    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

       SUBPAR SUBCONTRACTING: CHALLENGES FOR SMALL BUSINESSES CONTRACTORS

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

                                    HEARING

                                   before the

                                SUBCOMMITTEE ON
                           CONTRACTING AND WORKFORCE

                                     of the

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                    HEARING
                              HELDOCTOBER 6, 2011

                                   __________

                Small Business Committee Document Number 112-038
                  Available via the GPO Website: www.fdsys.gov

                                    _____

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                       HOUSE COMMITTEE ON SMALL BUSINESS

                         SAM GRAVES, Missouri, Chairman
                           ROSCOE BARTLETT, Maryland
                               STEVE CHABOT, Ohio
                                STEVE KING, Iowa
                             MIKE COFFMAN, Colorado
                         MICK MULVANEY, South Carolina
                             SCOTT TIPTON, Colorado
                             JEFF LANDRY, Louisiana
                       JAIME HERRERA BEUTLER, Washington
                              ALLEN WEST, Florida
                         RENEE ELLMERS, North Carolina
                              JOE WALSH, Illinois
                           LOU BARLETTA, Pennsylvania
                            RICHARD HANNA, New York
                           ROBERT SCHILLING, Illinois

                   NYDIA VELAZQUEZ, New York, Ranking Member
                             KURT SCHRADER, Oregon
                            MARK CRITZ, Pennsylvania
                          JASON ALTMIRE, Pennsylvania
                            YVETTE CLARKE, New York
                              JUDY CHU, California
                         DAVID CICILLINE, Rhode Island
                           CEDRIC RICHMOND, Louisiana
                            JANICE HAHN, California
                             GARY PETERS, Michigan
                              BILL OWENS, New York
                          BILL KEATING, Massachusetts

                          Lori Salley, Staff Director
                        Paul Sass, Deputy Staff Director
                          Barry Pineles, Chief Counsel
                      Michael Day, Minority Staff Director

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

    Mulvaney, Hon. Mick..............................................     1
    Chu, Hon. Judy...................................................     2

                                   WITNESSES

    Mr. Joseph G. Jordon, Associate Administrator of Government
      Contracting and Business Development, U.S. Small Business
      Administration, Washington, DC.................................     6
    Ms. Mary L. Kendall, Acting Inspector General, U.S. Department of
      the Interior, Washington, DC...................................     4
    Ms. Jennifer Bisceglie, President, Interos, McLean, VA...........    22
    Ms. Jamie Borromeo, President, The E & J Commission, LLC,
      Washington, DC.................................................    25

                                    APPENDIX

    Prepared Statements:
        Mr. Joseph G. Jordon, Associate Administrator of Government
          Contracting and Business Development, U.S. Small Business
          Administration, Washington, DC.............................    37
        Ms. Mary L. Kendall, Acting Inspector General, U.S.
          Department of the Interior, Washington, DC.................    42
        Ms. Jennifer Bisceglie, President, Interos, McLean, VA.......    44
        Ms. Jamie Borromeo, President, The E & J Commission, LLC,
          Washington, DC.............................................    50
    Questions for the Record:
        Chairman Mulvaney Questions for Mr. Jordan...................    54
        Chairman Mulvaney Questions for Inspector General Kendall....    57
    Answers for the Record:
        Mr. Jordan Response to Chairman Mulvaney.....................    59
        Inspector General Kendall Response to Chairman Mulvaney......    67
    Additional Materials for the Record:
        Ms. Borromeo Addendum........................................    73
        United Solutions and Services Statement for the Record.......    75

       SUBPAR SUBCONTRACTING: CHALLENGES FOR SMALL BUSINESSES CONTRACTORS

                                  ----------

                           THURSDAY, OCTOBER 6, 2011

                      House of Representatives,
                           Committee on Small Business,
                     Subcommittee on Contracting and Workforce,
                                                        Washington, DC.
        The Subcommittee met, pursuant to call, at 10 a.m., in room
    2360, Rayburn House Office Building. Hon. Mick Mulvaney
    (chairman of the subcommittee) presiding.
        Present: Representatives Mulvaney, West, Ellmers, and Chu.
        Chairman Mulvaney. Folks, before we start officially today,
    thank you for coming. I was just pointing out to Ms. Chu that
    clearly the majority leader does not call the Subcontracting
    Workforce Committee to clear their schedule for votes with us.
    And we just received a note that we will be voting today at
    about 10:15. It will be a fairly long series of votes. It looks
    like there are three or four amendments plus a Motion to
    Recommit and then the vote on the underlying bill. So I would
    imagine the vote series will take someplace between a half an
    hour and 45 minutes. So we will go as far as we possibly can
    until they ring the bell and then we will adjourn the meeting
    and come back as quickly as we possibly can. I apologize in
    advance to the witnesses and to the folks who are here to
    participate and to watch, as those of you who have done this
    before know that this happens probably more often than not.
        So, with that, we will call this meeting to order. And we
    are here today to talk about small business and specifically,
    subcontracting. We are going to look at the challenges small
    businesses face when they are both the prime contractor, as
    well as when they are the subcontractor. Additionally, this
    hearing will examine the three systems the government uses to
    monitor and promote small business subcontracting.
        When a prime contract is set-aside for small business, the
    government wants to make sure that the small business is not
    simply a front for a large business. So the Small Business Act
    requires that the small business perform a certain percentage
    of the work. However, there are two problems with the current
    system. It is very hard to catch bad actors and very hard for
    small businesses who want to to comply. These problems make
    legitimate small businesses pay even more in compliance costs
    and in turn waste even more taxpayer money.
        While many of the contracts we will hear about today deal
    with the 8(a) program, especially the Alaska Native
    Corporations program, these problems are not limited to any
    single program. However, it is inevitable that the larger
    dollar contracts obviously attract more attention. By
    addressing these challenges, we hope to hold--hope to open up
    opportunities for legitimate small businesses to obtain
    government contracts. The government-wide goal, again, we have
    talked about many times in this Committee, for small business
    prime subcontracting dollars--excuse me, prime contracting
    dollars, is 23 percent and legitimate small businesses, not
    fronts for large corporations, deserve those contracts.
        There are also challenges when small businesses are the
    subcontractors. In Fiscal Year 2010, federal prime contractors
    subcontracted over $200 billion. The SBA has established a
    government-wide goal of awarding 35.9 percent of those
    subcontracting dollars to small businesses, a goal that has
    decreased from 40 percent less than five years ago. To help
    small businesses compete for those $200 billion in
    subcontracts, large prime contractors are required to submit
    subcontracting plans. These plans detail how much a business
    will subcontract to each type of small business. Failure to
    make a good faith effort to comply with this plan is supposed
    to result in a fine; however, companies are failing to report
    to the government on their actual subcontracting achievements,
    and yet no prime contractor ever, ever has been fined as a
    result. So clearly, in the last five years, all of the almost
    3,000 prime contractors have always perfectly submitted their
    subcontracting plans worth over $1 billion or we have a serious
    problem on enforcement. We need to address how to retool the
    subcontracting program.
        Finally, there are three systems that the federal
    government uses to monitor and promote subcontracting. First,
    the Federal Subcontractor Reporting System, which requires that
    all contractors report each subcontract above $25,000. Second,
    the Electronic Subcontracting Reporting System, which requires
    that firms with subcontracting plans report their subcontracts;
    and third, there is the SBA Subcontracting Network, which
    allows prime contractors to post subcontracting opportunities
    over $10,000 for small businesses to compete for. We need to
    examine duplication in these systems, as well as their
    effectiveness.
        Small business, both prime and sub, are good for government
    and good for the economy. They increase competition, increase
    innovation, create jobs, and save taxpayer jobs. As this
    Subcommittee considers today these issues surrounding small
    business and subcontracting, we want to learn how we can
    improve compliance without unduly unburdening--excuse me,
    unduly burdening, small firms. If we succeed at that goal, we
    will help businesses compete, create jobs, and save taxpayer
    dollars.
        I want to thank our witnesses in advance for their
    participation again today--it is good to see both of you--which
    will help us achieve these ends.
        I now yield to Ms. Chu for her opening remarks before
    introducing the witnesses.
        Ms. Chu. Thank you, Mr. Chair.
        Today, small businesses are looking for so many
    opportunities to grow stronger and expand. As the driving force
    behind nearly two-thirds of new jobs, this is critical for the
    economy. One way that we can enhance small firms' job creating
    power is through the federal procurement marketplace. In the
    last decade, the government has doubled its contracting efforts
    to more than $500 billion per year. This makes the U.S.
    Government one of the largest single buyers of goods and
    services in the world.
        Typically, prime contracts are generally viewed as the most
    lucrative way for entrepreneurs to participate in this
    marketplace; however, subcontracts are nearly as important. I
    am so glad that today's hearing is focused on this very
    important issue. In fact, last year, small businesses received
    $97 billion in prime contracts while receiving an additional
    $74 billion through subcontracting opportunities. For
    subcontracts, this totaled 35 percent of all contracts, just
    shy of the 35.9 percent goal. This reality is that
    subcontracting is a critical avenue for entrepreneurs to work
    with the government, particularly for those dealing with the
    current economic slowdown.
        Although subcontracts are an important entry point, more
    needs to be done to make them accessible to small firms, and
    today's hearing will help us shed light on this. The
    preparation and enforcement of subcontracting plans is a
    critical area that needs to be strengthened. For businesses,
    like the ones here today, such plans are absolutely essential
    to winning work. However, given recent GAO reports, it is clear
    that more needs to be done to make these plans more effective.
    One of the main issues is that limiting the effectiveness of
    these plans is both a lack of SBA personnel, namely PCRs and
    CMRs, and I am glad that the Agency is here to address this
    point.
        An adequate and thorough review of these plans is important
    but there is simply not enough staff to do so. With more than
    three million contracting actions each year, the less than 100
    staff assigned to these reviews is insufficient. Additionally,
    it is well understood that there is a lack of penalties and
    incentives regarding the implementation of a subcontracting
    plan. This means that in many cases small businesses will
    continue to be an afterthought rather than a primary focus.
        I am also looking forward to exploring the tools that exist
    for small businesses to become subcontractors. For example, the
    SBA operates a database called Subnet. Through this system,
    prime contractors can post subcontracting opportunities and
    small businesses can search through these entries. However, as
    posting is not mandatory, the website presents limited
    opportunities. A current search of the database reveals only
    100 active solicitations. If we want to draw in more small
    businesses, particularly those that are not regular government
    contractors, we must improve mechanisms like this.
        Finally, in light of recent allegations about fraud and
    abuse in SBA's contracting programs, it is worth talking about
    subcontracting from another perspective. Unfortunately, in some
    instances, subcontracts have become a means to defraud the
    government and take opportunities away from legitimate small
    businesses. To prevent those abuses from occurring, more
    resources must be directed to oversight and penalties have to
    be strengthened.
        Despite these challenges, subcontracting remains a vital
    means for small businesses to access government contracts.
    Channeling more procurement opportunities to them is a smart
    policy. Doing so spreads the economic power of the federal
    procurement marketplace to more companies and communities. With
    the economic challenges on the horizon, this is more important
    than ever. While we are always talking about the need for
    diversification in business models, the slowdown has made this
    particularly important, especially for small firms. For these
    businesses, government contracts put another option on the
    table. By further opening the federal marketplace to small
    businesses, we can ensure that entrepreneurs have an
    opportunity to win new customers in a new market, and this is
    key because while our economy is showing promise, the recovery
    remains fragile. We will need to see significant job growth and
    this job growth can come mainly from small business.
        Chairman Mulvaney. Thank you, Ms. Chu.
        Just by way of logistics here, we have always been a little
    loose with the five-minute rule in this Committee, so what you
    will see is the green light in front of you as you begin your
    testimony. Yellow will go on when you have one minute left, and
    red, technically, when your five minutes is up. But until you
    hear me quietly banging the gavel, please feel free to
    continue.

         STATEMENTS OF MARY KENDALL, ACTING INSPECTOR GENERAL,
        DEPARTMENT OF THE INTERIOR; JOSEPH G. JORDAN, ASSOCIATE
    ADMINISTRATOR, GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT,
                   U.S. SMALL BUSINESS ADMINISTRATION

        Chairman Mulvaney. I will introduce the first panel now.
    The first witness is Mary Kendall, the acting inspector general
    for the Department of the Interior. Ms. Kendall spent much of
    her career as an attorney for federal law enforcement programs
    and as a state and federal prosecutor. Since 1999, she has
    served as the deputy inspector general.
        Sitting next to her is Mr. Jordan. Welcome back, Mr.
    Jordan. He served as the associate administrator of Government
    Contracting and Business Development at the U.S. SBA since
    March 2009. The Office of Government Contracting and Business
    Development works to create an environment for maximum
    participation by small, disadvantaged, and women-owned
    businesses and federal contract awards and large prime
    subcontract awards. It also plays a major role in the
    formulation of federal procurement policies and affects small
    business.
        Ms. Kendall, we are going to begin with you today, so fire
    away.

                       STATEMENT OF MARY KENDALL

        Ms. Kendall. Thank you, Mr. Chairman, Ranking Member Chu.
    Thank you for the opportunity to testify today about the
    challenges in the administration of contracts between the
    federal government and small businesses.
        The Office of Inspector General does not purport to know or
    understand all of the intricacies or challenges that attend to
    contracts between the federal government and small businesses,
    but we can comment on our findings relative to the Department
    of the Interior's handling of several small business contracts
    which are, we believe, representative of some of the challenges
    that influence the management of federal contracts with small
    businesses.
        During a recent review, we discovered a service contract
    with an 8(a) small business, United Service and Solutions, LLC,
    (US2) that was not in compliance with the statutory
    subcontracting limitations which require the prime contractor
    to satisfy at least 50 percent of the personnel-based contract
    cost with its own employees. The Small Business Administration
    Participation Agreement requires that the contracting officer
    monitor and enforce that provision. US2, an Alaska Native
    corporation had been noncompliant with the 8(a) subcontracting
    limitations for more than two and a half years. The contracting
    officer told us that she believed the contractor on an
    indefinite quality, indefinite delivery contract, as was the
    case with US2, has the life of the contracting limit.
        To the contrary, the Code of Federal Regulations state that
    in order to ensure the required percentage of costs on an
    indefinite quantity 8(a) award is performed by the participant,
    the participant must demonstrate semi-annually that it has
    performed the required percentage to that date. The CFR goes on
    to say that the participant must perform 50 percent of the
    applicable costs for the combined total of all task orders
    issued to date at six-month intervals. In other words, US2 is
    required to perform 50 percent of the work every six months
    that the contract was in force.
        Our Recovery Oversight Office also addressed compliance
    with the 8(a) limitations on subcontracting in certain
    construction contracts funded by the American Recovery and
    Reinvestment Act monies. We found inconsistency in how and
    whether compliance with the limitations on subcontracting was
    assessed by DOI contracting officers. This inconsistency was
    found in compliance monitoring and absence of department-wide
    guidance and a lack of training for contracting officers.
    Confusion on the roles and responsibilities between SBA and DOI
    contracting officers contributed to our findings.
        In the US2 case, in particular, the contracting officer had
    identified potential problems with the limitations on
    subcontracting quite early in the life of the contract. SBA,
    however, indicated that it found US2's plan to address these
    problems sufficient. Therefore, the contracting officer took
    this as a signal to continue with the contract. We found this
    confusion to affect the recovery-funded contracts as well. The
    Department of Interior has since issued department-wide
    guidance on the limitations on subcontracting, provided a
    worksheet with instructions to all contracting officers to
    assess a contractor's compliance, and has agreed to provide
    annual training to the acquisition workforce regarding their
    responsibilities under the 8(a) partnership agreement between
    SBA and DOI.
        Even with a clear understanding of the roles and
    responsibilities, contracting officers are hampered in their
    monitoring efforts by receiving incomplete and inaccurate data
    from their 8(a) contractors. For example, US2 broke down labor
    costs by those incurred by US2 and those incurred by its
    subcontractors, but did not break down other direct costs in
    the same way. Based on the other direct costs we reviewed, we
    believe that additional subcontractor labor costs were
    contained in this category, exacerbating the extent to which
    US2 was out of compliance with the limitations on
    subcontracting. In fairness to US2, we do not believe that such
    manipulation of reporting data is limited to this company but
    may well be happening with other 8(a) contractors as well.
    Contracting officers are placed at a significant disadvantage
    to identify such data problems and correct them.
        Mr. Chairman, Ranking Member Chu, that concludes my
    prepared testimony. I would be happy to answer any questions
    you may have.
        [The statement of Ms. Kendall follows on page 42.]
        Chairman Mulvaney. Thank you, Ms. Kendall. And our practice
    here is to save all the questions until after the testimony of
    the witnesses.
        Mr. Jordan.

                     STATEMENT OF JOSEPH G. JORDAN

        Mr. Jordan. Thank you, Chairman Mulvaney, Ranking Member
    Chu, and members of the Subcommittee. Thank you for inviting me
    back here to testify today.
        As I told you when I was here a few weeks ago, and I
    sincerely mean, our top priority at SBA is to maximize
    opportunity for small businesses and ensure the benefits of our
    programs flow to the intended recipients. My office works each
    day to provide increased opportunities for eligible small
    businesses to compete for an win federal prime contracts, as
    well as subcontracts. We are always looking for ways to
    increase small business contracting opportunities, and in the
    two and a half years I have been in my position, the federal
    government has made significant improvements. For example, in
    Fiscal Year 2010, small businesses won nearly $100 billion or
    22.7 percent of federal prime contracting dollars. Small
    businesses also won $74 billion or 35.4 percent of
    subcontracting dollars, which is a marked increase from the
    28.6 percent they won in 2008 and the 31.8 percent in 2009.
        In terms of subcontracting, our focus at the SBA is on
    three main areas. One, working with agencies and prime
    contractors to make sure small businesses get their fair share
    of federal subcontracting opportunities; two, ensuring that
    when a small business is a federal prime contractor it complies
    with the limitations on subcontracting requirements; and three,
    developing and maintaining the tools, systems, and resources
    needed to monitor and track subcontracting achievements.
        I would like to take this opportunity share with you our
    initiatives to address each of these areas. First, one of our
    top priorities is to ensure that small businesses receive
    substantial federal subcontracting opportunities. For small
    businesses, subcontracting is not only a good source of
    revenue, but also allows them to gain relevant federal
    government contracting experience, which may be used as
    examples of past performance when they bid on future contracts.
        To help increase small business subcontracting and improve
    oversight of the process, my office has a team of commercial
    market representatives (CMRs), who are stationed across the
    country. Their responsibilities include counseling small
    businesses, conducting matchmaking events, providing training
    on the Subcontracting Assistance Program and conducting
    compliance reviews of large business prime contractors.
        Additionally, the Small Business Jobs Act included several
    provisions specifically related to holding prime contractors
    more accountable to their subcontracting plans. In fact, we
    published these proposed subcontracting rules in the Federal
    Register just yesterday. The first provision is designed to
    prevent small business small contracting misrepresentations.
    The second provision is aimed at mitigating ``bait and
    switch,'' which is when a prime contractor references a small
    business as its subcontractor in bid or proposal but does not
    utilize the small business in actual performance. The last
    provision requires prime contractors to notify a contracting
    officer whenever they reduce a payment or are more than 90 days
    delinquent in paying a small business subcontractor.
        Our second area of focus in subcontracting is ensuring that
    when a small business is a prime contractor it meets the
    limitations on subcontracting. Statutes and regulations were
    developed to ensure that if a small business concern is awarded
    a set-aside contract, the fund will perform a substantial
    portion of the contract. Although monitoring compliance with
    limitations on subcontracting is the responsibility of the
    contracting officer, SBA is committed to working closely with
    the Office of Federal Procurement Policy and the federal
    agencies to ensure they have the appropriate training, tools,
    and resources needed to monitor compliance.
        My office also conducts surveillance reviews of contracting
    activities. These are periodic examinations to provide
    recommendations on how to increase opportunities for small
    businesses and to ensure contracting officers are in compliance
    with small business policies and regulations. As part of these
    reviews, my team evaluates compliance with subcontracting
    regulations and provides recommendations to agencies on how to
    improve these processes and procedures. In addition to these
    reviews, SBA takes action against firms that violate the
    limitations on subcontracting. Our comprehensive fraud and
    abuse prevention strategy has already had significant impact.
    For example, last year SBA suspended a large company based on
    evidence indicating a lack of business integrity and federal
    procurements involving small businesses and an intentional
    disregard for compliance with the limitations on
    subcontracting. In the last two years, SBA has initiated more
    government-wide suspension and debarment actions than it had in
    the previous 10 years.
        Our third area of focus is ensuring agencies and
    contracting officers have the tools, systems, and resources
    needed to monitor and track subcontracting achievements. We
    work closely with the Office of Federal Procurement Policy and
    the General Services Administration to ensure these tools are
    available. The two primary systems used to capture federal
    subcontracting information are the electronic Subcontracting
    Reporting System (SRS) and the Federal Subaward Reporting
    System (FSRS).
        GSA is currently undergoing an effort to combine the
    various procurement databases into one new system called the
    System for Award Management, which is being deployed in phases
    with the first phase scheduled to be available in the first
    half of 2012. As demonstrated by the initiatives and efforts
    described in this testimony, SBA is taking great strides to
    strengthen our small business prime and subcontracting
    programs. While we have made significant progress, we continue
    to look for ways to identify further opportunities for
    improvement and to maximize small businesses' access to this
    important source of revenue so they can grow their businesses
    and create jobs.
        Thank you for allowing me to share SBA's views and
    initiatives with you today, and I will be happy to answer any
    questions you may have.
        [The statement of Mr. Jordan follows on page 37.]
        Chairman Mulvaney. Thank you, Mr. Jordan. And as our
    practice here, Ms. Chu will begin with her questions and then
    we will go down to the members and I will go last.
        So Ms. Chu, fire away.
        Ms. Chu. Mr. Jordan, as you know, there are these major
    kickback schemes that were discovered--the major kickback
    scheme that was discovered at the Army Corps of Engineers
    involving two 8(a) firms. SBA should be at the vanguard of
    federal small business procurement and combat the misuse of
    these small business contract programs, yet the IG office at
    SBA reported that SBA itself had inadequately planned and
    inappropriately awarded these two 8(a) sole source contracts.
    What tools does SBA need to enforce the federal contract
    standards and conduct better oversight?
        Mr. Jordan. Well, I believe the case in which you are
    referring to was not where SBA had awarded contracts, but it
    did involve an 8(a) firm and a different agency actually
    awarded and monitored those contracts.
        It is hard for me to comment on an ongoing investigation,
    but what I can say is that that type of action is a real
    demonstration of the type of partnership we have with our
    inspector general and the Department of Justice, and evidence
    that this administration has absolutely zero tolerance for
    fraud, waste, and abuse.
        I have talked in the past about some of the enforcement
    actions that SBA can take, and these are suspensions,
    debarments, terminations and those types of things. We do not
    have subpoena power. We cannot prosecute. So what we do is we
    take all the actions that we can and then turn over all of that
    evidence not the inspector general and the Department of
    Justice so that they can investigate further and take
    appropriate action. I think that is what you saw the outcome of
    yesterday or over the last couple of days.
        Ms. Chu. Well, one issue has to do with who is responsible
    for monitoring compliance. There is the agency and then there
    is SBA. The Interior's IG office previously indicated that the
    agency's 8(a) program partnership agreement with SBA did not
    say which agency would oversee the subcontracting restrictions.
    So what is your comment? Who is responsible?
        Mr. Jordan. The contracting officers have the primary
    responsibility for ensuring small businesses that they enter
    into contracts with comply with the limitations on
    subcontracting. That being said, SBA is fully committed to
    working with the agencies and the Office of Federal Procurement
    Policy to make sure they have the tools, training, and
    resources necessary to do that. Now, that is true in any small
    business set-aside context, be it 8(a) or any of the other
    small business set-aside programs. In the 8(a) contacts though
    we did see some areas where clarification would be helpful. So
    in March of this year we released the first comprehensive
    revision of the regulations--government program in more than a
    decade and made clear, especially in areas like joint ventures,
    what was permissible and what was not, clarified some of those
    rules, and bolstered some of the oversight.
        Also, just yesterday, we released three different
    subcontracting regulations that implement provisions that
    Congress passed in the Small Business Jobs Act. The first of
    those really reaffirms and makes it very clear that it is the
    contracting officer's responsibility to monitor the limitations
    on subcontracting compliance when they enter into a set-aside
    contract with a small business.
        Ms. Chu. So you are saying the agency is responsible?
        Mr. Jordan. The contracting officer is. Yes. But we
    definitely want to partner with all of the agencies to ensure
    that that is happening, that they have the training and
    awareness about what their responsibilities are, the tools to,
    you know, fulfill their responsibilities, and that the
    oversight is happening.
        Ms. Chu. But is not SBA ultimately responsible?
        Mr. Jordan. The contracting officer is ultimately
    responsible for those clauses in a contract that they are
    entering in, but SBA wants to work to makes sure that the
    policies are set up to ensure compliance and robust oversight
    and work with those agencies to make sure that they have the
    tools necessary to do that.
        Ms. Chu. And Ms. Kendall, is that your understanding?
        Ms. Kendall. My understanding is that in the agreement
    between SBA and the agency, at least with Interior, the
    contracting officer is, in fact, ultimately responsible. I
    think what we were pointing out in the US2 example, however,
    was that there was some review conducted by the SBA that
    indicated that US2's plan to come into compliance was adequate.
    While US2 never did come into compliance but the contracting
    officer took that signal by SBA as an okay to continue with the
    contract. I think that is where the confusion lay.
        Ms. Chu. And how could that be corrected?
        Ms. Kendall. Well, I think just clearer communication
    between SBA and the contracting officers would be one of the
    very simple ways in this case. And I can really only speak on
    this case. And I think there was responsibility on both sides
    quite frankly for the contracting officer to push back in their
    communications with SBA and SBA to be perhaps more clear in
    terms of what they meant by ``the plan was sufficient.''
        Ms. Chu. Okay. Ms. Kendall, last year your office found a
    U.S. Geological Survey contract that did not contain the
    subcontracting limitations provisions and this clause is there
    to ensure that small business contracts do not act as a pass-
    through to large firms. So why is this clause being left out of
    contracts?
        Ms. Kendall. I am not familiar with the instance that you
    are referring to but I would say probably human error. The
    contracting officers are, like many people, working as hard as
    they can with the tools that they have, but many of them are
    overworked, they have more responsibilities in terms of
    oversight than sometimes they can actually carry out, and
    again, I do not know which case you are talking about but I
    would guess that it was probably just a matter of human error.
        Ms. Chu. This was in the October 2010 IG Report by the
    Department of Interior which said that the agency was not
    including the limitation on subcontracting clause in their
    contracts. And it seems like it should be standard practice.
        Ms. Kendall. It should be. Yes, you are right.
        Ms. Chu. And not something that is due to human error but
    something that should be a practice.
        Ms. Kendall. No, I absolutely agree. Again, I am sorry that
    I am not familiar with the report that you are talking about.
    Perhaps what I could do is review it after the hearing and get
    back to you on what the result of that report was. I would hope
    that we recommended that there be some sort of process or a
    checklist where this is always included. And I am just not sure
    if USGS had done that but I can certainly get back to you about
    that.
        Ms. Chu. Okay. Also in your testimony you discuss how US2
    broke down its own costs and the costs of its subcontractors
    for only some categories. And it hid additional subcontracting
    costs where they were actually doing less work than was
    required. And part of the reason why it seems so easy to
    circumvent the system is because the accounting and other
    measures are also so complex. How could we simplify the system
    so that anyone can figure out whether or not someone is in
    compliance?
        Ms. Kendall. Ooh, I wish I could answer that question for
    you. Perhaps the reporting process would need to be simplified
    and clarified. In this case, and I am really only familiar with
    what happened precisely in this case, but in the category of ``
    Other Direct Costs,'' US2 was putting subcontractor labor costs
    into that category. A careful review of this by my office
    revealed that, in fact, the individuals that were contained in
    other direct costs were subcontractors, but it would not be
    apparent necessarily to a contracting officer without some
    greater scrutiny. So there may be a way to simplify the other
    contract or the other direct costs category or require them to
    break it out more thoroughly where it would become more
    apparent to the contracting officers.
        Ms. Chu. Mr. Jordan, do you have something to say on this?
    How could we better fix the reporting system to root out fraud?
        Mr. Jordan. Sure. I think there are three things that I
    would say. One is ensuring that contracting officers and all
    folks involved in the contracting process are aware of what
    their responsibilities are. So I mentioned that we came out
    with new regulations yesterday that clarify a lot of that
    responsibility and making sure that everyone is aware and
    trained on that is going to be very important. The second thing
    is making sure that we are doing everything we can to drive
    efficiencies, especially leveraging technology and systems to
    help contracting officers do their job.
        I mentioned in my opening statement that the Electronic
    Subcontracting and Reporting System, the Federal Subcontracting
    (FSRS), Subcontracting Reporting System, as well as some of the
    other databases and systems involved in federal contracting are
    all being combined into one system for award management. So let
    us give contracting officers a single point of entry where they
    can check a number of these things systematically.
        Third is we really need to look at the resources dedicated
    to the contracting officer workforce. You mentioned in your
    opening statement that contracting spend has doubled. Well, the
    contracting officer workforce charged with getting those
    contracts out has not doubled over that same period, and so it
    is very difficult for these folks, as Ms. Kendall said, to keep
    pace with all the things that we would like them to do. You
    know, we are very clear in the 8(a) regulations and in other
    regulations that it is applied to limitations of subcontractors
    responsibility of the procuring agency, and in a set-aside
    contract you want obviously to make sure that that clause is in
    the contract and all these types of things. We need to make
    sure that we are staffed appropriately, trained appropriately,
    and we are giving them all the tools so they can do that.
        Ms. Chu. Mr. Jordan, let us talk about the issue of
    penalties. Last year, GTSI was suspended for performing the
    majority of work for several small business prime contracts,
    but GTSI was suspended only for a couple of weeks. And yet, the
    small businesses that were involved remained suspended for
    about a year. I know that firms should face consequences but
    why is there this disproportionate treatment for small
    businesses?
        Mr. Jordan. Well, over the last two and a half years we
    have had five proposed debarments and eight suspensions for
    issues involving subcontracting. And 10 of those involved the
    prime contractor violating limitations on subcontracting. So
    there are enforcement actions happening. When it comes to the
    specific case that you have referenced, I am not the agency's
    suspension department official so there is only so much that I
    can comment on. But what I can say is the decisions that you
    reference are those of the agency's suspension debarment
    officials, so if they made the decision to suspend GTSI a year
    ago, subsequently suspending EG Solutions and MultimaxArray
    FirstSource 11 months ago, and to the extent that those
    decisions could be made public, they are all posted on our
    website.
        The letters make clear that the agency evaluated the
    evidence and acted decisively based upon everything that we had
    at the time. So I am not free to comment further about why
    additional actions did or did not occur at the time, but I can
    say that the inspector general is continuing to investigate
    GTSI, EG Solutions, MultimaxArray, on issues arriving out of
    their--arising, excuse me, out of their involvement in these
    various contracts. And I would direct further questions on that
    case and on that front to our inspector general.
        Ms. Chu. Okay. I yield back.
        Chairman Mulvaney. Thank you, Ms. Chu. We now turn to Mr.
    West from Florida.
        Mr. West. Thank you, Mr. Chairman, and Ranking Member,
    thank you.
        This is a very appropriate subject because just last week I
    was down in the District talking to the Brower County Small
    Business Advisory Council. And two of the critical issues they
    brought up are relating to the subject here today.
        The first issue is there is a federal building that is
    being constructed in Miramar, Florida, and for whatever reason
    the prime contractor in that federal building has not gone to
    look at any of the local subcontractors for opportunities for
    them being there. Is there some system in place to make sure
    that when we have these type of contracts down there that we do
    look at the local subcontractors because this does come back
    to, you know, jobs and opportunities within a local environment
    before we go to outside sources.
        Mr. Jordan. So in terms of ensuring that small businesses
    are a part of it, the prime contract will have to submit as
    part of--a material part o the contract, the subcontracting
    plan that says, ``By percentage basis, typically how they plan
    to allocate their subcontracting among small businesses and
    various groups of small businesses.'' And SBA reviewed about
    5,0000 of those plans last year.
        Then in terms of which businesses they use, that, as long
    as it falls into compliance with the contract terms, is really
    up to the prime contractor. Many of them, as they are
    formulating the solicitation, engage small businesses to
    understand exactly how much they are going to be able to
    subcontract to which types of small businesses. Others have a
    general idea of what small business representation is in those
    industries and sets aside a percentage and then goes and looks
    for small businesses to fulfill that percentage. And at that
    point in either of those cases that they are looking for
    subcontractors, we work with our SBA district offices and some
    of our resources partners to try to make small businesses aware
    of these opportunities and make both the agency and the prime
    contractors aware of the great small businesses in all of those
    industries. In terms of forcing them to utilize businesses from
    a particular location, other than certain types of contracts, I
    am not aware of a provision that allows or forces them to do
    that.
        Mr. West. Right, yeah, I am not talking about forcing them
    but at least making sure that the opportunity is provided to
    the local small businesses.
        Mr. Jordan. Absolutely.
        Mr. West. The second point was very near and dear because
    there are a couple of people on this council that were about to
    lose their businesses because obviously what happens, you know,
    a prime contractor comes down, gets a small business
    subcontractor. Let us say it is an 18-month, 24-month project.
    Well, you bring in the small business contractor. They do what
    they are supposed to do in the three- to four-month period
    within that overall larger project. Some of these small
    businesses, like I said, two people there on this council have
    been affected. Their payment was being held up even though
    their work had been completed, it had been certified, it had
    been signed off, and their payment was being held up until the
    end of the entire project.
        Now, you know, small businesses have a very small margin
    upon which they can operate. You know, we cannot continue to
    allow that to happen to them because that puts them in very
    untenable positions. Is there some kind of means by which we
    can, you know, eliminate that from happening or, you know, make
    sure these prime contractors are meeting their obligations, you
    know, within a 90-day period after work being completed? And is
    there an enforcement mechanism in place?
        Mr. Jordan. Yeah, I completely agree with you, Congressman,
    that the issue of payment and cash flow is of paramount
    importance right now. A lot of these small businesses are
    really going pay period to pay period and need that cash as
    quickly as possible. There are two things that we have done
    already, very recently. One is, as you heard the president say
    in his address to Congress, and later saw the Office of
    Management and Budget release, when it comes to small business
    prime contractors, we have cut the time in which the government
    takes to pay small business prime contractors in half, from 30
    days down to 15 days. And we are working aggressively to make
    sure that is happening across the board.
        When it comes to subcontracting, just yesterday SBA
    released regulations that say if a prime contractor is
    delinquent, which we have defined as--after substantial input
    and public comment period--defined as more than 90 days late,
    just like you said, in paying its small business subs. And
    assuming the prime has been paid, then they need to report that
    to the contracting officer and we are going to put that in the
    past performance database so that it can be a mark against them
    for any future awards to really give them that monetary and
    performance incentive to make sure they are doing it.
        We are not done. There are more things that we are looking
    at to try to accelerate payments to small business
    subcontractors, much like we worked hard to do so at the prime
    contractor level. There are a few more issues but I totally
    agree. And I would point to those things we have already done
    and say we are looking to do more.
        Mr. West. Thank you very much. I yield back.
        Chairman Mulvaney. Thanks very much.
        Ms. Ellmers from North Carolina.
        Ms. Ellmers. Thank you, Mr. Chairman. Thank you both to our
    panel.
        Ms. Kendall, along the lines of the US2 situation, I know
    that we were talking about other direct costs. Do you know
    why--I mean, were they looking at those direct costs? Were they
    not? Do you have any insight into that?
        Ms. Kendall. I really do not, Congresswoman.
        Ms. Ellmers. And then, too, you had stated that some other
    Recovery Act contracts also had problems in meeting
    subcontracting limits. Can you explain what those would have
    been?
        Ms. Kendall. These were very much the same. In
    construction, the requirement is significantly less than in
    services. It is a 15 percent requirement. But we found in the
    handful of National Park Service construction contracts that we
    looked at, that the same problem was occurring. They just
    simply were not conducting the amount that they were supposed
    to be.
        Ms. Ellmers. And so just in listening to your discussion
    and your comments it sounds to me like it has more of a
    simplification of reporting, things like that. How can that be
    improved? What are your thoughts on that? How can we get more
    information and everybody onboard doing it in a, you know,
    routine manner?
        Ms. Kendall. I wish I knew the answer to that. My
    experience in this is looking at it from an oversight body and
    really looking at how they are complying with the requirements.
    I do not feel like I have the expertise myself to really
    respond to that.
        Ms. Ellmers. Okay. I appreciate that. Thank you.
        And Mr. Jordan, you know, in talking with the situation of,
    you know, basically zero tolerance for fraud, waste, and abuse,
    and looking at the issues that are facing us right now with
    some of those things that have been developed now and some of
    the fraud that is going on, if a small business is not
    compliant, what measures are available right now? I mean, I am
    assuming that there are things in place right now for
    enforcement. And what happens to a contracting officer if they
    are failing to meet those requirements?
        Mr. Jordan. Sure. So the contracting officer would ask, you
    know, issue a show cause letter to the small business concerned
    saying, you know, show me how you are or will be in compliance
    with the limitations on subcontracting. Again, one of the
    challenges there is that you have got a contract that goes for
    a period of time. They may be below the 50 percent at one point
    in time but by the end of the contract they have a clear and
    rational plan to get above it. So it is not just a snapshot in
    time; it is what is your plan to at the end of this contract
    meet that limitation on subcontracting.
        That being said, there are, you know, certainly analytical
    and common sense evaluation factors that the contracting
    officer is looking for. If it, you know, is clear that they
    will not be meeting that contract requirement, you know, you
    can terminate the contract and there are a host of things the
    contracting officer could do. If it is something that moves
    more into the abusive or fraudulent area, then SBA may get
    involved as things are referred to us. And that is where we
    would take things such as suspension and debarment from federal
    contracting. And these are real tools. As you have seen, you
    know, the reason that suspensions, I believe, are so important
    is because the investigations into these bad practices can
    take--it is not a week's or even a month's thing; it can be a
    year's or years' things. So we try to act when we have clear
    evidence on a suspension as quickly as possible.
        For example, in 2008, SBA had done zero suspensions in this
    area. 2009, one. And then 2010, six. And then 2011, 15. So we
    really are utilizing this tool in an aggressive way and being
    serious about that zero tolerance. Then, we give all of the
    things that we find to an inspector general and to the
    Department of Justice so they can further investigate and take
    the more serious actions if appropriate.
        Ms. Ellmers. Thank you very much. And I give back the
    balance of my time.
        Chairman Mulvaney. All right. Thanks very much. As you can
    see we have got about five or six minutes left to vote. We are
    going to go ahead--for those of you who are not familiar with
    the system, if you want to know when we are going to be back,
    keep an eye on the TV which we will leave on. And when it gets
    to ``on passage'' that means we will be back about 15 minutes
    after that. So if you want to poke your head in from time to
    time, that will be great. I expect that we will be back
    somewhere around 11:15. That is what we will be shooting for.
        So what we are going to do is recess here for about 45
    minutes and we will be back as soon as we possibly can. I
    apologize for the delay. Thank you.
        [Recess.]
        Chairman Mulvaney. All right. We are going to call the
    meeting back to order, which means I have to do that. And
    again, I apologize.
        Ms. Kendall, I understand your time constraints and I
    assure you we will be out of here in just a few minutes and
    move on to the next panel.
        My question--it is always difficult to pick right back up
    where we were when we have an hour break, but I want you all to
    help me understand the process. Okay? I run a small business
    but I have never done any government contracting. Let us say
    that I am one of these 8(a) organizations. I will come back to
    that in some more detail later but let us say that I am on one
    of these big contracts. Walk me through the process, either Ms.
    Kendall, I think this is, to begin with Mr. Jordan, on how I
    get the contract, briefly, but then more importantly, how you
    make sure that I am doing what I am supposed to be doing, both
    in terms of me as a contractor and then my relationship with my
    subcontractors.
        Mr. Jordan. Sure. So your first step in the 8(a) context
    would be application and certification in this business
    development program. So now you are in the program and you want
    to compete for contracts. In the sole source context that you
    talked about, the agency would identify a contract that, you
    know, they had a particular need, they were going to contract
    out, and it was suitable for the 8(a) program. They did their
    market research. They knew there were 8(a) firms out there. It
    was the best small business program to use. So they would
    contact a district office or maybe they knew about it--there
    are multiple ways that this can happen. But they could talk to
    the district office and say, hey, we know you have an 8(a)
    portfolio with various firms here or we know that this firm can
    do it, what have you. The district office, the SBA district
    office would then evaluate, hey, can this firm, you know, does
    it have the capacity? Does it jive with their business
    development plan that they submitted to us? Yes, it does.
        Okay. That contract can go forward and the agency would
    then award on a sole source basis, assuming it is within the
    various limits, this contract to that firm.
        So over the period of that contract term, every year it has
    an annual review with SBA as a firm, not just on that contract
    but on everything they are doing. How are they improving
    against their business plan? Are they achieving their targeted
    objectives? All those types of things, one of which would be
    looking at what contracts they performed against. Then, in
    terms of subcontracting out, in that contract that they had
    entered into it would have limitations on subcontracting. So,
    you know, if it is a services contract it would say that that
    small business, because this was a set-aside, has to perform at
    least 50 percent of the labor costs with its own----
        Chairman Mulvaney. Let me stop you there.
        Mr. Jordan. Please.
        Chairman Mulvaney. Some of the things that I read say I am
    supposed to be able to--I would not know how to allocate that
    in my business. We did not use the cost accounting system. So
    tell me how we get around that hurdle? How do I satisfy that
    requirement? That 50 percent requirement?
        Mr. Jordan. We talk a lot about when we are engaging with
    small businesses and getting them up to speed to sell to the
    government about being contract ready. That is a phrase that
    you hear a lot. And what that means is--a lot of things--but
    one of which is you have to have all of the systems in place,
    approved systems in place to do business with the government.
    So it is very clear what the responsibilities are for the
    agency in terms of oversight and in terms of the small business
    to make sure that they can prove that. Because at any time it
    is a clause in the contract. The contracting officer can say,
    show me the documentation that says you are in compliance.
        Chairman Mulvaney. Let me ask a quick question, Ms.
    Kendall, because Ms. Chu was asking an interesting line of
    questions about the examples that you--one example that you
    gave where there was no subcontracting language in the
    contract. And she asked if there was a standard procedure. And
    I guess she is asking--what I am asking in a different way is,
    is there not a standard contract? Is it preprinted or is it
    written from scratch every single time that Mr. Jordan just
    described that it gets let?
        Ms. Kendall. I am going to have to defer to Mr. Jordan on
    that one. I truly do not know the answer to that.
        Chairman Mulvaney. Okay. That is fine.
        Mr. Jordan. There are some differences where clauses get
    inserted or taken out or whatever. But in the set-aside
    context, even if, you know, the example that Ms. Chu raised
    earlier it happened. And if Ms. Kendall's supposition proved to
    be correct that it was a contracting officer, Erin. We do not
    care. The fact that it was a small business set-aside means
    that that limitation on subcontractor requirements. Whether or
    not the contracting officer forgot to include that or did not
    cut and paste correctly, it does not matter in terms of the
    law. You still have to abide by limitations of subcontracting
    because it is a set-aside and all small business set-asides
    must----
        Chairman Mulvaney. I will stop you again, Mr.--I have got
    news for you. You and I sign a contract for me to do something
    and it is not in the contract, I am pretty sure I do not have
    to do it.
        Mr. Jordan. Our position has always been for all small
    business set-asides the regulations are very clear that the
    limitations on subcontracting exist. So whether or not they
    included that, it is applicable to that small business set-
    aside.
        Chairman Mulvaney. The staff tells me that may be the case.
    It is something unique to small business contracting. So again,
    that shows you what my law degree is worth.
        Mr. Jordan. I am not a lawyer.
        Chairman Mulvaney. All right. So now we are in this
    process. You have signed the contract with me. I am an 8(a)
    provider. I have got this contract. It is under $6.5 million. I
    am not an Alaska Native. How often do you come to make sure I
    am in compliance and how often do I have to show to you, prove
    to you that I am in compliance?
        Mr. Jordan. So for the contracting officer, who is really
    monitoring that contract----
        Chairman Mulvaney. He is an agency, right?
        Mr. Jordan. Yeah. They can do it periodically. They can--if
    they have any reason to believe you are not in compliance. And
    then typically it is semiannually or annually that they would
    check, you know, if it is a firm, fixed price, you know, sole
    source contractor. In this case, then the contractor, the 8(a)
    from you, would have to show that you have a plan that you are
    going to meet the limitations of subcontracting for that whole
    contract. And so if you dip below the 50 percent, but you are
    saying, yeah, we know, but here is why we are. At the end, we
    are going to be back above it. And then that can be acceptable.
        If it is an IDIQ, one of those indefinite delivery,
    indefinite quantity contracts where you do not know exactly how
    much money you are going to get over the life of that contract.
    You are supposed to always be above the limitation on
    subcontracting.
        Chairman Mulvaney. Okay. I have got this contract. Listen,
    it is going to be $4.5 million. She has looked at it and says,
    okay, it is going to be $4.5 million. And it is not; it is $2.5
    million, really. And what I have done is I have inflated the
    value of this deal by $2 million. And you see where I am going
    with this. I am not going to ask you specifics about the case
    that is ongoing, the Yacht Tech, but let us say that I did
    that. Let us say I did exactly what these gentlemen are accused
    of doing. And instead of telling you, giving you a number of
    $2.5 million, I told you it was $4.5 million and you said,
    okay, that makes sense. Where are you going to catch--how are
    you going to catch my fraud in this process?
        Mr. Jordan. There are multiple ways in which these frauds
    can be caught. Does it become challenging in a generic
    situation where you have a contracting officer, a
    representative of the prime contractor, and a representative of
    the subcontractor all in a hypothetical sense engaging in
    fraudulent activity? Yes. But that is why there are so many
    different points at which people are checking this.
        Chairman Mulvaney. But even if the contracting officer is
    not part of this deal, okay, maybe he just thought the $4.5
    million was a reasonable number, is not one of the standards he
    has to establish is that the government is being harmed by what
    he sees?
        Let me find the research. Hang on a second. There is a list
    of reasons that--where was it? Was it the memo? Contracting
    officers need to prove that the pass-through of the work harmed
    the government before most agencies take action against the
    companies. However, if I am delivering exactly what I promised
    to deliver, how does he meet that threshold? How does he prove
    that I am in noncompliance?
        Mr. Jordan. So it depends on exactly what is going on. If
    it was just a case of inflated pricing or things of that
    nature, the government before the contract should or may have
    come up with an independent government estimate of what they
    expect it to cost. And if they expected it to be that inflated
    price and it was, then that would be more difficult to prove.
    If it was coming in above what they thought, they would ask a
    lot of questions and ask for documentation, ask for proof. And
    that is why you have seen the Office of Federal Procurement
    Policy push agencies to go more towards these from fixed-priced
    contracts because when you are all in agreement at the outset
    of what this is going to cost for you to provide me the goods
    and services that I have asked for, then it is hardest to play
    those games with inflated costs and try and hide that.
        Now, the contracting officer would look at these
    limitations of subcontractors and say, how much is the prime
    actually performing? So is it the sub who is inflating costs
    because they are then getting passed back through the prime?
    Well, that is going to hurt that limitation because the
    subcontracting dollars will go up. The amount the prime--the
    percentage the prime is doing would go down and again, that
    would have to stay. So that is some of the ways.
        And then in the 8(a) context, you are going to have an
    annual review and we are going to be talking with you and your
    firm to make sure you are operating within the business plan.
    There is a whole host of checks we do, too.
        Chairman Mulvaney. I guess it strikes me that my example of
    inflating a $2.5 million contract to a $4.5 million might raise
    some red flags because it is a relatively large percentage, but
    when you get to the larger contracts, especially ones with the
    Alaska Native companies, the potential for fraud would grow.
    Would it not? Because the difference between a $2.5 million and
    $4.5 million contract is a relatively sizable chunk. The
    difference between a $100 million and a $102 million would not
    stand out as much, would it?
        Mr. Jordan. Certainly, you know, the percentage--the
    percentage difference based on the overcharging in that larger
    example is less, but the size of the contract would probably
    indicate that there is more attention being paid to it by the
    agency overall. And there are two pieces to your question,
    really, or to my answer to your question. One is the
    surveillance and monitoring. So making sure that folks at the
    agency, and when SBA does surveillance reviews and compliance
    reviews and these types of things, are looking for this type of
    behavior. And then making sure the enforcement is there to not
    just punish the bad actors we catch but disincentivize anybody
    from trying.
        So there are some new proposed regulations that will go
    out. And I have talked about them in terms of the Jobs Act
    statute that create them around presumption of loss. So in the
    past, and this is where that `` harm no government'' piece
    really came in, in the past if you misrepresented your size or
    status to win the award, we would suspend, debar, maybe pursue
    a False Claims Act action against you through the Department of
    Justice. But it was hard if the government got exactly what we
    wanted for a fair price, for us to go after you significantly
    because you lied about being a service-disabled vet. It is
    really that second place finisher, the true wounded warrior who
    should have got a contract that was harmed. Well, now, it does
    not matter. That stuff does not matter. The law clearly states
    if you lie about your size or status to win the award, we can
    sue you civilly for the full amount of that award and keep what
    you provided, and still do the suspensions and termination
    debarments.
        Chairman Mulvaney. In the last 12 months, how many times
    have you all done those things?
        Mr. Jordan. Well, this presumption of law is new so it is
    still being stood up. In terms of the suspensions and
    debarments, we stepped it up quite a bit. We have done--more
    referrals for suspension and debarment have happened in the
    last two years than the previous 10 years. And I mentioned
    before the suspension tool, which I think is a really important
    tool because it is something where SBA can take action while we
    are waiting for an investigation to run its course and we want
    due process to happen and we want any accused parties to get a
    full investigation and due process. But we can take the
    suspension action. In 2008, there were zero. In 2009, there was
    one. And then six in 2010, and then 15 this year. So we are
    stepping up the utilization of that tool when we think it is
    appropriate.
        Chairman Mulvaney. Does the use of that tool partially
    explain--I guess it cannot fully explain--does it partially
    explain why no fines have ever been issued? The liquidated
    damages provision? I heard that in my opening comment and I was
    actually reading the details during the break. And it is
    actually worse than I thought. In 30 years, there is no record
    of any company paying liquidated damages. Ever.
        Mr. Jordan. So when I started two and a half years ago and
    we started to work on or continue to do work that was happening
    on getting small businesses more subcontracting opportunity,
    preventing some of this ``bait and switch,'' all these types of
    things that were now--we just came out with some of the
    proposed regs on yesterday, that was one of the areas we
    pushed. The subcontracting plays a material part of the
    contract. So if you were violating that, you were violating the
    terms of the contract and there is a whole host of actions,
    including liquidated damages.
        Well, the problem that I am told by agencies is that you
    can drive a truck through what it means to make a good faith
    effort to meet the limitations or meet the subcontracting plan
    requirements. We have now shored up through these new regs
    whose responsibility it is, what some of the things that you
    should be looking for are, and what some of the penalties are.
    But you are right; that is--I have never heard of anybody
    actually using----
        Chairman Mulvaney. I will make you a deal. If you want to
    come up with some suggestions on how to close those loopholes
    and this Committee will take up those things. Because our
    research indicated the same thing, which is it is very
    difficult for you all to prove. There are safe harbor
    provisions in the good faith requirements, and if we need to
    start closing some of those, let us get together and see if we
    can do that.
        I am also--we will take up probably another day. It is a
    relatively minor issue I know for--in terms of its footprint
    but it seems like these Alaska Native companies really wear
    some more tension. Does the SBA have an official position on
    that policy as to why ANCs get special treatment?
        Mr. Jordan. Well, the provisions that allow those types of
    things are all statutory part of the Alaska Native Settlement
    Act and fall on amendments to that. So it is not something that
    SBA has a position on one way or the other, but what I will say
    is a point to the regulations that we came out with in March
    where we really--and we went around and did tribal
    consultations and talked to the community about how to get
    these right, but one of the key provisions in that
    comprehensive revision, the 8(a) regulations deals with the
    joint ventures. And that was a place where some of the actions
    that were happening before really did not pass the smell test,
    and we have tightened those quite a bit about when you form a
    joint venture between the 8(a) firm and a mentor, a larger
    business, what percentage of the work the 8(a) firm has to do
    and what are some of the subcontracting rules there. And I am
    proud of what we did there to move as quickly as possible but
    also thoughtfully to close any loopholes there.
        Chairman Mulvaney. All right. There was--just a couple more
    questions. There was a Washington Post story about a year ago
    and in that story it pointed out the SBA had been relying on
    three employees and paper records in Anchorage. I am going to
    spend more time another day on these ANCs but I want to ask
    this one question. That you all were using three employees and
    paper records to track some of these companies and there was $6
    billion worth of sole source contracts. Tell me more about
    that.
        Mr. Jordan. Sure. So I have had the privilege of testifying
    in front of Congress.
        Chairman Mulvaney. By the way, that does not mean I believe
    everything that I read in the Washington Post.
        Mr. Jordan. No, that is all right.
        Chairman Mulvaney. They are here someplace.
        Mr. Jordan. No. Yes. So I certainly welcome the
    conversation around native entities and the community benefits
    that they bestow versus the individual business development of
    the traditional individually-owned 8(a) firms.
        When it comes to our operating and overseeing the program,
    our inspector general raised some concerns, had, you know, six
    recommendations on things that we need to look at. Well, by the
    time I testified on that report, we already fixed four and we
    subsequently fixed the other two. We agreed, and have taken
    care of, increasing staffing, increasing training on how do you
    process and oversee the native entity applications, which are
    much different than when an individual applies or is in the
    8(a) program. And what are the rules that govern the behavior
    that do fall within our regulatory authority?
        Chairman Mulvaney. Thank you, Mr. Jordan.
        Ms. Kendall, very briefly. Come back to the US2 issue. My
    understanding is that they had contracts of about $250 million
    but were running out of a guy's house essentially. How did you
    all get involved? Help me understand the process as to where
    the inspector general's office got involved in this
    investigation.
        Ms. Kendall. We got involved in two ways. We actually
    conducted--we were conducting a joint review with the
    Department of Defense IG, which is mandated for them to do but
    because it was Sierra Vista's Contracting unit, we joined with
    them and found this contract and flagged it as a problem. We
    also----
        Chairman Mulvaney. What about the contract made you flag
    it?
        Ms. Kendall. I am not sure I can tell you right now.
        Chairman Mulvaney. Fair enough.
        Ms. Kendall. But we also got a referral from one of the
    deputy assistant secretaries where they had identified this as
    a potential problem. So we looked at it both as a result of the
    audit where this came to light for reasons I will be glad to
    tell you later, but then we also--the entity itself identified
    a problem with this particular contract and asked us to take a
    look at it.
        Chairman Mulvaney. Is it fair to say that that would have
    been an inquiry within the agency that was initiated by the
    contracting officer?
        Ms. Kendall. I do not know if it was initiated by the
    contracting officer or someone in the chain of command, but
    somebody internal to Interior identified it.
        Chairman Mulvaney. And I guess my question is this--did it
    happen--let us take your independent investigation off the
    table. I want to focus on the one that came from the deputy
    director. Did that happen by accident or did it happen the way
    it is supposed to happen?
        Okay. All right. And so you got involved with it and then
    what happened next? You are doing your independent
    investigation. You are also getting an inquiry from the agency
    itself.
        Ms. Kendall. Yes.
        Chairman Mulvaney. How did you come to find out that this
    was a problem?
        Ms. Kendall. We went in and looked at their records. We
    interviewed the contracting officer. We interviewed the entity.
    It was clear it was a problem on many, many levels. And I guess
    I feel like I maybe missed an opportunity with the
    congresswoman when she asked a question about fixing. And I
    refer to Mr. Jordan's answer just a minute ago. I think on all
    fronts we could do better to look at the capacity of these
    companies. In this case it was a company of one or two people.
    And I have only heard, I do not know for a fact, that it was
    run out of someone's living room, but previously they had never
    done more than $100,000 a year in business. To suggest that
    they had the capacity to do 50 percent of a $250 million
    contract is----
        Chairman Mulvaney. Mr. Jordan, are you familiar with the
    US2 situation?
        Mr. Jordan. I have read the inspector general's report just
    in preparation for this conversation but not in depth.
        Chairman Mulvaney. To the extent you can then, here is the
    question I am hoping to get an answer to--why were they allowed
    to get as far as they did? Why was a company that had never
    done more than a couple hundred thousand dollars worth of
    contract end up with such a huge chunk? What part of the
    process broke down to here that company could get as far along
    as they did?
        Mr. Jordan. I am not familiar enough with this case to
    speculate as to exactly where it broke down.
        Ms. Kendall. Well, and I am not pointing fingers certainly
    at SBA. I think that the Sierra Vista Contracting folks should
    have asked the question themselves, but it is----
        Chairman Mulvaney. Is that not part of the standard
    procedure though? I mean, is there not a form that says ``Have
    you ever done any other government contracting? If so, how big
    were they?''
        Ms. Kendall. There is past performance that accompanies
    ``Who Wants to Do Business with the Government?'' It attaches
    to their application. I am not familiar enough with the entire
    process to say that it is part of a process or not but it seems
    to me that it is a practical thing that somebody would want to
    ask the question or would look at the capacity of a company to
    say, hmm, not sure that they could do this.
        Chairman Mulvaney. I recognize you are not familiar with
    this exact situation but that has got to be part of the past
    performance, is it not?
        Mr. Jordan. Yeah. The contracting officer will make what is
    called ``responsibility determination'' that this prime
    contract is responsible or capable of performing on the
    contract and abiding by all of the clauses. And in the 8(a)
    context, it is a business development program so we want them
    to grow and that sort of thing. But, so SBA will look at that
    and agree with them. But in this specific case I am not sure.
        Chairman Mulvaney. Thank you all very much.
        Mr. Jordan, I am serious about those suggestions. If the
    SBA wants to start looking at a way to close some of those good
    faith, safe harbor loopholes, it is certainly something this
    Subcommittee would be interested in taking up in the upcoming
    year.
        So Ms. Kendall, thank you very much. I understand you have
    another time commitment. Thank you all both.
        We will go ahead and seat the second panel now and move
    through that as quickly as we can.
        Mr. Jordan. Thank you.
        Chairman Mulvaney. Thank you very much again to everybody
    for waiting.

    STATEMENTS OF JENNIFER BISCEGLIE, PRESIDENT, INTEROS, ON BEHALF
     OF WOMEN IMPACTING PUBLIC POLICY; JAMIE BORROMEO, PRESIDENT,
                       THE E & J COMMISSION, LLC

        Chairman Mulvaney. The second panel, I am going to
    introduce Mrs. Bisceglie, who is, excuse me, Jennifer
    Bisceglie, who is the owner of Interos, a small women-owned
    supply chain and logistics company. Ms. Bisceglie is testifying
    on behalf of Women Impacting Public Policy. And Ms. Chu is
    going to introduce our other witness.
        Ms. Chu. Yes. I have the honor of introducing Jamie
    Borromeo, and she is the president of E & J Commission, a
    federal contracting research and strategies firm which is based
    in Washington, D.C. And she is the co-founder and CEO of
    Generation Drive Entrepreneurs Network, which is a national
    non-profit that mentors young adult start-up firms. She has
    consulted with over a dozen Fortune 500 senior executives,
    CEOs, and community-based organizations on issues of economic
    development, public contracting, supplier diversity, and public
    policy. And also is a former executive director of the National
    Council of Asian-American Business Associations. Welcome.
        Chairman Mulvaney. Thank you. Ms. Bisceglie. We ask you to
    begin. And again, five minutes, give or take. When you see the
    red light on it means your five minutes is up.

                    STATEMENT OF JENNIFER BISCEGLIE

        Ms. Bisceglie. Chairman Mulvaney, Ranking Member Chu, my
    name is Jennifer Bisceglie. Thank you for inviting me to
    testify today on behalf of Women Impacting Public Policy
    (WIPP), a non-partisan organization that represents nearly one
    million women business owners with a coalition of 59
    organizations that support its policy objectives. I serve as
    chair of the board of WIPP, and I am also president of Interos
    Solutions, which is a small, women-owned company specializing
    in integrated logistics strategies, specifically as it relates
    to cyber security and supply chain risk management. Currently,
    100 percent of our billable work is subcontracting in the
    federal government sector.
        Just two years ago, my company was growing, we had 10
    employees, and we were very optimistic about our work in the
    government. Unfortunately, we had a development transpire with
    our largest prime contractor. In the span of about two months,
    they released five of my people, which in fact, cut my business
    in half. We had no recourse. The company had cut off any
    relationship we would have had with a contracting officer or
    with a government program manager. The only relationship was
    with the prime. At that point, I could not point to any other
    violations in the subcontracting plan because those were never
    shared with us. In short, there was really nothing we could do
    about the situation and we really felt pretty powerless. If
    there is a silver lining that I could share today, it really
    forced us to diversify the prime contractors and customers that
    we were working with, and we are now actually seeking prime
    contracts on our own. But it is not really a pretty solution,
    if you will, and it has been a pretty painful experience.
        The title of this hearing is Subpart Subcontracting, which
    encapsulates the experiences of many members who do
    subcontracting in the federal government. Many of us are happy
    for the work but frustrated when it comes to the limited rights
    that our small businesses have with respect to carrying out
    that work. The Small Business Jobs Act of 2010 contained an
    important provision which WIPP advocated for--a requirement
    that prime contractors must use those subcontractors listed in
    the subcontracting plans. We refer to this as ``if you list us,
    use us.'' We are interested in knowing whether this requirement
    has actually made any tangible impact within the agencies.
        While we are on the subject of the subcontracting plans, we
    wonder if prime contractors actually formally filed those
    subcontracting plans. Does anyone in the government actually
    read them? And if they read them, how or are they enforced at
    all?
        WIPP also suggests that the federal government should
    require disclosure of the portion of the subcontracting plan as
    it relates to that sublist. The government should require the
    primes to share that information with the subcontractor upon
    award. If the subcontractors do not have access to these plans,
    how can we ever be sure if the prime is actually compliant?
    WIPP does not believe the answer is to do away with filing the
    subcontracting plans; we think the answer is really better
    enforcement of those plans. Reminders are commonly used tools
    and calendaring software, so the solution we would think would
    be something just as simple, alerting the affected parties or
    the monitoring parties that their plan has not been filed or
    updated.
        A more fundamental problem is the confusion surrounding
    limitations on subcontracting contained in the Small Business
    Act. First, we actually learned something in preparing this
    testimony because we as small businesses are repeatedly told
    that prime are required to perform 51 percent of the work. Upon
    reviewing the law, we actually found that the actual percentage
    is only 50 percent. Let me just say that if the agencies do not
    understand the rules, small businesses are certainly not going
    to understand them or argue with that. While we definitely
    assume that and accept that our responsibility as federal
    contractors are to read and understand the FAR, we are, after
    all, running businesses and the rule just does not really make
    much sense.
        In the case of service contracts, the prime is actually
    required to perform 50 percent of the cost of contract
    performance incurred for personnel with employees of the prime.
    As we interpret this, in order for us to be compliant with this
    requirement we would actually have to know our subcontractors'
    personnel costs to make that calculation. No business that we
    know is really going to share that information, whether it be a
    commercial contract or a government contract. Second, this
    requirement basically requires a cost-based accounting system
    to monitor that many small businesses are not required to use
    and therefore, we do not use because of the cost.
        WIPP suggests that the Subcommittee take a look at amending
    the law to require 50 percent of the price of the contract, not
    the cost of the contract. In addition, it is our view that in
    the case of small business set-aside contracts, 50 percent
    should be calculated by including all of the small businesses
    on the contract, not just the prime.
        While we are on the subject of subcontracting plans, again,
    we note that there really are only two databases in which
    subcontracting plans are entered--FSRS and ESRS. It seems to us
    that the two databases are collecting much of the same
    information and really do not communicate with each other. This
    strikes us as an example of wasteful effort on the part of the
    government and the businesses that file the paperwork with
    those systems. We are unable to identify any penalties for non-
    compliance in either system as well.
        In conclusion, subcontracting is a good way for women-owned
    businesses to get involved in government contracting. With the
    implementation of the women-owned small business procurement
    program, we expect the ability to bid on prime contracts will
    increase. Nevertheless, many small businesses excel in the
    subcontracting arena. WIPP urges the Subcommittee to examine
    and push for changes that will make more small businesses
    successful subcontractors.
        Our suggestions and observations in summary are as follows:
    Compliance requirements can only work if penalties are in
    place. WIPP believes that in order to make the subcontracting
    rule effective, the percentage should be clarified. Is it 50
    percent or is it 51 percent? In the case of small business set-
    aside contracts, we urge that all small businesses on the
    contract should be counted towards the 50 percent requirement.
    And finally, we believe a few basic changes in the electronic
    reporting systems could result in much better data on
    subcontracting plans, thereby enhancing compliance.
        Thank you for giving WIPP the opportunity to testify on
    this important issue, and we welcome any questions.
        [The statement of Ms. Bisceglie follows on page 44.]
        Chairman Mulvaney. Thank you, Ms Bisceglie. Again, we will
    hold our questions until the end.
        Ms. Borromeo, please. Five minutes, give or take.

                      STATEMENT OF JAMIE BORROMEO

        Ms. Borromeo. Chairman Mulvaney, Ranking Member Chu, thank
    you for inviting me to testify today. My name is Jamie
    Borromeo, and I am the president of the E & J Commission, LLC,
    which is a contract research and strategies consulting firm for
    disadvantaged businesses. We are based here in Washington, D.C.
        In my former capacity as executive director of the National
    Council of Asian-American Business Associations, and in my
    former position as intern to Congressman Mike Honda, who was
    the chair of the Congressional Asian Caucus at the time, I was
    exposed to a number of small business owners across America who
    had voiced their challenges within both commercial and
    government contracting. Entering the federal market is one of
    the most challenging areas to break into as a small business
    owner, but even more so if cultural and linguistic barriers
    prevent one from being able to understand the complexities of
    government systems. So now after 10 years of working with
    communities of color, I am certain that institutional
    discrimination within federal contracting still exists and this
    is highlighted in the lack of subcontracting opportunities for
    our community.
        Subcontracting is the first point of entry for most small
    businesses attempting to enter the federal market because, one,
    agencies like to see past performance from those seeking award;
    and two, subcontracting allows for the slow growth necessary so
    that the small business can gain experience, capacity, and can
    acclimate to doing business in the federal contracting space.
    Discrimination within the subcontracting process is very
    difficult to prove, especially when those on the program level
    are not outwardly excluding small business from participating.
    What some are doing is turning a blind eye to the issues. It is
    in their dispassionate and apathetic approach to the matter,
    rather than their intentional overtly discriminatory practices
    which is the injustice in this case. Doing nothing is just as
    bad as causing harm, and the lack of oversight of these passive
    actions are what concern me the most.
        The first point I would like to address is the lack of
    compliance with the subcontracting plans administered by the
    contracting officers. I understand from many industry experts
    that there is an issue with contracting officers not properly
    evaluating subcontracting plans or monitoring, evaluating, and
    documenting contractor performance. I have worked alongside the
    Asian-American Justice Center, a civil rights organization for
    Asian-Americans that address these issues through the
    contractor empowerment program currently led by Ms. Jeanette
    Lee. We have partnered to identify some of these challenges and
    have collected testimonials from small business contractors.
    Some are hesitant to provide testimonial because they are
    afraid of being blackballed or not maintaining good rapport
    with an agency they still would like to receive work from.
    However, some brave contractors have emerged from the pack to
    describe their unjust experiences.
        In our findings, we discovered fraudulent practices that
    create barriers to contracting opportunities for Asian-
    Americans, women, and other minorities as outlined by Ms.
    Jeanette Lee in this statement where she describes ``bait and
    switch.'' And I quote, ``Because there is no enforcement, prime
    contractors often team up with minority contractors in order to
    win a bid but then drop them from the contract once they
    receive the award. I have heard this from several Asian-
    American contractors that this is a prevalent and pervasive
    occurrence.'' These, among many others, are testimonials from
    contractors that are still looking for an entity to hold firms
    accountable for what was promised to these small businesses.
        Another issue I would like to point out is that most
    contracts that are moved from large defense contractors to
    small businesses to reach set-aside goals are still controlled
    and dictated by the large contractor in the end in regards to
    who needs to be hired, what salaries they will be paid, and
    what benefits they will receive. The way that this occurs is
    large contractors keep a list of disadvantaged business
    enterprises that are willing to do just about anything for our
    contract. It is common practice for a large contractor to work
    with an agency to move some of their contracts which have
    recently been designated for set-aside programs to large
    contractors preferred vendors. These vendors will then continue
    to employ virtually all the same employees that the large
    contractor employed with identical compensation packages.
    Therefore, in essence, these employees are still working for
    the large defense contractors who maintain the specifics of
    their employment throughout the process. When the small
    business protests, they seem to find that their current and/or
    future contracts disappear from the federal agency, if not the
    federal space as a whole.
        Because the small business owner is hungry for work, they
    feel lucky to be in the game. Money for morals is what is up
    for trade here and until there are more small business
    opportunities and legitimate ones, it is all one closed network
    that is circulating contracts and dollars among their own
    without informing or much less encouraging competition.
        Lastly, a major issue I would like to present for the
    record is the lack of market research conducted to find
    qualified small businesses. With Silicon Valley as my former
    home, I witnessed some of the most creative, talented, and
    capable small businesses in the country produce and engineer
    products and services that are currently provided by large
    contractors. The boutique-size company has just as many robust
    capabilities to do the work; however, because adequate market
    research is not conducted, government agencies are not
    utilizing their services. Making the connection with these
    companies takes additional work, but as one large defense
    contractor admitted to me, I quote, `` We do not have time to
    look through databases. If we find an opportunity, we are going
    to our existing contacts.'' The challenge for subcontracting
    then becomes who you know and whom you know is not necessary
    determined by your skill, capability, or work ethic.
        My recommendation to the Subcommittee is twofold. Number
    one, we must ensure that contracting officers and technical
    representatives are complying with rules and systems in place
    to ensure prime contractors are performing well on existing
    contracts and subcontracting the proper amount to small
    business. This can be done by requiring past performance
    reports are executed by the COTR team. The contractor should
    perform monthly performance reports and check-ins with the
    contractors. I interviewed one former contracting officer who
    said that if the agencies and agency heads made it a priority
    in the contracting office, surely the contracting officer would
    as well. It takes leadership to enforce these and agencies are
    predominantly focused on prime contracts, but now we need
    concerted efforts to focus subcontracting efforts.
        Number two. Diligent and proper market research performed
    by program offices is necessary. I have met a number of small
    business representatives but access to the program office is
    nearly impossible unless you have an existing relationship.
    Existing relationships are usually formed through large federal
    primes that allow the small business into their network.
    Program office and technical reps should be required to do just
    as many meet-and-greets as the small business offices are.
    Taking a meeting with a new small business is declined for fear
    of protest on bids. Those are the excuses I have heard from the
    program offices, but it should be a requirement to know the
    leadership behind who is providing the goods and services for
    the federal government which is paid for by the American
    taxpayer.
        It is our right to meet with those making the executive
    decision on who is winning these contracts and monitoring
    subcontracting plans. Leadership of agencies should also
    encourage the program office to network with the small business
    program office with an agency so they build good rapport
    amongst each other.
        I have additional comments I would like inserted in the
    congressional record that were not stated in this verbal
    testimony, so in the interest of time I would like to thank the
    Subcommittee for inviting me to this hearing, and I would be
    happy to hear any questions you might have.
        [The statement of Ms. Borromeo follows on page 50.]
        Chairman Mulvaney. Thank you, Ms. Borromeo. Rest assured
    your additional comments will be made a part of the record.
        Before I turn it over to Ms. Chu, I want to thank you
    ladies for coming in. I was making comments to staff as you
    were speaking along two lines. Number one, that many of the
    recommendations that you have simply made, just now made in
    your presentations, staff has made to this Committee as well,
    and we will be pursuing many of those in the upcoming months.
    Secondly, and I know Ms. Chu would back me up on this, I would
    like in the future to make sure--do every effort that we can to
    have the real people testify before the agency people do. I
    would like to hear from the business owners, from the business
    operators, before I hear from the agency. You raised several
    questions here today that I would like to have Mr. Jordan and
    Ms. Kendall back again. So next time we will try and get the
    real world testimony on the record before we let the agency
    folks go. What a great opportunity for you to ask questions
    through us of the folks who are actually in a position to help
    you right away.
        So with that I will turn it over to Ms. Chu for her
    questions.
        Ms. Chu. Well, Ms. Bisceglie, you had several suggestions
    for improvements on the subcontracting process. And one area
    had to do with how the costs are calculated. You have to--the
    small business prime contractor has to perform a percentage of
    work based on the cost of the contract, but in so many cases
    small businesses do not have the resources to calculate their
    own costs, let alone a subcontractor's cost.
        So do the requirements as written make it difficult for
    small businesses to calculate the work that they must perform?
    And which ways could it be made simpler and easier for small
    businesses to understand?
        Ms. Bisceglie. Okay. Thank you for the question. I think
    the difference that we are sharing is that all businesses
    should understand their costs. The challenge is that most
    businesses are not going to share their true costs with other
    businesses. So our suggestion is that the percentage of work is
    based on the overall price. So if I am working with a prime, I
    can give them my rolled up price that it will take me to do
    that work versus my cost, which in effect is profit minus what
    it actually costs me to do. And that is where the rub is. So
    the suggestion is to look at just the grand total of what it is
    going to--my price to that prime versus asking for any
    breakdown of costs. So that would be the difference, is to look
    at the grand total of price on the contract.
        Ms. Chu. Very good suggestion.
        Ms. Borromeo, in your testimony you talked about how some
    Asian-Pacific American businesses are afraid to speak up about
    the discrimination and challenges they face as small business
    contractors and subcontractors. Do you have an example of these
    testimonies that we can insert into the record?
        Ms. Borromeo. I do. Yes.
        Ms. Chu. Okay. Mr. Chairman, I would like to have unanimous
    consent that this example be inserted into the record.
        Chairman Mulvaney. Accepted without objection.
        Ms. Chu. Okay. Thank you.
        What systems need to be in place to make businesses
    comfortable with bringing up some of these problems to light?
        Ms. Borromeo. I think realistically small business owners
    probably will not just come out and, you know, say that they
    are going through this. Like I said in my testimony, they want
    to keep the current work they have or the relationships that
    they have with the agencies or the prime contractor. But if SBA
    or another entity within the federal government is actually--
    they actually have some measurements or oversight reports that
    are happening more frequently, I think that might be a way,
    instead of the small business owner having to come out. They
    are already the little guy in this, and if you are trying to
    take down Goliath, some of these large prime contractors that
    are making, you know, multi billion dollars off of federal
    government contracts, it is very difficult to come out with an
    honest testimony about what is happening to them. So I think
    that it is going to be the responsibility of either SBA or
    whatever entity you see fit for this to really hold them
    accountable with more reporting and, you know, just taking
    notes on where they are in their performance.
        When I interviewed the former contracting officer he said
    he did not feel like the agency was enforcing it. And I said,
    well, do you have too much on your plate? You know, do you have
    too much work that would not allow you to do these reports? He
    said, no. If they made it a priority we could absolutely do it.
    So I know that from a testimonial from an actual contracting
    officer that it can be done. It is just you do not ever see
    these people and there is not really any accountability on the
    agency level. A lot of the time they are going to small
    business for these answers when they should be going directly
    to the contracting officers.
        Ms. Chu. What should SBA, MBDA, and other agencies tasked
    with improving access to these contracts do to make sure that
    more Asian-Pacific American businesses and other minority
    businesses and women-owned businesses secure contracts?
        Ms. Borromeo. What should they----
        Ms. Chu. What should the SBA and MBDA and other agencies--
    --
        Ms. Borromeo. Well, the subcontracting plans are already
    required for them to submit. And so it is about follow through
    and making sure that they actually stick to the subcontracting
    plan that was submitted. So like I said, they are not doing the
    reviews thoroughly, so I think that Mr. Jordan had expressed
    that they, you know, they meet with them annually but, you
    know, I mean, meeting annually does not mean that they are
    actually performing the work well or even subcontracting
    fairly. And so I think there has to be more frequent reviews
    and penalties incurred if they are not meeting the goals of
    their subcontracting plans.
        Ms. Chu. Very good. I would like to ask about how the
    subcontracting plans are being carried out by, say for
    instance, the commercial market representatives which are
    supposed to be counseling the large prime contractors on their
    responsibilities. So either of you, I would like to ask that--
    in your opinion are the commercial market representatives doing
    their job on this front in aiding small businesses in marketing
    themselves to the large businesses?
        Ms. Borromeo. I can go ahead and answer. I have been to a
    number of trade shows, networking events that SBA hosts and I
    have never met a CMR before. Even when you--when someone had
    asked me about the CMRs and SBA before I said what is a CMR? So
    I think that they are not relevant in the contracting process.
    And unless people like myself, who are constantly meeting with,
    you know, contracting, or attempting to meet contracting
    officers, do not even know about CMRs. I think it is more of an
    awareness campaign maybe SBA needs to do to make sure that
    these CMRs are visible and relevant to the contracting process.
        Ms. Bisceglie. I absolutely agree with that.
        Ms. Chu. Have you ever met one?
        Ms. Bisceglie. No. Not through my business, from an Interos
    perspective. No.
        Ms. Chu. That is pretty shocking. Well, then let me ask
    about this. The large prime contractors must submit
    subcontracting plans for review, and if the contracting officer
    finds that plans are inadequate, he or she can decide not to
    award the contact. In your experience, how often does that
    happen?
        Ms. Borromeo. In the example of talking to another
    contracting officer, again, he said that he has had colleagues
    that want to terminate contracts after a prime has been
    performing for a year saying they are just not, you know, doing
    what they said they were going to do. And he asked a colleague
    why, you know, what are your grounds for terminating him? You
    have not been taking notes on or reporting anything that they
    have been doing. And he said, well, I mean, it is not a
    requirement so I am not going to do it. So it is a lack of
    oversight. You just cannot terminate a contract without
    grounds. And so if they are not required to enter the data or
    report on how a contractor is performing, then it is just not
    going to happen. It is an enforcement issue from the agency
    level.
        And my experience working with the agency reps is OSDBU--a
    lot of the time the OSDBU reps are doing a fantastic job. They
    just do not have any power within the agency to really effect
    any change. And that is where the barrier is. I only meet with
    OSDBU reps. When I ask for a COTR, when I ask for a technical
    rep or a contracting officer, they refuse to meet with me until
    the solicitation is out on the street. And it is like, well, I
    cannot--if I cannot understand what the requirements are before
    it is out on FedBizOpps, how are we supposed to prepare for the
    bid?
        And so it is an unfair advantage to federal contractors who
    are experienced in this space because they already know the
    requirements. They already have the in with the agency. They
    already know the COTR. And so it does not allow for new vendors
    to enter the marketplace.
        Ms. Bisceglie. And I think I would absolutely agree. I
    think from, again, from an Interos standpoint, it is twofold.
    As she mentioned, the first part is the compliance. Are they
    actually being filed? Is someone actually looking at them? And
    is there any penalty for not being compliant?
        To the question or one piece of the question that you asked
    though, I think from a subcontractor standpoint and what I
    shared earlier in my testimony is that those subcontracting
    plans are never shared with us so there is a total lack of
    transparency. So when you ask if they are filed or if they are
    enforced, I do not have an idea. And again, when you have
    larger contracts that go on for five to 10 years, as Mr. Jordan
    mentioned, there is an ebb and a flow to how the subcontracting
    plans are implemented because it is over the lifetime of the
    contract. So in that, if there is a lack of transparency from
    the bottom up and there is a lack of compliance from the top
    down, there is a little bit of a who knows going on out there.
        Ms. Chu. I would also like to ask about the contractors who
    over-report their subcontracting achievements. In 2010, it was
    reported that small businesses received over 34 percent of
    subcontracting dollars, yet there have been cases that found
    that prime contractors were overreporting their small business
    subcontracting. Either of you in your estimation, what
    percentage of subcontracting dollars is actually going to small
    businesses?
        Ms. Bisceglie. And I will defer. I do not know if you have
    a shake on that again. I defer to the fact that we just--we
    have never been in the situation to have the transparency even
    on the contracts we are on to have an answer for you.
        Ms. Borromeo. Yeah. I mean, I think that for a lot of the
    small businesses that I represent, they are not even given the
    opportunity, so I cannot even answer that question. They are
    not given the opportunity to even compete. So it is a question
    of can I even just compete on this so that I can answer that
    question? I mean, that is a big issue.
        Ms. Bisceglie. It is a competition but it is also, to your
    point, when the filing occurs and the percentages are reported,
    we have no visibility to that. We do not have any visibility to
    how the overall subcontracting plan as executed, much less or
    actual role on it. So if at the time of the contract award, if
    the prime says we are going to subcontract 10 percent of the
    award to Interos, we are never told that. And we are never--it
    is never measured at the end because we are not actually,
    except for the public information that you can actually pay for
    on FOIA, that you can see how large the contract was. You do
    not know where that 10 percent falls at any point in time. So
    it is a very difficult answer to provide to you at this stage.
        Ms. Chu. Thank you. I yield back.
        Chairman Mulvaney. Thank you, Ms. Chu. And you--I think we
    shared a little bit of surprise at the fact that nobody had
    ever seen a commercial market representative. Staff informs me
    there are 35 or 36 of them nationwide, many of them part-time,
    overseeing $200 billion worth of contracts. Not a surprise that
    you have not seen them yet.
        Ms. Borromeo, let me press you on one issue because I did
    read the submission from the Asian-American Justice Center. And
    I am more than willing to consider that the possibility for
    discrimination exists. I used to work with large contractors
    building roads and bridges and so forth, and you certainly did
    not see a lot of women-owned businesses out on those jobs.
    Again, I am willing to entertain the possibility that the
    potential exists, but are you saying that you are seeing
    evidence of discrimination based upon the fact that groups of
    particular race or creed or gender or is it because--do you
    believe you are being discriminated against based upon the size
    of your company?
        Ms. Borromeo. I think it is both. I think small businesses
    in general based on size all experience this, but I think it
    becomes even more complex when you have cultural or linguistic
    barriers that do not allow for you to communicate your point as
    well as maybe other vendors would. So I think small businesses
    as a whole are not being treated very fairly in the space. But
    when you add, like I said, the cultural and linguistic aspects
    to it, it becomes very difficult. And if you also do not
    understand how government works, they would be very--they would
    be afraid to talk to you right now thinking you are going to
    hand them over to the police.
        Chairman Mulvaney. Do not feel bad. One of the traditional
    ways we try and deal with that is by trying to make the process
    as neutral as possible. Having been through the subcontracting
    process, do you see places where we can change the process in
    order to remove the potential for discrimination based upon
    race or gender?
        Ms. Borromeo. I think employing more folks in the federal
    government that would understand the cultural nuances of some
    of these folks. I think that if you have people that
    understand, you know, how a person grows up or how they
    communicate, you know, it is increasing the diversity within
    the pace. Hiring more women, hiring more minorities, to
    represent in the contracting space would make it much easier.
        Chairman Mulvaney. Let me go through sort of a real world
    scenario. Let us say I am a prime contractor and I have got a
    Department of Defense subcontract and I am looking to
    subcontract some of it out. I may post it on various websites
    and so forth. I do not understand the exact logistics of that
    but at some point I am going to receive a bunch of inquiries,
    either in paper or over e-mail or so forth. Is there some part
    of that process that says, oh, wait a second? It allows me to
    say that is a women-owned business, that is an Asian-owned
    business. Is there something that is broken in that system?
        Ms. Borromeo. I believe that they are not collecting data
    at this point regarding who is a minority or who is a woman. So
    that is one issue.
        The second issue is they are not posting these things, do
    you do not even know that a subcontracting opportunity exists
    except within your own little network. And it is when the prime
    contractors let you in. You have to hobnob in the same circles
    with them and it can cost a whole lot of money to go and
    network with them, and you just have to have the connections.
    And if you are not familiar with the culture or with a language
    or, you know, things like that or you are not comfortable
    interacting with another gender then it might be very difficult
    to make that.
        Chairman Mulvaney. If we had had more time today with Mr.
    Jordan we would have pressed him on some of the shortcomings
    that we perceive in the SBA regarding the postings and making
    information available.
        Ms. Bisceglie, you looked like you had some input on that
    process as to where it might be improved.
        Ms. Bisceglie. I actually, just from a support standpoint,
    one of the pieces from a governmental perspective to support
    what Jamie just shared, is the passage of the women's set-aside
    program. So the government is admitting that there is gender
    bias within government procurement. So I just wanted to bring
    that up as a resounding support point throughout her case.
        Chairman Mulvaney. An again, I am willing to admit it. I am
    trying to fix it through the process. Again, if you gave me a
    document--if you made an application for a subcontract on my
    prime and the name of your business was ABC Subcontracting, it
    is unlikely that I would ever know that you were a women-owned
    business is my point. So again, I am willing to admit that the
    potential is there; I am just trying to figure out at what
    point in the process you expose--you have let people know you
    are a women-owned business so that you cannot be discriminated
    against.
        Ms. Borromeo. Well, maybe when they are looking for these
    subcontractors they could ask if they qualify for any of these
    set-aside programs or if, you know, they are a DBE. So, number
    one, let us post it on Subnet. I went on Subnet and I actually
    talked to Judge Orden's office about it and I said, you guys
    only have a couple hundred subcontracts posted on this. I said,
    is there a more robust database that I can go to for this? Oh,
    everything is posted on FedBizOpps. It is not posted there.
        And I talked to a prime contractor, a large defense
    contract, who told me that they are not required by the federal
    government to do that. And so--and they just do not like your
    system so they are not going to do it. They have their own
    system of identifying qualified contractors.
        Ms. Bisceglie. And I think that is, if I may, back to the
    compliance issue. Many of the large prime do follow similar
    compliance to socioeconomic standards that are out there, so
    they go for a certain percentage of 8(a)s, a certain percentage
    of women-owned businesses. So they are out there. And very
    frequently, directly to your question, when we receive an RFP
    from one of those large prime, there is a check box that says;
    which of these socioeconomic standards are set-aside so you
    file under? So you check women-owned. You check small business,
    what have you. So right up front very often you announce where
    you fit.
        I think it goes back to compliance though, if I may, in
    that there is no teeth that says that we need to be--we need to
    actually implement the diversity that we are asking for. So we
    are starting to ask the questions and the information is being
    shared, but there is no compliance that says that we actually
    adhere to those levels.
        Chairman Mulvaney. And it strikes me. I know I asked the
    question but it struck me as you were giving your answer that
    there is a catch-22 here, which is there is a requirement that
    is a target. I cannot remember if it is three percent or five
    percent for women-owned businesses. Certain for service-
    disabled veterans. And so forth. And in order to meet the
    requirement you are required to disclose that you would fall
    into those categories. So again, you are in a catch-22. If you
    want this completely blind test that would not allow
    discrimination, you would not be able to satisfy the
    requirements of the--requirements that we have set. Interesting
    issue.
        Ms. Bisceglie, very briefly to you. You talked a bit about
    the transparency and about the small business plan not being
    shared with you. I am sympathetic to that but I have also been
    a subcontractor, I have been a contractor. It would be rare
    that I would share information about my contract with my owner
    with my sub. Not typically something that I would do. What
    would you be most interested in seeing in that if you had your
    will?
        Ms. Bisceglie. If I had my will I would be most interested
    in seeing the part of the response that affected me. So how
    were they measuring the success of my relationship with the
    prime?
        And you are right. Even as a potential prime contractor,
    there may be subcontractors that we share information with and
    some that we do not. I mean, again, from a small business to a
    small business, there is a bit more other relationships a
    little bit different than a very, very large business. So I can
    absolutely accept that. But I think understanding--if the prime
    contractor is going to be held to a level of compliance based
    on how they are dealing with me, it would be nice to have a
    voice in that fight.
        Chairman Mulvaney. Agreed. Go back to the specifics of the
    contract that you all dealt with. Did they breach the contract
    with you? I mean, the reason I ask, and it is completely off
    topic perhaps why we are here today is we have had some in-
    sourcing hearings this year and we have heard testimony about
    folks getting kicked off of contracts. And one of the questions
    I always ask is, did they breach the contract? Did the contract
    terminate? What were the grounds under which they were allowed
    to displace five of your folks?
        Ms. Bisceglie. I do not know. What I was told was that the
    folks, all five of them, were not working out and they were
    instantly replaced with five of the prime's people. So again,
    from our standpoint, it would have been nice to know what was
    reported to anybody managing the subcontracting plan. One, from
    just a reference ability from my own company. From the
    contracting, the people, all five of those people had worked on
    previous contracts for me with it never a problem, so it was a
    surprise. And the larger surprise, back to our wish and our
    desire to understand the compliance with the subcontracting
    plan, is that it was swift. It was your people are gone in less
    than five days. It was not this is not working out. We need to
    change it. It was just very quick and they replaced with their
    own people.
        So it was all Department of Defense work. My guess is that
    it was a budgetary situation, but we do not know, which again,
    is why we are asking for the transparency and the understanding
    of the compliance of the contracting plan.
        Chairman Mulvaney. All right. Thank you for that. Again, it
    strikes me that you have a contract and I could never just
    break my subcontract with my subcontractors unless the contract
    allowed me to do so.
        My last line of question relates to the experience you had
    in transitioning from a sub to a prime. How did you find it
    generally? Was your experience as a sub helpful to you when you
    tried to do it? And are there things you learned as a sub that
    have made you a better prime contractor dealing with your own
    subs?
        Ms. Bisceglie. Right. So the only two prime contracts we
    have right now are very large IDIQs. And we have not gotten
    billable work. They are relatively new for us. And right now we
    have three proposals to be prime contractors. So we have not
    been awarded as a prime yet.
        As far as the process, the one thing I will share with you
    is--and I will tell you, one of the bids that we have in right
    now is with a very, very large contractor who is a sub to us.
    And the other two are with mid-tier or smaller businesses just
    because of the work.
        And the one thing that is actually I have been educated on
    is a lot of what I shared here in the testimony, it was very
    easy for me to be here today because we have a very different
    relationship with our subs on these bids, as well as the ones
    that are on with the IDIQs, than we have had with our primes in
    the past. And part of it is the transparency and the working
    relationship that we are trying to foster, so it is kind of
    like, you know, be the change that you want to see. And I think
    that that is probably the biggest thing that we have learned.
    So we are already implementing a lot of that transparency with
    our subcontractors and hope and look to continue that once we
    get awarded the work.
        Chairman Mulvaney. The Past Performance Report, did you
    find it to be a fair process? Did you find it to be helpful to
    you? Did you find it to be a hindrance?
        Ms. Bisceglie. As far as filing our price performance?
        Chairman Mulvaney. Right.
        Ms. Bisceglie. It is--I think it is just we are fortunate.
    We have been in business for six years and I have been in the
    same industry for over 20. So from a past performance
    standpoint, we are very, very fortunate in the fact that we can
    definitely stand on our own laurels. So it is a lot of
    paperwork but I think it is fair in the fact that it is
    pretty--again, to Jamie's point, it is pretty blind as far as
    that is concerned. It is a standard template. You fill it out.
    You put your point of contact so that they can check
    everything, and for us it has been fine.
        Chairman Mulvaney. Would you have been able to go straight
    to prime contract? Or would you have had to have gone through
    the sub programs in order to qualify?
        Ms. Bisceglie. It depends on the contract. Some of them
    need specific relevant past performance. Again, because of the
    way that I am building my company, all of my people have at
    least 10 to 15 years experience in this industry so I am a
    little bit of an anomaly in that standpoint. I think that the
    benefit of coming in as a subcontract is that I had the ability
    to learn a lot of what it takes to be a federal government
    contractor on somebody else's time, if you will. And we have
    been able to foster some of the relationships that are going to
    make us much more successful going forward.
        Chairman Mulvaney. Have either of you ladies participated
    or known anybody who has participated in the mentor programs?
        Ms. Borromeo. I was actually just going to say that. One of
    my clients has been with the DHS Mentor Protege Program for a
    year and there is no extra merit in being part of that program.
        Ms. Bisceglie. We have actually done the Department of
    Defense and DHS, and I would absolutely agree. I think----
        Ms. Borromeo. They are for show.
        Ms. Bisceglie. Well, I think that what I have seen, and I
    actually attended the Mentor Protege conference. And I think
    that what I saw was that, and this again, this all is Interos,
    from a--I think that the programs largely came out of being
    product companies, so if I wanted to sell product to the
    government. And so the Raytheons and the Boeings and those sort
    of companies have very, very successful programs. We are
    services, and I think it is a little bit more difficult. And a
    clear example is that our mentor in the Department of Defense
    program, we thought it would work because they understood what
    we do for a living, yet then within their own company there was
    a stress factor of why should we bring in a sub because that
    takes work away from us? And we are not an IT company; we are a
    supply chain company. So if you can only imagine with as many
    IT contractors you have in this area, that that issue is all
    over the place.
        So I think that what I have heard from peers that have been
    part of the program, if you are with one of the larger that
    started as a product and move over to services, that they have
    seen a lot of success. But just services to services, it is a
    little bit tougher to implement.
        Chairman Mulvaney. Ladies, thank you very much. I
    appreciate the testimonies. It is fascinating stuff. We could
    do it all day but everybody has been here three hours and I do
    apologize again for the long hearing.
        As we--this Committee will work to expand opportunities for
    small business and compete for federal contracts both as prime
    and subcontractors. We keep in mind that there is a lot of room
    for improvement. Thank you specifically for your suggested
    improvements. Those will not go unheard of or unresponded to.
        Ms. Borromeo, thank you for this. This will be included in
    the record. And I think this really does help me and the
    ranking member try and get a feel for where we want to take
    this Subcommittee especially next year.
        So with that I will ask unanimous consent that we have five
    days to revise and extend our remarks or to ask questions of
    the witnesses. Again, witnesses, thank you very much. Thank you
    all for sticking around for three hours. Ms. Chu, it is always
    a pleasure. And with that we will adjourn for the day.
        Ms. Chu. Thank you.
        [Whereupon, at 12:50 p.m., the Subcommittee hearing was
    adjourned.]