[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.]




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