Regulation to ensure that prime contractors 
establish procedures for the timely payment of amounts due 
pursuant to the terms of their subcontract(s). DoD contracting 
officers will encourage the prime contractor to make timely 
payments to the subcontractor, or the contracting officer may 
reduce or suspend progress payments until the contractor 
complies. If prime contractors fail to pay their subcontractors 
in a timely manner then, negative past performance information 
is reported into the Federal Government Past Performance 
Information Retrieval System (PPIRS.) PPIRS is a Web-enabled, 
Government-wide application that provides timely and pertinent 
past contractor performance information to the Federal 
acquisition community to use in making source selection 
decisions.

    Question 2. Do you believe that the prompt payment act 
should be extended to all subcontracting?
    Answer. No. The Department has no ability to enforce the 
provisions or resolve disagreements regarding payment amounts 
or timing between prime contractors and their subcontractors.

    Question 3. When DoD relies on the credentials of 
subcontractors in the awarding of bids don't they have an 
interest in ensuring that those subcontractors are used for the 
work?
    Answer. To the extent the Government evaluates the 
capabilities of proposed subcontractors in making award 
decisions with respect to prime contracts, the Government would 
expect any replacement subcontractor to have equivalent 
capabilities.

    Question 4. In your testimony you stated that the DoD has 
suffered from a lack of funding for contracting officers. What 
plan does the DoD have to increase its number of contracting 
officers?
    Answer. The Director of Defense Procurement and Acquisition 
Policy (DPAP), serving as the Functional Advisor for the 
Contracting, Purchasing and Industrial/Contract Property 
Management Career Field (hereinafter referred to as the 
contracting community) is working hand-in-hand with the 
Department's Senior Acquisition Executives to develop a human 
capital plan for this community--drawing upon the strengths of 
the contracting community to ensure the Department has the 
right people, with the right skills mix.
    DPAP's human capital strategy will ensure that the 
Department's contracting community continues to effectively 
deliver equipment and services that meet the needs of the 
warfighters. DPAP is using competency-based management 
techniques to define current and future competency needs to 
support the Department's contracting community. By using 
competency-based management, DPAP is able to assess 
competencies resident in the contracting community, and 
identify gaps for current and future requirements. The 
Department of Defense completed development of a comprehensive 
competency model for the contracting career field in March 
2007. Beginning in the second quarter of calendar year 2007 and 
continuing through 2008, the Defense Acquisition University and 
DPAP are working with the contracting community to assess 
workload demands for these competencies and the degree to which 
members of the workforce possess these competencies. The 
results of these competency-based capability assessments will 
reveal where gaps exist in personnel and/or skill levels so 
that the Department can adjust efforts in hiring, allocation of 
resources and training to address these gaps.

    Question 5. At present, what percentage of contracts are 
reviewed for bundling at the department?
    Answer. Defense Federal Acquisition Regulation Supplement 
219.201 requires that all acquisitions over $10,000, except 
those under $100,000 that are totally set-aside for small 
business concerns, be reviewed by a small business specialist. 
Bundling is one element of this review.

    Question 6. Once a bundled contract is identified, what 
steps does the department take to break out contracting 
opportunities for small businesses?
    Answer. There are a number of strategies a DoD acquisition 
team may employ to avoid or lessen the adverse impact of 
contract bundling on small businesses, such as:
      Conduct industry forums or pre-solicitation 
conferences to determine small business interest and/or 
suggestions for potential strategies that will allow small 
businesses to participate as prime contractors;
      Remove obstacles to small business participation 
by configuring solicitations to be small business friendly. For 
example, if practicable, divide requirements into smaller 
geographic requirements or quantities, and/or adjust delivery 
schedules to increase the likelihood of small business 
participation;
      Fncourage teaming arrangements or joint ventures 
involving two or more small businesses;
      Take into account circumstances that may 
negatively affect the small business community. For example, 
the preservation of the small business base may be a 
significant consideration for avoiding bundling.
    Even if bundling can be justified by its anticipated 
benefits, the use of acquisition strategies that increase small 
business subcontracting opportunities are encouraged throughout 
the entire acquisition process--from the pre-award stage to 
post-award. To maximize small business participation, the 
acquisition team may develop a strategy that results not only 
in the setting of goals, but also ensures the achievement of 
these goals. In the pre-award stage, the acquisition team 
emphasizes the prime contractors' small business subcontracting 
performance during the source selection, including the 
establishment of aggressive subcontracting goals and 
incentives. Acquisition strategy teams are encouraged to 
implement a process (established during the pre-award stage) to 
ensure the prime contractor's achievement of subcontracting 
goals and enforcement of the requirements of the resultant 
subcontracting plan.
                                ------                                


    Response by Anthony Martoccia to Written Questions from Senator 
                               Lieberman

    Question 1. In your testimony, you indicated that a 
comprehensive review of small business size standards is 
needed. To meet the Defense Department's small business 
contracting goals, how would you change current SBA size 
standard guidelines by industry? Will the Defense Department 
consult with the SBA as the SBA issues new guidelines on size 
standards?
    Answer. The Department of Defense (DoD) is currently 
working with the Small Business Administration (SBA) to 
determine which North American Industry Classification System 
codes small business size standards need adjusting and the 
magnitude of any necessary adjustment.
    In March of 2007 representatives from the DoD Office of 
Small Business Programs (OSBP) met with staff members from the 
SBA and the Office of Federal Procurement Policy to discuss 
this matter at length. Since then the DoD OSBP has conducted a 
preliminary analysis to assess changes in the percentage of 
contracts awarded by the Department to small businesses for the 
most highly demanded commodities over the last 5 years. We 
intend to forward these results lo the SBA.

    Question 2. What is the Defense Department's goal for the 
percentage of contracts awarded to women-owned small 
businesses? What is the current percentage of Defense 
Department contracts awarded to women-owned small businesses? 
Do you have a plan to increase the current percentage? What is 
that plan? Is it a priority within the department?
    Answer. The Department's goal for participation by women-
owned small business (WOSB) is 5 percent of all eligible prime 
contract dollars and 5 percent of the total dollars 
subcontracted. In FY 2006 the Department of Defense (DoD) 
achieved 2.9 percent for WOSB prime contracting; the 
Department's subcontracting achievement for WOSBs was 5.5 
percent.
    Within DoD the WOSB is a special emphasis program; 
therefore improving our performance in this small business 
category is a priority. Our plan includes a combination of 
training (including Web casts) and outreach to emphasize the 
importance to our acquisition professionals of the need to 
maximize contracting opportunities for WOSBs. We anticipate 
that with the publication of the Small Business 
Administration's final rule regarding set-asides for WOSB (as 
authorized by section 8(m) of the Small Business Act, Public 
Law 85-536, as amended), we will have an even greater ability 
to increase our contract awards to companies owned by women.
    The Military Departments and Defense Agencies use outreach 
and matchmaking events to ensure that WOSB's are kept informed 
regarding contracting and subcontracting opportunities within 
the Department. In addition, the Procurement Technical 
Assistance Centers, which have offices and representatives in 
every state, participate in numerous outreach events and 
provide training and one-on-one counseling.

    Question 3. The San Diego based company, SAIC, is a multi-
billion dollar firm with more than 44,000 employees worldwide. 
But last year, SAIC received over $512 million in government 
based small business contracts with the Defense Department. 
Lockheed Martin and General Dynamics also boasted high numbers 
for small business contracts with the Defense Department. I 
understand that the Small Business Administration has different 
definitions for what constitutes a ``small business'' in its 
regulations, but I'm fairly certain that none of these large 
companies fits the bill. How will the SBA address this problem? 
Are current contracts being reviewed? What will be the penalty 
for the failure of a firm to recertify as a small business?
    Answer. There have been instances where a large business 
has mistakenly been identified as small in the Federal 
Procurement Data System--Next Generation (FPD-SG). DoD has 
acknowledged there were miscoding errors in the FPDS-NG and has 
dedicated a considerable amount of time and personnel resources 
to correct these data entry errors.
    The Small Business Administration formally requested all 
agencies to revalidate and correct certain historic records 
with respect to business size. The Defense Manpower Data Center 
is continually running reports in the FPDS-NG to flag activity 
that may appear to have been reported incorrectly for small 
business size determination. As of FY07, all DoD contract 
action reports are submitted to the FPDS-NG. Most of the DoD 
contract action reports in the FPDS-NG for FY06 and prior years 
are a result of migrated data from DoD's historical DD350 
system. Due to the differences in the two systems, data 
migration was extremely complex requiring revalidation and 
correction of individual records. DoD is working with General 
Services Administration (GSA) to manage data corrections.
    The Defense Department has a number of initiatives in place 
to address data accuracy in reporting. In May of this year DoD 
sent a letter to the Administrator, Office of Management and 
Budget. to provide the Department's plan for improving the data 
in the FPDS-NG. In addition to the plan, DoD has established a 
Data Management Team to oversee the Department's data 
improvement program. DoD's plan also includes dedicated 
resources to the FPDS-NG training with an emphasis on improving 
data quality.
    Congress has also expressed concern that a small business 
firm that received a contract award may, over the life of a 
contract, outgrow its small business size status yet still be 
counted by the awarding agency as a small business. This is 
most likely to occur in long-term contracts or when a 
contractor is merged or is acquired by another company. To 
account for these occurrences and ensure that the source data 
used to populate the FPDS-NG is as accurate as possible, DoD 
worked with the Small Business Administration (SBA) in support 
of its efforts to develop a new rule for small business size 
``rerepresentation.''
    SBA published a final rule in the Federal Register on 
November 15, 2006. This rule was implemented in the Federal 
Acquisition Regulations (FAR) on July 5, 2007. The FAR revision 
became effective on June 30, 2007 and was issued as an interim 
rule to provide an opportunity for public comment. The final 
rule may vary from the interim rule to reflect changes 
resulting from the comments received.
    Under the interim rule, a contractor that represented 
itself as a small business before contract award must now 
``rerepresent'' its size status within 30 days in the event of 
a novation agreement or merger or acquisition that does not 
require a novation and for a long-term contract (i.e., a 
contract with an anticipated performance period longer than 5 
years). This must be completed within 60-120 days prior to the 
end of the fifth year of the contract and prior to the exercise 
of any remaining contract option. Furthermore, if the 
contractor ``rerepresents'' that it is no longer a small 
business, then from that point forward the agency may no longer 
include the value of options exercised or the orders issued 
against the contract in its small business prime contracting 
goal achievements..
    DoD is working with GSA (the administrator of the FPDS-NG 
system) to make the necessary modifications to the FPDS-NG to 
accommodate the ``rerepresentation'' rule requirements.
    Current contracts are being reviewed, in accordance with 
the applicable acquisition regulations and policies. The new 
FAR clause was added to solicitations issued and contracts 
awarded on or after June 30, 2007.
    If the conditions of the FAR ``rerepresentation'' rule are 
met and a contracting officer receives a size protest or if the 
contracting officer has reason to believe the contractor is no 
longer small, the size protest would be submitted to the SBA in 
accordance with FAR 19.302. A change in size status does not 
change the terms and conditions of the contract and does not 
require termination of the contract.

    Question 4. I have received some less than flattering 
reports about the Defense Department's Mentor-Protege program. 
Some large contractors (mentors) are apparently requiring small 
business subcontractors to sign up for the program to generate 
reimbursable expenses for the mentor company. Can you explain 
how this program works? Specifically, how much money can a 
large contractor receive in reimbursed expenses when the firm 
takes on a protege?
    Answer. All Department of Defense (DoD) Mentor-Protege 
agreements must undergo an extensive review and approval 
process. This review includes an in depth assessment of the 
developmental assistance that will be provided, the period of 
performance of the agreement, and the funding required.
    Section 831 of Public Law 101-510, as amended, and the 
Defense Federal Acquisition Regulation Supplement mandate 
reports and reviews on the performance of both the mentor and 
protege. The Defense Contract Management Agency (DCMA) is 
required to perform annual performance reviews on every active 
Mentor-Protege agreement. Their review includes evaluation of 
the developmental assistance provided by the mentor to the 
protege (which includes audit by the Defense Contract Audit 
Agency to ensure that the expenditures are allowable, allocable 
and reasonable), and separate interviews with both the mentor 
and the protege to establish the health and welfare of the 
agreement.
    In addition to the report mentioned above, mentors and 
proteges are mandated as part of their participation to provide 
the DoD OSBP a semi-annual report (recently updated to a 
quarterly requirement) on their return on investment, 
employment, performance metrics and milestones, contract 
awards, and the status of funding provided. Misuse of funding 
is not tolerated.
    The total amount reimbursed to a mentor firm for costs of 
assistance furnished in a fiscal year to a protege firm may not 
exceed $1 million, except when the Secretary of Defense 
determines in writing that unusual circumstances justify a 
reimbursement of a higher amount.
                                ------                                


 Response by Anthony Martoccia to Written Questions from Senator Snowe

    Question 1. You stated at the hearing that ``the Department 
and Secretary Gates and my boss are totally committed . . .'' 
to make opportunities available to service-disabled veterans. 
Please provide specifies of the commitments and the timeframe 
when DoD will meet the 3 percent goal for service-disabled 
veterans.
    Answer. The Department has made achievement of the service-
disabled veteran-owned small business (SDVOSB) goal one of our 
highest priorities. The following list provides a chronology of 
the actions taken by the Department during Fiscal Year 2007, to 
promote contracting with SDVOSB firms:
      April 12, 2007--Mr. Kenneth Krieg, the Under 
Secretary for Acquisition, Technology & Logistics, issues 
memorandum to Department of Defense (DoD) leadership, making 
interagency commitment to use the General Services 
Administration (GSA) Veterans Government-wide Acquisition 
Contract and pursuing SDVOSB 3 percent goal ``with vigor''.
      May 18, 2007--Mr. Shay Assad, Director, Defense 
Procurement and Policy, issues memorandum to senior acquisition 
officials encouraging the use of set-aside and sole source 
tools to increase procurement awards to SDVOSBs.
      May 24, 2007--Mr. Tony Martoccia, Director, DoD 
Office of Small Business Programs (OSBP), issues memorandum to 
senior acquisition officials encouraging acquisition personnel 
to increase awards to SDVOSBs.
      June 6, 2007--Beginning of a series of interviews 
with the Director, OSBP by various news organizations including 
ABC News, National Public Radio, Federal Computer Week, the 
Kansas City Star, Federal News, the Federal Times, USA Radio, 
and WTOP-FM, regarding DoD's initiatives to increase contract 
awards to SDVOSBs. (These interviews occurred during June 6, 
2007 through August 27, 2007).
      June 7, 2007--Letter from Secretary of Defense 
Robert Gates to Senator John Kerry, establishing a high 
priority within the Department for implementing the SDVOSB 
program and enumerating initiatives to reach the statutory 
goal.
      June 23. 2007--The third year of the DoD 
Strategic Plan for SDVOSBs is amended to emphasis the use of 
data bases for increasing contracts and subcontracts to 
SDVOSBs.
      June 26, 2007--The Honorable Dr. James Finley, 
the Deputy Under Secretary of Defense (DUSD) for Acquisition 
and Technology (A&T), provides keynote address at the third 
Annual Veterans Business Conference on third Year of DoD's 
Strategic Plan before an audience of 1,200. Later that day 
during the same event the Director, OSBP, participated in a 
Federal acquisition panel to discuss various DoD initiatives 
for SDVOSBs.
      August 7, 2007--The Director, OSBP met with 
officials from Walter Reed Hospital, the Director of Small 
Business Programs at the Army Medical Command, and the Deputy 
Director of TRICARE, to develop a strategy and an 
implementation plan to increase awards to SDVOSBs at military 
medical facilities.
      August 7, 2007--The DUSD A&T met with the 
Director, OSBP and Small Business Director for United States 
Transportation Command and representatives from various Veteran 
Service Organizations (VSOs) to develop transportation 
initiative for SDVOSBs.
    August 9, 2007--The Director, OSBP, is a guest speaker at 
the third annual GSA Service Disabled Veteran-owned Small 
Business Conference, in New Orleans. The focus of his 
presentation was the DoD Strategic Plan and other SDVOSB 
initiatives with the Department.
      August 10, 2007--The Director, OSBP, is among 
several participants in GSA's SDVOSB Roundtable in New Orleans. 
The purpose of the round table was to discuss opportunities for 
SDVOSBs in the Gulf Coast area. Other participants were 
representatives of the Army Corps of Engineers (Hurricane 
Prevention Office), the GSA, VSOs, prime contractors and local 
chambers of commerce.
      August 20, 2007--The DUSD, A&T, and the Director, 
OSBP, present the inaugural Golden Talon awards for fiscal year 
2006. The DUSD, A&T, closed the ceremony by calling for Golden 
Talon nominees for next year. (The Golden Talon Award is 
presented to DoD acquisition professionals in recognition of 
their outstanding contributions to the Department's SDVOSB 
program.)
      August 21, 2007--The DUSD, A&T, met with senior 
DoD leadership and Directors of Small Business Programs for the 
Military Departments to impress upon these leaders the 
importance of achieving the 3 percent goal and to develop 
strategies and initiatives for increasing awards to SDVOSBs.
      August 27, 2007--The Director, OSBP, is a guest 
speaker at the American Legion National Convention. His speech 
focused on DoD's Strategic Plan and initiatives.
      September 13, 2007--The Director, OSBP, met with 
officials from DoD Installations and Environment (the DoD 
organization responsible for executing the Base Re-alignment 
and Closures (BRAC)), Navy and Air Force senior procurement 
officials to develop initiatives for SDVOSBs for the BRAC 
schedule.
      UPCOMING EVENT: November 5, 2007--The DoD OSBP 
will host the inaugural SDVOSB Achievement Awards at the 
beginning of Veterans Day Week, honoring outstanding 
achievements by DoD employees in the SDVOSB program and 
outstanding DoD SDVOSBs contractors. The ceremony will take 
place at the Pentagon.
    As evidenced by the above policy statements and 
initiatives, senior Departmental leadership and the entire DoD 
acquisition workforce are working aggressively to achieve the 3 
percent goal. However at present the Department cannot provide 
a timeframe for achieving the SDVOSP goal.
    Question 2. You disagreed with the figure that 87 percent 
of bundled contracts at DoD are not reviewed? What is the 
correct figure? Please outline specifically what DoD is doing 
to reduce bundling of requirements and give specific examples.
    Answer. The 87 percent pertained to the finding made by the 
Small Business Administration (SBA) Inspector General regarding 
the fact that the SBA did not have enough Procurement Center 
Representatives to review bundled contracts and that according 
to SBA IG's survey, the SBA had not reviewed 87 percent of 
bundled contracts. This was not a statement concerning contract 
reviews within the Department of Defense.
    Defense Federal Acquisition Regulation Supplement 219.201 
requires that all acquisitions over $10,000, except those under 
$100,000 that are totally set-aside for small business 
concerns, be reviewed by a small business specialist. Bundling 
is one element of this review. All of those contracts that fit 
this category under DoD purview were reviewed.
    The Department has focused its efforts in four areas: (1) 
data accuracy; (2) increasing awareness training for the 
acquisition workforce on the concepts of consolidation and 
bundling; (3) developing more tools to assist the acquisition 
workforce, as well as small business; and (4) taking small 
business participation into account in strategic sourcing 
decisions. I will discuss our progress as we are attempting to 
address each of these areas.
    Data accuracy: DoD has dedicated a significant number of 
resources to ensure the successful transition into the 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. As 
a result of this latter initiative, OSBP recently discovered 
2,066 actions in fiscal year 2007 that were coded as bundled by 
one DoD component. 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.
    Training: The Department requires analyses of alternatives, 
including methods for mitigating the impact on small business, 
even if the bundling or consolidation can be justified by its 
anticipated benefits. During the past year. DoD has provided 
training to acquisition professionals in our efforts to 
facilitate the successful use of small business joint ventures, 
partnerships, and teaming. In addition. the DoD Office of Small 
Business Programs is currently developing an online Guidebook 
and a formal workshop that will identify Federal and commercial 
best practices and real world examples.
    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 that the DoD Office 
of Small Business Programs (OSBP) 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. Finally, OSBP collaborated 
with the Defense Acquisition University this past year to 
establish a small business community of practice (COP) Website. 
The COP provides invaluable small business information and 
resources to the DoD acquisition community.
    Small business in strategic sourcing considerations: 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. 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.

    Question 3. How specifically does DoD monitor and enforce 
subcontracting plans?
    Answer. It is the post-award responsibility of Department 
of Defense contracting officers and small business specialists 
to ensure prime contractors' make a good faith effort to comply 
with their subcontracting plan. Military Departments and Other 
Defense Agencies may delegate contract administration, 
including monitoring and oversight of the prime contractor's 
entire small business program to the Defense Contract 
Management Agency (DCMA). DCMA conducts small business program 
compliance reviews to assess the effectiveness of the prime 
contractor's overall small business subcontracting program, and 
when delegated, will monitor individual subcontracting plans.
    The monitoring of an individual subcontracting plan is 
usually performed by the cognizant DCMA Administrative 
Contracting Officer (ACO). The ACO evaluates and monitors 
subcontracting plans in accordance with Federal Acquisition 
Regulation (FAR) 19.706. If warranted, section 8(d) of the 
Small Business Act as implemented in FAR 19.705-7 provides for 
liquidated damages to be paid by a prime contractor when the 
prime contractor fails to make a good faith effort to comply 
with the requirements of the small business subcontracting 
plan.

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                        COMMENTS FOR THE RECORD

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