[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
FOLLOW-UP ON THE U.S. DEPARTMENT OF
VETERANS AFFAIRS SERVICE-DISABLED
VETERAN-OWNED SMALL BUSINESS CERTIFICATION PROCESS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
AND
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
of the
COMMITTEE ON VETERANS' AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
NOVEMBER 30, 2011
__________
Serial No. 112-35
__________
Printed for the use of the Committee on Veterans' Affairs
----------
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COMMITTEE ON VETERANS' AFFAIRS
JEFF MILLER, Florida, Chairman
CLIFF STEARNS, Florida BOB FILNER, California, Ranking
DOUG LAMBORN, Colorado CORRINE BROWN, Florida
GUS M. BILIRAKIS, Florida SILVESTRE REYES, Texas
DAVID P. ROE, Tennessee MICHAEL H. MICHAUD, Maine
MARLIN A. STUTZMAN, Indiana LINDA T. SANCHEZ, California
BILL FLORES, Texas BRUCE L. BRALEY, Iowa
BILL JOHNSON, Ohio JERRY McNERNEY, California
JEFF DENHAM, California JOE DONNELLY, Indiana
JON RUNYAN, New Jersey TIMOTHY J. WALZ, Minnesota
DAN BENISHEK, Michigan JOHN BARROW, Georgia
ANN MARIE BUERKLE, New York RUSS CARNAHAN, Missouri
TIM HUELSKAMP, Kansas
MARK E. AMODEI, Nevada
ROBERT L. TURNER, New York
Helen W. Tolar, Staff Director and Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
BILL JOHNSON, Ohio, Chairman
CLIFF STEARNS, Florida JOE DONNELLY, Indiana, Ranking
DOUG LAMBORN, Colorado JERRY McNERNEY, California
DAVID P. ROE, Tennessee JOHN BARROW, Georgia
DAN BENISHEK, Michigan BOB FILNER, California
BILL FLORES, Texas
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
MARLIN A. STUTZMAN, Indiana, Chairman
GUS M. BILIRAKIS, Florida BRUCE L. BRALEY, Iowa, Ranking
BILL JOHNSON, Ohio LINDA T. SANCHEZ, California
TIM HUELSKAMP, Kansas TIMOTHY J. WALZ, Minnesota
MARK E. AMODEI, Nevada
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
__________
November 30, 2011
Page
Follow-Up on the U.S. Department of Veterans Affairs Service-
Disabled Veteran-Owned Small Business Certification Process.... 1
OPENING STATEMENTS
Chairman Bill Johnson, Subcommittee on Oversight and
Investigations................................................. 1
Prepared statement of Chairman Johnson....................... 37
Hon. Joe Donnelly, Ranking Democratic Member, Subcommittee on
Oversight and Investigations, prepared statement of............ 39
Chairman Marlin A. Stutzman, Subcommittee on Economic Opportunity 3
Prepared statement of Chairman Stutzman...................... 38
Hon. Timothy Walz, Democratic Member, Subcommittee on Economic
Opportunity.................................................... 3
Hon. Bruce L. Braley, Ranking Democratic Member, Subcommittee on
Economic Opportunity, prepared statement of.................... 39
WITNESSES
Thomas J. Leney, Executive Director, Small and Veteran Business
Programs, Office of Small and Disadvantaged Business
Utilization, U.S. Department of Veterans Affairs............... 5
Prepared statement of Mr. Leney.............................. 40
Accompanied By:
John H. ``Jack'' Thompson, Deputy General Counsel, Office
of General Counsel, U.S. Department of Veterans
Gregory D. Kutz, Forensic Audits and Investigative Service, U.S.
Government Accountability Office............................... 27
Prepared statement of Mr. Kutz............................... 42
Ralph O. White, Managing Associate General Counsel for
Procurement Law, Office of General Counsel, U.S. Government
Accountability Office.......................................... 29
Prepared statement of Mr. White.............................. 46
SUBMISSIONS FOR THE RECORD
Steve L. Gonzalez, Assistant Director, National Economic
Commission, American Legion.................................... 50
Robert G. Hesser, Vetrepreneur, LLC, Herndon, VA................. 53
FOLLOW-UP ON THE U.S. DEPARTMENT OF
VETERANS AFFAIRS SERVICE-DISABLED
VETERAN-OWNED SMALL BUSINESS CERTIFICATION PROCESS
----------
WEDNESDAY, NOVEMBER 30, 2011
U.S. House of Representatives,
Committee on Veterans' Affairs,
Subcommittee on Oversight and Investigations and
Subcommittee on Economic Opportunity,
Washington, DC.
The Subcommittees met, pursuant to notice, at 10:07 a.m.,
in Room 334, Cannon House Office Building, Hon. Bill Johnson
[chairman of the Subcommittee] presiding.
Present from Subcommittee on Oversight and Investigations:
Representatives Johnson, Donnelly, and Barrow.
Present from Subcommittee on Economic Opportunity:
Representatives Stutzman, Bilirakis, Amodei, and Walz.
OPENING STATEMENT OF CHAIRMAN JOHNSON, SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
Mr. Johnson. Well, good morning. This hearing will come to
order.
I want to welcome everyone to today's follow-up hearing on
the VA's service-disabled veteran-owned small business
certification process.
I thank the Members of the Subcommittee on Economic
Opportunity for their participation today and their efforts in
improving the process for veteran-owned and service-disabled
veteran-owned small businesses to do business with the VA.
In July, we held a hearing on this certification process.
And at that time, Mr. Tom Leney was relatively new to his
position as the executive director of Small and Veteran
Business Programs at VA's Office of Small and Disadvantaged
Business Utilization commonly referred to as the OSDBU.
At that hearing, we promised a follow-up discussion with
Mr. Leney to see how his planned improvements for the process
and certifying veteran-owned small businesses had been
implemented after several months.
Today is that follow-up. I look forward to hearing of the
progress made toward achieving these goals and how much longer
it will be until the goals are finally realized.
I also have concerns regarding recent actions taken by the
VA's senior procurement executive in response to the recent GAO
Aldevra decision which states that the VA should make efforts
to contract with veteran-owned small businesses when feasible
and in accordance with the Veterans First Contracting Program.
GAO recently upheld a bid protest filed by the Aldevra
business on a VA contract and recommended that VA rebid that
contract. Despite clear legislative and committee report
language outlining the intent of the Veterans First Contracting
Program, the VA decided that GAO's decision would not apply to
its contracting operations and that it would continue as it
pleased, doing away with the preference for VOSBs and SDVOSBs
in much of its contracting.
The VA has made it clear in correspondence and meetings
following the Aldevra decision that it has no intention of
attempting to clear up its own questions about Veterans First.
Despite acknowledging the problem, the VA is not trying to
solve the problem nor did it even ask Congress or this
committee those questions that needed to be answered years ago.
Even after the Aldevra decision and the VA's response,
efforts by these two Subcommittees to help explain parts of the
new law that the VA had trouble understanding several years
after its passage were met with a lack of cooperation on the
VA's part.
Instead the VA is determined to run this through the court
system eliminating key opportunities for VOSBs to contract with
the Federal Government.
When the VA cannot or chooses not to implement clearly
written legislation, we have a problem. This is not rocket
science. The Veterans First Contracting Program exists to help
the VA set the standard in Federal Government contracting with
VOSBs and SDVOSBs.
With Congress and the Administration sharing a goal of
increasing contracting with VOSBs and SDVOSBs, the Veterans
First language facilitated the achievement of that goal.
The law contains clear wording on how the VA can achieve
that goal while simultaneously helping our veterans do business
and not hindering the VA in its contracting efforts.
With straightforward language such as the secretary shall
give priority to a small business concern owned and controlled
by veterans, it is difficult to understand the VA's failure to
correctly interpret this law which also provides reasonable
accommodations when a VOSB or SDVOSB cannot fill the need.
We need to get this right. The certification process must
ensure that VOSBs and SDVOSBs are efficiently processed and
certified. We then must ensure that these same businesses are
able to compete for the appropriate contracts. Otherwise, there
is no point in having these businesses in the system if the VA
is going to ignore them.
I look forward to today's testimony on improvements made in
the certification process since our last hearing and the
further improvements we can look forward to in the near future.
I also look forward to discussion on how we can make the actual
contracting system with VOSBs and SDVOSBs work as it is
intended.
I am, however, disappointed that the VA's testimony barely
touches on the Aldevra topic despite knowing for 30 days that
it would be a part of this hearing. This is no surprise to
anyone.
And since the VA's October meeting with committee staff, we
have seen no great effort on the VA's part to improve this
situation.
I now yield to the acting Ranking Member, Mr. Walz, for an
opening statement.
OPENING STATEMENT OF HON. WALZ, DEMOCRATIC MEMBER, SUBCOMMITTEE
ON ECONOMIC OPPORTUNITY
Mr. Walz. Well, thank you, Mr. Chairman, and to our
witnesses for coming today, for holding this joint hearing. I
believe this follow-up hearing deserves this Committee's full
attention.
And because small business concerns do overlap into the
jurisdiction of Oversight and Investigation, we are certainly
happy to work with the Economic Opportunity Subcommittee to
ensure proper oversight.
The tough economic times that we are in make it as
important as ever to properly address transparency,
programmatic policy concerns, and thoroughly review the
service-disabled veteran-owned small business or SDVOSB
certification process. Providing contracting opportunities to
our deserving veterans through this process is important.
But when you have a successful program such as the VA's
Small Business Contracting Program and you are awarding
millions of dollars, it potentially attracts unqualified
businesses whose intentions are unfortunately to commit fraud.
This is why it is as important as ever for the VA to implement
and enforce fraud prevention measures.
During this joint hearing, I look forward to look at the
following things: An overview of the VA's preventative measures
and monitoring controls to minimize vulnerability or fraud;
VA's disbarment procedures; staff training to identify and
monitor potential fraud; VA's verification process such as how
they verify SDVOSBs; and the process of conducting announced
site visits.
These are just some of the items I have on today's agenda.
I believe that unless we remedy these concerns, the same
problems that have haunted this really important program and
the problems with verification will remain.
I want to thank you, Mr. Chairman, for your leadership and
I yield back.
Mr. Johnson. I thank the gentleman for yielding back.
I now yield to the chairman of the Subcommittee on Economic
Opportunity, Chairman Stutzman, for his opening comment.
OPENING STATEMENT OF HON. STUTZMAN, CHAIRMAN, SUBCOMMITTEE ON
ECONOMIC OPPORTUNITY
Mr. Stutzman. Thank you, Chairman Johnson.
First, let me express my appreciation for offering to join
forces on enabling service-disabled veteran-owned small
businesses to compete for contracts with the Department of
Veterans Affairs.
Let me begin by adding some context to why we are here
today. In 1999, the President signed legislation that became
Public Law 106-50 which established a government-wide goal for
all Federal agencies to award 3 percent of their contract
dollars to small businesses owned and controlled by service-
disabled veterans.
Until that time, there was no goal for service-disabled
veteran-owned small businesses or SDVOSBs. Since then, there
have been several laws and an executive order that made it
clear that Federal agencies are to make every effort to award
at least 3 percent of their acquisition dollars to service-
disabled veteran-owned small businesses.
This legislative effort has continued with the passage of
two laws that established and reinforced Section 8127 of Title
38 to provide VA with special tools and priorities to meet and
hopefully exceed the 3 percent goal.
By most indicators, the intent of Section 8127 has been
met. But meeting the 3 percent goal is not the sole intent of
Section 8127. Another goal is to establish a database of
validated veteran and service-disabled veteran-owned small
businesses that any government agency can access as part of
their efforts to meet the 3 percent goal. And that is why there
are still significant problems.
Today, VA data shows contract awards exceeding 20 percent
and I congratulate them for that effort. However, the process
in achieving those numbers has been painful at best. Until
recently, implementation of the database of validated veteran
and service-disabled veteran-owned small businesses required by
Public Law 109-461 has been less than professional to put it
kindly.
The VA is still recovering from its initial reluctance to
implement the law. Its policy of allowing self-certification of
ownership and control status instead of actively performing the
validation function prescribed in the law was frankly a
disaster.
As a result, as we will hear today, millions of contract
dollars went to businesses that did not meet the veteran or
disabled veteran-owned and controlled status.
I also find VA's recent decision to ignore GAO's finding in
favor of a protest by Aldevra, a service-disabled veteran-owned
small business, as evidence of a continuing reluctance to fully
embrace the clear requirements of Section 8127.
The law does not require VA to set aside all contracts for
SDVOSBs or award all contracts to SDVOSBs. More importantly,
nowhere in Section 8127 is there a provision exempting
acquisitions using the Federal supply schedule.
If nothing else, setting aside contracts using the FSS will
provide VA contracting officers additional flexibility in
meeting the SDVOSB goals.
Let's assume for the moment that those who believe the
provisions of Section 8127 go too far and that they give too
much advantage to SDVOSBs are correct. To those, I would point
out the literally dozens of Federal agencies who continue to
fail miserably to meet even the 3 percent goal.
For example, DoD, the largest department in the Federal
Government, awarded only 1.82 percent to SDVOSBs in fiscal year
2010. I suspect DoD could do better if they limited janitorial
awards to those SDVOSBs in that business. So if VA is picking
up part of the slack for the rest of the Federal Government, so
be it.
Finally, my staff and I have been hearing with increasing
frequency that many legitimate SDVOSBs are having an extremely
difficult time being validated and several have even had to
close down as a result.
While I understand that verification rules must be enforced
to ensure non-SDVOSBs are kept out, there must be a balance. I
am interested to hear from Mr. Leney about how he can better
strike this balance and expedite reconsideration for many of
these small businesses.
I am also concerned about what happens to the very dubious
arbitrary decisions to deny status to businesses by contractors
hired to validate the ownership and control status. And I
suggest that may be as a result of a lack of clear regulations
on things like survivorship and conflicts with state laws.
Thank you, Mr. Chairman, and I will yield back.
Mr. Johnson. Thank you, Mr. Chairman, for being here.
I thought we were going to have a statement from your
Ranking Member from your Subcommittee, but I think he is not--
--
Mr. Johnson. Yeah.
Mr. Johnson. Okay. Well, thank you both, for both
Subcommittees' participation.
And I now invite the first panel to the witness table. On
this panel, we will hear today from Mr. Tom Leney, the
executive director of Small and Veteran Business Programs at
VA's Office of Small and Disadvantaged Business Utilization.
Mr. Leney, your complete written statement will be made a
part of the hearing record and you are now recognized for five
minutes.
STATEMENT OF THOMAS J. LENEY, EXECUTIVE DIRECTOR, SMALL AND
VETERAN BUSINESS PROGRAMS, OFFICE OF SMALL AND DISADVANTAGED
BUSINESS UTILIZATION, U.S. DEPARTMENT OF VETERANS AFFAIRS
ACCOMPANIED BY JOHN H. ``JACK'' THOMPSON, DEPUTY GENERAL
COUNSEL, OFFICE OF GENERAL COUNSEL, U.S. DEPARTMENT OF VETERANS
AFFAIRS
Mr. Leney. Thank you, Chairman Johnson, Chairman Stutzman,
Ranking Member Walz, and Members of the Subcommittees.
I want to thank you for inviting me to testify on the VA's
implementation of veteran-owned small business provisions in
the Veterans Benefits Health Care Information Technology Act of
2006 and the Veterans Benefit Act of 2010.
I would like to briefly summarize my statement for the
record so we can address your questions and concerns.
The Vet First Program enables the VA to provide preferences
to veteran small businesses. VA has used this program to lead
the Federal Government in contracting with veteran small
businesses.
In the last fiscal year, the VA awarded more than $3
billion to veteran firms. The VA far exceeded the procurement
goals of 3 percent for SDVOSBs. We also exceeded the higher VA
goals of 12 percent for veteran small businesses overall,
providing nearly 22 percent of our total procurement to
veterans.
This is real money in the hands of veteran small businesses
and it establishes the VA as a leader in this arena.
At the same time, the VA has actively implemented the
statutory verification provisions that you have given us in
Public Law 109-461 so that procurement preferences go only to
legitimate firms.
I would like to update you on the progress VA has made to
improve the verification program and our plans to continue
improving it so that legitimate veteran businesses have greater
access to VA procurement opportunities.
As promised, we have completed the removal of all non-
verified firms from the vendor information pages 3 months ahead
of schedule.
When I last met with you in July, it took an average of 127
days to process an initial verification application. We have
now reduced that to 75 days.
In April, some applicants had waited months to receive word
that there was an issue with their veteran or service-disabled,
service-connected disability status. Veterans now receive their
status within 48 hours.
In response to valid complaints regarding lack of
information on status of initial applications, we have
established a policy that applicants receive updates at all key
points in the process and the current standard for the CVE help
desk to provide a response is one business day.
In addition, applicants can now receive an update on demand
via vetbus.gov.
Along with more frequent correspondence, we have launched
our Verification Assistance Program to clarify the regulatory
requirements and to explain the most frequent reasons for
denial.
This program enables applicants to eliminate common errors
up front and helps legitimate firms to receive favorable
decisions more quickly.
In July, the GAO followed up its May 2010 evaluation of CVE
verification and identified some challenges and vulnerabilities
that the VA has since overcome.
Among the issues identified were training, use of site
visits, and debarment of ineligible firms.
In addition to expanded internal training, CVE has
initiated a program to train all of its staff members as
certified fraud examiners.
We reduced the potential for ineligible firms to become
verified by creating a Risk Mitigation Program that requires
high-risk firms to undergo a site visit in addition to a
document review.
We have increased the number of site visits nearly ten-fold
from calendar year 2010 to calendar year 2011.
We have also increased training of the acquisition staff.
In the past 6 months, we provided training to more than a
thousand contracting officers.
The VA is serious about debarring companies who
misrepresent their status. VA has developed and formalized
specific processes and criteria related to debarment. They can
be found on the VA Debarment Committee Web site.
It is important to note, however, that most firms that we
find to be ineligible are not intentionally misrepresenting
their status and are not committing fraud.
Those firms that do provide false information or material
information are referred to the VA's Office of Inspector
General.
Mr. Chairman, we were also asked to address the October GAO
decision upholding a bid protest by an SDVOSB. My statement for
the record addresses the VA acquisition policy position on the
Aldevra decision. And Jack Thompson, the VA's deputy general
counsel, is with me today to answer any questions you may have
on that issue.
In conclusion, the VA Verification Program has made
significant progress in the last 6 months. We have overcome
many of the challenges and vulnerabilities that were raised by
the GAO and OIG reports.
And I am confident that we are protecting the integrity of
the Verification Program. We are not satisfied and we are not
done improving the process.
Mr. Chairman and Members of the Subcommittee, that
concludes my statement. I am pleased to answer any questions
you may have.
[The prepared statement of Thomas J. Leney appears on p.
40.]
Mr. Johnson. I thank you for your testimony. And we will
begin questions at this point. And I begin with myself.
Mr. Leney, you state that VA has consistently interpreted
the Vet First Program as VOSBs having priority over any other
class of small businesses when VA is conducting full and open
competition procurements.
In 2009 testimony, Jan Frye stated that the Vet First
provisions are preferences in open-market contracting for
veteran entrepreneurs.
Can you outline for us the purchasing priority hierarchy at
VA and explain where these VOSBs fall in the hierarchy?
Mr. Leney. Sir, there is hierarchy for procurement within
the VA and within the Federal Government. Vets have priority
within all open-market purchases.
Mr. Johnson. What priority? Where do they fall in the
hierarchy?
Mr. Leney. On the open-market purchases, they fall first.
They are first priority.
Mr. Johnson. No, open market is like the eighth category in
the priority. Where do the VOSBs fall in VA's hierarchy? You
are saying it is all the way down in open market?
Mr. Leney. Veteran-owned small businesses do not receive
priority under FAR Part 18 purchases. The acquisition policy
related to these issues is----
Mr. Johnson. Let me help you a little bit because I am not
sure. You are having trouble crafting your answer here.
On June 19th of 2007 as written in VA's information letter,
VA expressed that Public Law 109-461 changes the priorities for
contracting preferences within VA placing SDVOSBs and VOSBs
first and second respectively in satisfying VA's acquisition
requirements.
On August 20th, 2008 in the Federal Register, VA again
noted that Public Law 109-461 requires the secretary to give
priority to a small business concern owned and controlled by
veterans.
If we go back to the June 20th, 2007 testimony, this
approach changes the small business hierarchy within VA placing
service-disabled veteran-owned small businesses and veteran-
owned small businesses first and second respectively in
satisfying VA's acquisition requirements.
And the Veterans Benefits Act, if we look at October 26,
2010, the United States Court of Federal Claims, the ANGELICA
decision stated that in part the Veterans Benefits Act is a
specific mandate to the department and only to the department
to grant first priority to SDVOSBs and VOSBs in the awarding of
contracts.
So let me ask you again. Where do VOSBs and SDVOSBs fall in
your current practice of priority within the Veterans
Administration for contracting opportunities?
Mr. Leney. Mr. Chairman, the VA has an obligation to
balance a number of objectives that you have provided.
Mr. Johnson. Where Mr. Leney, I want a straightforward
answer. Where in the priority scheme do VOSBs and SDVOSBs fall?
You said there is a priority and a hierarchy. Putting them
in open source which is the eighth category down is not first
and second as previously identified in VA acknowledgment of the
Title 38 requirements.
So straightforward answer. Where do they fall?
Mr. Leney. Well, I appreciate the opportunity to become
engaged in acquisition policy issues. I am not the right person
to answer that question directly.
Mr. Johnson. Who is the right person?
Mr. Leney. It would be our chief of acquisition policy. As
an advocate for small businesses within the VA my focus has
been on helping small businesses by promoting the verification
process and----
Mr. Johnson. Well, you know, we started asking these
questions 30 days ago. And we were told that the people
appearing before this Subcommittee today would be able to
answer those specific questions.
So, Mr. Thompson, you were the one that was identified as
being able to answer those specifics.
Mr. Thompson. Well, I----
Mr. Johnson. Where do VOSBs and SDVOSBs fall in that
priority?
Mr. Thompson. Within department set-asides, service-
disabled veteran-owned small businesses are number one. Other
veteran-owned----
Mr. Johnson. That is not what Title 38 says. It does not
say for VA set-asides. It says in the contracting acquisition
process, they were to be placed as number one and number two.
And that has been acknowledged by the VA in the past.
Mr. Thompson. Sir, I respectfully disagree. VA has always
been of the opinion that the correct interpretation of those
Veterans First provisions is that within all set-asides,
service-disabled veteran-owned businesses stay on top.
Mr. Johnson. Well, Mr. Thompson, I would submit to you that
that is contrary to what the GAO says.
Where are you getting your authorization? Where in the law
does it say that it is based on set-asides and not the overall
contracting requirements and provisions? Give me a reference.
Where is the law? Where in the law does it say that it is set-
asides?
Mr. Thompson. I believe you are referring to the issue in
the Aldevra decision.
Mr. Johnson. Partly.
Mr. Thompson. And the reason VA attorneys, the principal
reason VA attorneys are not persuaded by GAO's Aldevra decision
is because it does not contain analysis of all of the words of
that statute.
The set-aside law provides that for purposes of meeting the
secretary's annual goals for contracting with VOSBs and
SDVOSBs, the department shall set aside contracts for them if
certain conditions are met.
I respectfully disagree that Congress said we are to use
this set-aside authority in all cases, but rather as a tool for
meeting the secretary's goals.
GAO's opinion did not discuss this important qualifier that
Congress placed on this set-aside authority, that is it was to
be used for purposes of meeting the secretary's contracting
goals.
As Mr. Leney noted in his opening statement, VA has more
than met, it is surpassing the secretary's small business
contracting goals and, therefore, in our opinion, VA is meeting
both the letter and the spirit of that Public Law.
Mr. Johnson. Mr. Thompson, we are not so concerned about
percentages as we are about process. And the process according
to the law and according to the GAO opinion is that SDVOSBs and
VOSBs are not being considered in the right priority. And how
the VA can simply choose to ignore what the GAO is
recommending, I would commend to the VA that that deserves much
more scrutiny.
We have seen only a few examples in previous
administrations where GAO findings were ignored or not
followed. And I can assure you that we have lots of concerns
about this.
The clock is now running, gentlemen, so I am not sure how
long I have got, but I am going to yield to the Ranking Member
for his questions. We are going to have multiple rounds. I have
lots of them, so we are going to be coming around again.
Mr. Donnelly. Mr. Leney, the SDVOSB contract accounting for
$3.2 billion in government-wide contracts during fiscal year
2010, we verified the eligibility of 5,000 SDVOSB firms.
How many firms are in the queue that you are reviewing
right now to become eligible?
Mr. Leney. Sir, we now have about 8,000 firms verified----
Mr. Donnelly. Okay.
Mr. Leney [continuing]. Within the VIP. And we have
approximately 1,700 firms in the queue.
Mr. Donnelly. What has to be done to get those additional
1,700 firms certified and what is the timeline that you are
using on those?
Mr. Leney. Right now the timeline for initial verification
is on average, we are able to verify firms within 75 days which
is a considerable reduction in time required. About 95 percent
of all firms are receiving an initial determination within the
90 day goal.
So it is really a case of continuing the process and
continuing to refine and improve the process. We have applied
additional resources to the verification process to ensure that
we can meet those objectives.
Mr. Donnelly. In fiscal year 2011, the prime contracting
goal for VOSB was 12 percent. For SDVOSB, it was approximately
10 percent.
What is the impediment, if there is any, on bringing those
numbers higher and to ensuring that our VOSBs have the
opportunity to become even more a part of our contracting
processes?
Mr. Leney. Well, the good news is with regard to those
goals is we have substantially exceeded them. In 2011, we gave
more than 19 percent of our procurement dollars to SDVOSBs and
almost 22 percent to VOSBs. And even in our Federal supply
schedules, we gave 13 percent of our Federal supply schedule
dollars to veteran-owned firms.
So we continue to attempt to identify maximum practical
opportunities for small businesses, particularly veteran small
businesses, to do business with the VA.
Mr. Donnelly. What we would like to see is monthly data on
the certification statistics and on what percentage is going to
our VOSBs and SDVOSBs so we can see that the effort, the
service given by our vets is being recognized and rewarded on
the contracting portion as well.
Is that going to cause you any difficulty to make sure that
we can get those on a monthly basis?
As just indicated, my numbers were a little behind. I'm
thrilled to hear we are at 8,000, you know, hoping to push it
to 9,000 because there are 1,700 in the queue.
Is that something that you can provide us with, monthly
numbers on that?
Mr. Leney. Yes. We can provide reports as required to the
Committee on the status of verification. In the last month, we
verified an additional 116 firms.
One of the challenges that we are presented with is the
reality that applications do not come in a consistent fashion.
And as we attempt to be good stewards of resources and apply
our resources effectively----
[The VA subsequently provided the following information:]
VA Veteran-owned small business (VOSB) Verification Report
As of November 30, 2011
------------------------------------------------------------------------
November
2011
------------------------------------------------------------------------
Total businesses in the Vendor Information Pages (VIP) 8,040
------------------------------------------------------------------------
Businesses approved 162
------------------------------------------------------------------------
Nota Bene: All businesses in VIP are verified. There is no direct
correlation between the number of businesses approved each month and
the increase in the number of businesses in VIP. This is due to
companies being denied on re-verification and companies who had been
denied subsequently receiving approval in the request for
reconsideration process.
Mr. Donnelly. What do you mean they do not come in a
consistent fashion?
Mr. Leney. Well, in October, we may get 300 applications.
In November, we may get 20.
Mr. Donnelly. Okay. Well, you know, whatever the number is,
the number is, but that enables us to see that there is
continual progress on this front.
Mr. Leney. We can provide reports as required by the
Committee.
Mr. Donnelly. Thank you very much.
I yield back.
Mr. Johnson. I thank the gentleman for yielding.
I will go to the chairman, Chairman Stutzman, for his
questions.
Mr. Stutzman. Thank you, Mr. Chairman.
I would like to go down the road a little bit on
understanding how you certify certain businesses. We have heard
from veteran-owned small businesses that they were denied
verification because as required by California State law, they
had an executive board for their company and it was determined
that this showed they did not have ownership and control
despite the fact that the veteran held all of the stock.
We have also heard other complaints about the denials based
on the existence of a corporate board.
Can you explain CVE's reasoning for decisions like this and
the process that they use in determining who is eligible and
who is not?
Mr. Leney. Yes, sir. Our process for determining
eligibility is based on 38 CFR 74 of the regulation that
promulgates the standards established in Public Law 109-461.
There is no prohibition on a firm being eligible for the
Vet First Program based on the fact that they have a board.
There is no prohibition based on the fact that a particular
state requires them to have multiple members on the board.
As established in the regulation, however, there is a
prohibition on verifying the eligibility of a firm when the
veteran does not have full control of the organization.
You can have a board. If the board has the capacity to out-
vote the veteran, based on the regulation, he is not in control
of the board. If the board has the ability to make decisions
for the corporation that are binding and legal, even if the
owner were to fire the board the next day, because he appointed
the board, that firm would not be eligible for verification
because a decision could be made that the owner was not in
control of. It would be binding on the firm.
Mr. Stutzman. You are saying it is not a veteran-owned
business at that point?
Mr. Leney. It is a veteran-owned business, but the
regulation requires it to be both veteran owned and controlled.
A very small number of firms, less than 5 percent, are denied
verification based on ownership issues. More than 90 percent of
the denials that occur in the process of verification are a
function of control.
Mr. Stutzman. Is that in Federal statute?
Mr. Leney. Control----
Mr. Stutzman. The Federal statute requires ownership----
Mr. Leney. Owner controlled?
Mr. Stutzman [continuing]. And control?
Mr. Leney. Yes, sir.
Mr. Stutzman. Would that be consistent with SBA's policy?
Mr. Leney. The policy that the CVE is responsible for
implementing is 38 CFR 74 and that is the regulation that we
are focused on implementation.
In my discussions with the SBA, they also require ownership
and control and they do a status when they do status
verification.
Mr. Stutzman. Okay. Thank you.
Are veterans with DoD disability discharge eligible for
SDVOSB status if they are not included in the VA's BIRLS
database that lists veterans with a VA disability rating?
Mr. Leney. A veteran has to have a disability status to be
eligible for the SDVOSB Program. We have made a modification 6
months ago. If a person was not in the BIRLS, the veteran was
not in the BIRLS database, we rejected their application.
Currently our policy is if they are not in the BIRLS
database, we continue to process their application, but we
require them to be in the BIRLS database before making a final
verification decision because that is the basis for ensuring
that veterans are, in fact, service disabled that we utilize in
the VA.
Mr. Stutzman. Okay. Thank you, Mr. Chairman. That is all I
have right now.
Mr. Johnson. I thank you.
Mr. Leney, you mentioned that the VA exceeded its
procurement goals by reaching nearly 20 percent of SDVOSBs and
nearly 22 percent of VOSBs.
Are the 20 and 22 percents, are those clean numbers,
meaning is there a zero overlap between those two numbers?
Mr. Leney. There is overlap between the two numbers, sir.
The 22 percent that go to veteran-owned small businesses
includes the nearly 19 percent that go to service-disabled
veteran-owned small business.
So as you look at those numbers, the vast majority of our
procurements that go to veteran-owned businesses go to service-
disabled veterans.
Mr. Johnson. My apologies. My peripheral vision blanked out
on me there. Mr. Walz, no, please, please continue. I
apologize.
Mr. Walz. No, no. Thank you, Mr. Chairman.
Again, thank you for being here, Mr. Leney. Thank you for
you and for the work you are doing and for your service. And as
you can see, this committee is committed to getting it right.
And sitting behind you are numerous folks, small business
owners, veterans, veterans' advocates, and we all want to get
there.
And I always say at these hearings I am certainly the VA's
staunchest supporter. But at times, I can be the harshest
critic because this is one of those examples. This is a great
program. It is an important program. We must get it right.
And I know the battle that you are in and it is that
razor's edge on the fraud, waste, and abuse, at the same time
moving resources to the veterans. It appears like we might be
in one of those odd cases where the attempt to fight fraud is
actually becoming waste in itself. And that is a very
challenging one for me.
The question I had, and in your testimony, Mr. Leney, you
said you are serious about disbarment. You stood up the
Committee in September of 2010 and by October of 2011, we have
disbarred one business.
According to the GAO's report is what we are getting, when
they spot check, they estimated that there were at least ten
businesses that they could verify that were not veteran-owned
small businesses in that hundred million. At the pace we are
going, we will have those ten disbarred by 2022.
Now, the question sitting behind us is, that is a problem.
And what we are asking for is, is only thing we want to see on
this committee, and I know it is the only thing you want to see
is, is qualified veteran-owned small businesses getting the
priority to get the contracts, do business, grow their
business, and serve the VA and other veterans to the best of
their ability.
Do you think it is being portrayed uncharacteristic or
unfairly, I should say, that there is a slowness here and that
there is a resistence to what the GAO said and there is a
resistance to making changes because that is certainly the way
it feels to me?
So I know this is somewhat of a subjective question because
I have no doubt that your hundred percent commitment is to
delivering the resources to veterans in the best way and
shepherding the taxpayer dollars in a responsible manner.
How come it appears like there is a disconnect here? What
are we missing that is making it appear, because I think you
are seeing a lot of unanimous agreement that there is a problem
here?
Mr. Leney. Sir, I absolutely believe that we share the
goals that you just stated, not only myself as the director of
Small and Veteran Business Program, but the senior leadership
at the VA, absolutely sure of those goals. And I am absolutely
confident there is no hesitation to pursue aggressively the
goals that were laid in 109-461. I think the numbers speak for
themselves. In terms of----
Mr. Walz. Was my number correct on disbarment? It was
wrong?
Mr. Leney. We have actually made seven disbarment decisions
at the Debarment Committee and I am happy to provide for the
record the details for that.
[The VA subsequently provided the following information:]
L VA Response: VA is serious about debarring companies who
misrepresent their status as a VOSB or SDVOSB, and in September
2010 formed the 8127 Debarment Committee, named after the
portion of the U.S. Code that implements the Veteran small
business acquisition portions of P.L. 109-461. VA has developed
and formalized specific processes and criteria related to the
8127 Debarment Committee which can be found on the Committee's
Web site at: (http://www.va.gov/oal/business/
8127debarments.asp). The Committee consists of representatives
from the Office of Acquisition, Logistics, and Construction
(OALC); the Office of Small and Disadvantaged Business
Utilization (OSDBU); the Office of General Counsel (OGC); and
the Veterans Health Administration (VHA). The Committee will
review referrals for debarment and make formal recommendations
to the debarring official pursuant to the procedures in VAAR
809.406-3.
L As of December 2011, the Committee had debarred seven
separate firms and ten individuals associated with those firms.
These firms are:
LSeabreeze Contracting, Inc.
LTriton Services, Inc.
LChevron Construction Services, LLC
LMitsubishi Construction Corp.
LKDV, Inc.
LT.E.M. Group, Inc.
LDAVID Construction, Inc.
L Of this seven, one firm has completed the debarment
period and is no longer listed in Excluded Parties List System
(EPLS) listing. This firm is:
LDAVID Construction, Inc.
L Of this seven, two have filed a lawsuit against VA in
Federal district court, and the court directed VA to remove the
names of the firms from EPLS pending resolution of the
litigation. These firms are:
LKDV, Inc.
LT.E.M. Group, Inc.
L The remaining four firms are currently debarred and
listed in EPLS. These firms are:
LSeabreeze Contracting, Inc.
LTriton Services, Inc.
LChevron Construction Services, LLC
LMitsubishi Construction Corp.
Mr. Walz. Okay.
Mr. Leney. We have referred over 60 cases in the last 12
months to the Office of Inspector General. So there is
absolutely no resistence within the VA to supporting and
maintaining the integrity of the 109-461 Veterans First
Verification Program.
The senior leadership of the VA has put resources into it.
The challenges we face is the implementation of resources. When
it comes to hiring, when it comes to contracting, these things
do not happen overnight.
I think in the last 6 months, we have made major strides.
As I said in my opening statement, we are not satisfied. We are
not done.
And I apologize, Mr. Chairman, for my stuttering in
response to your question, but these are very important issues
of acquisition policy. And I would like to submit for the
record from the VA a response that we can lay out in detail
both our Vet First preferences and how they link to FAR Part
18.
Mr. Walz. Mr. Leney, if I could ask you. On some of these
firms, it is high risk. I hear what you are saying. We want to
give you all the tools necessary. And I think with the GAO and
the IG and things, those are all tools to streamline the
process.
Do we do unannounced visits to high-risk firms?
Mr. Leney. Yes, sir, we do. One of the things we
established about 4 months ago was a program of unannounced
visits. As part of our Risk Mitigation Program, we now rank
firms based on a number of factors in terms of their risk to
the VA and the taxpayer.
We not only do unannounced visits with respect to high-risk
firms as a part of the application process, we now have
established visits to already verified firms based on their
risk category.
We have also included a random element to that. We have
instituted random site visits for verified firms because we
realize that verification is a snapshot in time.
Mr. Walz. Do you think those things are helpful? Are those
tools helpful? Is this good best practices in terms of fraud
and management?
Mr. Leney. Yes, sir, I believe so. It works for the IRS and
it is working for us as well.
Mr. Walz. Okay. I yield back, Mr. Chairman. Thank you for
the time.
Mr. Johnson. I thank you and thank you for your indulgence.
I apologize that I did not scan down.
Mr. Leney or Mr. Thompson, I apologize. We have more
Members showing up. I got to get my scan down. I yield to our
colleague from Florida, Mr. Bilirakis.
Mr. Bilirakis. Thank you, Mr. Chairman. I appreciate it.
I recently had a veteran small business roundtable and the
difficulty they have encountered with the verification process
is extensive.
I particularly am concerned that the reconsideration
process is taking much too long and could inhibit the
legitimate veteran small business owners from opportunities to
create jobs and keep their doors open.
Specifically one of my constituents, and I would like to
discuss this with you, Mr. Leney, but specifically one of my
constituents competed in a 17 month VA bid process and was
awarded a multiple award task order contract in mid October.
He found out that he had been denied service-disabled
veteran-owned small business status and submitted a request for
reconsideration. However, his business needs to be verified by
December 6, 2011 to meet the deadline to maintain the multiple
award task order contract.
Yet, under the first in, first out methodology, it seems
improbable that this time frame will be met which will cost
jobs, of course.
I worry that a process intended to help veterans is hurting
them, Mr. Chairman.
What solutions would you suggest to this circumstance?
Would it be feasible to expedite requests for reconsideration
pending a documented contract award that will reflect specific
deadlines or, in the alternative, would it be possible to
maintain a conditional verified status until the
reconsideration review is complete?
I am concerned about the lack of due process under the
current reconsideration structure and how this lack of due
process affects legitimate service-disabled veteran-owned small
businesses.
Can you specifically answer those questions and if you can,
please, I would like to get them in writing and maybe share
with the Committee as well?
Thank you. Mr. Leney, please.
Mr. Leney. Sir, I would be happy to provide for the record
information with regard to the specific situation that you
referred to. But I would like to address some of the more
general and important issues that you raised.
First, I want to reassure the Committee there is an
absolute commitment to due process both in our initial
verification and our request for reconsideration. One of the
prices we are paying for a commitment to due process is time.
I mentioned in response to Congressman Walz's question the
ebb and flow of applications. We have received recently a
dramatic surge in requests for reconsideration. And at one
point going, almost a thousand requests for reconsideration
came in within 45 days.
Our priority has been to ensure that those firms when
patiently in line to receive a verification determination get
that in a timely way. Every request for reconsideration--it is
important to note is those firms have failed to meet the
requirements of Public Law 109-461.
I have a difficult time putting those firms in front of
firms that have, as far as we know, met all of the criteria
and, again, are waiting patiently in line.
We have shifted resources in CVE to put more resources
against requests for reconsideration. I have made a policy
decision to not disadvantage those firms who are undergoing
initial verification and to avoid sending us over the 90-day
limit so that those firms can have some expectation that we
will meet our objective and meet our goals in their initial
verification.
That has resulted quite frankly in the fact that we are now
not meeting our objective in terms of turning around all of our
requests for reconsideration within 60 days. But it is not a
capricious process.
In order to ensure that a firm that has been determined to
not meet the requirements, that firm is now a higher risk, when
they submit a request for reconsideration, we do a complete
reevaluation. All of those firms are referred to our Office of
General Counsel to ensure that they do receive due process and
that we make an accurate determination.
Many of them receive site visits because their issues are
more complex. And our first priority based on the
communications we receive from this body are to ensure the
integrity of the process to ensure that when the GAO and the IG
come by the next time and they are coming back that they report
to you that we have maintained the integrity of the program and
that ineligible firms are not being verified.
And, unfortunately, sir, that takes time.
Mr. Bilirakis. Thank you, Mr. Chairman.
I would like to follow up with you on this.
Mr. Leney. Be happy to do that, sir.
Mr. Bilirakis. And the lack of communication as well and
what these folks are doing wrong, what the requirements are.
They need to know these things.
And, you know, this guy has a contract, Mr. Chairman, and
this is creating jobs in my district.
So I would like to follow up with you on that. Thank you,
sir.
I yield back.
Mr. Johnson. Thank you.
We are going to go to Mr. Amodei to see if he has
questions.
Mr. Amodei. Thanks, Mr. Chairman. I do not at this time. I
yield back.
Mr. Johnson. Okay. Well, thank you.
Then I would like to follow up a little bit on yours just
quickly.
How does a company get a contract if they have not been
verified?
Mr. Leney. Sir, they do not----
Mr. Johnson. Well, they did. That is what you said, right?
Mr. Bilirakis. Absolutely.
Mr. Johnson. Okay. So how do they get a contract if they
have not been verified?
Mr. Leney. There are a number of firms that currently have
contracts with the VA who were verified under the self-
certification process.
Mr. Johnson. This is a new one. They were awarded the
contract in October. That is recently. How does that happen?
Mr. Thompson, you got any ideas?
Mr. Leney. Sir, I am not aware of any firms--I am not aware
of any firms to include that one receiving a contract from the
VA that is not verified.
Mr. Johnson. Okay. Well, I look forward to hearing some
feedback on that further discussion then because it sounds like
we have a dichotomy.
Mr. Leney. If I could clarify. My understanding, what does
occur is we have firms that submit proposals for procurements.
Prior to award, contract officers are required to check the
vendor information pages to ensure that firms are, in fact,
verified.
At that time, we have had requests by contract officers,
hey, I have an apparent awardee and we need them to be
verified.
Unfortunately, our response is we are happy to verify firms
that have submitted applications and have been through the
process, but we do not currently have a program of accelerating
the----
Mr. Johnson. Is it typical to even consider? Why would we
consider a firm and entertain a proposal from a firm that is
not verified?
Mr. Leney. You raise an excellent point, Mr. Chairman. And
we have clarified to the acquisition community that they now
check, as part of my training to the thousand contracting
officials in the VA, they now check VIP upon receipt of
proposals because it is a waste of good government resources.
Mr. Johnson. When did that policy go into effect?
Mr. Leney. The policy was always in effect, sir. We
clarified that policy and conducted training because there were
instances where contracting officials did consider proposals
prior to confirming verification.
Mr. Johnson. Well, it appears somebody is not following the
internal rules then if indeed this contractor or this firm was
considered. I am glad you have clarified that and hopefully----
Mr. Bilirakis. Mr. Chairman, will you yield? I understand
that he was certified under the old process.
Mr. Johnson. Okay.
Mr. Bilirakis. He did the recertification and that is what
he is waiting for. And he has secured the contract and he has
to be recertified. And this is a legitimate small business. I
can attest to that. But he has to be recertified by December
6th. Otherwise, he loses the contract.
Mr. Johnson. How long does it take once a company is
certified, how long does it take to get them into system so
that they are visible and can compete for contracts?
Mr. Leney. Currently that time is measured in hours. It
was----
Mr. Johnson. It is measured in hours?
Mr. Leney [continuing]. Measured in weeks. Right now upon
determination, whether it is a denial or an affirmation, we
immediately now post it into the VIP system----
Mr. Johnson. Okay.
Mr. Leney [continuing]. That same day.
Mr. Johnson. So if a company is verified today, you are
saying within hours----
Mr. Leney. Yes, sir.
Mr. Johnson [continuing]. They would show up in the system?
Are you familiar with a company called Ironclad?
Mr. Leney. The name is familiar, sir. I would hesitate to
speak to the details.
Mr. Johnson. They received their congratulatory
verification letter on November 7th. Any idea why they are not
in the system?
Mr. Leney. I would have to check, sir, because I would be
surprised that they are not in the system given the changes
that we have made. If they received a congratulatory letter on
November 7th, they should have been in the system on the same
day.
Mr. Johnson. Well, as of today, they are still not in
there. So I----
Mr. Leney. I will be happy to check on that, sir, and
provide you a response for the record to find out why not.
Mr. Johnson. Yeah. I would like some feedback.
Mr. Leney, your testimony specifically mentions the tools
to aid veteran entrepreneurs provided in the Vet First Program,
yet, as you are aware from the recent Aldevra decision by GAO,
VA does not always use these tools according to the VAO
analysis.
Do you think VA is fully utilizing the Vet First Program
given its stated preference for using the Federal supply
schedule?
Mr. Leney. Sir, while I do not claim to be an expert on
acquisition policy, I do believe that the department does have
an obligation to balance a number of objectives.
First we have an obligation to seek best value for the 23
million veterans we support. We have an obligation to promote
competition and to reduce costs to the Federal Government. And
we have an obligation to help veteran businesses in the Federal
procurement process.
And as we balance these obligations, I think we have made
use of the Federal supply schedules in a positive way. Forty
percent of our Federal supply schedule dollars go to small
businesses. Across the government, the figure is 20 percent.
Thirteen percent of our Federal supply schedule dollars go to
veteran businesses.
So I think we are making use of the Federal supply
schedules. And it allows us to support veterans. It allows us
to provide opportunities to veteran firms. It also allows us to
be good stewards of the taxpayers' dollars.
The Federal supply schedules are an important tool for all
agencies within the government to include the VA. We use that
tool. We use that tool to get to veteran businesses.
And so my efforts have been to encourage and to educate
veteran small businesses on how to get on these Federal supply
schedules so we can----
Mr. Johnson. Based on your preference for using the Federal
supply schedule, where do the VOSBs and SDVOSBs fall in open
source, where do they fall on that Federal supply schedule?
Mr. Leney. You mentioned our preference to use the Federal
supply schedules.
Mr. Johnson. Yeah.
Mr. Leney. Only about 20 percent of our procurement is done
through the Federal supply schedule. Eighty percent is done in
the full and open marketplace. Within that 20 percent, we do 13
percent to veterans. Currently veterans do not, as Mr. Thompson
stated, do not have a preference. Our position is, our
understanding of the law is that veterans do not have a
preference within the Federal supply schedule.
Mr. Johnson. When did your interpretation of the law
change, Mr. Leney?
As I reiterated earlier, as early back as October 26 of
2010, the United States Court of Federal Claims, the ANGELICA
decision stated that the Veterans Benefit Act is a specific
mandate to the department and only to the department to grant
first priority to SDVOSBs and VOSBs in the awarding of
contracts.
You go even further back than that. April 28th of 2010 in a
VA information letter, the VA again noted that on December
22nd, 2006, Public Law 109-461, the Veterans Benefits Health
Care and Information Technology Act of 2006 was signed.
Sections 502 and 503 of the legislation authorized a unique
veterans first approach to specific VA contracting implemented
as the Veterans First Contracting Program.
And going back to the June 20th, 2007, this approach
changes the small business hierarchy within VA placing service-
disabled veteran-owned small businesses and veteran-owned small
businesses first and second respectively in satisfying VA's
acquisition requirements.
It does not talk about percentages. It does not talk about
the Federal supply schedule or any of that. It says first and
second respectively in satisfying the VA's acquisition
requirements.
When did your interpretation of the law change?
Mr. Leney. Our interpretation of the law has not changed.
But in terms of that interpretation, I defer to our deputy
general counsel, Mr. Thompson.
Mr. Thompson. Sir, he is correct. We have always
interpreted the Veterans First legislation as it is sometimes
called as establishing within the hierarchy of set-asides the
primacy of service-disabled veteran-owned small businesses.
Mr. Johnson. Mr. Thompson, nothing in previous VA
statements on this issue says anything about VA set-asides. And
the GAO disagrees with your interpretation of the law.
Mr. Thompson. I understand GAO is of a different opinion.
Mr. Johnson. And can you please tell us, tell this
committee----
Mr. Thompson. Uh-huh.
Mr. Johnson [continuing]. How VA considers itself exempt
from the requirements laid out in Title 38, Section 8127 of
Public Law 109-461? You see, the Federal Government cannot be
sued for not meeting goals, but the Federal Government can be
sued for not adhering to the law. And that is what this
committee is concerned about.
Your department is supposed to be looking out for veteran-
owned businesses. Why is there such reluctance from the
department to follow the intent and the spirit of the law as
identified by the GAO?
Mr. Thompson. Sir, as I indicated, we have a different
interpretation than GAO. And, you know, our interpretation has
consistently been that Public Law 109-461 did several things,
among them establishing service-disabled veteran-owned
businesses as having primacy within the categories of all set-
aside categories.
It also authorized VA and only VA to do restricted
competitions that are limited to VOSBs and SDVOSBs for purposes
of meeting the secretary's goals. And VA has been meeting those
goals. It has complied with the letter and with the spirit of
the law in our humble opinion.
Mr. Johnson. I am going to yield to the Ranking Member to
ask some questions. Just one final follow-up on this issue.
Obviously there is great disagreement with the VA's
interpretation of the law. The GAO disagrees. I disagree.
Is there going to be a review to go back and look at this
because you have been told by the GAO that your interpretation
is wrong?
Mr. Thompson. We have been told by GAO. GAO recommendations
are just that to Federal agencies. This issue is still being
discussed with the executive branch. There has been no final
decision as to what position the Administration will take on
this issue. And so as soon as that is resolved, we will
certainly be back in touch.
Mr. Johnson. I yield to Mr. Donnelly.
Mr. Donnelly. Mr. Leney, with the prime contracting goals
at 12 percent for VOSB and 10 percent for SDVOSB, and we
exceeded those, why can't those goals be 25 and 25 or 35 and
35? Do we have enough contractors to meet those numbers and
shouldn't our efforts in the VA above all--not even above all
Federal agencies, but as an example to all Federal agencies
that we not shoot for the lowest number but push hard for
higher numbers? What will hold us back from moving those to a
higher percentage?
Mr. Leney. I believe that the VA has served as an example
in this arena. We are a leader in this area. We have exceeded
the goals. We have not attempted to do minimum necessary. We
have not----
Mr. Donnelly. I did not say that. What I am trying to say
is how can we move those numbers higher? And, for instance,
what would stop us from doing 25 and 25 this year and 35 and 35
next year?
Mr. Leney. You asked a very important question, what are we
doing to move those numbers higher, and we are doing a number
of things.
First of all, with respect to verification is to promote
the number of firms that are being verified while at the same
time ensuring that only eligible firms are verified because if
we fail in that regard, then we put at risk all of the firms
who are receiving the preferences and the benefits of the Vet
First Program.
Secondly, we have initiated an aggressive program to
directly connect veteran-owned small businesses with
procurement decision makers within the VA.
At the national veterans conference back in August, we
brought more than 250 procurement decision makers to New
Orleans.
Mr. Donnelly. So who sets the 12 and 10?
Mr. Leney. In this case, the secretary set expanding goals.
Mr. Donnelly. Then it would be the Secretary we would go to
to say can we make it 25 and 25 for next year?
Mr. Leney. Yes, sir. At the end of the day, the secretary
drives the train at the VA.
I would just caution you that as we put more and more of
our procurement dollars into a relatively small group of firms
that we run the risk of--whenever we limit competition via set-
asides, we run the risk of increasing the cost to the
government in terms of its procurements.
Mr. Donnelly. Well, let me ask you this. And we run the
risk. If our veterans can match them on price, shouldn't we be
giving it to our veterans?
Mr. Leney. If we have veteran-owned businesses that are
qualified, if we have veteran-owned businesses that are
competitive, absolutely. And in our program, when we have those
situations, we give preference to veterans.
Mr. Donnelly. And I understand your concern because you
want to be a good steward of the taxpayers' dollar. But at the
same time, if we can do it at 12 and 10 and we are already
pushing way over our number and we look and we say let's shoot
for 25 and 25 and we are able to do it in a taxpayer-funded
protected way, wouldn't that be a good thing?
Mr. Leney. I think it is a good thing and I support maximum
practical opportunities to small businesses and particularly
veteran-owned small businesses. And that is what we seek to do
is to identify maximum practical opportunities and get to those
businesses. I am not able to speak to whether or not 25 is the
right number or 22 is the right number.
Mr. Donnelly. I am not saying that is the right number. I
am saying why don't we continue to push our numbers in an
effort to continue to try to pay back the people who have put
their lives on the line for our country.
I yield back, Mr. Chairman.
Mr. Johnson. I thank the gentleman for yielding back.
Mr. Stutzman.
Mr. Stutzman. Thank you.
And I think that is an excellent point in what Mr. Donnelly
is saying is, and if I understood his comments correctly, is
what is the harm in trying to pursue more? I mean, if this is
the VA, it should be a priority in finding and contracting to
those veteran-owned businesses.
It should not be an obligation. It should really be at the
top of our priority list. And I think back to the question that
the chairman is asking is why not?
And the question here is, why are there fully eligible
firms being denied because of state community property laws?
Any comments? It sounds like there are fully eligible
businesses out there that are being denied.
Mr. Leney. Mr. Chairman, I am not aware fully eligible
businesses are being denied. We have had an issue with and we
have examined the issue of community property laws in a number
of different states.
And we have actually provided some assistance as part of
our Veteran Assistance Program, our Verification Assistance
Program to clarify how a firm can meet the community property
requirements of their state while still meeting the requirement
to have ownership and control.
The problem that we encountered in the past was the lack of
understanding and how to address both of those issues. And we
provided clarification to applicants on how they--and we are
getting applicants who are, in fact, from community property
states who are being verified.
Mr. Stutzman. Are they being denied?
Mr. Leney. Sir?
Mr. Stutzman. Are they being denied?
Mr. Leney. If an applicant has not met the requirements of
38 CFR 74, they are denied. If they have not taken the action
to disassociate and to ensure that they have 51 percent
ownership, then they are denied. And in some cases, applicants
primarily through ignorance have not met those requirements.
Mr. Stutzman. Can you give us an interpretation for the 60
percent increase in the last 2 months on the number of denials
that are requesting reconsideration?
Mr. Leney. Yes, sir. That is primarily a function of our
efforts to move a larger number of firms through the process.
We have had great success in completing verification decisions
on initial applications. As a result, more decisions have come
out. And when you have more decisions, we are denying almost 50
percent of those applications because they do not meet the
requirements of the law.
Mr. Stutzman. And it appears you have hired contractors to
assist with verification. How do you determine whether their
employees are qualified to make verification decisions?
Mr. Leney. No verification decisions are made by
contractors. All verification decisions are made by government
employees. Without the support of government contractors from
SDVOSBs, I would not be able to sit here and demonstrate any
progress over the last 6 months.
Mr. Stutzman. It just sounds to me like our veteran-owned
businesses, small businesses are having to scrap and scrap
for--I mean, they should not be getting their crumbs. They
should not be the ones that are having to fight so hard.
I mean, is this typical for any other small businesses?
Mr. Leney. Sir, I came out of the small business community
and I will tell you that I have enormous respect for small
businesses because small businesses do scrap. They have to be
scrappy.
Mr. Stutzman. I agree with that. I am a small business
owner and I agree with that.
Mr. Leney. It is not our intent to make it difficult or
more difficult for small businesses to be successful. It is I
believe our responsibility as provided by this body to ensure
that when we give preferences to veteran-owned businesses that
they are eligible to receive those preferences. And that is
what we seek to do and that is what we are working very hard
at.
We realized we are also trying to balance the challenge of
ensuring that you do not confront us with a failure to ensure
that only eligible businesses get verified and to ensure that
we do have due process. Our rules are not capricious. Our
process is not capricious.
Yes, we use contractors to assist us with this process in
order to speed up. We have expanded the number of contractors
we use in the process. Why? Because I had an imperative to get
127 days to get an initial determination made down to less than
our 90 day commitment that we have made to small businesses.
And we have successfully done that.
But we have a process. Is it as streamlined as I want it to
be? Absolutely not. Is it a lot better? Absolutely yes.
Mr. Stutzman. Let me ask you this because I am a nonveteran
and I am a small business owner. And if I am trying to get a
contract, is it easier for me to get a contract than it would
be for a veteran-owned small business?
Mr. Leney. Not in the VA. Not in the VA because currently
in the VA, if you look at our numbers, last year we did 37
percent, actually a little over 36 percent to small businesses.
Twenty-two percent went to vet--two-thirds of our small
business dollars go to veterans.
So if you are a small business, my advice to you and my
advice to small businesses who are not veterans is the VA is
probably not a lucrative market for you because we do give
preference to veterans and we have demonstrated that.
Mr. Stutzman. Thank you.
I will yield back.
Mr. Johnson. Thank you for yielding back.
Mr. Walz.
Mr. Walz. Thank you, Mr. Chairman.
Thank you, Mr. Leney.
We are trying to get at this and I cannot help but think
this is somewhat of a microcosm of what goes on in the country,
that we are polarized. We have the either/ors. We are all in
here together working on the same cause. We have the private
sector. We have the government sector.
But I also am certainly not going to defend what we are not
moving quickly enough.
I was going to ask and not facetiously or whatever, how
many of those contractors helping on the contractor
verification process were veteran businesses?
Mr. Leney. Every contractor that we used in the
verification process is a veteran-owned business.
Mr. Walz. That is great.
Mr. Leney. Every company.
Mr. Walz. And how did you come to that? How did you do
that? How did you fill that or how did you succeed at a hundred
percent in that because the question I think that has been very
important asked today is, if the VA is not going to give the
highest veteran preferences, who then? Who then? There is
nobody else to do it. I argue that with our offices that we
have a hiring preference and my last hire comes right back from
Iraq and gets hired. We have to live by our own rules. I am
just curious on that. That is good.
How did you get that done? So you got a hundred percent of
these contractors that are helping with verification are
veteran-owned small businesses that is great and that is a
positive story. How did we get to that?
Mr. Leney. Well, we took advantage of the tool that you
provided us which is 109-461 and opted into the Vet First
Program. We were able to reach out to service-disabled veteran-
owned small businesses who are fully qualified and fully
competitive.
And I am fully satisfied that we have received quality work
at a competitive price from these firms. And there are many,
many service-disabled veteran-owned small businesses and
veteran-owned small businesses that fall in that category.
My focus is to ensure that we enhance the opportunities for
those businesses and that is why we have undertaken a major
effort within the VA to enhance their ability to deal directly
with program decision makers.
Mr. Walz. And this is where I am going to be your
staunchest supporter on this. I want to tell that story. That
is good. You have some folks behind you that I do not think
have been overly appreciative. I think they are glad to hear
that.
My question is, is part of this equation that we are
talking some carrot and doing some of this? Is the stick to be
there?
What I want to know is, if you are a business and you are
applying fraudulently on the backs of veterans, I think we
should smoke you in the public like you have never been smoked
because I tell you whether there is a legal precedence, the
public's perception of that business trying to scam off
veterans will be enough to keep people away from it.
Can we give more tools to make sure that that hammer that
drops, you better think twice about signing that paper? If you
do not have the DD214 and you are not going to be in there
working the number of hours doing this, there is going to be
hell to pay because what you are doing is not just defrauding
the taxpayers, you are cheating a veteran who is coming back
from serving this Nation.
Is that a part that can help? Is that part of the equation
that would strengthen your ability to cut down on these because
it just seems like you are being bombarded with these?
And I am asking the staff up here who has the audacity to
put in a false claim as a veteran-owned business knowing you
are taking away from a deserving veteran? Is that a place where
we can help you?
Mr. Leney. I want to assure you of a couple things. One, we
agree that we are also opposed to any fraudulent business doing
business with the VA or any part of the Federal Government.
I think it is important to note that a very, very small
percentage of those firms that we deem to be ineligible to
participate in Vets First are intentionally misrepresenting or
are pursuing a fraudulent endeavor.
All of those that we believe to be in that category, we
refer to the IG for action. As I said, we have referred over 60
firms.
However, that is 60 firms out of over 2,000 that we have
denied verification. There is----
Mr. Walz. Are the rules so unclear that people do not know?
Is that what is happening here, the rules on what a veteran-
owned small business?
I was just asking here. The colonel was sitting here. If he
and I as both veterans decided we wanted to do this, how would
you verify us? I got a 214. He has got a 214. We are going to
invest some money. We are going to hire our kids to work in the
company or whatever. Would we get a contract? What would stop
us from getting a contract?
Mr. Leney. Less than 1 percent of the denials are a
function of the owner not being a veteran. There are very few
instances that I have seen in the last----
Mr. Walz. Okay.
Mr. Leney [continuing]. Six months, very few where the
person who asserts that I am a veteran is, in fact, not. That
is the outlier. That is the extreme outlier.
Mr. Walz. The reason for getting thrown is control of the
company----
Mr. Leney. Yes, sir.
Mr. Walz [continuing]. And the rules?
Mr. Leney. Yes, sir. And the rules within 38 CFR 74 that
came out of 109-461 are rigorous. And we believe----
Mr. Walz. Are they too rigorous because you are telling me
these are real veterans really applying, but they are getting
thrown out?
Now, some of them you want to be thrown out if they are a
firm that does not have the capacity to fill the contract. I
certainly do not expect you to award them the contract. But if
they have the capability, what is throwing them out?
Mr. Leney. Well, let me address I think the core of your
question. I believe that the current policy is designed to
ensure only legitimate businesses, veteran-owned businesses are
verified as eligible for Vet First.
And I really welcome and I have reached out to veterans
service organizations and a large number of veteran-owned
businesspeople to engage in policy discussions on where should
we and how should we and is it appropriate to change the
policy.
And I was surprised at the lack of consensus over what
policy changes should be made. And while I have initiated these
conversations, given the diversity of viewpoints that I have
run into, it is going to require considerable discussion and
consideration by the VA and by this body.
And I will confess my focus over the last 6 months has been
to improve the process because I am painfully aware having come
out of that community of what it means to a small business and
its ability to do business with the VA.
So I have been focused on making sure that we communicate
and that we implement the policy that exists rather than
focusing on how to change that policy. But there are those who
would argue for changes and I confront those who would argue
that it should not be changed.
Mr. Walz. No. I thank you. That is helpful to me. This is
one of those things, if the Chairman would indulge me for just
a minute, I always like myself to know the exact process that
goes through this.
I would be curious, and I certainly do not want to take up
your time on a hypothetical or whatever, but I would be curious
to see what it would be like for myself.
Do you know if there are any Members of Congress who are
veterans that have used this program who would have firsthand
experience of what these small business owners are frustrated
about?
Mr. Leney. I am not aware that there has been any Member of
Congress. I will check and respond.
Mr. Walz. I am just curious because I think it would
probably be for me to go back again and look at every single
one of those forms, look at every single verification, look at
the potential because this is--I was hopeful that it would not
be a whole bunch of people fraudulently claiming to be
veterans. And you are telling me that is the absolute anomaly.
But I am curious now and maybe even a little more concerned
of these veterans that are saying I am a veteran, I still got
thrown out. It made no difference. That is the part that I am a
little more concerned about.
Mr. Leney. If I could respond to that, Mr. Chairman.
Mr. Walz. Sorry.
Mr. Leney. The major issue is about control of the firm.
And as I say, I believe the current policy is designed to
ensure that veterans are, in fact, in control of the firm, that
veterans are not used as passers, veterans are not used as
fronts.
We have had instances where that has happened. And I do not
think it is the intent of this body to allow that to go
forward. The nature of the rules is such that it does make it
difficult sometimes for a veteran to do business like he would
like to or he or she would like to do business and still meet
the requirements of 109-461.
I will give you one clear example that has an adverse
effect on small businesses. And I am not making a statement
about whether I support the policy or do not support the
policy. I support the VA policy on this. I support 38 CFR 74.
But 109-461 makes it very difficult for a veteran-owned
small business owner to get equity financing. Why? Because,
sir, if you were providing me with a million dollars to my
business and I am the veteran and you are not a veteran, are
you going to give me 100 percent control of that organization?
Are you going to allow me to sell that business out from under
you and you receive 49 percent of the million dollars I get for
the business and I receive 51 percent of that million dollars
when I put in not a nickel and you put in a million dollars? I
do not think----
Mr. Walz. Does it have to be a hundred percent then? We
were just asking that question. This hypothetical could be
real, though, this----
Mr. Leney. It is very real to a lot of firms. That is how
it works.
Mr. Walz. Well, that is very helpful. I do not want to----
Mr. Leney. The current requirement is for 100 percent
control. Right now the regulation says I could sell the
business in which you have invested a million dollars tomorrow
for $500,000 and walk away with 51 percent of the sale price
and give you 49 percent of that sale price.
Mr. Walz. Thank you, Mr. Chairman, for indulging me.
Mr. Johnson. I thank you for your line of questioning.
We are going to have to wrap this up because we have a
second panel that we want to hear from today.
But did I understand you correctly that the law currently
says in your interpretation that the veteran has to own 100
percent of the company?
Mr. Leney. Absolutely not. The veteran has to own 51
percent of the company.
Mr. Johnson. Okay.
Mr. Leney. But the veteran must be in control of the
company.
Mr. Johnson. Okay.
Mr. Leney. One hundred percent in control.
Mr. Johnson. Isn't 51 percent in control of the company?
Mr. Leney. No, sir, it is not.
Mr. Johnson. On the outside, if you have two partners and
one partner is at 51 percent and one partner is at 49 percent,
the 51 percent makes the decision. That is who is in control of
the company, right?
Mr. Leney. Unless your operating agreement authorizes the
board that may and is often comprised of or includes
nonveterans.
Mr. Johnson. Okay. All right. Well, obviously there are
some details that we do not have time to get into here today.
That is helpful. And, you know, I do not want to come across as
berating.
I know that what the intent of your department is, but I
think you can see from the questions and the concerns from this
Subcommittee and our other Subcommittee on Economic
Opportunity, we have some real concerns whether veterans and
disadvantaged veterans, disabled veterans' businesses are
getting the fair shake that was intended in the law.
The GAO has validated our concerns. We have expressed those
concerns to you folks. We are going to continue to address this
issue until we feel that we have an adequate answer and a
response and a process that is going to ensure that our
veterans are getting the shake that they are supposed to.
With that, I want to thank you for your testimony.
Mr. Leney. Thank you, sir.
Mr. Johnson. And you are now excused.
I will call the second panel. On our second panel today, we
will hear from Mr. Greg Kutz and Mr. Ralph White from the U.S.
Government Accountability Office.
Mr. Kutz and Mr. White, your complete written statements
will be made a part of the hearing record.
Mr. Kutz, you are now recognized for five minutes.
STATEMENTS OF GREGORY D. KUTZ, FORENSIC AUDITS AND
INVESTIGATIVE SERVICE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE;
RALPH O. WHITE, MANAGING ASSOCIATE GENERAL COUNSEL FOR
PROCUREMENT LAW, OFFICE OF GENERAL COUNSEL, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
STATEMENT OF MR. KUTZ
Mr. Kutz. Chairman and Members of the Subcommittees, thank
you for the opportunity to discuss the Service-Disabled
Veteran-Owned Small Business Program.
Today's testimony highlights the results of our assessment
of the Department of Veterans Affairs' fraud prevention
controls.
My testimony has two parts. First, I will discuss progress
made in the Verification Program and, second, I will discuss
our recommendations.
[Chart]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kutz. As you can see on the monitor, this shows GAO's
fraud prevention framework which we use to assess VA's
controls. On the left is prevention which includes steps to
keep ineligible firms from entering the program.
In the middle is monitoring which is making sure that
verified firms remain eligible. And on the right is
investigation and consequences for fraud and abuse.
Let me start by saying that VA has made the most progress
in the area of prevention. This is evident with progress and
enhanced staffing, as Mr. Leney mentioned, and stronger
verification of firms and individuals.
According to VA, these steps have helped the agency deny
the applications of 1,800 ineligible firms. They also led to
the rejection of our applications for two bogus firms that used
fictitious individuals that were not service-disabled veterans.
Overall, there has been less progress in the areas of
monitoring and consequences. However, with respect to
monitoring, VA is doing random announced site visits for
verified firms to ensure that they remain eligible.
They have also with respect to consequences established a
Debarment Committee and, as Mr. Leney said, taken several
debarment actions. They have also, as was mentioned, referred
70 is what we understand firms to the VA Inspector General for
further investigation.
Moving on to my second point, we are making 13
recommendations to address a number of remaining
vulnerabilities. VA generally has concurred with these
recommendations and is taking action on most of them.
We will work with Mr. Leney and his staff to determine
which of these 13 recommendations has been fully implemented
and report our results back to you.
There are three areas in particular that VA should focus on
starting with human capital. For this program to succeed, VA
needs expert staff dedicated to maintaining program integrity.
Mr. Leney has shown strong leadership and very good
progress in a short period of time. However, VA needs to
develop a deep bench of expert staff to sustain progress made
and to perhaps build on it in the near future.
Second, unannounced site visits are an important tool that
we use in our own investigations. For example, the monitor
shows what we found during an unannounced site visit to Fort
Irwin in California as part of a past investigation.
The portable toilet and hand wash stations that you see
belong to an ineligible pass-through firm that was actually
performing the work. We recommended VA use unannounced site
visits like this as part of their application process and as
part of re-verification with a particular focus, as Mr. Leney
said, on high-risk firms.
Third, historically the vast majority of fraud and abuse in
this program was not identified and the bad actors face
absolutely no consequence.
For example, the front firm for the portable toilet case
again that you see on the monitor was highlighted not only in
our investigation but was found to be ineligible by the SBA
during a protest. This firm was not debarred by SBA and got to
keep the contracts that they won through fraud and abuse.
We recommend that VA strengthen its Debarment Committee
established in September of 2010 to prevent known bad actors
like this from entering the program.
In conclusion, stealing money from legitimate service-
disabled veterans should not be tolerated. That is why we are
here today and that is why this is so important.
I look forward to continuing to work with both
Subcommittees and VA to help protect the rights of legitimate
service-disabled veteran entrepreneurs.
Mr. Chairman, that ends my statement and I look forward to
your questions.
[The prepared statement of Gregory D. Kutz appears on p.
42.]
Mr. Johnson. Thank you for your testimony.
Mr. White, you are now recognized for five minutes.
STATEMENT OF RALPH O. WHITE
Mr. White. Thank you, Mr. Chairman.
Chairman Johnson, Chairman Stutzman, Ranking Members, and
Members of the Subcommittees, my name is Ralph White and I am
the head of the Bid Protest Unit at GAO.
Thank you for asking for us to come today and talk about
GAO's recent bid protest decision, sustaining a protest filed
by a service-disabled veteran-owed small business named
Aldevra.
Mr. Chairman, for more than 80 years, GAO has provided
disappointed bidders with an objective, independent, and
impartial forum for the resolution of disputes concerning the
award of Federal Government contracts.
In 1984, Congress provided a statutory basis for these
protests with the passage of the Competition in Contracting
Act.
Under this statute, any business participating in a Federal
procurement can challenge the award or the solicitation for a
government contract provided it acts within a very short time.
When a protest is filed within this short time, executive
branch agencies are required by the law in most instances to
wait for GAO's decision. In return, GAO is required to produce
its decision within 100 days.
The standard of review set by Congress is simply whether
the award or planned award violates procurement law regulation.
Unlike GAO's audit function, we do not consider issues of
whether the agency is properly managing a program or buying the
right mix of goods or services.
In the case called Aldevra, which has been discussed a fair
amount here, we were given a protest that involved two VA
solicitations seeking to buy industrial kitchen equipment using
the Federal supply schedule.
As you know, the Federal supply schedule is administered by
the GSA available for us by all executive branch agencies and
open to businesses of all sizes.
Aldevra appearing before us without the benefit of a lawyer
argued that the VA's use of the Federal supply schedule
violated a statute passed by this committee, the Veterans
Benefits Health Care and Information Technology Act of 2006.
Aldevra argued that under the 2006 act, the VA first had to
consider whether this equipment could be purchased using a
competition between two or more service-disabled veteran-owned
small businesses. In our October 11 decision, we agree with
Aldevra.
In short, our decision applied the plain meaning of the
2006 act. The act sets up a two-step priority first for
service-disabled veteran-owned small businesses, then followed
by veteran-owned small businesses, and it then states that the
VA shall set aside contracts for these businesses whenever,
one, there are two or more of them capable of performing the
work and, two, they can do the work at a fair and reasonable
price. If these conditions are not met, the VA is free to
procure in any manner appropriate.
In conclusion, just a few observations. First, the 2006 act
applies only to the VA. It is different from the 2003 act which
applies to the entire executive branch.
Second, the 2006 act does not always require set-asides. It
only operates when there are two or more veteran-owned small
businesses capable of doing the work at a fair market price.
Thus, Congress directed the VA to rely upon the power of
competition and the power of the free market, but if the
competition and the marketplace permit, give first priority to
veteran-owned small businesses.
Third, because GAO is a legislative branch agency, we
cannot compel the VA to follow our recommendations. GAO's
statute gives the VA 60 days to decide whether to follow the
recommendation and five more days to advise us of their
decision.
If the VA elects not to follow the recommendation, GAO is
required to notify the Congress of the agency's decision. The
due date for the VA to respond to GAO is December 15th.
Finally, I just would like to also mention that the owner
of Aldevra and his family are in the audience here today.
Mr. Chairman, with that, that is the end of my prepared
statement and I would be happy to answer any questions that you
might have.
[The prepared statement of Ralph O. White appears on p.
46.]
Mr. Johnson. Well, thank you, gentlemen. Thank you both.
We will start with the questioning. Mr. White, how many bid
protests are filed with the GAO each year? Do you have an idea
of what that number would be?
Mr. White. I do. We have been seeing an increase in
protests in recent years and we had just over 2,300 in fiscal
year 2011.
Mr. Johnson. Okay. How many get sustained?
Mr. White. Actually, a good number of our decisions do not
go all the way to a decision. Agencies voluntarily pull back a
number of procurements. But of the cases that go to a decision,
that was 417 of them, we sustained 67.
Mr. Johnson. Okay. Is it safe to say then that the
remainder get denied?
Mr. White. Yes, the 417 minus 67. The percentages, Mr.
Chairman, just to put it in perspective, we deny about 84
percent of protests. We sustain 16 percent of the ones we
decided on the merits.
Mr. Johnson. Okay. How many protests are there of VA
procurements?
Mr. White. Actually, we have not quite topped 200 in VA
procurements. I have the numbers for the last few years. I
think it was about 180 in fiscal year 2011. If I could, I would
like to provide you for the record both the total number of VA
protests and denies and sustains for the record.
Mr. Johnson. Okay. All right. I would appreciate that.
You have heard in previous testimony this morning that the
VA does not interpret the law the same way that GAO does.
Would you care to comment on that, either of you?
Mr. White. Well, first, I just would not mind mentioning
that we view our obligation is to in thinking about legislative
history to look at the plain meaning of the statute. And if we
can decide a question based on the plain meaning, that is
really where we stop.
And the plain meaning of this statute led us to conclude
that Congress used the word shall. It did not include any
exceptions. And we could not see nor did the VA provide any
explanation of how they could justify going elsewhere.
Mr. Johnson. Just a good distinction. The word shall has a
very, very explicit meaning in government contracting, right?
What does the word shall mean?
Mr. White. It certainly does not mean may.
Mr. Johnson. That is right. It does not leave much to
interpretation. Is that safe to say?
Mr. White. Yes, sir.
Mr. Johnson. Okay. All right. In dealing with the
certification process, of your 13 recommendations, several
relate to the need for VA to enhance its staff capabilities.
You have noted that there is enhanced staffing at VA, but that
more needs to be done in this area.
How important is the staffing or the human capital element
of the VA employees to the overall success of the Verification
Program?
Mr. Kutz. Well, it is very important. You have the human
capital element, processes, uses of technology, but none of it
works unless you have strong expert government employees
running the operation. That is really very important.
As Mr. Leney and some of you mentioned, there are a lot of
contractors involved in this process, so contract management
and oversight is also important. But I really believe that the
human capital is probably central to the success of this
Verification Program, not only the quality of the people but
the right number of people.
Mr. Johnson. Okay. Has the VA taken steps to evaluate the
sufficiency of the number of staff and the training and
qualifications of the staff that are overseeing this program?
Mr. Kutz. Yeah. They have taken steps and there are two
parts to it. Again, there is the government employee group
which is between 10 and 20. I do not know what the current
number is. And then there is the contracting group which is
larger.
And so it is a combination of both. And I think at this
point, they have good people, but I think that they may not
always be trained in the right areas. Mr. Leney has talked
about having them trained in the area of certified fraud
examination, for example.
So I believe they are doing an assessment and looking to
see ways to upgrade their own staff and perhaps the contract
staff also.
Mr. Johnson. Okay. In regards to debarments, how do you
explain the gap between 1,800 ineligible firms, 70 firms
referred by VA to the IG, and only a few debarment actions?
Mr. Kutz. Well, I think it is difficult. I mean, the way
the law was written, it said misrepresentation, but I think we
all could agree that the interpretation would be willful
misrepresentation.
I do not think we want to debar people who are making
mistakes necessarily. But there is a large gap between what has
been done so far and perhaps the people that should have been
debarred. And I think what it creates is a situation where
people are going to be able to get into the system that perhaps
should not and stay in the system.
They may even be kicked out here or denied, but then they
go do work with DoD or NASA or someone else because keep in
mind you are looking at $3.2 billion or so out of $10 or $11
billion government-wide in service-disabled contracting. So I
think that it is a matter of--right now all the staff as we
understand are part time on the Debarment Committee, so it is a
matter of perhaps resources and how many can you actually do. A
debarment is a very difficult, time-consuming process.
Mr. Johnson. Okay. All right. Thank you.
I will yield to Mr. Walz for his questions.
Mr. Walz. Well, thank you both for being here. It is good
that we are having both these panels. Obviously we want to hear
the whole thing. It seems like there is a bit of a disconnect.
How often does it happen, if you can help me with this,
where a GAO's recommendation, and we heard from the last panel
that they are just interpreting it differently, do you have an
idea how often that happens in your experience?
Mr. White. That happens very rarely, Mr. Walz. In fact, I
think I can think of fewer than five times in the last decade.
Mr. Walz. Okay.
Mr. White. We had about 2,000 cases.
Mr. Walz. And I am also curious and I am a stickler for
getting the details right. I mentioned the one disbarment. We
got that from the GAO, from you guys, was the number that we
were using.
I want to be very clear. The VA says it is seven now. Is
that just the lag time in reporting it is happening there?
Mr. Kutz. Well, you are talking about the ten cases that we
identified in our first report. None of those have been
debarred by VA. The ones that they have debarred have come
through their own processes.
In fact, one of those ten in----
Mr. Walz. My scenario of 20, 22 is actually optimistic on
those ten cases.
Mr. Kutz. Yeah. I do not think it is going to happen at VA
probably, but one of the ten recently this month was indicted
on 15 counts of wire fraud and other fraud. So as you may be
aware of that, that was one of our original cases, and----
Mr. Walz. And they are still not disbarred? Now, I want to
give due process. They were indicted. They were convicted.
Mr. Kutz. They were indicted and I believe the individual
and not the firm right now is debarred which that is
questionable. And we are going to look at that.
Part of our follow-up work for both Subcommittees here is
to report back to you the details of what happened to those ten
firms. And I believe SBA did debar or suspended a couple of
them. And now this is the first indictment out of the ten and
there a couple of others that are still under investigation.
Mr. Walz. I am curious about this. You know, I mentioned
one. They said, no, it is seven. And we have a disconnect here.
Are those still small numbers? I know it is the statistics
here type of thing. I finished seventh in my class which was
great, but there were only 25 of us. So that is a little
different.
So is this is a case of this--yeah, they know it is
Congress. Do you know what I am saying? It seems like an
inordinately small number, but maybe the problem is not as
great in the ineligibles.
I am trying to get at this of where--I just get a feeling
and maybe I will take this one step further to you, Mr. White.
This is a very unusual disconnect between GAO and an agency
since I have been here. I am feeling that. And I have to say
your initial statement mentioning Aldevra being here seemed
highly unusual to me.
Do you feel that strongly that that is why you mentioned
that? I am glad they are here and it is an open public hearing,
but for the GAO to mention that they are here and their
statement seems to me to show--maybe I am misinterpreting
here--that you feel very strongly about this.
Mr. White. I actually noticed they were here and I thought
it was a nice gesture.
Mr. Walz. Okay. Well, good. And I do not want to read
anything into it. I want to be very clear on that. You know,
and I think it is great for the citizens. I think what we are
seeing is a great example of how the checks and balances can
work.
What I am trying to figure out is, is how we use what you
have given us, how we apply that to improve which is, as I said
again, an incredibly good organization, the VA, an incredibly
good program that is serving veterans. We just want to make it
even better and get these out.
Do you get the feeling they are implementing your
suggestions at a pace that can be done, Mr. Kutz? Do you think
they are?
Mr. Kutz. With respect to the 13 recommendations----
Mr. Walz. Yes.
Mr. Kutz [continuing]. They are taking action on most of
those and, as I mentioned, I believe that the prevention area
is where they are the strongest and perhaps the debarment is
the area where they are the weakest.
And I wanted to mention that firm that I showed you on the
monitors is one of our original firms and they were never
debarred by SBA. They got to keep the contracts, millions of
dollars of contracts they got through fraud and abuse, and now
they are vet bus verified today.
Now, I am not going to blame VA on that necessarily because
they may look good today, but the point is that protecting the
government interest was not done in the first place through a
firm in this case that misrepresented their status and our
belief intentionally and committed fraud.
Mr. Walz. So this is one of the egregious ones here
probably.
Mr. Kutz. Yes, this is an egregious case. And, again, it
just shows the impact of not debarring someone, that they are
able to continue to exist and move around the government and
stay in programs and keep doing business. And if they are going
to lie about this, what else are they going to lie about?
Mr. Walz. I am always very careful and I think the group up
here tends to be that way. Is this a case where we can clarify
or tweak--I know this gets people nervous--the original law to
make the intent very clear that our spirit and letter of the
law converge very clearly as with shall and may and some of
those? Is that your interpretation? Would that help you make
the case?
Mr. Kutz. Well, not on debarment. I mean, I think
debarment----
Mr. Walz. Just in general on the whole program.
Mr. Kutz. On the whole program, no. I think the framework
you have set up for the VIP--I mean, the bigger issue here, we
are--I am just here to talk to you about VA.
Mr. Walz. Right.
Mr. Kutz. The bigger issue is you have not addressed, no
one has addressed what happens outside of VA. So you still have
the ability of firms--it is still a self-certification program
for service-disabled vets outside of VA.
Now, granted, some of the agencies I think are using the
VIP pages, but it is not necessarily happening across the
government. And so you still have a little bit bigger problem.
Even if VA gets it tight here for their $3 or $4 billion worth
of service disabled, you have the other $7 billion or so
happening outside of that that is still self-certification
basically.
Mr. Walz. Very good. Well, I thank you for your time. That
is very helpful.
Mr. Johnson. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman.
How often do executive branch agencies refuse to follow the
recommendation--I think maybe, Mr. White, you kind of touched
on that--in a GAO bid protest?
Mr. White. Very rarely. This would be the first time this
year. It happened last about 2 years ago. And it happened
involving a very similar statute where the word shall in one
statute versus may in some others. And it was a difficult
situation because different Members of Congress felt that the
different statutes should have had priority in that situation.
And could I say just one other thing about that? We do not
get invested in which of the statutes sets a priority. We
simply try to interpret the statutes that Congress passes.
Mr. Stutzman. Sure. What will happen if the VA refuses to
follow the recommendation in the Aldevra decision?
Mr. White. Under the statute that governs the bid protest
process, the comptroller general is required to notify the
Congress, the Committees involved, that would be this
committee, and then it would be a matter between the executive
branch and the legislative branch.
Mr. Stutzman. Has the VA in recent past refused any other?
Has there been any other GAO reports to the VA?
Mr. White. I am not aware that there has ever been an
instance where the VA has not followed a GAO bid protest
recommendation.
Mr. Stutzman. Why on this one?
Mr. White. Why? I do not really understand why. Could I
speak factually about a couple of things that I think they are
mistaken about?
In the testimony earlier, they mentioned that they will get
back to the Committee on where this is laid out in the Federal
Acquisition Regulation Part 19 which governs small businesses
and set-aside programs.
Well, I can tell you that there is only one subpart of Part
19 that addresses service-disabled veteran-owned small business
contracting preferences. And it has a preamble and in its
preamble, it expressly states that it is implementing the 2003
Veterans Benefits Act that applies government-wide and is
codified in Title 15.
It was not written to implement the 2006 Veterans Benefits
Act that is specific to the VA and codified in Title 38.
Mr. Stutzman. And I agree with Mr. Walz's statements
earlier that if there is somebody out there that is taking
advantage of this particular program, I mean that the hammer
should come down. But at the same time, we do not want to
overreact and make it so difficult for businesses that are
legitimate.
And I guess would there be an appropriate way to have
appeals reviewed by a third party like SBA's Office of Hearings
and Appeals? Is there something we could add to the process
that would make it more fair or make the appeal process
legitimate for a business that would be denied?
Mr. White. And do you mean other than the Federal courts?
Mr. Stutzman. Yes.
Mr. White. I know that there have been exchanges between
the VA and the SBA about whether or not SBA would review the
VA's decisions in this area. And I think the SBA has taken the
view that it will not. So I do not know why they took that
position. I imagine they have reasons for their views.
Mr. Stutzman. But doesn't it seem inappropriate to have SVE
reviewing their own decisions when it comes to verification?
Mr. White. I can understand that they may view it that
Congress did not anticipate anyone else doing that kind of
review other than the courts, but----
Mr. Stutzman. Okay. Thank you, Mr. Chairman. I yield back.
Mr. Johnson. I thank the gentleman for yielding back.
I think that is all the questions that we have. You have
certainly enlightened us here.
We talk about the word shall. We talk about Title 38 versus
Title 15. I am very concerned with the VA's refusal to accept
the GAO's response to this particular bid protest.
I am looking forward to see their response.
What did you say again the deadline is?
Mr. White. The deadline works out to be December 15th.
Mr. Johnson. Okay. All right. Well, gentlemen, I appreciate
your being here. Our thanks to you today and you are now
excused.
In closing, improvements in the SDVOSB verification process
are obviously a good thing, but I believe we all know and we
have seen from today that the work is far from over.
I look forward to the VA's continued reporting to this
committee on progress made in this effort, not only in
approving those eligible companies, but also in taking prompt
action against those that seek to defraud the government and
take business away from our deserving veterans.
Our concerns regarding the Aldevra decision are fairly
clear as well. Knowing that for the last 30 days that it would
come up at this hearing, the testimony provided was
disappointing at best.
There is a prime opportunity for the VA to solve this issue
without the added time and expense of forcing it into the court
system. Our veterans serve this country with pride and we
should be proud to do business with them when they return to
the workforce. The VA can maintain leadership in this arena,
but instead it is choosing to only do so when it is convenient.
That is not the treatment our veteran small business owners
deserve.
With that, I ask unanimous consent that all Members have
five legislative days to revise and extend their remarks and
include extraneous material. Without objection, so ordered.
I want to thank all Members and witnesses for their
participation today, especially to Chairman Stutzman in today's
hearing and the Ranking Members from both the Subcommittees for
being here today.
With that, this hearing is now adjourned.
[Whereupon, at 11:53 a.m., the Subcommittees were
adjourned.]
A P P E N D I X
----------
Prepared Statement of Hon. Bill Johnson,
Chairman, Subcommittee on Oversight and Investigations
Good morning. This hearing will come to order.
I want to welcome everyone to today's follow-up hearing on the VA's
Service-Disabled Veteran-Owned Small Business Certification Process. I
thank the Members of the Subcommittee on Economic Opportunity for their
participation today and their efforts in improving the process for
veteran-owned and service-disabled veteran-owned small businesses to do
business with the VA.
A first item I would like to mention is the several outstanding
deliverables due to the Committee, some of which are now nearly 2
months overdue. If the VA is sincere about working with this Committee
to better the lives of our Veterans, I would expect action that
reflects that desire. Failing to identify the leadership structures of
your own VISNs for over 2 months, or not being able to identify
efficiency measures in patient visits for over a month is alarming, and
makes me wonder whether the VA is fully aware of events happening under
its watch.
In July, we held a hearing on this certification process. At that
time, Mr. Tom Leney (``Linn-ee'') was relatively new to his position as
the Executive Director of Small and Veteran Business Programs at VA's
Office of Small and Disadvantaged Business Utilization, commonly
referred to as the ``OSDBU'' (``Ausd-booh''). At that hearing, we
promised a follow-up discussion with Mr. Leney to see how his planned
improvements for the process in certifying veteran-owned small
businesses had been implemented after several months. Today is that
follow-up. I look forward to hearing of the progress made toward
achieving those goals and how much longer it will be until the goals
are realized.
I also have concerns regarding recent actions taken by the VA's
Senior Procurement Executive in response to the recent GAO Aldevra
decision, which states that the VA should make efforts to contract with
veteran-owned small businesses when feasible, and in accordance with
the Veterans First contracting program. GAO recently upheld a bid
protest filed by the Aldevra business on a VA contract, and recommended
that the VA re-bid that contract. Despite clear legislative and
committee report language outlining the intent of the Veterans First
contracting program, the VA decided that GAO's decision would not apply
to its contracting operations and that it would continue as it pleased,
doing away with preference for VOSBs and SDVOSBs in much of its
contracting.
The VA has made it clear in correspondence and meetings following
the Aldevra decision that it has no intention of attempting to clear up
its own questions about Veterans First. Despite acknowledging a
problem, the VA is not trying to solve the problem, nor did it even ask
Congress or this Committee those questions that needed to be answered
years ago.
Even after the Aldevra decision and the VA's response, efforts by
these two Subcommittees to help explain parts of the law that the VA
had trouble understanding--several years after its passage--were met
with a lack of cooperation on the VA's part.
Instead, the VA is determined to run this through the court system,
eliminating key opportunities for VOSBs to contract with the Federal
Government.
When the VA cannot, or chooses not to, implement clearly written
legislation, we have a problem.
This is not rocket science. The Veterans First contracting program
exists to help the VA set the standard in Federal Government
contracting with VOSBs and SDVOSBs. With Congress and the
Administration sharing a goal of increasing contracting with VOSBs and
SDVOSBs, the Veterans First language facilitated the achievement of
that goal. The law contains clear wording on how the VA can achieve
that goal, while simultaneously helping our veterans do business and
not hindering the VA in its contracting efforts. With straightforward
language such as ``the Secretary shall give priority to a small
business concern owned and controlled by veterans,'' it is difficult to
understand the VA's failure to correctly interpret this law, which also
provides reasonable accommodations when a VOSB or SDVOSB cannot fill
the need.
We need to get this right. The certification process must ensure
that VOSBs and SDVOSBs are efficiently processed and certified. We then
must ensure that those same businesses are able to compete for the
appropriate contracts. Otherwise, there is no point in having these
businesses in the system if the VA is going to ignore them.
I look forward to today's testimony on improvements made in the
certification process since our last hearing and the further
improvements we can look forward to in the near future. I also look
forward to discussion on how we can make the actual contracting system
with VOSBs and SDVOSBs work as it is intended. I am, however,
disappointed that VA's testimony barely touches on the Aldevra topic
despite knowing for 30 days that it would be a part of this hearing.
This is no surprise to anyone, and since VA's October meeting with
Committee staff we see no great effort on VA's part to improve this
situation.
Closing remarks
Improvements in the SDVOSB verification process are obviously a
good thing, but I believe we all know the work is far from over. I look
forward to VA's continued reporting to the Committee on progress made
in this effort, not only in approving those eligible companies but also
in taking prompt action against those that seek to defraud the
government and take business away from our deserving Veterans.
Our concerns regarding the Aldevra decision are fairly clear as
well. Knowing for the last 30 days that it would come up at this
hearing, the testimony provided was disappointing at best. There is a
prime opportunity for VA to solve this issue without the added time and
expense of forcing it into the court system. Our Veterans served this
country with pride, and we should be proud to do business with them
when they return to the workforce. The VA can maintain leadership in
this arena, but instead is choosing to only do so when convenient. That
is not the treatment our veteran small business owners deserve.
Prepared Statement of Hon. Marlin A. Stutzman,
Chairman, Subcommittee on Economic Opportunity
Thank you Chairman Johnson. First, let me express my appreciation
for offering to join forces on enabling service disabled veteran-owned
small businesses to compete for contracts with the Department of
Veterans Affairs.
Let me begin by adding some context to why we are here today. In
1999, the President signed legislation that became Public Law 106-50,
which established a government-wide goal for all Federal agencies to
award 3 percent of their contract dollars to small businesses owned and
controlled by service-disabled veterans. Until that time, there was no
goal for Service Disabled Veteran Owned Small Businesses or SDVOBs.
Since then, there have been several laws and an Executive Order
that make it clear that Federal agencies are to make every effort to
award at least 3 percent of their acquisition dollars to service
disabled veteran-owned small businesses.
This legislative effort has continued with the passage of two laws
that established and reinforced section 8127 of title 38 to provide VA
with special tools and priorities to meet, and hopefully exceed, the 3
percent goal. By most indicators, the intent of section 8127 has been
met. But meeting the 3 percent goal is not the sole intent of section
8127. Another goal is to establish a database of validated veteran and
service disabled veteran-owned businesses that any government agency
can access as part of their efforts to meet the 3 percent goal. And
that is where there are still significant problems.
Today, VA data shows contract awards exceeding 20 percent and I
congratulate them for that effort. However, the process in achieving
those numbers has been painful at best. Until recently, implementation
of the database of validated veteran and service disabled veteran-owned
small businesses required by P.L. 109-461 has been less than
professional, to put it kindly.
VA is still recovering from its initial reluctance to implement the
law. Its policy of allowing self-certification of ownership and control
status instead of actively performing the validation function
prescribed in the law was, frankly, a disaster. As a result, as we will
hear today, millions of contract dollars went to businesses that did
not meet veteran or disabled veteran-owned and controlled status.
I also find VA's recent decision to ignore GAO's finding in favor
of a protest by Aldevra, a service disabled veteran-owned small
business, as evidence of a continuing reluctance to fully embrace the
clear requirements of section 8127. The law does not require VA to set
aside all contracts for SDVOSBs or award all contracts to SDVOSBs. More
importantly, nowhere in section 8127 is there a provision exempting
acquisitions using the Federal Supply Schedule. If nothing else,
setting aside contracts using the FSS will provide VA contracting
officers additional flexibility in meeting the SDVOSB goals.
Let's assume for the moment that those who believe the provisions
of section 8127 go too far and that they give too much advantage to
SDVOSBs are correct. To those I would point out the literally dozens of
Federal agencies who continue to fail miserably to meet even the 3
percent goal. For example, DoD, the largest Department in the Federal
Government, awarded only 1.82 percent to SDVOSBs in FY 2010. I suspect
DoD could do better if they limited janitorial awards to those SDVOSBs
in that business. So, if VA is picking up part of the slack for the
rest of the Federal Government, so be it.
Finally, my staff and I have been hearing with increasing frequency
that many legitimate SDVOSBs are having an extremely difficult time
being validated and several have even had to close down as a result.
While I understand that verification rules must be enforced to ensure
non-SDVOSB are kept out there must be a balance. I am interested to
hear from Mr. Leney about how he can better strike this balance and
expedite re-consideration for many of these small businesses. I am also
concerned about what appears to be very dubious arbitrary decisions to
deny status to businesses by contractors hired to validate the
ownership and control status and I suggest that may be as a result of a
lack of clear regulations on things like survivorship and conflicts
with state laws.
I yield back.
Prepared Statement of Hon. Joe Donnelly, Ranking Democratic Member,
Subcommittee on Oversight and Investigations
The tough economic times make it as important as ever to properly
address oversight, programmatic, policy concerns, and thoroughly review
the Service Disabled Veteran Owned Small Business or SDVOSB
certification process.
Providing contracting opportunities to our deserving Veterans
through the SDVOSB process is important, but when you have a successful
program such as the VA's small business contracting program awarding
millions of dollars, it attracts non-veteran business owners whose
intentions are unfortunately to commit fraud. This is why it's
important for the VA to implement and enforce fraud prevention
measures.
During this joint hearing, I will look for the following: an
overview of VA's preventive measures and monitoring control to minimize
vulnerability to fraud, VA's debarment procedures, staff training to
identify and monitor potential fraud, VA's verification process such as
how they verify SDVOSBs and the purpose of conducting unannounced site
visits. These are just some of the few items I have in today's agenda.
I believe that unless we remedy these concerns, the same problems that
have haunted the VA's verification program will remain.
Prepared Statement of Hon. Bruce L. Braley, Ranking Democratic Member,
Subcommittee on Economic Opportunity
The opportunity we have to hold this hearing with the Subcommittee
on Oversight and Investigations is rare but shows how important today's
topic is. By having this joint hearing, I believe it will bring to
light the importance of preventing service-disabled veteran owned small
business program fraud by non-veteran small business.
Providing contracting opportunities to veteran owned small
businesses and service-disabled veteran owned small businesses was a
preference that Congress agreed veterans and disabled veterans merited.
The purpose of the 3 percent set-aside for SDVOSB was to increase
contracting opportunities throughout the Federal Government; this was a
right that our service-disabled veterans earned.
At this time, I would like to take the opportunity to thank the
Department of Veterans Affairs for their support to VOSBs and SDVOSBs
and for exceeding the government-wide goal as well as the VA's own
internal goals. This program lacks rigorous controls to prevent fraud
by contractors seeking to perform under the SDVOSB program when they
deliberately misrepresent themselves as such. VA has a long history of
problems in its verification program but I'm pleased to hear that they
are working through these hurdles. However, verification doesn't only
happen once, businesses are required to be re-verified yearly which
means the VA needs to be prepared to have enough staff, resources, and
proper guidelines to re-verify SDVOSBs.
I would like to thank my colleagues from the Subcommittee on
Oversight and Investigations for including us in this hearing today. I
look forward to today's joint hearing and hearing from all of our
panelists here today.
Prepared Statement of Thomas J. Leney, Small and Veteran Business
Programs, Office of Small and Disadvantaged Business Utilization,
U.S. Department of Veterans Affairs
Chairman Johnson, Chairman Stutzman, Ranking Member Donnelly,
Ranking Member Braley, and Members of the Subcommittees, thank you for
inviting me to testify on the VA's implementation of Veteran-owned
small business (VOSB) provisions in the Veterans Benefits, Health Care
and Information Technology Act of 2006 (Public Law 109-461, Sections
502 and 503), and the Veterans Benefits Act of 2010 (Public Law 111-275
Section 104).
The goal of VA's Office of Small and Disadvantaged Business
Utilization (OSDBU) is to help small and Veteran-owned businesses
contribute most effectively to the important mission of VA. The Center
for Veterans Enterprise (CVE), which is part of OSDBU, is responsible
for ensuring that all money and contracting preferences set-aside for
Veterans and service-disabled Veterans go to legitimate Veteran-owned
small businesses through a verification process that is intended to put
contracts and job-creating opportunities into the hands of legitimate
Veteran owned and controlled businesses.
Congress has provided VA with tools to aid Veteran entrepreneurs.
The Vet First program under P.L. 109-461 enables VA to provide
preference to Service Disabled Veteran Owned Small Businesses (SDVOSB)
and Veteran Owned Small Businesses (VOSB). VA has used this program
aggressively and leads the Federal Government in contracting with
service-disabled Veteran-owned small businesses (SDVOSBs). VA is also
the only agency with specific authority to contract with all VOSBs,
regardless of service-disability. In Fiscal Year 2011, VA awarded more
than $3 billion in contracts to both categories, out of our contracting
base of $15.5 billion. P.L. 109-461 enabled VA to far exceed its
procurement goals of 10 percent for SDVOSBs and 12 percent for VOSBs,
by reaching nearly 20 percent and nearly 22 percent respectively.
That is real money in the hands of Veterans and their small
businesses, and it establishes VA as a leader in this area. At the same
time, VA has actively implemented statutory provisions to ensure the
Public Law 109-461 procurement eligibility goes only to legitimate
SDVOSBs and VOSBs. We are carrying out the direction of Congress to
verify such firms, and to ensure that only those firms whose business
models meet the criteria laid out in P.L. 109-461 gain the benefits of
the preferences it provides. We have also moved aggressively against
the relatively small number of firms who would misrepresent their
status in order to obtain illegitimate benefit.
I would like to update you on the progress VA has made to improve
the VA VOSB Verification Program and our plans to continue improving so
that legitimate SDVOSBs and VOSBs have greater access to VA procurement
opportunities. As we promised, we have completed the removal of all
non-verified companies from the Vendor Information Pages (VIP). In
April 2011, we had nearly 1,800 non-verified companies in VIP. As of
September 4, 2011, only verified companies are listed in VIP, 3 months
ahead of schedule. In June, 2011, it took an average of 127 days to
process an initial verification application. Today it takes an average
of 75 days. When the Veterans Small Business Verification Act (Public
Law 111-275, Section 104) required business owners to send in
documents, we did not have an easy way for them to do so. We received
CDs, paper copies and even email attachments, and our first attempt at
an online upload site did not produce the desired results. Veterans now
have the ability to submit their entire application online, to include
uploading all required documents directly to their VIP profile. In
April, a Veteran may have waited months to receive word that there was
an issue with their Veteran or service-connected status in the VA
Beneficiary Identification Records Locator Subsystem (BIRLS) database.
The BIRLS database is used to determine the Veteran's status, character
of service and whether or not the Veteran has a service-connected
disability. Veterans now receive this status within 48 hours.
To further ensure the accuracy of our verification process, CVE
conducts an additional Quality Check (QC) on 10 percent of its approval
decisions. The QC check includes site visits for a randomly selected
sample of approved applications. CVE officials have also increased our
communications with applicants. Our policy is that applicants receive
updates within 30 days, and at all key points in the process. The CVE
help desk provides a response within one business day regarding at what
stage the application is in and applicants can receive an update on
demand in our new online system. Decision letters are also now
delivered electronically to avoid the delay of conventional mail. VA's
online application tool also posts the approval letters in the
company's profile.
Along with more frequent correspondence, we have launched our
Verification Education Program, which is a series of fact sheets that
explain the most frequent reasons for denial. This program aims to
educate applicants on common issues. Our goal is to eliminate common
errors up-front to help legitimate SDVOSB/VOSBs quickly receive
favorable decisions. We are also seeking partnerships with the
Association of Procurement Technical Assistance Centers, the
Association of Small Business Development Centers and Veterans Service
Organizations so that applicants can receive assistance from local
business counselors.
VA has recently launched a new online application and tracking
system called VIP-6. The initial launch of VIP-6 created a number of
challenges, but the platform is now fully operational. The project is a
complete overhaul of the legacy system, built on a new platform. It
seeks to provide VA with a robust application process that gives
Veteran business owners the ability to complete applications online,
immediately obtain the results of their Veteran status check by VA from
BIRLS, and track the status of their application on demand.
The Government Accountability Office (GAO) did a follow-up on its
May, 2010 evaluation of the CVE verification and identified some
challenges and vulnerabilities that VA has since overcome. Among these
were issues of training, unannounced site visits and debarment of
ineligible firms. CVE staff are now evaluated and provided on-the-job-
training for job functions. A fraud awareness program is in place for
CVE staff that will provide Certified Fraud Examiner credentials for
all CVE staff through training and evaluation. Qualified supervisors
train staff on fraud awareness on a rotating basis. All firms
identified by the risk mitigation program as high risk currently
undergo an in-depth second examination that includes an announced site
visit. Site visits are an important part of our risk mitigation program
and a tool to ensure eligibility; we have increased them nearly ten-
fold from calendar year 2010 and 2011. Verified firms that are
identified as high risk undergo unannounced site visits. CVE also has
initiated random unannounced site visits for verified firms.
In June and October 2011, OSDBU provided training to 500
contracting officers on the use of VIP. The Office of Acquisition and
Logistics (OAL) clarified policy regarding contracting officer (CO) use
of VIP for SDVOSB or VOSB set-aside and sole-source actions. The policy
clarification states that the CO must check VIP at both the proposal
receipt and again before making the award. Those businesses not in VIP
are ineligible to submit a proposal and ineligible to receive an award.
Checking the database a second time ensures that a company has not lost
its eligibility between the proposal submission and award.
VA is serious about debarring companies who intentionally
misrepresent their status as a VOSB or SDVOSB, and has formed the 8127
Debarment Committee, named after the portion of the U.S. Codes that
implements the small business portions of P.L. 109-461. VA has
developed and formalized specific processes and criteria related to the
8127 Debarment Committee which can be found on the Committee's Web
site. As of October 2011, it had debarred seven separate contractors
and related individuals. Two additional concerns which VA had worked to
debar, filed suit and a resulting Court Order required VA remove the
concerns and associated individuals from the Excluded Parties List
System (EPLS) listing pending remand to VA for further action and final
decision of the Court. However, it is important to note that most
ineligible firms are not committing fraud. The vast majority of firms
self-report issues that preclude their eligibility for verification.
Those firms that provide false information or omit material information
are referred to VA's Office of the Inspector General (OIG) for action.
Even with the substantial progress that VA has made, we realize
that there are still challenges to face and improvements to be made.
Our request for reconsideration option has faced a tremendous increase
in use. Historically, about 20 percent of applicants who received an
initial denial submitted a request for reconsideration. Over the last 2
months, this has increased to more than 60 percent. We have shifted and
increased resources to speed up the process. In order to be fair to all
applicants, we continue to process all requests for reconsideration on
a first-in, first-out basis.
Mr. Chairman, we were also asked to address an October 11, 2011,
GAO decision upholding a bid protest by an SDVOSB on two VA
solicitations for the purchase of food-preparation equipment. In the
Matter of Aldevra decision, B-405271 & B-405524, GAO determined that
before placing purchase orders against the Federal Supply Schedule
(FSS), VA should have first determined whether the factual predicates
for a set-aside for VOSBs using the restricted-competition standards of
38 U.S.C. Sec. 8127(d) were satisfied.
GAO's decisions in these matters are advisory and its
recommendations are not binding on executive agencies. This particular
decision is still being discussed internally within the Executive
Branch.
However, VA has consistently interpreted the authority Congress
gave it in Public Law 109-461 as a small business set-aside program
with VOSBs having priority over any other class of small businesses
when VA is conducting full-and-open-competition procurements. Congress
also gave the Department authority to do ``restricted competitions''
(set-asides) ``for the purpose of meeting the goals'' set by the
Secretary for contracting with VOSBs. VA has not interpreted the latter
as a requirement that VA always endeavor to do restricted competitions,
nor have we interpreted it as abridging VA's authority to make FSS buys
when it is appropriate to do so. VA has always been of this view, as it
made clear in the Federal Register notice (74 Federal Register 64619
(December 8, 2009).
Conclusion
VA has made significant progress in the last 6 months in its VOSB
verification program. We have overcome many of the challenges and
vulnerabilities that were raised by the GAO and OIG reports, and are
working to resolve those that remain. We are being proactive in our
approach to these issues and seek continuous improvement. Mr. Chairmen
and Members of the Subcommittees, this concludes my statement. I am
pleased to answer any questions you may have.
Prepared Statement of Gregory D. Kutz, Director, Forensic Audits and
Investigative Service, U.S. Government Accountability Office
Service-Disabled Veteran-Owned Small Business Program: Additional
Improvements to Fraud Prevention Controls Are Needed
Chairmen Stutzman and Johnson, Ranking Members Braley and Donnelly,
and Members of the Subcommittees:
Thank you for the opportunity to discuss the fraud prevention
controls within the Service-Disabled Veteran-Owned Small Business
(SDVOSB) program at the Department of Veterans Affairs (VA). Today's
testimony summarizes our report, released today, on the design of VA's
fraud prevention controls within the SDVOSB verification program,
including recent improvements in controls.\1\ The SDVOSB program is
intended to provide Federal set-aside and sole-source contracts to
small businesses owned and controlled by one or more service-disabled
veterans. About $10.8 billion in contracts were awarded in fiscal year
2010 to firms that self-certified as SDVOSBs in the Central Contractor
Registration (CCR), according to the Small Business Administration
(SBA).\2\ VA's SDVOSB contracts accounted for $3.2 billion, or about 30
percent of the $10.8 billion in governmentwide SDVOSB contracts during
fiscal year 2010. As of October 2011, VA's VetBiz Vendor Information
Pages database shows that the agency has verified the eligibility of
more than 5,000 SDVOSB firms. In addition, more than 15,000 firms also
self-certified their SDVOSB eligibility in CCR.
---------------------------------------------------------------------------
\1\ GAO, Service-Disabled Veteran-Owned Small Business Program:
Additional Improvements to Fraud Prevention Controls Are Needed, GAO-
12-152R (Washington D.C.: Oct. 26, 2011).
\2\ 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.
---------------------------------------------------------------------------
In audits of the SDVOSB program conducted in 2009 and 2010, we
identified weaknesses in fraud prevention controls that allowed
ineligible firms to receive about $100 million in SDVOSB contracts.\3\
These weaknesses included a lack of governmentwide controls, which
allowed ineligible firms to receive contracts by self-certifying that
they were legitimate SDVOSB firms. In addition, we found the absence of
continued monitoring of firm eligibility and an ineffective process for
investigating and prosecuting firms abusing the program. We also found
that VA had made limited progress enacting an effective verification
program as required by the Veterans Benefits, Health Care, and
Information Technology Act of 2006.\4\ To improve governmentwide
program controls, we recommended that SBA and VA explore the
feasibility of expanding the use of VA's verified VetBiz database to
the rest of the Federal Government. SBA and VA generally agreed with
our recommendation.
---------------------------------------------------------------------------
\3\ See the list of related GAO products at the end of this
testimony.
\4\ The act requires VA to institute controls over its SDVOSB
contracts. The requirement to maintain a database of VA-verified
SDVOSBs and Veteran-Owned Small Businesses (VOSB) became effective June
2007. The act also requires that VA only use its set-aside and sole-
source award authority for SDVOSB firms listed in the database and to
debar for a reasonable period of time, as determined by VA, firms that
misrepresent SDVOSB and VOSB status. Pub. L. No. 109-461, Sec. 502, 120
Stat. 3403, 3431-3435 (2006).
---------------------------------------------------------------------------
After the Veterans Benefits, Health Care, and Information
Technology Act of 2006 was passed, Congress passed laws further
intended to strengthen the SDVOSB program within VA and governmentwide.
The Veterans Small Business Verification Act requires VA to verify a
firm's eligibility before including that firm in the database and
permits VA to request additional documentation substantiating veteran
ownership and control of a firm in order to establish eligibility.\5\
Furthermore, Congress also passed the Small Business Jobs Act of 2010,
which facilitates prosecution of firms that willfully seek and receive
small business awards through misrepresentation of their status,
including SDVOSBs.\6\
---------------------------------------------------------------------------
\5\ Veterans Small Business Verification Act, Pub. L. No. 111-275,
Sec. 104, 124 Stat. 2864, 2867-2868 (2010).
\6\ Small Business Jobs Act of 2010, Pub. L. No. 111-240,
Sec. 1341, 124 Stat. 2504, 2543-2544 (2010).
---------------------------------------------------------------------------
Today's testimony summarizes our report on the design of VA's fraud
prevention controls within the SDVOSB verification program, including
recent VetBiz verification efforts, instituted in response to the
Veterans Small Business Verification Act. The report is being released
today as a separate product.\7\ To conduct this work, we reviewed prior
findings from GAO audits and investigations of the SDVOSB program. We
reviewed applicable guidance on internal control standards from GAO's
Standards for Internal Control in the Federal Government,\8\ the fraud
prevention framework,\9\ VA's Office of Inspector General (OIG)
report,\10\ and VA's Verification Process Guidelines and internal
control policies. We also interviewed VA officials and reviewed related
documents. In addition, we conducted undercover tests to assess initial
screening controls of an individual's service-disabled veteran status
within VA's verification process. The undercover tests were limited in
scope to providing a fictitious firm controlled by an individual whose
Social Security number was not listed as a service-disabled veteran in
VA's database of service-disabled veterans. Our assessment is part of
an ongoing review of fraud prevention controls for the entire SDVOSB
program. This testimony focuses on the design of VA's SDVOSB
verification controls within its Center for Veterans Enterprise (CVE)
office. With the exception of undercover tests to assess initial
screening controls, we did not test the effectiveness of VA's fraud
prevention controls or attempt to project the extent of fraud and
abuse. Additional information on our scope and methodology is available
in the issued report.
---------------------------------------------------------------------------
\7\ GAO-12-152R.
\8\ GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
\9\ GAO, Service-Disabled Veteran-Owned Small Business Program:
Fraud Prevention Controls Needed to Improve Program Integrity, GAO-10-
740T (Washington, D.C.: May 24, 2010).
\10\ VA OIG, Office of Audit and Evaluations, Department of Veteran
Affairs: Audit of Veteran-Owned and Service-Disabled Veteran-Owned
Small Business Programs, 10-02436-234 (July 25, 2011).
---------------------------------------------------------------------------
We conducted the work related to the report from July 2011 to
October 2011 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
performed our investigative work, limited to our undercover tests, in
accordance with the standards prescribed by the Council of the
Inspectors General on Integrity and Efficiency.
Summary
VA's fraud prevention controls for the SDVOSB program within VA
have improved since the Veterans Small Business Verification Act was
enacted. Specifically, VA has made progress in implementing an enhanced
initial SDVOSB verification process that reduces the risk that
ineligible firms will receive VA contracts. However, further
enhancements could do more to reduce the program's vulnerability.
Improvements in the areas of preventive controls, detection and
monitoring, and investigations and prosecutions could be made within
VA's VetBiz verification process. With a comprehensive framework in
place, VA can be more confident that the billions of dollars meant to
provide VA contracting opportunities to our Nation's service-disabled
veteran entrepreneurs make it to the intended beneficiaries. In an
effort to improve controls, in our report, we made recommendations to
improve fraud prevention controls in the areas of prevention, detection
and monitoring, and investigations and prosecutions. VA generally
agreed with the recommendations.
VA's SDVOSB Program Controls Have Improved, but Vulnerabilities Remain
VA's fraud prevention controls for the SDVOSB program have improved
since the Veterans Small Business Verification Act was enacted, but
additional enhancements would further reduce the vulnerabilities we
identified in the areas of preventive controls, monitoring and
detection, and investigations and prosecutions. These are also the
components of GAO's fraud prevention framework (see fig. 1). First,
preventive controls are an effective and efficient way of preventing
ineligible firms from being verified. Second, active and continual
monitoring of verified SDVOSB firms is necessary to detect any changes
in their status that may affect eligibility. Third, investigations and
prosecution is a strong deterrent for those considering misrepresenting
their SDVOSB status.
Figure 1: GAO's Fraud Prevention Framework
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Additional Improvements to Preventive Controls Are Needed
VA has enhanced deterrents to ineligible firms becoming verified
through VetBiz. As of April 2011, VA had established verification
guidelines, including a requirement to search the exact names of
company principals in the Excluded Parties List System, and developed a
risk assessment model to examine applications. VA also updated its data
systems to limit manual data entries. Its process of verifying service-
disabled veteran status allowed VA to prevent two fictitious ineligible
SDVOSB applications submitted by GAO from being verified. Specifically,
we submitted two fictitious companies for verification, listing the
names and Social Security numbers of the majority owners who were not
service-disabled veterans. VA's controls appropriately identified that
our company owners were not service-disabled veterans and rejected our
applications. VA also hired additional CVE staff to conduct initial
file reviews and site visits. Additionally, VA has conducted announced
site visits at high-risk firms before they receive VetBiz approval.
Finally, VA created a quality review team to inspect a subset of
initial file examination decisions. VA's enhanced deterrents under new
guidelines have resulted in VA's denial of verification to over 1,800
firms under the new verification guidelines, according to VA.
Even with these enhanced deterrents, program weakness and
vulnerabilities remain within VA's SDVOSB program. During our
interviews with CVE officials, we found that CVE had not performed a
systematic assessment of the qualifications of its staff. In addition,
CVE staff and contracting officials had not received fraud awareness
training. VA also did not have formal processes or procedures for
considering all SBA status protest decisions related to an applicant,
and was not validating applicants' self-reported information. VA also
did not have a formal process for selecting high-risk companies for
unannounced site visits or using information from previously denied
SDVOSB applications to prevent individuals and fraudulent companies
from repeated attempts at breaching VA controls. Additionally, we found
that VA was not requesting that denied companies reassess their self-
certified SDVOSB status in CCR. By addressing the identified
vulnerabilities, VA could further improve its fraud prevention
controls.
Additional Improvements to Detection and Monitoring Controls Are Needed
VA has developed some controls that may help identify firms in the
VetBiz-verified database that do not meet SDVOSB eligibility
requirements, such as a reverification initiative designed to review
previously verified SDVOSB firms under new controls. VA has also
developed a process for interested parties to protest a firm's status,
and instituted random announced site visits of verified SDVOSB firms.
However, even with enhanced controls, certain weaknesses and
vulnerabilities remain because of VA's focus on initial eligibility
verification. For example, VA does not monitor firms' continued
compliance with North American Industry Classification System size
standards, nor does it have contact with contracting officials to
determine whether the required percentage of work on SDVOSB contracts
has been performed. VA also does not systematically data mine existing
contract awards for review and further inspection. VA also does not
have a formal process for selecting companies for unannounced site
visits to contract performance locations and does not have a formal
process for interviewing contracting officials. Finally, VA has not
formalized its quality assurance process for selecting verified
companies for unannounced site visits to determine if the verification
process is effective. Further improvements in these areas would
increase the design of detection and monitoring controls within the
verification process.
Additional Improvements to Investigations and Prosecutions Are Needed
VA has taken some actions to debar firms violating SDVOSB program
requirements. VA may debar an ineligible firm in accordance with the
Veterans Benefits, Health Care, and Information Technology Act of 2006,
which requires that any business determined to have misrepresented its
status as an SDVOSB shall be debarred from contracting for a reasonable
period of time, as determined by VA. VA instituted a debarment
committee in September 2010 specifically to debar firms violating
SDVOSB regulations. As of October 2011, the Committee had debarred one
SDVOSB firm and related individuals that had misrepresented their
status as an SDVOSB. Several other debarment actions are currently
pending or are being litigated. Additionally, CVE officials have sent
about 70 referrals to the VA OIG for potential fraudulent actions by
firms receiving SDVOSB contracts. VA OIG is currently investigating
these cases.
We identified certain weaknesses and vulnerabilities in the
investigation and prosecution controls during our site visits. The
debarment of only one firm and related individuals suggests that there
is room for additional action given the 1,800 firms rejected by VA
during its verification process and the 70 firms referred to VA OIG for
potentially fraudulent actions. Additionally, VA does not have specific
procedures for CVE staff to refer companies to the debarment committee
or VA OIG, and has no specific guidelines documenting how VA is
implementing debarments or outlining the debarment committee's decision
process. Providing more emphasis on debarments and investigations could
further help VA deter firms from attempting to fraudulently gain access
to its SDVOSB program.
Conclusions
In conclusion, VA has made progress in implementing a valid
verification program to deter ineligible firms from becoming verified
and receiving SDVOSB contracts. However, additional improvements can be
made, particularly in monitoring and detection and investigations and
prosecutions. Specifically, developing a robust unannounced site visit
process for verified firms and aggressively pursuing debarments and
prosecutions of firms found to have violated program rules will further
enhance fraud prevention controls. With a comprehensive framework in
place, VA can be more confident that the billions of dollars meant to
provide VA contracting opportunities to our Nation's service-disabled
veteran entrepreneurs make it to the intended beneficiaries.
To minimize the risk of fraud and abuse within VA's SDVOSB program,
in the report released today, we recommended that the Secretary of
Veterans Affairs take 13 actions in the following three areas:
Improve VA's preventive controls to provide reasonable
assurance that only eligible firms gain access to the VetBiz database.
Strengthen VA's detection and monitoring controls over
verified firms.
Strengthen VA's investigative and prosecutorial actions
for firms violating SDVOSB program laws and regulations.
VA generally concurred with our recommendations and noted a number
of significant actions planned or taken since the time of our site
visits and development of our findings, which, according to VA, address
many of the identified vulnerabilities.
According to VA officials, VA has recently made improvements of its
preventive controls. For example, VA officials stated that CVE staff
and most contractors assisting with the application evaluation are now
required to receive Certified Fraud Examiner training, and additional
VetBiz training has been provided to contracting officials. VA
officials also stated VA has recently strengthened the agency's
monitoring and detection of verified SDVOSB firms. Specifically, VA
officials stated that VA conducts unannounced visits to verified
companies either randomly or during the course of a high-risk SDVOSB
reverification assessment. Finally, VA officials stated that VA
recently strengthened the investigative and prosecutorial actions by
creating guidelines for referring firms to VA OIG and the debarment
committee. We plan to follow up on actions taken by VA as part of our
ongoing work and will report back to the Subcommittees on our findings.
Chairmen Stutzman and Johnson, Ranking Members Braley and Donnelly,
and Members of the Subcommittees, this completes my prepared statement.
I would be pleased to answer any questions that you may have at this
time.
GAO Contacts
If you or your staff have any questions 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.
Related GAO Products
Service-Disabled Veteran-Owned Small Business Program: Additional
Improvements to Fraud Prevention Controls Are Needed. GAO-12-152R.
Washington, D.C.: October 26, 2011.
Service-Disabled Veteran-Owned Small Business Program: Preliminary
Information on Actions Taken by Agencies to Address Fraud and Abuse
and Remaining Vulnerabilities. GAO-11-589T. Washington, D.C.: July
28, 2011.
Department of Veterans Affairs: Agency Has Exceeded Contracting Goals
for Veteran-Owned Small Businesses, but It Faces Challenges with
Its Verification Program. GAO-10-458. Washington, D.C.: May 28,
2010.
Service-Disabled Veteran-Owned Small Business Program: Fraud Prevention
Controls Needed to Improve Program Integrity. GAO-10-740T.
Washington, D.C.: May 24, 2010.
Service-Disabled Veteran-Owned Small Business Program: Case Studies
Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of
Dollars in Contracts. GAO-10-306T. Washington, D.C.: December 16,
2009.
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. Washington, D.C.: November 19,
2009.
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.: October 23,
2009.
(192388)
Prepared Statement of Ralph O. White, Managing Associate General
Counsel, Office of General Counsel, U.S. Government Accountability
Office
Veterans Administration Procurement: Protests Concerning Service-
Disabled Veteran-Owned Small Business Preferences Sustained
GAO Highlights
GAO's Role Under The Competition in Contracting Act
Under the Competition in Contracting Act of 1984, GAO is required
to consider protests filed by interested parties concerning the terms
of solicitations or contract awards. In deciding protests, GAO makes a
determination of whether the agency's actions complied with procurement
statutes and regulations. Aldevera, an SDVOSB concern, argued that two
solicitations issued by the Veterans Administration should have been
set aside for SDVOSB concerns.
GAO's Recommendations
GAO recommended, for the solicitation where the record showed that
two or more SDVOSBs were capable of meeting the agency's requirements
at a fair and reasonable price, that the VA cancel the solicitation and
obtain its requirements using an SDVOSB set-aside. GAO also
recommended, for the solicitation where the record did not indicate
whether there were two or more SDVOSBs capable of meeting the agency's
requirements at a fair and reasonable price, that the VA conduct
reasonable market research regarding its requirements. If the VA
determines that there is a reasonable expectation of receiving offers
from two or more SDVOSB concerns capable of performing the requirements
at a fair and reasonable price, we recommended that the VA cancel the
solicitation and re-solicit its requirements using an SDVOSB set-aside.
GAO's Findings
The Veterans Benefits, Health Care, and Information Technology Act
of 2006, 38 U.S.C. Sec. Sec. 8127-8128 (2006) (the 2006 Act) provides
in relevant part that the Department of Veterans Affairs (VA) must set
aside procurements for Service-Disabled Veteran-Owned Small Business
(SDVOSB) concerns if the contracting officer has a reasonable
expectation of receiving offers from two or more SDVOSB concerns and
that award can be made at a fair and reasonable price that provides the
best value to the government.
Aldevra, an SDVOSB concern, challenged the terms of two
solicitations issued by the VA for kitchen equipment. In both protests,
Aldevra argued that the VA should have restricted the competitions to
SDVOSB concerns, instead of issuing the solicitations for competition
under the General Services Administration's (GSA) Federal Supply
Schedule (FSS). In its response to the protest, VA argued that the
SDVOSB set-aside requirements of the 2006 Act did not apply to the FSS.
In a decision issued by our Office, GAO concluded that the 2006 Act
applies to the FSS.
Accordingly, GAO sustained the protests. The decision is available
at: http://www.gao.gov/decisions/bidpro/405271.pdf.
__________
Chairman Johnson, Chairman Stutzman, Ranking Members, and Members
of the Subcommittees:
Thank you for the opportunity to be here today to discuss the bid
protest decision recently issued by the Government Accountability
Office (GAO) in response to two protests challenging the issuance of
solicitations by the Department of Veterans Affairs (VA). This decision
addressed the statutory preference for setting aside VA procurements
for Service-Disabled Veteran-Owned Small Business (SDVOSB) concerns.
GAO provides an objective, independent, and impartial forum for the
resolution of disputes concerning the awards of Federal contracts.
Since 1984, the Competition in Contracting Act (CICA) has established
statutory authority for GAO's bid protest function. GAO has issued
implementing regulations establishing the procedural framework for our
bid protest forum in Title 4, Part 21, of the Code of Federal
Regulations.
In Fiscal Year 2011, we received 2,353 bid protests challenging
procurements across the Federal Government. The bid protest process is
a legal one, and both the process and the resulting product differ from
those associated with the reports that GAO issues in connection with
its program audits and reviews. Protests are handled solely by GAO's
Office of General Counsel (OGC), not by its audit teams. In developing
the record, OGC provides all parties--the protester, the awardee, and
the contracting agency--an opportunity to present their positions. In
some cases, OGC conducts a hearing to further develop the record. Under
CICA, as amended, we have 100 calendar days to decide a protest.
The product of a GAO protest--our legal decision--does not address
broad programmatic issues such as whether or not a particular
government program is being managed effectively or consistent with best
practices. Instead, our bid protest decisions address specific
allegations challenging particular procurement actions as contrary to
procurement laws, regulations, and the evaluation scheme set forth in
the solicitation. We sustain a protest when we find that the procuring
agency has not complied with procurement laws, regulations, or the
solicitation's evaluation scheme, and that the violation prejudiced the
protester's chances of winning the contract.
With that background, my testimony today will summarize our
recently issued decision concerning challenges to the VA's
interpretation of the statutory requirement that VA set aside
procurements for SDVOSB concerns.
Background
Our decision concerns two protests filed by Aldevra, an SDVOSB. The
first protest, which was received on July 1, 2011, challenged the terms
of solicitation No. VA-69D-11-RQ-1170 for a tilting skillet/braising
pan and one countertop electric griddle for the Federal Health Care
Center in Chicago, Illinois. The second protest, which was received on
August 12, challenged the terms of solicitation No. 693-11-4-179-0306,
for two griddles and one food slicer for the VA Medical Center in
Wilkes-Barre, Pennsylvania. Our decision of October 11 addressed both
protests by the 100-day deadline for the first protest.
The VA issued both solicitations under the Federal Supply Schedule
(FSS), which is a program consisting of contracts administrated by the
General Services Administration that is available for all Executive
Branch agencies to use in their procurements. The solicitations here
were not restricted to SDVOSB concerns, or concerns under any other
socio-economic program.
The Legal Standard
The sole issue raised by Aldevra was whether the Veterans Benefits,
Health Care, and Information Technology Act of 2006, 38 U.S.C.
Sec. Sec. 8127-8128 (2006) (the 2006 VA Act), required the VA to
conduct market research to determine whether the VA should set aside
the procurements for SDVOSB concerns before using the FSS to satisfy
its requirements.
In relevant part, the 2006 Act provides as follows:
. . . a contracting officer of [the VA] 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.
The statute also sets out an order of priority for the contracting
preferences it establishes, providing that the first priority for
contracts shall be given to SDVOSB concerns, followed by veteran owned
small businesses (VOSBs).
A regulation issued by the VA implementing the 2006 Act similarly
stated that a contracting officer ``shall'' set aside a procurement for
SDVOSBs (or VOSBs) if there is a ``reasonable expectation'' that offers
will be received from two or more SDVOSB (or VOSB) concerns, and award
will be made at a reasonable price. Veterans Administration Acquisition
Regulation (VAAR), 48 CFR Sec. 819.7005(a) (2011).
The VA argued that, notwithstanding the statutory language in the
2006 Act, the agency is not required to conduct market research to
determine whether SDVOSBs (or VOSBs) are capable of performing the
requirement if the VA instead chooses to procure its requirements
through the FSS. In support of its position, the VA cited provisions of
Federal Acquisition Regulation (FAR) part 19.14, which states that
agencies ``may'' set aside procurements for SDVOSBs if they have an
expectation of receiving two or more offers from SDVOSB concerns
capable of performing the requirements at a fair and reasonable price.
As relevant to the protests--and the VA's response to the protests--FAR
part 8.4 states that the small business set-aside rules under FAR part
19--including SDVOSBs--do not apply to the FSS.
GAO's Review of the Record
Our Office reviewed the language of the 2006 Act, as well as the
FAR provisions cited by the VA. We concluded that the 2006 Act plainly
states that the VA ``shall'' set aside procurements for SDVOSB (or
VOSB) concerns if it determines that there is a reasonable expectation
of receiving offers from two or more SDVOSB (or VOSB) concerns capable
of performing the requirements at a fair and reasonable price. This
statutory language takes precedence over any regulatory language to the
contrary.
Moreover, the FAR provisions cited by the VA, which state that
agencies ``may'' consider using an SDVOSB set-aside, were implemented
to meet the statutory requirements of the Veterans Benefit Act of 2003,
15 U.S.C. Sec. 657f (2006) (the 2003 Act), which applies government-
wide. The 2006 Act, however, is a separate statutory authority codified
within the statutes that govern the VA (i.e., Title 38 of the U.S.
Code) that applies only to the VA.
Thus, the FAR provisions, which state that agencies ``may'' set
aside procurements for SDVOSBs, and which are also exempt under the FSS
from the provisions of FAR part 19.14, do not apply to the VA, because
the VA is governed by the later-enacted and VA-specific 2006 Act, and
not the 2003 Act, which applies government-wide. Put differently, the
VA is subject to procurement rules concerning SDVOSBs that do not apply
to any other Executive Branch agency.
For the record, our decision does not state that the VA must set
aside every competition for SDVOSB (or VOSB) concerns. Instead, our
decision states that the VA must first conduct market research to
determine whether it will receive offers from two or more SDVOSB (or
VOSB) concerns. If the VA concludes that there is a reasonable
expectation of receiving offers from two or more SDVOSB (or VOSB)
concerns capable of performing the requirements at a fair and
reasonable price, the agency must set aside the procurement for SDVOSBs
(or VOSBs). If the VA concludes that there is not a reasonable
expectation of receiving offers from two or more SDVOSB (or VOSB)
concerns capable of performing the requirements at a fair and
reasonable price, it may use any other authorized procurement method.
Recommendation
Based on our review of the record, we sustained the protests. For
the first solicitation, the VA conceded that there were two or more
SDVOSB concerns capable of performing its requirements at a fair and
reasonable price. GAO therefore recommended that the VA cancel the
first solicitation and re-solicit its requirements using an SDVOSB set-
aside. For the second solicitation, the record did not address whether
there were two or more SDVOSB concerns capable of performing the
requirements at a fair and reasonable price. GAO therefore recommended
that the VA conduct market research regarding its requirements for that
solicitation.
If the VA determines that there is a reasonable expectation of
receiving offers from two or more SDVOSB concerns capable of performing
the requirements at a fair and reasonable price, we recommended that
the VA cancel the solicitation and re-solicit its requirements using a
SDVOSB set-aside. We also recommended that the agency reimburse the
protester the costs of filing and pursuing the protests.
Under CICA, a GAO decision sustaining a protest results in a
recommendation. The statute gives agencies 60 days to implement a GAO
recommendation. In the event an agency does not implement a GAO
recommendation, the agency must advise GAO within 5 days after the
conclusion of the 60-day period. In the event an agency advises it will
not follow a GAO recommendation, CICA requires GAO to advise the
Congress of the agency's decision.
Here, the VA has until December 15, 2011, to respond to our
recommendation. As of today, the VA has not yet responded.
Chairman Johnson, Chairman Stutzman, this concludes our prepared
statement. I would be happy to respond to any questions regarding our
bid protest decisions that you or other Members of the Subcommittees
may have.
SUBMISSIONS FOR THE RECORD
Statement of Steve L. Gonzalez, Assistant Director,
National Economic Commission, American Legion
Chairman Bill Johnson, Ranking Member Donnelly and Members of the
Subcommittee:
Thank you for the opportunity in allowing The American Legion to
submit for the record its views on the Department of Veterans Affairs'
(VA) Center for Veterans Enterprise and Veterans First Contracting
Program.
For more than half a century, it has been the policy of the Federal
Government to provide ``maximum practicable opportunity'' for small
businesses to participate in Federal contracts. To achieve this
objective, Congress established an aspirational goal in 1978 for the
percentage of annual prime contract spending awarded to small
businesses each year. Congress later set the government-wide goal at 23
percent and created a set of sub-goals to support the participation of
special segments of the small business community: small disadvantaged
businesses (5 percent), women-owned small businesses (5 percent),
service-disabled-veteran-owned small businesses (3 percent), and small
businesses in Historically Underutilized Business Zones (HUB Zones) (3
percent). These goals help ensure that a diverse set of small
businesses share in the jobs and opportunities created by Federal
contracting.\1\
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\1\ http://www.sba.gov/content/interagency-task-force-federal-
contracting-opportunities-small-businesses.
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America has benefited immeasurably from the service of its 23.4
million \2\ living veterans, who have made great sacrifices in the
defense of freedom, preservation of democracy, and the protection of
the free enterprise system. Due to the experience veteran's gain in the
military, the success rate of veteran-owned businesses is higher than
non-veteran-owned businesses. The current Global War on Terror has had
a devastating impact on the Armed Forces and has exacerbated this
country's veterans' unemployment problem, especially within the
National Guard and Reserve components. According to the most current
Federal data available, veterans owned 2.4 million businesses. Another
1.2 million firms were at least 50 percent veteran owned \3\ within the
fifty states and District of Columbia. According to this survey,
veteran-owned and co-owned firms accounted for 13.5 percent of all non-
farm businesses in the United States, employed 11 million people (4.9
percent of total U.S. employment) and generated $1.655 trillion in
receipts.\4\
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\2\ http://www.va.gov/opa/publications/factsheets/
fsdepartment_of_veterans_affairs.pdf.
\3\ http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24.
\4\ Survey of Business Owners--Veteran-Owned Firms: 2007. U.S.
Census Bureau. http://www.census.gov/econ/sbo/get07sof.html?17.
---------------------------------------------------------------------------
According to the Department of Labor, the present unemployment rate
for recently discharged veterans is as high as 12.1 percent. One way of
combating unemployment or underemployment is through the creation of
new jobs. Increasingly, the growth and stability of this Nation's
economy is dependent on the long-term success of the small business
networks across the country. However, during a time of war there is
much to be accomplished. Ironically, for too many years, the very men
and women who served in uniform, stood ready to fight, and if necessary
die in order to protect and preserve the free enterprise system, are
summarily ignored by the Federal agencies responsible for meeting their
small business needs.
The barriers to entry for small businesses are numerous: weak
policies and rules that limit the effectiveness of tools that are
supposed to facilitate contracting opportunities; inadequate workforce
training to help contracting officers, small business advocates, and
program offices to successfully use contracting tools; and a lack of
coordination among and accessibility to agency training and outreach
events designed to help small businesses navigate the contracting
system. Action must be taken to remove these barriers and ensure small
businesses get access to Federal contracts.
THE CENTER FOR VETERANS ENTERPRISE
According to its Web site, the VA's Center for Veterans Enterprise
(CVE) ``is designed to improve the business climate for veterans, to
minimize access barriers and to inform the public about the benefits of
working with veteran-owned small businesses.'' In addition, CVE
provides opportunities for veteran-owned small businesses by
collaborating with like-minded individuals and organizations who
believe that veterans in business are still serving the American
public. They work and link with partner organizations to provide local
support to veteran-owned small businesses, because they are the face of
a local economy. They also support acquisition teams through
procurement coaching, free market research, awareness briefings and
provide awards for noteworthy achievements. Their goal is to provide
smart business information for those veteran-owned small businesses in
search of starting their business or continuing to grow their business.
PUBLIC LAW 109-461
On December 22, 2006, President Bush signed Public Law (P.L.) 109-
461, The Veterans Health Care, Benefits and Information Technology Act
of 2006. This law directs the Secretary of Veterans Affairs to ``give
priority to a small business concern owned and controlled by veterans,
if such business concern also meets the requirements of that
contracting preference.'' 38 U.S.C. Sec. 8128(a). To implement the
Veterans Benefits Act, VA established the ``Veterans First Contracting
Program'' on June 20, 2007. See AR 38-540 to 541 (New Guidelines for
Placing Items and Services on the AbilityOne Procurement List (Apr. 28,
2010) (``New Guidelines'')). The program directed VA to consider
service-disabled veteran-owned small businesses (``SDVOSB'') and
veteran-owned small businesses (``VOSB'') as a first and second
priority when satisfying its acquisition requirements. Id. at 38-541. A
final implementing rule establishing changes to the Department's
acquisition regulations was made effective January 7, 2010. See 74 Fed.
Reg. 64619-01 (Dec. 8, 2009) (codified in scattered sections of 48 CFR
Subparts 802, 804, 808, 809, 810, 813, 815, 817, 819, 828, and 852).
VA'S IMPLEMENTATION OF PUBLIC LAW 109-461
In 2006, Congress created the Veteran First contracting program to
help provide preference to small businesses owned by veterans and
service-disabled veterans over other companies. VA was charged with
putting procedures in place to verify the ownership and status of the
companies that wanted to participate in Veterans First. The VA has
failed time and time again to follow the ``Veterans First'' law, which
establishes set aside guidelines for service-disabled veteran-owned
small businesses. While the GAO has investigated and agreed with the
protest's claims, an internal memo from the VA dated October 17th makes
the assertion that since the GAO is part of the legislative branch, the
VA is not bound by their findings and that the courts would decide the
issue. The memo goes on further to state that ``GAO recommendation does
not change how VA will acquire goods and services in support of its
mission.''
On October 26, 2010, the United States Court of Federal Claims
(USCFC) set precedence on behalf of all SDVOSB/VOSB, when it ruled in
favor of Angelica Textile Services, Inc., in the case of Angelica
Textile Services, Inc., v. United States (10-496C).\5\ The Federal
Court decision confirmed that veterans have a contract preference and
priority. Here are some excerpts from the court ruling: \6\
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\5\ http://www.uscfc.uscourts.gov/sites/default/files/
LETTOW.ANGELICA102610.pdf.
\6\ Ibid.
``The Veterans Benefits Act is a specific mandate to the
Department, and only to the Department, to grant first priority to
SDVOSBs and VOSBs in the awarding of contracts.''
Above ``any other provision of law'' such as FAR Part 8
Required Sources of Supply
Above ``any other provision of law'' such as FAR Part
19.14;
Above general Federal statues and initiatives
In all market types such Federal supply schedules and
open market;
Exclusively within the VA under 8127 (b), (c), or (d) and
8128
In March 2007, Scott Dennison, Director of the VA's Office of
Service-Disabled Veteran-Owned Small Business Utilization (OSDBU) wrote
in his department's local newsletter the Small Business Advocate ``a
major challenge to implementing P.L. 109-461 will be educating and
training VA's workforce of the significant changes brought by the law.
To that end, OSDBU is available to provide training to acquisition
professionals, program officials engineering officers and personnel,
purchase cardholders and anyone else involved in the acquisition
process that could use this training.''
Challenges:
Over the past 10 years, VA has built CVE through non-
appropriated funds. CVE markets itself as a technical training and
assistance center that maintains a database of veteran-owned small
businesses. With regard to CVE's technical assistance capabilities,
this effort represents a negligible impact locally and virtually no
impact nationally. CVE maintains one small assistance center in
Washington, DC, where they see a small amount of clients and field
phone calls.
It takes anywhere from 1 month to 1 year to have a
company registered with VA. One veteran complained after registering,
he was deleted from the data system a few months later.
Veterans cannot register multiple businesses at one time,
and owners must work full time in their registered business.
CVE staff qualifications have been questioned by many.
A 10-case Government Accountability Office study proved
approximately $100 million in SDVOSB sole-source and set-aside
contracts through fraud and abuse of the program.
The Web site is not user-friendly and needs to be
improved.
An inability to foster communication between veteran-
owned small businesses on the Web site.
On July 21, 2009, Secretary of Veteran Affairs Eric Shinseki
addressed SDVOSB/VOSB at the 5th Annual National Veteran Small Business
Conference in Las Vegas and stated, ``VA will begin putting Veterans
first--fully first--in our contracting efforts because we recognize the
on-time, on-budget, quality solutions that you offer to meet our
contracting needs.'' \7\ This statement seems to be contradictory to VA
Department official's actions when issuing VA contracts to businesses.
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\7\ http://www.va.gov/opa/speeches/2009/09_0721.asp.
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RECOMMENDATIONS
The American Legion fully understands and support Title 38 section
8127 and 8128 does not automatically award VA government contracts to
SDVOSB/VOSB; however, when qualified SDVOSB/VOSB are being overlooked
or ignored by the VA this is cause for great concern.
CVE's marquee program is their VIP database. As the only Federal
database focusing strictly on veteran-owned small businesses, the VIP
database has established itself as the premiere database for veterans
in the country. CVE has successfully promoted this database
commercially, as well as cross agency and has established a strong
foundation and infrastructure that can easily be interwoven into other
Federal databases such as the Central Contractors Registry (CCR).
VA and the Small Business Administration (SBA) should develop a
comprehensive partnership to assist veterans who are interested in
participating in Federal procurement. CVE should maintain the database
(VIP) and verify accurate veteran/service-connected disabled veterans'
status. SBA should retain the responsibility for validating the
business ownership, size standards, and structural integrity of the
business. SBA should have direct reporting and input authority to the
VIP database through the Office of Veterans Business Development once
this information is collected. VA should maintain the eligibility
status regarding veteran status. SBA is responsible for verifying all
other socioeconomic categories for the purpose of Federal procurement.
SBA already maintains the infrastructure, expertise and established
regulatory guidance to include the veterans' population within their
authority. VA should develop clearer and more comprehensive small
business contracting policies.\8\
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\8\ http://www.sba.gov/sites/default/files/
contracting_task_force_report_0.pdf.
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Recommendation 1: Update acquisition policies and regulations to
provide clear guidance on small business set-asides and related tools.
Recommendation 2: Issue guidance clarifying practices and
strategies to prevent unjustified contract bundling and mitigate any
negative effects of justified contract bundling on small businesses.
Recommendation 3: Identify where focused efforts will likely have
the most positive effect on increasing small business utilization in
prime contracting.
Recommendation 4: Strengthen the skills of the acquisition
workforce by revising existing core certification, requiring training
on small business contracting, procurement policies and regulations,
and creating focused refresher materials for continuous learning.
Recommendation 5: Use meaningful ``carrots and sticks'' to create a
greater sense of agency accountability for reaching small business
Federal contracting goals.
Recommendation 6: Facilitate the identification and rapid adoption
of best practices across the agencies to maximize successful
strategies.
These observations come from The American Legion's National Small
Business Task Force. This Task Force is made up of veterans who are
successful business owners, Federal agency officials and The American
Legion leaders. Their mission is to gather information, data and
research regarding the current and future economic status of veteran
businesses. These individuals are the very individuals who are using
the CVE and are a part of the database that CVE is maintaining.
CONCLUSION
While The American Legion applauds the Federal Government in
setting up and implementing a program that is designed to assist
Veteran-Owned and Service-Disabled Veteran Owned Small Business to
start up and receive government contracts, it is our belief that this
program could be improved. VA and SBA should develop a comprehensive
partnership to assist veterans who are interested in participating in
Federal procurement, with each Department utilizing their resources to
ensure proper implementation. As interpreted by Federal Court, the VA
is mandated by law to purchase all products and services from SDVOSB/
VOSB as mandated by the Veteran First law, as long as those SDVOSB/VOSB
meet both the legal and contract requirements. Any regulations,
policies, and procedures disseminated by the VA that deny SDVOSB/VOSB
their contracting preference and priority as defined by the United
States Court of Federal Claims is a violation of law.
Unfortunately, SDVOSB and VOSB businesses have been relegated to
last in the VA's procurement hierarchy even when Congress and United
States Court of Federal Claims said they should be first. The irony and
greatest insult is that this agency which was created to help veterans
appears to be actively and knowingly shutting them out when it's time
to award government contracts.
The American Legion appreciates the opportunity to present this
statement for the record. Again, thank you Mr. Chairman, Ranking Member
Donnelly, and Members of the Subcommittee for allowing The American
Legion to present its views on these very important issues.
Statement of Robert G. Hesser, Vetrepreneur, LLC, SDVOSB Owner,
Herndon, VA, Retired Master Chief, USN
This document is a compilation of comments from members of the
veteran business community and includes suggestions, ideas and
concerns. Most of the comments were unsolicited and frequently
passionate. Our commenters represent almost every ethnic, cultural,
age, gender and possible demographic. We are united in our concern for
how veterans, their families and employees are treated.
We are also united in our belief that the VA's mission of helping
veterans should be integral to acquisition planning and implementation
. . . as we understand that the greatest value to the taxpayers is to
have a robust and competitive small business industrial base. To us,
that means that the objectives of Vets First include the impact on
veteran unemployment and homelessness as well as opportunities through
the marketplace to improve access to medical care through employer
funded plans.
Vets helping vets, it's that simple. We ask the Committee to
reinforce the importance of including the Department of Veterans
Affairs mission in the planning and execution of their acquisitions. In
today's economic environment, it will be good to get a win-win where we
are helping our Nation's veterans while reducing the total cost of
implementing the VA's mission.
______
Vets First = Vets Last
The Department of Veterans Affairs (VA) has stated that it
``conducts its contracting with small businesses in good faith and in
the spirit of the ``Veterans First'' legislation that gives preference
to eligible veteran-owned small businesses (VOSBs) and service-disabled
veteran-owned small businesses (SDVOSBs).'' Despite the value that
veteran small business owners bring to VA procurement, they continue to
face barriers and obstacles. One of the lateral benefits of the
Veterans First law is its ability to decrease veteran unemployment,
which is currently 11.5 \1\ percent with estimates as high as 25
percent when the troops return from Iraq and Afghanistan. Veterans hire
veterans! From battle to business, veteran small businesses care for
fellow comrades.
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\1\ Bureau of Labor Statistics ``Employment Situation of Veterans
News Release'' October 20, 2011 http://stats.bls.gov/news.release/
vet.htm.
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Background on Vets First Law
On December 22, 2006, Former President Bush signed P.L. 109-461,
The Veterans Health Care, Benefits and Information Technology Act of
2006, which directs the Secretary for Veterans Affairs to ``give
priority to a small business concern owned and controlled by veterans,
if such business concern also meets the requirements of that
contracting preference.'' 38 U.S.C. Sec. 8128(a). Note that there is no
mention of Federal supply schedules, open market, or other qualifiers.
The law clearly and profoundly declares that veteran owned small
businesses shall be given priority when the VA procures goods and
services.
VA Understood Vets Come First
It's clear that the VA initially understood the intent of the law.
In the June 19, 2007 Information Letter (IL 049-07-08), VA stated that
``this approach changes the priorities for contracting preferences
within VA, placing SDVOSBs and VOSBs first and second, respectively, in
satisfying VA's acquisition requirements.''
A year later, the VA still clearly understood the intent of the law
to consider veteran owned businesses first because they declared in the
August 20, 2008 Federal Register that ``We interpret section 8128 and
the legislative history to mean that SDVOSBs and VOSBs must receive
priority in VA contracting opportunities without regard to other
provisions of law concerning contracting preferences . . . VA finds
that section 8128 requires VA contracting officers to have the
authority to override other statutory contracting preferences to
provide priority to SDVOSBs and VOSBs . . .'' \2\
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\2\ VAAR 808.603 Purchase Priorities, VA Proposed Rule in Federal
Register August 20, 2008.
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VA Puts Vets Last
Then, in testimony before the U.S. House of Representatives
Committee on Veterans' Affairs Subcommittee on Economic Opportunity on
April 23, 2009, everything changed. Jan Frye, VA Deputy Assistant
Secretary, Office of Acquisition and Logistics, testified, ``It is
important to note that the unprecedented and extraordinary contracting
authorities granted to VA under Public Law 109-461 are preferences in
open market contracting for veteran entrepreneurs.'' \3\
---------------------------------------------------------------------------
\3\ Testimony before the U.S. House of Representatives Committee on
Veterans' Affairs Subcommittee on Economic Opportunity, April 23, 2009.
---------------------------------------------------------------------------
In one fell swoop; veteran owned small businesses were moved from
FIRST to LAST in the VA Purchasing Priority List. The VA's unilateral
interpretation that the law only applies to ``open market'' purchases
means that veteran businesses are now first in the LAST category on the
purchasing priority hierarchy.
VA Uses Convoluted Purchasing Priority List
Eight months later, a commenter in the Federal Register (December
8, 2009) asked that the VA Purchasing Priority Hierarchy be
specifically defined for contracting personnel to avoid confusion. The
VA disagreed by stating ``this rule clearly implements the priority
purchasing preference for SDVOSB and VOSB in accordance with the
statute. Under section 8128(a), VA must give priority to small business
concerns owned and controlled by veterans, if the business concern
meets the requirements of that contracting preference. In this rule, VA
will provide discretion to its contracting officers to override certain
statutory priority preferences, such as Federal Prison Industries and
Government Printing Office. Under section 8128, VA is implementing
priority for SDVOSBs and VOSBs to the extent authorized by the law . .
.''
Yet, there is confusion for VA contracting personnel. The VA
purchasing priority list basically goes like this. First and Second in
the purchasing hierarchy includes--Number 1--Agency inventories and
Number 2--Excess from other agencies. Veterans understand that the Vets
First law does not apply here as the VA is not buying goods and
services because they were previously purchased or are from an existing
agency on-hand inventory. Number 3--Federal Prison Industries. VA
regulation (808.6) states that veteran businesses come before Federal
Prison Industries. Number 4--Supplies which are on the Procurement List
maintained by the Committee for Purchase From People Who Are Blind or
Severely Disabled (Ability One). The United States Court of Federal
Claims found in the ``Angelica'' decision on October 26, 2010 that
veteran businesses take priority over Ability One (otherwise known as
``Javits-Wagner-O'Day Act'' (JWOD)). The court found that ``the New
Guidelines . . . provide mandatory procedures for Departmental
contracting officers and procurement officials to explore whether
SDVOSB and VOSB entities are potential suppliers, in which instances
they are to be accorded first priority over that provided by the
Javits-Wagner-O'Day Act.'' The court further found that the ``Veterans
Benefits Act is a specific mandate to the Department [VA], and only to
the Department, to grant first priority to SDVOSBs and VOSBs in the
awarding of contracts.''
Let's continue down the VA purchasing priority list. Number 5--
Wholesale supply sources. Number 6--Mandatory Federal Supply Schedules.
There are no mandatory Federal supply schedules. This will be further
clarified once the proposed rule FAR Case 2009-024 takes effect. Number
7--Optional use Federal Supply Schedules (``FSS''). The October 11,
2011 Government Accountability Office (GAO) Aldevra decision states,
``We see nothing in the VA Act or the VAAR that provides the agency
with discretion to conduct a procurement under FSS procedures without
first determining whether the acquisition should be set aside for
SDVOSBs. The provisions of both the VA Act and the VAAR are
unequivocal; the VA ``shall'' award contracts on the basis of
competition restricted to SDVOSBs where there is a reasonable
expectation that two or more SDVOSBs will submit offers and award can
be made at a fair and reasonable price. Thus, contrary to the agency's
position, the VA Act requires, without limitation, that the agency
conduct its acquisitions using SDVOSB set asides where the necessary
conditions are present. 38 U.S.C. sect. 8127-8128.''
Finally, we arrive to the bottom, last category on the VA
purchasing priority list--Number 8--Commercial sources and open market.
This ``open market'' area is where Jan Frye testified that the Vets
First law applies.
Based on these findings, it's no wonder why VA contracting
personnel and the veteran business community are confused. The
purchasing priority list is convoluted--how are veteran businesses
ahead of some areas, yet below others? It makes no sense. The VA allows
this confusion to continue as a means to NOT consider doing business
with veterans first.
VA Refuses to Comply with Law
Even after the U.S. Federal Court of Claims and GAO declared that
VA should be considering veteran small businesses first, VA stands by
its faulty interpretation. VA says in an October 17, 2011 internal memo
from Jan Frye that the agency will continue to violate the law, ``VA is
of the opinion GAO's interpretation is flawed and legally incorrect. .
. . Because GAO is part of the Legislative Branch, Executive Branch
agencies are not bound by GAO's legal advice. Therefore, VA determined
this GAO recommendation . . . shall not be followed . . . The GAO
recommendation does not change how VA will acquire goods and services
in support of its mission.''
VA Refuses to Consider Vets with a Federal Supply Schedule First
Even when veteran business owners have a Federal Supply Schedule
contract, they are still not considered first! The VA has stated the
``Vets First'' program does not apply to awards made using Federal
Supply Schedules, although the recent interim FAR rule FAR Case 2011-
024 implementing the Small Business Jobs Act of 2010 would allow this
evaluation factor.
Service disabled veteran owned small business owners have done
their best to comply with all the VA terms to do business with them--
the arduous task of verification, in business for 2 years, obtain past
performance, apply and be awarded a Federal Supply Schedule contract,
etc. Yet, after obtaining all these requirements, their opportunity to
do business with the VA is given to others.
VA Transformation Twenty-One Total Technology (T4) Contract--
$12,000,000,000 IT Contract Awarded to Six Veteran Small
Businesses and Eight Non-Veteran Businesses with the existence
of P.L. 109-461
Prior to solicitation release, during briefings and discussions
with VET-Force the TAC (VA Technology Acquisition Center) provided an
organizational and mission overview. A key point emphasized during this
briefing was that T4 would capture funds, such as the GSA/VA Schedule
Industrial Funding Fee (IFF) for the supply fund.
T4 Solicitation Q&A's openly flaunted P.L. 109-461, ``Vets First''
in at least six of the Q&A responses to industry where TAC emphasized
that the SDVOSB and VOSB awards were not set-aside and therefore were
not subject to ``Limitations of Subcontracting.''
T4, as procured, may actually serve to reduce the SDVOSB and VOSB
industrial base. In an SDVOSB set-aside, more than 50 percent of the
direct labor must be performed by the prime and any combination of
SDVOSBs. By not having an SDVOSB set-aside ``limitations of
Subcontracting'' several SDVOSB companies will do quite well, but the
key objective of 109-461--to build SDVOSB capabilities and industrial
base--will not be met.
With recent GAO and CoFC decisions re-affirming ``Vets First'' as
the VA acquisition priority, it would appear that only six of the
awardees (the SDVOSBs) will be eligible for Task Order Awards.
VA Buys Chinese Gloves Instead of Gloves Made in U.S. from a Veteran
with FSS
In one egregious example, a veteran invented a medical glove. The
VA buys tens of millions of gloves annually. These gloves are
manufactured in the United States in a historically underutilized
business zone (HUBZone) in Alabama by a company that employs veterans.
The gloves are distributed by a verified service disabled veteran with
a Federal Supply Schedule. About 32 U.S. jobs are created for every $1
million in gloves sold. So where do you think the VA spends millions
buying gloves to care for veterans? The VA spends our hard earned tax
dollars to buy these gloves from a company that makes them in China and
sells them to the VA for more money than the American manufactured,
veteran distributed gloves.\4\
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\4\ VA Basic Ordering Agreement (BOA) V797P2071.
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The VA states that it ``continues to strongly support eligible
Veteran-owned small businesses who seek to do business with the Federal
Government.'' Yet this example and many others demonstrate otherwise.
VA Touts Inaccurate Numbers
The VA touts their achievements in awarding 23 percent of contracts
to VOSBs and 20 percent to SDVOSBs. This is commendable; however, it is
not accurate. The VA is double dipping. They're counting service
disabled veteran owned small businesses as part of the veteran owned
small business contracting percentages. The true numbers are that 3
percent of contracts go to VOSBs and 20 percent to SDVOSBs. This
includes $500 million awarded to 1,400 ineligible businesses
highlighted in the July 25, 2011 VA Office of Inspector General audit.
In addition, considering that there is a law to consider veteran small
businesses first 100 percent of the time, the VA's performance is
disappointing and signifies a loss of approximately $11.8 billion a
year to veteran owned small businesses.
VA Gives Small Contracts to Large Businesses
VA fails to first consider qualified veteran small businesses in
Simplified Acquisitions. These are purchases valued between $3,000 and
$150,000. The Small Business Act exclusively reserves these contracts
for small businesses. For FY 2011, the VA had more than 213,000
simplified acquisition purchases equating to more than $3.8 billion.\5\
More than 55 percent of these purchases went to large businesses, most
of which hold a Federal Supply Schedule contract. The VA awarded 7.74
percent to SDVOSBs and 4.25 percent to VOSBs of a combined total of
$606 million of the $3.8 billion of VA simplified acquisition
transactions. This equates to $3.2 billion in simplified acquisition
contract awards to non-veteran businesses.
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\5\ Simplified acquisition transaction numbers extracted from
USASpending.gov on 11/18/2011.
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VA Leadership Contradicts Itself
On July 21, 2009, Secretary of Veteran Affairs Eric Shinseki
addressed veteran entrepreneurs at the 5th Annual National Veteran
Small Business Conference in Las Vegas and stated, ``VA will begin
putting Veterans first--fully first--in our contracting efforts because
we recognize the on-time, on-budget, quality solutions that you offer
to meet our contracting needs.'' \6\ This statement seems to contradict
VA practices. The hypocrisy continues in the VA's strategic plan for
2010-2014, which states that ``As the economy begins to recover, small
firms will be the most likely source of new jobs for Veterans. Small
firms employ about half of all private sector employees, create 60 to
80 percent of net new jobs annually, and tend to lead the way in new
employment when the economy improves. In this vein, VA has a
longstanding commitment to contracting with Veteran-Owned Small
Businesses (VOSBs).'' The VA is not doing what they say they will do!
Vets hire vets! The only thing veteran small businesses ask is for
first consideration at the VA. Right now, they don't have it. If
they're not being considered, veterans can't create jobs for themselves
or for another veteran.
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\6\ http://www.va.gov/opa/speeches/2009/09_0721.asp.
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Recommendations:
VA and the Small Business Administration (SBA) should develop a
comprehensive partnership to assist veterans who are interested in
participating in Federal procurement. VA should develop clearer and
more comprehensive small business contracting policies\7\:
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\7\ http://www.sba.gov/sites/default/files/
contracting_task_force_report_0.pdf.
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Recommendation 1: Update or revise existing VA acquisition policies
and regulations to comply with P.L. 109-461 and provide clear guidance
to VA contracting personnel to increase veteran small business set-
asides. The revision must clearly state that veteran small businesses
have a contracting preference and priority:
a...................................... above statutory preference
entities from General Federal
Statutes under FAR Part 8
Required Sources of Supply
that lists Federal Prison
Industries, AbilityOne, and
Federal supply schedules;
b...................................... above statutory preference
entities from General Federal
Statutes under FAR Part 19
Small Business Programs that
lists 8(a), HUBZone, & WOSB;
c...................................... above General Federal
Procurement Statutes and
Acquisition Initiatives such
as Strategic Sourcing
Initiative;
d...................................... in all acquisition thresholds;
e...................................... in all NAICS Codes;
f...................................... in all market categories such
as Federal Supply Schedules
and Open Market; or all goods
or services procured by the
VA;
g...................................... exclusively within the VA.
Recommendation 2: Issue guidance clarifying practices and
strategies to prevent unjustified contract bundling and mitigate any
negative effects of justified contract bundling on veteran small
businesses.
Recommendation 3: Identify industries where focused efforts on
existing qualified veteran small businesses would likely have the most
positive effect on increasing small business utilization in prime
contracting. Then develop a plan to increase veteran small business
participation in those industries where veteran small businesses are
non-existent to increase contract awards.
Recommendation 4: Strengthen the skills of the acquisition
workforce by revising existing core certification, requiring training
on veteran small business contracting, procurement policies and
regulations, and creating focused refresher materials for continuous
learning to increase the number of contract awards to veteran small
businesses in all industries.
Recommendation 5: Increase the number of simplified acquisition
procedure (SAP) transactions awarded to SDVOSBs at 16,000 (7.74
percent) and VOSBs at 9,000 (4.25 percent) of VA total awards of
213,000 to 60 percent of SAP transactions within 1 year. This can be
accomplished due to the fact that more than 100,000 transactions (more
than 50 percent) were awarded to non-veteran businesses for
commodities. An increase in simplified acquisition transactions to the
veteran small business community has a direct effect on increasing
veteran employment.
Recommendation 6: Create a separate budget line item designating
that the funds are to be used for only the Center for Veterans
Enterprise. The Center for Veterans Enterprise will assist veterans in
obtaining verification of their small business in accordance with 38
U.S.C. 74.
Summary
The veteran small business community has the best overall
understanding and is in the best position to fully support VA's mission
with an in-depth procurement knowledge, experience, and understanding
for mission success. The veteran small business community has a vested
interest in VA's mission success and the health care, job creation, and
homelessness of their fellow veterans that goes beyond profits. There
is no finer group of small business owners and their families who have
invested through their individual sacrifices to ensure the American
Nation persevered with each new and challenging millennium.