[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
ACQUISITION DEFICIENCIES AT THE
U.S. DEPARTMENT OF VETERANS AFFAIRS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON VETERANS' AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
December 16, 2009
__________
Serial No. 111-54
__________
Printed for the use of the Committee on Veterans' Affairs
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54-421 WASHINGTON : 2010
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COMMITTEE ON VETERANS' AFFAIRS
BOB FILNER, California, Chairman
CORRINE BROWN, Florida STEVE BUYER, Indiana, Ranking
VIC SNYDER, Arkansas CLIFF STEARNS, Florida
MICHAEL H. MICHAUD, Maine JERRY MORAN, Kansas
STEPHANIE HERSETH SANDLIN, South HENRY E. BROWN, Jr., South
Dakota Carolina
HARRY E. MITCHELL, Arizona JEFF MILLER, Florida
JOHN J. HALL, New York JOHN BOOZMAN, Arkansas
DEBORAH L. HALVORSON, Illinois BRIAN P. BILBRAY, California
THOMAS S.P. PERRIELLO, Virginia DOUG LAMBORN, Colorado
HARRY TEAGUE, New Mexico GUS M. BILIRAKIS, Florida
CIRO D. RODRIGUEZ, Texas VERN BUCHANAN, Florida
JOE DONNELLY, Indiana DAVID P. ROE, Tennessee
JERRY McNERNEY, California
ZACHARY T. SPACE, Ohio
TIMOTHY J. WALZ, Minnesota
JOHN H. ADLER, New Jersey
ANN KIRKPATRICK, Arizona
GLENN C. NYE, Virginia
Malcom A. Shorter, Staff Director
______
Subcommittee on Oversight and Investigations
HARRY E. MITCHELL, Arizona, Chairman
ZACHARY T. SPACE, Ohio DAVID P. ROE, Tennessee, Ranking
TIMOTHY J. WALZ, Minnesota CLIFF STEARNS, Florida
JOHN H. ADLER, New Jersey BRIAN P. BILBRAY, California
JOHN J. HALL, New York
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Veterans' Affairs are also
published in electronic form. The printed hearing record remains the
official version. Because electronic submissions are used to prepare
both printed and electronic versions of the hearing record, the process
of converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
December 16, 2009
Page
Acquisition Deficiencies at the U.S. Department of Veterans
Affairs........................................................ 1
OPENING STATEMENTS
Chairman Harry E. Mitchell....................................... 1
Prepared statement of Chairman Mitchell...................... 51
Hon. David P. Roe, Ranking Republican Member..................... 2
Prepared statement of Congressman Roe........................ 51
Hon. Timothy J. Walz, prepared statement of...................... 52
Hon. Steve Buyer................................................. 3
Prepared statement of Congressman Buyer...................... 52
WITNESSES
U.S. Government Accountability Office:
Kay L. Daly, Director, Financial Management and Assurance.... 24
Prepared statement of Ms. Daly........................... 68
Gregory D. Kutz, Managing Director, Forensic Audits and
Special Investigations..................................... 25
Prepared statement of Mr. Kutz........................... 76
U.S. Department of Veterans Affairs:
Maureen T. Regan, Counselor to the Inspector General, Office
of Inspector General....................................... 26
Prepared statement of Ms. Regan.......................... 91
Glenn D. Haggstrom, Executive Director, Office of
Acquisition, Logistics, and Construction................... 39
Prepared statement of Mr. Haggstrom...................... 97
______
MicroTech, LLC, Vienna, VA, Anthony R. Jimenez, President and
Chief Executive Officer........................................ 10
Prepared statement of Mr. Jimenez............................ 62
National Veteran Owned Business Association, Scott F. Denniston,
Director of Programs, and President, Scott Group of Virginia,
LLC, Chantilly, VA............................................. 8
Prepared statement of Mr. Denniston.......................... 60
Project On Government Oversight, Scott H. Amey, Esq., General
Counsel........................................................ 6
Prepared statement of Mr. Amey............................... 53
Veterans' Entrepreneurship Task Force (VET-Force), Robert G.
Hesser, 1st Co-Chairman, and President and Chief Executive
Officer, Vetrepreneur, LLC, Herndon, VA........................ 12
Prepared statement of Mr. Hesser............................. 66
SUBMISSIONS FOR THE RECORD
Stearns, Hon. Cliff, a Representative in Congress from the State
of Florida, statement.......................................... 100
MATERIAL SUBMITTED FOR THE RECORD
Witness Comments on H.R. 4221, the ``Department of Veterans
Affairs Acquisition Improvement Act of 2009'':
Scott H. Amey, General Counsel, Project On Government
Oversight, to Hon. Harry E. Mitchell, Chairman, and Hon.
David P. Roe, Ranking Republican Member, Subcommittee on
Oversight and Investigations, letter dated February 12,
2010....................................................... 101
Comments on H.R. 4221 by the National Veteran-Owned Business
Association (NaVOBA)....................................... 102
Comments on H.R. 4221 from Anthony Jimenez, President and
Chief Executive Officer, MicroTech, LLC.................... 103
Bob Hesser, 1st Vice Chair, Veterans' Entrepreneurship Task
Force (VET-Force), Silver Spring, MD, to Diane Kirkland,
Printing Clerk, Committee on Veterans' Affairs, letter
dated February 18, 2010, and attached comments............. 104
Post-Hearing Questions and Responses for the Record:
Hon. Harry E. Mitchell, Chairman, and Hon. David P. Roe,
Ranking Republican Member, Subcommittee on Oversight and
Investigations, Committee on Veterans' Affairs, to Hon.
Eric K. Shinseki, Secretary, U.S. Department of Veterans
Affairs, letter dated January 11, 2010, and VA responses... 119
ACQUISITION DEFICIENCIES AT THE
U.S. DEPARTMENT OF VETERANS AFFAIRS
----------
WEDNESDAY, DECEMBER 16, 2009
U.S. House of Representatives,
Committee on Veterans' Affairs,
Subcommittee on Oversight and Investigations,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
Room 334, Cannon House Office Building, Hon. Harry E. Mitchell
[Chairman of the Subcommittee] presiding.
Present: Representatives Mitchell, Space, Walz, Adler, and
Roe.
Also Present: Representative Buyer.
OPENING STATEMENT OF CHAIRMAN MITCHELL
Mr. Mitchell. Welcome to the December 16, 2009,
Subcommittee on Oversight and Investigations hearing. Today's
hearing is on Acquisition Deficiencies at the U.S. Department
of Veterans Affairs (VA).
This hearing will come to order. I ask unanimous consent
that all Members have 5 legislative days to revise and extend
their remarks and that statements may be entered into the
record. Hearing no objection, so ordered.
I would like to thank everyone for attending today's
hearing and especially thank our witnesses for testifying
today.
We are here to examine the VA acquisition system and
procurement structure. Our hearing will hopefully determine the
extent of the reform needed in order to ensure that the
acquisition process within the VA is one that is fair, fiscally
responsible, and effective, most importantly, serves veterans.
We all know that the acquisition system within the VA has
failed to develop a process that is both transparent and
fiscally responsible. One recent report produced by the U.S.
Government Accountability Office (GAO) revealed that network
and medical center staff within the Veterans Health
Administration (VHA) failed to use the Federal Supply Schedule
(FSS) due to a lack of information and the proper tools needed
to use the FSS.
This resulted in lost savings of almost $8.2 million a year
or $41 million over 5 years. This is simply unacceptable.
Several VA Office of Inspector General (OIG) and GAO
reports have detailed major deficiencies within the procurement
process at the VA, citing prolific material weaknesses, and how
disabled veteran-owned small businesses (VOSBs) are being
cheated out of millions of dollars in contract opportunities
each year due to a lack of sufficient oversight.
Just last month, the GAO released a report on the Service-
Disabled Veterans-Owned Small Business (SDVOSB) Program showing
a fragmented structure within the VA and a lack of oversight of
companies claiming service-disabled veterans-owned small
business status.
Fraud and abuse has allowed ineligible firms to improperly
receive millions of dollars in set-side and sole-source
contracts, potentially denying legitimate service-disabled
veterans and their businesses the benefits of the veteran and
small business program.
With the ineffective oversight and lack of effective fraud
prevention controls, these ineligible firms have received
almost $100 million in contracts over the years.
There is no secret that there are major deficiencies in the
VA's procurement process and to blame are a number of things,
including a lack of centralized acquisition structure, self-
policing policies in place that allow fraud and abuse, and
continuous material weaknesses.
Although I remain fairly optimistic that reform of this
system can be accomplished, legislation to fix these problems
may be necessary along with change in policy and procedures.
I am grateful that the GAO, as well as service-disabled
veteran-owned small business owners and entrepreneurs, are here
today to shed light on issues such as these.
[The prepared statement of Chairman Mitchell appears on p.
51.]
Mr. Mitchell. Before I recognize the Ranking Member for his
remarks, I would like to swear in our witnesses. And I would
ask that all witnesses that are going to testify today please
stand and raise their right hand.
[Witnesses sworn.]
Mr. Mitchell. Thank you.
I now recognize Dr. Roe for opening remarks.
OPENING STATEMENT OF HON. DAVID P. ROE
Mr. Roe. Thank you, Mr. Chairman, for yielding.
Today's hearing entitled, Acquisition Deficiencies at the
U.S. Department of Veterans Affairs is important to the
Subcommittee as we move forward to assist the Department in
guiding it through to better management of its procurement and
acquisition processes.
The Department of Veterans Affairs is one of the largest
procurement and supply agencies in the Federal Government. Its
annual expenditures are more than $14.1 billion for supplies
and services, including construction, drugs, medical supplies,
and equipment.
Information technology (IT) equipment and services and
other critical patient care items must be procured and
distributed to the VA's health care facilities in what is the
largest health care delivery system in the country.
Over the past 12 years, the VA and the Office of Inspector
General have detailed what can be considered the existence of
serious long-term severe systemic procurement problems within
the VA.
Last Congress, this Subcommittee held a hearing on
miscellaneous obligations, which highlighted how difficult it
is to track expenditures at the VA without proper oversight and
guidance.
From reading the hearing report of that hearing, it was
apparent the frustration felt by all Members present with the
brokenness of the acquisition process within the VA. I
understand that the Department followed this hearing by
providing its acquisition workforce with new rules and
procedures regarding the use of miscellaneous obligations.
I will be interested to hear from the Department how well
these new rules are being implemented. I hope that there is
improvement in tracking these expenditures since the last
hearing.
Additionally, the Government Accountability Office issued a
report showing fraud and abuse within the Service-Disabled
Veteran-Owned Small Business Program. The findings are
extremely disturbing.
And I look forward to testimony from GAO relating to this
report and to see if they have any further recommendations to
fix these fraudulent practices and make certain that
contracting officials who knowingly allow this are held
accountable.
I was pleased to join Ranking Member Buyer last week in
introducing H.R. 4221, the ``Department of Veterans Affairs
Acquisition Improvement Act of 2009.'' I understand that Mr.
Buyer will discuss his bill further this morning and look
forward to working with him and other Members of this Committee
to help Secretary Shinseki fix the acquisition process at the
Department of Veterans Affairs.
Holding this hearing is an important step in the right
direction. Moving forward legislatively will also be an
additional step we can take, and look forward to working with
you, Mr. Chairman, in this effort.
And one final comment. With unemployment at 10 percent and
not going down, small businesses around this country failing,
it is absolutely imperative that we as an organization spend
the taxpayers' funds wisely with people losing faith in our
government when they see this kind of waste. And I think it is
imperative that we show the way for businesses around this
country. And I think it is unacceptable what I have read in
this report last evening.
And I yield back my time.
[The prepared statement of Congressman Roe appears on p.
51.]
Mr. Mitchell. Thank you.
Votes have been called. If Mr. Walz and Mr. Buyer want to
wait until we get back?
Mr. Buyer. First of all, I would ask unanimous consent that
I may participate in the Subcommittee hearing.
Mr. Mitchell. So ordered.
Mr. Buyer. All right. And, Mr. Walz, do you have an opening
statement?
Mr. Walz. No. I will just submit it for the record.
[The prepared statement of Congressman Walz appears on
p.52.]
Mr. Buyer. Okay.
Mr. Mitchell. You may go ahead.
Mr. Buyer. How much time do we have left for votes?
Mr. Mitchell. Eleven minutes and 54 seconds.
OPENING STATEMENT OF HON. STEVE BUYER
Mr. Buyer. All right. I will go ahead and start.
I want to thank you, Mr. Chairman, for yielding.
I want to thank both of you, Chairman Mitchell and Dr. Roe,
for your leadership here.
And, Sergeant Major, thanks for being here.
This is going to be a pretty important hearing, helping to
lay out a foundation. Both of these GAO reports, if you had a
chance to look at them, have some disturbing facts in them. So
I appreciate all of you for holding this hearing on acquisition
reform.
Years ago, when I was Chairman of this Subcommittee, we
reviewed a number of issues relating to acquisition at the
Department of Veterans Affairs, including the VA's own Task
Force on Acquisition Reform.
What came out of the hearings we held and the
investigations conducted by VA's own Inspector General's Office
and the Government Accountability Office and VA's Procurement
Reform Task Force ordered by then Secretary Principi in 2001
was a strong sense that the acquisition procedures at the VA
were broken, fragmented, and disorganized.
Ranking Member Roe, in his opening statement, alluded to
the hearing that you held last Congress on July 31st, 2008, on
miscellaneous obligations. That hearing only served to further
emphasize the fact that without proper oversight, funds that
could be used to better serve our Nation's veterans were being
wasted on broken procurement practices with little or no
oversight review.
The frustration of all the Members on both sides of the
aisle at the hearing was loud and clear. It was obvious that
action was needed then to address the problems of acquisition
at the VA.
To its credit, the VA commissioned an $800,000 plus
PricewaterhouseCoopers' study to see how dysfunctional and
broken the acquisition process was at the VA. This study
offered three options.
I believe the VA selected the option that would create the
least push back from the bureaucracy, and sent to the last
Congress a legislative proposal that would create an Assistant
Secretary of Acquisition, but it did not provide any further
direction or solution to respond to the universal complaint
throughout the VA that glaciers move faster than its own
contracting process.
So I started working on legislation to change the way the
VA conducts its acquisition business. My staff and I spoke with
industry experts, the GAO, VA OIG to formulate a way to fix
broken acquisition services at the VA in order to create better
accountability.
I have also discussed this issue several times with
Secretary Shinseki who has acknowledged that it is imperative
for the VA to change its procurement system to expedite the
many transformational ways the VA does business.
And I have shared a draft of this bill with him, and I look
forward to working not only with him but also with Chairman
Mitchell and Chairman Filner and any other Members of the
Committee that would like to.
Last week, I was joined by several Members of the
Committee, in particular Dr. Roe, in the introduction of H.R.
4221, the ``Department of Veterans Affairs Acquisition
Improvement Act of 2009.''
And I welcome any input, Chairman Mitchell, that you may
have or, Sergeant Major. I am completely open to ideas as we
proceed not only for myself but also recommendations that we
are going to receive from the OIG and the GAO and working with
the Administration.
The only way that we were successful and way ahead to
centralize the IT from a decentralized model was we had
unanimous support of this Committee. And I think in order for
us to be successful on an acquisition model, we have to do the
same thing. I think it has to be replicated to do that. This is
not going to be an easy task. This is going to be very
challenging.
The Administration drafted a bill introduced last Congress
by Senator Akaka. This new bill creates a new Assistant
Secretary position, the Assistant Secretary for Acquisition,
Construction, and Asset Management, who will serve as the Chief
Acquisition Officer for the Department of Veterans Affairs.
Our bill also builds the acquisition workforce structure
through the use of Deputy Assistant Secretaries to align the
VA's business lines and principal Deputy Assistant Secretary.
The bill further requires the Secretary to establish and
maintain a comprehensive Department-wide acquisition program,
which the Secretary will develop, implement, and enforce a
streamlined approach to entering into contracts in purchasing
goods and services.
The legislation would thereby provide better oversight and
accountability for procurement at the Department of Veterans
Affairs.
One of the key points that came out of the Industry
Acquisition Roundtable that I held on October 27th was the
strong need for a well-trained workforce. This legislation
would provide the direction needed to put in place and keep a
workforce that is knowledgeable and able to provide acquisition
and contracting services to the Department.
The bill also recognizes the VA's separate and
dysfunctional procurement construction and asset management
processes into distinct entities with contracting expertise.
Mr. Chairman, H.R. 4221 is the first step to provide a
centralized oversight and policy for contracting and
acquisition within the Department by streamlining the business
operations under an Assistant Secretary.
It is my hope that we can work together to improve the bill
and create an acquisition model that can eventually be followed
by other agencies because VA's acquisition problems are, in
fact, governmentwide.
With that, I yield back.
[The prepared statement of Congressman Buyer appears on
p. 52.]
Mr. Mitchell. Thank you.
At this time, we will have a break. There are four votes.
So how long will that take? You are the veteran. Thirty
minutes? Okay. We will reconvene in about 30 minutes.
Thank you.
[Recess.]
Mr. Mitchell. We will reconvene the hearing. It is my
understanding in the next hour, there is probably another vote.
At this time, I would like to welcome Panel One to the
witness table. Joining us for our first panel is Scott Amey,
General Counsel for the Project On Government Oversight (POGO);
Scott Denniston, President of the Scott Group of Virginia; Tony
Jimenez, President and Chief Executive Officer of MicroTech;
and Bob Hesser, President and Chief Executive Officer of
Vetre----
Mr. Hesser. Vetrepreneur.
Mr. Mitchell. There, Vetrepreneur. There it is. As well as
Members of the Veterans' Entrepreneurship Task Force or VET-
Force.
I ask that all witnesses stay within 5 minutes of their
opening remarks. Your complete statements will be made part of
the hearing record. We will begin with Mr. Amey.
STATEMENTS OF SCOTT H. AMEY, ESQ., GENERAL COUNSEL, PROJECT ON
GOVERNMENT OVERSIGHT; SCOTT F. DENNISTON, PRESIDENT, SCOTT
GROUP OF VIRGINIA, LLC, CHANTILLY, VA, AND DIRECTOR OF
PROGRAMS, NATIONAL VETERAN OWNED BUSINESS ASSOCIATION; ANTHONY
R. JIMENEZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MICROTECH,
LLC, VIENNA, VA; AND ROBERT G. HESSER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, VETREPRENEUR, LLC, HERNDON, VA, AND 1ST CO-
CHAIRMAN, VETERANS' ENTREPRENEURSHIP TASK FORCE (VET-FORCE)
STATEMENT OF SCOTT H. AMEY, ESQ.
Mr. Amey. Good morning. Thank you, Chairman Mitchell and
Ranking Member Roe, for inviting me to testify.
I am Scott Amey, General Counsel of the Project on
Government Oversight, also known as POGO.
Throughout its 28-year history, POGO has worked to remedy
waste, fraud, and abuse in government spending in order to
achieve a more effective, accountable, open, and ethical
Federal Government.
POGO has a keen interest in government contracting matters,
and I am pleased to share POGO's thoughts with the Subcommittee
today. I am very pleased that the Subcommittee is holding
today's hearing.
The VA ranked fifth with approximately $14.6 billion in
contract awards in fiscal year 2009 and has a complex mission
that requires the procurement of pharmaceuticals, medical
supplies and equipment, as well as building construction,
maintenance, and repair services.
Many events over the past 15 years have called into
question the effectiveness of the Federal acquisition and
contracting system.
Federal spending has grown tremendously, exceeding $530
billion in both fiscal year 2008 and 2009. Oversight of Federal
spending has decreased. The acquisition workforce has been
stretched thin and been supplemented by contractors. Spending
on services now outpaces goods and stimulus spending is adding
to an already complex system. In short, poor contracting
planning, management, and oversight decisions are placing
taxpayer dollars and sometimes lives at risk.
On a positive note, interest in improvements in Federal
acquisition and contracting systems has grown significantly in
recent years as Congress, and now the White House, are paying
more attention. Multiple executive orders and memos have come
out from the White House mandating that agencies minimize
contracting risk and maximize the value of the goods and
services procured each year.
Many contracting experts and government officials blame the
inadequate size and training of the acquisition workforce for
all of today's problems. POGO agrees that the workforce is an
issue, but we believe that additional problems deserve equal
attention. These problems are inadequate competition, deficient
accountability, lack of transparency, and risky contracting
vehicles.
My testimony today will focus in on 20 different
recommendations which have been provided in my written
testimony, but I will just highlight a few of those today.
Although I will point out some positives and negatives in
VA contracting, I will defer to today's other panelists to
highlight specific failures and ways to improve VA acquisition
and contracting systems.
And as already has been mentioned, multiple GAO reports
have come out, including one that detailed overruns and delays
in VA construction projects.
As far as inadequate competition, competition in
contracting is essential to getting the best products and
services at the most practical prices. The government needs to
reverse the philosophy of quantity over quality. Acquisition is
now about speed and competition is oftentimes considered a
burden. That is a recipe for waste, fraud, and abuse.
VA's competition numbers are unknown. According to Federal
data in 2008, full or limited competition procedures were used
21 percent of the time. Sole-source contracts totaled nearly 21
percent of the acquisition dollars spent. The actual
competition numbers is unknown because according to
usaspending.gov, 54 percent of the dollars awarded, nearly $8
billion, were listed as not identified as far as their
competition category. This Committee might want to inquire
about VA's actual extent of competition in its contracts.
VA stimulus contracting is faring a little better. VA
programs received approximately $1.4 billion in Recovery Act
funds with $543 million paid out thus far. And according to
GAO, those have been competed approximately 94 percent of the
time.
Government wide, agencies must do more to ensure that full
and open competition involving multiple bidders is the rule,
not the exception. Agencies also need to debundle or break
apart contracts to try to lure contractors both large and small
into the system. Doing that might also reduce the multiple
layers of subcontracting that we have seen in recent years.
Deficient accountability, Congress should not underestimate
the value of accountability and oversight. The VA OIG's pre-
award and post-award oversight have potentially saved the
Agency $165 million in fiscal year 2009. A question for this
Subcommittee is, how much of those potential dollars were
actually recovered.
The Committee has already touched on the set-asides for
veteran-owned businesses as well as for service-disabled
veteran-owned small businesses, so I will not touch on that.
Additionally, I would like to recommend that this
Subcommittee investigate service contracts and the high number
of unemployed veterans who are out there. In the VA Human
Resource or contract planning, if it is based on tailoring
service contracts to contractors rather than former
servicemembers, the Agency is doing a major disservice to the
vets and that has created a problem and a higher rate of
unemployment for returning vets.
POGO also believes that contracting laws should require
contractors to provide cost or pricing data to the Government
for nearly all contracts and allow all contracting actions,
including task and delivery orders, to be subject to bid
protest.
My additional testimony touches on lack of transparency and
risky contracting vehicles, specifically cost reimbursement,
commercial items, and time and material labor hour contracts,
but that has all been submitted in my written comments.
Thank you for inviting me to testify today. I look forward
to working with this Subcommittee further to explore how the
Government and the VA can improve Federal contract spending.
Thank you.
[The prepared statement of Mr. Amey appears on p. 53.]
Mr. Mitchell. Thank you.
And our next speaker, Mr. Denniston.
STATEMENT OF SCOTT F. DENNISTON
Mr. Denniston. Thank you. Chairman Mitchell, Ranking Member
Roe, Committee Members and staff, thank you for the opportunity
to testify today on the Department of Veterans Affairs
Acquisition Program.
I am Scott Denniston, President of Scott Group of Virginia,
representing one of my clients, the National Veteran Owned
Business Association (NaVOBA) and its over 2,000 veteran small
business owners around the country.
Within the past week, I have been contacted by a veteran-
owned business in Arizona providing vinyl banners to the VA's
Vocational Rehabilitation Service. Shipment to 58 Regional
Offices was completed in October 2009.
The veteran is unable to be paid as VA regulations require
a receiving report be completed. The veteran business owner
when inquiring as to being paid is bounced between the
contracting office and the Program Office as to who is
responsible for completing the receiving report.
All the veteran knows is he has fulfilled the contract
requirements and now suffers. The interest the veteran is
paying for operating capital will negate all profit that he
expected to earn on the contract. He stated he will never do
business with the VA again.
And interestingly enough, just Monday, I received an update
from this veteran who said that over the weekend, he sent an e-
mail to General Shinseki asking for some assistance and on
Monday morning, he received over 20 calls from VA staff who
said they needed to report back to the Secretary by the close
of business as to why he cannot get the receiving report done.
Bottom line, though, he still has not received payment.
Another veteran doing business with VA is frustrated as he
is currently working on two contracts with expiration dates of
December 31st, 2009. The two contracts represent approximately
$6 million a year in revenue. To date, he has not been told
whether VA intends to exercise any of the options. As you can
imagine, this causes great angst for the firm and its
employees. Will they have a job come January 1st?
When the business owner inquires to the contracting office,
he is told the contracts have been transferred to another
contracting office. When he inquires to the new contracting
office, he is told there is no contracting officer assigned and
no knowledge of who the Program Office is.
When the veteran business owner inquires to VA's Central
Office, he is told that the policy is to notify contractors
within 60 days of expiration of VA's intent. Nice policy, but
who follows it and where does the veteran small business owner
go for assistance?
Another common practice at VA, which frustrates veteran
small business owners, is VA's practice of advertising a
request for proposal (RFP), having vendors incur substantial
cost to submit proposals to VA, then VA cancels the opportunity
and procures through an existing contract vehicle or enters
into agreement with another Federal agency to award a contract
for the same services.
The small businesses who submit the original offer did so
in vane as now, because the VA's change of mind, they cannot
bid on the opportunity.
NaVOBA members continue to be concerned about VA's overly
restrictive interpretation of Public Law 109-461, commonly
referred to as the Veterans First Contracting Program.
NaVOBA believes the provisions of P.L. 109-461 require VA
to provide a preference to service-disabled veteran and
veteran-owned small businesses for all goods and services the
VA purchases. VA interprets the law's provisions to apply only
to open market acquisitions.
As you know, VA spends a large percentage of its
acquisition dollars using the Federal supply schedules.
Therefore, service-disabled vets and veteran-owned small
businesses are not provided a preference on much of what VA
procures.
This in addition to VA's efforts to eliminate distributors
and resellers from VA's Federal supply schedules, as well as
VA's efforts to consolidate contracting opportunities under the
guise of strategic sourcing makes selling to VA difficult for
veteran-owned small businesses.
NaVOBA understands the Federal supply schedule is the
preferred method of doing business, but we also believe that VA
has responsibility to provide maximum practical opportunity to
veterans on everything the VA buys.
On August 13th, 2009, VA Deputy Secretary Scott Gould
hosted a supplier relation transformation forum. The Deputy
Secretary is to be commended for hosting this event. The
purpose was to hear from large and small vendors to the VA on
what issues and impediments exist in doing business with VA.
The forum was attended by over 100 people representing 82
vendors from most industries doing business with the VA.
There were many common themes that were expressed during
that conference, all of which are in my testimony.
A suggestion NaVOBA would like to have VA consider is that
the vendor community today is dynamic, enterprising, and
inventive. VA cannot in the normal course of operating maintain
ongoing operations and also evaluate new technologies and
opportunities to use new products and services to improve care
to veterans.
The vendor community is frustrated as VA is reluctant to
change. The VA is in our opinion missing opportunities as there
is no mechanism to test new products in the VA environment.
We propose the VA establish an organization independent of
day-to-day operations to test new products and services through
trials, test programs, and field demonstrations to more rapidly
bring technologies and solutions to VA's operation. Such an
organization could pay huge dividends in caring for our
Nation's veterans.
In summary, the VA must be more sensitive to the needs and
concerns of the veteran community, especially the veteran small
business community. Every VA employee should work in a small
business for a period of time and understand the impact of
their decisions and inactions on cash flow, retention of
employees, bank's lines of credits, and the myriad of issues
facing veteran entrepreneurs on a daily basis.
Again, I would like to thank the Committee for this
opportunity to testify and look forward to answering any
questions.
[The prepared statement of Mr. Denniston appears on p. 60.]
Mr. Mitchell. Thank you.
Mr. Jimenez.
STATEMENT OF ANTHONY R. JIMENEZ
Mr. Jimenez. Good morning, Chairman Mitchell, Ranking
Minority Member Roe, and Subcommittee Members. I greatly
appreciate the opportunity to testify at this hearing regarding
acquisition deficiencies at the Department of Veterans Affairs,
and I am honored to represent other veteran-owned and service-
disabled veteran-owned small business owners.
My name is Tony Jimenez and I am the President and Chief
Executive Officer of MicroTech. MicroTech is a minority-owned
and a certified and verified service-disabled veteran-owned
small business. We are also a certified 8(a) small business and
we provide information technology, systems solutions, design,
installation of telecommunications and video telecommunications
systems, as well as product solutions and consulting services.
I retired from the Army in 2003 after serving 24 years on
active duty and started MicroTech in 2004. Today I employ over
400 great Americans in an era of layoffs and job cutbacks.
MicroTech has become a powerful job creation engine and force
for economic development in my community, in my State of
Virginia, and in a number of other locations across the Nation.
This year, MicroTech was named America's number one fastest
growing Hispanic-owned business. And just last week, our
success was celebrated during the NASDAQ Closing Bell ceremony.
Since I first testified before Congress in 2006, MicroTech
has grown 3,000 percent in gross revenue and is now a prime
contractor on over 100 Federal projects and 14 indefinite
delivery/indefinite quantities (IDIQs), blank purchase
agreements (BPAs), and Government wide acquisition contracts
(GWAC) contract vehicles and we are the prime on all 14 of
those.
MicroTech manages over a half a million IT government users
daily and provides products and solutions to over 30 government
agencies along with every branch of the military. We have
repeatedly been recognized by trade groups, industry
publications, diversity organizations as a leading small
business that has notably succeeded at supporting the business
of government.
MicroTech's exponential growth has led to recognition in a
number of different areas, including the Deloitte Tech Fast
500. We were the number one communications and networking small
business in the metropolitan area of Washington and Baltimore.
We are the number one unified communications specialist
according to CRN Magazine, the number one 8(a) business
according to Washington Technology Magazine, and we are a
Washington Business Journal fast growing company.
Like most veterans who retire from active duty, initially I
had no idea what I was going to do when I retired and I knew I
wanted to remain close to the fight and continue in some way to
serve my country, but I was not exactly sure how to do that.
As an owner of a business that manages large-scale Federal
projects, I now have the opportunity to use my unique military
skills and expertise to help the Government reach its goals as
well as my ability to continue to work closely with veterans
and provide jobs to veterans.
My small business targets contracting opportunities based
not only on our core competency but also on my opportunity to
hire veterans, to hire service-disabled veterans, and to hire
wounded warriors, and, more importantly, to give them jobs and
perform the work, giving them a chance at a viable second
career.
The unfortunate thing is that in the short 5 years I have
been doing business with the Federal Government, I have
discovered that opportunities for veteran-owned businesses and
service-disabled veteran-owned businesses have been extremely
hard to find. They are not abundant and they are definitely not
as abundant as I assumed they would be.
In the last few years, I have noticed that the emphasis on
increasing government contract opportunities for service-
disabled veterans is improving, but we have still got a long
way to go.
Our experience with the Department of Veterans Affairs
regarding the 3-percent rule actually has been very positive.
We believe that VA exceeds its service-disabled veteran small
business prime contracting goals and will continue to do so and
that they reflect a commitment from the top and across the
Agency to do the right thing for veterans.
VA awarded 15 percent of its fiscal 2008 contract dollars
to veteran-owned small businesses and 12 percent to service-
disabled veteran-owned small businesses.
On December 8, the VA displayed their special commitment to
veterans by finalizing a new set-aside contract program focused
on veteran-owned small businesses, offering them a substantial
advantage in VA business contract procurement.
Veteran-owned businesses and even prime contractors that
propose using veteran-owned firms or subcontractors now receive
special VA preference.
As the rest of the Government has failed to make the 3-
percent rule a priority, there are currently no penalties to
failing to meet Executive Order 13360 and very few incentives
for meeting or exceeding the established standard. This lack of
oversight makes it extremely difficult for agencies to realize
the advantage of contracting with veteran-owned businesses and
service-disabled veteran-owned small businesses.
There needs to be a significant improvement made to correct
the systemic problems in current procurement systems and to add
incentives for achieving the 3-percent goal. And I recommend
the following steps:
I believe that contract bundling adversely impacts
competition and hurts small business. The standard procedures
for contract bundling require agencies to provide
justifications for bundling decisions and have the decisions
reviewed at higher levels.
Consolidate contracts so that small businesses can share in
the benefits of bundling. And one of the things I have talked
about in the past is that we as a small business have found
that we have the ability to manage large contracts provided we
partner with the right large contracting organization to large
systems integrators.
However, many of the contracts that are presently being
procured for do not provide an opportunity for a small business
to be, for lack of a better term, the general contractor for
the large opportunities.
We believe that placing more orders under small business
GWACs would also be a success, particularly those like VETS,
which is the Veteran Technology Service governmentwide
acquisition contract, and the NASA SEWP contract, the NASA
Solutions for Enterprise-Wide Procurement. Those are two
excellent examples of contract vehicles that offer multiple
award contracts with highly qualified service-disabled veteran-
owned small businesses.
And I believe the VA has done an outstanding job of using
those GWACs. Obviously it could be improved.
I also encourage the Small Business Administration (SBA) to
proceed under the proposed rule making of RIN 3245 AF70. Thank
you.
[The prepared statement of Mr. Jimenez appears on p. 62.]
Mr. Mitchell. Thank you.
Mr. Hesser.
[Witness sworn.]
Mr. Mitchell. Thank you.
STATEMENT OF ROBERT G. HESSER
Mr. Hesser. I wanted to make sure I was legal when I am
talking.
Good morning, Chairman Mitchell, Ranking Member Roe, other
Members of the Subcommittee, fellow veterans, and guests.
Let me first thank you for the opportunity to come before
you today to share views on VA acquisition deficiencies and how
this Subcommittee can help to increase contracting
opportunities for veteran and service-disabled veteran-owned
businesses.
I am the 1st Co-Chair of the Veterans' Entrepreneurship
Task Force known as the VET-Force. My testimony today is mine
and the VET-Force.
My Navy active duty was many years ago. With 22\1/2\ years,
I was unexpectedly transferred to the disability retirement
list as a Master Chief. I was given a check and sent home. At
that time, I could not work a full workday. This has happened
to thousands of veterans. The VET-Force and its members want
this practice stopped.
Public Law 106-50 and subsequent legislation and rule
making has significantly improved the veterans procurement
program. This testimony is aimed at the Veterans Administration
and number one out of five areas is the Center for Veterans
Enterprise (CVE).
CVE personnel are responsible for tasks that require
tenfold the assets they now have. Many of their tasks cannot be
completed in a timely fashion because they do not have the
authority to complete them. In other words, they are frequently
micro managed.
Twelve thousand veteran-owned companies desiring
verification are waiting their turn. CVE was verifying 200 each
month. I do not know what the recent figure is, but there is a
lot to go.
Contracting officers in the VA: Not all contracting
officers are required to follow regulations and rules. I mean
that because the Veterans Integrated Service Networks (VISNs),
every VISN is different. They are not always given authority
commensurate to their responsibility.
Appropriations and budgets: CVE is a nonappropriated
organization and exists only by the grace of the VA supply
fund. CVE needs its own line item and significant increase of
available funds.
VA General Counsel (GC): The VA has not complied with
Public Law 109-461. The date of enactment was supposed to be
180 days and we are within 6 days of it being 3 years. And it
does not look like they are going to go anywhere and get it
done because they still have to get an agreement between the VA
and SBA and that is not getting anywhere.
It is General Counsel's responsibility to ensure
regulations are followed in a timely and accurate manner. The
result of their ignoring 108-183, 109-461, and Executive Order
13360 is apathy and confusion throughout the VA acquisition
community. Every VISN is different.
General Counsel's inaction has caused in some areas within
the VA acquisition community derogatory feelings toward the
VOSB Procurement Program. Lack of firm direction has been and
is still today creating road blocks.
Vocational rehabilitation and employment, we have to have
more counselors and money for them to operate. Our wounded
warriors are now coming home and when they want to be self-
employed, we send them to CVE. They have not had any
counseling. So we need to hit that area as well.
Passage of the original concept of Public Law 109-461 was
highly supported by the VET-Force and most veteran supporters.
It is still supported by the VET-Force. The law is written for
the VA.
One requirement is that the VETBIZ database be expanded
using both VA and the U.S. Department of Defense (DoD) data. It
also requires the VA to make VETBIZ available to the entire
Federal Government to view the registrants within the database.
It also states the VA will verify all VOSBs and SDVOSBs prior
to awarding a Veterans Affairs contract.
Public Law 109-461 does not say that the VA's application
of their 38 CFR 74 regulation was to be Federal Government
wide. That was not the original idea. As we understand of the
Congressional staff and everybody else, it is ``try the VA
first.''
Both Public Law 106-50 and 183 direct non-VA contracting
officers to accept self-certification. The Federal acquisition
regulations (FARs) also require all contracting officers to
practice due diligence prior to an award. Only those desiring
VA contracts are to be verified by CVE.
VA's present procedure is to verify the company and issue
them a verification pin. The VA then enters in that company's
profile that they are verified.
When a VA contracting officer wants the award contracted
SDVOB who is in a VETBIZ queue for VA verification, the
contracting officer simply calls CVE and they rush it through.
That is very good.
However, when an SDVOB in the VETBIZ queue submits a
response to a non-VA, say Department of Labor, SDVOB set-aside
request for proposal by a contracting officer who uses VETBIZ,
the company not verified will unjustly be considered as not
qualified to bid.
The VET-Force has recommended to the VA CVE that all VA
verifications remain accessible only to VA acquisition
personnel. The VA CVE has not accepted this recommendation. Not
doing so is sabotaging the Service-Disabled Veteran-Owned
Program.
The first step was the VA only. Then we were going to move
off. The second step should have been all the way. We know of
cases where a source went out from one Department, one other
Agency. She got twenty applications, she went on the VetBiz Web
site and found eight of them who had been verified. The only
people who got a request for quotation (RFQ) were those eight
people. That is wrong. Self-certification is the only thing to
require until we get this ball rolling properly.
Thank you, sir.
[The prepared statement of Mr. Hesser appears on p. 66.]
Mr. Mitchell. Thank you.
And I thank all of you for your testimony.
I have a couple questions, first of Mr. Amey.
There have been several discussions within the Subcommittee
about the threat resellers and pass-through entities play in
procuring Government waste and abuse.
Do you think this concern is justifiable and what should
the VA be doing to mitigate this risk?
Mr. Amey. It is very justifiable. And I believe last year
in the Defense Authorization Bill, if it was not in the 2009
Bill, it was in the 2008 bill, tried to handle that issue with
trying to limit pass-throughs, that if there is not value added
through a subcontract, and I do not know exactly how they are
going to monitor value added in that case, but at that point,
then the subcontract opportunity should not be awarded.
I believe that is only DoD. So they are the types of
improvements that we need to expand Government wide to hit all
agencies to prevent pass-throughs and prevent someone from
adding very little value added, but at the same time reaping
profits from that procurement.
Mr. Mitchell. Thank you.
And this question is for Mr. Denniston.
Why do you think the VA has a practice of advertising a
request for proposal and then have vendors incur all, as you
mentioned, all the substantial costs to submit the proposal
only to have the VA cancel the opportunity and procure through
an existing contract vehicle? It just does not make too much
sense.
Mr. Denniston. My feeling on that, sir, is that there needs
to be better acquisition planning. And the VA to their credit
about a year and a half ago established a process called the
integrated product teams, IPTs, where the goal was to get the
program people, the contracting people, the small business
people, and the General Counsel people together to actually
plan acquisitions and know what the statement of work should
be, what VA's needs are.
I think if that process was followed, I think we would not
have the situations that we have got now where RFPs are
requested and then canceled.
Mr. Mitchell. So there is a policy?
Mr. Denniston. There is a policy in place.
Mr. Mitchell [continuing]. To start following that?
Mr. Denniston. I think it needs to be followed more
strictly, yes.
Mr. Mitchell. Thank you.
And, Mr. Hesser, in your testimony, you discussed the
displeasure with the VA's General Counsel Office. Specifically
you mentioned inaction on the GC's part and the derogatory
feelings toward the VOSB, and the SDVOSB procurement programs.
Can you elaborate on why you feel that these derogatory
feelings are there toward the veterans and their businesses?
Mr. Hesser. I think first at VET-Force, we deal only with
procurement, so we are supported by all the other
organizations. So we get a lot of information. And if somebody
has a hard time, they will call us. And sometimes it's not too
good because it takes a lot of my time.
But we have a case where a very senior individual in the
Veterans Administration has told a client who is a vet who is
trying to get business there, well, the contracting officers do
not like you. And the program, they do not like this program,
so do not waste your time literally. And I would be willing to
share that, but I do not think it should be done publicly.
We have other cases where the service-disabled veteran has
tried to go in, this was maybe as long as 5 or 6 months ago,
and tried to sell a product that they did not manufacture. They
represented the company, but they used that product to make
their business services, et cetera. And they were told that,
no, we want to deal directly with the manufacturer. We do not
want to deal with the dealer.
Now, most of that has been cleared up because several
organizations went in there screaming. But that is strictly
against the law, but they do it anyhow.
General Counsel has in many cases made policy directions
that are not there. They came out with 38 CFR 74 and it was
supposed to be their rule of thumb of going. Now General
Counsel is aware of it. CVE is, in fact, saying that you cannot
be a service-disabled veteran-owned small business on a part-
time basis because you are not fully in control of it.
Like most veterans start in their house. Of course they
work for somebody else to make some money and then work their
way into the business.
They also say that you cannot own two businesses. And there
are cases where we have individuals do that. We have one
individual who has two companies because one is very highly
tech with doctors and master's degrees and one is not. They are
general services, secretaries, et cetera, he provides. He has
two separate cost differences there for his labor, so he has to
have two. He has been doing it for years.
The General Counsel sticks their head in places and they
allow things to happen that they should not be doing. The law
is the law. A rule is a rule. And to make that law, rule and
everybody tries to follow by it and they do not do it. And,
yes, we have some cases we will be happy to discuss.
Mr. Mitchell. Thank you.
Dr. Roe.
Mr. Roe. Thank you, Mr. Chairman.
And thank you all for testifying and thank you all for your
service to our country.
And I just have a couple of comments to start with and then
some questions.
I guess the problem I am having with this is that we have
hardworking American citizens out there every day, veterans
included, and we have disabled veteran businesses, and we have
other veteran businesses.
And my job back home in Tennessee before I came here was
Mayor of our city, the largest city in our district. And I know
it is not a lot of money for Washington, but over the last 6
years, we managed about $1 billion, a little short of $1.5
billion.
And we would have projects, and we are talking about $100
million water and sewer projects. We are talking about building
tens of millions of dollars for schools, roads, all the things
that local Governments do. It was a very transparent, clear
process about how the taxpayers got value for their tax
dollars.
If we had an RFP or we had a contract, it was a sealed bid
and the lowest bidder meeting all the specifications of that
project got the project. It was a fairly quick process. And I
would think that the VA, we know the rules for the veteran-
owned small businesses and the disabled veteran businesses, and
they should have every access to that business.
Master Chief, I agree with you completely. It ought to be
transparent. It ought to be easy to do. So that is one of the
parts as I read this material last night that was disconcerting
to me was that there seems to be a lot of at least, I will not
say fraud and abuse, I will say inefficiencies in this system
that is wasting a lot of money and is incredibly slow to get
done.
And I think this bill that Congressman Buyer has, and I am
a cosponsor, will address some of these things. And I would
suggest that other Members here take a very close look at it,
to have someone who is responsible.
As you said, these veterans are getting the run-around.
They are running in a circle. They go here and they are told to
go there and they are told to go there and finally they just
quit.
And I am sure, Mr. Jimenez, you have probably faced that in
your business and I am sure you will share some of that
frustration with us.
And, Mr. Amey, on page three of your, on the POGO, on page
three of your written testimony, you stated that 54 percent of
the contract dollars were listed as not identified.
And are these miscellaneous obligations or are these
additional obligations that have not been categorized into some
form or does anybody know where the money is?
Mr. Amey. I hope someone knows. But you do not know.
Federal procurement data has always had major data errors in
it. You do not know if it is just a problem with the
acquisition workforce with not pulling down the right pull-down
screen in data entry or if they do not know what type of
competition it really was. And that is the problem.
That is the first time in going through a lot of
procurement data that I have ever seen half of the pie chart
that has been filled in black with unknown amount. And, you
know, when it is $8 billion, that is a lot of amount to kind of
have unknown. And it is something that we need to get down to
the bottom of.
And that is why the full and open competition number is
low. You know, in the normal Federal Government, that number
averages about 60 or close to 70 percent. Here it is in the
twenties. You know, I am not saying that there is all kinds of
waste, fraud, and abuse going on----
Mr. Roe. Right.
Mr. Amey [continuing]. As far as the extent of competition
goes, but without even knowing. And in the data, it is kind of
funny because it says like searching for the answer or
something like that. Like it is very user friendly, like
public, you know, language in it, but that was the same
information and tag line they had for the 2008 data as well as
the new 2009 data. So it does not seem as if they have righted
the ship.
Mr. Roe. I can assure you in my business that I ran, which
was a medical practice, that there was not any miscellaneous
obligation and I did know where the money was going. And I
think most businesses know because either--if they do not know,
as Mr. Jimenez will tell you, you do not have a business. You
go out of business.
Mr. Jimenez, what criteria did MicroTech have to fulfill in
order to become certified and verified as a service-disabled
veterans-owned small business? I would like to hear that.
Mr. Jimenez. Sir, I do not recall the number of the form,
but we filled out a form. All the partners had to sign. All the
partners then submitted it along with the documentation
required which I believe was proof of 51 percent ownership or
more by myself, as well as day-to-day control by myself, as
well as my service-disabled veteran status, as well as the
other documents required. And it was submitted. It was not a
smooth process initially.
In fact, at the time, Mr. Denniston was still employed by
the VA and we were hoping we got it done early and we were
hoping it would come back. And they were actually very thorough
and came back and asked some additional questions and gave us
some additional guidance and we got it in.
And we did not experience the problems that other folks are
experiencing. But I suspect it was because we were one of the
early ones and we heard about it and we got out and got it
done.
Mr. Roe. How long a period of time was that?
Mr. Jimenez. It probably took us about 2 months.
Mr. Roe. Okay. Thanks very much.
I yield back my time.
Mr. Mitchell. Thank you.
Mr. Walz.
Mr. Walz. Thank you, Mr. Chairman and Ranking Member.
And thank you all for being here and sharing and help us
understand this.
Twofold responsibilities, and I do not think there is
probably anything more important that we do here, looking out
for the taxpayer dollars and making sure that every dollar that
is allocated for our veterans ends up with our veterans.
So this problem at the end of the day ends up being any
misspent dollars one less that is going to the care or to
creating jobs for those veterans. So this is a really, really
important issue.
Mr. Amey, in your written testimony, you talked about a
call for a comprehensive review of the VA procurement system.
One of the things I found in my short amount of time here in 3
years is we do a lot of those.
And I just have a list here of studies on procurement and
acquisition over the last couple of years, an audit of VA
medical center procurement of medical prosthetics, audit of
Veterans Health Administration (VHA) major construction
contract, evaluation of Veterans Benefits Administration of
vocational rehabilitation contracts, audit of veterans'
procurement of desk-top computer models, on and on and on and
on.
What makes you and especially us believe that we have
learned anything from this if we are still here today?
Mr. Amey. Well, I think it is a matter of the procurement
system has changed dramatically throughout the years. The
dollars spent have dramatically increased. You know, you have
gone from an agency in fiscal year 2000 that was about $3
billion to now over $14 billion in 9 fiscal years. So that
increase far exceeds the Federal contract dollar increase that
has gone from $200 billion to $530 billion in that same time
frame.
At the same time, through tweaks in the contracting system,
there has been new contracting vehicles and mechanisms that
have been thrown at the contracting officers and the
acquisition workforce overall, program staff that have changed
as well.
Services now outpace goods. So when you factor all those
things in, the procurement system and acquisition continually
changes. And at that point, we need to know what we are buying
and how we are buying it. They are the two big questions.
And at that point, if there are things that we are
outsourcing as far as services go, that may change from the
previous studies that have been done that we need to take a
look at now.
Mr. Walz. And I am going to go further in here. You talk
about reversing the VA trend toward contracting out services to
direct hiring a little bit. You talk about that.
I want to know what role in this that I am very, very
appreciative of and they are going to speak here in a little
bit, it may go to them, the Office of the Inspector General, it
seems to me that we saw a systematic reduction of OIG staff and
budgeting at the same time we saw outsourcing of contracts at
the same time we saw lost dollars.
So my question in this is, is, yes, the VA can do better,
but there is a partnership in inefficiency that works to the
private sector also. Can you address that?
Mr. Amey. Certainly. Yeah. I think contractors have a role
in this as well. I think it ends up being, you know, the
agencies, the program staff, the acquisition staff, then it is
the administrators of the contracts, the oversight staff of the
contracts, but it is the contractors as well.
A good contractor is going to say, hey, there is
inefficiency, there is waste. We could do this better. And I do
not know if those incentives are always built into either the
contracts or in the business models for them to come forward
with that type of information.
Mr. Walz. But you think some of this could stay in-house--
--
Mr. Amey. Certainly.
Mr. Walz [continuing]. To be more efficient?
Mr. Amey. Certainly. And that is where I do not know at
what level, but I think the Department of Defense is doing it
right now, the Department of Homeland Security is doing an
audit of all its service contracts to see what have we
outsourced as far as the service go and should we bring those
in-house. It may or may not be----
Mr. Walz. But we do not know where we are saving money.
There has been some outsourcing that has absolutely saved us
money it would be your opinion and some that has not?
Mr. Amey. Certainly. I am not saying that we cannot
outsource, you know, certain services. But at some point, we
have to take an audit of those services that we have outsourced
and say can we do this cheaper in-house, does it fringe on an
inherently governmental function that we want performed by a
Government employee rather than a contractor employee and,
therefore, bring those in-house. At that point, these are the
contractors that----
Mr. Walz. That is what I was going to say. I want to make
sure that these folks, Mr. Jimenez, and thank you for your
service, all of you, but this is the type of story we want to
hear. We want to make it as easy as possible. We want to make
sure you are providing the right services. We want to make sure
you have competed out there and won rightfully so.
If we study this and we increase the oversight through the
OIG, you are convinced we can do this better and not add your
study to the list, to page four?
Mr. Amey. I think it would be a mix. I think it would be a
mixture of studying what is currently taking place, what we are
contracting for, how we are contracting for it to make sure we
are doing it as efficiently as possible and, if not, bring some
of those jobs in-house, you know, hire contractors to do some
of those jobs. It is going to be a mixture of all of them.
Mr. Walz. Okay. I yield back, Mr. Chairman.
Mr. Mitchell. Thank you.
Mr. Buyer.
Mr. Buyer. Thank you very much.
Sergeant Major, there is a reason we love you. There is no
reason you should not be on this legislation. Okay?
Mr. Walz. We will talk.
Mr. Buyer. So you are going to have to tell me why you are
not on it. We will do that at the next vote, okay, because you
cannot do that type of statement and you cannot do that line of
questioning without embracing what is in this bill. So if there
are some things that you are looking for, please, we will
develop your thoughts further, okay, because you were right on.
One of the questions I have, have any of you seen the
legislation that has been introduced? Have you seen it?
Mr. Amey. No.
Mr. Buyer. No?
Mr. Amey. Not in detail.
Mr. Buyer. Well, I will tell you what. We will make sure we
get it to you. And for the record, if you can submit your
responses to it or if you have other recommendations.
[The witnesses provided responses to Mr. Buyer's request
for comments on H.R. 4221, the ``Department of Veterans Affairs
Acquisition Improvement Act of 2009,'' which appear on p. 101.]
Mr. Buyer. In response to the Chairman's opening question,
Mr. Amey, you made comments about the resellers and actions
that DoD had taken. We attempt to cover that.
Back in 2006 when we passed the law and creation of the
database and we go into the verification process, you know, it
is our hope, we always do this, sometimes we create our
legislation and we want departments and agencies then to
develop it further.
Sometimes our constituents will ask how come you just
introduced a 2,000 page bill. And it is because sometimes we
express our intent, but if we really want to, we tell them
exactly how to do it.
And so sometimes we sort of back off and so when we talk
about putting together a database and for a verification
system, we assume, you know, that actually that verification is
going to be done in a manner and we do not assume that it is
going to be self-verification.
I mean, we get involved in this stuff all the time, so I do
not want to be too hard on the VA. I mean, we get in really
nasty battles here in Congress on verifications for immigration
issues and qualification of benefits and whether they should
show an ID or not an ID.
So, Mr. Jimenez, I appreciate you talking about what you
had to go through, but obviously something is not working here.
So, number one, we have got the verification issue and we
are going to address that further in the legislation. The other
is on resellers.
And we have actually put it into the language that the
Secretary may not include in the database a small business
concern that is the vendor of a commercial item unless the
concern is the manufacturer or a regular dealer of the item.
And then I give some discretion to the Secretary specifically
that provides for waivers for such requirement.
What is your initial reaction to that?
Mr. Amey. Well, first, I spend a lot of time making public
comments to Federal regulations and as they trickle down
through the regulatory process, they do not always meet the
intent or the mandate that Congress, you know, had in the
actual bill and the legislation, the law. So it is not the
first time that I have heard this.
It sounds from what I have heard like a worthwhile
provision. Too many times I am contacted by third, fourth, and
fifth tier subcontractors that are doing something for a prime
and it raises many legal issues, who you hold accountable if
you are not getting paid, you know, what type of service are
you offering, what is the value added, the debundling question
that, you know, I had mentioned in my testimony and someone
else on the panel had mentioned. Can we break those contracts
apart to try to go to those contractors right off the bat
rather than having them delegated to a third or fourth tier
subcontractor?
So at that point, it sounds like it is a worthwhile
provision that will cut out some red tape and it will also
provide better benefit probably to the Government.
Mr. Buyer. Mr. Denniston, in your testimony on page three,
you mention about the 54 percent of the contract dollars were
listed as not identified.
Mr. Denniston. That was----
Mr. Buyer. Oh, I am sorry. Was that you?
Mr. Amey. That was in my testimony.
Mr. Buyer. Okay. I am sorry. Are those miscellaneous
obligations?
Mr. Amey. I do no know. All it is is a list of contract,
extent of competition, so it is not by goods or services being
provided. It was only by was it full and open competition,
limited competition, sole source, one bid, follow-on contract.
So to me, it is very high, 54 percent. I have never seen
that pie chart configured in that method. And it would be
something that I think people would want to get down to the
bottom to is how is that actually done. It seemed odd that for
2 fiscal years, the VA has a very high percentage of unknown in
its extent of competition listing.
Mr. Buyer. How will the VA be successful to break the game,
the procurement game that is done in this town, that I will
just find a front, I will find someone who is a minority
service-disabled veteran and I will get a bid on that contract
and I am going to use them as the front for the bid and I am
the sub and we do the pass-through? And it is a game, a
procurement game that goes on in this town. And when that
happens--sir?
Audience. Bar him.
Mr. Buyer. Who said that? I welcome your recommendation.
Let me ask the panel, though. Give me some ideas here on
how we end this game in this town because we are squeezing out
legitimate business concerns when that happens. Yes?
Mr. Jimenez. Sir, I would like to address this. My name is
Tony Jimenez.
I think what you need to do, sir, is you need to insist
that the contracting officer do due diligence. I mean, if a
contracting officer gets a contract and signs a contract and
never talks to the contractor, never explores the viability of
a contractor to make the determination whether this is a one
person, what we like to affectionately call trunk slammers,
shame on the Agency for allowing that contracting officer to do
that. That is working in a vacuum and not being able to
actually attest to the fact that this is a bona fide company.
And we were approached, and I had a discussion prior to
sitting down at the panel about the exact same thing, we were
approached and continue to be approached to do just that. And
the problem with doing just that is I am in business to be in
business. I am not in business to make money and take it and go
retire. I am already retired.
What I am in business to do is to hire veterans, to hire
service-disabled veterans, to create jobs, and to build a
business that can be a legacy for other service-disabled
veterans.
And when you find companies that are willing to do that,
and Mr. Hesser and a number of other organizations are out
there to assist in identifying quality businesses, it is then a
requirement of the contracting officer and being a former
Government contracting officer to make sure that you are giving
a contract to somebody that can do what they say they can do
and not pass it through.
The contracting officers in many instances unfortunately do
not look past the signature. They do not do the due diligence
required to ensure that the contract that they are giving to a
contractor is, in fact, a viable contract between the Federal
Government and somebody that can accomplish the work.
And we write a lot of legislation and we do a lot of things
and I think right now we have got more than enough legislation.
The problem is there is nobody enforcing it. Nobody is saying
shame on you, do not do that, go to jail, shame on you, do not
do that, you are out of business, shame on you, go to jail, go
be debarred, cannot compete anymore. We continue to come up
with more legislation and more ways, but nobody is enforcing
them. Nobody is saying enough.
We have now got the GAO report that says guys are out there
passing themselves off as service-disabled veterans. Everybody
goes, ah, but then nothing is done.
Mr. Buyer. Right. Yes.
Mr. Amey. And if I may, it does end up being a market
research question. I go to a lot of conferences where
businesses tell how they procure goods and services and we
always talk about best practices and stealing best practices
from the private sector. And that is one where they do do their
due diligence. That is where they have more requirements as far
as down select and getting attractive contractors in, getting
bids in, doing the market research that they need to do.
The Federal regulations say contracts are supposed to be
awarded to responsible contractors only. Well, that is having
the proper finances, the skill, performance. One of those
factors is also a satisfactory record of integrity and business
ethics.
Well, until last year and it is forthcoming, there was no
benchmark to make a determination as far as responsibility for
a contractor's level of performance, integrity, and business
ethics. There is soon to be a Federal database, but it will not
be publicly available.
And, unfortunately, the two gentlemen in the front may be
able to see it, but no one else or no other Members will. It is
going to only be seen by Chairmen and Ranking Members with
jurisdiction to be able to even see the type of data that is in
that integrity and performance database.
Mr. Buyer. Well, when you bring up business integrity or
ethics, if, in fact, the business community recognizes that the
VA itself is not going to enforce nor bar particular businesses
or blacklist them and no one is going to know, then it opens
the door for the unscrupulous ones. And it is kind of what is
happening here in this town. I do not want to say that is the
standard, but we all sort of know.
I mean, how many lobbying firms are out there in this town
who make money off of, well, okay, if you want to bid in this
particular contract, let me set you up with this particular
company because, you know, they will go ahead and make the bids
for you. And it is a procurement game.
And when I look at that, and it has really bothered me
inside, it has bothered me because it really squeezes out, Mr.
Chairman, the legitimate disabled veterans who want a business
enterprise.
And legislatively, and that is why I want to work with
everyone on the Committee, if we can sort of break that, we can
break that mold and allow the VA to make sure that these
contracts are awarded to the right person, to the right
business entities, and let us stop this game that is being done
in this town, I think we will make leaps and bounds of
improvements.
I yield back.
Mr. Mitchell. Thank you.
And I want to thank again the panel for coming and sharing
your information and your insight.
Before I dismiss you, I would like to extend our deepest
sympathies to Joe Wynn who joins us in the audience today for
his recent loss. Joe Wynn was going to be a part of the panel
if one of the other panelists could not show up.
As a strong advocate for veterans and veteran small
business owners, his advocacy through the years has provided
the Committee with insight on how we can improve the lives of
our Nation's veterans. Joe has worked tirelessly over the years
on behalf of millions of veterans and has been a strong voice
in the veterans service organizaton advocate community.
Thank you for your hard work and we look forward to working
with you in the new year. I know that everyone was with you in
spirit during the funeral service at St. George Episcopal
Church. Please accept our condolences in the loss of your
mother who was laid to rest yesterday at Lincoln Memorial
Cemetery. And thank you very much.
And this panel is excused.
I welcome Panel Two to the witness table. And for our
second panel, we will hear from Kay Daly, Director of Financial
Management and Assurance at the U.S. Government Accountability
Office; Greg Kutz, Managing Director of Forensic Audits and
Special Investigations, U.S. Government Accountability Office;
and Maureen Regan, Counselor to the Inspector General, Office
of Inspector General, U.S. Department of Veterans Affairs;
accompanied by Belinda Finn, Assistant Inspector General for
Audits and Evaluations.
And, again, I would like to remind all those who are
speaking if they could keep it within the 5 minutes because we
are going to be interrupted back and forth for votes.
First I would like to recognize Ms. Daly.
STATEMENTS OF KAY L. DALY, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; GREGORY D.
KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL
INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; AND
MAUREEN T. REGAN, COUNSELOR TO THE INSPECTOR GENERAL, OFFICE OF
INSPECTOR GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS;
ACCOMPANIED BY BELINDA J. FINN, ASSISTANT INSPECTOR GENERAL FOR
AUDITS AND EVALUATIONS, OFFICE OF GENERAL COUNSEL, U.S.
DEPARTMENT OF VETERANS AFFAIRS
STATEMENT OF KAY L. DALY
Ms. Daly. Thank you, Chairman and Members of the
Subcommittee. I would like to thank you for the opportunity to
discuss the Veterans Health Administration's use of
miscellaneous obligations.
My testimony today summarizes the results of our September
2008 report that focused on how VA used miscellaneous
obligations during fiscal year 2007 and whether VA's policies
and procedures provided adequate controls over their use. I
will also discuss the status of VA's actions to implement the
recommendations contained in our report.
On the first topic, VHA recorded over $6.7 billion in
miscellaneous obligations during fiscal year 2007. These
miscellaneous obligations were used for a variety of mission-
related goods and services, things such as fee-based medical
services, drugs, medicines, hospital supplies, transportation
of veterans to and from medical centers, and logistical support
for VA's medical centers nationwide, including rent and
utilities.
The results of our audit work over fiscal year 2007
miscellaneous obligations found that VA's policies and
procedures did not provide adequate controls over the use of
them. Without effectively designed controls, VA is at increased
risk of fraud, waste, and abuse, including the risk of
unauthorized procurements, overpayments for services, and
conversion of Government assets for personal use without
detection.
Specifically, although existing policies required
contracting officials to review miscellaneous obligations,
there was no guidance as to how such reviews should be carried
out and documented.
With regard to segregation of duties, the policies and
procedures for miscellaneous obligations did not prevent one
individual from being able to perform multiple roles in
authorizing and executing miscellaneous obligations.
Finally, regarding documentation, VA's guidance did not
require key pieces of information to be included on the
authorization form.
These systemic design control flaws were confirmed in 42
case studies we conducted at three locations. Our case studies
demonstrated that there was a lack of documented oversight by
contracting officials in all of the 42 case studies we
examined. Inadequate segregation of duties occurred in 30 of
the 42 case studies and supporting documentation was not
complete in many of these cases.
For example, crucial descriptive information was not
included in the purpose field for eight of the case studies.
The vendor name was blank for 20 of the case studies and the
contract number was not provided in 16 of the case studies.
Without basic controls over the billions of dollars in
VHA's miscellaneous obligations, VA is at significant risk of
fraud, waste, and abuse. Effectively designed internal controls
act as the first line of defense in preventing and detecting
fraud and help ensure that an agency can effectively meet its
missions and goals, comply with laws and regulations, and
provide reliable financial information on its programs.
VA has issued new guidance on the use of miscellaneous
obligations in January 2009 aimed at addressing our
recommendations. VA's actions are an important step. However,
full and effective implementation of these new policies and
procedures will be even more important.
We have not yet fully evaluated the extent to which VA's
new policies and procedures are in place and operating as
intended.
Chairman Mitchell and other Members of the Subcommittee,
this completes my prepared statement and I would like to thank
you for holding this hearing today. It is important that
hearings such as this be held to shed important light on these
topics and to help address the problems that are there.
I would be glad to answer any questions you or other
Members have at this time.
[The prepared statement of Ms. Daly appears on p. 68.]
Mr. Mitchell. Thank you.
Mr. Kutz.
STATEMENT OF GREGORY D. KUTZ
Mr. Kutz. Mr. Chairman and Members of the Subcommittee,
thank you for the opportunity to discuss the Service-Disabled
Veteran-Owned Small Business Program.
This program honors service-disabled veterans for their
incredible service and sacrifice by providing contracting
opportunities.
Today's testimony highlights the results of our
investigation into allegations of fraud and abuse in this
program. My testimony has two parts. First I will discuss cases
of fraud and abuse and, second, I will discuss fraud prevention
controls.
First we received over 100 allegations of fraud and abuse
in this program. I will note that we stopped counting when we
hit 100. From these allegations, we investigated ten cases
which often included a number of affiliated firms and joint
ventures. These ten case studies received $100 million of
service-disabled sole-source and set-aside contracts using
various fraudulent schemes.
Two key program eligibility requirements include, first,
the firm's day-to-day operations must be controlled by the
service-disabled veteran owner and, second, the firm must
perform 15 to 50 percent of the work itself.
Cases that clearly did not meet these requirements include,
first, a firm that subcontracted 100 percent of its work at a
VA hospital to an international corporation headquartered in
Denmark with annual revenues of $12 billion.
Second, a construction firm with no assets and no employees
passing through VA contracts to ineligible firms. The owner of
this shell company lived 80 miles away and managed a restaurant
in another city.
And, third, a firm whose owner was a full-time employee for
the State of New Jersey. His shell company serves as a pass-
through for five ineligible firms located at the shell company
address.
[Slide]
Mr. Kutz. What is discouraging about many of these cases is
the contracting officials are actively involved. For example,
the monitor shows the VA hospital in Palo Alto, California,
where 100 percent of a $6 million contract for janitorial
services was subcontracted to the Denmark firm that I just
described.
The monitor also shows a picture that we took 2 weeks ago
of one of the vans with a Denmark firm logo parked at the
hospital. It is clear that in pass-through cases like this,
contracting officials know exactly who is performing the
service.
Moving on to my second point, there are no effective fraud
prevention controls in place for this program. For the most
part, this has been a self-certification program. As was
mentioned, the Veterans Administration is in the process of
setting up a process to validate the eligibility of firms
looking to do business with the VA. However, two of the fraud
cases that we investigated have been certified through this
process.
[Slide]
Mr. Kutz. The monitor shows a screen shot for one of the
certified firms in VA's database. Notice the VA seal of
approval. This is actually the California firm that I just
described. Contrary to program requirements, this is a shell
company that passes through work to ineligible firms across the
country. We found despite having only five employees, they have
received 33 service-disabled sole-source and set-aside
contracts for over $7 million.
In conclusion, for just ten cases, we identified $100
million of fraud and abuse. This multi-billion dollar small
business program has no controls and no consequences for the
few that are caught cheating. Unfortunately, the victims of
this fraud are legitimate service-disabled veterans that play
by the rules.
I look forward to working with this Subcommittee and VA to
eliminate fraud and abuse from this important program. Mr.
Chairman, that ends my statement and I look forward to your
questions.
[The prepared statement of Mr. Kutz, and referenced slides,
appear on p. 76.]
Mr. Mitchell. Thank you.
Ms. Regan.
STATEMENT OF MAUREEN T. REGAN
Ms. Regan. Thank you. Mr. Chairman, Members of the
Subcommittee, on behalf of the Inspector General, I would like
to thank you for the opportunity to testify on the findings of
the Inspector General relating to the VA's procurement
processes.
I am accompanied today by Belinda Finn. She is our
Assistant Inspector General for Audits and Evaluations.
As you are aware, procurement is and has been one of VA's
major management challenges. We believe the nature and broad
spectrum of our work on procurement provides us with a unique
nationwide perspective on VA's practices.
For example, from an operational standpoint, our oversight
of VA's procurement activities is through our audits,
investigations, reviews, and inspections. These can be
proactive or they can be reactive from complaints through our
hotline, Congressional inquiries, and other referrals.
In addition, our operational work over the last 5 fiscal
years had 35 reports addressing some procurement issue and
resulted in a cost savings or potential cost savings of $112
million. I think also during the last 6 years, we did specific
reviews of procurement failures showing that VA lost over $650
million from failed procurements.
In addition, under a memorandum of understanding with the
Department, we have an Office of Contract Review. This group is
responsible for conducting pre- and post-award reviews of
contracts awarded by VA's National Acquisition Center or other
entities under the direction of the Office of Acquisition,
Logistics, and Construction. And these would all be
noncompetitive contracts.
We also conduct pre-award reviews of proposals for health
care resource contracts to be awarded on a sole-source basis to
VA affiliated universities and medical centers. In the past 5
fiscal years, we have issued 424 reports to contracting
officers under the memorandum of understanding.
Our pre-award reviews have identified $1.54 billion in
potential cost savings if a contracting entity negotiates what
is recommended as a fair and reasonable price. Of this amount,
$166 million related specifically to health care resource
contracts awarded by VA medical facilities.
Our post-award reviews have resulted in the collection of
more than $115 million which has been deposited in VA's supply
fund.
Across the board, our work has identified systemic issues
that caused or contributed to procurement failures,
overpayments, and misuse of funds. These systemic issues
include poor acquisition planning, poorly written contracts,
inadequate competition, inadequate price reasonableness
determinations, and poor contract administration.
We believe the decentralized organizational structure for
procurement and activities in VA as well as inadequate
oversight and accountability are primary factors contributing
to the systemic problems.
As we have testified in previous hearings, VA procurement
is so decentralized that on a system-wide basis, VA cannot
identify what it bought, who it bought it from, whether the
products or services were received, or whether the prices paid
were fair and reasonable.
Data systems such as VA's electronic contract management
system and the Federal procurement data system should provide
accurate information relating to procurements. However, we have
found through our work that both systems contain inaccurate,
incomplete information and cannot be relied upon.
Because we do not have a reliable system-wide inventory of
contracts, we have had to develop techniques in order to
identify contracts for our reviews. For example, if we are
looking at how many contracts were awarded to a particular
vendor, we may actually have to--we have actually had to go to
each medical facility to be included in our review and ask them
to produce the contract. Even then, we are not sure that we
have an accurate accounting or that we have all the documents
in those contracts.
If we have a review going on about a specific type of
product or a specific service and how much did VA buy of that
product, we actually have to go to the vendors with a subpoena
and ask the vendors to provide us with sales transaction
information. We cannot get that information from VA.
We have identified the procurement process as three steps
involving three groups of individuals. There is the planning,
there is the solicitation, negotiation, and award, and there is
contract administration. The three groups responsible for this
are the Program Office, the contracting entity, and legal
counsel. We found problems at all steps in the process and by
all three individuals and these problems have led to contract
failures.
We recognize that VA has and is taking action to improve
its procurement activities. For example, the recently
established Acquisition Academy in Frederick, Maryland,
provides training needed to develop a more robust acquisition
workforce.
The Technology Acquisition Center in New Jersey will
consolidate VA's IT acquisitions and will provide the staff
with the training and expertise needed to conduct complex IT
acquisitions.
Overall, there is minimal oversight of VA procurement
activities, particularly at the facility level. Oversight is
necessary to identify both deficiencies and best practices.
As noted, the Department has with the memorandum of
understanding, we conduct oversight over the large contracts
awarded by the National Acquisition Center. One of the effects
of the oversight is a deterrent to industry.
Over the last 5 years, out of 164 post-award reviews that
were conducted, 97 or 56 percent were the result of vendor
voluntary disclosures. You would not have these disclosures if
we did not have an oversight program where we go out and look
at it on our own initiative.
We also believe that ineffective oversight resulted in or
could have prevented some of the criminal conduct and our
criminal investigations. We had 254 criminal investigations
with 110 arrests during this time period. A lot of that could
have been prevented with effective oversight.
This concludes my oral statement and Ms. Finn and I would
be happy to answer any questions.
[The prepared statement of Ms. Regan appears on p. 91.]
Mr. Mitchell. Thank you very much, all of you. Very
revealing here.
The first question I have of Ms. Daly is, you stated in
your testimony that VA has designated new policies and
procedures to address the recommendations in your report and
miscellaneous obligations.
In your opinion, has the VA taken adequate steps to address
those recommendations?
Ms. Daly. Mr. Chairman, I think VA has taken the important
first steps by issuing policies and procedures aimed at
addressing this. I am concerned in that some of the system
patches and other steps they have taken are not as effective as
they could because--let me give you an example of that.
VA has put in a patch that identifies whether or not
someone with incompatible duties are performing those duties
instead of putting in a patch that prevents that person from
performing it.
To make it simple, they are doing it so that they detect a
problem instead of preventing a problem. And I think that there
could be other ways they could try to address that.
Mr. Mitchell. I think you mentioned they put in some
policies or procedures. That is just about what Mr. Buyer said.
We have passed laws, but if there is no follow-up or
accountability, what good is a policy or procedure if no one is
doing it.
Mr. Kutz, one of the key things you have brought to our
attention today was the report, which you prior issued a report
by fraud of the SDVOSB Federal contractors and potential
involvement of Federal contracting officials.
How vulnerable is this program to fraud and kickbacks and
collusion with Federal contracting officials?
Mr. Kutz. It is very vulnerable. For the ten cases we had,
we have no specific allegations of that. But when you look at
some of these cases, the actual contracting officials were well
aware of what was going on in the beginning and, in fact, in
some cases, there is evidence they helped arrange the front
company to pass the work through.
So given that these front companies are taking a cut and
then passing through work to large businesses, is there an
opportunity for the contracting officials to get a cut of that
money? Absolutely.
Mr. Mitchell. And how widespread do you feel this is within
this program?
Mr. Kutz. I cannot really say except that we did get over
100 allegations. We are continuing to get allegations. There
was a hearing we had on the Small Business Committee several
weeks ago and now you are having this hearing. We will probably
get a new batch of allegations coming in after your hearing
today. So indications are the ten cases we have are just the
tip of the iceberg.
Mr. Mitchell. And the ten cases that you did investigate
with the $100 million of services, since you have finished your
investigation, is there any indication that these firms are
continuing to receive Federal contracts?
Mr. Kutz. Yes. Not only that, they are getting service-
disabled sole-source and set-aside contracts. And, in fact, it
appears in the last month that the company that was the front
for the furniture transaction at MacDill Air Force Base was
certified by VA through their process that we have described
today.
Mr. Mitchell. So they are still operating?
Mr. Kutz. Yes.
Mr. Mitchell. You also mentioned that the SDVOSB firm that
has no employees or assets, received a $900,000 contract for
the furniture design in Tampa.
Has this firm been certified or verified by the VA for
eligibility?
[Slide]
Mr. Kutz. Yes. In fact, I want to show you the firm
actually. On the right, there is the firm. It is the
individual's house. He is a full-time employee at MacDill Air
Force Base. So hard to believe he can control the operations
when he is at MacDill. And that picture on the left is actually
the mailbox and this is the firm that it appears was certified
by VA in the last month or so.
Mr. Mitchell. Can you tell me, this transaction was
referred to as a double pass-through, what do you mean by
double pass-through?
[Slide]
Mr. Kutz. If you look at the picture, I have a slide that
kind of shows this that we have used, there are two companies
that were middle companies that took a cut of this $900,000
contract. The first one was the one that I just showed you that
was the individual's house. He worked at MacDill Air Force
Base.
The second company was a furniture dealer that his wife
worked at. They passed it through both of those companies who
each took a cut. And then the final company that got this was
the furniture manufacturer that you see on the far right there.
So there are two companies that took a cut before the
actual company that did the work took it. So that would be
something we would call a double pass-through here.
Mr. Mitchell. Looking at this and the person who in this
particular case, do you think this employee has a potential
conflict with the MacDill Air Force Base?
Mr. Kutz. Yes, I would say so. And we have referred that
case to the Air Force Office of Special Investigations to look
at. Like I said, he worked full-time at MacDill Air Force Base.
He knew people in the procurement community. They knew who he
was. And it was very clear it was a front company to pass
through work to the furniture installer and dealer.
Mr. Mitchell. Let me ask, because this person got the bid,
did you know of any work that other people who bid on this,
were there other people who bid on this that did not get it?
Mr. Kutz. Yes. And, in fact, they filed a protest.
Mr. Mitchell. I still have some time.
Ms. Regan, in your opinion, what are the three biggest
problems with the VA's acquisition process?
Mr. Buyer. Mr. Chairman?
Mr. Mitchell. Yes?
Mr. Buyer. I am sorry. Do we know the result of the
protest?
Mr. Mitchell. No.
Mr. Buyer. Is it all right if we ask that?
Mr. Mitchell. Yes, sure.
Mr. Kutz. It was ultimately withdrawn, but it was initially
protested.
Mr. Buyer. All right. Thank you. Thank you.
I am sorry, Mr. Chairman.
Mr. Mitchell. No, no.
Mr. Buyer. I thought it was important to know.
Mr. Mitchell. Ms. Regan, what are the three biggest
problems with the VA's acquisition process?
Ms. Regan. In the process itself, there are problems at
each step in the process. Poor acquisition planning; the
purchasing entity does not know what they want. They do not
want to define their needs.
We see a lot of open-ended contracts. Just give me labor
hours and I will order off the contracts. I think that was one
of the problems with the computer incident reporting
capability, the CIRC contract.
One part of it was IDIQ, indefinite delivery, indefinite
quantity, and they ordered 10 years worth of services against
it in 2 years. So they ran out of money. They do not know what
they want. They do not like to plan a lot of times for what
they want.
The second biggest problem in the process that we see is
probably in contract administration and that is either that
contracts that do not set any type of performance standards,
just pay, when an invoice comes in.
You also have people who are not trained in contract
administration. They pay an invoice without looking for
delivery of services, without looking to see if the rates are
correct, without looking if the invoice matches the contract.
I think all of this gets into the fact that there is no
oversight at all, especially at the field activities with the
regular contracting, and the decentralization contributes to
that.
Mr. Mitchell. Could you tell me, how much support do you
think the people in the field get from the General Counsel?
Ms. Regan. Up until recently, there were very few General
Counsel people out in the field. I think there were five
working mostly with protests and claims. But on day-to-day
activities, there was no review of proposals and they were not
involved in negotiations.
Now, they have hired some additional attorneys through the
supply fund to provide those services, so they are getting more
support now than they were in the past.
But I know on our pre-awards working with some of the
facilities, they would be going into negotiations and did not
know how to develop a negotiation strategy. They are going into
negotiation with the universities bringing attorneys and
contract officers are going in by themselves. It is not
balanced that way. They need that kind of legal support and
somebody that is involved in assisting them.
Mr. Mitchell. And my last question to you, do you get
complaints from contracting officers and, if so, what is the
biggest complaint you get?
Ms. Regan. The one we have heard probably the most in the
past year is they are being pressured to award contracts when
they do not feel that it is in the best interest of the
Government.
Mr. Mitchell. Thank you.
Mr. Roe.
Mr. Roe. Well, as a former Mayor and a doctor and a
politician, I did not think I could be made speechless by
anybody, but you all have done that. I mean, I have never heard
any such testimony since I have been here. And I guess a couple
things I want to pursue on this.
Ms. Regan, first, you astonished me when you said we did
not know what we were buying, we did not know what we paid for
it, and there were no consequences to any of this. And then
when you found out what you paid for, you went to the vendor,
and many of them who are honest vendors, I might add, but you
went to them to confirm what the VA should have confirmed. It
is like asking the fox in the henhouse have you eaten the
chicken.
And so, I mean how do you even respond to that? I am
flabbergasted when I heard what you said.
Ms. Regan. It has been very difficult from our perspective
to do our work in looking at contracting because a lot of it is
hidden. You cannot find it.
We reported in our report on the Replacement Scheduling
Activity that some contracts avoid oversight and become
invisible to the Department because VA is going to other
agencies to contract for them. So those contracts are not seen.
We noted one contract where nobody in the VA could even
give us a copy of the contract. We were told we had to write a
letter to General Services Administration to get a copy.
So there is just no visibility. It is very difficult. It
creates additional work we have to do to look at contracts. We
have done work-arounds, but we are not always sure we have all
the right information or all accurate information when we do
our reviews.
Mr. Roe. Well, are there an inadequate number of
contracting people at the VA? Is that where they have so much
to do, they just, you know, sign them and go? Is that the
problem?
Ms. Regan. No. It is so decentralized that information is
not maintained in a centralized database that gives you the
visibility.
For example, the Electronic Contract Management System
should be keeping track of what contracts have been awarded
since, I believe, 2007, but our audit of that system showed
people were not using it.
Also, a lot of purchases do not fit the requirements of
what is required to be entered into that system. So in looking
at the Federal Procurement Data System, we found that that is
inaccurate. I believe the prior panel mentioned that also in
following up. So there is no place you can go to in VA and get
accurate data or complete data on procurements.
Mr. Roe. Well, I have another couple of questions, Mr.
Chairman.
One, Mr. Kutz, you got into this a little bit and peeled
this onion back a little bit, but you stated that you picked
ten of the hundred and all ten of them you found. And you just,
I guess, at random picked those ten companies?
Mr. Kutz. No, not necessarily random. Probably based on the
allegations. Some of the allegations were more specific than
others. So when we assess allegations, we would take the more
credible allegations, one where there might have been some
documented evidence or some credibility. So I would not say
they were a random sample from the 100.
Mr. Roe. Okay. Would you just name the ten companies? Would
you mind doing that?
Mr. Kutz. Certainly. I can name them. In our report and in
our testimony to you, they are numbered case numbers one
through ten. And I will list the name of the company and the
location of the company if that would meet your request there.
Mr. Roe. Yes, it would.
Mr. Kutz. Case number one is C. Martin Co. in north Las
Vegas, Nevada.
Number two is Corners Construction in Chico, California.
Number three is Teamus Construction Co. in Carnegie,
Pennsylvania.
Number four is Sullivan International Group, Inc. in San
Diego, California.
Number five is Ron Jon Rentals, Inc. in Barstow,
California, and their predecessor company, which is no longer a
service-disabled veteran company, is DAV Prime, Inc., from
Peoria, Illinois.
Case six is called Veterans Construction Associates in
Burlington, New Jersey.
Case seven is McDonald Roofing and Construction, Inc., in
Emmett, Idaho.
Case eight is B&J Multi-Service Corps in Leominster,
Massachusetts.
Case nine is GMT Mechanical in Grantville, Georgia.
And case ten that I showed you on the monitor is FF&E
Office Solutions in Tampa, Florida, near MacDill Air Force
Base.
Mr. Roe. It sounds like it is coast to coast, border to
border.
Mr. Kutz. Correct. And the allegations were across the
country also.
Mr. Roe. And these particular contracts that are awarded
that are either double pass-throughs or pass-throughs probably
are preventing legitimate veteran-owned, disabled veteran-owned
or veteran-owed businesses from getting this contract or
getting these contracts. Am I correct or not?
Mr. Kutz. Not only that. And I think the first panel
discussed that you are talking about jobs for veterans also.
How many veterans do you think the international company from
Denmark hired?
And if it had been a legitimate service-disabled veteran-
owned small business, veterans hire veterans. So I think you
are talking about not only the company and the owner of
legitimate firms being impacted here, but veterans' job are at
stake also.
Mr. Roe. So basically what this company did, this $6
million contract to this foreign company, somebody just got a
cut on the front end and they just paid basically a finder's
fee----
Mr. Kutz. Correct.
Mr. Roe [continuing]. Of this business?
Mr. Kutz. Yes.
Mr. Roe. That is what happened?
Mr. Kutz. That is how it worked.
Mr. Roe. How prevalent is that, do you think?
Mr. Kutz. Well, in these cases, it is very prevalent. And
some of the other allegations from the hundred plus that we
have received, that appears to be what is going on.
I mean, some people refer it as rent-a-vet. There are
various ways it is described, but it is still just having a
front company, somebody taking a cut, and then most of the
money going to an ineligible firm, oftentimes large business.
And if you think about the contracting officer, like let us
use the VA hospital case, they knew that this ISS Corp. from
Denmark was one of the world's best janitorial services
contractor. So they are getting the work done the way they
want, but they are not giving the work to a legitimate service-
disabled company.
Mr. Roe. Thank you, Mr. Chairman. I yield back.
Mr. Mitchell. Mr. Buyer.
Mr. Buyer. Thank you very much.
I want to follow your line of questioning on that, on the
Denmark firm. The SDVOSB company that was awarded that bid,
what was the name of that company?
Mr. Kutz. Corners Construction in Chico, California, and
the hospital was in Palo Alto, California.
Mr. Buyer. Corners Construction, were they certified for
eligibility by the VA?
Mr. Kutz. No.
Mr. Buyer. Wow.
Mr. Kutz. Oh, they have. I am sorry. Yes, they have been.
Yes. That is one of the two. The two that have been are Corners
and FF&E. I am sorry.
Mr. Buyer. So only two out of the ten were certified?
Mr. Kutz. Two of the ten have been certified and three
others are in the database awaiting certification, correct. So,
yes, Corners is one. I am sorry.
Mr. Buyer. Did you guys hear that?
Mr. Mitchell. No. Repeat that.
Mr. Buyer. Of the ten cases that he examined, only two of
them had SDVOSB certifications. Only two out of the ten.
Mr. Kutz. From the Veterans Administration. They all self-
certified that they were service-disabled veteran-owned small
businesses. That is the difference. The two went through the VA
process based on the bill you issued in 2006 that requires VA
to set up this process. So two have gone through the process
the gentleman on the first panel said his company has gone
through.
Mr. Buyer. This goes back to that issue of how are we going
to do this enforcement and accountability function. Obviously
the self-verification is not working.
This Corners Construction, what was their primary line of
business?
Mr. Kutz. Construction.
Mr. Buyer. Not janitorial services?
Mr. Kutz. Not janitorial. And keep in mind, I said they had
five employees, including the two owners, and they have 33
contracts across the country. So it is very clear what is going
on here.
Mr. Buyer. They are pretty talented.
Mr. Kutz. Yes. They are talented at getting the work,
certainly.
Mr. Buyer. Now, how could a contracting officer not know
that the firm was going to subcontract?
Mr. Kutz. I suppose there are some cases where they would
not know. But in most of these cases, we believe they not only
knew, but they helped arrange the transaction and they were
involved in some of these cases in these transactions. And,
again----
Mr. Buyer. All right. Are you making a specific allegation
of collusion?
Mr. Kutz. Well, it depends. I mean, their incentive is to
get the going requirements. Your Committee is getting reports
that 12 percent of VA contracting went to service-disabled
veteran-owned small businesses.
So the company from Denmark, that contract for $6 million,
that all counted in those numbers that you get and those
percentages you get. And those are not what you are thinking
that they are.
Mr. Buyer. You know, I just, I do not know, 15, 20 minutes
ago, I just turned to my staff and I asked them how much are we
driving part of the problem when we set these benchmarks. And
years ago when we sent these benchmarks, the budgets were not
even close to the way they are today.
So the more we increase these billions of dollars into the
pipeline, the more it begins to drive and incentivize
individuals to make sure they either meet or exceed their goals
and they will figure out some type of way to do it because
maybe at the end of the day, because they get a 10 or 12
percent award of those contracts, I may get a bonus at the end
of the day.
Mr. Kutz. Right. And that is the incentive system we have
seen and there does not seem to be a lot of incentive for them
to actually build integrity into this program. And that is what
you are talking about today.
Mr. Buyer. So any of your allegations with regard to
collusion is not necessarily that the contracting officers
themselves are getting any forms of kickbacks to them, it is
they are doing everything possible and imaginable to hit goals
within the system?
Mr. Kutz. Yes. And getting someone who they believe can do
the work. And, again, if you have a choice between a new
service-disabled entrepreneur company and a $12 billion
international firm with a proven track record, from the
standpoint of getting the work done, you are probably going to
pick the big company.
Mr. Buyer. Let us talk about the issue of enforcement and
disbarment. What have you seen about how aggressive, if any,
the VA has been with regard to taking action against particular
companies?
Mr. Kutz. Well, I will speak governmentwide. We are not
aware of any suspensions, debarments, or prosecutions related
to misrepresentations for service-disabled veterans unless the
OIG has some specific examples. We have not seen any specific
examples of anyone that has had any consequences for this.
Mr. Buyer. Okay. I am speechless. My mouth is just
completely wide open. I am stunned.
What about a particular company that has been found to be
fraudulent? Do they remain on the list? Do they continue to
participate in the Federal contracting procurement?
Mr. Kutz. Well, I would not say fraud. Some of these have
gone through a bid protest process at SBA. And SBA determined
that they were ineligible, but no one followed through with
suspension, debarment, prosecution, or any consequences.
So the closest we have to a prosecution would be someone
that went through a bid protest and the Small Business
Administration said you are not eligible and nothing happened.
Mr. Buyer. So the VA does not blacklist?
Mr. Kutz. No one has blacklisted any of these companies we
are aware of for this----
Mr. Buyer. How about OIG? Can you verify that?
Ms. Regan. Not as far as I know. The Debarment Committee
had only received one referral, but that went back to the
Program Office. But there have not been any debarments under
section 8127 that I am aware of.
Mr. Buyer. Wow.
Mr. Kutz. Now, we have referred all of our cases to the
relevant agencies, including the Veterans OIG along with the
Defense Department and SBA, et cetera. So our cases are now out
there and we understand criminal investigators are in the field
looking at a bunch of these cases.
Mr. Buyer. The VA is sitting there. They are going to be
testifying coming up.
But can you help explain, since you have got teams that
have done these investigations, help break this down to me? I
am a common-sense kind of guy, I hope, and I just cannot figure
it out. Why would we not be disbarring bad actors from
procurement?
Mr. Kutz. Well, we should be. And it is to protect the
government. I will give you an example of one of the cases we
have where the individual lied about being a service-disabled
veteran. They were not even a service-disabled veteran and they
got $7.5 million of Federal Emergency Management Agency (FEMA)
contracts. In that particular case, we also found in a separate
investigation we did several years ago that they lied about
trailer inspections and maintenance they were doing on trailers
for FEMA in Louisiana and Mississippi.
And so when you get to the integrity issue, the purpose of
the suspension and debarment is to protect the government. And
so these people that will lie to us about this program are
potentially going to over bill us. They are potentially going
to do other things fraudulently. And so that is why we believe
it is important.
But I agree with you. You are speaking to the choir here.
If you do not make poster children out of some of these people,
no one will take you seriously for program integrity and
enforcement here.
Mr. Mitchell. Mr. Buyer, let me ask one quick question.
Mr. Buyer. Absolutely.
Mr. Mitchell. Do we need to pass legislation for that? Is
there something already that says if you people lie or do these
things or misrepresent, does there need to be a law? Why cannot
the SBA or whoever it is that said you are not qualified, where
does the ball drop? What needs to be done then?
Mr. Kutz. Well, if I read your legislation correctly,
Public Law 109-461, you already require it for VA that if
someone misrepresents themselves to the Veterans
Administration, they are to be debarred. So you have already
written a law, I believe.
Mr. Mitchell. It is already there? It is just not being
enforced?
Ms. Regan. I believe there may be in section 8127, there is
a provision that if they misrepresented, then the Secretary of
VA can debar a vendor from VA contracts for a reasonable period
of time.
I think there is some confusion about whether or not the
standard in the law or statute is the same standard that you
have in FAR Part 9 debarment, from government procurement,
which I think has a much higher standard than
misrepresentation.
I think the issue that the Agency has been dealing with
right now is it a FAR debarment or is it a nonprocurement, or
noncontract debarment such as you would have for eligibility to
participate in a program.
So there are differences in the statutes and which rules
apply to this type of debarment. Under FAR debarment, you are
debarred to protect the Government's interest, also it may be a
short period of time.
Section 8127 debarment is a little bit broader in that
sense. So I think there are some legal problems about who has
what responsibility and what rules apply to the debarment
process.
Mr. Mitchell. I think that certainly needs to be cleared
up. But also you mentioned, Mr. Kutz, the person who did the
FEMA trailers, twice he was caught.
Mr. Kutz. Right.
Mr. Mitchell. And nothing has happened to him.
Mr. Kutz. They are still out there doing business with the
government as far as we can tell.
Mr. Mitchell. That is just not a VA problem.
Mr. Kutz. No. This is a governmentwide issue. Our look was
governmentwide. It happens that six of our ten case studied
were doing business with the Veterans Administration. But we
have seen this as going on across the government.
Mr. Mitchell. Thank you.
Mr. Buyer. Now, Mr. Chairman, you are on the right vein
when you talked about the functionality of accountability also
has synergies with enforcement.
So if the VA is not going to do these things or if, in
fact, the General Counsel has particular concerns, let me go
back to my first appeal, I would love to work with you. I will
help create a complete disbarment section and we will work with
the General Counsel, the VA and let us write the procedures. I
mean, I do not know how far you want to take this. But I think
what is this testimony here is unconscionable. It is
outrageous.
We all get upset. Remember when the veterans came back and
some veterans were pinning on medals and we got upset and said,
well, those were not medals that you earned in battle and so we
passed a law called the Stolen Valor? What is the difference?
What is the difference here if someone steps forward and claims
they are a disabled veteran so they can get contracts and
squeezing out the legitimate disabled veterans? That is stolen
valor. This is pretty outrageous.
I want to thank you for doing this kind of hearing and I
want to thank all of you for your good work and for your teams.
Please pass that word on to your teams for the good work that
you are doing here on behalf of a lot of veterans and on behalf
of our country.
Ms. Daly, the issue on miscellaneous obligations, now, this
is one, Mr. Chairman, we should not have to go with specificity
and write this type of thing. I mean, she already has outlined
this. She has already worked.
You know, the VA, my gosh, you know, the VA says here we
agree, we agree with the GAO's recommend--you know, every time
you guys go out and do your work, the VA goes we agree. Enough
is enough.
And the fact that you said in all of the 42 obligations
that you reviewed, you found no documentation of approval by
contracting officials, none, none. You know, and I love how you
wrote this about without proper segregation of duties, risk of
errors, improper transactions, and fraud, it just increases. So
the segregation of those duties and responsibilities is pretty
important.
But, Mr. Chairman, you are absolutely right. We should not
have to do this.
Mr. Mitchell. No.
Mr. Buyer. We should not have to do this. And this is
exactly something that the Administration should be doing.
I yield back.
Mr. Mitchell. Thank you.
And I want to thank all of you for what you are doing as
Mr. Buyer said.
Votes have been called for again. There are four votes. We
will recess this hearing for another 30 to 40 minutes and come
back and hear the last panel.
Thank you.
[Recess.]
Mr. Mitchell. The Subcommittee will continue its hearing.
Joining us on the third panel is Glenn Haggstrom, Executive
Director of the Office of Acquisition, Logistics, and
Construction, U.S. Department of Veterans Affairs. He is
accompanied by Jan Frye, Deputy Assistant Secretary for
Acquisition and Logistics; Ed Murray, Deputy Assistant
Secretary for Finance, Office of Management; Craig Robinson,
Executive Director of the National Acquisition Center;
Frederick Downs, Jr., Chief Procurement and Logistics Officer,
Veterans Health Administration; and David Canada, Senior
Procurement Analyst for the Center for Small Business
Utilization, Office of Small and Disadvantaged Business
Utilization (OSDBU).
I thank you all for being here, and we will start with you,
Mr. Haggstrom.
STATEMENT OF GLENN D. HAGGSTROM, EXECUTIVE DIRECTOR, OFFICE OF
ACQUISITION, LOGISTICS, AND CONSTRUCTION, U.S. DEPARTMENT OF
VETERANS AFFAIRS; ACCOMPANIED BY JAN R. FRYE, DEPUTY ASSISTANT
SECRETARY FOR ACQUISITION AND LOGISTICS, OFFICE OF ACQUISITION,
LOGISTICS, AND CONSTRUCTION, U.S. DEPARTMENT OF VETERANS
AFFAIRS; ED MURRAY, DEPUTY ASSISTANT SECRETARY FOR FINANCE,
OFFICE OF MANAGEMENT, U.S. DEPARTMENT OF VETERANS AFFAIRS;
CRAIG ROBINSON, EXECUTIVE DIRECTOR, NATIONAL ACQUISITION
CENTER, U.S. DEPARTMENT OF VETERANS AFFAIRS; FREDERICK DOWNS,
JR., CHIEF PROCUREMENT AND LOGISTICS OFFICER, VETERANS HEALTH
ADMINISTRATION, U.S. DEPARTMENT OF VETERANS AFFAIRS; DAVID
CANADA, SENIOR PROCUREMENT ANALYST, CENTER FOR SMALL BUSINESS
UTILIZATION, OFFICE OF SMALL AND DISADVANTAGED BUSINESS
UTILIZATION, U.S. DEPARTMENT OF VETERANS AFFAIRS
Mr. Haggstrom. Mr. Chairman, Ranking Member Roe, and
Members of the Subcommittee, thank you for today's opportunity
to update and discuss with you acquisition operations at the
Department of Veterans Affairs.
Today I am accompanied by Mr. Jan Frye, VA's Deputy
Assistant Secretary for Acquisition and Logistics; Mr. Ed
Murray, Deputy Assistant Secretary for Finance, Office of
Management; Mr. Craig Robinson, Executive Director of VA
National Acquisition Center; Mr. Frederick Downs, Jr., Chief
Procurement and Logistics Officer for the Veterans Health
Administration; and Mr. David Canada, Senior Procurement
Analyst, Office of Small and Disadvantaged Business
Utilization.
As VA's Acting Chief Acquisition Officer, I believe there
is much good news to report and we will start today by
highlighting several of VA's many accomplishments this past
year.
VA continues to transform and improve its acquisition
operations by increasing centralized decision-making and
decentralized execution in VHA.
A study of the Department's contracting offices and
processes will be completed this coming February and is likely
to result in further centralization of contracting authorities
under the Office of Acquisition, Logistics, and Construction.
Mindful of the role private industry plays and as part of
VA's transformation to a 21st century organization, we
established the Supplier Transformation Initiative. And under
the American Recovery and Reinvestment Act of 2009, over 70
percent of VA's facility-related stimulus dollars have been
spent with veteran-owned small businesses.
VA made great strides in the last year to recruit and
retain a professional acquisition workforce by establishing the
VA Acquisition Academy which several HVAC staff members have
visited, growing the contract specialist workforce to over
1,400 full-time employees, and we will begin an Acquisition
Core Development Program in 2010.
We established the VA Technology Acquisition Center to
provide dedicated contracting support to the Office of
Information and Technology (OI&T) and developed an acquisition
process to support OI&T's program management accountability
system.
We have introduced a procurement governance process
establishing the VA Senior Procurement Council and as part of
VA's acquisition transformation, implemented other positive
steps to create and maintain an effective, integrated,
department-wide management capability.
In 2009, VA began conducting acquisition assessments under
the Office of Management and Budget's (OMB's) Circular A123,
Management, Accountability, and Control, and established a
requirement for the use of integrated product teams and
contract review boards to minimize contracting risks.
There is an indication our changes have made a difference.
In fiscal year 2009, 220 protests were lodged against VA. All
but one of these protests has been decided and only one was
sustained. These numbers are especially impressive given VA
conducted over 230,000 acquisition transactions in fiscal year
2009.
VA remains the Federal leader in contracting with veteran-
owned small businesses. The veteran's first contracting program
final rule was published in the Federal Register on Tuesday,
December 8, 2009.
Tentative data for fiscal year 2009 shows VA spent over
$2.7 billion with all veteran-owned small businesses. Nearly
$2.3 billion of that amount was spent with service-disabled
veteran-owned small businesses.
This represents over 19 percent and 16 percent of total VA
dollars reported in the Federal procurement data system and
exceeded VA's goals for these programs of seven percent and 10
percent respectively.
Last, Mr. Chairman, I mentioned at the beginning of my
testimony I serve as VA's acting Chief Acquisition Officer. VA
has sought to establish an Assistant Secretary for Acquisition,
Logistics, and Construction, but has been unsuccessful in this
endeavor. Establishment of this Assistant Secretary position is
the cornerstone of our efforts to continue transformation of
the acquisition culture at VA and provide focused political
leadership in this important area.
Such action would embrace the spirit and intent of the
Services Acquisition Reform Act of 2003, which requires the
appointment of a noncareer Chief Acquisition Officer. Your
support in establishing this Assistant Secretary position is
essential to the long-term success of VA's acquisition
operations.
Mr. Chairman, we appreciate the opportunity to discuss VA's
acquisition operations with you. My colleagues and I are
available for your questions.
[The prepared statement of Mr. Haggstrom appears on p. 97.]
Mr. Mitchell. Thank you very much.
I just have to very quickly let you know that we have just
been called for votes. There are two votes. And we will have to
continue this hearing right after that which will hopefully be
15, 20 minutes.
So this hearing is recessed.
[Recess.]
Mr. Mitchell. The Subcommittee will reconvene the hearing.
Mr. Haggstrom, I have just a couple questions. You know,
prior to the testimony you heard this morning, was the VA aware
of the misrepresentations and the fraud and the abuse that the
SDVOSB in its contracting program, were you aware of that at
all?
Mr. Haggstrom. Mr. Chairman, I did read through the GAO
report if that is what you are referring to.
Mr. Mitchell. No. Let me put it this way. Did you know
before the GAO report even came out? Were you unaware of any of
this happening until the GAO report came out?
Mr. Haggstrom. I cannot say that I particularly was
appraised of any specific instances because up to this last
summer when we started putting verification contracts in place
for OSDBU to go out and begin the verification process, it was
a self-declaring program where the veterans themselves said
this is my eligibility. And so we relied to a great extent on
the self-declaration process of what the veterans had told us.
Mr. Mitchell. Can you explain how the VA certified a firm,
and maybe you just did, their eligibility that has no
employees, no assets, and no legitimate business location?
Mr. Haggstrom. Sir, if I could refer that to Mr. David
Canada. He is part of the OSDBU Office, which is responsible
for the certification process within the Department.
Mr. Mitchell. Who is ultimately responsible for all this?
You?
Mr. Haggstrom. The Secretary is, sir.
Mr. Mitchell. The Secretary?
Mr. Haggstrom. Yes.
Mr. Mitchell. Okay.
Mr. Canada. Well, sir, I think what I would like to do is
take the specifics back so we can research it on these specific
firms that were identified today.
Mr. Mitchell. So you were not aware of any of this
happening either until this report?
Mr. Canada. Well, these specific instances, no. I mean, I
do know that there have been some cases made in the past of
different firms at the Center for Veterans Enterprise that they
had been removed from this database.
Mr. Mitchell. So I assume the next question I am going to
ask will be the same answer. You know, can you explain how the
VA certified a construction firm with only five employees as
eligible with a firm that received over 30 contracts in 9
States, including a $7 million contract for janitorial
services? I assume the answer is the same, you did not know
anything about it and you are going to study it?
Mr. Canada. Well, these particular cases, we would like to
go back and study them, yes, sir.
[The VA subsequently provided the following information:]
VA's Center for Veterans Enterprise (CVE) conducts its
verification program according to statutory criteria specified
in Title 38, United States Code, section 8127(f)(4). This
provision requires VA to verify that small business concerns
listed in the database are owned and controlled by Veterans,
and that Veteran owners asserting a service-connected
disability are in fact service-disabled.
To carry out this requirement, VA regulations define and
authorize collection of information to document direct and
unconditional ownership (38 CFR Sec. 74.3), control of day-to-
day management and long-term planning (Sec. 74.4) and Veteran
and service-disabled Veteran status of applicants (Sec. 74.25).
Not having employees and operating out of the owner's home
are not, in themselves, grounds for questioning a firm's
legitimacy as a service-disabled or Veteran-owned small
business (SDVOSB or VOSB). The vast majority of small
businesses have no employees and are operated solely by their
owners. In its 2002 Survey of Business Owners (the most recent
available), the Census Bureau found that 12.7 million (75.5
percent) of the 16.7 million businesses responding to the
survey had no employees. About half of the respondents
indicated they were home-based, and largely fell into four
industries: professional, scientific, and technical services
(19 percent); construction (16 percent); retail trade (11
percent); and other services, such as personal services, and
repair and maintenance (10 percent). These tend to be the
smallest of small businesses; as the Census Bureau reported,
64.7 percent of businesses with less than $5,000 in annual
receipts were home-based. More information on the 2002 Survey
may be found at http://www.census.gov/econ/sbo/02/cbsof.html.
Accordingly, VA's verification program does not authorize VA
to withhold verification from a firm solely on the grounds that
the firm is a home-based, owner-operated firm. Such a
requirement would exclude the vast majority of small firms from
Government contracting opportunities. Whether such firms have
the capability to perform any specific contract is another
matter--one that the contracting officer examines as part of
evaluating offers in response to a specific solicitation. The
solicitation describes the Government's requirements on a
particular contract, and the offeror's capabilities must be
evaluated in light of whether it has the capabilities to
fulfill those requirements. An owner in a home-based business
may be able to provide expert consulting for the Government on
technical matters within the owner's expertise; the same firm
likely cannot construct a multi-million dollar VA Medical
Center. This is a determination that will vary from contract to
contract and is not a determination that can be made, or even
known, at the time a firm seeks verification from CVE.
Of the 10 businesses identified in the GAO report, only two
of those submitted an application (VA Form 0877) for VA's
Verification program. Below, we have outlined the steps in
these two cases.
Corners Construction (Case 2) initially applied for
Verification on December 2, 2008. Using the Beneficiary
Identification Records Locator Subsystem (BIRLS), CVE confirmed
that one of the two owners was an eligible service-disabled
Veteran. The VA Form 0877 stated that she owned 51 percent of
the firm and that the second owner was a non-Veteran and owned
49 percent of the firm. VA CVE conducted a full verification
examination and determined that the service-disabled Veteran
owner was not controlling and managing the firm, but the non-
Veteran minority owner was really controlling the firm. This
decision was made after reviewing the firm's General
Partnership Agreement which indicated that the minority
business owner, a non-Veteran, provided the ``capital
investment and the credit for the business.'' This violates the
requirement that the business be controlled by one or more
service-disabled Veterans.
On December 16, 2008, VA CVE dispatched a letter to the
service-disabled Veteran owner notifying her that the firm,
Corners Construction, did not meet the requirements for
inclusion in the Verification program and the application was
denied. On December 31, 2008, VA CVE received a timely request
for reconsideration of the denial from Corners Construction. In
the request for reconsideration, Corners Construction
satisfied, in written documentation, all the discrepancies
noted in the initial denial letter. Prior to the decision to
approve Corners Construction, the file and details of the
request for reconsideration were reviewed by VA's Office of
General Counsel (OGC) for compliance with our regulatory
guidelines. OGC agreed that Corners Construction corrected its
deficiencies and the business was approved.
However, this business is now past the 1-year verification
period and is no longer verified. They have submitted a
Verification renewal application and VA CVE has conducted an
on-site examination for this business as part of its
Verification examination. CVE is also reviewing a SBA status
protest decision dated March 26, 2010, that determined that
Corners Construction does not qualify as a SDVOSB because the
Veteran does not exercise required ``control'' of the concern.
They will not be put back in the database until it is proven
that they are in full compliance.
It is possible, even though a verified business meets the
criteria for eligibility as far as Veteran status, ownership,
and control for the VA Verification program, they may not meet
other contract requirements. The nature of the fraud GAO
identified regarding Corners Construction is an example of a
contractor's failure to conform to contract requirements (i.e.,
performance fraud). The contractor agreed, in the terms of the
contract, that at least 50 percent of the cost of personnel for
contract performance work would be incurred by the firm's own
employees or those of another SDVOSB. This requirement is a
clause in the contract, similar to that in the Federal
Acquisition Regulation (FAR), at 52.219-27(c)(1). This
information is submitted by the contractor when it submits its
contract proposal, and is reviewed during the technical
evaluation of that proposal.
During contract performance, the commitment is monitored by
the contracting activity's daily oversight of the contractor's
work. When the contracting officers became aware of these
concerns, they assessed each contract to determine the
ramifications of early termination. A determination was made
that it would be in the best interest of the Medical Centers to
allow Corners to fulfill the current performance period;
however, no option years would be exercised.
The fraud cited by GAO in this case was performance fraud.
FF&E Office Solutions, Inc., (Case 10) initially applied for
Verification on April 23, 2009. Using the Beneficiary
Identification Records Locator Subsystem (BIRLS), CVE confirmed
that one of the two owners was an eligible service-disabled
Veteran. The VA Form 0877 stated that he owned 95 percent of
the firm and that the second owner was a non-Veteran and owned
5 of the firm. VA CVE conducted a full verification examination
and determined that the service-disabled Veteran owned business
met the requirements for inclusion in the Verification program
and the application was approved on August 5, 2009.
The fraud cited by GAO in this case was performance fraud.
Mr. Mitchell. And Mr. Haggstrom. In your testimony, you
state that the VA is setting records for spending in veteran-
owned small businesses and that the VA awarded 11.76 percent of
its contract dollars to SDVOSB and all of this.
Have you validated any of this? I know you have said this.
Has anybody validated what you just told us?
Mr. Haggstrom. These are validated, sir, not only through
the Small Business Administration on what we do, but also
through FPDS, the Federal procurement data system, which is the
enterprise data system for procurement actions in the Federal
Government.
Mr. Mitchell. Do you think we need to pass any more laws to
keep this from happening?
Mr. Haggstrom. Sir, I believe that what we have with P.L.
109-461 and the processes that we are attempting to put in
place right now are adequate. We do have to do the due
diligence and the backup to ensure that what we are looking at
is the correct thing and will, in fact, validate the fact that
the veteran is the majority owner of the firm, that they have
the day-to-day operations, and that they are employing the
correct percentage of veterans whether it be in a services area
or construction area in order to do that work and not have it
just as a pass-through. I believe they are in place to do that.
Mr. Mitchell. You know, in panel number two, they talked
about the person who had the FEMA trailers. Twice, you know, he
was ineligible twice and he is still on the list.
Do you audit any of this stuff at all?
Mr. Haggstrom. Sir, I was not aware of that particular
example. I cannot speak on behalf of FEMA and how their
contracting shop handled that. I can only try to speak on
behalf of VA and what we would do in that particular
circumstance.
Mr. Mitchell. Mr. Murray, in Ms. Daly's testimony, she was
talking about all the miscellaneous obligations. And some of
that were obligations like cars, furniture, scientific
equipment.
Are there problems continuing to put all this kind of stuff
in miscellaneous?
Mr. Murray. To answer your question, sir, the Chief
Financial Officer (CFO) organization put a number of controls
in place after the GAO report was issued that contain very
strong policies signed by our Deputy Secretary requiring four
levels of separations of duties to approve a miscellaneous
obligation.
We also have audit organizations reviewing the use of
miscellaneous obligations in the field. Our management quality
assurance service under the CFO and VHA's fiscal quality
assurance managers group are reviewing miscellaneous
obligations and have reported those results to GAO as well as
to VA management. During field facility visits, we make
recommendations for corrective actions.
In addition, through our financial management system
starting in this fiscal year 2010, we can identify which
obligations are related to a purchase order and which
obligations are related to a 1358. We have also provided
compliance reports to facilities so they can look at
separations of duties themselves to make sure they have certain
required fields like contract number, vendor, and purpose
filled out when they do issue a 1358.
We believe as Ms. Daly said, we are moving very strongly to
implement detective controls, but, believe there is more work
to be done.
Mr. Mitchell. Now, just one question about that. All of
these sound very good and I think after looking at the GAO
report, you think that that is the right thing to do. But all
of you have been with the VA for a while.
And did it ever occur to you that these were things that
should be in place before or does somebody have to come in and
look over your shoulder? You do not have to answer that.
One last question because I have gone over my time. What is
the biggest, and this is to Mr. Robinson, what is the biggest
complaint you hear from veteran small and disabled business
owners?
Mr. Robinson. Generally, I think despite what we do as it
relates to outreach and our willingness and ability to award
those businesses, there is always the feeling that we can do
more. I think that is definitely a feeling that comes from the
veteran-owned businesses and from the service organizations
that represent those businesses.
Mr. Mitchell. Thank you.
Mr. Roe.
Mr. Roe. Thank you, Mr. Chairman.
I want to just start by asking a couple of questions to
anyone here. When these benchmarks of a certain percent of
seven or 10 percent of VA owned and disabled veterans, is there
any financial incentive for the people at the VA to meet those
benchmarks?
Mr. Haggstrom. No, sir, there is not.
Mr. Roe. It is not for, you know, for a bonus or is that
when the VISN is looking at you? I know you have certain
criteria you have to meet when you are bonused money because we
have been over those bonuses in the past. And is this any part
of the bonus criteria?
Mr. Haggstrom. As far as I know, these are not of, in part
currently, of the performance work plans that are put in place
for employees. There has been some discussion about putting
something like this in place so that our employees understand
what our goals are for our socioeconomic targets. But as far as
an incentive or does their bonus depend on this, not to my
knowledge.
Mr. Roe. Okay. Well, the reason I ask the question is that
when you have seven to 10 percent, in the seven to 10 percent
are people who should never have gotten the contracts to begin
with.
These are people, we just heard in the previous testimony
an hour or so ago about literally hundreds of businesses and
contracts that may have kept eligible veterans out. So that
goes into the seven or 10 percent that you have presented to
us.
So how do you know that information that you have given us
is accurate when it had not been audited?
Mr. Haggstrom. The only way I can address that, sir, is
because of where we were in terms of the self-certification
process up to this past summer where we have started the actual
verifications is that we rely on those individual firms for
that self-certification and that is what our data mining is
based on.
Mr. Roe. So basically it was just self-verifying is what it
amounted to?
Mr. Haggstrom. That is correct.
Mr. Roe. So you think the guy down there in the house and
his wife that was doing the furniture, the double deal, was
going to self-certify that he was out of compliance? I do not
think so.
Mr. Haggstrom. Well, certainly I would agree with you.
Mr. Roe. And that is what I am saying is this data, I
cannot, I mean, I cannot--not that I am saying I cannot. The
numbers are what they are. I just think they may be inaccurate
because of the self-verification that we have had.
Now, maybe since you have started verifying, we will get
some better data. But, anyway, on to something else.
What happens and why when we found out that these folks
have not been the businesspeople that they should have been to
qualify for this, why are they still on the list? Why are they
still doing business with the Federal Government?
Mr. Haggstrom. Well, with regard to what the gentleman from
GAO talked about this morning, that was the first time that I
have ever heard the names of those vendors. We have read the
report, but in the report, I did not recall seeing any of
those, the names of the vendor where we could go out and
investigate. And we will go out and investigate if, in fact, VA
has done business with them and they----
Mr. Roe. Well, VA has done business with them. I mean, we
just heard testimony with the names of the companies. The VA
certainly has done business with them. And you will not know
because we do not know how many should not be doing business
with the VA.
I do not know whether you share my frustration or not. And
none of these businesses have been turned down. And if they
are, what is the penalty? I mean, this is like I have got a
free rein to rob the bank and there is no penalty for it. I can
just come back to the bank again next year.
Mr. Haggstrom. In the rule that was published this past
week in December, there are provisions that the Secretary may
take in order to preclude businesses that misrepresent
themselves as an SDVOSB or a VOB to be removed from that and
not be able to do business with VA.
Mr. Roe. Since last summer when you all started doing a
little bit better monitoring, did you ask the GAO for these
names of companies or did you not know about that?
Mr. Haggstrom. I did not know. The report was just
published in November as far as I know.
Mr. Roe. So today was the first time you knew anything
about it?
Mr. Haggstrom. Today was the first time I had heard the
names of the companies out there.
Mr. Roe. Okay. But you did know before?
Mr. Haggstrom. I did know of the report.
Mr. Roe. Okay. But----
Mr. Buyer. Will the gentleman yield?
Mr. Roe. Yes, I will yield.
Mr. Buyer. Did you ever bother to ask the GAO for the names
of the companies?
Mr. Haggstrom. Sir, we have been trying to get those names
for the past several days and were unsuccessful in getting
those names.
Mr. Roe. Why were you unsuccessful?
Mr. Haggstrom. Sir, my staff has been trying to find the
contact for those and we were unsuccessful in getting anybody
to be able to provide us the specific names of the companies
that were referenced in those ten examples.
Mr. Roe. I think after today, we ought to be able to do
that.
Mr. Haggstrom. And we will. And we will work with our
General Counsel on that.
Mr. Roe. I will yield back my time, Mr. Chairman.
Mr. Mitchell. Mr. Buyer.
Mr. Buyer. I am going to reask a question that was just
asked in a different manner. So you said that bonuses are not
taken or, actually, if contracting officers exceed the 3-
percent threshold that that in no way takes into account
whether they receive a bonus or not.
What happens to contracting officers that do not meet their
3 percent? Maybe they blew it off and were only at one or 2
percent. What happens in their reviews then?
Mr. Haggstrom. Sir, I cannot answer that because of the way
the individual performance work plans are crafted by the
respective Administration and those supervisors.
But I would think it would be a fair indication, even
though there may be some anomalies here because of the self-
certification, when you look at a 16 and a 19 percent, which is
well above the Federal mandate of 3 percent and above the
Secretary's established goals of seven and 10 percent, there is
a conscious effort on our contracting officers to, in fact, go
out and seek veteran-owned business and service-disabled owned
businesses to do business with.
Mr. Buyer. You cannot cheerlead numbers. If the numbers are
embellished because contracts go to illegitimate companies, do
not cheerlead the numbers. Maybe that is part of the leadership
that is going to be required within the VA. That is not what
our intent is. That is not Congressional intent. That should
not be the intent of even the VA.
The intent should be how do we get contracts to legitimate
disabled veteran-owned companies. That is what we want to do.
This pass-through, this scheme, these frauds that are going on,
none of us want that. You guys do not want that either. There
is no way. You guys have invested too much of your lives to
care for veterans for you to really want that.
Mr. Canada, let me ask you, who is your boss?
Mr. Canada. Gail Wegner, sir.
Mr. Buyer. Where is she?
Mr. Canada. My understanding is she had an urgent family
issue to deal with today.
Mr. Buyer. You know what we call that in Congress? You are
the sacrificial lamb today. That is all right. You do not have
to answer. I think you are. So I get to ask you the tough
questions, huh?
So based on the GAO report, give me your personal opinion,
so you do not get in trouble with your boss, okay, would you
agree that the lack of an active verification program that
relies solely on self-verification is allowing businesses that
do not meet the requirements of Public Law 109-461 to take
contracts away from legitimate, qualified disabled veteran-
owned small businesses?
Mr. Canada. Well, certainly that has happened in some
cases. Businesses in the VA's vendor information page database
self-represent, may self-represent their status just as they do
in the Government central contractor registration database and
the online reps and certs database.
As the GAO report identified, self-representation of status
does create opportunity for fraud for unscrupulous contractors.
The VA has a unique procurement authority that enables us to
officially verify ownership and control of veteran-owned small
businesses seeking to sell to the VA and to our large prime
contractors.
The VA has initiated the official verification program in
May 2008. On December 8, 2009, the VA revised its acquisition
regulation to inform the public that verification will become a
requirement on January 1, 2012.
Mr. Buyer. 2012?
Mr. Canada. Yes, sir.
Mr. Buyer. 2012?
Mr. Canada. Yes, sir.
Mr. Buyer. Which means we are going to rely on self-
verification for the next couple of years? Is that what that
means?
Mr. Canada. Well, firms can request the verification. It is
not going to become mandatory until that date. They have
contractor----
Mr. Buyer. Which means in the field, in the field, these
companies that have been scheming and doing fraudulent
practices will continue to do this on a self-verification
process through 2012 even though you sat here today and learned
and have read the GAO and OIG's testimony and read the reports?
Mr. Canada. Well, certainly those companies identified will
be looked at at this point.
Mr. Buyer. Okay. Great. We could send the GAO back out. We
could send the OIG back out. And guess what? They are going to
give you another 20. They are going to give you another 30.
This is about getting off the heels and on your toes. This
is an awareness now that there are frauds and schemes that are
actually happening today. So from my perspective, and I do not
want to speak for my colleagues here, I do not think we are
going to be very satisfied with 2012. This ought to be an
immediate change in a system. Yes, no?
Mr. Canada. Well, there is a logistical issue of backlog
and catching up and the contractor support is really part of
the reason it could not be immediate.
Mr. Buyer. I do not get it. I do not understand why it
cannot be immediate.
Mr. Canada. There is a process to do the verifications, man
hours and site visits and processes that they go through.
Mr. Buyer. If you need a pass, okay, if you need a pass
from us, if you need a pass from the Secretary on some 3-
percent requirement, we would be more than happy to give you a
pass until you can actually implement a system that prevents
the schemes and the frauds from occurring because we know that
the payoff in the end is going to be best practices.
Would you agree with that?
Mr. Canada. Yes, sir.
Mr. Buyer. I must be missing something here, Mr. Chairman.
My gut here is that 2012 is not an acceptable time frame here.
That is just my read on this.
Gentlemen, you have the reports. You have got the GAO. I
think we have to move out smartly. And I assure you I do not
want to be beating you up. We just recognize these are programs
that have been created. People are gaming the system out there
and we want to correct this as soon as possible. And I think
that is going to be the position that we should be taking.
And, Mr. Chairman, I applaud your questions. This is going
to be one of these issues whereby how prescriptive do we need
to be.
And we would like to meet you in the middle. He asked you a
very legitimate question. What can you do administratively
through the executive function of Government that you do not
need for us, quote, to legislate? This may be a moment where
you need to turn to your General Counsel's Office and say what
changes, if any, are necessary legislatively. If we can do this
in-house, then proceed smartly, move out. I mean, that is what
you have in your military background.
And, Mr. Chairman, that might be exactly where we are. We
want to be able to meet you in the middle here so we can have
the best contracting procurement system because we know that
this is--if this is what is happening here, we know this has
got to be happening on our 8(a) and other types of set-aside
programs.
With that, I will yield back.
Mr. Mitchell. Thank you.
You know, one of the things that bothers me is that what
these people have been doing, they actually have been stealing.
They are getting money that they were not entitled to. And they
are doing this all under our noses. That is the frustrating
thing. Not that we did not get service for our dollar, the
cleaning out there. But they were not entitled to that. And
there are all these people out there getting money that were
not entitled to it and it was not going to who it should have
gone to.
One of the things that I have found being here, that making
laws, of course, is the main function of Congress, but I have
found that right up there, right next to it oversight and
making sure that the laws that we do pass are being carried out
in the way that we intended.
And I can assure you this is not the last hearing. I would
expect, and I think the Ranking Member would also expect that
when we come back, we will see a whole different approach to
this than what we have seen today.
If there is nothing else--
Mr. Buyer. May I?
Mr. Mitchell. Yes.
Mr. Buyer. I do not know all of you on the panel. Mr.
Downs, Mr. Frye, I have worked with you in the past. And, you
know, I have got legislation out there. I have spoken with the
Secretary and I want to work with the VA on how we make this
right.
And I know you guys from the past. We want to fix this in a
manner that makes it accountable. We can address the
miscellaneous accounts issues. And I know that the Secretary
has signed off on the GAO report.
But I really at a very personal level, gentlemen, you know,
let us have a meeting of the minds here between our legislative
package and what you believe you can do through the executive
function and let us get this done. Let us do it right. That is
my personal appeal to you.
I yield.
Mr. Mitchell. Mr. Roe.
Mr. Roe. Just to comment. There are six of you all sitting
there and there is not one of you out there that wants this
going on the way it is. I absolutely believe that. And I think
you want it done. There is a law out there. You want it done
right. I know good and well that is a fact.
And I think what Mr. Buyer and what the Chairman is saying
is that we want to see that happen because we do want to see
the resources get to the people and ultimately we want the
services to the veterans that we are here to serve.
And sometimes if we are losing resources to people who are
doing it fraudulently, then those resources are not only being
taken from the taxpayers who are paying the bill but they are
also not getting to the intended veteran that we want to serve.
And as I said, I know you all are professional people and
you have served this country honorably in many ways. And I want
to see you put those assets and resources into making sure this
is done right.
This is embarrassing. When I go home and see the VA in my
own district, I mean, it is not 2 minutes from my house where
the VA is; it will be embarrassing to tell people the story if
I am asked this in our local media.
I mean, there is a lot of skill sitting right out in front
of me right now. I know that. Let us put those years of
experience and skill together for making this right and getting
the resources to where it needs to be.
I thank you for being here today and exposing this, but
this is a shock to me to see actually how bad this process is.
And I agree with Congressman Buyer. I do not think we need to
wait 2 years.
And I also appreciate that from reading this material last
night that manpower may be an issue as you pointed out, and I
think that may be where we have understaffed something. And I
notice the amount of money that you save for the amount of
money you spend in oversight is considerable. I think $38 to
$50 to $1.
So I would encourage you to do that, and I thank you for
being here.
And, Mr. Chairman, the rest of the Committee, and the staff
especially, let us not forget what time of the year it is.
Merry Christmas to everyone.
Mr. Mitchell. That concludes this hearing.
[Whereupon, at 2:36 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Prepared Statement of Hon. Harry E. Mitchell, Chairman,
Subcommittee on Oversight and Investigations
I would like to thank everyone for attending today's Oversight and
Investigations Subcommittee hearing entitled, Acquisition Deficiencies
at the U.S. Department of Veterans Affairs. Thank you especially to our
witnesses for testifying today.
We are here to examine the U.S. Department of Veterans Affairs
acquisition system and procurement structure. Our hearing will
hopefully determine the extent of the reform needed in order to ensure
that the acquisition process within the VA is one that is fair,
fiscally responsible, and effective. And, most importantly, serves
veterans.
We all know that the acquisition system within the Department of
Veterans Affairs has failed to develop a process that is both
transparent and fiscally responsible. One recent report, produced by
the U.S. Government Accountability Office revealed that Network and
Medical Center staff within the Veterans Health Administration failed
to use the Federal Supply Schedule or FSS, due to a lack of information
and the proper tools needed to use the FSS. This resulted in a lost
savings of almost $8.2 million a year or $41 million over 5 years. This
is simply unacceptable.
Several VA Office of Inspector General and Government
Accountability reports have detailed major deficiencies within the
procurement process at the VA, citing prolific material weaknesses, and
how Small Disabled Veteran Owned Businesses are being cheated out of
millions of dollars in contract opportunities each year due to a lack
of sufficient oversight. Just last month, the GAO released a report on
the Service-Disabled Veterans-Owned Small Business Program showing a
fragmented structure within the VA, and a lack of oversight of
companies claiming Service-Disabled Veterans-Owned Small Business
status. Fraud and abuse has allowed ineligible firms to improperly
receive millions of dollars in set-aside and sole-source contracts,
potentially denying legitimate service-disabled veterans and their
businesses the benefits of the veteran small business program. With the
ineffective oversight and lack of effective fraud prevention controls,
these ineligible firms have received almost $100 million of contracts
over the years.
It is no secret that there are major deficiencies within VA's
procurement process, and to blame are a number of things, including a
lack of a centralized acquisition structure, self policing policies in
place that allow fraud and abuse, and continuous material weaknesses.
Although I remain fairly optimistic that reform of this system can be
accomplished, legislation to fix these problems may be necessary, along
with change in policy and procedures. I am grateful that the GAO as
well as Service-Disabled Veteran-Owned Small Business owners and
entrepreneurs are here today to shed light on issues such as these.
Prepared Statement of Hon. David P. Roe, Ranking Republican Member,
Subcommittee on Oversight and Investigations
Mr. Chairman, thank you for yielding.
Today's hearing, entitled ``Acquisition Deficiencies at the U.S.
Department of Veterans Affairs'' is important to this Subcommittee, as
it will help us as we move forward to assist the Department in guiding
it through to better management of its procurement and acquisition
processes.
The Department of Veterans Affairs (VA) is one of the largest
procurement and supply agencies in the Federal Government. Its annual
expenditures are more than $14.1 billion for supplies and services,
including construction. Drugs, medical supplies and equipment, IT
equipment and services, and other critical patient care items must be
procured and distributed to VA's health care facilities in what is the
largest health care delivery system in the country. Over the past 12
years, the VA and the Office of Inspector General have detailed what
can be considered the existence of serious long-term severe systemic
procurement problems within the VA.
Last Congress, this Subcommittee held a hearing on Miscellaneous
Obligations which highlighted how difficult it is to track expenditures
at the VA without proper oversight and guidance. From reading the
hearing report from that hearing, it was apparent the frustration felt
by all Members present with the brokenness of the acquisition process
within the VA. I understand that the Department followed this hearing
by providing its acquisition workforce with new rules and procedures
regarding the use of Miscellaneous Obligations. I will be interested to
hear from the Department how well these new rules are being
implemented. I hope that there is improvement in tracking these
expenditures since the last hearing.
Additionally, the Government Accountability Office (GAO) issued a
report showing ``fraud and abuse'' within the Service-Disabled Veteran-
Owned Small Business program. The findings are extremely disturbing,
and I look forward to the testimony from GAO relating to this report,
and to see if they have any further recommendations to fix these
fraudulent practices, and make certain that contracting officials who
knowingly allow this are held accountable.
I was pleased to join with Ranking Member Buyer last week in
introducing H.R. 4221, the Department of Veterans Affairs Acquisition
Reform Act of 2009. I understand that Mr. Buyer will discuss his bill
further this morning, and look forward to working with him and other
Members of this Committee to help Secretary Shinseki fix the
acquisition process at the Department of Veterans Affairs. Holding this
hearing is an important step in this direction. Moving forward
legislatively will also be an additional step we can take, and I look
forward to working with you, Mr. Chairman in this effort.
Again, thank you for holding this hearing, and I yield back my
time.
Prepared Statement of Hon. Timothy J. Walz
Chairman Mitchell, Ranking Member Roe; Members of the Subcommittee;
thank you for calling this hearing today; thanks also to our witnesses
from the Department of Veterans Affairs, the Government Accountability
Office, and the private sector from being here today to share their
insight and experience on this issue.
I realize that this is not the first time this body has met to
discuss the issue of VA procurement, and unfortunately, I do not suffer
under the illusion that it will be the last.
Given the scope of the problem, which is literally in the billions
of dollars, I think it is clear that this is an issue which requires
extraordinary measures to address--certainly well beyond those that
have been attemted over the course of the previous decade during which
this has been acknowledged problem. To that end, I appreciate the work
the proposal that Ranking Member Buyer has put forward, and I look
forward to working with him to advance that idea.
For the most part, we come at the issue of procurement reform from
the good governance angle: we want to fulfill our duties as stewards of
the taxpayers' money, and we want the government to effectively deliver
the services that it is our democratic responsibility to deliver.
But more importantly, we need to remember that every dollar
mismanaged or misspent by the Department of Veterans Affairs is a
dollar that will not be spent treating a service-related injury,
providing benefits to surviving spouses and children, or ensuring a
deceased veteran receives a proper burial.
So I look forward to hearing from our witnesses about my progress
that has been made in the area of procurement reform, and with that I
yield back my time.
Prepared Statement of Hon. Steve Buyer
Thank you for yielding me time, Mr. Chairman.
I appreciate the Subcommittee on Oversight and Investigations
holding this important hearing on acquisition reform. When I was
Chairman of this Subcommittee, we reviewed a number of issues relating
to acquisition at the Department of Veterans Affairs, including the
VA's own Task Force on Acquisition Reform. What came out of the
hearings we held and the investigations conducted by the VA's own
Inspector General's office, the General Accounting Office and VA's
Procurement Reform Task Force ordered by Secretary Principe in 2001,
was the strong sense that acquisition procedures at the VA were broken,
fragmented and disorganized.
Ranking Member Roe in his opening statement alluded to the hearing
you held last Congress on July 31, 2008, on Miscellaneous Obligations.
That hearing only served to further emphasize the fact that without
proper oversight, funds that could be used to better serve our Nation's
veterans were being wasted on broken procurement practices with little
or no oversight review. The frustration of all the Members on both
sides of the aisle at that hearing was loud and clear, and it was
obvious that action was needed then to address the problems of
acquisition at the VA.
To its credit, VA commissioned an $800,000 plus Price Waterhouse
Cooper study to see how dysfunctional and broken the acquisition
process was at the VA. This study offered three options. The VA
selected the option that would create the least push back from the
bureaucracy, and sent to last Congress a legislative proposal that
would create an Assistant Secretary of Acquisition, but it did not
provide any further direction or solution to respond to the universal
complaint throughout the VA that glaciers move faster than its
contracting process.
So, I started working on legislation to change the way VA conducts
its acquisition business. My staff and I spoke with industry experts,
GAO and VA IG to formulate a way to fix broken acquisition services at
the VA in order to create better accountability. I also discussed this
issue with Secretary Shinseki who acknowledged that it was imperative
for VA to change its procurement system to expedite the many
transformational ways VA does business, and I shared a draft of the
bill with him.
Last week, I was joined by several other Members of this Committee
in the introduction of H.R. 4221, the Department of Veterans Affairs
Acquisition Improvement Act of 2009. Like the administration drafted
bill introduced last Congress by Senator Akaka, this new bill creates a
new Assistant Secretary position, the Assistant Secretary for
Acquisition, Construction and Asset Management, who will serve as the
Chief Acquisition Officer for the Department of Veterans Affairs. Our
bill also builds the Acquisition workforce structure through the use of
Deputy Assistant Secretaries aligned to VA's business lines, and a
Principal Deputy Assistant Secretary.
The bill further requires the Secretary to establish and maintain a
comprehensive Department-wide acquisition program under which the
Secretary will develop, implement, and enforce a streamlined approach
to entering into contracts and purchasing goods and services. The
legislation would thereby provide better oversight and accountability
for procurement at the Department of Veterans Affairs.
One of the key points that came out of the Industry Acquisition
Roundtable I held on October 27th was the strong need for a well-
trained acquisition workforce. This legislation would provide the
direction needed to put in place and keep a workforce that is
knowledgeable and able to provide acquisition and contracting services
to the Department. The bill also reorganizes VA's disparate and
dysfunctional procurement, construction and asset management processes
into distinct entities with contracting expertise.
Mr. Chairman, H.R. 4221 is a first step to provide a centralized
oversight and policy for contracting and acquisition within the
Department by streamlining the business operations under an Assistant
Secretary. It is my hope that we can work together to improve this
bill, and create an acquisition model that can eventually be followed
by other agencies, because VA's acquisition problems are in fact
governmentwide.
Prepared Statement of Scott H. Amey, Esq. General Counsel,
Project On Government Oversight
Thank you for inviting me to testify today. I am the General
Counsel of the Project On Government Oversight, also known as POGO.\1\
POGO was founded in 1981 by Pentagon whistleblowers who were concerned
about weapons that did not work and wasteful spending. Throughout its
28-year history, POGO has worked to remedy waste, fraud, and abuse in
Government spending in order to achieve a more effective, accountable,
open, and ethical Federal Government. POGO has a keen interest in
Government contracting matters, and I am pleased to share POGO's
thoughts with the Subcommittee today.
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\1\ For additional information about POGO, please visit
www.pogo.org.
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Many events over the past fifteen years have called into question
the effectiveness of the Federal contracting system and highlighted how
drastically the contracting landscape has changed. Contract spending
has grown tremendously, exceeding $530 billion in fiscal years 2008 and
2009; \2\ oversight has decreased; the acquisition workforce has been
stretched thin and been supplemented by contractors; and spending on
services now outpaces spending on goods. This new emphasis on services
has also increased the risk of waste, fraud, and abuse in contracts, as
it is more difficult to assess value on services than on goods. Some
acquisition reforms have significantly reduced contract oversight,
making it difficult for Government investigators and auditors to
identify and recover wasteful or fraudulent spending. These reforms
have also created contracting vehicles that often place public funds at
risk.\3\ In short, poor contracting decisions are placing taxpayer
dollars--and sometimes lives--at risk.
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\2\ FPDS-NG, Trending Analysis Report for the Last 5 Years, no date
provided. http://www.fpdsng.com/downloads/top_requests/
FPDSNG5YearViewOnTotals.xls.
FPDS-NG, List of Agencies Submitting Data to FPDS-NG, December 10,
2009.
http://www.fpdsng.com/downloads/agency_data_submit_list.htm.
\3\ The Federal Acquisition Streamlining Act 1994 (FASA) (Public
Law 103-355), the Federal Acquisition Reform Act 1996 (FARA) (Public
Law 104-106), and the Services Acquisition Reform Act of 2003 (SARA)
(Public Law 108-136) have removed taxpayer protections.
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On a positive note, interest in improving the Federal contracting
system has grown significantly in recent years. Congress created the
Commission on Wartime Contracting in Iraq and Afghanistan, which
recently released an interim report that discovered many Government and
contractor contracting processes.\4\ Additionally, the Senate and House
have created Committees to dig deep into the contracting weeds.\5\
These moves follow efforts in the two most recent National Defense
Authorization acts to improve Federal contracting.\6\
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\4\ According to the Commission on Wartime Contracting in Iraq and
Afghanistan, approximately $830 billion dollars has been spent since
2001 to fund U.S. operations in Iraq and Afghanistan. Commission on
Wartime Contracting in Iraq and Afghanistan, At What Cost? Contingency
Contracting In Iraq and Afghanistan, June 2009, p. 1.
http://www.wartimecontracting.gov/docs/
CWC_Interim_Report_At_What_Cost_06-10-09.pdf.
\5\ The Senate Committee on Homeland Security and Governmental
Affairs created the Ad Hoc Subcommittee on Contracting Oversight. The
House Armed Services Committee created the Panel on Defense Acquisition
Reform.
\6\ The 2008 and 2009 National Defense Authorization acts include
many contract-related provisions. See Pub. Laws 110-181 (January 28,
2008) and 110-417 (October 14, 2008).
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The contract oversight bug has also hit President Obama's
administration. In his first 100 days in office, President Obama issued
a contracting memorandum outlining the Government's obligation to
contract wisely by increasing competition and eliminating wasteful
spending.\7\ The President's budget also mentions concerns with risky
contract types, wasteful spending, and contracts awarded without full
and open competition.\8\ Subsequent contracting and acquisition
workforce memoranda have been issued by the Office of Management and
Budget.\9\
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\7\ Memorandum for the Heads of Executive Departments and Agencies,
Subject: Government Contracting, March 4, 2009. http://
www.whitehouse.gov/the_press_office/Memorandum-for-the-Heads-of-
Executive-Departments-and-Agencies-Subject-Government/. See Jesse Lee,
The White House Blog, ``Priorities--Not Lining the Pockets of
Contractors,'' March 04, 2009.
http://www.whitehouse.gov/blog/09/03/04/priorities_not-lining-the-
Pockets-of-Contractors/.
\8\ Office of Management and Budget, A New Era of Responsibility:
Renewing America's Promise, pp. 35, 38-39, 2009. http://
www.whitehouse.gov/omb/assets/fy2010_new_era/
A_New_Era_of_Responsibility2.pdf.
\9\ OMB, Increasing Competition and Structuring Contracts for the
Best Results, October 27, 2009.
http://www.whitehouse.gov/omb/assets/procurement_gov_contracting/
increasing_competition_10272009.pdf.
OMB, Acquisition Workforce Development Strategic Plan for Civilian
Agencies--FY 2010-2014, October 27, 2009.
http://www.whitehouse.gov/omb/assets/procurement_workforce/
AWF_Plan_10272009.pdf.
OMB, Improving Government Acquisition, July 29, 2009.
http://www.whitehouse.gov/omb/assets/memoranda_fy2009/m-09-25.pdf.
OMB, Improving the Use of Contractor Performance Information, July
29, 2009.
http://www.whitehouse.gov/omb/assets/procurement/
improving_use_of_contractor_perf_info.pdf.
OMB, Managing the Multi-Sector Workforce, July 29, 2009.
http://www.whitehouse.gov/omb/assets/memoranda_fy2009/m-09-26.pdf.
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So far, Congress and the President seem to be well on their way to
implementing contracting improvements. On May 22, the President signed
the ``Weapons Systems Acquisition Reform Act of 2009,'' which he
described as ``a bill that will eliminate some of the waste and
inefficiency in our defense projects--reforms that will better protect
our Nation, better protect our troops, and may save taxpayers tens of
billions of dollars.'' \10\ Additional contract-related legislation
moved through the Senate and the House and was signed by the President
in the National Defense Authorization Act for FY 2010.\11\
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\10\ The White House, Office of the Press Secretary, Remarks by the
President at Signing of the Weapons Systems Acquisition Reform Act, May
22, 2009.
http://www.whitehouse.gov/the_press_office/Remarks-by-the-
President-at-signing-of-the-Weapons-Systems-Acquisition-Reform-Act/.
\11\ Public Law No: 111-84, Sec. Sec. 810-848, October 28, 2009.
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Despite all of those actions, there are more improvements that are
needed. In addition to the $530 billion spent on contracts, agencies
and their stretched staffs now awarding hundreds of billions more in
Stimulus funds, which is a recipe for waste, fraud, and abuse.
Numerous Government Accountability Office (GAO) and Inspector
General (IG) reports highlight contracting deficiencies and recommend
ways to correct them.\12\ These reports have found that contract
planning, requirements definitions, contract types used,
administration, and oversight is deficient. These are the leading
reasons management of Federal contracts at several agencies remains on
GAO's ``high risk'' list.\13\
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\12\ GAO, Defense Acquisitions: Actions Needed to Ensure Value for
Service Contracts, GAO-09-643T, April 23, 2009. http://www.gao.gov/
new.items/d09643t.pdf. Treasury IG for Tax Administration, Current
Practices Might Be Preventing Use of the Most Advantageous Contractual
Methods to Acquire Goods and Services, 2009-10-037, February 10, 2009.
http://www.treas.gov/tigta/auditreports/2009reports/200910037fr.html.
\13\ GAO, High-Risk Series, GAO-09-271, pp. 77-84, January 2009.
http://www.gao.gov/new.items/d09271.pdf.
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Industry has also criticized the current system. The Grant Thornton
consulting firm's 14th Annual Government Contractor Survey, released in
January 2009,\14\ showed that cost reimbursable contracts are used more
frequently than fixed price contracts. Cost-reimbursable contracts have
also been a subject of concern for both the White House and Members of
Congress, and the survey stated that it ``is difficult to equate the
high use of cost-reimbursable contracts with the notion that the
Government is attempting to use more commercial processes to streamline
Federal procurement.'' \15\
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\14\ Grant Thornton, 14th Annual Government Contractor Industry
Highlights Book--Industry survey highlights 2008, January 26, 2009.
(Hereinafter Grant Thornton Report). http://www.grantthornton.com/
staticfiles//GTCom/files/Industries/Government%20contractor/
14th_Gov_Con_Highlights_011409small.pdf. Grant Thornton is an
international consulting company that provides services to public and
private clients.
\15\ Grant Thornton Report, at p. 8.
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Veterans Affairs Procurement Summary
Veterans Affairs (VA) is an agency that has seen its share of
growth in contract spending. VA contract jumped to $14.6 billion in FY
2008 from $3.9 billion in FY 2000--the last year complete contract data
is available.\16\ VA's contract portfolio is as follows:
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\16\ USAspending.gov, Contracts from Dept. of Veterans Affairs FY
2000-2009, as of December 10, 2009. (Hereinafter VA FY 2000-2009).
http://www.usaspending.gov/fpds/fpds.php?sortby=u&maj_agency_
cat=36&reptype=r&database=fpds&fiscal_year=&detail=-
1&datype=T&submit=GO.
1. Extent of actual competition is unknown because 54 percent
(nearly $8 billion) of the contract dollars were listed as
``Not identified.'' \17\
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\17\ VA FY 2008.
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2. Full or limited competition was used for 21 percent of the
dollars award. \18\
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\18\ VA FY 2008. The 21 percent figure includes full and open
competition, one-bid offers, and awards based on limited competition.
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3. Sole source contracts totaled nearly 12 percent (nearly
$1.7 billion).\19\
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\19\ VA FY 2008.
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4. Fixed price contracts account for over 98 percent of the
amount spent ($14.3 billion).\20\
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\20\ VA FY 2008.
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5. VA programs received a total of $1.4 billion in Recovery
Act funding, with $543 million ``paid out'' as of December 4,
2009.\21\
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\21\ Office of Inspector General Department of Veterans Affairs,
Semiannual Report to Congress April 1, 2009-September 30, 2009,
November 30, 2009, p. 61. (Hereinafter VA OIG Report). http://
www4.va.gov/oig/pubs/VAOIG-SAR-2009-2.pdf.
Recovery.gov, Agency Reported Data--Veterans Affairs, as of
December 11, 2009.
http://www.recovery.gov/Transparency/agency/reporting/
agency_reporting1.aspx?agency_code=36.
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6. Recovery Act contracts were competed 94 percent of the
time.\22\
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\22\ GAO, Recovery Act: Contract Oversight Activities of the
Recovery Accountability and Transparency Board and Observations on
Contract Spending in Selected States, November 30, 2009, p. 4.
http://www.gao.gov/new.items/d10216r.pdf.
---------------------------------------------------------------------------
7. Small business contract dollars were approximately 35
percent (nearly $5 billion).\23\
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\23\ Small Business Administration, FY2008 Official Goaling Report,
no date provided.
http://www.sba.gov/idc/groups/public/documents/sba_homepage/
fy2008official_goaling_report.html.
SBA Department of Veterans Affairs Grade Report, 2008.
http://www.sba.gov/idc/groups/public/documents/sba_homepage/
goals_08_va.pdf.
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8. Pre-award and post-award oversight potentially saved the VA
over $165 million in FY 2009.\24\
---------------------------------------------------------------------------
\24\ VA OIG Report, p. 37.
That data remains relatively consistent to VA's contracting history
from 2000 to 2008--with the aggregate totals decreasing in the ``not
identified'' competition category (36 percent), increasing in
competitive contracts (nearly 40 percent), and slightly increasing in
noncompetitive contact awards (13 percent).\25\ Remaining constant was
VA's 98 percent figure for fixed price contracts.\26\
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\25\ VA FY 2000-2009.
\26\ VA FY 2000-2009.
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Despite the large figure of contract awards where competition was
not identified, the data overall paints a relatively positive picture
of VA contracting. However, there are some VA contracting areas that
are in need of oversight and improvement.
First, VA's contract award total has increased from $3.9 billion to
$14.6 billion since 2000. That spending increase outpaces the
Government-wide figures ($200 billion in FY 2000 to $537 billion in FY
2008). Simply stated, VA is increasingly spending a lot of taxpayer
dollars on contracts for goods and services and a comprehensive review
should be conducted to ensure taxpayer dollars are being spent
wisely.\27\
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\27\ Many other Federal agencies, including Defense and Homeland
Security, are looking at their service contracts, examining the
services procured and the cost of hiring contractors. A review should
pay close attention to inherently Governmental functions and certain
services and actions that are not considered to be inherently
Governmental functions may approach being in that category. See FAR
Subpart 7.503.
https://www.acquisition.gov/far/current/html/
Subpart%207_5.html#wp1078202.
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Second, according to a recent GAO report,\28\ lax oversight
controls and fraud related to Service-Disabled Veteran-Owned Small
Business (SDVOSB) and Veteran-Owned Small Businesses (VOSB) contracts
allowed ineligible firms to improperly receive approximately $100
million in SDVOSB contracts, and an additional $300 million in
contracts set aside for other small businesses.\29\ Because there are
no requirements for improper contract awards, many of those contractors
were allowed to continue their work.\30\ The Small Business Association
(SBA), awarding agencies,\31\ and the VA verification process were all
blamed for the problem.\32\
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\28\ GAO, Service-Disabled Veteran-Owned Small Business Program--
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain
Millions of Dollars in Contracts GAO-10-108, November 19, 2009.
http://www.gao.gov/new.items/d10108.pdf.
\29\ GAO, Statement of Gregory D. Kutz, Managing Director Forensic
Audits and Special Investigations Before the House Committee on Small
Business, Service-Disabled Veteran-Owned Small Business Program--Case
Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain
Millions of Dollars in Contracts GAO-10-255T, November 19, 2009, pp. 1,
3, and 9. (Hereinafter GAO-10-255T).
http://www.gao.gov/new.items/d10255t.pdf.
\30\ GAO-10-255T, p. 3.
\31\ According to the GAO, ``VA exceeded its prime contracting
goals for SDVOSBs and VOSBs in fiscal years 2007 and 2008.'' GAO,
Department of Veterans Affairs Contracting with Veteran-Owned Small
Businesses, March 19, 2009, p. 3.
http://www.gao.gov/new.items/d09391r.pdf.
\32\ GAO-10-255T, pp. 9-11.
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Third, the Subcommittee might want to inquire about the frequency
of VA outsourcing efforts.
If VA human resource planning is tailored to hiring service
contractors rather than servicemembers, the agency is doing a major
disservice to the one constituency that it was created to assist--a
group who is struggling in the private sector. To help highlight my
concern, please consider the following employment statistics.
Currently, national unemployment figures run about 10 percent,\33\ but
the figure for returning servicemembers is approximately 12 percent and
18 percent for servicemembers who left the military in the past 3
years.\34\ Responding to those elevated rates, President Obama issued
an Executive Order intended to ``enhance recruitment of and promote
employment opportunities for veterans within the executive branch.''
\35\ VA should be doing its best to assist qualified servicemembers
find jobs with the agency rather than hiring contractor employees.
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\33\ U.S. Bureau of Labor Statistics, Employment Situation Summary,
December 4, 2009.
http://www.bls.gov/news.release/empsit.nr0.htm.
\34\ American Federation of Government Employees, VA Outsourcing
Threatens Employment Opportunities For Veterans, November 30, 2009.
http://www.afge.org/
Index.cfm?Page=PressReleases&PressReleaseID=1080.
\35\ 74 Federal Register No. 218, Executive Order 13518, Employment
of Veterans in the Federal Government, November 9, 2009, p. 58533.
http://edocket.access.gpo.gov/2009/pdf/E9-27441.pdf.
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Big Picture Contracting Concerns
Many contracting experts and Government officials blame the
inadequate size and training of the acquisition workforce for today's
problems in the contracting system. POGO agrees that workforce
reduction is a major problem, but we believe additional problems
deserve equal attention. These problems are:
1. Inadequate Competition
2. Deficient Accountability
3. Lack of Transparency
4. Risky Contracting Vehicles
I will discuss all of these issues in detail, and provide realistic
recommendations that will improve the way Federal contracts are
awarded, monitored, and reviewed. I will defer to today's other
panelists to recommend specific ways to improve contract award,
administration, project management, and contract oversight within the
VA.
Inadequate Competition
To better evaluate goods and services, and to get the best value
for taxpayers, the Government must encourage genuine competition. At
first glance, it may seem that Federal agencies frequently award
contracts competitively. For example, the Department of Defense (DoD)
claims that 64 percent of its contract obligations were competitive in
2008,\36\ and Federal contracting data shows that the Department of
Homeland Security competes approximately 70 percent of its
contracts.\37\ These numbers, however, do not tell the entire story.
The ``competitive'' label includes contracts awarded through less than
full and open competition, including competitions within a selected
pool of contractors, offers on which only a single bid was received, or
a follow-on contract to a previously competed action.
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\36\ Shay D. Assad, Director Defense Procurement & Acquisition
Policy, to the Office of Federal Procurement Policy, March 4, 2009.
http://www.acq.osd.mil/dpap/cpic/cp/docs/
dodfy2008competitionreport.pdf.
USAspending.gov DoD summary for FY 2008.
http://www.usaspending.gov/fpds/
fpds.php?sortby=u&maj_agency_cat=97&reptype=r&
database=fpds&fiscal_year=2008&detail=-1&datype=T&submit=GO.
\37\ USAspending.gov reports 70.4 percent of DHS contracts were
subject to competition in 2008.
http://www.usaspending.gov/fpds/fpds.php?sortby=u&maj_agency_
cat=70&reptype=r&database=fpds&fiscal_year=2008&detail=-
1&datype=T&submit=GO.
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The 110th Congress limited the length of certain noncompetitive
contracts and mandated competitive procedures at the task and delivery
level,\38\ but the Government must do more to ensure that full and open
competition involving multiple bidders is the rule, not the exception.
Consequently, to accurately track or evaluate competition, the
definition of ``competitive bidding'' should be revised to apply only
to contracts on which more than one bid was received.
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\38\ Pub. Law 110-181, Sec. 843, January 28, 2008. http://
frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ181.110.pdf.
Pub. Law 110-417, Sec.862, October 14, 2008. http://
frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ417.110.pdf.
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In addition to redefining competition, Federal agencies must:
1. Reverse the philosophy of quantity over quality.
Acquisition is now about speed, making competition a burden;
this is a recipe for waste, fraud, and abuse.
2. Debundle contract requirements in order to invite more
contractors to the table. Contracts that lump together multiple
goods and services exclude smaller businesses that could
successfully provide one good or service, but are incapable of
managing massive multi-part contracts. Breaking apart multi-
supply or service contracts reduce the multiple layers of
subcontracting which can drive up costs while adding little
value.\39\
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\39\ The 2009 Defense Authorization bill directed DoD to minimize
the excessive use of multiple layers of subcontractors that add no or
negligible value to a contract. Pub. Law 110-417, Sec. 866, October 14,
2008.
http://frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ417.110.pdf.
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3. Update USAspending.gov to include a searchable, sortable,
and user-friendly centralized database of all contracts and
delivery/task orders awarded without full and open competition,
including all sole-source awards. The database would enhance
the requirement created by the National Defense Authorization
Act of 2008 to disclose justification and approval documents
for noncompetitive contracts.\40\
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\40\ Pub. Law 110-181, Sec. 844, January 28, 2008. http://
frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ181.110.pdf. On
January 15, 2009, a Federal Register notice was issued creating an
interim rule and requesting public comment on the proposed public
database of justification and approval documents for noncompetitive
contracts. 74 Fed. Reg. 2731. http://edocket.access.gpo.gov/2009/pdf/
E9-555.pdf.
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4. Ensure that waivers of competition requirements for task
and delivery orders issued under multiple-award contracts or
the Federal supply schedule program are granted
infrequently.\41\
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\41\ See GAO, Contract Management: Guidance Needed to Promote
Competition for Defense Task Orders, GAO-04-874, July 30, 2004. http://
www.gao.gov/new.items/d04874.pdf.
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5. Increase emphasis on sealed bidding to receive the lowest
prices.\42\
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\42\ Sealed bidding is a method of contracting that employs
competitive bids and the contract is then awarded by the agency to the
low bidder who is determined to be responsive to the Government's
requirements. FAR Subpart 6.4 and Part 14.
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6. Use reverse auctions more frequently. In a Department of
Energy reverse auction for pagers, two companies' submitted
initial bids for $43 and $51 per pager. At the close of
bidding, the Government awarded the contract at the low price
of $38 per pager.\43\
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\43\ Steve Sandoval, LANL NewsBulletin, ``Reverse auctions save Lab
money,'' January 23, 2007.
http://www.lanl.gov/news/index.php/fuseaction/nb.story/story_id/
9654.
Why is competition in contracting important? In a nutshell, genuine
competition between contractors means the Government gets the best
quality goods and services at the best price. Competition also prevents
waste, fraud, and abuse because contractors know they must perform at a
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high level or risk being replaced.
Deficient Accountability
Through the years, the Government has placed a premium on speeding
up the contracting process and cutting red tape. Those policies led to
downsizing the acquisition workforce and gutting the oversight
community. When considering the large-scale increase in procurement
spending during the past decade, the contracting and oversight
communities lack sufficient resources to watch the money as it goes out
the door.
Many acquisition reforms also eliminated essential taxpayer
protections. For example, one ``reform''--commercial item contracting--
made it so Federal contracting officials now lack the cost or pricing
data necessary to ensure that the Government is getting the best value.
Commercial item contracts, which prevent Government negotiators and
auditors from examining a contractor's cost or pricing data, might make
sense when buying computers, office supplies, or landscaping services,
but has been exploited in some cases, such as the C-130J cargo planes
procured by the Air Force. Because the C-130J was determined to be a
commercial item, Government auditors were not allowed to have access to
have cost or pricing data. After Senator McCain forced the Air Force to
convert the contract back to a traditional contracting vehicle, the
taxpayers saved $168 million.\44\
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\44\ Secretary of the Air Force, Office of Public Affairs, Press
Release (051006), Officials announce C-130J contract conversion,
October 25, 2006.
http://www.af.mil/information/transcripts/story.asp?id=123029927.
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Contract oversight provides great benefits to taxpayers. According
to the Veterans Affairs Office Of Inspector General, ``OIG audits,
investigations, and other reviews identified over $2.3 billion in
monetary benefits, for a return of $59 for every dollar expended on OIG
oversight'' for the 2nd half of the FY 2009 and $38 for entire fiscal
year.\45\
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\45\ VA OIG Report, pp. 1 and 5.
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POGO believes that Congress should:
1. Appropriate money to agencies to end their reliance on the
industrial funding fees collected from other agencies for
orders placed on interagency contracts. This system creates a
perverse incentive to keep costs or prices high. In other
words, agencies might not be seeking the best prices because
program revenue would be lost.
2. Require contractors to provide cost or pricing data to the
Government for all contracts, except those where the actual
goods or services being provided are sold in substantial
quantities in the commercial marketplace.
3. Provide enforcement tools needed to prevent, detect, and
remedy waste, fraud, and abuse in Federal spending, including
more frequent pre-award and post-award audits to prevent
defective pricing.\46\
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\46\ National Procurement Fraud Task Force, Legislation Committee,
Procurement Fraud: Legislative and Regulatory Reform Proposals, June 9,
2008. (Hereinafter Fraud White Paper). http://pogoarchives.org/m/co/
npftflc-white-paper-20080609.pdf.
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4. Eliminate the Right to Financial Privacy Act requirement
requiring IGs to notify contractors prior to obtaining the
companies' financial records. This requirement ``tips off''
contractors and can harm the Government's ability to
investigate Federal contracts.\47\
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\47\ Fraud White Paper, pp. 4-5.
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5. Realize that audits are worth the investment. On average,
all IGs appointed by the President return $9.49 for each dollar
appropriated to their budgets--which is low in comparison to
the VA oversight returns.\48\
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\48\ GAO, Inspector General--Actions Needed to Improve Audit
Coverage of NASA, GAO-09-88, p. 5, December 2008. http://www.gao.gov/
new.items/d0988.pdf.
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6. Enhance the acquisition workforce through improvements in
hiring, pay, training, and retention.
7. Require comprehensive agency reviews of outsourcing
practices, especially for contract-related management and
consulting service contracts.\49\
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\49\ Alice Lipowicz, Federal Computer Week, DHS draws flak for
review of services contracts, June 5, 2009. http://fcw.com/articles/
2009/06/08/news-dhs-contracts.aspx.
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8. Pass the Contracting and Tax Accountability Act of 2009
(H.R. 572) prohibiting Federal contracts from being awarded to
contractors that have an outstanding tax liability.\50\
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\50\ http://frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=111_cong_bills&docid=f:h572ih.txt.pdf.
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9. Hold agencies and contractors accountable when small
business contracts are diverted to large corporations and when
set-aside dollars don't reach their legally intended
targets.\51\
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\51\ Department of the Interior, Office of the Inspector General,
Interior Misstated Achievement of Small Business Goals by including
Fortune 500 Companies, W-EV-MOI-0003-2008, July 2008.
http://www.doioig.gov/upload/2008-G-0024.pdf.
Carol D. Leonnig, Washington Post, ``Agencies Counted Big Firms As
Small,'' A1, October 22, 2008. http://www.washingtonpost.com/wp-dyn/
content/article/2008/10/21/AR2008102102989_pf.html.
Through the years, measures to ensure Government and contractor
accountability have been viewed as burdensome and unnecessary. This
attitude needs to be replaced with one recognizing that accountability
measures are essential to protecting taxpayers, and should be seen as
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an acceptable cost of doing business with the Federal Government.
Lack of Transparency
To regain public faith in the contracting system, the Government
must provide the public with open access to information on the
contracting process, including contractor data and contracting
officers' decisions and justifications.
The following actions should be taken to provide the public with
contracting information:
1. USAspending.gov should become the one-stop shop for
Government officials and the public for all spending
information. This includes actual copies of each contract,
delivery or task order, modification, amendment, other
transaction agreement, grant, and lease. Additionally,
proposals, solicitations, award decisions and justifications
(including all documents related to contracts awarded with less
than full and open competition and single-bid contract awards),
audits, performance and responsibility data, and other related
Government reports should be incorporated into USAspending.gov.
2. To better track the blended Federal Government workforce,
Congress should require the Government to account for the
number of contractor employees working for the Government using
a process similar to FAIR Act inventories of Government
employees filed by Federal agencies.
Risky Contracting Vehicles
As previously mentioned in my testimony, POGO is concerned with the
Government's acceptance of limited competition in contracting as well
as its over-reliance on cost-reimbursement, time and material
contracts, and commercial item contracts--although as I mentioned
previously, the vast majority of VA contracts are awarded on a fixed
price basis, which bodes well for taxpayers. POGO realizes that there
are benefits to these vehicles in certain circumstances, but we are not
alone in voicing concerns about how these contract vehicles are used in
practice.
POGO has concerns with the Government placing taxpayer dollars at
risk by over-designating many items and services as commercial. The
changes to procurement law and regulation during the past fifteen years
have been most stark in this area. Designating an item or service as
commercial when there is no actual commercial marketplace places the
Government at risk because the Government doesn't have access to cost
or pricing data that is essential for ensuring the contract is fair and
reasonable. The Government's failure or inability to obtain cost or
pricing data has been nothing short of shocking, and has invited
outright price gouging of the public fisc.
POGO believes that risky contracts can work in practice, but only
if additional oversight protections are added, including:
1. For commercial item contracts, goods or services should be
considered to be ``commercial'' only if there are substantial
sales of the actual goods or services (not some sort of close
``analog'') to the general public. Otherwise, the goods or
services should not be eligible for this favored contracting
treatment.
2. The Truth in Negotiations Act (TINA) should be
substantially revised to restore it to the common-sense
requirements that were in place prior to the ``acquisition
reform'' era. Specifically, all contract awards over $500,000,
except those where the goods or services are sold in
substantial quantities to the general public in the commercial
marketplace, should be subject to TINA. This small step would
result in enormous improvements in contract pricing,
negotiation, and accountability, and save taxpayers billions of
dollars per year.
3. All contracting opportunities in excess of $100,000 -
including task or delivery orders, and regardless of whether
the action is subject to full and open competition, award
against a GSA Federal Supply Schedule or an agency Government
Wide Acquisition Contract, or any other type of contacting
vehicle - should be required to be publicly announced for a
reasonable period prior to award, unless public exigency or
national security considerations dictate otherwise.
4. All contracting actions, including task and delivery
orders, should be subject to the bid protest process at the
GAO. While POGO recognizes that many will decry this
recommendation as adding ``red tape'' to the process, we
believe it is the only meaningful way to ensure that
contractors are treated on an even playing field, and that the
public can be confident in agency contract award decisions.
Thank you for inviting me to testify today. I look forward to
working with the Subcommittee to further explore how the Government
should improve the Federal contracting system to better protect
taxpayers and welcome any questions.
Prepared Statement of Scott F. Denniston, President,
Scott Group of Virginia, LLC, Chantilly, VA, and Director
of Programs, National Veteran Owned Business Association
Chairman Mitchell, Ranking Member Roe, Committee Members and staff.
Thank you for the opportunity to testify today on the Department of
Veterans Affairs acquisition program. I am Scott Denniston, President
of the Scott Group of Virginia, LLC, representing one of my clients,
The National Veteran Owned Business Association and its over 2,000
veteran small business owners across the country. I would ask that my
formal testimony be submitted for the record.
Your letter of invitation asked me to discuss ``Acquisition
Deficiencies at the U.S. Department of Veterans Affairs''. I will
respond to your invitation through the experiences of veteran owned
small businesses in dealing with the vast bureaucracy of the VA.
Within the past week I was contacted by a veteran owned small
business in Arizona providing vinyl banners to VA's Vocational
Rehabilitation Service. Shipment to 58 regional offices was completed
October 20, 2009. The veteran is unable to be paid as VA regulations
require a ``receiving report'' be completed. The veteran business owner
when inquiring as to being paid is bounced between the contracting
officer and the program officer as to who is responsible for completing
the receiving report. All the veteran knows is he fulfilled the
contract requirements and now suffers. The interest the veteran is
paying for operating capital will negate all profit that he expected to
earn on the contract. He has stated he will never do business with VA
again if this is the way they treat their vendors.
Another veteran doing business with VA is frustrated as he is
currently working on 2 contracts with expiration dates of December 31,
2009. The two contracts represent approximately $6 million per year in
revenue. To date he has not been told whether VA intends to exercise
the options. As you can imagine this causes great angst for the firm
and its employees. Will they have jobs on January 1st? When the
business owner inquires of the contracting office he is told the
contracts have been ``transferred'' to another contracting office. When
he inquires of the new contracting office he is told there is no
contracting officer assigned and no knowledge of who the program office
is. When the veteran business owner inquires to VA's Central Office he
is told the policy is to notify contractors within 60 days of
expiration of VA's intent. Nice policy but who follows it and where
does a veteran small business owner go for assistance?
Another common practice at VA which frustrates veteran small
business owners is VA's practice of advertizing an RFP, having vendors
incur substantial costs to submit proposals then VA cancels the
opportunity and procures through an existing contract vehicle or enters
into an agreement with another Federal agency to award a contract for
the same services. The small businesses who submitted the original
offers did so in vain as now, because of VA's ``change of mind'', they
cannot bid on the opportunity.
NaVOBA Members continue to be concerned about VA's overly
restrictive interpretation of Public Law 109-461, commonly referred to
as the ``Veterans First Contracting Program.'' NAVOBA believes the
provisions of PL109-461 require VA to provide a preference to service
disabled veteran and veteran owned small businesses for all goods and
services VA purchases. VA interprets the law's provisions to apply only
to ``open market'' acquisitions. As you know VA spends a large
percentage of its acquisition dollars using the Federal Supply
Schedules, therefore service disabled veteran and veteran owned small
businesses are not provided a preference for much of what VA purchases.
This in addition to VA's efforts to eliminate distributors and
resellers from VA's Federal Supply Schedules as well as VA's efforts to
consolidate contracting opportunities under the guise of ``Strategic
Sourcing'' makes selling to VA difficult for a veteran owned small
business. NaVOBA understands that FSS is the preferred method of
purchasing in the Federal Government but we also believe PL 109-461
gives VA responsibility to provide maximum practicable opportunity to
service disabled and veteran owned small businesses first! If a veteran
owned business can supply the same product with the same terms and
conditions VA can get using FSS, VA should buy from the veteran. Why
should VA buy from a large foreign firm using FSS when an American
veteran owned small business can provide the same product?
As I testified before the Subcommittee on Economic Opportunity on
April 23, 2009, our members tell us the biggest impediments to doing
business with VA are access to decisionmakers to present capabilities,
access to timely information on upcoming contract opportunities,
inconsistent implementation of the provisions of PL 109-461, VA's
administration of the Federal Supply Schedules regarding distributors,
and VA's use of contract vehicles such as prime vendor and
standardization opportunities.
On August 13, 2009, VA Deputy Secretary Scott Gould hosted a
``Supplier Relationship Transformation Forum''. The Deputy Secretary is
to be commended for hosting this event. The purpose was to hear from
large and small vendors to the VA on what issues and impediments exist
in doing business with VA. The forum was attended by over 100 people
representing 82 vendors from most industries doing business with VA.
There were several common themes expressed:
1. Participants were generally frustrated, and hopeful but
skeptical that change will occur.
2. Vendors perceive the acquisition process to be unclear, not
applied in a standardized manner and not communicated well.
3. VA does a poor job of matching contract types and terms and
conditions to the acquisitions.
4. Similar contracts are managed differently within and across
programs.
5. Many contracts are not launched with kickoff meetings; none
end with closeouts. Few contain a discovery period, but many require
project plans, work breakdown structures, etc. within 5 to 10 days of
award.
6. VA is often unclear and unfamiliar with what it is procuring-
unclear requirements, cut and paste solicitations, expired dates in
solicitations, Questions & Answers that do not clarify, independent
Government cost estimates that are very soft, etc.
7. Contracting officers and contracting officers technical
representatives are often risk adverse and say no to possible solutions
without considering them.
8. Contractors broker communications and problem solving between
VA COs, COTRs and project managers.
9. Partnering means sharing risks, but VA puts all risk on the
contractor.
10. In reality, best value means lowest cost. VA wants contractor
``A'' teams but will only pay for ``B'' or ``C'' teams.
11. Contract mods--even no cost period of performance extensions
can take months to complete, putting contractors and projects at risk.
This list comes from the Executive Summary of the forum prepared by
Ambit Group, LLC for VA, and is very consistent with comments expressed
by NaVOBA Members.
The vendor community today is dynamic, enterprising and inventive.
VA cannot as a normal course of operating maintain ongoing operations
and also evaluate new technologies and opportunities to use new
products and services to improve care to veterans. The vendor community
is frustrated as VA is reluctant to change. VA is, in our opinion,
missing opportunities as there is no mechanism to test new products in
the VA environment. We propose VA establish an organization,
independent of day to day operations, to test new products and services
through trials, test programs, field demonstrations to more rapidly
bring new technologies and solutions to VA operations. Such an
organization could pay huge dividends in caring for our Nation's
veterans.
In summary, VA must be more sensitive to the needs/concerns of the
vendor community, especially the veteran owned small business
community. Every VA employee should work in a small business for a
while and understand the impact of their decisions and inactions on
cash flow, retention of employees, bank lines of credit, and the myriad
of issues faced by veteran entrepreneurs on a daily basis.
I would like to thank the Committee once again for holding this
important hearing and I'm happy to answer any questions.
Prepared Statement of Anthony R. Jimenez, President and
Chief Executive Officer, MicroTech, LLC, Vienna, VA
Good Afternoon Chairman Mitchell, Ranking Minority Member Roe, and
Subcommittee Members. I greatly appreciate the opportunity to testify
at this hearing regarding Acquisition Deficiencies at the Department of
Veterans' Affairs (VA), and I am honored to represent other Veteran-
Owned and Service-Disabled Veteran-Owned Small Business Owners.
My name is Anthony (Tony) Jimenez and I am the President and Chief
Executive Officer of MicroTech. MicroTech is a Minority-Owned,
certified and verified Service-Disabled Veteran-Owned Small Business
(SDVOSB), and certified 8(a) Small Business providing Information
Technology Systems and Services, Strategic Solutions, Audio-Visual
Telecommunications Design and Installation, Product Solutions, and
Consulting Services.
MicroTech Success
I retired from the Army in 2003 after serving 24 years on active
duty and started MicroTech in 2004. Today I employ over 400 great
Americans--and in an era of lay-offs and job cutbacks--MicroTech has
become a powerful job creation engine and force for economic
development in my community, in the state of Virginia, and in a number
of other locations across the nation. This year, MicroTech was named
America's Number One Fastest-Growing Hispanic-Owned Business, and just
last week our success was celebrated during the NASDAQ Closing Bell
ceremony.
Since the first time I testified before Congress in 2006, MicroTech
has grown almost 3000 percent in gross revenue and is now the Prime
Contractor on over 100 Federal projects and 14 Contract Vehicles.
MicroTech manages over half-a-million Government IT users daily and
provides products and solutions to more-than-30 Government Agencies,
along with every military branch.
MicroTech has been repeatedly recognized by trade groups, industry
publications, and diversity organizations as a leading Small Business
that has notably succeeded at supporting the Business of Government.
MicroTech's exponential growth has led to recognition this year that
includes the prestigious Inc. 500; Washington Business Journal's Third
Fastest Growing Co. in the region; the Deloitte Tech Fast 500 Number
One Communications-Networking Small Business in the Washington Metro
Area; CRN Magazine's Number One ``Unified Communications Solutions
Specialist;'' Washington Technology's Number One Information Technology
8(a) Business; and as a DiversityBusiness.com Top 25 Disabled Veteran
Owned Business.
Veteran Running a Business
Like most of the Veterans who retire from active duty, initially I
had no idea what I wanted to do when I left the military. However, I
knew I wanted to remain close to the fight and continue, in some way,
to serve my country.
I told BusinessWeek earlier this year in the article, ``What I
Learned in the Trenches,'' that there is a misperception that people in
the military have been trained to shoot and win battles, but when it
comes to business savvy, they don't have any. What many don't realize
is that running a military unit is just like running a business.
As an owner of a business that manages large-scale Federal
projects, I have the opportunity to use my unique military skills and
expertise to help the Government reach its goals, as well as the
ability to work with and provide jobs for other Veterans.
My small business targets contracting opportunities based not only
on our core competencies, but also on the opportunity to hire Veterans
and Wounded Warriors to perform the work; giving them a chance at a
viable second career. However, in the short 5 years MicroTech has been
doing business with the Federal Government, unfortunately I discovered
that opportunities for Veteran-Owned Small Businesses (VOSB) and
SDVOSBs were hard to find and not as abundant as I assumed they would
be. In the last few years, though, the emphasis on increasing
Government contracting opportunities for SDVOSBs is improving but still
has a ways to go.
It's been 5 years since President Bush issued Executive Order 13360
requiring Federal agencies to provide 3 percent of all contracting
opportunities to SDVOSBs. Fewer than a handful have achieved that
annual goal, notably the Environmental Protection Agency, the GSA, the
Department of Labor, and the VA.
Small Business Opportunities are Improving
Through mostly the efforts of the Small Business Administration and
the four agencies mentioned, small business opportunities overall are
growing. In Fiscal Year 2008, small businesses won a record $93.3
billion in Federal prime contracts, an increase of almost $10 billion
from 2007. SDVOSB contracts increased to about one-half (1.49 percent)
of the 3 percent goal, from the one-third (1.01 percent) mark a year
earlier, and won $6.4 billion in Federal contracts from the lower FY
2007 mark of $3.8 billion.
Along with those gains, the Obama Administration's American
Recovery and Reinvestment Act is playing a role in increasing Federal
contracting share to SDVOSBs; they have received 4 percent of Recovery
contracting dollars, so far. The current administration has ``walked
the walk,'' and proven their commitment to Federal contracting
opportunities for Small Business.
MicroTech and the VA
MicroTech's experience with the Department of Veteran Affairs (VA)
regarding the 3 percent rule has been very positive. The VA exceeded
its SDVOSB prime contracting goals in the last two fiscal years,
reflecting a commitment at the top and a broad across-the-agency effort
to ``do the right thing.''
Veteran-Owned Small Businesses seem to enjoy greater success at the
VA than non-veteran owned. This is happening because of the superlative
efforts of the Veteran's Affairs Committee and others. In addition, the
VA, as one expects, wants to take care of our Nation's Veterans, so it
makes sense that the VA strongly supports set-aside opportunities. The
VA keeps their ``eyes on the prize,'' and works hard to ensure Veteran-
Owned Small Businesses get their fair share of competitive contracts.
Three Percent Rule Recommendations
As for the rest of the Government that has failed to make the 3
percent rule a priority, there are currently no penalties for failing
to meet EO 13360, and very few incentives for meeting or exceeding the
established standard. This lack of oversight makes it extremely
difficult for agencies to realize the advantages of contracting with a
Veteran-Owned Small Business. There needs to be significant
improvements made to correct systemic problems in the current
procurement system and to add incentives in achieving the 3 percent
goal. I recommend the following steps be taken in all agencies,
government-wide:
Revise Contract Bundling
Contract Bundling adversely impacts competition and hurts all small
businesses. According to VET-Force's reporting of a Rand Corp. 2008
study, for every 100 bundled contracts, Small Business loses 60
contracts. The study is quoted as claiming, ``More than one-half of all
DoD prime contract spending is on bundled contracts.''
The standard procedures for Contract Bundling require agencies to
provide justification for bundling decisions and have the decisions
reviewed at higher levels. The problem with this is that the decision
is often made in a vacuum and the affected small businesses have no
means to object. In most of these cases, the small businesses are not
even aware that the decision is being made. Instead, they don't
discover that their contract has been bundled with a larger requirement
until just before the RFP is released. By then, it is too late to do
anything except determine how to stay involved in the competitive bid.
Supporters say that Contract Bundling saves money. While Contract
Bundling may save Contracting Officers time and effort and reduce
Government overhead, those dollar savings are often offset by the
higher costs associated with doing business with larger organizations.
Consolidate Contracts so Small Businesses Share Benefits of Bundling
This tactic allows the Government to continue to take advantage of
cost savings, price reductions, quality improvements, reduced
acquisition cycle times, and better terms and conditions for both
parties. Make a fair portion of these bundled contracts specifically
Small Business opportunities, and don't assume that because it has been
bundled, it has to be large business-focused. In most cases, making the
opportunity SDVOSB-focused will lead to the very same team as if it was
a full and open opportunity.
Place Orders under a Small Business GWAC
The Veteran Technology Services (VETS) Government-wide Acquisition
Contract (GWAC) and the NASA Solutions for Enterprise-Wide Procurement
(SEWP) GWAC are two excellent examples of Contract Vehicles that offer
multiple award contracts with highly qualified SDVOSBs. The VA has done
an outstanding job of using both of these GWACs; another outstanding
example of their commitment to SDVOSBs. This approach should be
duplicated throughout the Government.
Solicit Quotes for Federal Supply Service Orders only from Small
Business (or Socioeconomic Small Business Groups)
Small Business set aside programs are rarely used under the GSA
Federal Supply Schedule, this most widely used contracting vehicle in
the Federal Government. This is due to a common perception that set-
asides are not allowed under the schedule program. The use of set-
asides as part of the GSA schedule program should be encouraged.
Create a Small Business Participation Enforcement Team
Consider taking a portion of the savings realized through Contract
Bundling to implement a Small Business Plan Enforcement Team that
enforces small business participation in accordance with the Request
for Proposal (RFP).
Establish a Mentor-Protege Program at SBA for Veteran-Owned Small
Business
A Mentor-Protege program administered by the SBA that mirrors the
current 8(a) program would be a boon to SVDOSBs and allow them some of
the additional advantages that 8(a) companies currently enjoy.
In order to raise capital for the Protege firm, the Mentor could
own an equity interest of up to 40 percent in the Protege firm. A
Protege firm could still qualify for other assistance as a Small
Business, including SBA financial assistance. And no determination of
affiliation or control would be found between a Protege firm and its
Mentor based on the Mentor-Protege agreement or any assistance provided
pursuant to the agreement.
Better FAR Enforcement
The Federal Acquisition Regulation (FAR) already includes
provisions intended to help Small Business in the event that bundling
occurs. Unfortunately, the FAR does not include enforcement mechanisms,
nor does it include a reward or punishment system. If the FAR or Code
of Federal Regulations (CFR) were to include mandatory enforcement, it
would go a long way toward assisting Small Business. When it comes to
FAR requirements for Contract Bundling, they are a good start, but fail
to follow through with the most important aspect of the system. Bundled
contracts are often made so complex that small businesses are precluded
from competing for them.
How to Better Highlight SDVOSBs
Address VA Contracting Concerns and How to Improve the Process
Contracting with the VA can be extremely difficult for small
businesses, requiring them to not only understand VA-specific
contracting and complex procurement requirements, but also to
understand the VA organization and culture. At MicroTech, we must
constantly educate our customers about public policy like the
``Veterans First Contracting Program,'' and other initiatives that are
designed to help Veteran-Owned Small Business grow. We also have to
emphasize that there are enough capable SDVOSBs that have the
experience and resources to adequately and competently fulfill Federal
contracts. There are many contracting officers at the VA that genuinely
want to do business with a Veteran-Owned Small Business; unfortunately
policies and regulations designed to make it easier to do business with
Veterans are either not clearly promoted, or not understood.
GAO SDVOSB Fraud Report
The October 2009, GAO report on the SDVOSB Program (Case Studies
Show Fraud and Abuse Allowed; Ineligible Firms to Obtain Millions of
Dollars in Contracts) is a telling indictment of the fraud in the
program highlighting test cases of ineligible and uncertified
businesses that are giving legitimate SDVOSBs a black eye.
The enforcement issues are clear. For example, the SBA is only
allowed to investigate suspected SDVOSB fraud if a formal protest is
filed questioning the bid process. Even if the SBA finds that a
contract was awarded to a fraudulent company, they are not required to
restart the bidding process. And because no documentation proving
eligibility is required, the SBA has no proven way to confirm status.
In 2008, more than 15,000 Veteran-Owned Businesses were registered
in the Central Contracting Register (CCR), a requirement to do business
with the Federal Government. The CCR collects, validates, stores and
disseminates data in support of agency acquisition missions.
Unfortunately the CCR does not call for proof that companies are
legitimate Veteran-Owned Businesses.
SDVOSB Enforcement Recommendations
Additional requirements are needed to prove legitimate SDVOSB
status. Take the handcuffs off the SBA and allow them to rigidly
enforce eligibility. The GAO recommended that the SBA work to develop
penalties that would prohibit companies from obtaining Federal work if
they are found to knowingly misrepresent their status as a Veteran-
Owned Small Business. It also urged the VA to expand its database of
validated Veteran-Owned Small Businesses, so that the SBA and other
Federal contracting officials across the Government can access it to
verify eligibility.
I applaud Representative Hall for his recent decisive action on the
issue, and back his reported recommendations of completing the VetBiz
database for a truer, more comprehensive picture of all qualified small
businesses; to insist on more SDVOSB qualifying documentation; and to
share the database with the rest of the Government.
SUMMARY
How to Help Veteran-Owned Small Business Grow
I have often heard people in Washington say that we don't need any
more laws; we just need to enforce the ones we have. In order to
sustain or further increase the VA's ability to contract with VOSBs and
SDVOSBs, it will require vigilance, clearer guidance, improved
oversight, and effective enforcement. More will also need to be done to
educate procurement officials about requirements and about the
Government's desire to contract with Veteran-Owned Businesses. We need
to do more to get the word out and to let others know procurements that
provide opportunities to Veteran-Owned Businesses have the support of
the VA leadership, the House and the Senate, and President Obama. I
would also ask that you carry the message you're hearing today to the
other Committees you serve on, and do everything you can to help
educate others in Washington who don't recognize the value and
importance of Veteran Entrepreneurs.
Mr. Chairman and Distinguished Committee Members--I appreciate the
time you and the other Members of the Subcommittee on Oversight and
Investigations have spent on this and other critical topics affecting
Veteran Entrepreneurship. Pride means a lot to our Nation's Veterans.
We're proud to have served the Nation in wartime, and proud that we can
continue to serve our country through supporting the Government's
goals. I speak for all Veteran Entrepreneurs when I say thank you for
insisting on a level Playing Field for those who have sacrificed so
much, and for recognizing their value to Federal Government service.
This concludes my testimony. I would be happy to answer any questions
you may have.
Prepared Statement of Robert G. Hesser, President and
Chief Executive Officer, Vetrepreneur, LLC, Herndon, VA, and
1st Co-Chairman, Veterans' Entrepreneurship Task Force (VET-Force)
EXECUTIVE SUMMARY
Congress passed Public Law (PL) 109-461, the Veterans Benefits,
Health Care, and Information Technology Act of 2006. While this
legislation provided a number of benefits for veterans; what's of
particular importance for the purposes of this hearing today, is that
Title V, sections 502 and 503 of this legislation, authorized a unique
``Veterans First'' approach to VA contracting. This approach would
change the priorities for contracting preferences within the Department
of Veterans Affairs (VA), by placing Service-Disabled Veteran Owned
Small Businesses (SDVOSB's) and Veteran Owned Small Businesses (VOSB's)
first and second, respectively, in satisfying VA's acquisition
requirements.
In so doing, it required that certain conditions be met. All
SDVOSB's and VOSB's, must register in the VA's Vendor Information Pages
(VIP), aka Veterans Small Business Database, available at
www.VetBiz.gov. To be eligible for award of a contract exclusively
within the Department of Veterans Affairs and be `VERIFIED' by the VA's
Center for Veterans Enterprise (CVE). Once registered in the database,
the veterans' status, ownership, and control would be verified and
penalties would be assessed for misrepresentation.
Unfortunately, after more than 2 years, VA's acquisition officials,
their General Counsel, and/or the Office of Management and Budget still
have not come to an agreement to publish the regulations to fully
implement the portion of the law that pertains to VA contracting for
veteran business owners. Last week, December 8, 2009, the VA issued the
Request for Comments on section 819.307 of the Final Rule 48 CFR 819.
Comments are due January 7, 2010. The result is that veteran and
service-disabled veteran business owners are continuing to be deprived
of millions of dollars in contracting opportunities that could benefit
them, their families, and their communities.
There are thousands of capable and qualified veteran and service
disabled veteran owned businesses registered in the VA's Veteran Small
Business Database. Yet, we often hear from contracting officers and
Large Primes that they cannot be found. Veteran business owners
represent America. They are all races, Black, White, Hispanic, Asian,
Jewish, they are Male, Female, Old, and Young.
VA must fully implement The Veterans Benefits, Health Care, and
Information Technology Act of 2006 now and implement it correctly.
INTRODUCTION (Verbal Testimony):
Good Morning Chairman Mitchell, Ranking Member Roe, other Members
of this Subcommittee, fellow veterans, and guests.
Let me first thank you for the opportunity to come before you today
to share views on the Department of Veterans Affairs' (VA)
``Acquisition Deficiencies'' and how this Subcommittee can help to
increase contracting opportunities for Veteran and Service-Disabled
Veteran-Owned Businesses. I am the 1st Co-Chairman of the Veterans
Entrepreneurship Task Force known as the VET-Force. My testimony today
is mine; not the VET-Force.
My Navy active duty was many years ago. With 22 1/2 years, I was
unexpectedly transferred to the Disability Retirement List as a Master
Chief (E9). I was given a check and sent home. At that time, I could
not work a full workday. This has happened to thousands of veterans.
The VET-Force and its Members want this practice stopped. PL 106-50 and
subsequent legislation/Rule making has significantly improved the
Veteran's Procurement Program.
This testimony concerns five points:
1. Center for Veterans Enterprise (CVE)
a. CVE personnel are responsible for tasks that
require 10-fold the assets they now have.
b. Many of their tasks cannot be completed in a timely
fashion because they do not have the authority to
complete them. In other words, they are frequently
micro-managed.
c. 12,000 Veteran owned companies desiring
``verification'' are waiting their turn. CVE was
verifying 200 each month. I do not know the recent
figure.
2. Contracting Officers
a. Not all contracting officers are required to follow
regulations and rules.
b. They are not always given authority commensurate to
responsibility.
3. Appropriations and Budgets
a. CVE is a non appropriated organization and it
exists only by the grace of the VA Supply Fund.
b. CVE needs its own Line Item and a significant
increase of available funds.
4. VA General Counsel
a. The VA has not complied with the PL 109-461. The
date of enactment was to be 180 days after Dec 22,
2006--the date of the Act. Today, 6 days short of 3
years, the Act has yet to be completely implemented.
b. All requirements might not ever be implemented
because there is a requirement that VA and SBA execute
an interagency agreement pursuant to the Economy Act.
Negotiations of this interagency agreement have not yet
been finalized.
c. It is General Counsel's responsibility to ensure
regulations are followed in a timely and accurate
manner. The result of their ignoring PL 108-183, 109-
461, and Executive Order 13-360 is apathy and confusion
throughout the VA acquisition community.
d. General Counsel's inaction has caused, in some
areas within the VA Acquisition Community, derogatory
feelings toward the VOSB/SDVOSB procurement program.
Lack of firm direction has been and is still today
creating roadblocks.
5. Vocational Rehabilitation & Employment (VR&E) program and
CVE
a. A significant funds increase is needed for VR&E
because CVE cannot assist service-connected disabled-
veterans without the VR&E Counseling occurring before
the Veteran goes to CVE.
Passage of the original concept of PL 109-461 was highly supported
by the VET-Force and most Veteran supporters. It is still supported by
the VET-Force. The law is written for the VA. One requirement is that
the VETBIZ VIP data base be expanded using both VA and DoD data. It
also requires the VA to make VETBIZ VIP available to the entire Federal
Government to view the registrants within the data base. It also states
that the VA will verify all VOSB's and SDVOSB's prior to awarding a
Veteran Affairs contract. PL 109-461 does not say that the VA's
application of their 38 CFR 74 regulations was to be Federal Government
wide. Both, PL 106-50 or 108-183 direct non-VA contracting officers to
accept self-certification. The Federal Acquisition Regulations also
require all contracting officers to practice due diligence prior to
award. Only those desiring VA contracts are to be verified by CVE. VA's
present procedure is to verify a company and issue them a Verification
Pin. The VA then enters in that company's profile that they are
VERIFIED. When a VA contracting officer wants to award a contract to a
SDVOSB who is in the VETBIZ que for VA verification the contracting
officer contacts the CVE and the verification is rushed. However, when
a SDVOSB in the VETBIZ que submits a response to a ``NON-VA'' SDVOSB
set-aside Request for Proposal by a contracting officer who uses
VETBIZ, the company not verified will unjustly be considered as not
qualified to bid. The VET-Force has recommended to the VA CVE that all
VA CVE verifications remain accessible to only VA acquisition
personnel. The VA CVE has not accepted this recommendation. Not doing
so is sabotaging the Service-Disabled Veteran-Owned Small Business
procurement program.
The first step was the VA only. The second step should be all the
Federal Government.
Prepared Statement of Kay L. Daly, Director, Financial Management and
Assurance, U.S. Government Accountability Office
Veterans Health Administration: Inadequate Controls
Over Miscellaneous Obligations Increase Risk Over
Procurement Transactions
GAO Highlights
Why GAO Did This Study
In September 2008, GAO reported internal control weaknesses over
the Veterans Health Administration's (VHA) use of miscellaneous
obligations to record estimates of obligations to be incurred at a
future date. GAO was asked to testify on its previously reported
findings that focused on (1) how VHA used miscellaneous obligations,
and (2) the extent to which the Department of Veterans Affairs' (VA)
related policies and procedures were adequately designed. GAO also
obtained an update on the status of VA's activities to improve controls
over its use of miscellaneous obligations.
GAO's testimony is primarily a summary of its prior report (GAO-08-
976), and also includes follow-up work to obtain information on the
status of VA's efforts to implement our prior recommendations.
What GAO Recommends
In its September 2008 report, GAO made four recommendations to VA
to develop and implement policies and procedures to improve internal
control. VA agreed with GAO's recommendations and has since taken
action to develop the recommended policies and procedures. GAO will
monitor the effectiveness of VA's implementation of these new policies
and procedures.
What GAO Found
In September 2008, GAO reported that VHA recorded over $6.9 billion
of miscellaneous obligations for the procurement of mission-related
goods and services in fiscal year 2007. VHA officials stated that
miscellaneous obligations were used to facilitate payment for goods and
services when the quantities and delivery dates are not known.
According to VHA data, almost $3.8 billion (55.1 percent) of VHA's
miscellaneous obligations was for fee-based medical services for
veterans and another $1.4 billion (20.4 percent) was for drugs and
medicines. The remainder funded, among other things, state homes for
the care of disabled veterans, transportation of veterans to and from
medical centers for treatment, and logistical support and facility
maintenance for VHA medical centers nationwide.
In 2008, GAO found that VA policies and procedures were not
designed to provide adequate controls over the authorization and use of
miscellaneous obligations with respect to oversight by contracting
officials, segregation of duties, and supporting documentation for the
obligation of funds. Collectively, these control design flaws increased
the risk of fraud, waste, and abuse. These control design flaws were
confirmed in GAO's case studies at VHA medical centers in Pittsburgh,
Pennsylvania; Cheyenne, Wyoming; and Kansas City, Missouri. For
example, in all of the 42 obligations reviewed, GAO found no documented
approval by contracting officials. The systems used did not have a
mechanism for contracting officials to electronically document their
review of miscellaneous obligations and no manual documentation
procedures had been developed. Furthermore, in 30 of the 42 obligations
reviewed, one official performed two or more of the following
functions: requesting, creating, approving or obligating funds for the
miscellaneous obligation, or certifying delivery of goods and services
and approving payment. Without proper segregation of duties, risk of
errors, improper transactions, and fraud increases. Last, GAO found a
lack of adequate supporting documentation at the three medical centers
we visited. In 8 of 42 instances, GAO could not determine the nature,
timing, or the extent of the goods or services being procured from the
description in the purpose field. As a result, GAO could not confirm
that these miscellaneous obligations were for bona fide needs or that
the invoices reflected a legitimate use of Federal funds.
In January 2009, VA issued volume II, chapter 6 of VA Financial
Policies and Procedures--Miscellaneous Obligations which outlines
detailed policies and procedures aimed at addressing the deficiencies
GAO identified in the September 2008 report. Full and effective
implementation of this new guidance will be critical to reducing the
Government's risks associated with VA's use of miscellaneous
obligations. GAO has not yet evaluated the extent to which these new
policies have been fully and effectively implemented.
__________
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the findings from our
prior work on the Veterans Health Administration's (VHA)--a component
of the Department of Veterans Affairs' (VA)--use of miscellaneous
obligations,\1\ and steps VA is taking to address our prior
recommendations. VHA provides a broad range of primary health care,
specialized health care, and related medical and social support
services through a network of more than 1,200 medical facilities. In
carrying out its responsibilities, VHA uses ``miscellaneous
obligations'' to obligate, or administratively reserve estimated funds
against appropriations for the procurement of a variety of goods and
services for which specific quantities and time frames are uncertain.
VHA officials said that they have been using miscellaneous obligations
for over 60 years to record estimates of obligations to be incurred at
a later time.\2\ According to VA policy,\3\ miscellaneous obligations
can be used to record estimated obligations to facilitate the
procurement of a variety of goods and services, including fee-based
medical and nursing services and beneficiary travel.
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\1\ An obligation is a definite commitment that creates a legal
liability of the Government for the payment of goods and services
ordered or received, or a legal duty on the part of the United States
that could mature into a legal liability by virtue of actions on the
part of the other party beyond the control of the United States.
Payment may be made immediately or in the future.
\2\ A Office of Finance Directive, VA Controller Policy MP-4, part
V, chapter 3, section A, paragraph 3A.01 Types of Obligations and
Methods of Recording states in pertinent part that ``it will be noted
that in many instances an estimated miscellaneous obligation (VA Form
4-1358) is authorized for use to record estimated monthly obligations
to be incurred for activities which are to be specifically authorized
during the month by the issuance of individual orders, authorization
requests, etc. These documents will be identified by the issuing
officer with the pertinent estimated obligation and will be posted by
the accounting section to such estimated obligation.''
\3\ VA Office of Finance Directive, VA Controller Policy MP-4, part
V, chapter 3, section A, paragraph 3A.02 Estimated Miscellaneous
Obligation or Change in Obligation (VA Form 4-1358).
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The large dollar amount of procurements recorded as miscellaneous
obligations in fiscal year 2007--$6.9 billion--raised questions about
whether proper controls were in place over the authorization and use of
those funds. In September 2008 we reported \4\ that improvements were
needed in VHA's design of controls over miscellaneous obligations.
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\4\ GAO, Veterans Health Administration: Improvements Needed in
Design of Controls over Miscellaneous Obligations, GAO-08-976
(Washington, D.C.: Sept. 11, 2008).
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My testimony today summarizes the findings of our September 2008
report that are most relevant to the subject of today's hearing.
Specifically, I will focus on our findings concerning (1) how VHA used
miscellaneous obligations during fiscal year 2007, and (2) the extent
to which VA's policies and procedures were designed to provide adequate
controls over their authorization and use. I will also discuss the
results of our limited review of the status of VA's actions to
implement our recommendations.
To achieve the first objective, we obtained and analyzed a copy of
VHA's Integrated Funds Distribution, Control Point Activity, Accounting
and Procurement (IFCAP) database of miscellaneous obligations.\5\
According to VA, the IFCAP database provided the best available data on
VHA miscellaneous obligations created in fiscal year 2007. We
determined that the IFCAP data were sufficiently reliable for the
purposes of our report based on (1) testing various required data
elements, (2) performing walkthroughs of the system, and (3) tracing
selected transactions from source documents to the database. To achieve
the second objective, we compared VA policies and procedures governing
the use of miscellaneous obligations with Federal appropriations law
\6\ and internal control standards,\7\ interviewed VHA officials in
Denver, Colorado, and Washington, D.C., and conducted three case
studies at VHA medical centers in Cheyenne, Wyoming; Kansas City,
Missouri; and Pittsburgh, Pennsylvania. As part of the case studies, we
interviewed VHA financial management and procurement officials, and
reviewed a nongeneralizable sample of miscellaneous obligations to
provide more detailed data on the extent and nature of any control
design deficiencies. We did not review VHA's procurement or service
authorization processes. Additional details on our scope, methodology,
and findings are included in our September 2008 report.\8\ To assess
the status of our prior recommendations, we reviewed volume II, chapter
6 of VA Financial Policies and Procedures--Miscellaneous Obligations
(dated January 2009) which outlines detailed policies and procedures
aimed at addressing the deficiencies we identified in our September
2008 report. We have not tested whether or to what extent VA has
effectively implemented these policies and procedures.
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\5\ IFCAP is used to create miscellaneous obligations at VA and
serves as a feeder system for VA's Financial Management System, the
department's financial reporting system of record used to generate VA
financial statements and other reports.
\6\ GAO, Principles of Federal Appropriations Law third ed vol II,
GAO-06-382SP (Washington, D.C.: February 1, 2006).
\7\ GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
\8\ GAO-08-976.
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We conducted the work for the September 2008 report on which this
testimony was based from November 2007 through July 2008 in accordance
with generally accepted Government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives. We also conducted a limited review of
VA's actions to address our recommendations intended to improve its use
of miscellaneous obligations.
Miscellaneous Obligations Used Extensively for Mission-Related
Activities in Fiscal Year 2007
In fiscal year 2007, VHA used miscellaneous obligations to record
over $6.9 billion against its appropriations for the procurement of
mission-related goods and services at 129 VHA stations throughout the
country.\9\ As shown in figure 1, $3.8 billion of this total (55.1
percent) was for fee-based medical and dental services for veterans,
and another $1.4 billion (20.4 percent) was for drugs, medicines, and
hospital supplies. The remainder covered, among other things, state
homes for the care of disabled veterans,\10\ transportation of veterans
to and from medical centers for treatment, and logistical support and
facility maintenance for VHA medical centers nationwide.
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\9\ The IFCAP database of miscellaneous obligations included 129
VHA stations. A VHA station may include more than one medical center
and is located in one of VHA's 21 Veterans Integrated Service Networks
(VISN). A VISN oversees the operations of the VHA stations (various
medical centers and treatment facilities) within its assigned
geographic area.
\10\ State veterans homes are established by individual states and
approved by VA for the care of disabled veterans. The homes include
facilities for domiciliary nursing home care and adult day health care.
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Figure 1: VHA Miscellaneous Obligations for Fiscal Year 2007
[GRAPHIC] [TIFF OMITTED] T4421.001
Source: GAO analysis of VHA data
VHA officials said they used miscellaneous obligations to
administratively reserve estimated funds required to facilitate the
payments for goods and services for which specific quantities and time
frames were uncertain. Specifically, a miscellaneous obligation can be
created for an estimated amount and then modified as specific
quantities are needed or specific delivery dates are set. In contrast,
when a purchase order is used to obligate funds, the obligated amount
cannot be changed without a modification of the purchase order.
According to VHA officials, the need to prepare numerous modifications
to purchase orders could place an undue burden on the limited
contracting personnel available at individual centers and could also
require additional work on the part of fiscal services personnel.
Therefore, VHA officials view the use of miscellaneous obligations as
having the benefit of reduced workload.
Another cited benefit was that miscellaneous obligations simplify
the procurement process when no underlying contract or purchase order
exists. For example, providing medical care on a fee-basis to veterans
outside of VHA medical centers may involve the services of thousands of
private physicians nationwide. Attempting to negotiate a separate
agreement or contract with each of these individuals would be a
difficult task for VHA's contracting staff. Under the policies and
procedures in place during fiscal year 2007, VHA centers could use
miscellaneous obligations as umbrella authorizations for fee-based
medical services performed by a number of different physicians. In
effect, in cases for which there is no preexisting contract, the
miscellaneous obligation form becomes the record of an obligation.\11\
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\11\ VA officials said that this practice is consistent with 38
C.F.R. 17.52, which provides that infrequently used services, such as
fee-basis services, may be initiated using individual authorizations.
They said that individual authorizations for fee-basis care are not
subject to procurement regulations, and that procurement regulations
apply when the need for like medical services from the same medical
provider is frequent enough to warrant the use of standard acquisition
processes.
Deficiencies in Design of Controls over Miscellaneous Obligations
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Increase the Risk of Fraud, Waste, and Abuse
In September 2008, we reported that VA policies and procedures were
not designed to provide adequate controls over the use of miscellaneous
obligations. The use of miscellaneous obligations carries inherent risk
due to a lack of a negotiated contract. Without effectively designed
mitigating controls, the use of miscellaneous obligations may also
expose VHA to increased risk of fraud, waste, and abuse. VHA did not
have effective basic internal controls nor mitigating controls with
respect to oversight by contracting officials, segregation of duties,
and supporting documentation for recording the obligation of funds. Our
Standards for Internal Control in the Federal Government \12\ state
that agency management is responsible for developing detailed policies
and procedures for internal control suitable for its agency's
operations and ensuring that they provide for adequate monitoring by
management, segregation of duties, and supporting documentation for the
need to acquire specific goods in the quantities purchased. We
identified control design flaws in each of these areas, and we
confirmed that these weaknesses existed in our case studies of VA
fiscal year 2007 transactions at Pittsburgh, Cheyenne, and Kansas City,
as shown below in table 1. Collectively, these control design flaws
increase the risk of unauthorized procurements, overpayments for
services rendered, and the conversion of VHA assets for personal use
without detection.
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\12\ GAO/AIMD-00-21.3.1.
Table 1: Summary of Case-Study Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
Inadequate supporting documentation
--------------------------------------------------------------------------------------------------------------------------------------------------------
No documented
Number of Dollar value of approval by Inadequate Incomplete Blank vendor Blank contract
Station obligations obligations contracting segregation of purpose field field c
reviewed reviewed officials duties a description b
--------------------------------------------------------------------------------------------------------------------------------------------------------
Pittsburgh 14.............. $6,694,853...... 14.............. 9............... 3.............. 6.............. 3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cheyenne 11 $2,076,648 11 11 1 6 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Kansas City d 17 $27,274,395 17 10 4 8 9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total.................... 42 $36,045,896 42 30 8 20 16
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Source: GAO analysis of VHA data.
a In 30 of the 42 obligations we reviewed, one official performed two or more of the following functions: requesting, creating, approving, or obligating
funds for the original miscellaneous obligations, or certifying delivery of goods and services and approving payment.
b In 8 of 42 instances, we could not determine the nature, timing, or the extent of the goods or services being procured from the description in the
purpose field without reference to supporting invoices.
c In these instances, we confirmed that contracts existed, but no contract number was listed on the miscellaneous obligation document.
d Includes facilities located in Kansas City, Kansas; Wichita, Kansas; Columbia, Missouri; and eastern Kansas.
Inadequate Oversight of Miscellaneous Obligations
The 42 miscellaneous obligations we reviewed at three VHA stations
had no evidence of approval by contracting officials. The systems used
did not have a mechanism for contracting officials to electronically
document their review of miscellaneous obligations, and no manual
documentation procedures had been developed.\13\ Furthermore, none of
the three sites we visited had procedures in place to document review
of the miscellaneous obligations by the appropriate contracting
authorities. As a result, VHA lacks assurance that miscellaneous
obligations are being reviewed and that related policies are being
followed. Effective oversight and review by trained, qualified
officials is a key factor in helping to assure that funds are used for
their intended purposes, in accordance with laws, while minimizing the
risk for fraud, waste, or abuse. Without control procedures to help
ensure that contracting personnel review and approve miscellaneous
obligations prior to their creation, VHA is at risk that procurements
do not have the necessary safeguards.
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\13\ To help minimize the use of miscellaneous obligations, VA
policy (VA Office of Finance Bulletin 06GA1.05) entitled Revision to
MP-4, Part V, Chapter 3, section A, Paragraph 3A.02--Estimated
Miscellaneous Obligation or Change in Obligation (VA Form 4-1358)
(Sept. 29, 2006) stated that miscellaneous obligations would not be
used as obligation control documents unless the contracting authority
for a station had determined that purchase orders or contracts would
not be required. VA policy also required a review of miscellaneous
obligations by contracting officials to help ensure proper use in
accordance with Federal acquisition regulations, but did not address
the intended extent and nature of these reviews or how the reviews
should be documented.
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For example, in our case study at the VA Pittsburgh Medical Center,
we found 12 miscellaneous obligations, totaling about $673,000, used to
pay for laboratory services provided by the University of Pittsburgh
Medical Center (UPMC). The Chief of Acquisition and Materiel Management
for the VA Pittsburgh Medical Center stated that she was not aware of
the UPMC's laboratory testing service procurements and would review
these testing services to determine whether a contract should have been
established for these procurements. Subsequently, she stated that VISN
4--the Veterans Integrated Service Network (VISN) that oversees the
operations of the VA Pittsburgh Medical Center--would revise procedures
to procure laboratory testing services through purchase orders backed
by reviewed and competitively awarded contracts, instead of funding
them through miscellaneous obligations.
In the absence of review by contracting officials, controls were
not designed to prevent miscellaneous obligations from being used for
unauthorized purposes, or for assets that could be readily converted to
personal use. Our analysis of the IFCAP database for fiscal year 2007
identified 145 miscellaneous obligations for over $30.2 million that
were used for procurement of such items as passenger vehicles;
furniture and fixtures; office equipment; and medical, dental, and
scientific equipment. Although VA's miscellaneous obligation policy did
not address this issue, VA officials stated that acquisition of such
assets should be done by contracting rather than through miscellaneous
obligations. Without adequate controls to review miscellaneous
obligations and prevent them from being used for the acquisition of
such assets, it is possible that VHA may be exposing the agency to
unnecessary risks by using miscellaneous obligations to fund the
acquisitions of goods or services that should have been obtained under
contract with conventional controls built in.
Inadequate Segregation of Duties
VA policies and procedures and IFCAP's control design allowed a
single official to perform multiple key roles in the process of
creating and executing miscellaneous obligations. Control point
officials were authorized to create, edit, and approve requests for
miscellaneous obligations. In addition, these same individuals could
certify the delivery of goods and services and approve payment. Similar
weaknesses have been reported by agency auditors as well.\14\ Federal
internal control standards provide that for an effectively designed
control system, key duties and responsibilities need to be divided or
segregated among different people to reduce the risk of error or
fraud.\15\ These controls should include separating the
responsibilities for authorizing transactions, processing and recording
them, reviewing the transactions, and accepting any acquired assets.
Without proper segregation of duties, risk of errors, improper
transactions, and fraud increases. The lack of segregation could allow
for improper expenditures to occur without detection.
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\14\ Department of Veterans Affairs, Office of Inspector General,
Audit of Alleged Mismanagement of Government Funds at the VA Boston
Healthcare System, Report No. 06-00931-139 (Washington, D.C.: May 31,
2007); Grant Thornton, Department of Veterans Affairs, OMB Circular A-
123, Appendix A--Findings and Recommendations Report (Procurement
Management) (July 18, 2007).
\15\ GAO/AIMD-00-21.3.1.
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Our case studies showed inadequate segregation of key duties in 30
of the 42 obligations we reviewed. In these instances, controls were
not designed to prevent one official from performing two or more of the
following key functions:
requesting the miscellaneous obligation,
approving the miscellaneous obligation,
recording the obligation of funds, or
certifying delivery of goods and services and
approving payment.
For example, in one case in Pittsburgh, one official requested and
approved a miscellaneous obligation of over $140,000 for medical
services and then certified receipt and approved payment for at least
$43,000 of those services. In another case in Cheyenne, we found one
miscellaneous obligation for utilities where one official requested,
approved, and certified receipt and approved payment of over $103,000
in services. Such weak control design could enable a VHA employee to
convert VHA assets to his or her personal use, without detection.
Lack of Adequate Supporting Documentation
Control design flaws in VA's policies and procedures resulted in
several instances of insufficient documentation to determine whether
the miscellaneous obligations we reviewed as part of our case-study
analysis represented a bona fide need. Specifically, VA policies and
procedures were not sufficiently detailed to require the type of
information needed such as purpose, vendor, and contract number that
would provide crucial supporting documentation for the obligation.
Internal control standards provide that transactions should be clearly
documented and all documentation and records should be properly managed
and maintained.\16\ Adequate documentation is essential to support an
effective funds control system; is crucial in helping to ensure that a
procurement represents a bona fide need; and reduces the risk of fraud,
waste, and abuse. When a legal obligation is recorded, it must be
supported by adequate documentary evidence of the liability.\17\ An
agency should use its best estimate to reserve an amount for future
obligation when the amount of the Government's final liability is
undefined. Further, the basis for the estimated liability and the
computation must be documented.
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\16\ GAO/AIMD-00-21.3.1.
\17\ 31 U.S.C. Sec. 1501(a).
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We found that 8 of the 42 miscellaneous obligations had
insufficient data to determine whether the miscellaneous obligation
represented a bona fide need. This level of documentation was not
sufficient for an independent reviewer to determine what items were
procured and whether the appropriate budget object code was charged. As
a result of these deficiencies, in several cases we had to rely on
invoices to determine the probable purpose of the miscellaneous
obligation and whether it represented a bona fide need.
For example, in Kansas City, we found one miscellaneous obligation
for over $1.3 million whose purpose was listed as ``To obligate funds
for the Oct 06 payment,'' while the associated invoices showed that the
miscellaneous obligation was used to cover the services of medical
resident staff. In Pittsburgh, we found a miscellaneous obligation for
over $45,000 whose purpose was listed as ``LABCORP 5/1-5/31/07,'' while
the associated invoices showed that the obligation was for laboratory
testing services. Without procedures calling for more definitive
descriptions of the purpose, we could not confirm that these
miscellaneous obligations were for bona fide needs or that the invoices
reflected a legitimate use of Federal funds. Other instances of
inadequate supporting documentation we found during our case-study
analysis included the absence of vendor names for 20 of the 42
miscellaneous obligations, and missing contract numbers for 16 of the
42 miscellaneous obligations.
Inadequate control requirements for supporting documentation and
completing data fields concerning the purpose of the obligation, vendor
information, and contract numbers can hinder oversight by senior VA
management officials. The Deputy Assistant Secretary for Logistics and
Acquisition \18\ said that he and other VHA officials use the IFCAP
database to monitor the extent and nature of miscellaneous obligations
nationwide, including analyzing the number and dollar amounts of
miscellaneous obligations and identifying the types of goods and
services procured using miscellaneous obligations. He told us that he
was concerned with the extent and nature of the use of miscellaneous
obligations at VA, that he lacked adequate oversight or control over
procurements made through miscellaneous obligations, and that he often
did not know what was being bought or whom it was being bought from.
Our analysis of the IFCAP database found that over 88,000 (69 percent)
of 127,070 miscellaneous obligations did not include vendor
information, accounting for over $5 billion of the $6.9 billion in
recorded miscellaneous obligations in fiscal year 2007. Similarly, the
IFCAP database did not contain a description of what was purchased or
information on the quantities purchased. As a result, important
management information was not available to senior VA procurement
officials.
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\18\ This official acts as VA's Senior Procurement Executive and
oversees the development and implementation of policies and procedures
for department-wide acquisition and logistics programs supporting all
VA facilities.
VA Has Made Improvements in Its Policies and Procedures, but
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Implementation Has Not Been Assessed
Our September 2008 report included four recommendations to VA to
develop and implement policies and procedures intended to improve
overall control. These recommendations focused on the need to better
ensure adequate oversight of miscellaneous obligations by contracting
officials; segregation of duties from initiation through receipt of the
resulting goods and services; maintaining supporting documentation for
miscellaneous obligations; and establishing an oversight mechanism to
ensure control policies and procedures are fully and effectively
implemented. In comments on a draft of that report, VA concurred with
our recommendations and has since taken action to develop policies and
procedures to address them. Specifically, in January 2009, VA issued
volume II, chapter 6 of VA Financial Policies and Procedures--
Miscellaneous Obligations which outlines detailed policies and
procedures aimed at addressing the deficiencies we identified in our
September 2008 report.
Key aspects of the policies and procedures VA developed in response
to our four recommendations were the following:
Oversight of miscellaneous obligations by contracting
officials--VA issued procedures regarding the review of
miscellaneous obligations by contracting officials.
Specifically, the request and approval of miscellaneous
obligations by contracting officials are to be reviewed by the
Head of Contracting Activity or delegated to the Local Head of
Contracting Activity. In addition, the obligation document will
be returned to the initiating office if the miscellaneous
obligation is not appropriately signed off by the Head of
Contracting Activity.
Segregation of duties--VA issued procedures that
require that no one official may control all key aspects of a
transaction or event. Specifically, no one official may perform
more than one of the following key functions: requesting the
miscellaneous obligation; approving the miscellaneous
obligation; recording the obligation of funds; or certifying
the delivery of goods and services or approving payment.
Supporting documentation for miscellaneous
obligations--New procedures require completion of the purpose,
vendor, and contract number fields on VA Form 1358, Estimated
Miscellaneous Obligation or Change in Obligation. The
procedures permit that a new miscellaneous obligation can only
be processed if the appropriate information is recorded in the
purpose, vendor, and contract field. The purpose field must be
specific, contain adequate references, and note the period of
performance; the vendor name and address must be provided,
except in the case of multiple vendors; and the contract number
must be included on the miscellaneous obligation document.
Oversight mechanism to ensure control policies and
procedures are fully and effectively implemented--VA developed
procedures requiring oversight to help ensure the new policies
and procedures are followed. For example, each facility is now
responsible for performing independent oversight of the
authorization and use of miscellaneous obligations. In
addition, facility reviews must be performed quarterly, at a
minimum, and should include all new miscellaneous obligations
or changes to existing miscellaneous obligations that occurred
in the previous quarter. The facility may use sampling to
conduct the quarterly reviews. Further, the results of the
independent reviews are to be documented and recommendations
tracked by facility officials.
VA actions taken to develop policies and procedures intended
to address the deficiencies found in our September 2008 report
represent an important first step. However, full and effective
implementation of VA's new policies and procedures will be even
more important. We have not yet fully evaluated the extent to
which VA's new policies and procedures are in place and
operating as intended. Further, VA's ability to fully and
effectively address the deficiencies identified in our
September 2008 report concerning miscellaneous obligations may
be adversely affected by continuing financial system weaknesses
reported by agency auditors. Specifically, one of the
weaknesses we reported on in November 2009 \19\ was that VA
lacked a system to track obligations and purchases by vendors,
resulting in VA relying on those vendors to supply operational
sales data on medical center purchases. Consequently, this type
of deficiency exposes VA to continued risk of errors in
financial information and reporting, potentially impacting
actions VA has made in developing policies and procedures
intended to increase accountability and controls over its use
of miscellaneous obligations.
---------------------------------------------------------------------------
\19\ GAO, Department of Veterans Affairs: Improvements Needed in
Corrective Action Plans to Remediate Financial Reporting Material
Weaknesses, GAO-10-65 (Washington, D.C.: Nov. 16, 2009).
In summary, our September 2008 report demonstrated that without
basic controls in place over billions of dollars in miscellaneous
obligations, VA is at significant risk of fraud, waste, and abuse.
Effectively designed internal controls serve as the first line of
defense for preventing and detecting fraud, and they help ensure that
an agency effectively and efficiently meets its missions, goals, and
objectives; complies with laws and regulations; and is able to provide
reliable financial and other information concerning its programs,
operations, and activities. VA management has made progress to reduce
the risks associated with the authorization and use of miscellaneous
obligations by developing policies and procedures that improve overall
control design over miscellaneous obligations. However, full and
effective implementation of this new guidance will be critical to
reducing the Government's risks associated with VA's use of
miscellaneous obligations.
Mr. Chairman and Ranking Member Roe, this concludes my prepared
statement. I would be happy to respond to any questions you or other
Members of the Subcommittee may have at this time.
GAO Contact and Staff Acknowledgments
For further information about this testimony, please contact Kay L.
Daly, Director, Financial Management and Assurance at (202) 512-9095,
or [email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
testimony. Major contributors to this testimony included Glenn Slocum,
Assistant Director; Carla Lewis, Assistant Director; Richard Cambosos;
Debra Cottrell; Francine DelVecchio; Daniel Egan; W. Stephen Lowrey;
Robert Sharpe; and George Warnock.
Prepared Statement of Gregory D. Kutz, Managing Director, Forensic
Audits and Special Investigations, U.S. Government Accountability
Office
Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible
Firms to Obtain Millions of Dollars in Contracts
GAO Highlights
Why GAO Did This Study
The Service-Disabled Veteran-Owned Small Business (SDVOSB) program
is intended to provide Federal contracting opportunities to qualified
firms. In fiscal year 2008, the Small Business Administration (SBA)
reported $6.5 billion in Governmentwide sole-source, set-aside, and
other SDVOSB contract awards. Given the amount of Federal contract
dollars being awarded to SDVOSB firms, GAO was asked to determine (1)
whether cases of fraud and abuse exist within the SDVOSB program and
(2) whether the program has effective fraud prevention controls in
place.
To identify whether cases exist, GAO reviewed SDVOSB contract
awards and protests since 2003 and complaints sent to GAO's fraud
hotline. GAO defined case-study firms as one or more affiliated firms
that were awarded one or more SDVOSB contracts. To assess fraud
prevention controls, GAO reviewed laws and regulations and conducted
interviews with SBA and Department of Veterans Affairs (VA) officials.
GAO did not attempt to project the extent of fraud and abuse in the
program. In addition, GAO did not attempt to assess the overall
effectiveness of VA's validation process to prevent or address fraud
and abuse in VA SDVOSB contracts.
What GAO Found
GAO found that the SDVOSB program is vulnerable to fraud and abuse,
which could result in legitimate service-disabled veterans' firms
losing contracts to ineligible firms. The 10 case-study firms that GAO
investigated received approximately $100 million in SDVOSB sole-source
and set-aside contracts through fraud, abuse of the program, or both.
For example, contracts for Hurricane Katrina trailer maintenance were
awarded to a firm whose owner was not a service-disabled veteran. GAO
also found that SDVOSB companies were used as pass-throughs for large,
sometimes multinational corporations. In another case a full-time
Federal contract employee at MacDill Air Force Base set up a SDVOSB
company that passed a $900,000 furniture contract on to a company where
his wife worked, which passed the work to a furniture manufacturer that
actually delivered and installed the furniture. The table below
provides details on 3 of the 10 cases, all of which included fraud and
abuse related to VA sole source or set aside SDVOSB contracts.
Details of Three Ineligible SDVOSB Cases
------------------------------------------------------------------------
Industry Award--agencies Notes
------------------------------------------------------------------------
Construction, $39.4 million--VA SBA determined the firm
maintenance, and was ineligible because
repair a non-service-disabled
veteran manages daily
operations.
Service-disabled
veteran owned and
managed a restaurant
in another city 80
miles away when the
contract was awarded.
Despite being
ineligible, VA allowed
the firm to continue
multiple SDVOSB
contracts.
------------------------------------------------------------------------
Construction and $5 million--VA, U.S. Fish Firm is ineligible
janitorial and Wildlife Service, because it
services Agricultural Research subcontracts 100
Service, and U.S. Forest percent of the work to
Service non-SDVOSB firms.
Our investigation found
that the SDVOSB firm
utilizes employees
from a large non-
SDVOSB foreign-based
corporation, which
reported almost $12
billion in annual
revenue in 2008, to
perform contracts.
Firm is currently
listed in VA database
of verified SDVOSB
firms.
------------------------------------------------------------------------
Construction, $8.1 million--VA Firm is ineligible
maintenance, and because the service-
medical equipment disabled veteran owner
is a full time New
Jersey state employee
and does not manage
day-to-day operations.
Our investigation found
that the firm's 49
percent non-service-
disabled veteran owner
owns five additional
construction firms at
the same address as
the SDVOSB firm
receiving contracts.
------------------------------------------------------------------------
Source: GAO analysis of FPDS-NG, ORCA, CCR, and contractor data and
interviews.
GAO found that the government does not have effective fraud
prevention controls in place for the SDVOSB program. However, in
response to the Veterans Benefits, Health Care, and Information
Technology Act of 2006, VA is developing a certification processes for
SDVOSB firms, but currently the certification will only be used for
contracting by VA. VA officials stated that the certification process
could include reviews of documents, validation of the owner's service-
disabled veteran status, and potential site visits to SDVOSB firms. To
be effective, VA's processes will need to include preventive controls,
detection and monitoring of validated firms, and investigations and
prosecutions of those found to be abusing the program. In a report GAO
issued in October 2009, GAO suggested Congress consider providing VA
with additional authority necessary to expand its SDVOSB verification
process governmentwide.
__________
Mr. Chairman and Members of the Subcommittee:
The Small Business Administration (SBA), which, along with Federal
procuring agencies, administers the Service-Disabled Veteran-Owned
Small Business (SDVOSB) program, reported in fiscal year 2008 that $6.5
billion \1\ in Federal contracts were awarded to firms that self-
certified themselves as SDVOSBs. Government contracts to SDVOSBs
accounted for only 1.5 percent of all Government contract dollars paid
in fiscal year 2008. Since the SDVOSB program began, the Government has
not met its annual mandated goal of 3 percent.\2\ However, in fiscal
year 2008 the Department of Veterans Affairs' (VA) SDVOSB contracts
accounted for $1.7 billion, or 12 percent, of all VA small business
eligible contracting dollars. In addition to SBA's statutory authority
over administration of the SDVOSB program, several other Government
agencies have separate authority over issues related to the SDVOSB
program. The Veterans Benefits, Health Care, and Information Technology
Act \3\ requires VA, among other things, to maintain a database of
SDVOSBs and Veteran-Owned Small Businesses (VOSB) so contractor
eligibility can be verified on VA SDVOSB and VOSB contracts. In
addition, the Office of Federal Procurement Policy (OFPP), within the
Office of Management and Budget, provides overall direction for
Governmentwide procurement policies, regulations, and procedures to
promote economy, efficiency, and effectiveness in the acquisition
processes. The office's primary focus is on the Federal Acquisition
Regulation (FAR), the Governmentwide regulation governing agency
acquisitions of goods and services, including SDVOSB set-aside and
sole-source contract actions.
---------------------------------------------------------------------------
\1\ SBA calculates its SDVOSB total by including all dollars
awarded to SDVOSBs, not just those received through set-aside or sole-
source contracts.
\2\ SBA's Small Business Procurement Scorecards report the annual
percentage share of SDVOSB awards.
\3\ Veterans Benefits, Heath Care, and Information Technology Act
of 2006, Pub. L. No. 109-461, 120 Stat. 3433 (2006).
---------------------------------------------------------------------------
My statement summarizes our report issued in October 2009.\4\ This
testimony discusses (1) whether cases of fraud and abuse exist within
the SDVOSB program and (2) whether the program has effective fraud
prevention controls in place.
---------------------------------------------------------------------------
\4\ GAO, Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain
Millions of Dollars in Contracts, GAO-10-108 (Washington, D.C.: Oct.
23, 2009).
---------------------------------------------------------------------------
To identify examples of firms that received SDVOSB contracts
through fraudulent or abusive eligibility misrepresentations, we
reviewed SDVOSB contract awards and protests filed with SBA since the
program's inception in 2003. We also reviewed allegations of fraud and
abuse sent to our fraud hotline, FraudNET. In addition, we posted
inquiries on our Web page and on several veteran advocacy group Web
pages and in newsletters seeking information on fraud or abuse of the
SDVOSB program. We received over 100 allegations of fraud and abuse in
the SDVOSB program. From these sources, we selected 10 cases for
further investigation based on a variety of factors, including facts
and evidence provided in protests and allegations, whether a firm
received multiple SDVOSB contracts, and whether a firm received other
non-SDVOSB contracts. To investigate these case studies, we interviewed
firm owners and managers and reviewed relevant documentation, such as
business filings and tax returns, to determine if SDVOSB eligibility
requirements had been met. We also analyzed data from the Federal
Procurement Data System--Next Generation (FPDS-NG) for 2003 through
2009 \5\ to identify SDVOSB contracts received by the firms since the
program's inception. Furthermore, we reviewed certifications made by
firms, such as certifications about a firm's size, SDVOSB status, and
line of business, in the Federal Government's Online Representations
and Certifications Application (ORCA).\6\ To determine whether the
program has effective fraud prevention controls in place, we reviewed
relevant laws and regulations governing the SDVOSB program. We also
interviewed agency officials about their responsibility for the program
and controls currently in place to prevent or detect fraud and abuse.
We did not attempt to project the extent of fraud and abuse in the
program. In addition, we did not attempt to assess the overall
effectiveness of VA's validation process to prevent or address fraud
and abuse in VA SDVOSB contracts. Additional details on our scope and
methodology can be found in our report issued in October 2009.\7\
---------------------------------------------------------------------------
\5\ FPDS-NG is the central repository for capturing information on
Federal procurement actions. Dollar amounts reported by Federal
agencies to FPDS-NG represent the net amounts of funds obligated and
deobligated as a result of procurement actions. Because we did not
obtain disbursement data, we were unable to identify the actual amounts
received by firms.
\6\ ORCA was established as part of the Business Partner Network,
an element of the Integrated Acquisition Environment, which was
implemented by the Office of Management and Budget's OFPP and the Chief
Acquisition Officers Council. ORCA is the primary Government repository
for contractor-submitted representations and certifications required
for conducting business with the Government.
\7\ GAO-10-108.
---------------------------------------------------------------------------
We conducted our audit work and investigation from October 2008
through December 2009 in accordance with U.S. generally accepted
Government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our objectives. We
performed our investigative work in accordance with the standards
prescribed by the Council of the Inspectors General on Integrity and
Efficiency.
Ineligible Firms Obtain Millions of Dollars in SDVOSB Contracts
Fraud and abuse in the SDVOSB program allowed ineligible firms to
improperly receive millions of dollars in set-aside and sole-source
SDVOSB contracts, potentially denying legitimate service-disabled
veterans and their firms the benefits of this program. We identified 10
case-study examples of firms that did not meet SDVOSB program
eligibility requirements but received approximately $100 million in
SDVOSB contracts, and over $300 million in additional 8(a), HUBZone,
and non-SDVOSB Federal Government contracts. Six of these 10 case
studies were awarded one or more sole-source or set-aside SDVOSB
contracts by VA. For example, 1 firm was awarded a $3.5 million
contract by VA for janitorial services at a VA hospital, but
subcontracted 100 percent of the work to an international firm. SBA
found 4 of the 10 firms, including 2 firms that were awarded VA
contracts, ineligible for the SDVOSB program through the agency's bid
protest process.\8\ Nevertheless, because there are no requirements to
terminate contracts when firms are found ineligible, several
contracting agencies allowed the ineligible firms to continue their
work. In addition to the 4 firms SBA found to be ineligible, we
identified 6 other case-study firms that were not eligible for the
SDVOSB program. The misrepresentations case-study firms made included a
firm whose owner was not a service-disabled veteran, a serviced-
disabled veteran who did not control the firm's day-to-day operations,
a service-disabled veteran who was a full-time Federal contract
employee at MacDill Air Force Base, and firms that served as ``pass-
throughs'' for large and sometimes foreign-based corporations. In the
case of a pass-through, a firm or joint venture lists a service-
disabled veteran as the majority owner, but contrary to program
requirements, all work is performed and managed by a non-service-
disabled person or a separate firm.
---------------------------------------------------------------------------
\8\ 15 U.S.C. Sec. 631 et seq., 13 C.F.R. Parts 125 and 134.
---------------------------------------------------------------------------
Federal regulations set requirements for a small business to
qualify as an SDVOSB. Specifically, SDVOSB eligibility regulations
mandate that a firm must be a small business \9\ and at least 51 \10\
percent owned by one or more service-disabled veterans \11\ who control
the management \12\ and daily business operations of the firm. In
addition, SDVOSB regulations also place restrictions on the amount of
work that can be subcontracted. Specifically, regulations require the
SDVOSB to incur a mandatory percentage of the cost of the contract
performance that can range from 15 percent to 50 percent, depending on
the type of goods or services. The FAR requires each prospective
contractor to update ORCA to state whether the firm qualifies as an
SDVOSB under specific North American Industry Classification System
codes. Pursuant to 15 U.S.C. Sec. 657 f(d), firms that knowingly make
false statements or misrepresentations in certifying SDVOSB status are
subject to penalties. Of the 10 cases we identify, all 10 of them
represented to be SDVOSBs in the Central Contractor Registration
(CCR).\13\ Table 1 provides details on our 10 case-study firms that
fraudulently or abusively misrepresented material facts related to
their eligibility for the SDVOSB program. We have referred all 10 firms
to appropriate agencies for further investigation and consideration for
removal from the program.
---------------------------------------------------------------------------
\9\ The criteria for a small business are defined in 13 C.F.R. Part
121.
\10\ For any publicly owned business, not less than 51 percent of
the stock must be owned by one or more service-disabled veterans.
\11\ The term ``veteran'' means a person who served in the active
military, naval, or air service, and who was discharged or released
there from under conditions other than dishonorable. 38 U.S.C.
Sec. 101(2). Service-disabled means, with respect to disability, that
such disability was incurred or aggravated in line of duty in the
active military, naval, or air service.
\12\ In the case of a veteran with permanent and severe disability,
the spouse or permanent caregiver of such veteran may control the
business.
\13\ CCR is the primary contractor registrant database for the U.S.
Federal Government. CCR collects, validates, stores, and disseminates
data in support of agency acquisition missions.
Table 1: Case-Study Firm Details
----------------------------------------------------------------------------------------------------------------
SDVOSB contracts a for years
Case Industry and location 2003-2009,b and awarding Case details
agencies
----------------------------------------------------------------------------------------------------------------
1 Maintenance/repair $7.5 million--Federal Emergency Firm is ineligible
North Las VegasManagement Agency (FEMA) because majority owner is not
a service-disabled veteran.
Firm's ineligibility
was determined by SBA during a
bid protest in June 2007.
After the SBA
protest, in July of 2007 FEMA
sent the firm a letter
providing it approximately 30
days to vacate SDVOSB contract
awards.
Company continues to
receive tens of millions in
non-SDVOSB contracts.
SBA determined that
the firm was ineligible;
however, the firm has not been
suspended or debarred from
receiving Federal contracts.
----------------------------------------------------------------------------------------------------------------
2 Construction and janitorial $5 million--VA, U.S. Fish and Firm is ineligible
services Wildlife Service, Agricultural because it does not perform
Chico, Calif. Research Service, and U.S. any work and subcontracts 100
Forest Service percent of the work to non-
SDVOSB firms.
Our investigation
found that the firm employs
three full-time workers and
performs SDVOSB contract work
with employees from a large
international-based
corporation that reported
almost $12 billion in annual
revenue in 2008.
Firm received over 20
SDVOSB contracts since 2008.
Firm is currently
listed in VA's database of
verified SDVSOB firms.
----------------------------------------------------------------------------------------------------------------
3 Construction/maintenance/repair $39.4 million--VA Firm is ineligible
Carnegie, Pa. because a non-service-disabled
veteran manages and controls
the firm's daily operations.
Firm's ineligibility
was determined by SBA during a
bid protest.
Despite the firm's
being determined ineligible,
VA allowed the firm to
continue multiple SDVOSB
contracts because there are no
requirements for agencies to
terminate contracts awarded to
ineligible firms.
A non-SDVOSB
construction company, located
at the same address, manages
and performs the SDVOSB
contract work.
Service-disabled
veteran owned and managed a
restaurant in another city
over 80 miles away when the
contract was awarded.
SBA determined that
the firm was ineligible;
however, the firm has not been
suspended or debarred from
receiving Federal contracts.
----------------------------------------------------------------------------------------------------------------
4 Construction/environmental/ $12.2 million--Environmental Firm is ineligible
defense technology/maintenance Protection Agency and FEMA because it is not a small
San Diego, Calif. business.
Our investigation
determined that Federal
agencies have obligated
approximately $171 million for
payment to the firm during
fiscal years 2003 to 2009,
exceeding SBA size standards
for average annual receipts.
Firm is also
ineligible because it has
formed at least five SDVOSB
joint ventures, violating SBA
joint-venture rules.
Firm uses the
employees from the large firm
in the joint ventures to
perform the SDVOSB contract
work.
----------------------------------------------------------------------------------------------------------------
5 Septic tank and related $200,000--U.S. Army Firm and its SDVOSB
services/facilities support joint ventures are ineligible
services/rental and leasing for the program because a non-
services SDVOSB firm performs the work.
Austin, Tex.
Firm and first joint
venture were determined
ineligible during an SBA bid
protest.
After the SBA
determination, the non-SDVOSB
firm used another SDVOSB joint
venture to continue to receive
SDVOSB contracts.
Over $5 million in
Federal contracts has been
obligated to the firm and its
SDVOSB joint ventures since
SBA ruled the firm and its
first SDVOSB joint venture
ineligible for the program.
Service-disabled
veteran used to qualify for
current contracts lives over
1,800 miles from contract
performance location.
SBA determined that
the firm was ineligible;
however, the firm has not been
suspended or debarred from
receiving Federal contracts.
----------------------------------------------------------------------------------------------------------------
6 Construction/maintenance/repair/ $8.1 million--VA Firm is ineligible
medical and surgical equipment because the service-disabled
Burlington, N.J. veteran owner is a full-time
New Jersey state employee and
does not manage the firm's day-
to-day operations.
Our investigation
also found that the firm's 49
percent owner, who is not a
service-disabled veteran, owns
five additional non-SDVOSB
construction firms at the same
address as the SDVOSB firm
receiving contracts.
SBA bid protest
initially determined that the
SDVOSB firm was ineligible
because the service-disabled
veteran did not own at least
51 percent of the firm. SBA
later reversed its decision
when the firm submitted
revised paperwork.
----------------------------------------------------------------------------------------------------------------
7 Construction/roofing $3.9 million--VA, Public Firm is ineligible
Boise, Idaho Buildings Service, and U.S. because a non-service-disabled
Army veteran manages and controls
the firm's daily operations.
Our investigation
found that the service-
disabled veteran is an
employee of the firm
performing the contract work.
Joint venture was
established as a pass-through
for a non-SDVOSB roofing firm.
SDVOSB joint venture
and non-SDVOSB firm share
employees and adjust payrolls
to meet program percentage of
work requirements.
Service-disabled
veteran received only 26
percent of the joint venture's
profits.
----------------------------------------------------------------------------------------------------------------
8 Construction/specialty trade $13.8 million--VA, U.S. Coast Firm is ineligible
contracting Guard, U.S. Army, Public because a non-service-disabled
LeominBuildings Service, and National veteran manages and controls
Park Service the firm's daily operations.
During our
investigation, firm executives
admitted that the service-
disabled veteran is not
involved with SDVOSB
construction contracts.
Service-disabled
veteran is an information
technology specialist who
currently works from home on
nongovernment contracts.
All the company
construction contracts are
managed by the non-service-
disabled partner of the firm.
The service-disabled
veteran does not receive a
salary from the company and
received less in Internal
Revenue Service 1099
distributions than the 10
percent minority owner of the
firm.
Ten percent minority
owner of the SDVOSB firm is
also the president of another
construction company located
at the same address as the
SDVOSB firm.
----------------------------------------------------------------------------------------------------------------
9 Construction/ maintenance/ $2.8 million--VA, U.S. Coast Firm is ineligible
repair Guard, Department of because a non-service-disabled
LuthersAgriculture, and U.S. Army veteran manages and controls
the firm's day-to-day
operations and because the
SDVOSB firm is a pass-through
for a non-SDVOSB firm.
Firm was determined
ineligible through an SBA bid
protest.
Through interviews
and our review of documents
submitted by the firm, we
found that the SDVOSB firm
only has four employees and
the owner of a non-SDVOSB firm
is responsible for day-to-day
operations of SDVOSB
contracts.
The SDVOSB firm
submitted 10 joint-venture
bids within a 5-month period,
violating Federal regulations.
After being found
ineligible by SBA, the firm
continued to receive
approximately $1.8 million in
new SDVOSB contracts.
SBA determined that
the firm was ineligible;
however, the firm has not been
suspended or debarred from
receiving Federal contracts.
----------------------------------------------------------------------------------------------------------------
10 Furniture/merchant wholesaler $900,000--U.S. Air Force Firm is ineligible
Tampa, Fla. because it does not perform
any work; it subcontracts 100
percent of the work to non-
SDVOSB firms.
Our investigation
found that the firm's service-
disabled veteran owner works
full-time as a Department of
Defense contract employee at
MacDill Air Force Base--the
same location as the contract
award.
SDVOSB firm served as
a pass-through to a company
where the service-disabled
veteran's wife works, which
passed the work to a furniture
manufacturer that designed,
delivered, and installed the
furniture.
Manufacturer
performed planning, design,
and installation of contracted
goods.
This manufacturer is
also on the General Services
Administration schedule and
could have provided the
contracted goods at a
significantly lower price.
The firm's physical
address is the owner's home
and its mailing address is a
mailbox rental store.
Contracting officials
at MacDill Air Force Base were
aware of the pass-through
structure of the firm and
approved the award knowing
that the SDVOSB would not
perform the required
percentage of work.
Firm is currently
listed in VA's database of
verified SDVSOB firms.
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of FPDS-NG, ORCA, CCR, and contractor data and interviews.
a Obligation amounts are rounded to the nearest $100,000.
b Year 2009 amounts are through July 2009.
VA Plans to Develop Fraud Prevention Controls for VA SDVOSB Contractors
We found that the Federal Government does not have an effective
fraud prevention system in place for the SDVOSB program. The 10 case
studies discussed above show the impact of the significant control
weaknesses in the Governmentwide SDVOSB program, which allowed
ineligible firms to receive millions in SDVOSB contracts. The lack of
effective fraud prevention controls by SBA and agencies awarding
contracts allowed these ineligible firms to receive approximately $100
million of sole-source or set-aside SDVOSB contracts over the last
several years. Recently, VA has taken steps to develop a validation
program for contracts it awards to SDVOSBs and VOSBs. According to VA
officials, these controls are being developed to validate eligibility
for awarding VA contracts only. However, currently the VA validation
program is not fully implemented.
A well-designed fraud prevention system should consist of three
crucial elements: (1) up front preventive controls, (2) detection and
monitoring, and (3) investigations and prosecutions. For the SDVOSB
program this would mean (1) front-end controls over program eligibility
prior to contract award, (2) fraud detection and monitoring of firms
already receiving SDVOSB contracts, and (3) the aggressive pursuit and
prosecution of individuals committing fraud, including suspension and
debarment and, if appropriate, termination of the contract. In
addition, agency officials should also use ``lessons learned'' from
detection and monitoring controls and investigations and prosecutions
to design more effective preventive controls.
VA's proposed validation program is encouraging in that it attempts
to address at least the first of the three essential elements of a
fraud prevention framework. The Veterans Benefits, Health Care, and
Information Technology Act \14\--which took effect in June 2007--
requires VA, among other things, to maintain a database of SDVOSBs and
VOSBs so that contractor eligibility can be verified. It also requires
VA to determine whether SDVOSBs and VOSBs are indeed owned and
controlled by veterans or service-disabled veterans in order to bid on
and receive VA contracts. Last, it requires that VA set-aside and sole-
source awards be made only to firms that have had their eligibility
verified. At the time the act took effect, VA already maintained an
online database, VetBiz Vendor Information Pages, referred to as VA's
VetBiz database, in which nearly 16,500 firms had self-certified as
SDVOSBs or VOSBs. While not yet fully implemented,\15\ VA's planned
validation program includes steps to verify a firm's eligibility for
the program, including validating the service-disabled status claimed
by an owner and his/her control of day-to-day operations. The VA
program also includes plans for document reviews and site visits to
firms seeking VA certification as SDVOSBs or VOSBs. Requiring
submission of documents to demonstrate ownership and control of an
SDVOSB has some value as a deterrent--ownership documents could have
prevented instances demonstrated in our case studies where the service-
disabled veteran was receiving less than 51 percent of the profits. The
most effective preventive controls involve the verification of
information, such as verifying service-disabled status with VA's
database and service-disabled veteran participation in the business
through an unannounced site visit. Verification of service-disabled
veteran status through VA's database could have prevented the most
egregious example of fraud where the owner was not even a service-
disabled veteran. Although VA's proposed system was not intended for
Governmentwide use, once the certification system is in place, all
SDVOSBs wishing to do business with VA will eventually have to be
certified.
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\14\ Veterans Benefits, Health Care, and Information Act of 2006,
Pub. L. No. 109-461, 120 Stat. 3433 (2006).
\15\ See GAO, Department of Veterans Affairs Contracting with
Veteran-Owned Small Businesses, GAO-09-391R (Washington, D.C.: Mar. 19,
2009).
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Although preventive controls are the most effective way to minimize
fraud and abuse, to be effective, VA's process will need to include the
remaining two elements of the fraud prevention model. The second
element, monitoring and detection, involves actions such as data mining
for fraudulent and suspicious applicants and evaluation of firms by
contracting officers and program officials to provide reasonable
assurance that contractors continue to meet program requirements. The
final element of an effective fraud prevention system is the aggressive
investigation and prosecution of individuals who commit fraud against
the Federal Government. In a report we issued in October 2009, we
suggested that Congress consider providing VA with the additional
authority necessary to expand its SDVOSB eligibility verification
process to all contractors seeking to bid on SDVOSB contracts
Government wide. In addition, we recommended that the Administrator of
SBA and the Secretary of Veterans Affairs coordinate with OFPP to
explore the feasibility of requiring that all contractors that
knowingly misrepresent their status as an SDVOSB be debarred for a
reasonable period of time.
VA generally agreed with our two recommendations. In its response,
VA expressed that specific authority would be required for other
agencies to be able to rely on the department's VetBiz database and
exclude firms from acquisitions if not ``verified'' in this database.
SBA's response, provided by the Associate Administrator for Government
Contracting and Business Development, generally agreed with our
recommendations; however, in its general observations and specific
responses to our recommendations, SBA stated that it has limited
responsibility for the SDVOSB program and questioned the efficacy of
one of our recommendations. Specifically, SBA stated that agency
contracting officers bear the primary responsibility for ensuring that
only eligible SDVOSB firms perform SDVOSB set-aside and sole-source
contracts. SBA also stated that it is only authorized to perform
eligibility reviews in a bid protest situation, and contracting
officers, not SBA, are responsible for taking appropriate action after
a bid protest decision is made. The Associate Administrator maintained
that SBA was under no legal obligation to create a protest process for
the SDVOSB program, and that its only statutory obligation is to report
on other agencies' success in meeting SDVOSB contracting goals. In
addition, SBA expressed that it was not obligated to institute any type
of fraud prevention controls within the SDVOSB program.
Mr. Chairman, this concludes my statement. I would be pleased to
answer any questions that you or other Members of the Subcommittee may
have at this time.
Contacts and Acknowledgments
For additional information about this testimony, please contact
Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement. Jonathan Meyer, Assistant Director;
Gary Bianchi; Bruce Causseaux; Randy Cole; Victoria De Leon; Beth
Faraguna; Ken Hill; John Ledford; Deanna Lee; Barbara Lewis; Vicki
McClure; Andrew O'Connell; George Ogilvie; Gloria Proa; Barry Shillito;
and Abby Volk made key contributions to this testimony.
GAO Slide Presentation
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Prepared Statement of Maureen T. Regan, Counselor
to the Inspector General, Office of Inspector General,
U.S. Department of Veterans Affairs
Mr. Chairman and Members of the Subcommittee, thank you for this
opportunity to testify on the findings of the Office of Inspector
General (OIG) relating to VA procurement processes. I am accompanied
today by Belinda Finn, Assistant Inspector General for Audits and
Evaluations.
BACKGROUND
Procurement is one of VA's major management challenges. Our
oversight of VA's procurement activities is through audits,
investigations, reviews, and inspections. In addition, the Office of
Contract Review conducts pre- and post-award reviews of contracts
awarded by VA's National Acquisition Center. These include Federal
Supply Schedule (FSS) contracts for pharmaceuticals; medical and
surgical supplies; health care services contracts; and national
contracts for major medical equipment. The Office of Contract Review
also conducts pre-award reviews of proposals for health care resources
to be awarded to VA affiliated universities and medical centers on a
sole-source basis. Our work provides us with a unique nationwide
perspective on VA's procurement practices. A list of published reports
from fiscal years 2004 through 2009 is attached to our testimony.
In the past 5 fiscal years, the OIG has published more than 35
reports relating to VA's procurement practices. These reports
identified $112 million in better use of funds. Another 424 reports
relating to pre and post-award reviews of FSS contracts awarded by VA's
National Acquisition Center and pre-award reviews of health care
resource contracts issued by VA medical facilities were issued directly
to contracting officers during this time period and are not publically
available because they contain proprietary information. The pre-award
reviews identified $1.54 billion in potential cost savings if the
contracting entity negotiated the recommended fair and reasonable
prices. Of this amount, $166 million related to health care resource
contracts awarded by VA medical facilities. The post-award reviews
collected more than $115 million, which was deposited in VA's Supply
Fund.
During this same time period, we conducted 254 criminal
investigations relating to procurement that resulted in the arrest of
110 individuals.
In addition, an audit of payments made under Veterans Health
Administration's (VHA) non-VA outpatient fee care program estimated
about $1.126 billion in overpayments and $260 million in underpayments
over a 5-year period due to poor oversight and administration of claims
for payment. The audit found systemic program weaknesses similar to
those we have identified in VA's procurement processes. We found that
VA medical facilities were not properly justifying and authorizing fee
services for 80 percent of outpatient care payments. In addition, VA
improperly paid 37 percent of fee claims by making duplicate payments,
paying incorrect rates, and through other payment errors such as paying
for the wrong quantity of services.
Across the board, our audits, reviews, and investigations have
identified systemic issues that caused or contributed to procurement
failures, overpayments, and misuse of funds, including poor acquisition
planning; poorly written contracts; inadequate competition; no price
reasonableness determinations; and poor contract administration.
We believe the decentralized organizational structure for
procurement activities in VA as well as inadequate oversight and
accountability are primary factors contributing to these problems. As
we have previously testified, VA procurement is so decentralized that
on a system-wide basis, VA cannot identify what it bought, who it
bought it from, whether the products or services were received, or
whether prices were fair and reasonable.
Data systems such as VA's Electronic Contract Management System
(eCMS) and the Federal Procurement Data System (FPDS), which should
provide accurate information relating to procurements, contain
inaccurate and incomplete data. Because of VA's lack of a system-wide
inventory of contracts, we have had to develop techniques for
identifying each universe of contracts for audits, investigations, and
other reviews. For example, our audit of non-competitive clinical
sharing agreements required that we contact each medical center
selected for review to obtain their listing of agreements. Although we
took steps to assess the information we received, we cannot be certain
that we had a complete inventory of agreements for review. If an audit,
investigation, or other review involves the purchase of items other
than pharmaceuticals purchased through the pharmaceutical prime vendor
program, we have to request VA sales data with line item visibility
from the vendor as the information is not contained in any VA
centralized database.
DEFICIENCIES IN THE PROCUREMENT PROCESS
The procurement process involves at least three critical steps and
three groups of individuals who must work together for a successful
procurement. The three steps include planning, solicitation/
negotiation/award, and contract administration. The three groups of
individuals involved in the process are the program office requiring
the goods or services, the contracting entity, and the Office of
General Counsel. Breakdown at any step in the process or by any of the
three groups of individuals can result in the failure of the
procurement. Through our oversight activities, we have identified
breakdowns at all three steps in the procurement process and by each
group of individuals involved in the process.
Procurement Planning
Planning involves identifying requirements, identifying potential
sources through market research, developing an Independent Government
Cost Estimate, and developing a comprehensive statement of work that
clearly defines the requirements, deliverables, and performance
measures. Our reports on the failure of contracts for the development
of the Core Financial and Logistics System (CoreFLS), the National
Vietnam Veterans Longitudinal Study, the development of the Patient
Financial Services System, the Centralized Incident Response Capability
(CIRC), and the development of the Replacement Scheduling Application
identified the inability of the responsible program offices to
adequately identify and define their needs as a significant factor in
the poor outcome. These failures resulted in losses to VA that exceeded
$650 million. (Report Nos. 04-1371-177, 04-02330-212, 06-03285-73, 04-
03100-90, 09-01446-203.) Other reports that address deficiencies in
procurement planning include the evaluation of sole-source health care
resource contracts, a national audit of open market medical equipment
and supply purchases, a national audit of the acquisition and
management of selected surgical device implants, and the contract with
the University of Texas Southwest Medical Center for Gulf War illness
research. (Report Nos. 05-01318-85, 08-01519-172, 06-03677-221, and 09-
0175-164)
The national audit of VHA open market medical equipment and supply
purchases reported that VHA medical facility staff needed to plan
medical equipment and supply purchases more effectively to reduce
purchases on the open market and increase purchases through the FSS.
Medical facility staff lacked the knowledge, information, and proper
tools to effectively use the FSS. We estimated that VHA could reduce
its supply costs by about $41 million over 5 years if it improved its
acquisition planning and oversight processes and increased the use of
the FSS to purchase medical equipment and supplies. (Report No. 08-
01519-172)
Issues identified in these and other OIG reviews include the
failure to develop complete and comprehensive statements of work
containing specific deliverables and performance measures, which made
them difficult to administer and ensure compliance. Our review of the
Interagency Agreement between VA and the Department of Navy, Space and
Naval Warfare Systems (SPAWAR), found that VA lacked qualified and
experienced program personnel to plan and manage IT enterprise
development. As a result, VA personnel were unable to develop the
required statements of work and essentially abdicated responsibility
for IT development to SPAWAR and ultimately to SPAWAR contractors.
(Report No. 09-01213-142)
Solicitation/Negotiation/Award
The solicitation, negotiation, and award process can involve the
award of a new contract, a modification to a contract to add services
or change terms and conditions, or the issuance of a task order or
purchase order against an existing contract. One of the most frequent
issues we have identified is the failure to comply with Federal laws
and regulations requiring competition. As an example, our recent review
of the contract awarded to develop the Replacement Scheduling
Application showed that the contract was improperly modified at the
direction of the program office to change the scope of work when it was
determined that there was no commercial off-the-shelf product available
for the program. (Report No. 09-01926-207) An audit of the use of
expired funds and related contracting practices at the Boston
Healthcare System, the subsequent national audit addressing the same
issues, and our review of the CIRC contract also identified that
contracts were improperly modified at the direction of program
officials to add services that were outside the scope of the original
statement of work. These improper cardinal changes to the contracts
allowed VA medical facilities to noncompetitively obtain goods and
services. (Report Nos. 06-03677-221, 08-00244-213, and 04-03100-90)
In a report issued in February 2007, we found that VA conducted a
procurement in the middle of the night on a weekend to obtain the
services of forensic analysts to review electronic media relating to
the theft of an employee's external hard drive containing information
about 26 million veterans. This was done at the direction of the
program office to avoid competition and steer the contract to the
vendor preferred by the program office. A separate administrative
investigation found that a contracting officer who expressed concern
over the inappropriateness of the procurement was subject to
retaliation by a former VA supervisor. Further, we found that the
program office approved and authorized payment for additional work that
was outside the scope of the task order without consulting with or
notifying the contracting officer and authorized payment for travel
expenses without verifying the charges. (Report No. 06-02238-84)
Two reviews conducted in response to complaints received through
the OIG Hotline identified the failure at facilities in Veterans
Integrated Systems Network 7 to comply with Federal Acquisition
Regulations (FAR) when purchasing services. Two of the purchases were
off General Services Agency (GSA) FSS contracts. We found that a
contract was awarded to a retired VA employee on a sole source basis
without the justification required by FAR Part 6. In two others awards,
the competition requirements in FAR Part 8.4 were not followed because
the program office, not the contracting entity, negotiated the
procurement. In one, the program officials identified and contacted the
contractor, asked the contractor to hire a retired VA employee to
perform the work, negotiated the hourly rates, wrote the task orders,
and then submitted it to the purchasing agent for signature. In
addition, we found that the task order was for services outside the
scope of those on the vendor's FSS contract and the services were
inherently Governmental in nature. (Report Nos. 08-02110-02 and 08-
01866-61)
Another issue we have repeatedly identified is the failure to
accurately assess price reasonableness. Our review of VA's contract
with QTC Medical Services, Inc., to conduct disability rating
examinations showed that VA failed to make a fair and reasonable price
determination prior to award. We found indicators that VA may have paid
more than fair and reasonable prices for the services provided. When an
independent audit conducted at the request of the Veterans Benefits
Administration and a subsequent review by the OIG Office of Contract
Review identified overcharges, VA officials declined to recover $2.6
million of the $6 million in overcharges. (Report No. 07-02280-104)
Our national audit of VHA's Government purchase card practices
examined more than 700 purchase card transactions. We found that for
17.4 percent of the transactions examined, the cardholders did not
maintain the documentation needed to confirm price reasonableness or
ensure the most efficient use of funds. The results supported the need
for VHA to strengthen controls to ensure cardholders maintain adequate
documentation of the receipt of goods and services to ensure purchases
are made for valid medical facility needs at reasonable prices. (Report
No. 07-02796-203)
Our review of the contract awarded to Dell for the lease of
computers found that in addition to limiting competition, the price
analysis was faulty and that it would have been more cost effective to
purchase rather than lease the equipment. (Report No. 08-02213-138)
Our report on FSS contracts awarded to resellers found that
contracts and contract modifications adding products and increasing
prices were awarded without obtaining the information necessary to
determine price reasonableness. For 63 percent of 11,576 products added
to four contracts via 28 modifications, the contracting officer failed
to document that an adequate price reasonableness determination had
been made. (Report No. 05-01670-04)
Our 2005 report relating to our reviews of 72 proposals for sole-
source contracts awarded to affiliated institutions to purchase health
care services found that VA was overpaying for services provided at the
VA medical facility on a per procedure basis because VA was paying 100
percent or more of the applicable Medicare part B rate, which consists
of four components - practice expense, physician expense, malpractice
insurance, and a geographic adjustment. The rate should have been
reduced because VA was already incurring the costs associated with the
practice expense component. (Report No. 05-01318-85) VA subsequently
issued policy requiring that the practice expense be excluded from the
Medicare rate when negotiating prices. However, a 2008 audit of the
administration of these contracts found the policy was not followed.
The audit concluded that exclusion of the practice expense component
could result in a savings of $2.5 million annually. (Report No. 08-
00477-211)
Contract Administration
Once a contract has been awarded or a purchase or task order issued
against an existing contract, it must be administered. This process
includes ensuring that the right product or service is delivered in a
timely manner, at the agreed upon price, and in accordance with the
terms and conditions of the contract. Contract administration is the
responsibility of the contracting officer and/or the contracting
officer's technical representative. When the contractor fails to
perform, action must be taken in a timely manner to ensure compliance
or the termination of the contract. We have identified numerous
systemic problems in contract administration.
A national audit of 58 contracts for health care resource clinical
services awarded non-competitively to affiliated institutions showed
that VA lacks reasonable assurance that it receives the services it
paid for because of ineffective controls to monitor performance. We
identified problems in all contracts in the sample reviewed and found
that for 52 percent of the contracts, the vendor was overpaid. We
estimated that by strengthening controls, VA could save $9.2 million
annually. (Report No. 08-00244-213)
During our recent reviews of contracts for primary medical services
provided at VA Community Based Outpatient Clinics (CBOCs) we found that
VA overpaid for the services because the Contracting Officer Technical
Representatives (COTRs) were not properly administering the contracts.
For example, we found that the COTRs were not disenrolling patients in
a timely manner, reviewing invoices for accuracy and completeness
before authorizing payment, and monitoring performance according to
performance measurements in the contract. (Report Nos. 09-01446-233,
09-01446-226, and 09-1446-37)
A national audit of Consolidated Mail Outpatient Pharmacy (CMOP)
contract management showed that poor monitoring controls during
contract administration put VA at significant risk to overpay for
services on contracts valued at $40.7 million. (Report No. 09-0026-143)
In our review of the contract between VA and QTC for rating
examinations, we found that neither the contracting officer nor the
COTR identified the applicable Medicare Current Procedural Terminology
(CPT) codes for laboratory and other tests that QTC was allowed to
charge for under the contract. As a result, the COTR approved invoices
for payment that included procedural codes created by QTC. In addition,
neither the contracting officer nor the COTR ever calculated the actual
price that QTC could charge for each CPT code. Notwithstanding the
absence of this key information, the COTR approved the invoices for
payment. (Report No. 07-02280-104) Our review of the CIRC contract
found that VA paid the invoice every month without verifying
deliverables. We also found that under the contract VA purchased almost
$35 million in equipment but did not know whether the VA ever obtained
possession of the equipment and, if so, where the equipment was
located. (Report No. 04-03100-90)
A national audit of VHA's Home Respiratory care program found that
the program office, including the COTRs, lacked documentation to
support purchases, and lacked invoices and delivery tickets to support
certification for payment. We estimated that proper contract
administration could reduce program costs by about $16.8 million over 5
years. (Report No. 06-00801-30)
We also have found that VA is reluctant to take appropriate and
timely action when a contractor does not perform under the contract or
does not comply with contract terms and conditions. For example, when
Unisys consistently failed to submit deliverables for the Patient
Financial Services System within the time frames established in the
contract, it was almost 4 months before VA began any action to obtain
compliance or terminate the contract for default. Despite the delay,
the termination process was proceeding when the Office of General
Counsel decided unilaterally that a termination for default was not
feasible. Instead, VA terminated the contract for convenience, paid the
contractor for the level of effort as of the date of termination, and
took possession of the work that had been completed. We were told that
a termination for convenience was necessary because it was VA's intent
to obtain the work completed to date and contract with another vendor
to finish the project. Shortly thereafter, VHA canceled the project,
thus wasting the $30 million paid to Unisys. (Report No. 06-03285-73)
Similarly, our review of the contract between VA and the University of
Texas Southwest Medical Center for Gulf War illness research, showed
that the contracting officer was precluded by internal and external
forces from timely initiating the process to require compliance or
terminate the contract for default when the contractor blatantly
refused to comply with key terms and conditions of the contract.
(Report No. 09-1075-164.)
CAUSATION
Deficiencies in VA's procurement program are caused by a variety of
factors, including:
Decentralization of the acquisition function and lack of oversight
The vast majority of contracting officers and contract specialists
work directly for the program office requesting the service. We have
found that they experience undue pressure to comply with the desires of
program office and/or facility management rather than complying with
applicable laws and regulations. As a result, the interests of the
Government are not protected.
In addition, there is inadequate oversight of procurement within
VA. This is due to the decentralization of the process and the failure
of VA entities with dedicated contract specialists to establish an
oversight program. VA has expended resources to conduct pre-award and
post-award reviews of FSS contracts and pre-award reviews of health
care resource contracts awarded sole-source to affiliated institutions.
VA has also vigorously campaigned against efforts to remove contract
provisions that would prohibit oversight of FSS contracts through pre-
award and post-award reviews. These reviews have not only resulted in
significant dollar savings and recoveries as discussed above, but they
have had a deterrent effect. Of the 164 post-award reviews conducted in
the past 5 fiscal years, 97 (59 percent) were the result of voluntary
disclosures.
Effective oversight is difficult because there is no central
database that captures contracting and purchasing information. For
example, in 2007, the Office of Acquisition, Logistics and Construction
(OAL&C) began requiring contracting entities to use eCMS for
procurements over $25,000 to gain better oversight of VA procurements
and to ensure better contracting. However, our audit of the system
found that it was far from a complete inventory of acquisitions. We
estimated that only 17 percent of procurement actions that were
required to be recorded were recorded in VA's eCMS system and 30
percent of VA procurement actions that were recorded in the FPDS were
not recorded in eCMS records as required. We concluded that the reports
generated by eCMS were unreliable and could not be used in making
management decisions.
We also have found that some procurements are made invisible to
oversight by having other Government agencies do the procurement. This
problem was identified in our review of the Interagency Agreement
between VA and SPAWAR and in our report on the Replacement Scheduling
Application. In the latter report, we found that GSA is awarding
contracts on behalf of VA for IT related services. We found that these
contracts did not appear in any VA system, that VA did not have a copy
of the contract or task order, and the COTR was located at GSA even
though the services were provided at a VA location.
This lack of oversight within VA has been the common denominator in
the criminal investigations involving procurement fraud we have
conducted during the last 5 years. For example, until we arrested the
third CMOP Director, VHA oversight of local CMOP contracts for supplies
and services was non-existent. The former Director of the Dallas CMOP
steered a $55 million services contract to a company and was arrested
after he attempted to extort an ownership share of this company. The
former Director and Associate Director of the Murfreesboro CMOP were
arrested after we developed evidence that the pair had received
$350,000 in kickbacksfrom supplies and services purchases without
competition, including the purchase of 115,000 rolls of inferior
quality red tape meant to secure controlled substance packages. The
former Director of the Hines CMOP was arrested after we were notified
by a supervisory contracting officer at the Great Lakes Acquisition
Center of suspected collusion between this Director and a favored
contractor who had been awarded $10 million in service and supply
contracts non-competitively in the previous 10 years. Our investigation
revealed that the Director had not only accepted gratuities in exchange
for this favoritism but also knowingly allowed his Associate Director
to operate a fraudulent 8A firm that received at least $7 million in
sub-contracts for services from another company doing business with VA.
We noted in our National audit of CMOP contract management that in
response to criminal investigations involving the CMOP program, the
National CMOP Office began centralizing all CMOP procurement at the
CMOP in Leavenworth, Kansas. In addition, the authority over CMOP
contracting officers transferred from the National CMOP Office to VA's
National Acquisition Center. (Report No. 09-00026-143) We believe this
centralization of the two functions in different offices will result in
better procurements and decrease the potential for similar criminal
activity.
Noncompliance with VA policies and regulations
In addition to statutes and regulations, VA has established
internal procurement policies. Our reviews have consistently found non-
compliance. For example, after a report on VHA's purchasing practices
that we issued in 2002, VA convened the Procurement Reform Task Force
to address the issues raised in the report. One result was a purchasing
hierarchy that required VHA to purchase medical/surgical supplies and
equipment and pharmaceuticals from VA-awarded national contracts,
including FSS contracts, before entering into a local contract or
purchasing products open market. In 2004, 2007, and again in 2009, we
issued audit reports showing that VA facilities were not complying with
the purchasing hierarchy yet could save significant amounts of money if
they used national contracts and blanket purchase agreements instead of
purchasing health care products on the open market. (Report Nos. 02-
01481-118, 06-03677-21, 08-01519-172)
Similarly, in response to our 2005 report on sole-source contracts
with medical schools and other affiliated institutions, VA Directive
1663 established specific requirements for contracts awarded for health
care services pursuant to 38 U.S.C. Sec. 8153. Our subsequent pre-award
reviews of proposals for these contracts have found little compliance
with the provisions of the policy. To gain better oversight of VA
procurements and to ensure better contracting, in 2007, OAL&C issued
policy requiring contracting entities to use eCMS for certain
procurements. A recent audit found that the system was ineffective, in
part, because VA personnel were not using the system as mandated. As a
result, the reports generated by the system were unreliable and could
not be used in making management decisions.
Lack of Training and Expertise
In the last couple of years, VA has made a significant effort to
recruit and train a strong acquisition workforce. However, we still
find that contracting personnel lack training and expertise in the
types of procurements they are asked to process. Contracting officers
who do not understand the nature of the goods or services being
procured and their relationship to the needs of the program office are
unable to assist program officials in the planning, awarding, and
administration of the contract. IT procurement is one example. As noted
in our 2009 report on the failure of the contract for the Replacement
Scheduling Application, the contracting officer had no experience or
expertise in the award and administration of contracts for IT system
development. To help resolve this problem relating to IT procurements,
VA is in the process of consolidating IT procurements under OAL&C at a
facility in Fort Monmouth, New Jersey. We have identified the same
problem at VHA facilities with respect to the award and administration
of contracts for health care resources. Our pre-award reviews and our
audit of the administration of the sole-source contracts to affiliated
institutions have identified that the contracting officers and COTRs
lack training regarding the use of Medicare rates even though prices
are based on Medicare rates.
We also have found that program officials often do not have the
training and expertise needed to define requirements, develop
statements of work, or monitor contract performance. This results in
poor contract development and administration. This problem was
highlighted in our review of the Interagency Agreement with SPAWAR. We
found that VA's Office of Enterprise Development had relinquished its
authority and responsibility for IT program development to SPAWAR and
SPAWAR contractors.
Mr. Chairman, this concludes our statement and we would be pleased
to answer any questions that you or other Members of the Subcommittee
may have on these issues.
Prepared Statement of Glenn D. Haggstrom, Executive Director,
Office of Acquisition, Logistics, and Construction,
U.S. Department of Veterans Affairs
Mr. Chairman, Ranking Member Roe, and Members of the Subcommittee,
thank you for the opportunity to appear before you today to discuss and
update you on acquisition operations at the Department of Veterans
Affairs (VA). As VA's acting chief acquisition officer, I believe there
is much good news to report. It is a privilege for me to represent the
many dedicated and hardworking acquisition and logistics professionals
throughout the Department who provide mission-critical support everyday
to ensure quality care and benefit delivery for our Nation's most
special citizens--Veterans. I am accompanied here today by Mr. Jan
Frye, VA's Deputy Assistant Secretary for Acquisition and Logistics,
who also serves as VA's senior procurement executive; Mr. Ed Murray,
Deputy Assistant Secretary for Finance, Office of Management; Mr. Craig
Robinson, Executive Director, VA National Acquisition Center; Mr.
Frederick Downs, Jr., Chief Procurement and Logistics Officer for the
Veterans Health Administration (VHA); and Mr. David Canada, Senior
Procurement Analyst, Center for Small Business Utilization, Office of
Small and Disadvantaged Business Utilization (OSDBU).
I will start today by providing a brief update on VA's
accomplishments under the American Recovery and Reinvestment Act (ARRA)
of 2009. Transparency is the hallmark of VA's Recovery spending; all
acquisition opportunities are advertised in the Federal Business
Opportunities System. Through November 30, 2009, VA obligated
approximately 32 percent of its non recurring maintenance stimulus
funds for facilities projects and is on track to have 50 percent
obligated by March 31, 2010. Over 95 percent of these contract awards
were accomplished competitively, and over 70 percent of VA's Recovery
contract dollars have been spent with Veteran-owned small businesses.
VA's acquisition professionals have negotiated better prices than
estimated, allowing VA to reallocate remaining funds to other needed
projects. Using the Department's enterprise contract writing system for
all contracting actions associated with facilities projects has given
VA valuable insight on ways to improve measurement and quality control
systems. Improvements affect cycle cost, data integrity, and automated
tools used to track progress.
VA continues to transform and improve its acquisition operations.
Recommendations from a 2008 PricewaterhouseCoopers study of the VA
acquisition program resulted in implementation this year of a new
acquisition business model increasing centralized decision-making and
decentralized execution. As a result of this study, VHA has realigned
its acquisition staff under a centralized structure with four regional
offices focused on the internal business process of running an
acquisition organization, to include a focused approach to training and
oversight. Further, this structure allows each Veterans Integrated
Service Network (VISN) Contract Manager to drive organizational
standardization, individual performance, and allows for direct
responsibility and accountability through a professional certified
workforce. A follow on study will be completed in February 2010 and is
likely to result in further enhancements to the acquisition business
model.
Mindful of the innovation of private industry and as part of VA's
transformation to a 21st century organization, VA recently established
an innovative Supplier Transformation Relationship Initiative; for the
first time ever, VA's supplier community is being treated as a critical
component to VA's success. This initiative improves VA's acquisition
process by establishing better and more transparent communications with
vendors, which increases VA's access to industry's best practices and
innovation. Dialog began in August 2009 with a subset of VA's industry
partners at a VA-hosted forum to support this initiative, attended by
140 individuals from more than 90 companies representing every
material, service, and socioeconomic area of VA's contracting
expenditures. Critical feedback was provided on the VA acquisition
process and this initiative is further developing to expand the dialog
to include more than 15,000 of VA's industry partners.
VA made great strides in the last year to recruit and retain a
professional acquisition workforce. The VA Acquisition Academy, the
only Federal civilian agency acquisition academy, was established and
represents a significant investment in growing, training and retaining
the VA acquisition workforce. The academy comprises three schools: the
Intern School, the Contracting Professional School, and the Program
Management School. The academy has received extensive favorable press
as well as Congressional and other Federal agency interest. The Office
of Management and Budget's (OMB) Chief Acquisition Officer Council
awarded the academy the 2009 Team Excellence Award for VA's efforts to
recapitalize its acquisition workforce. Additionally, the Federal
Acquisition Certification for Contracting rate for VA contracting
officers has increased from 65 percent to over 93 percent, and use of
the Acquisition Career Management System has increased from 30 percent
to nearly 94 percent.
In Fiscal Year 2010, VA will begin an ``Acquisition Corps
Development Program.'' This program will develop transformational
leaders in order to leverage best practices and executive leadership
skills to develop business solutions optimizing VA's mission results.
The goal of the Acquisition Corps Development Program is threefold:
first, to develop a professional cadre of VA
acquisition experts to focus on the visible, highly complex and
enterprise-wide programs;
second, to increase the bench strength to support
succession planning for critical and senior-level positions;
and
third, to enhance retention of high performers by
feeding their desire to excel.
We continue to grow VA's acquisition workforce to meet our ever-
increasing contracting workload. The GS-1102 contract specialist
occupational series has increased by 45 percent since Fiscal Year (FY)
2003, from 766 to 1,405 full time employees. Additionally, VA
recognizes having trained program managers is critical to the overall
acquisition life cycle, formulating an acquisition strategy, and taking
responsibility for ensuring contract results in terms of cost,
schedule, and performance. To this end, the VA Acquisition Academy's
Program Management School developed a ``Boot Camp'' Program Management
Course to train up to 10,000 individuals involved in managing the
department's programs. Upon successful completion of the course, these
individuals will be certified as FAC-P/PM level one program managers.
Additional workforce increases associated with establishment of the
VA Technology Acquisition Center (TAC) will further enhance our ability
to support VA's transformation. The TAC, located in Eatontown, New
Jersey, was established to provide exclusive contracting support to the
Office of Information and Technology (OI&T). The TAC, a departmental
strategic asset, will dramatically improve the operational
effectiveness of VA's procurement. VA moved swiftly and creatively to
capitalize on the opportunity presented by the closure of the Fort
Monmouth Army Post, recruiting the highly skilled and experienced cadre
of acquisition professionals from one of the Army's premier contracting
activities.
To support our acquisition professionals, VA deployed a fully
operational electronic contract writing system. We also established a
new program management office reporting directly to the Deputy
Assistant Secretary for Acquisition and Logistics to support this
system and other enterprise-wide acquisition systems to ensure VA
exploits technology at every opportunity to support our acquisition
operations.
VA is conducting more competitive acquisitions. Our competition
rate increased in 1 year from 49 percent to 72 percent, bringing VA in
line with most of the Federal community.
VA's OI&T instituted a Performance Management Accountability System
(PMAS) that enhances the acquisition process. This system ensures
deliverables on information technology contracts are received and
reviewed incrementally, thereby forcing adherence to delivery and
performance schedules. The contracting community is in lockstep with
OI&T and has developed an acquisition model that fully supports the
PMAS objectives.
We have introduced a procurement governance process, establishing
the VA Senior Procurement Council. This council will build on best
practices across VA, leverage resources, and ensure consistency of
service and response to needs. The council will share information and
develop a common understanding of VA's strategic procurement needs, OMB
regulations and actions to meet these needs and regulations, thereby
synchronizing procurement to develop departmental solutions for
improved acquisitions. The ultimate goal of the council is to remove
procurement roadblocks so products and services can reach Veterans
faster and with greater quality.
As part of VA's acquisition transformation, VA instituted other
positive steps to improve the effectiveness of its acquisition
operations.
In 2009, VA began conducting acquisition assessments under OMB
Circular A-123. These assessments will provide VA's senior acquisition
leadership insight and information about the operation contracting
activities and business processes. Assessment results will provide
early opportunities to correct identified deficiencies, processes and
policies before they become unmanageable. The A-123 process also
ensures compliance by monitoring findings and following-up on
corrective actions.
Also in 2009, VA established a requirement for the use of
Integrated Product Teams (IPTs) for all acquisitions with estimated
values of $5 million or greater. IPTs consist of subject matter experts
from program offices, procurement, legal counsel and the Office of
Small and Disadvantaged Business Utilization. These cross-functional
teams work collaboratively to develop strategies and approaches to meet
particular objectives and have been successful in streamlining the
acquisition process.
Contract Review Boards (CRBs) are now required for all acquisitions
of $5 million or greater. CRBs minimize vulnerabilities leading to
protests, disputes, claims and litigation against VA. CRBs ensure
compliance with Federal and VA acquisition regulations, policies and
procedures. They provide senior-level advice on contracting actions to
support the contracting officer, and provide consistency of
procurements across VA. CRBs also improve the knowledge of VA
acquisition personnel as they embrace and implement good business
practices.
I spoke a moment ago of how CRBs minimize protests and would like
to add VA has impressive statistics for protests. In Fiscal Year 2009,
154 protests were lodged with the Government Accountability Office
(GAO). All but three of these protests have been decided. Of the 151
decided, only one protest was sustained by GAO. GAO denied 15 and
dismissed 106, and 29 were withdrawn. A total of 21 agency-level
protests were lodged with the Deputy Assistant Secretary for
Acquisition and Logistics (VA's Senior Procurement Executive). Eight
were denied, 10 dismissed and 3 withdrawn. Forty-five protests were
lodged at the contracting officer level; 12 were denied, 31 dismissed
and two withdrawn. These numbers are especially impressive given VA
conducted over 230,000 acquisition transactions in Fiscal Year 2009.
VA remains the Federal leader in contracting with Veteran-owned
small businesses. The final rule formally amending VA's acquisition
regulations to reflect VA's implementation of the ``Veterans First
Contracting Program'' back on June 20, 2007, was published in the
Federal Register on Tuesday, December 8, 2009. VA acquisition
professionals continue to use the extraordinary and unprecedented
contracting authorities granted VA under Public Law 109-461
extensively, setting records for spending with Veteran-owned small
businesses. Tentative data for FY 2009 show VA spent over $2.7 billion
with all Veteran-owned small businesses, and nearly $2.3 billion of
that amount was spent with service-disabled Veteran-owned small
businesses. This represents over 19 percent and 16 percent,
respectively, of total VA dollars reported in the Federal Procurement
Data System. For FY 2008, the latest data officially certified by the
Small Business Administration, VA awarded 11.76 percent of its contract
dollars to service-disabled Veteran-owned small businesses, and 14.72
percent to all Veteran-owned small businesses. These comfortably exceed
VA's goals for these programs, of 7 percent and 10 percent
respectively.
VA has worked tirelessly to improve its acquisition operations. At
this time there are no major outstanding GAO issues and management
agreements are in place addressing all Office of Inspector General
issues. But as proud as we are of the many improvements in VA's
acquisition operations, we recognize the need for continuous
improvement and will continue to work diligently to improve upon them
and set a standard worthy of emulation throughout the Federal
acquisition community and maintains the confidence of the American
public and the Congress.
Last Mr. Chairman, I mentioned at the beginning of my testimony I
serve as VA's ``acting'' chief acquisition officer, having served in
this capacity since October 2008. VA has sought to establish an
Assistant Secretary for Acquisition, Logistics, and Construction, but
has been unsuccessful in this endeavor. Establishment of this assistant
secretary position is the cornerstone of our efforts to transform the
acquisition culture at VA. This assistant secretary would provide the
laser-focused critical political leadership in this important area, and
allow VA to designate a chief acquisition officer. There are cogent and
compelling reasons for establishing a new assistant secretary position.
Considering the VA spend has increased by over 300 percent since FY
2002, VA's acquisition programs have become increasingly complex and
highly visible, as evidenced by this very hearing. Such action would
embrace the spirit and intent of the Services Acquisition Reform Act of
2003, which requires the appointment of a non-career chief acquisition
officer. Your support in establishing this assistant secretary position
is essential to the long-term success of transforming VA's acquisition
operations.
Mr. Chairman, we appreciate the opportunity to discuss VA's
acquisition operations with you. My colleagues and I are available for
your questions.
Statement of Hon. Cliff Stearns, a Representative
in Congress from the State of Florida
Thank you, Mr. Chairman.
I appreciate the opportunity to be here this morning, and I thank
the Chairman for holding this important hearing.
Unfortunately, the Department of Veterans Affairs procurement
system is broken. And the fact that the procurement process is broken
is hardly a secret. Problems stemming from VA's fragmented and
decentralized procurement system have been documented for over 10
years, and the VA has openly acknowledged that there are serious
deficiencies. These deficiencies have led to hundreds of millions of
taxpayer dollars being wasted.
In recognizing that VA needs to improve its procurement structure,
a VA Procurement Reform Task Force was created, and in 2002 it issued a
report that included 65 recommendations on how the VA could improve the
efficiency and effectiveness of its procurement acquisition system.
Despite the Task Force recommendations, very few issues with VA's
procurement structure have actually been addressed.
Several GAO reports have revealed significant weaknesses with the
VA procurement process, and poor financial management oversight has
been reported as a major material weakness since fiscal year 2005.
The Inspector General of the VA has estimated that in 2004 alone,
VA could have saved $1.4 billion over 5 years if the VA had improved
procurement practices at its medical centers.
Unfortunately though, the VA does not have its 152 hospitals and
over a thousand outpatient clinics utilize a procurement system that
ensures the VA is getting the best available price. This has resulted
in $41 million over a period of 5 years being wasted. Overall, the VA
IG has identified millions of dollars that could be put to better use
if the VA were to reform its procurement process. This is a blatant
abuse of taxpayer dollars and is particularly troubling given the
current state of our economy and our rising national debt.
Even more troubling is the fraud and abuse that is occurring as a
result of VA's lack of oversight over companies claiming Service
Disabled Veteran Owned Small Business (SDVOB) status. Due to VA's lack
of oversight - a direct result of its fragmented acquisition structure
- ineligible firms that have falsely claimed SDVOB status have been
able to receive approximately $100 million of sole-source or set-aside
SDVOB contracts. These companies are wrongfully taking job
opportunities away from our Nation's service disabled veteran owned
businesses and are getting away with it due to the fact there is no
requirement to terminate these contracts even after they are found to
be ineligible and the firms are allowed to self-certify themselves.
Clearly Mr. Chairman, we are facing a major problem at the VA.
Billions of dollars are at stake - these are taxpayer dollars-- and the
VA Office of Acquisition, Logistics, and Construction is doing a poor
job of overseeing acquisition contracts. Additionally, small veteran
owned businesses are being cheated out of millions in Federal
contracts.
I look forward to hearing from the VA today on how they plan to
reform their procurement process once and for all, and I hope the VA
will also provide our Committee with an accurate dollar amount as to
how much the VA spends on procurement annually.
MATERIAL SUBMITTED FOR THE RECORD
Project On Government Oversight
Washington, DC
February 12, 2010
Exposing Corruption Exploring Solutions
Chairman Harry E. Mitchell
House Committee on Veterans' Affairs
Subcommittee on Oversight and Investigations
335 Cannon House Office Building
Washington, DC 20515
Ranking Member David P. Roe
House Committee on Veterans' Affairs
Subcommittee on Oversight and Investigations
335 Cannon House Office Building
Washington, DC 20515
Dear Chairman Mitchell and Ranking Member Roe:
The Project On Government Oversight (POGO) provides this supplement
to the Subcommittee's December 16, 2009, hearing on ``Acquisition
Deficiencies at the U.S. Department of Veterans Affairs.'' During that
hearing, Representative Buyer asked panelists to comment or give
recommendations regarding legislation that he introduced with
Representative Roe, the ``Department of Veterans Affairs Acquisition
Improvement Act of 2009'' (H.R. 4221). POGO supports the general intent
of the bill, but defers to recommendations by the U.S. Department of
Veterans Affairs acquisition staff and the Inspector General as to
specific agency needs to improve contract spending and oversight.
POGO provides specific comments regarding the following sections of
the bill:
1. Section 2 of the bill includes the creation of an Assistant
Secretary for Acquisition, Construction, and Asset Management.
POGO believes that there might be some redundancy with the
existing Assistant Secretary of Procurement, and therefore the
VA should establish a clear mission for each of those positions
to avoid duplication of efforts.
2. Section 2 also establishes seven (7) Deputy Assistant
Secretary positions. POGO supports the creation of those
offices so long as the agency finds a need for all of them. The
legislative creation of more bureaucracy might have the
indirect consequence of burdening the system.
3. Section 3 assigns the newly created Assistant Secretary for
Acquisition, Construction, and Asset Management as the Chief
Acquisition Officer (CAO) with duties including managing and
monitoring VA missions, strategies, and contracting processes.
That assignment should benefit the agency and result in
improved acquisition and contracting policies and
accountability.
4. Section 4 mandates the establishment of a Department-wide
acquisition policy centralized under the newly created CAO. The
establishment of a comprehensive Department-wide acquisition
program should integrate many VA policies and result in
improved accountability. POGO warns, however, that streamlining
efforts in the past included the termination of many oversight
protections that have caused many of the contracting issues
that exist today. Speedy contracting without oversight is a
recipe for disaster.
5. Section 4(c) refers to the use of Federal Supply Schedule
65 or 66. The specific mention of those Supply Schedules in
legislation might create a problem down the road if there are
any modifications to the schedule system. The mentions of those
specific schedule numbers might be more appropriate in the
legislative history rather than the bill. The bill should
include a list of the goods or services included under those
schedules.
6. Section 5 provides authority to enter into certain personal
services contracts. Personal services contracts are those that
make ``contractor personnel appear to be, in effect, government
employees,'' FAR Subpart 2.101. Those contracts circumvent
Federal employment hiring processes and are permitted only when
authorized by law. The bill creates three (3) such carve-outs,
which runs afoul of the general prohibition against the use of
personal services contracts and as a result might place
critical functions in the hands of contractor employees rather
than public officials.
7. POGO strongly supports section 6 and its intent to ensure
that the VA has the authority to conduct pre- and post-award
audits on contracts using certain Federal supply schedules. In
addition, POGO would like to see oversight officials provided
with supplementary enforcement tools that are needed to
prevent, detect, and remedy waste, fraud, and abuse in VA
spending, including improved access to contractor cost or
pricing data. Furthermore, Congress needs to eliminate the
``Right to Financial Privacy Act,'' which requires Inspectors
General to notify contractors prior to obtaining the companies'
financial records. This requirement ``tips off'' contractors
and harms the Government's ability to investigate Federal
contracts.
8. Section 7 proposes changes to VA's small business
contracting policies. POGO would recommend that any additions
involving commercial items or services be predicated on the
fact that those items or services should be considered
``commercial'' only if there are substantial sales of the
actual goods or services to the general public. We have seen
many instances where goods or services have been called
``commercial'' without a genuine commercial marketplace
existing.
9. POGO applauds section 7's mandate that certain small
business contractors be listed and verified prior to receiving
an award with less than full and open competition. We also
believe that the verification process should occur for any
contractor representing itself as a small business.
Thank you for this opportunity to share POGO's views on the
``Department of Veterans Affairs Acquisition Improvement Act of 2009.''
I would be pleased to answer any additional questions and to work with
the Subcommittee in the future.
Sincerely,
Scott H. Amey
General Counsel
COMMENTS ON H.R. 4221 BY NATIONAL VETERAN-OWNED BUSINESS ASSOCIATION
(NaVOBA)
The National Veteran-Owned Business Association (NaVOBA) would like
to thank the House Veterans' Affairs Committee for the opportunity to
comment on H.R. 4221. Our comments are as follows:
Section 2: NaVOBA fully supports the establishment of the position
of Assistant Secretary of Veterans Affairs for Acquisition,
Construction, and Asset Management. The importance of acquisition as
evidenced by the growth of the acquisition budget, interest of the
Congress in VA acquisition, and the complexity of VA's mission all
require the elevation of the acquisition process in VA. We believe
however, that this position should be responsible for oversight, policy
development, compliance, and training of the acquisition workforce. We
do not believe all acquisition functions must be centralized under this
position. We firmly believe that acquisition, like IT, is a tool to be
used by the service delivery units of VA to provide services and
benefits to veterans. The people responsible for the delivery of
veteran services should control the tools necessary to get the job
done. Therefore, we do not support the establishment of the Deputy
Assistant Secretary positions envisioned in Section 2 of the bill. We
also believe the establishment of these positions is too prescriptive
and limits the VA's ability to meet the needs of veterans.
Section 3: There needs to be added to the responsibilities of the
Chief Acquisition Officer: ``Establishment of Policies, Procedures, and
Accountability for accomplishment of VA's small business contracting
goals with emphasis on goals for contract awards to veteran and
service-disabled veteran-owned small business.'' As contemplated in the
bill, the Assistant Secretary for Acquisition, Construction, and Asset
Management will be responsible for, and have acquisition officials
reporting to him/her, therefore this person will have the most control
over small business goal attainment and should therefore be held
accountable.
Section 4: There needs to be added to the ``elements'' of the
``Department-wide acquisition policy'' an element addressing
accomplishment of the small business contracting goals with emphasis on
contract awards to veteran and service-disabled veteran-owned small
businesses. As evidenced by various laws Congress has determined that
contract awards to veteran and service-disabled veteran-owned small
business is in this Nation's best interest. Therefore this goal
warrants inclusion in VA's policies.
Section 8129: The goal of this new section under ``Acquisition
Requirements'' appears to be the standardization and centralization of
VA health care acquisitions. This goal concerns NaVOBA and our members
as VA traditionally has used similar goals as a way to exclude veteran
and service-disabled veteran-owned small business from health care
acquisitions. In those instances where veteran and service-disabled
veteran-owned small business have been successful in winning
standardized contract they have been severely impacted as VA has no
mechanism in place to monitor compliance.
We also believe this section will unreasonably tie VA's hands in
providing world class health care to veterans given the process
contemplated in the bill with the Secretary or Assistant Secretary for
Acquisition, Construction and Asset Management substituting his/her
knowledge for that of a medical doctor.
Section 6 and Section 8130: The goal of these sections appears to
be further restricting which firms are eligible to compete on Federal
Supply Schedules and places additional requirements on such firms. As
the Federal Supply Schedules are administered by the General Services
Administration and historically have provided ``best value'' to the
Government we question why the authors of this bill require contract
clause requirements which GSA finds unnecessary and burdensome on small
business. Federal Supply contracts are competitively awarded and orders
against schedules are competitively awarded. Competition will drive
``best value'' to the Government, not overly restrictive clauses.
Section 7: NaVOBA fully supports the provisions requiring that
veteran and service-disabled veteran-owned small businesses be listed
in the data base maintained by the Secretary. In fact we believe ALL
firms claiming to be veteran or service-disabled veteran-owned small
business wishing to do business with the Federal Government must be
verified by VA. We also support the provision requiring any vendor of a
commercial item to be a manufacturer or regular dealer.
We strongly object to the provision requiring the Secretary to
specify the North American Industry Classification System (NAICs) code
that VA may procure from such firm. This is overly restrictive and
burdensome on the veteran small business community and is not required
by any other special emphasis small business program in the Federal
Government, except for the 8a Business Development Program. This
Committee has maintained the intent of the veteran small business
program is not business development but merely contract opportunity.
Small business firms in their normal course of growth and development
change NAICs depending on the opportunities and their strategic
business plan. To require approval by the Secretary of any change is
burdensome, unnecessary, and given VA's track record in verification
could never be done in a timely manner.
We thank the Committee for the opportunity to comment on the
proposed legislation and look forward to discussions to improve the
bill.
Comments on H.R. 4221 from Anthony Jimenez,
President and Chief Executive Officer MicroTech, LLC
Concerning H.R. 4221 proposal, we have only one area to highlight.
Our concern revolves around section 8127 (c)(a)(3). As we understand
it, the intent of this paragraph is help SDVOSBs become a true value
add to the products they sell and to keep large businesses from taking
advantage of SDVOSBs by making them nothing more than a ``pass
though''. The term ``regular dealer'' used in section 8127 (c)(a)(3) as
defined in section 7(e)(5), does not do enough to eliminate that
problem. In order for the small business to be a true value add, it
needs to be authorized by the Original Equipment Manufacturer (OEM) and
obtain all of the rights and responsibilities that go along with that
authorization. This would also ensure that where the OEM sells
exclusively through distribution channels the small business would be
forced to go directly through the distributor (as opposed to another
large business reseller), and would not be forced to act as a ``pass
through'' for a large business. To that end, we recommend the following
changes:
38 section 8127 (c)(a)(3)
Strike the words ``regular dealer'' and substitute with ``a
reseller authorized by the original equipment manufacturer and
purchased through authorized distribution channels.''
This revision would then require the striking of section
7(e)(5) which is the definition of ``regular dealer''.
Thanks again for the opportunity to participate in this effort and
my sincere appreciation to CM Buyer and your team for working so hard
to make things better for vets and small business. Please do not
hesitate to call upon me.
Veterans' Entrepreneurship Task Force (VET-Force)
Silver Spring, MD
February 18, 2010
Diane Kirkland
Printing Clerk
Committee on Veterans' Affairs
335 Cannon HOB
Washington, DC 20515
This file is the VET-Force response to your email request of
January 27th requesting comments on the proposed H.R. 4221. We have
sent two files. One is this letter called ``VET-FORCE Recommendations
on H.R. 4221 2 18 2010 BH1.doc.'' The second is ``Attach 1 to VET-FORCE
Recommendations on H.R. 4221 2 18 2010.doc'' Within Attachment 1 are
the different documents of concern for H.R. 4221 IH. We did this so you
and others have all documents.
``38 U.S.C. Sec 8127.doc'' as the basic document as of 1/5/2009.
``H.R. 4221 sec 8127.doc'' as the recommended changes to 38 U.S.C.
Sec 8127.
``H.R. 4221 sec 8127 with recommended additions in RED.doc'' with
recommended changes. These changes were originally in the past proposed
H.R. 2300 by Congressman Buyer.
``38 U.S.C. Sec. 8127 with H.R. 4221 changes.doc'' Taking a look at
the final section 8127 after the existing H.R. 4221 changes.
``38 U.S.C. Sec. 8127 with H.R. 4221 changes + H.R. 2300.doc''
Taking a look at the final section 8127 after the existing H.R. 4221
changes and H.R. 2300 are incorporated.
``H.R. 4221 IH section 7 (d)(9) and 7(e)(5) Change.doc'' section 7
(d)(9) is deleted. The definition of `regular dealer' is changed to our
recommended definition of a person or firm marketing, selling,
delivering and supporting products purchased by the Federal Government
from a veteran-owned small business.
We believe these documents will provide ample words to support our
position on H.R. 4221. We want to thank Congressman Buyer for H.R. 4221
and hope our recommended changes are taken into consideration. The VET-
Force can not support H.R. 4221 in its present form.
Respectfully,
Bob Hesser
1st Vice-Chairman
__________
Attachment One to VET-FORCE 12-16 HVAC Subcommittee Response to H.R.
4221.doc
38 U.S.C. Sec. 8127
01/05/2009
EXPCITE
TITLE 38--VETERANS' BENEFITS
PART VI--ACQUISITION AND DISPOSITION OF PROPERTY
CHAPTER 81--ACQUISITION AND OPERATION OF HOSPITAL AND DOMICILIARY
FACILITIES; PROCUREMENT AND SUPPLY; ENHANCED-USE LEASES OF REAL
PROPERTY
SUBCHAPTER II--PROCUREMENT AND SUPPLY
HEAD
Sec. 8127. Small business concerns owned and controlled by
veterans: contracting goals and preferences
STATUTE
(a) Contracting Goals.--(1) In order to increase contracting
opportunities for small business concerns owned and controlled by
veterans and small business concerns owned and controlled by veterans
with service-connected disabilities, the Secretary shall----
(A) establish a goal for each fiscal year for participation
in Department contracts (including subcontracts) by small
business concerns owned and controlled by veterans who are not
veterans with service-connected disabilities in accordance with
paragraph (2); and
(B) establish a goal for each fiscal year for participation
in Department contracts (including subcontracts) by small
business concerns owned and controlled by veterans with
service-connected disabilities in accordance with paragraph
(3).
(2) The goal for a fiscal year for participation under paragraph
(1)(A) shall be determined by the Secretary.
(3) The goal for a fiscal year for participation under paragraph
(1)(B) shall be not less than the Government-wide goal for that fiscal
year for participation by small business concerns owned and controlled
by veterans with service-connected disabilities under section 15(g)(1)
of the Small Business Act (15 U.S.C. 644(g)(1)).
(4) The Secretary shall establish a review mechanism to ensure
that, in the case of a subcontract of a Department contract that is
counted for purposes of meeting a goal established pursuant to this
section, the subcontract was actually awarded to a business concern
that may be counted for purposes of meeting that goal.
(b) Use of Noncompetitive Procedures for Certain Small Contracts.--
For purposes of meeting the goals under subsection (a), and in
accordance with this section, in entering into a contract with a small
business concern owned and controlled by veterans for an amount less
than the simplified acquisition threshold (as defined in section 4 of
the Office of Federal Procurement Policy Act (41 U.S.C. 403)), a
contracting officer of the Department may use procedures other than
competitive procedures.
(c) Sole Source Contracts for Contracts Above Simplified
Acquisition Threshold.--For purposes of meeting the goals under
subsection (a), and in accordance with this section, a contracting
officer of the Department may award a contract to a small business
concern owned and controlled by veterans using procedures other than
competitive procedures if----
(1) such concern is determined to be a responsible source
with respect to performance of such contract opportunity;
(2) the anticipated award price of the contract (including
options) will exceed the simplified acquisition threshold (as
defined in section 4 of the Office of Federal Procurement
Policy Act (41 U.S.C. 403)) but will not exceed $5,000,000; and
(3) in the estimation of the contracting officer, the
contract award can be made at a fair and reasonable price that
offers best value to the United States.
(d) Use of Restricted Competition.--Except as provided in
subsections (b) and (c), for purposes of meeting the goals under
subsection (a), and in accordance with this section, a contracting
officer of the Department shall award contracts on the basis of
competition restricted to small business concerns owned and controlled
by veterans if the contracting officer has a reasonable expectation
that two or more small business concerns owned and controlled by
veterans will submit offers and that the award can be made at a fair
and reasonable price that offers best value to the United States.
(e) Eligibility of Small Business Concerns.--A small business
concern may be awarded a contract under this section only if the small
business concern and the veteran owner of the small business concern
are listed in the database of veteran-owned businesses maintained by
the Secretary under subsection (f).
(f) Database of Veteran-Owned Businesses.--(1) Subject to
paragraphs (2) through (6), the Secretary shall maintain a database of
small business concerns owned and controlled by veterans and the
veteran owners of such business concerns.
(2) To be eligible for inclusion in the database, such a veteran
shall submit to the Secretary such information as the Secretary may
require with respect to the small business concern or the veteran.
(3) Information maintained in the database shall be submitted on a
voluntary basis by such veterans.
(4) In maintaining the database, the Secretary shall carry out at
least the following two verification functions:
(A) Verification that each small business concern listed in
the database is owned and controlled by veterans.
(B) In the case of a veteran who indicates a service-
connected disability, verification of the service-disabled
status of such veteran.
(5) The Secretary shall make the database available to all Federal
departments and agencies and shall notify each such department and
agency of the availability of the database.
(6) If the Secretary determines that the public dissemination of
certain types of information maintained in the database is
inappropriate, the Secretary shall take such steps as are necessary to
maintain such types of information in a secure and confidential manner.
(g) Enforcement Penalties for Misrepresentation.--Any business
concern that is determined by the Secretary to have misrepresented the
status of that concern as a small business concern owned and controlled
by veterans or as a small business concern owned and controlled by
service-disabled veterans for purposes of this subsection shall be
debarred from contracting with the Department for a reasonable period
of time, as determined by the Secretary.
(h) Treatment of Businesses After Death of Veteran-Owner.--(1)
Subject to paragraph (3), if the death of a veteran causes a small
business concern to be less than 51 percent owned by one or more
veterans, the surviving spouse of such veteran who acquires ownership
rights in such small business concern shall, for the period described
in paragraph (2), be treated as if the surviving spouse were that
veteran for the purpose of maintaining the status of the small business
concern as a small business concern owned and controlled by veterans.
(2) The period referred to in paragraph (1) is the period beginning
on the date on which the veteran dies and ending on the earliest of the
following dates:
(A) The date on which the surviving spouse remarries.
(B) The date on which the surviving spouse relinquishes an
ownership interest in the small business concern.
(C) The date that is 10 years after the date of the veteran's
death.
(3) Paragraph (1) only applies to a surviving spouse of a veteran
with a service-connected disability rated as 100 percent disabling or
who dies as a result of a service-connected disability.
(i) Priority for Contracting Preferences.--Preferences for awarding
contracts to small business concerns shall be applied in the following
order of priority:
(1) Contracts awarded pursuant to subsection (b), (c), or (d)
to small business concerns owned and controlled by veterans
with service-connected disabilities.
(2) Contracts awarded pursuant to subsection (b), (c), or (d)
to small business concerns owned and controlled by veterans
that are not covered by paragraph (1).
(3) Contracts awarded pursuant to----
(A) section 8(a) of the Small Business Act (15 U.S.C.
637(a)); or
(B) section 31 of such Act (15 U.S.C. 657a).
(4) Contracts awarded pursuant to any other small business
contracting preference.
(j) Applicability of Requirements to Contracts.--(1) If after
December 31, 2008, the Secretary enters into a contract, memorandum of
understanding, agreement, or other arrangement with any Governmental
entity to acquire goods or services, the Secretary shall include in
such contract, memorandum, agreement, or other arrangement a
requirement that the entity will comply, to the maximum extent
feasible, with the provisions of this section in acquiring such goods
or services.
(2) Nothing in this subsection shall be construed to supersede or
otherwise affect the authorities provided under the Small Business Act
(15 U.S.C. 631 et seq.).
(k) Annual Reports.--Not later than December 31 each year, the
Secretary shall submit to Congress a report on small business
contracting during the fiscal year ending in such year. Each report
shall include, for the fiscal year covered by such report, the
following:
(1) The percentage of the total amount of all contracts
awarded by the Department during that fiscal year that were
awarded to small business concerns owned and controlled by
veterans.
(2) The percentage of the total amount of all such contracts
awarded to small business concerns owned and controlled by
veterans with service-connected disabilities.
(3)The percentage of the total amount of all contracts
awarded by each Administration of the Department during that
fiscal year that were awarded to small business concerns owned
and controlled by veterans.
(4) The percentage of the total amount of all contracts
awarded by each such Administration during that fiscal year
that were awarded to small business concerns owned and
controlled by veterans with service-connected disabilities.
(l) Definitions.--In this section:
(1) The term ``small business concern'' has the meaning given that
term under section 3 of the Small Business Act (15 U.S.C. 632).
(2) The term ``small business concern owned and controlled by
veterans'' means a small business concern----
(A)(i) (A)(i) not less than 51 percent of which is owned by
one or more veterans or, in the case of a publicly owned
business, not less than 51 percent of the stock of which is
owned by one or more veterans; and
(ii) the management and daily business operations of which
are controlled by one or more veterans; or
(B) not less than 51 percent of which is owned by one or more
veterans with service-connected disabilities that are permanent
and total who are unable to manage the daily business
operations of such concern or, in the case of a publicly owned
business, not less than 51 percent of the stock of which is
owned by one or more such veterans.
SOURCE
(Added Pub. L. 109-461, title V, Sec. 502(a)(1), Dec. 22, 2006, 120
Stat. 3431; amended Pub. L. 110-389, title VIII, Sec. 806, Oct. 10,
2008, 122 Stat. 4189.)
REFTEXT
REFERENCES IN TEXT
The Small Business Act, referred to in subsec. (j)(2), is Pub. L.
85-536, Sec. 2(1 et seq.), July 18, 1958, 72 Stat. 384, which is
classified generally to chapter 14A (Sec. 631 et seq.) of Title 15,
Commerce and Trade. For complete classification of this Act to the
Code, see Short Title note set out under section 631 of Title 15 and
Tables.
MISC1
AMENDMENTS
2008--Subsecs. (j) to (l). Pub. L. 110-389 added subsec. (j) and
redesignated former subsecs. (j) and (k) as (k) and (l), respectively.
EFFECTIVE DATE
Pub. L. 109-461, title V, Sec. 502(d), Dec. 22, 2006, 120 Stat.
3435, provided that: ``This section [enacting this section and
provisions set out as a note below] and the amendments made by this
section shall take effect on the date that is 180 days after the date
of the enactment of this Act [Dec. 22, 2006].''
TRANSITION RULE
Pub. L. 109-461, title V, Sec. 502(b), Dec. 22, 2006, 120 Stat.
3435, provided that: ``A small business concern that is listed in any
small business database maintained by the Secretary of Veterans Affairs
on the date of the enactment of this Act [Dec. 22, 2006] shall be
presumed to be eligible for inclusion in the database under subsection
(f) of section 8127 of title 38, United States Code, as added by
subsection (a), during the period beginning on the effective date of
that section [see Effective Date note above] and ending one year after
such effective date. Such a small business concern may be removed from
the database during that period if it is found not to be a small
business concern owned and controlled by veterans (as defined in
subsection (k) of such section).''
---------------------------------------------------------------------------
---------------------------------------------------------------------------
H.R. 4221 section 8127
(a) Additional Requirement--section 8127(c) of title 38, United
States Code, is amended----
(1) in paragraph (2), by striking `and' at the end;
(2) in paragraph (3), by striking the period and inserting
the following: `; and'; and
(3) by adding at the end the following new paragraph:
`(4) in the case of a contract for the purchase of a
commercial item, the vendor of the item is a manufacturer or a
regular dealer.'.
(b) Complaint Process for Use of Restricted Competition--Subsection
(d) of such section is amended----
(1) by striking `Except as provided' and inserting `(1)
Except as provided'; and
(2) by adding at the end the following new paragraph:
`(2) Any complaint regarding the noncompliance of a contracting
officer with this subsection shall be submitted to the Secretary.'.
(c) Eligibility--Subsection (e) of such section is amended--
(1) by striking `only if the small business concern and the
veteran' and all that follows and inserting `only if--'; and
(2) by adding at the end the following new paragraphs:
`(1) the small business concern and the veteran owner of the
small business concern are listed in the database of veteran-
owned businesses maintained by the Secretary under subsection
(f);
`(2) the Secretary has performed the verification functions
of the Secretary under paragraph (4) of such subsection with
respect to the small business concern; and
`(3) the contract is only for the procurement of a good or
service with North American Industry Classification System code
specified by the Secretary under paragraph (9) of that
subsection for the small business concern.'.
(d) Database--Subsection (f) of such section is amended by adding
at the end the following new paragraphs:
`(7) The Secretary may not include in the database a small
business concern that is the vendor of a commercial item unless
the concern is the manufacturer or regular dealer of the item,
unless the Secretary specifically provides for a waiver of such
requirement for such concern.
`(8) The Secretary shall establish specific criteria to be
used in carrying out the verification functions under paragraph
(4), including criteria requiring specific documentation and
certifications from each small business concern proposed to be
included in the database.
`(9) For each small business concern included in the
database, the Secretary shall specify the North American
Industry Classification System code or codes of the goods and
services that may be procured by the Department from such
concern.
(e) Definitions--Subsection (l) of such section is amended by
adding at the end the following new items:
`(3) The term `commercial item' has the meaning given that
term in section 4(12) of the Office of Federal Procurement
Policy Act (41 U.S.C. 203(12)) as long as items and services
directly relating to the sale of such a commercial item are
offered to commercial customers.
`(4) The term `management and daily business operations'
includes----
`(A) with respect to a contract for the provision of
services, the services to be performed by a contract
awarded under this section; and
`(B) with respect to a contract for the provision of
goods that are not manufactured by the small business
concern in question, the provision of services relating
directly to the sale of such goods.
`(5) The term `regular dealer' with respect to any contract
means a person who owns, operates, or maintains a store,
warehouse, or other establishment in which the commodities or
goods of the general character described by the specifications
and required under the contract are bought, kept in stock, and
sold to the public in the usual course of business.'
__________
H.R. 4221 section 8127 with Recommendations in RED [Recommendations in
RED appear in Italics]
(a) Additional Requirement--Section 8127(c) of title 38, United
States Code, is amended----
(1) in paragraph (2), by striking `and' at the end;
(2) in paragraph (3), by striking the period and inserting
the following: `; and'; and
(3) by adding at the end the following new paragraph:
`(4) in the case of a contract for the purchase of a
commercial item, the vendor of the item is a manufacturer or a
regular dealer.'
(b) Complaint Process for Use of Restricted Competition--Subsection
(d) of such section is amended----
(1) by striking `Except as provided' and inserting `(1)
Except as provided'; and
(2) by adding at the end the following new paragraph:
`(2) Any complaint regarding the noncompliance of a contracting
officer with this subsection shall be submitted to the Secretary.'
(c) Eligibility-Subsection (e) of such section is amended----
(1) by striking `only if the small business concern and the
veteran' and all that follows and inserting `only if--'; and
(2) by adding at the end the following new paragraphs:
`(1) the small business concern and the veteran owner of the
small business concern are listed in the database of veteran-
owned businesses maintained by the Secretary under subsection
(f);
`(2) the Secretary has performed the verification functions
of the Secretary under paragraph (4) of such subsection with
respect to the small business concern; and
`(3) the contract is only for the procurement of a good or
service with an North American Industry Classification System
code specified by the Secretary under paragraph (9) of that
subsection for the small business concern.'.
(d) Database-Subsection (f) of such section is amended by adding at
the end the following new paragraphs:
`(7) The Secretary may not include in the database a small
business concern that is the vendor of a commercial item unless
the concern is the manufacturer or regular dealer of the item,
unless the Secretary specifically provides for a waiver of such
requirement for such concern.
`(8) The Secretary shall establish specific criteria to be
used in carrying out the verification functions under paragraph
(4), including criteria requiring specific documentation and
certifications from each small business concern proposed to be
included in the database.
`(9) For each small business concern included in the
database, the Secretary shall specify the North American
Industry Classification System code or codes of the goods and
services that may be procured by the Department from such
concern.
`(10) Ownership and control by a veteran or veterans of more
than one small business concern shall not be grounds for
disqualification of any of such concerns from inclusion in the
database under this subsection.'
(e) Definitions--Subsection (l) of such section is amended by
adding at the end the following new items:
`(3) The term `commercial item' has the meaning given that
term in section 4(12) of the Office of Federal Procurement
Policy Act (41 U.S.C. 203(12)) as long as items and services
directly relating to the sale of such a commercial item are
offered to commercial customers.
`(4) The term `management and daily business operations'
includes----
`(A) with respect to a contract for the provision of
services, the services to be performed by a contract
awarded under this section; and
`(B) with respect to a contract for the provision of
goods that are not manufactured by the small business
concern in question, the provision of services relating
directly to the sale of such goods.
`(5) The term `regular dealer' with respect to any contract
means a person who owns, operates, or maintains a store,
warehouse, or other establishment in which the commodities or
goods of the general character described by the specifications
and required under the contract are bought, kept in stock, and
sold to the public in the usual course of business.'.
`(6) The term 'control of management and daily business
operations' with respect to a business concern means the
authority to make final decisions affecting financial,
operational, management policy, and employment issues,
irrespective of the number of hours worked by the individual
with such authority or the location of such individual with
respect to the business concern.'.
__________
38 U.S.C. Sec. 8127 with H.R. 4221 Proposed changes using Track
Changes----
01/05/2009
EXPCITE
TITLE 38--VETERANS' BENEFITS
PART VI--ACQUISITION AND DISPOSITION OF PROPERTY
CHAPTER 81--ACQUISITION AND OPERATION OF HOSPITAL AND DOMICILIARY
FACILITIES; PROCUREMENT AND SUPPLY; ENHANCED-USE LEASES OF REAL
PROPERTY
SUBCHAPTER II--PROCUREMENT AND SUPPLY
HEAD
Sec. 8127. Small business concerns owned and controlled by
veterans: contracting goals and preferences
STATUTE
(a) Contracting Goals.--(1) In order to increase contracting
opportunities for small business concerns owned and controlled by
veterans and small business concerns owned and controlled by veterans
with service-connected disabilities, the Secretary shall----
(A) establish a goal for each fiscal year for participation
in Department contracts (including subcontracts) by small
business concerns owned and controlled by veterans who are not
veterans with service-connected disabilities in accordance with
paragraph (2); and
(B) establish a goal for each fiscal year for participation
in Department contracts (including subcontracts) by small
business concerns owned and controlled by veterans with
service-connected disabilities in accordance with paragraph
(3).
(2) The goal for a fiscal year for participation under paragraph
(1)(A) shall be determined by the Secretary.
(3) The goal for a fiscal year for participation under paragraph
(1)(B) shall be not less than the Government-wide goal for that fiscal
year for participation by small business concerns owned and controlled
by veterans with service-connected disabilities under section 15(g)(1)
of the Small Business Act (15 U.S.C. 644(g)(1)).
(4) The Secretary shall establish a review mechanism to ensure
that, in the case of a subcontract of a Department contract that is
counted for purposes of meeting a goal established pursuant to this
section, the subcontract was actually awarded to a business concern
that may be counted for purposes of meeting that goal.
(b) Use of Noncompetitive Procedures for Certain Small Contracts.--
For purposes of meeting the goals under subsection (a), and in
accordance with this section, in entering into a contract with a small
business concern owned and controlled by veterans for an amount less
than the simplified acquisition threshold (as defined in section 4 of
the Office of Federal Procurement Policy Act (41 U.S.C. 403)), a
contracting officer of the Department may use procedures other than
competitive procedures.
(c) Sole Source Contracts for Contracts Above Simplified
Acquisition Threshold.-- For purposes of meeting the goals under
subsection (a), and in accordance with this section, a contracting
officer of the Department may award a contract to a small business
concern owned and controlled by veterans using procedures other than
competitive procedures if----
(1) such concern is determined to be a responsible source with
respect to performance of such contract opportunity;
(2) the anticipated award price of the contract (including options)
will exceed the simplified acquisition threshold (as defined in section
4 of the Office of Federal Procurement Policy Act (41 U.S.C. 403)) but
will not exceed $5,000,000; and
(3) in the estimation of the contracting officer, the contract
award can be made at a fair and reasonable price that offers best value
to the United States.; and
`(4) in the case of a contract for the purchase of a commercial
item, the vendor of the item is a manufacturer or a regular dealer.
(d) Use of Restricted Competition.--Except as provided (1) Except
as provided in subsections (b) and (c), for purposes of meeting the
goals under subsection (a), and in accordance with this section, a
contracting officer of the Department shall award contracts on the
basis of competition restricted to small business concerns owned and
controlled by veterans if the contracting officer has a reasonable
expectation that two or more small business concerns owned and
controlled by veterans will submit offers and that the award can be
made at a fair and reasonable price that offers best value to the
United States..
(2) Any complaint regarding the noncompliance of a contracting
officer with this subsection shall be submitted to the Secretary.
(e) Eligibility of Small Business Concerns.--A small business
concern may be awarded a contract under this section only if the small
business concern and the veteran only if----
--owner of the small business
--concern are listed in the database
--of veteran-owned businesses
--maintained by the Secretary under
--subsection (f).
(1) the small business concern and the veteran owner of the small
business concern are listed in the database of veteran-owned businesses
maintained by the Secretary under subsection (f);
(2) the Secretary has performed the verification functions of the
Secretary under paragraph (4) of such subsection with respect to the
small business concern; and
(3) the contract is only for the procurement of a good or service
with a North American Industry Classification System code specified by
the Secretary under paragraph (9) of that subsection for the small
business concern.
(f) Database of Veteran-Owned Businesses.--(1) Subject to
paragraphs (2) through (6), the Secretary shall maintain a database of
small business concerns owned and controlled by veterans and the
veteran owners of such business concerns.
(7) The Secretary may not include in the database a small business
concern that is the vendor of a commercial item unless the concern is
the manufacturer or regular dealer of the item, unless the Secretary
specifically provides for a waiver of such requirement for such
concern.
(8) The Secretary shall establish specific criteria to be used in
carrying out the verification functions under paragraph (4), including
criteria requiring specific documentation and certifications from each
small business concern proposed to be included in the database.
(9) For each small business concern included in the database, the
Secretary shall specify the North American Industry Classification
System code or codes of the goods and services that may be procured by
the Department from such concern.
(2) To be eligible for inclusion in the database, such a veteran
shall submit to the Secretary such information as the Secretary may
require with respect to the small business concern or the veteran.
(3) Information maintained in the database shall be submitted on a
voluntary basis by such veterans.
(4) In maintaining the database, the Secretary shall carry out at
least the following two verification functions:
(A) Verification that each small business concern listed in
the database is owned and controlled by veterans.
(B) In the case of a veteran who indicates a service-
connected disability, verification of the service-disabled
status of such veteran.
(5) The Secretary shall make the database available to all Federal
departments and agencies and shall notify each such department and
agency of the availability of the database.
(6) If the Secretary determines that the public dissemination of
certain types of information maintained in the database is
inappropriate, the Secretary shall take such steps as are necessary to
maintain such types of information in a secure and confidential manner.
(g) Enforcement Penalties for Misrepresentation.--Any business
concern that is determined by the Secretary to have misrepresented the
status of that concern as a small business concern owned and controlled
by veterans or as a small business concern owned and controlled by
service-disabled veterans for purposes of this subsection shall be
debarred from contracting with the Department for a reasonable period
of time, as determined by the Secretary.
(h) Treatment of Businesses After Death of Veteran-Owner.--(1)
Subject to paragraph (3), if the death of a veteran causes a small
business concern to be less than 51 percent owned by one or more
veterans, the surviving spouse of such veteran who acquires ownership
rights in such small business concern shall, for the period described
in paragraph (2), be treated as if the surviving spouse were that
veteran for the purpose of maintaining the status of the small business
concern as a small business concern owned and controlled by veterans.
(2) The period referred to in paragraph (1) is the period beginning
on the date on which the veteran dies and ending on the earliest of the
following dates:
(A) The date on which the surviving spouse remarries.
(B) The date on which the surviving spouse relinquishes an
ownership interest in the small business concern.
(C) The date that is 10 years after the date of the veteran's
death.
(3) Paragraph (1) only applies to a surviving spouse of a veteran
with a service-connected disability rated as 100 percent disabling or
who dies as a result of a service-connected disability.
(i) Priority for Contracting Preferences.--Preferences for awarding
contracts to small business concerns shall be applied in the following
order of priority:
(1) Contracts awarded pursuant to subsection (b), (c), or (d) to
small business concerns owned and controlled by veterans with service-
connected disabilities.
(2) Contracts awarded pursuant to subsection (b), (c), or (d) to
small business concerns owned and controlled by veterans that are not
covered by paragraph (1).
(3) Contracts awarded pursuant to----
(A) section 8(a) of the Small Business Act (15 U.S.C.
637(a)); or
(B) section 31 of such Act (15 U.S.C. 657a).
(4) Contracts awarded pursuant to any other small business
contracting preference.
(j) Applicability of Requirements to Contracts.--(1) If after
December 31, 2008, the Secretary enters into a contract, memorandum of
understanding, agreement, or other arrangement with any Governmental
entity to acquire goods or services, the Secretary shall include in
such contract, memorandum, agreement, or other arrangement a
requirement that the entity will comply, to the maximum extent
feasible, with the provisions of this section in acquiring such goods
or services.
(2) Nothing in this subsection shall be construed to supersede or
otherwise affect the authorities provided under the Small Business Act
(15 U.S.C. 631 et seq.).
(k) Annual Reports.--Not later than December 31 each year, the
Secretary shall submit to Congress a report on small business
contracting during the fiscal year ending in such year. Each report
shall include, for the fiscal year covered by such report, the
following:
(1) The percentage of the total amount of all contracts awarded by
the Department during that fiscal year that were awarded to small
business concerns owned and controlled by veterans.
(2) The percentage of the total amount of all such contracts
awarded to small business concerns owned and controlled by veterans
with service-connected disabilities.
(3) The percentage of the total amount of all contracts awarded by
each Administration of the Department during that fiscal year that were
awarded to small business concerns owned and controlled by veterans.
(4) The percentage of the total amount of all contracts awarded by
each such Administration during that fiscal year that were awarded to
small business concerns owned and controlled by veterans with service-
connected disabilities.
(l) Definitions.--In this section:
(1) The term ``small business concern'' has the meaning given that
term under section 3 of the Small Business Act (15 U.S.C. 632).
(2) The term ``small business concern owned and controlled by
veterans'' means a small business concern----
(A)(i) not less than 51 percent of which is owned by one or
more veterans or, in the case of a publicly owned business, not
less than 51 percent of the stock of which is owned by one or
more veterans; and
(ii) the management and daily business operations of which
are controlled by one or more veterans; or
(B) not less than 51 percent of which is owned by one or more
veterans with service-connected disabilities that are permanent
and total who are unable to manage the daily business
operations of such concern or, in the case of a publicly owned
business, not less than 51 percent of the stock of which is
owned by one or more such veterans.
(3) The term `commercial item' has the meaning given that term in
section 4(12) of the Office of Federal Procurement Policy Act (41
U.S.C. 203(12)) as long as items and services directly relating to the
sale of such a commercial item are offered to commercial customers.
(4) The term `management and daily business operations' includes--
--
(A) with respect to a contract for the provision of services,
the services to be performed by a contract awarded under this
section; and
(B) with respect to a contract for the provision of goods
that are not manufactured by the small business concern in
question, the provision of services relating directly to the
sale of such goods.
(5) The term `regular dealer' with respect to any contract means a
person who owns, operates, or maintains a store, warehouse, or other
establishment in which the commodities or goods of the general
character described by the specifications and required under the
contract are bought, kept in stock, and sold to the public in the usual
course of business.
SOURCE
(Added Pub. L. 109-461, title V, Sec. 502(a)(1), Dec. 22, 2006, 120
Stat. 3431; amended Pub. L. 110-389, title VIII, Sec. 806, Oct. 10,
2008, 122 Stat. 4189.)
REFTEXT
REFERENCES IN TEXT
The Small Business Act, referred to in subsec. (j)(2), is Pub. L.
85-536, Sec. 2(1 et seq.), July 18, 1958, 72 Stat. 384, which is
classified generally to chapter 14A (Sec. 631 et seq.) of Title 15,
Commerce and Trade. For complete classification of this Act to the
Code, see Short Title note set out under section 631 of Title 15 and
Tables.
MISC1
AMENDMENTS
2008--Subsecs. (j) to (l). Pub. L. 110-389 added subsec. (j) and
redesignated former subsecs. (j) and (k) as (k) and (l), respectively.
EFFECTIVE DATE
Pub. L. 109-461, title V, Sec. 502(d), Dec. 22, 2006, 120 Stat.
3435, provided that: ``This section [enacting this section and
provisions set out as a note below] and the amendments made by this
section shall take effect on the date that is 180 days after the date
of the enactment of this Act [Dec. 22, 2006].''
TRANSITION RULE
Pub. L. 109-461, title V, Sec. 502(b), Dec. 22, 2006, 120 Stat.
3435, provided that: ``A small business concern that is listed in any
small business database maintained by the Secretary of Veterans Affairs
on the date of the enactment of this Act [Dec. 22, 2006] shall be
presumed to be eligible for inclusion in the database under subsection
(f) of section 8127 of title 38, United States Code, as added by
subsection (a), during the period beginning on the effective date of
that section [see Effective Date note above] and ending 1 year after
such effective date. Such a small business concern may be removed from
the database during that period if it is found not to be a small
business concern owned and controlled by veterans (as defined in
subsection (k) of such section).''
__________
38 U.S.C. Sec. 8127 with H.R. 4221 + H.R. 2300 Proposed changes
Using Track Changes----
01/05/2009
TITLE 38--VETERANS' BENEFITS
PART VI--ACQUISITION AND DISPOSITION OF PROPERTY
CHAPTER 81--ACQUISITION AND OPERATION OF HOSPITAL AND DOMICILIARY
FACILITIES; PROCUREMENT AND SUPPLY; ENHANCED-USE LEASES OF REAL
PROPERTY
SUBCHAPTER II--PROCUREMENT AND SUPPLY
HEAD
Sec. 8127. Small business concerns owned and controlled by
veterans: contracting goals and preferences
STATUTE
(a) Contracting Goals.--(1) In order to increase contracting
opportunities for small business concerns owned and controlled by
veterans and small business concerns owned and controlled by veterans
with service-connected disabilities, the Secretary shall----
(A) establish a goal for each fiscal year for participation
in Department contracts (including subcontracts) by small
business concerns owned and controlled by veterans who are not
veterans with service-connected disabilities in accordance with
paragraph (2); and
(B) establish a goal for each fiscal year for participation
in Department contracts (including subcontracts) by small
business concerns owned and controlled by veterans with
service-connected disabilities in accordance with paragraph
(3).
(2) The goal for a fiscal year for participation under paragraph
(1)(A) shall be determined by the Secretary.
(3) The goal for a fiscal year for participation under paragraph
(1)(B) shall be not less than the Government-wide goal for that fiscal
year for participation by small business concerns owned and controlled
by veterans with service-connected disabilities under section 15(g)(1)
of the Small Business Act (15 U.S.C. 644(g)(1)).
(4) The Secretary shall establish a review mechanism to ensure
that, in the case of a subcontract of a Department contract that is
counted for purposes of meeting a goal established pursuant to this
section, the subcontract was actually awarded to a business concern
that may be counted for purposes of meeting that goal.
(b) Use of Noncompetitive Procedures for Certain Small Contracts.--
For purposes of meeting the goals under subsection (a), and in
accordance with this section, in entering into a contract with a small
business concern owned and controlled by veterans for an amount less
than the simplified acquisition threshold (as defined in section 4 of
the Office of Federal Procurement Policy Act (41 U.S.C. 403)), a
contracting officer of the Department may use procedures other than
competitive procedures.
(c) Sole Source Contracts for Contracts Above Simplified
Acquisition Threshold.--For purposes of meeting the goals under
subsection (a), and in accordance with this section, a contracting
officer of the Department may award a contract to a small business
concern owned and controlled by veterans using procedures other than
competitive procedures if----
(1) such concern is determined to be a responsible source with
respect to performance of such contract opportunity;
(2) the anticipated award price of the contract (including options)
will exceed the simplified acquisition threshold (as defined in section
4 of the Office of Federal Procurement Policy Act (41 U.S.C. 403)) but
will not exceed $5,000,000; and
(3) in the estimation of the contracting officer, the contract
award can be made at a fair and reasonable price that offers best value
to the United States.; and
`(4) in the case of a contract for the purchase of a commercial
item, the vendor of the item is a manufacturer or a regular dealer.
(d) Use of Restricted Competition.--Except as provided (1) Except
as provided in subsections (b) and (c), for purposes of meeting the
goals under subsection (a), and in accordance with this section, a
contracting officer of the Department shall award contracts on the
basis of competition restricted to small business concerns owned and
controlled by veterans if the contracting officer has a reasonable
expectation that two or more small business concerns owned and
controlled by veterans will submit offers and that the award can be
made at a fair and reasonable price that offers best value to the
United States.
`(2) Any complaint regarding the noncompliance of a contracting
officer with this subsection shall be submitted to the Secretary.
(e) Eligibility of Small Business Concerns.--A small business
concern may be awarded a contract under this section only if the small
business concern and the veteran only if----
--owner of the small business
--concern are listed in the database
--of veteran-owned businesses
--maintained by the Secretary under
--subsection (f).
(1) the small business concern and the veteran owner of the small
business concern are listed in the database of veteran-owned businesses
maintained by the Secretary under subsection (f);
(2) the Secretary has performed the verification functions of the
Secretary under paragraph (4) of such subsection with respect to the
small business concern; and
(3) the contract is only for the procurement of a good or service
with an North American Industry Classification System code specified by
the Secretary under paragraph (9) of that subsection for the small
business concern.
(f) Database of Veteran-Owned Businesses.--(1) Subject to
paragraphs (2) through (6), the Secretary shall maintain a database of
small business concerns owned and controlled by veterans and the
veteran owners of such business concerns.
(7) The Secretary may not include in the database a small business
concern that is the vendor of a commercial item unless the concern is
the manufacturer or regular dealer of the item, unless the Secretary
specifically provides for a waiver of such requirement for such
concern.
(8) The Secretary shall establish specific criteria to be used in
carrying out the verification functions under paragraph (4), including
criteria requiring specific documentation and certifications from each
small business concern proposed to be included in the database.
(9) For each small business concern included in the database, the
Secretary shall specify the North American Industry Classification
System code or codes of the goods and services that may be procured by
the Department from such concern.
`(10) Ownership and control by a veteran or veterans of more than
one small business concern shall not be grounds for disqualification of
any of such concerns from inclusion in the database under this
subsection.'.
(2) To be eligible for inclusion in the database, such a veteran
shall submit to the Secretary such information as the Secretary may
require with respect to the small business concern or the veteran.
(3) Information maintained in the database shall be submitted on a
voluntary basis by such veterans.
(4) In maintaining the database, the Secretary shall carry out at
least the following two verification functions:
(A) Verification that each small business concern listed in
the database is owned and controlled by veterans.
(B) In the case of a veteran who indicates a service-
connected disability, verification of the service-disabled
status of such veteran.
(5) The Secretary shall make the database available to all Federal
departments and agencies and shall notify each such department and
agency of the availability of the database.
(6) If the Secretary determines that the public dissemination of
certain types of information maintained in the database is
inappropriate, the Secretary shall take such steps as are necessary to
maintain such types of information in a secure and confidential manner.
(g) Enforcement Penalties for Misrepresentation.--Any business
concern that is determined by the Secretary to have misrepresented the
status of that concern as a small business concern owned and controlled
by veterans or as a small business concern owned and controlled by
service-disabled veterans for purposes of this subsection shall be
debarred from contracting with the Department for a reasonable period
of time, as determined by the Secretary.
(h) Treatment of Businesses After Death of Veteran-Owner.--(1)
Subject to paragraph (3), if the death of a veteran causes a small
business concern to be less than 51 percent owned by one or more
veterans, the surviving spouse of such veteran who acquires ownership
rights in such small business concern shall, for the period described
in paragraph (2), be treated as if the surviving spouse were that
veteran for the purpose of maintaining the status of the small business
concern as a small business concern owned and controlled by veterans.
(2) The period referred to in paragraph (1) is the period beginning
on the date on which the veteran dies and ending on the earliest of the
following dates:
(A) The date on which the surviving spouse remarries.
(B) The date on which the surviving spouse relinquishes an
ownership interest in the small business concern.
(C) The date that is 10 years after the date of the veteran's
death.
(3) Paragraph (1) only applies to a surviving spouse of a veteran
with a service-connected disability rated as 100 percent disabling or
who dies as a result of a service-connected disability.
(i) Priority for Contracting Preferences.--Preferences for
awarding contracts to small business concerns shall be applied
in the following order of priority:
(1) Contracts awarded pursuant to subsection (b), (c), or (d) to
small business concerns owned and controlled by veterans with service-
connected disabilities.
(2) Contracts awarded pursuant to subsection (b), (c), or (d) to
small business concerns owned and controlled by veterans that are not
covered by paragraph (1).
(3) Contracts awarded pursuant to----
(A) section 8(a) of the Small Business Act (15 U.S.C.
637(a)); or
(B) section 31 of such Act (15 U.S.C. 657a).
(4) Contracts awarded pursuant to any other small business
contracting preference.
(j) Applicability of Requirements to Contracts.--(1) If after
December 31, 2008, the Secretary enters into a contract, memorandum of
understanding, agreement, or other arrangement with any Governmental
entity to acquire goods or services, the Secretary shall include in
such contract, memorandum, agreement, or other arrangement a
requirement that the entity will comply, to the maximum extent
feasible, with the provisions of this section in acquiring such goods
or services.
(2) Nothing in this subsection shall be construed to supersede or
otherwise affect the authorities provided under the Small Business Act
(15 U.S.C. 631 et seq.).
(k) Annual Reports.--Not later than December 31 each year, the
Secretary shall submit to Congress a report on small business
contracting during the fiscal year ending in such year. Each report
shall include, for the fiscal year covered by such report, the
following:
(1) The percentage of the total amount of all contracts awarded by
the Department during that fiscal year that were awarded to small
business concerns owned and controlled by veterans.
(2) The percentage of the total amount of all such contracts
awarded to small business concerns owned and controlled by veterans
with service-connected disabilities.
(3) The percentage of the total amount of all contracts awarded by
each Administration of the Department during that fiscal year that were
awarded to small business concerns owned and controlled by veterans.
(4) The percentage of the total amount of all contracts awarded by
each such Administration during that fiscal year that were awarded to
small business concerns owned and controlled by veterans with service-
connected disabilities.
(l) Definitions.--In this section:
(1) The term ``small business concern'' has the meaning given that
term under section 3 of the Small Business Act (15 U.S.C. 632).
(2) The term ``small business concern owned and controlled by
veterans'' means a small business concern----
(A)(i) not less than 51 percent of which is owned by one or
more veterans or, in the case of a publicly owned business, not
less than 51 percent of the stock of which is owned by one or
more veterans; and
(ii) the management and daily business operations of which
are controlled by one or more veterans; or
(B) not less than 51 percent of which is owned by one or more
veterans with service-connected disabilities that are permanent
and total who are unable to manage the daily business
operations of such concern or, in the case of a publicly owned
business, not less than 51 percent of the stock of which is
owned by one or more such veterans.
(3) The term `commercial item' has the meaning given that term in
section 4(12) of the Office of Federal Procurement Policy Act (41
U.S.C. 203(12)) as long as items and services directly relating to the
sale of such a commercial item are offered to commercial customers.
(4) The term `management and daily business operations' includes--
--
(A) with respect to a contract for the provision of services,
the services to be performed by a contract awarded under this
section; and
(B) with respect to a contract for the provision of goods
that are not manufactured by the small business concern in
question, the provision of services relating directly to the
sale of such goods.
(5) The term `regular dealer' with respect to any contract means a
person who owns, operates, or maintains a store, warehouse, or other
establishment in which the commodities or goods of the general
character described by the specifications and required under the
contract are bought, kept in stock, and sold to the public in the usual
course of business.
`(6) The term `control of management and daily business operations'
with respect to a business concern means the authority to make final
decisions affecting financial, operational, management policy, and
employment issues, irrespective of the number of hours worked by the
individual with such authority or the location of such individual with
respect to the business concern.'
SOURCE
(Added Pub. L. 109-461, title V, Sec. 502(a)(1), Dec. 22, 2006, 120
Stat. 3431; amended Pub. L. 110-389, title VIII, Sec. 806, Oct. 10,
2008, 122 Stat. 4189.)
REFTEXT
REFERENCES IN TEXT
The Small Business Act, referred to in subsec. (j)(2), is Pub. L.
85-536, Sec. 2(1 et seq.), July 18, 1958, 72 Stat. 384, which is
classified generally to chapter 14A (Sec. 631 et seq.) of Title 15,
Commerce and Trade. For complete classification of this Act to the
Code, see Short Title note set out under section 631 of Title 15 and
Tables.
MISC1
AMENDMENTS
2008--Subsecs. (j) to (l). Pub. L. 110-389 added subsec. (j) and
redesignated former subsecs. (j) and (k) as (k) and (l), respectively.
EFFECTIVE DATE
Pub. L. 109-461, title V, Sec. 502(d), Dec. 22, 2006, 120 Stat.
3435, provided that: ``This section [enacting this section and
provisions set out as a note below] and the amendments made by this
section shall take effect on the date that is 180 days after the date
of the enactment of this Act [Dec. 22, 2006].''
TRANSITION RULE
Pub. L. 109-461, title V, Sec. 502(b), Dec. 22, 2006, 120 Stat.
3435, provided that: ``A small business concern that is listed in any
small business database maintained by the Secretary of Veterans Affairs
on the date of the enactment of this Act [Dec. 22, 2006] shall be
presumed to be eligible for inclusion in the database under subsection
(f) of section 8127 of title 38, United States Code, as added by
subsection (a), during the period beginning on the effective date of
that section [see Effective Date note above] and ending 1 year after
such effective date. Such a small business concern may be removed from
the database during that period if it is found not to be a small
business concern owned and controlled by veterans (as defined in
subsection (k) of such section).''
__________
H.R. 4221 IH section 7 (d)(9) and (e)(5) Change.doc [Recommendations in
RED appear in Italics]
H.R. 4221 IH section 7 (d)(9) `(9) For each small business concern
included in the database, the Secretary shall specify the North
American Industry Classification System code or codes of the
goods and services that may be procured by the Department from
such concern.'
H.R. 4221 IH section 7 (e)(5) `(5) The term `regular dealer' with
respect to any contract means a person who owns, operates, or maintains
a store, warehouse, or other establishment in which the commodities or
goods of the general character described by the specifications and
required under the contract are bought, kept in stock, and sold to the
public in the usual course of business.'
The above verbiage has been around for many years. Today, it is
unrealistic and is not followed by contracting officers, manufacturers,
wholesalers, distributors or dealers.
1. Internet has decreased purchase order, funding and
manufacturer/ distributor invoicing costs significantly because
products are touched only once between manufacturer and
customer or twice between manufacturer/ customer and
distributor.
2. Quality Assurance is lessened when another point of
shipment, storage, stocking point is added.
3. Small business bill of material/product costs are less
because shipping costs are borne only once to the customer.
4. When selling to the Federal Government, States exempt sales
tax and all States have mechanisms in place that takes into
consideration sales to the Federal Government based on a
contract. Most States levy sales tax when product is maintained
within a dealer's premises located within the dealer's State of
business.
5. GSA Schedule sales for product require F.O.B. (Freight On
Board) Destination on purchased product.
Manufacturers/distributors accept these GSA
Schedule requirements within their Letters of Supply
and price items to the Dealer accordingly.
It is advantageous to both the originating
point and the receiving point to have only one
shipment.
GSA Schedule buys almost always allow for
thirty days deliver After Receipt of Orders (ARO).
Small business competes with large business when the
Federal Government uses the GSA Schedule for purchasing
because FAR Part 8.404-1 exempts small business for
orders placed against Federal Supply Schedules
contracts. Adding additional shipping costs almost
always loses the bid for small business competing with
large business because large businesses ship direct
from manufacturers/distributors.
If veteran owned businesses are required to
meet the proposal in H.R. 4221 IH section 7(e)(5) they
will be unjustly put out of business.
6. Prior to 1996 there were at least 25 small business
manufacturers of micro-computers. In 1997/1998 all were gone or were
manufacturing niche products. More than 20 were gone by 1999. The
reason was the price wars between the large microcomputer
manufacturers. There was no way small business could compete. The SBA
did not modify the non-manufacturer rule thus maintaining the
requirement that small business sell only small business manufactured
computers through an ``other than full-competition'' contract awarded
through the Small Business Act. This forced small businesses into
accumulating large expenses in order to get a GSA Schedule. The rule of
only selling small business products does not apply to GSA Schedules.
When those small businesses entered into contracts with the large
business manufacturers to sell large business products the large
business got an increased marketing staff because the small business
GSA Schedule holders had very slim margins of profit and were
controlled by the competition between the large manufacturers. Every
large business discount to the Federal Government reduced the bottom
line of small business. The only way the small business can compete
with large business is to keep PRODUCT prices extremely low and create
profit through special SERVICES provided with the dealer sales. This
paragraph discusses only computers. These examples apply to the entire
spectrum of product sales; e.g. furniture, automobiles, drugs, and
office supplies. If VETERAN owned businesses are required to meet the
proposal in H.R. 4221 IH section 7(e)(5) VETERANS will be unjustly put
out of business.
The recommended H.R. 4221 IH section 7(e)(5) is:
`(5) The term `distributor, manufacturer representative, or dealer'
with respect to any Federal veteran owned small business contract means
a person who owns, operates, or maintains a business, warehouse, or
other establishment in which the commodities or goods of the general
character described by the specifications and required under the
contract are bought and sold to the public in the usual course of
business. A `wholesaler' meets the definition contained in this
paragraph and has exclusive rights to market, within a given Federal
Government territory, the goods of the applicable manufacturer or
company.'
Committee on Veterans' Affairs
Subcommittee on Oversight and Investigations
Washington, DC
January 11, 2010
Honorable Eric K. Shinseki
Secretary
U.S. Department of Veterans Affairs
810 Vermont Avenue, NW
Washington, DC 20420
Dear Secretary Shinseki:
Thank you for the testimony of Glenn Haggstrom, Executive Director
of the Office of Acquisition, Logistics and Construction, accompanied
by Ed Murray, Deputy Assistant Secretary for Finance, Office of
Management, U.S. Department of Veterans Affairs; Jan R. Frye, Deputy
Assistant Secretary, Office of Acquisition, Logistics and Construction;
Frederick Downs, Jr., Chief Procurement and Clinical Logistics Officer,
Veterans Health Administration; Craig Robinson, Executive Director of
the National Acquisition Center; and David Canada, Senior Procurement
Analyst, Center for Small Business Utilization, Office of Small and
Disadvantaged Business Utilization, U.S. Department of Veterans Affairs
on the hearing entitled, ``Acquisition Deficiencies at the U.S.
Department of Veterans Affairs.''
Please provide answers to the following questions by Tuesday,
February 23, 2010, to Todd Chambers, Legislative Assistant to the
Subcommittee on Oversight and Investigations.
1. What is the Office of the General Counsel's role in
assisting you in VA acquisition operations?
a. The Subcommittee is concerned that the legal
opinions from the General Counsel's office,
specifically Group 5, in relation to contract and
acquisition issues are fragmented, piecemealed, and
does not provide adequate guidance. Are you satisfied
with the quality or value of the legal technical review
being released from the General Counsel's office
regarding VA acquisitions?
b. When was the last time the quality or value of this
group's legal technical review of its legal opinions
were evaluated for satisfaction from people requesting
its assistance in the field? What were the results of
that evaluation?
i. If one has not been conducted, when will VA
conduct one?
2. GAO's testimony noted that many miscellaneous obligations
did not include adequate information on the purpose, vendor,
and contract number--crucial information related to the
miscellaneous obligation. Does VA have system patches to now
require this type of information?
a. Are those patches working?
b. In your opinion, if GAO went out and reevaluated
this issue again, would GAO be satisfied with the
results and say ``problem solved?''
3. In your testimony, you state that VA is setting records
for spending with veteran-owned small businesses and that VA
awarded 11.76 percent of its contract dollars to SDVOSB and
14.72 percent to all VOSBs. Have you validated this data?
a. When was the last time VA conducted an audit on
this data?
4. What is VA's opinion on resellers or ``pass-through
entities'' in VA acquisition, the adverse impact they have on
the VA, and the role they play in wasting taxpayer dollars?
5. Annually, the VA reports to SBA the percentage of small
business contracting that the VA has awarded to SDVOSBs. After
being informed of GAO's testimony at this hearing and the
findings contained in its report issued in October 2009, do you
believe that the VA goal reports are an accurate account of the
small business contracts VA has awarded to SDVOSBs?
6. According to the VA OIG, the data systems such as VA's
Electronic Contract Management System (eCMS) and the Federal
Procurement Data System (FPDS), which should provide accurate
information relating to procurements, contain inaccurate and
incomplete data. How can VA allow inaccurate and incomplete
data to be included in eCMS and FPDS, what is VA's plan to
correct this, and who is being held accountable?
7. A 2004 GAO report stated that though VA had implemented
policies and procedures that required medical centers to
purchase medical products and services through VA's contract
programs, a VA OIG report found that medical centers continued
to make many less cost efficient purchases from local
suppliers. What specific procedures has VA implemented to
provide oversight and compliance?
8. During the July 31, 2008 hearing, VA testified that
starting in fiscal year 2009, the Office of Business Oversight
would be reviewing 70 to 80 stations with a special emphasis on
segregation of duties and how miscellaneous obligations are
handled. What were the findings of the review, and what actions
has VA taken to correct each deficiency found?
a. Please specify actions VA has taken to correct each
deficiency found?
9. VA published VA Financial Policies and Procedures, chapter
6, Miscellaneous Obligations, was previously known as the VA
Directive and Handbook 4533. This was supposed to address all
the egregious issues uncovered at last year's hearing on
Miscellaneous Obligations. Please inform the Committee on how
this new guidance has corrected the problems detailed during
the July 31, 2008 hearing.
a. Why did a recent audit show that 242 of 476 (51%)
miscellaneous obligations that were reviewed where not
in compliance with the Directive?
b. Why did 47 of 56 (84%) of miscellaneous obligations
requiring the Head of Contracting Authority (more
commonly known as the HCA) not go to the HCA for
approval as required?
c. Why did 13 of 47 (28%) miscellaneous obligations
for goods and services named in the directive were
invalid uses of miscellaneous obligations?
10. Since Public Law 109-461 was enacted on December 22, 2006,
what has VA done to put the verification program in place and
what kind of documentation must a business provide to VA in
order to be listed in the database.
a. How extensively are other Federal agencies
utilizing the database?
11. Based on the GAO report issued on November 19, 2009, it
appears there is a lack of an active verification program that
relies solely on self-verification is allowing businesses that
do not meet the requirements of PL 109-461 to take contracts
away from legitimate qualified disabled veteran-owned small
businesses. Please list all steps VA is taking to address this
issue?
12. Please describe, in detail, the process through which an
SDVOSB is certified by the VA, and how a contracting officer
determines that a business has been certified by the VA?
13. Last year, several of our Committee staff had the
opportunity to visit the Acquisition Academy in Frederick,
Maryland. While there, they had the opportunity to meet with
several attendees of the internship program. One of the
concerns our staff came back with was once these interns
graduated from the Academy, there was nothing to keep them from
leaving the VA for other opportunities within or outside of the
Federal Government.
a. What is VA doing to keep these highly trained
individuals at VA?
b. What is the annual cost of running the Academy?
c. How many individuals will be placed into the
acquisition workforce in 2010, 2011 and 2012?
14. Recently, minority and majority staff met with the acting
director of the Center for Veterans Enterprise. During that
meeting, Ms. Wegner stated that VA was allowing small
businesses to be listed on the VIP database without the veteran
or ownership and control status being verified by VA. Both
staff reminded her of previous conversations in which they made
Ms. Wegner aware that the law required VA to verify the
ownership and veteran's status before being listed. They also
explained that affixing a logo to a business to indicate a
business's status as verified was not sufficient to comply with
the law.
a. Are unverified businesses still listed in the
database?
b. If they are, when will VA remove them from the
database?
15. What is the status of the contract for assistance with
verifying ownership and control and what is the process by
which the contractor will accomplish that function and what
will be VA's role in that process?
Thank you again for taking the time to answer these questions. The
Committee looks forward to receiving your answers. If you have any
questions concerning these questions, please contact Subcommittee on
Oversight and Investigations Majority Staff Director, Martin Herbert,
at (202) 225-3569 or the Subcommittee Minority Staff Director, Arthur
Wu, at (202) 225-3527.
Sincerely,
HARRY E. MITCHELL DAVID P. ROE
Chairman Ranking Republican Member
Questions for the Record,
The Honorable Harry E. Mitchell, Chairman, and
The Honorable David P. Roe, Ranking Member
Subcommittee on Oversight and Investigations
House Committee on Veterans' Affairs
Acquisition Deficiencies at the U.S. Department of Veterans Affairs
December 16, 2009
Question 1: What is the Office of the General Counsel's role in
assisting you in VA acquisition operations?
Question 1(a): The Subcommittee is concerned that the legal
opinions from the General Counsel's office, specifically Group 5, in
relation to contract and acquisition issues are fragmented,
piecemealed, and does not provide adequate guidance. Are you satisfied
with the quality or value of the legal technical review being released
from the General Counsel's office regarding VA acquisitions?
Response: Office of General Counsel (OGC) officials would like to
meet with Subcommittee staff to better understand the nature and bases
for the expressed concern. As is further detailed below in response to
question 1.b., the first question is puzzling because surveys have
shown consistently strong levels of client satisfaction with the legal
assistance provided by Professional Staff Group V.
There may be some misunderstanding underlying this question.
``Technical review'' is a term of art referring not to reviews
conducted by OGC, but rather by acquisition-program professionals.
These are designed to ensure that procurements are conducted in
accordance with prescribed policies. Once these technical reviews are
conducted, OGC attorneys are frequently asked to perform legal
evaluations of the matters and to suggest revisions/corrections of the
proposed courses of action as necessary.
We are also surprised by the question because OGC now has
considerably greater legal resources to support departmental
procurement activities than was the case just a few years ago, and
client offices have voiced their deep appreciation. Over the 2006-2008
time frame, OGC not only trained over twenty existing VA Regional
Counsel attorneys in contract law, it also was permitted to hire (from
the revolving Supply Fund) 22 attorneys to work in support of the
supply system. While these attorneys report to Regional Counsels, Staff
Group V coordinated their training and developed mentor-mentee
relationships between them and its headquarters legal experts. Staff
Group V itself is larger now than ever before, now totaling 35 staff
attorneys who report to supervising attorneys under the management of a
single Assistant General Counsel for purposes of ensuring coordination
and consistency of advice. This staff is strategically located not only
in VA Central Office (VACO) but also at the Austin Information
Technology Center in Austin, Texas; the National Acquisition Center in
Hines, Illinois; and the new Technology Acquisition Center in
Eatontown, New Jersey. Client offices have been very pleased with the
expanded availability of this legal expertise.
Question 1(b): When was the last time the quality or value of this
group's legal technical review of its legal opinions were evaluated for
satisfaction from people requesting its assistance in the field? What
were the results of that evaluation? If one has not been conducted,
when will VA conduct one?
Response: This question further suggests some underlying
misunderstanding of OGC's role in the procurement process.
Specifically, we do not understand what is meant by ``legal technical
review of its legal opinions,'' and we reiterate our desire to meet
with Subcommittee staff to better understand the concern that prompted
the question.
To the extent it is helpful, we can tell you that client
satisfaction with the legal services provided by Staff Group V and all
other OGC components is measured on a regular basis, most recently in
2009. The cumulative client-satisfaction scores for Staff Group V have
been strong. In 2009, they achieved an overall score of 4.29 on a scale
of 5, with 5 being the highest possible satisfaction level. Scores for
the immediately prior surveys, as conducted every other year, were also
consistently high: 4.24 in 2007, 4.37 in 2005, and 4.39 in 2003. These
surveys have proven useful in not only reinforcing our understanding of
what we are doing well, but also allowing us to identify and focus
efforts on areas of client concern.
Question 2: GAO's testimony noted that many miscellaneous
obligations did not include adequate information on the purpose,
vendor, and contract number--crucial information related to the
miscellaneous obligation. Does VA have system patches to now require
this type of information?
Response: A system patch was released in September 2009, which
enables local management at facilities to have improved oversight over
the use of miscellaneous obligations.
This first patch (Patch PRC*5.1*131) to VA's Integrated Funds
Distribution, Control Point Activity, Accounting, and Procurement
(IFCAP) system provides two sets of functionality. The first enhances
the reporting capabilities of the National Logistics Database. Reports
are now available that identify those obligations that do not have the
required procurement information and those that were created in
violation of separation of duties policies so that management can take
corrective action. The second functionality of the IT patch allows the
financial system (FMS) to identify if a financial transaction
originated as a ``Miscellaneous Obligation'' (VA Form 4-1358) or as a
``Request, Turn-In and Receipt for Property or Services'' (Form 2237).
Further development work on 4-1358 remediation caused a resource
conflict with VA's Financial and Logistics Integrated Technology
Enterprise (FLITE) system. FLITE is composed of the Integrated
Financial Accounting System (IFAS) and the Strategic Asset Management
(SAM) system. IFAS and SAM impact, and eventually will replace, the
IFCAP system. In August 2009, VA determined the best use of limited
IFCAP developers would be to re-direct these resources away from
developing any additional interim IFCAP patches and toward developing
and implementing the FLITE program, whose requirements fully address
GAO's recommendations on miscellaneous obligations, and which will be
the permanent system solution.
Although the IT resources were re-directed to FLITE from any
follow-up 4-1358 remediation work, mitigation processes and policies
are in place from a management controls perspective.
Question 2(a): Are those patches working?
Response: Yes. The first patch is working as programmed. At present
we are getting additional information from all IFCAP sites. This
additional information allows us to prepare better management reports
to ensure compliance of 4-1358's written policy. Reports that are
currently being developed include showing if separation of duties and
if a vendor has been attached to the procurement. These and other
reports will continue to be developed and shared with the various
program offices as they become available.
Question 2(b): In your opinion, if GAO went out and reevaluated
this issue again, would GAO be satisfied with the results and say
``problem solved?''
Response: Through the combination of the release of the national
policy on the use of miscellaneous obligations and the release of the
IFCAP system patch discussed in 2a, we expect to see significant
improvements in audits beginning with FY 2010 data and that the problem
identified by GAO will be addressed satisfactorily.
Question 3: In your testimony, you state that VA is setting records
for spending with veteran-owned small businesses and that VA awarded
11.76% of its contract dollars to SDVOSB and 14.72 percent to all
VOSBs. Have you validated this data?
Question 3(a): When was the last time VA conducted an audit on this
data?
Response: VA is proud of its record with respect to service-
disabled Veteran-owned small business (SDVOSB) and Veteran-owned small
business (VOSB) contracts, and is committed to meeting and exceeding
our annual contracting goals with these categories of business. A part
of that commitment is to ensure data accuracy when reporting agency
contracting dollars in the Federal Procurement Data System-Next
Generation (FPDS-NG). Effective Fiscal Year (FY) 2010, VA began an
ongoing independent verification and validation (IV&V) initiative of
agency data through the services of an IV&V contractor. The IV&V
contractor samples and validates data quarterly and makes
recommendations for adjustments to VA policies, procedures, and
training to improve the accuracy of the data reported in FPDS-NG. Data
pertaining to SDVOSBs and VOSBs is included in the IV&V reviews. Data
accuracy is a key performance measurement indicator and will be
reviewed quarterly by senior leadership in the Office of Acquisition,
Logistics, and Construction.
In addition, the data is certified by VA's Office of Small and
Disadvantaged Business Utilization during the first quarter following
the end of each fiscal year. The socio-economic data was last certified
in November 2009.
Question 4: What Is VA's opinion on resellers or ``pass-through
entities'' in VA acquisition, the adverse impact they have on the VA,
and the role they play in wasting taxpayer dollars?
Response: Resellers are companies that buy goods or services with
the intention of reselling them rather than using or consuming them. VA
does not object to resellers participating in VA acquisitions, so long
as they comply with applicable Federal law, policies, and requirements,
including the Federal Acquisition Regulation and General Services
Administration's Federal Supply Schedule program policies and
requirements, such as limitations on the percentage of work on a
SDVOSB/VOSB set-aside award that can be subcontracted to a non-SDVOSB/
VOSB firm. The Government has the obligation to determine price
reasonableness in all contracts regardless of the business type (e.g.,
resellers, manufacturers, or wholesalers). Price reasonableness is
determined by comparing the value of offered products or services
relative to similar offerings in the commercial marketplace. VA seeks
and awards contracts that are in the best interest of the Government
and are fair and reasonably priced.
Question 5: Annually, the VA reports to SBA the percentage of small
business contracting that the VA has awarded to SDVOSBs. After being
Informed of GAO's testimony at this hearing and the findings contained
in its report issued in October 2009, do you believe that the VA goal
reports are an accurate account of the small business contracts VA has
awarded to SDVOSBs?
Response: VA goal accomplishment reporting for SDVOSB and VOSB
contracts is based upon the award data actually transmitted to FPDS-NG,
which includes all contract awards over $25,000. VA data used in these
reports is extracted from FPDS-NG which is the most accurate assessment
tool available. This data will now be subject to sampling by VA's IV&V
contractor further described in VA's response to Question No. 3, above.
The issue does not address the legitimacy of the firms which have
self-certified. This information will be verified through the full
implementation of VA's Veteran's First program, which includes a vendor
status verification program.
Question 6: According to the VA OIG, the data systems such as VA's
Electronic Contract Management System (eCMS) and the Federal
Procurement Data System (FPDS), which should provide accurate
information relating to procurements, contain inaccurate and incomplete
data. How can VA allow inaccurate and incomplete data to be included in
eCMS and FPDS, what is VA's plan to correct this, and who is being held
accountable?
Response: VA is committed to ensuring accurate and complete data
records in its acquisition systems. The agency has taken steps to
improve both the operational processes and the automated systems to
address this issue. VA has developed features within the enterprise-
wide electronic contract management system (eCMS) to prohibit
contracting officers from finalizing awards before records have been
sent to FPDS-NG for awards over $25,000. In addition, VA Information
Letters (IL) have been developed and issued addressing utilization and
accuracy of FPDS-NG data. Specifically, Information Letter 049-07-09,
``FPDS Data Verification and Validation,'' addresses data integrity and
assigns accountability to each contracting officer as well as the
office manager. This data is also included in the IV&V contractor's
data sampling (see VA's response to Question No. 3).
One root cause of inaccurate data in the acquisition systems is the
existence of a knowledge gap within the acquisition workforce in fully
understanding the system features of FPDS-NG and eCMS. In an effort to
further reduce the occurrence of inaccurate data entry, VA is holding
new and refresher training courses for both eCMS and FPDS-NG users. VA
has also established a web-based central repository of detailed
acquisition policies and procedures, which is accessible to all
acquisition professionals to augment their classroom training. In
addition, VA has appointed on-site experts in each administration and
contracting office to provide training and oversight for eCMS and FPDS-
NG system use. VA's Office of Acquisition, Logistics and Construction
will be accountable for eCMS and FPDS-NG program management and for
ensuring data accuracy and completeness at the agency.
Question 7: A 2004 GAO report stated that though VA had implemented
policies and procedures that required medical centers to purchase
medical products and services through VA's contract programs, a VA OIG
report found that medical centers continued to make many less cost
efficient purchases from local suppliers. What specific procedures has
VA implemented to provide oversight and compliance?
Response: VA contracting officers are required to purchase medical
equipment and supplies from Federal Supply Schedule (FSS) contracts
awarded by VA. This requirement to award contracts off of FSS is based
upon a delegation of procurement authority from the General Services
Administration (GSA) pursuant to the VA Acquisition Regulation. Also,
VA hired Price Waterhouse Coopers (PWC) to complete a review of the
existing acquisition structure, and to recommend an acquisition
organization business model. As a result, the recommended regional
model provides administration decision makers with more authority in
executing strategic procurement programs, uses procurement oversight
organizations resources effectively, and provides the best opportunity
for stewardship responsibilities with mission focus.
Under this model all acquisition workforce members (GS 1102 and
acquisition related GS 1105 and GS 1106s) will report to the Network/
Program Contract Manager (NCM/PCM), the Service Area Officer (SAO), the
Deputy Chief Procurement Officer (DCPO), and Chief Procurement and
Logistics Officer.
Implementation of the acquisition realignment process began the
second quarter of FY 2009, and has been completed, with the exception
of the realigning of the GS 1105 and GS 1106 workforce under the NCM,
which will conclude September 2010.
Each NCM has been authorized an additional Full-time Employee
Equivalent (FTEE) for a Compliance Officer, and each SAO will be
staffed with three Compliance Officers to ensure proper oversight.
Question 8: During the July 31, 2008 hearing, VA testified that
starting in fiscal year 2009, the Office of Business Oversight would be
reviewing 70 to 80 stations with a special emphasis on segregation of
duties and how miscellaneous obligations are handled. What were the
findings of the review, and what actions has VA taken to correct each
deficiency found?
Response: In FY 2009, the Office of Business Oversight analyzed a
total of 476 VA Form 4-1358s at 39 sites VA-wide. We found no fraud. We
found instances of separation of duty violations, inadequate supporting
documentation, VA Form 4-1358 not being submitted to the Head of
Contracting Authority (HCA) as required and instances of invalid uses.
Question 8(a): Please specify actions VA has taken to correct each
deficiency found?
Response: In FY 2009, the Office of Business Oversight issued 35
recommendations for improving compliance with VA Form 4-1358
procedures. All affected facilities submitted corrective action plans
as required in response to the recommendations. Twenty-five
recommendations have since been closed.
Question 9: VA published VA Financial Policies and Procedures,
Chapter 6, Miscellaneous Obligations, was previously known as the VA
Directive and Handbook 4533. This was supposed to address all the
egregious issues uncovered at last year's hearing on Miscellaneous
Obligations. Please inform the Committee on how this new guidance has
corrected the problems detailed during the July 31, 2008 hearing.
Question 9(a): Why did a recent audit show that 242 of 476 (51%)
miscellaneous obligations that were reviewed where not in compliance
with the Directive?
Question 9(b): Why did 47 of 56 (84%) of miscellaneous obligations
requiring the Head of Contracting Authority (more commonly known as the
RCA) not go to the HCA for approval as required?
Question 9(c): Why did 13 of 47 (28%) miscellaneous obligations for
goods and services named in the directive were invalid uses of
miscellaneous obligations?
Response: As stated in a recent Management Quality Assurance
Service Report, the primary cause of the reported shortcomings was a
``lack of knowledge or timely receipt of the initial policy issued in
August 2008.'' VHA provided electronic distribution of national policy
(all Administrations) to the VHA financial community in January 2009.
VA anticipates significant improvement in subsequent reviews.
Question 10: Since Public Law 109-461 was enacted on December 22,
2006, what has VA done to put the verification program in place and
what kind of documentation must a business provide to VA in order to be
listed in the database?
Response: VA leadership receives weekly reports, and VA has taken
numerous steps to implement the program:
Re-organized and expanded the Office of Small and
Disadvantaged Business Utilization (OSDBU);
Hired a Senior Executive Service official to manage the
operations;
Acquired contractor support to supplement full-time staff
and provide advisory and assistance services to improve the program's
efficiency, effectiveness and performance measures;
Completed certification and accreditation of the Center
for Veterans Enterprise's (CVE's) integrated electronic signature
system in May 2009, culminating a 3-year period of research, planning
and development;
Formally trained CVE examiners in business operations
through George Mason University's School of Public Policy;
Purged 207 inactive business profiles from the database;
Published an Interim Final regulation in the Federal
Register informing the public of how VA will manage the Verification
Program (see 38 CFR Part 74);
Launched formal examination of ownership and control of
applicant businesses on May 19, 2008;
Completed awareness training for business owners through
254 conferences and outreach activities since May 19, 2008;
Supported 38,285 calls through CVE's Customer Interaction
Center since May 19, 2008;
Initiated on-site visits to applicants in October 2009
after acquiring contractor support;
Re-engineered the VetBiz.gov web portal to conform to
VA's new transparency guidelines in November 2009; and
Received 7,776 applications and completed action on 4,004
(as of January 28, 2010).
The database requires all owners to address five eligibility
questions before they may be listed in the database. In addition,
owners who apply for the Verification Program must submit VA Form 0877,
authorizing VA to examine their individual eligibility status (Veteran,
service-disabled Veteran, eligible surviving spouse) and agreeing to
permit VA to examine business records. The listing of records that VA
may examine is contained in 38 CFR 74.12.
Question 10(a): How extensively are other Federal agencies
utilizing the database?
Response: The Vendor Information Pages (VIP) database is publicly
available on the Internet. In Fiscal Year 2009, the database was
visited 33,893,747 times. VA does not track individual visitor
characteristics, so we are not able to more specifically answer the
question. The Verification Program is applicable only to VA and to its
prime contractors.
Question 11: Based on the GAO report issued on November 19, 2009,
it appears there is a lack of an active verification program that
relies solely on self-verification is allowing businesses that do not
meet the requirements of P.L. 109-461 to take contracts away from
legitimate qualified disabled veteran-owned small businesses. Please
list all steps VA is taking to address this issue.
Response: P.L. 109-461 provides contracting advantages for service-
disabled and other Veteran-owned small businesses only when contracting
with the VA. It does not extend to non-VA Federal agencies. Only 3 of
the 10 examples provided in the GAO report relate to contracts with the
VA.
In May 2008, VA began to officially verify ownership and control of
Veteran-owned small businesses. To develop a sufficient number of
verified concerns eligible to receive set-aside and sole source
contracts, businesses may self-represent their status until December
31, 2011, in accordance with VA Acquisition Regulation (VAAR) Part
804.1102. At the present time, any business that is registered in the
VIP database--self-verified or not--that is putatively selected for a
contract will first undergo a full verification before the contract
will be awarded.
Question 12: Please describe, in detail, the process through which
an SDVOSB is certified by the VA, and how a contracting officer
determines that a business has been certified by the VA.
Response: The Attachment is a process flow chart which details the
steps involved in verifying a SDVOSB. Once a business has been approved
for verification, a ``Center for Veterans Enterprise (CVE)-- verified''
logo appears on the company's profile in the database. Until December
31, 2011, VA contracting officers may award to any business that is
listed in the VIP database. However, if a business is found to lack
SDVOSB/VOSB status through a verification examination or a status
protest, the firm will be removed from the VIP database.
This process is intended to verify that small business concerns
listed in the database are owned and controlled by Veterans, and that
Veteran owners asserting a service-connected disability are in fact
service-disabled. To carry out this requirement, VA collects
information to document direct and unconditional ownership, control of
day-to-day management and long-term planning, and Veteran and service-
disabled Veteran status of applicants. OSDBU would be pleased to brief
Subcommittee staff on how this process achieves those objectives.
Question 13: Last year, several of our Committee staff had the
opportunity to visit the Acquisition Academy in Frederick, Maryland.
While there, they had the opportunity to meet with several attendees of
the internship program. One of the concerns our staff came back with
was once these interns graduated from the Academy, there was nothing to
keep them from leaving the VA for other opportunities within or outside
of the Federal Government.
Question 13(a): What is VA doing to keep these highly trained
individuals at VA?
Response: The Internship School's holistic training approach
includes a number of activities intended to promote VA loyalty. VA
integrates mission service activities throughout the program in an
effort for interns to (1) gain a better understanding of the
interrelation and significance of their positions to VA's mission,
vision and core values; and (2) promote a connection and allegiance to
VA by visiting VA medical centers and working with the Veterans they
support. As part of the interns' leadership development, they are
trained on the mechanisms by which junior personnel can effect change
in organizations. VA is also implementing a change management strategy
for VA contracting organizations to ensure the vision of the
contracting professional as a ``trusted business advisor'' is accepted
and its application widely understood throughout VA.
In addition to these early measures promoting VA loyalty, the
Academy is currently exploring various retention strategies as VA
begins to transition the first intern class into the VA Workforce
during the late summer/early fall 2010. Some of these strategies
include: (1) student loan repayment; (2) retention incentives; or (3)
relocation incentives. Implementation of these strategies would require
a continuing service agreement (CSA). However, interns hired on
Excepted Service Appointments are not authorized to enter into a CSA.
To retain and continue the intern's employment with VA, the intern can
be converted to Career-Conditional Appointment at which time a CSA
could be applicable.
Question 13(b): What is the annual cost of running the Academy?
Response:
------------------------------------------------------------------------
------------------------------------------------------------------------
VA Acquisition Academy Internship School
FY 2009 and 2010 (projected) Operating Costs
------------------------------------------------------------------------
FY 2009
------------------------------------------------------------------------
*Personnel Services & Benefits $ 2,198,144
------------------------------------------------------------------------
Non-Personnel Costs $ 934,391
------------------------------------------------------------------------
Total Operating Costs $ 3,132,535
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
VA Acquisition Academy Internship School--Continued
FY 2009 and 2010 (projected) Operating Costs
------------------------------------------------------------------------
FY 2010
------------------------------------------------------------------------
**Personnel Services & Benefits $ 4,131,489
------------------------------------------------------------------------
Non-Personnel Costs $ 1,745,287
------------------------------------------------------------------------
Total Operating Costs $ 5,876,776
------------------------------------------------------------------------
*FY 2009 Includes costs for Vice Chancellor, Asst. Vice Chancellor and 30
Interns.
------------------------------------------------------------------------
**FY 2010 Includes costs for Vice Chancellor, Asst. Vice Chancellor and
Interns.
------------------------------------------------------------------------
Question 13(c): How many individuals will be placed into the
acquisition workforce in 2010, 2011, and 2012?
Response: Based on the size of the intern classes, VA estimates the
following number of interns to be placed into the VA workforce.
------------------------------------------------------------------------
Number of Interns Fused Into the VA
Year Workforce
------------------------------------------------------------------------
2010 26
------------------------------------------------------------------------
2011 30
------------------------------------------------------------------------
2012 30
------------------------------------------------------------------------
Question 14: Recently, minority and majority staff met with the
acting director of the Center for Veterans Enterprise. During that
meeting, Ms. Wegner stated that VA was allowing small businesses to be
listed on the VIP database without the veteran or ownership and control
status being verified by VA. Both staff reminded her of previous
conversations in which they made Ms. Wegner aware that the law required
VA to verify the ownership and veteran's status before, being listed.
They also explained that affixing a logo to a business to indicate a
business's status as verified was not sufficient to comply with the
law.
Question 14(a): Are unverified businesses still listed in the
database?
Response: There are two sets of businesses in the database: self-
representing businesses and those which have been officially verified
for ownership and control by staff in the Center for Veterans
Enterprise.
Question 14(b): If they are, when will VA remove them from the
database?
Response: VAAR Part 804.1102 permits businesses to self-represent
their status until December 31, 2011.
Question 15: What is the status of the contract for assistance with
verifying ownership and control and what is the process by which the
contractor will accomplish that function and what will be VA's role in
that process?
Response: VA has two contracts for assistance with verifying
ownership and control. The Verification Batch Processing Support
Contract engages a support contractor to examine approximately 400-500
applications per month. The Onsite Examinations Contract engages a
support contractor to perform onsite examinations at the applicant's
place of business. The Verification Batch Processing Support contractor
also examines published business information in accordance with the
CVE's approved Verification Guidelines. The Onsite Examination
contractor conducts site visits in accordance with the Site Visit
Protocol that was created under a third support contract for
Verification Advisory and Assistance Services. VA's role is to review
the results of the examinations performed by the contractors, request
additional information when appropriate, and based on VA's review of
all the information gathered, decide whether the applicant is a
legitimate VOSB or SDVOSB in conformance to the provisions of the laws
and regulations.
Attachment
Implementation of VA's Veteran-Owned Small Business Verification
Program
(Supplement to Question 12)
The Verification process in its current state is laid out in the
following flowchart (3 pages). This is a swim lane diagram that shows
the responsibilities of each team and how they interconnect.
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