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




                                     

                         [H.A.S.C. No. 112-94]

 
DOING BUSINESS WITH DOD: UNIQUE CHALLENGES FACED BY SMALL AND MID-SIZED 
                               BUSINESSES

                               __________

                                HEARING

                               BEFORE THE

        PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                            JANUARY 17, 2012

                                     
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        PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY

                  BILL SHUSTER, Pennsylvania, Chairman
BOBBY SCHILLING, Illinois            RICK LARSEN, Washington
JON RUNYAN, New Jersey               BETTY SUTTON, Ohio
ALLEN B. WEST, Florida               COLLEEN HANABUSA, Hawaii
                Lynn Williams, Professional Staff Member
               Timothy McClees, Professional Staff Member
                  Catherine Sendak, Research Assistant


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2012

                                                                   Page

Hearing:

Tuesday, January 17, 2012, Doing Business with DOD: Unique 
  Challenges Faced by Small and Mid-Sized Businesses.............     1

Appendix:

Tuesday, January 17, 2012........................................    27
                              ----------                              

                       TUESDAY, JANUARY 17, 2012
DOING BUSINESS WITH DOD: UNIQUE CHALLENGES FACED BY SMALL AND MID-SIZED 
                               BUSINESSES
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Larsen, Hon. Rick, a Representative from Washington, Ranking 
  Member, Panel on Business Challenges within the Defense 
  Industry.......................................................     8
Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman, 
  Panel on Business Challenges within the Defense Industry.......     1

                               WITNESSES

Hillmer, Linda, Chair, Small Business Division, National Defense 
  Industrial Association.........................................     4
Schubert, Lynn M., President, The Surety & Fidelity Association 
  of America.....................................................     6
Shoraka, A. John, Acting Associate Administrator for Government 
  Contracting and Business Development, U.S. Small Business 
  Administration.................................................     2

                                APPENDIX

Prepared Statements:

    Hillmer, Linda...............................................    41
    Larsen, Hon. Rick............................................    33
    Schubert, Lynn M.............................................    48
    Shoraka, A. John.............................................    35
    Shuster, Hon. Bill...........................................    31

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    [There were no Questions submitted post hearing.]
DOING BUSINESS WITH DOD: UNIQUE CHALLENGES FACED BY SMALL AND MID-SIZED 
                               BUSINESSES

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
                        Panel on Business Challenges within
                                      the Defense Industry,
                         Washington, DC, Tuesday, January 17, 2012.
    The panel met, pursuant to call, at 3:04 p.m., in room 
2118, Rayburn House Office Building, Hon. Bill Shuster 
(chairman of the panel) presiding.

 OPENING STATEMENT OF HON. BILL SHUSTER, A REPRESENTATIVE FROM 
PENNSYLVANIA, CHAIRMAN, PANEL ON BUSINESS CHALLENGES WITHIN THE 
                        DEFENSE INDUSTRY

    Mr. Shuster. We are going to get started. Mr. Larsen is en 
route. We had a very hectic schedule last week; we traveled to 
the west coast and to Hawaii. So maybe Mr. Larsen is still jet 
lagged or, like me, is not sure where he is. We had to get up 
every day and say, ``What State are we in?''
    But we will go ahead and get started. The hearing will come 
to order.
    I want to welcome our panelists today. I look forward to 
hearing your testimony.
    The Armed Services Committee Panel on Business Challenges 
in the Defense Industry is meeting today to continue our 
dialogue regarding the health and future of our Nation's 
defense industrial base. And today we specifically look at the 
unique challenges that small and medium-sized businesses face 
in trying to do business with the Department of Defense [DOD].
    Members of the panel, as I said, just returned on Friday 
morning from meeting with businesses in southern California and 
Honolulu. And as I have said before, these roundtable 
discussions have been extremely valuable to the panel. And 
meetings we had last week provided us with a great deal of 
insight into many of the challenges that they face in the 
defense industry. We were honored to have a hearing in Chairman 
McKeon's district in Santa Clarita, and we also had a meeting 
in San Diego with Congressman Duncan Hunter and Susan Davis, 
who both serve on the Armed Services Committee.
    In addition to the three industry roundtables, we also had 
an opportunity to meet with Admiral Willard, the Commander of 
the U.S. Pacific Command, and we toured many of the DOD 
industrial facilities that support our Navy in the Pacific.
    While we were in Hawaii, one of the small business owners 
commented that DOD takes the view that small businesses should 
take a small role. In reality, small businesses are the 
backbone of this economy. And, according to the Small Business 
Administration [SBA], small businesses play a leading role as 
the driver of economic growth and job creation in the national 
economy and that more than half of working Americans own or 
work for a small business and that small businesses are 
responsible for two of every three net new private sector jobs 
created in recent years. We also heard from some of the large 
companies out there how important small business is in the 
defense industrial base and what they make up.
    There is no doubt that the DOD acquisition community is 
very risk-averse, and we have to find ways to meter that risk-
aversion and reduce the bureaucracy and leverage this critical 
sector of our economy to meet our national security 
requirements.
    We have three terrific witnesses today, and they are with 
us today to explore this topic and assist us in trying to 
understand this paradigm.
    We have with us Mr. John Shoraka, Acting Associate 
Administrator for Government Contracting and Business 
Development for the Small Business Administration.
    Ms. Linda Hillmer is the chair of the Small Business 
Division of the NDIA [National Defense Industrial Association]. 
And Ms. Lynn Schubert is president of The Surety & Fidelity 
Association of America.
    While Ms. Hillmer and her organization are very familiar 
with HASC [House Armed Services Committee], I know that Mr. 
Shoraka and Ms. Schubert are probably a bit out of their 
comfort zones. It is not often that someone from the SBA or the 
world of surety bonding comes to testify before the defense 
committees. However, your experience and insight and 
recommendations are going to be very important to us, and we 
are honored you are here with us today.
    I also would like to thank Mr. Dan Else and the rest of his 
team at the Congressional Research Service [CRS] for their 
assistance in preparations for today's hearing. I am looking 
forward to the discussion.
    And, with that, I was going to turn to Mr. Larsen, but he 
is still probably on another time zone. So what we will do is 
once Mr. Larsen--and we will go through your testimony first, 
and then when Mr. Larsen arrives maybe he will have some 
opening remarks to make.
    So, with that, we will proceed. Mr. Shoraka, if you want to 
go first, you have 5 minutes. And proceed, please.
    [The prepared statement of Mr. Shuster can be found in the 
Appendix on page 31.]

 STATEMENT OF A. JOHN SHORAKA, ACTING ASSOCIATE ADMINISTRATOR 
FOR GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL 
                    BUSINESS ADMINISTRATION

    Mr. Shoraka. Thank you, Chairman Shuster and members of the 
House Armed Services Committee. Thank you for inviting me to 
testify today.
    Our top priority at the SBA is to maximize opportunities 
for small businesses and ensure that the benefits of our 
programs flow to the intended recipients. My office works each 
day to get Federal contracting dollars into the hands of small 
and disadvantaged businesses.
    Contracting with small business is a win-win. Small 
businesses, who are drivers of the American economy, get the 
revenue they need to grow and create jobs. Meanwhile, the 
Federal Government has the opportunity to work with the most 
innovative and responsive companies in the country.
    My office's primary objective is to ensure that eligible 
small businesses receive their fair share of Federal prime and 
subcontracting dollars. One way we do that is through our 
oversight of the Federal Government's efforts to meet the 
statutorily mandated small business goals, which include prime 
contracting dollars, awarding 23 percent to small businesses.
    Over the last 2 years, the Federal Government has made 
significant improvements in contracting to small businesses. 
For example, in fiscal year 2010, small businesses won nearly 
$100 billion, or 22.7 percent, of Federal prime contracting 
dollars. This marks the second consecutive year of percentage 
and dollar increases after 3 consecutive years of decline and 
was the largest 2-year increase in over a decade.
    Small businesses also won $74 billion, or 35.4 percent, of 
subcontracting dollars.
    Throughout the fiscal year, we at the SBA track and monitor 
Federal agencies' small business contracting performance 
closely and publish the annual ``Small Business Procurement 
Scorecard.'' In fiscal year 2010, DOD achieved a grade of 
``B,'' reaching 95.8 percent of its small business contracting 
goals.
    The Department awarded 20.94 percent, or $61 billion, of 
its Federal contracts to small businesses. The Department 
awarded $10.4 billion in prime contracts to women-owned small 
businesses; $20.7 billion to small disadvantaged businesses; 
$5.3 billion to service-disabled veteran-owned small 
businesses; and $8.7 billion to Historically Underutilized 
Business Zones, or HUBZones. It also significantly exceeded 
overall subcontracting goals of 31.7 percent to small 
businesses, awarding 37.3 percent.
    DOD submitted a fully responsive plan to increase small 
business contracting within its procurement. The Department was 
fully receptive to SBA during the reporting period and 
demonstrated its procurement data was fully and accurately 
reported.
    Congress took a major step toward helping small businesses 
engage in the Federal marketplace with the passage of the Small 
Business Jobs Act of 2010. Since its enactment, we continue to 
roll out many benefits to small businesses, specifically the 19 
contracting provisions contained in the Jobs Act that will help 
redirect billions of contracting dollars into the hands of 
small business.
    Among changes already enacted include: making it harder to 
bundle contracts, a practice that makes it more difficult for 
small businesses to compete; holding large prime contractors 
more accountable to their own subcontracting plans; and 
strengthening the skills of Federal acquisition workforces by 
implementing mandatory small business training, revising 
existing core certifications, and requiring training on small 
business contracting.
    While the Jobs Act has made marked improvement to the 
Federal procurement environment for small businesses, 
contracting with a large and complex agency like the Department 
of Defense naturally comes with unique challenges. My office 
works regularly with all branches of the DOD and their small 
business communities conducting outreach and training events 
and finding new ways to support small businesses and help DOD 
hit and/or exceed its small business contracting goals.
    Because of the significant amount of contracts coming from 
the Department of Defense, my office is in constant contact 
with the DOD's Office of Small Business Programs and Office of 
Small Business and Disadvantaged Business Utilization [OSDBU] 
to track and monitor DOD's small business contracting goals. 
Monthly, the SBA chairs the Small Business Procurement Advisory 
Council, a meeting where we collaborate with OSDBUs from across 
the Federal Government to find out how we can best support 
agencies and address any issues they have with their small 
business contracting goals.
    DOD has continued to work to increase small business 
contracting opportunities for small businesses demonstrating 
unprecedented top-level commitment to small business 
procurement. As an example, in August of 2011, Secretary of 
Defense Leon Panetta issued a memorandum urging the 
Department's acquisition workforce to identify opportunities to 
increase contracting with small businesses. In addition to 
Secretary Panetta, the Assistant Secretaries of each component 
of the Department of Defense issued detailed memoranda to their 
respective acquisition teams and program buyers to encourage 
the increased use of small businesses.
    The SBA remains committed to working with Federal agencies 
to get even more contracts and subcontracts into the hands of 
small businesses in the coming years.
    I want to 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 prepared statement of Mr. Shoraka can be found in the 
Appendix on page 35.]
    Mr. Shuster. Thank you very much.
    And, Mr. Larsen, when they get done with testimony, if you 
have an opening statement.
    Mr. Larsen. That is fine. Thank you.
    Mr. Shuster. Okay. Thanks.
    Ms. Hillmer.

  STATEMENT OF LINDA HILLMER, CHAIR, SMALL BUSINESS DIVISION, 
            NATIONAL DEFENSE INDUSTRIAL ASSOCIATION

    Ms. Hillmer. Thank you.
    Good afternoon, Chairman Shuster, Ranking Member Larsen, 
and other distinguished members of the committee. My name is 
Linda Hillmer, and I am the chair of the Small Business 
Division of America's leading defense industrial association 
promoting national security. NDIA has 95,000 members worldwide, 
more than 1,700 corporate members, and nearly 900 Small 
Business Division members.
    In addition to volunteering as the chair of the NDIA Small 
Business Division, I am a small business owner whose company 
has supported DOD since 2001. I am also a former Federal 
Government contracts professional, which means I am kind of 
bilingual; I speak English and I speak Federal acquisition.
    In fiscal year 2010, DOD awarded over $61 billion in prime 
contracts to small businesses. I am here today to talk about 
some of the challenges that small businesses face in doing 
business with DOD.
    One of those challenges is bundling. We know why DOD 
bundles contracts. There was a war on two fronts, increasing 
budgets and a stretched acquisition staff. Bundling appeared to 
be a logical answer to meeting the wartime requirements. We are 
now in a different time, however, and different solutions are 
required.
    DOD is very concerned, and rightly so, with avoiding what 
it calls a ``hollow force'' inside the military. I believe the 
Department ought to also be concerned about a hollow small 
business industrial base. One of the acquisition approaches 
bringing about this hollow small business industrial base is 
the increased use of bundling.
    Let me give you an example of how bundling hurts small 
business. Bundling puts small businesses in a dependent 
subcontracting role, well-hidden from government 
decisionmakers. It keeps us at arm's length from the government 
program managers who set the requirements. It also means that 
the government contracting leaders who make all the acquisition 
strategy decisions do not see the small businesses who are 
performing the work under the primes.
    But bundling contracts not only hurts small business, it 
hurts DOD. Bundling means the government pays twice on 
overhead; it pays for the prime and again for the sub. But more 
important than dollars, bundling hurts the government by 
attacking quality. As DOD is awarding more and more IDIQ 
[Indefinite Delivery, Indefinite Quantity] task orders based on 
the lowest price, the large primes are putting the squeeze on 
small businesses. This may mean lower costs for DOD, but at 
what ultimate cost? Don't get me wrong, lower prices are not 
bad, but where are the cuts coming from? Are they coming from 
the prime's profit or from the small businesses?
    In an effort to stay alive, small businesses will generally 
cut quality or leave the defense industrial base entirely. Both 
decisions ultimately result in lower-quality products and 
services in support of the warfighter.
    Bundling is an acquisition approach, and it is a symptom of 
a much larger issue at DOD, and that is the perception of small 
business within the Department. It is an issue that requires 
the meaningful inclusion of small business in all funded 
requirements. It needs to be the responsibility of three 
players: the requirements community, which has the need and the 
money and forecast requirement; the acquisition community, 
which commits the funding and sets the acquisition strategy; 
and the small business directors, who have the responsibility 
to meet the Federal small business goals.
    Through deliberate organizational approaches and strategic 
cultural changes, DOD can ensure maximum small business 
participation, smartly stretching limited budgets to meet our 
Nation's defense and security needs.
    Thank you again for the opportunity to speak, and I am 
happy to take any questions.
    [The prepared statement of Ms. Hillmer can be found in the 
Appendix on page 41.]
    Mr. Shuster. Thank you.
    And, with that, Ms. Schubert, you are recognized.

STATEMENT OF LYNN M. SCHUBERT, PRESIDENT, THE SURETY & FIDELITY 
                     ASSOCIATION OF AMERICA

    Ms. Schubert. Thank you, Chairman Shuster and the 
committee, for inviting us here to testify on this critical 
issue.
    The Surety & Fidelity Association [SFA] is a trade 
association of more than 450 insurance companies who write 
surety bonds. They write the vast majority of surety bonds 
written here in the United States, as well on core projects 
around the world. We also are a rating agency and licensed by 
each insurance department across the country. We work closely 
with Federal agencies on surety issues and particularly well 
with the Corps of Engineers.
    One of the many requirements for performing construction 
projects for the DOD, as well as other Federal agencies, is to 
provide surety bonds to protect the taxpayers and workers, 
subcontractors, and suppliers on construction projects. For 
small and medium-sized contractors, this requirement provides 
both protections and challenges.
    There is good public policy for the universal requirement 
of surety bonds on public construction projects. These 
performance and payment bonds guarantee that the project will 
be completed and that the subcontractor suppliers and laborers 
on the job will be paid. Contractors on DOD projects over 
$150,000 must be able to provide these required bonds. If the 
contractor defaults and additional funds are needed for 
completion and to pay the subcontractors and workers, the 
surety pays the excess costs.
    There is a direct connection between a contractor's 
capability and its bond ability. There are a number of things 
DOD can do to increase both that capability and the bond 
ability.
    If a contractor is bidding for a job that is too large for 
its business to perform, it will have difficulty in obtaining 
the surety bonds that were required. Over recent years, the 
size and dollar value of contracts being let by DOD has 
increased, and, almost by definition, small and medium-sized 
contractors cannot perform those large contracts. Therefore, 
many of the contracts from the DOD are just simply too large.
    Also, as you have already heard, bundling is a tremendous 
problem with DOD projects. While this may assist in 
administration of the contract for the DOD, it directly impacts 
the ability of small and mid-sized contractors to perform the 
contract and, consequently, to get the required surety bonds.
    To address the needs of small businesses, Federal 
procurement rules should contain both mandates and incentives 
to break construction contracts into smaller parts.
    First, Federal construction contracts need to be subject to 
the current anti-bundling regulations. Unfortunately, there is 
a recent case that holds that construction contracts are not 
even subject to the existing anti-bundling regulations, and 
that needs to be changed by legislation.
    SFA also recommends that a Federal agency letting 
construction contracts should let 5 percent of its total budget 
in contracts of no more than $5 million.
    Third, the projects that are set aside for small businesses 
need to be of a size that small businesses can perform.
    And, fourth, the Joint Venture and Mentor-Protege Programs 
must be allowed to work more effectively. The current Federal 
regulations lack clarity and standardization among the 
procuring agencies as to what arrangements are acceptable. In 
addition, the regulations present a disincentive for smaller 
contractors to participate in Federal construction projects 
with larger contractors as joint ventures or with the Mentor-
Protege Program. SFA suggests that small businesses should not 
lose their status and be disqualified from bidding on small 
business opportunities because of their participation in these 
programs or because surety bonds were issued based on the 
strength of the larger contractor joint venture program. The 
larger contractor's indemnity to the surety for losses under 
the bond should not threaten the small contractor's status.
    What happens is you have the partnership, and if a surety 
is allowed to use the financial status of the larger contractor 
to begin to develop a relationship with the smaller contractor, 
ultimately they will develop a surety relationship for that 
smaller contractor, who will be able to bid individually 
without a joint venture or as part of the Protege Program.
    We also urge Congress to look at improvements to the SBA 
Surety Bond Guarantee Program. We have worked very closely with 
the SBA over the years on improvements that are necessary, and 
quite recently as well. And I believe legislation will be 
introduced, and we urge you to support that legislation.
    If you are interested, we work very closely with the 
Department of Transportation and other agencies on programs to 
assist small, emerging contractors in getting surety bonds. We 
would be more than happy to roll out a program with the DOD for 
DOD contractors as well.
    Last two other points. There is an automatic increase in 
the Miller Act threshold, which is the threshold below which 
bonds are not required, that has been put in place, and it has 
exemptions in there for certain statutes. The Miller Act needs 
to be added to that exemption. And all of the details on that 
are in our written testimony.
    And last, there is a bill pending in Congress, H.R. 3534, 
called the ``Security in Bonding Act of 2011'' that would 
ensure that the small and mid-sized contractors who are 
adversely impacted by fraudulent sureties would no longer have 
to face that. And I urge you to look at that bill and consider 
it when it comes to the House.
    Thank you very much.
    [The prepared statement of Ms. Schubert can be found in the 
Appendix on page 48.]
    Mr. Shuster. Thank you very much.
    With that, Mr. Larsen, if you have an opening statement.

     STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE FROM 
WASHINGTON, RANKING MEMBER, PANEL ON BUSINESS CHALLENGES WITHIN 
                      THE DEFENSE INDUSTRY

    Mr. Larsen. Thank you, Mr. Chairman. And we had a great 
CODEL [congressional delegation], and I appreciate your 
leadership on that CODEL. And it was good to see several of the 
Members be able to attend all or part of it and really provide 
good further insight for us out in the field about what our 
small businesses are facing as part of their contracting with 
the DOD.
    I have a statement I will enter for the record, but I just 
want to make a few key points.
    A key message that has been shared by a lot of the 
stakeholders that we have met with is the importance of the 
defense industrial base to our Nation's security and how 
important that base is to ensuring our women and men in the 
Armed Forces have the best weapons, the best services, the best 
products to do their job, and this defense industrial base is a 
force multiplier for our military.
    But, as we are even hearing today and we have heard over 
this last week as part of the CODEL and in other hearings, this 
defense industrial base is a force multiplier but not a 
monolithic entity. It has many faces to it. It has large, 
multinational corporations; small companies that provide 
important subsystems and parts to major weapons programs, as 
well as services. And we are even hearing some of the concerns 
today expressed that we have heard as part of the trip we just 
had.
    But I just want to be sure that we continue to focus the 
panel on what we feel the key elements hindering small and mid-
sized businesses are in their ability to contract with the DOD 
and what steps we can take to open up opportunities with the 
Department of Defense.
    With that, Mr. Chairman, I will just enter the rest of the 
statement into the record, without objection, if that is 
possible.
    Mr. Shuster. Without objection, so ordered.
    Mr. Larsen. Thank you.
    [The prepared statement of Mr. Larsen can be found in the 
Appendix on page 33.]
    Mr. Shuster. Thank you, Mr. Larsen.
    And, with that, we will go to questions. I am going to 
start off first.
    Mr. Shoraka, you said that for 3 years running, prior to 
this year, or I guess it would be 2011 where your numbers came 
from 22.7 [percent]? Is that from 2011 or 2010?
    Mr. Shoraka. 2010.
    Mr. Shuster. Okay. Prior to that, you said, for 3 years 
straight there was a decline in the percent. What was the 
reason for that? Did it have to do with we were at war and 
getting contracts out quick, or was there some other reason 
that you feel that that was on a decline?
    Mr. Shoraka. The numbers for 2009 and 2010 showed 2 
consecutive years of increases.
    Mr. Shuster. Right.
    Mr. Shoraka. Before that, there was 3 years of declines.
    I would say that, in the last several years, there has been 
a high priority given from the Administration to small business 
contracting, from the President and his advisor, Valerie 
Jarrett, having quarterly meetings with Deputy Secretaries from 
each of the agencies. And I think that has had a significant 
positive impact on the agencies meeting their goals.
    Mr. Shuster. Right. And who were those business meetings 
with you said?
    Mr. Shoraka. The quarterly meetings are White House 
initiatives with all the Deputy Secretaries from each of the 
CFO [chief financial officers] agencies, the 24 agencies.
    Mr. Shuster. Okay.
    And, Ms. Hillmer, you said that the government is paying 
twice from a prime to a sub. Can you sort of explain why you 
think they are paying twice?
    Ms. Hillmer. Sure.
    The prime contractor has the main contract, and they have 
their own overhead structure and the profits requirements that 
they need to meet. Small businesses who are the subs to these 
primes, we have our own overhead as well. So you are paying--or 
DOD is paying for our overhead as well as the prime's overhead. 
Whereas if they came to us directly and contracted, it would be 
one overhead----
    Mr. Shuster. Right.
    Ms. Hillmer [continuing]. But it requires more 
administration on their part.
    Mr. Shuster. Right. And you don't feel--I mean, I think the 
idea behind subbing it out is you lower your overhead because 
you are going out to a subcontractor, but you don't feel that 
is happening there. Their overhead is their overhead; they are 
going to--they are subbing it out because it is a way for them 
to increase their profit as well.
    Ms. Hillmer. That is exactly correct.
    Mr. Shuster. Okay.
    And as we are moving forward with this panel, we see that 
when the Office of the Secretary of Defense [OSD] focuses on--
we look at the MRAPs [Mine Resistant Ambush Protected vehicles] 
and some of the other products that had to get out there 
quickly, do you believe that the Office of the Secretary of 
Defense, that Small Business Programs, is focused enough on 
working with the small businesses?
    You mentioned there were some, here, White House 
initiatives. But at OSD, is there enough focus on small 
business, do you believe?
    Any one of you can all comment on that if you care to.
    Mr. Shoraka. If I may first?
    Mr. Shuster. Sure.
    Mr. Shoraka. I think certainly when we talk about the last 
fiscal year and looking at the continuing resolutions at the 
end of the fiscal year, some challenges obviously--that 
presented some challenges. But there was very close 
collaboration between our agency as the SBA along with the 
Department of Defense, along with their Office of Small 
Business as well as their OSDBUs. And I think, moving forward, 
we have identified opportunities to continue where we left off 
last quarter of last year and adding additional identification 
of opportunities.
    As an example, we talk about our procurement center 
representatives, which are SBA officials who sit at the most 
active buying activities that the DOD has. So the procurement 
center representatives identify opportunities where small 
businesses should be participating. And if they don't go small 
business set-aside, they can object to that.
    Mr. Shuster. And what happens if they object?
    Mr. Shoraka. They can object, and there have been cases 
where the contracting officer has turned around and made a 
portion of it small set-aside. If the procurement agency does 
not agree, we can file for an appeal, which raises it up to a 
higher level.
    Mr. Shuster. Okay.
    Ms. Hillmer.
    Ms. Hillmer. It has been interesting watching the OSD Small 
Business Office, having been in DOD for quite a few years. You 
know, that office sat vacant for 2 years, and during that time 
it really hurt small business. Now they have put a director in 
there, and he has worked very hard and made a lot of progress. 
He is working very closely with NDIA. They have put a lot of 
policies in place. Yet to see how those policies are going to 
affect small business per se. But the focus that I have seen at 
DOD on small business has been more serious than what I have 
seen in a number of years.
    Mr. Shuster. Just in the past couple years.
    Ms. Hillmer. Yes.
    Mr. Shuster. Ms. Schubert, do you have a comment?
    Ms. Schubert. We have not worked directly with that office. 
We have for a number of other agencies but not with DOD.
    Mr. Shuster. And just so I am clear, on surety bonds the 
contracting is just on construction?
    Ms. Schubert. There are other requirements, there are other 
Federal requirements for surety bonds for a particular service: 
contracts--there are hundreds of them.
    Mr. Shuster. Right.
    Ms. Schubert. Construction is the one that is most impacted 
by this.
    Mr. Shuster. But building a component for a bigger system, 
are you required to have a surety bond for that? If one of the 
small companies is building, you know, an engine for a Humvee, 
does that require a surety bond?
    Ms. Schubert. I don't believe so.
    Mr. Shuster. Okay.
    Ms. Schubert. But I will get back to you with the answer on 
that.
    Mr. Shuster. Okay.
    All right. With that, we go to Mr. Larsen for questions.
    Mr. Larsen. First, for Ms. Schubert, can you just explain 
again to me on the Mentor-Protege Program, does the protege, 
for the sake of definition, become subsumed in the definition 
of a larger contractor, and therefore they can lose their 
ability to get a surety bond? Is that kind of what you are 
saying?
    Ms. Schubert. Yes, that is what I am saying. And one of the 
major problems is that it is handled differently throughout the 
various agencies. There is no one way that it is acceptable or 
unacceptable. And what we would love to see is one standard 
that, ``This is what is acceptable.''
    Not only do they get subsumed, but even if they don't, if 
the surety looks to the larger contractor for the bond, then 
there is a----
    Mr. Larsen. It applies to the protege?
    Ms. Schubert. Yes. Exactly.
    Mr. Larsen. Only in the DOD?
    Ms. Schubert. No. It is a problem throughout the Federal--
all the Federal agencies.
    Mr. Larsen. Okay. And then how would you specifically fix 
that?
    Ms. Schubert. Well, we would suggest that it not make the 
smaller contractor lose out on its small contractor status. 
What happens is they lose out on their status and then they no 
longer can qualify for the set-aside program.
    Mr. Larsen. Yeah. To do your bonding, do you need to have a 
certain--does the contractor need to have a certain size 
contract to do surety----
    Ms. Schubert. Well, in the Federal Government, the size 
contract where bonding is required is $150,000----
    Mr. Larsen. Oh, okay.
    Ms. Schubert [continuing]. And above. In States, some of 
them are $50,000. Local municipalities, some of them are 
$10,000, $20,000.
    Mr. Larsen. So those are relatively small?
    Ms. Schubert. It is.
    Mr. Larsen. Relatively.
    Ms. Schubert. It is--no, it is definitely relatively small.
    Mr. Larsen. Yeah. Yeah.
    Ms. Schubert. And what happens is you have contractors who 
are starting to get bonding at $100,000 or $150,000, and then 
the project they want to bid on is a $5 million project, and 
they don't have the capability to perform the project, and now 
they need a surety bond, and therefore they can't get that 
bond.
    Mr. Larsen. Yeah. Are these largely construction?
    Ms. Schubert. Yes.
    Mr. Larsen. Yeah. Yeah. Okay.
    Ms. Schubert. And there is plenty of that in DOD.
    Mr. Larsen. Yeah. And we always want more.
    Ms. Schubert. Yes. So do we.
    Mr. Larsen. And if we ever get a transportation bill, we 
will have more.
    Ms. Hillmer, in your written testimony on page 3 and your 
oral testimony, you talked about the longer-term cultural and 
organizational shift necessary. How can that happen, and how 
could we write that into legislation? Give me something to grab 
on to here.
    Ms. Hillmer. I love it. Thank you for asking.
    It really needs to start from the top, as with any cultural 
change. If there is any way that Congress can put teeth to the 
small business goals, that would be a huge step in the right 
direction. Right now, if DOD or any agency doesn't meet its 
small business goals, they get hauled before Congress and get 
their wrist slapped. But there is no--there is no price to pay 
literally.
    Ms. Hillmer. So if there were some teeth to those goals, 
that would help.
    Just having the Secretaries of the services understand the 
importance of the small business industrial base and embrace 
that and push that down through their services I think would 
make a huge difference. The program managers themselves, the 
requirers, have to understand the importance of small business 
and the role that small business plays.
    I believe you mentioned before that the DOD culture is 
risk-averse. Nobody gets fired for hiring IBM, right? But for a 
small business, there is some risk there. And so they are not 
as embracing of small business as they could be. And if the 
requirements community were perhaps held accountable for 
including small business, they might be a little bit more open 
to doing that.
    Mr. Larsen. One of the issues we heard about last week--and 
we may have heard about it before, and it may have been stated 
a different way--had to do with--and I want to see if I can get 
this right, and the staff could help me remember this 
correctly--it is a difference between, you know, being allowed 
to compete and then actually being qualified to compete or 
qualified to do the job.
    Is that--you are nodding your head, for the record, as if 
you understand what I am talking about. So maybe you could help 
me out with the problem and what you think the solution is.
    Ms. Hillmer. I do understand the problem. And that is 
actually something that the OSD Office of Small Business has 
been looking into in their market research surveys, to their 
credit.
    When a commercial company wants to do business with a small 
business, they do a lot of research on that small business, and 
they make sure that they are not only qualified, they are 
viable, they are able to perform. And that is the type of 
information that is missing from the market research that is 
available to PMs [program managers] and small business 
specialists and contracting officers right now.
    Mr. Larsen. Okay. All right.
    Is it ``Shoraka,'' Mr. Shoraka?
    Mr. Shoraka. That is correct.
    Mr. Larsen. Can you discuss briefly your view about the 
teeth or lack of teeth in enforcing the small business goal, 
the goal of achieving the small business contracting goals?
    Mr. Shoraka. Sure. I think there are several, I guess, 
different layers of that.
    As mentioned earlier, there is an emphasis on small 
business goals from the White House on down. The 
Administration, through Valerie Jarrett, has made it very clear 
to each agency that the goals are very important to meet. Our 
agency, Karen Mills, holds regular conversations with each of 
the agencies to make sure that the goals are met.
    Our Deputy Administrator, beginning as soon as the goals 
were released this year, has held calls with each of the Deputy 
Secretaries, emphasizing, one, the importance of the goals, 
but, also, what are the tools to meeting those goals. As I 
mentioned, the Small Business Jobs Act gave us some additional 
tools. So what are the tools under there? Like, we talk about 
bundling and the restrictions on bundling now. We talk about 
indefinite quantity contracts and how those can now be set 
aside. So what are the tools?
    Another thing that I would point out is that, from the 
White House initiative, all SESes [Senior Executive Service] 
that have in their program procurement activity are now under 
their performance metrics graded on understanding the small 
business and meeting the small business goals. So that is one 
thing we have worked with agencies, to make sure that the 
program officers are now also aware of and are rated on the 
goals.
    Mr. Larsen. Are they rated individually, or are they rated 
as an agency and then their budget requests reflect the 
achievement?
    Mr. Shoraka. With regards to the goals for the agency, 
obviously it is rated as an agency. But supervisors, then, that 
are doing reviews on SESes, as an example, can rate them 
individually.
    Mr. Larsen. Uh-huh. Yeah. Thank you.
    Thank you, Mr. Chairman.
    Mr. Shuster. With that, Mr. Schilling is recognized for 
questions.
    Mr. Schilling. Thank you, Chairman.
    Welcome. Happy New Year. It is good to be back.
    I would like to start out with Mr. Shoraka. I am going to 
be, here soon, going to be introducing a small business bill 
that will address the Mentor-Protege programs. Its main goal is 
to allow the SBA to either create a new program for a 
qualifying small business or to participate to open up a 
current program for them. Anyway, it would also streamline--and 
I think that is one of the things that we are getting at.
    And I got to say I am very impressed with what is going on 
here. I mean, I think we are really getting a good grip here. I 
am a small business owner. I kind of jump ahead of myself all 
the time.
    But it will streamline and make the process easier for 
small businesses to participate by setting standard regulations 
for each department. Specifically, it will put SBA in charge of 
overseeing and setting standard rules, and the department would 
implement regulations for all of the programs. This bill would 
also require SBA to present data to Congress about the progress 
of the programs with regard to how successful proteges are in 
general and in terms of obtaining and retaining Federal 
contracts.
    Currently, 13 departments sponsor programs, which differ in 
eligibility and incentives to participate, but each program 
exists to pair new businesses with businesses that are more 
experienced with Federal contracting. However, success among 
departments varies widely.
    Do you think something like this would help the small 
businesses? And then, in what ways?
    Mr. Shoraka. I think we hear about the Mentor-Protege 
Program at the Department of Defense oftentimes, and we often 
hear that that is one way of engaging mentors along with the 
proteges and bringing them on board either as a subcontractor 
or on a prime contract relationship. And that has been very 
successful.
    Different agencies have different models, certainly. At the 
SBA, our Mentor-Protege Program as it stands focuses on our 
8(a) portfolio, our 8(a) portfolio being disadvantaged firms. 
This provides an opportunity for a protege to team up with a 
mentor and submit for a joint venture application. Under that 
joint venture application, that entity now is considered an 
8(a), so they can actually pursue, even though they are joined 
together now, a set-aside project. This is an incentive, I 
think, for the large business because now they can pursue small 
businesses, but it is an incentive for the small business 
because now they can be mentored and pursue larger projects.
    I think there are different models that work at different 
agencies in certain respects, and they have been modeled after 
what works at their own agency. I know the Small Business Jobs 
Act allowed for the SBA to roll out the Mentor-Protege Program 
to our other set-aside programs, and that is something that we 
are working on currently.
    Mr. Schilling. Very good.
    My next question will go to Mrs. Hillmer. DOD has been used 
as an example of successful mentor-protege programs, which is 
basically why my bill gives them the option to remain separate 
if they want to in the program.
    Can you speak on your experiences with the DOD's mentor-
protege programs and why they are so successful?
    Ms. Hillmer. I have no personal experience with it. 
However, I do know other small businesses that do participate. 
And it is true, DOD has a very good Mentor-Protege Program in 
place. It is well structured, and it is implemented well. So I 
think it would serve as a very good example. And I have known 
several small businesses that have found it to be very useful 
and it has helped them.
    Mr. Schilling. Very good.
    Ms. Schubert, in reference to the unbundling, can you 
give--I mean, we have got some ideas as to why we should 
unbundle, but what would be some of the adverse things, some of 
the reasons why we shouldn't unbundle? Are there any reasons 
why not to unbundle, I guess?
    Ms. Schubert. Well, what we hear from the Federal 
Government is the ease of administration. They want to see one 
contract, one place, one sense of responsibility. And, 
unfortunately, that eliminates vast numbers of small businesses 
when you do that. And it also does double bill overhead, there 
is no question about that.
    Unbundling would make a lot more small businesses eligible 
for surety bonding, which would allow them to then participate 
as general contractors and not just subcontractors on the jobs.
    Mr. Schilling. Very good.
    Thank you very much.
    Mr. Shuster. I recognize Ms. Hanabusa for questions.
    Ms. Hanabusa. Thank you, Mr. Chair.
    Ms. Hillmer, I understand the theory behind why we 
shouldn't bundle, and I agree with you. However, if it is not 
one company that is doing it and bundling, then who takes that 
role? In other words, say you have one project, you have to 
have these different components, and now we have it bundled. 
Does it then mean that we increase the government acquisition 
staff so they then become responsible, where before we kind of 
pushed it onto the prime?
    Ms. Hillmer. I have been with DOD a while now, so I am 
watching this come full circle. It used to be where DOD did 
have program integration, and those program integrators were 
responsible for, yes, hiring scores of contractors to do 
various types of work under the bigger programs.
    So, yes, it does result in more work for the Department of 
Defense, quote, unquote. But I just think that the importance 
of maintaining a strong industrial base and the small 
businesses in that industrial base outweighs that.
    Ms. Hanabusa. So that would be the cost that would have to 
be paid if we decide that small business is the priority. And 
we have decided that. But to implement it--in other words, to 
put our money where our mouth is--we would need to then realize 
that maybe the unintended intended consequence of that action 
is going to be that we are going to have to increase the 
acquisition force within DOD so that they would now be 
overseeing the contracts in a different manner.
    Ms. Hillmer. The short answer is yes. DOD has been 
increasing its acquisition workforce, as you know. So I say, 
why not?
    Ms. Hanabusa. But they are still bundling?
    Ms. Hillmer. They are still bundling.
    Ms. Hanabusa. It takes a while to refocus.
    Ms. Hillmer. Right. It takes a while to turn the ship 
around.
    Ms. Hanabusa. Thank you.
    Ms. Schubert, I understand a lot about surety bonds. And 
the interesting part about surety bonds in the construction 
context is that it really has been the mechanism by which we 
have kept smaller contractors out of large construction 
projects, because they just can't bond it. I think one of the 
issues that people do not realize is small businesses, when 
they actually go out for those bonds, really put a lot of their 
personal assets on the line because that bond has got to be 
backed by someone's assets. And if you are a big corporation, 
you have assets, but usually a small business is an individual. 
So that is why, for many of them, they not only do not have the 
capabilities of getting the bonds, but they also may not want 
to put their home, for example, on the line.
    So, having said that, as the consequence of that, is there 
an alternative for that surety requirement to keep the small 
business contractor being able to bid and to be competitive? 
Because for a lot of them one bad project could wipe them out 
forever.
    Ms. Schubert. Well, that is actually our concern. One bad 
project could wipe a subcontractor out forever, as well. So if 
you don't have the performance and the payment bonds in place, 
then the other people, the other small businesses are 
definitely impacted because that protection is not there. In 
fact, there is some excellent testimony from a number of years 
ago by subcontractors who said they just would not participate 
on Federal contracts any longer until the size of the payment 
bond was made equal with the size of the performance bond. So 
you have both sides of the story.
    We represent sureties who write a tremendous number of 
bonds for small contractors. We actually have some statistics 
that I would be happy to provide for you at a later date in 
writing about the number of small contractors that have 
bonding.
    It is extraordinarily rare that a surety company is 
interested in taking somebody's house as collateral, 
particularly in this economy, but even in previous economies it 
just isn't something that a surety wants to do. They have to 
have the capital, but, more importantly, they have to have the 
capacity to do the work.
    And if you look at--what Ms. Hillmer was talking about is 
analyzing the capability and the qualifications of the 
contractor. That is what a surety bond does, that is what the 
surety does, is they evaluate the contractors to make sure that 
they can do the work.
    We have a number of excellent programs that actually help 
small contractors get their first bond.
    Ms. Hanabusa. So you are acting like a pre-qualifier for 
the government as well, is what you are saying, by having that 
contract?
    Ms. Schubert. Correct. And that is why the requirement was 
put in place in the first place, was contractors not 
performing----
    Ms. Hanabusa. But most of the big contracts, like, for 
example, in Hawaii, they have to be able to bond a 50-year 
project.
    Ms. Schubert. A 50-year project?
    Ms. Hanabusa. Fifty. That is the way military construction 
works in Hawaii. The housing is built on a 50-year project. So 
there are very few companies who are able to bond a 50-year 
housing project.
    Ms. Schubert. That is correct. I would recommend that you 
change the requirement--because you are not going to get 
contractors to bond 50 years.
    Ms. Hanabusa. Congress did it well. I wasn't here, but they 
did it well. And there are few who qualify for that.
    Ms. Schubert. We would be happy to help with that.
    Ms. Hanabusa. Thank you.
    Ms. Schubert. The direct answer to your question is there 
are alternatives. You are allowed to post letters of credit, 
you are allowed to post assets. And those assets have to be 
pledged to the Federal Government, and they are put in a 
federally insured financial institution.
    It is much more difficult to do that for a contractor than 
it is to get a surety bond. That is why we like working through 
the mentor-protege programs and joint ventures to try and 
assist those contractors.
    Ms. Hanabusa. Thank you very much.
    Thank you, Mr. Chair.
    Mr. Shuster. Mr. Runyan is recognized for questions.
    Mr. Runyan. Thank you, Mr. Chairman.
    And, Ms. Hillmer, as we go through this, in talking, 
obviously, you say the double charge on bundling--and we get 
that, because it is a redundant overhead on both sides. But 
with your experience with acquisitions and contracting 
officers, as we have been through many of these hearings, a lot 
of time, and you mentioned it too, that there is no history, no 
research, and they are afraid to take that step and give them 
that contract. Therefore, a lot of the subs actually have to go 
through the primes to even get their foot in the door.
    And a lot of times--and we experienced this out in 
California--a lot of times the subs will just get bought up by 
the primes, and their intellectual property [IP] and everything 
will just disappear, and it is not getting to the DOD.
    How do we deal with the lack of background and the lack of 
the acquisition or the contracting officer being out there and 
being exposed also? There has to be a way we can help that 
process.
    Ms. Hillmer. That is a very good question, and it is a 
difficult one to answer. I mean, I have been wrapping my brain 
around it, the division has been wrapping their brains around 
it. We are trying to come up with the answer to that.
    Part of it is about market research. Right now, DOD--none 
of the military services have really sufficient market research 
tools. How to get the small businesses to--how to get DOD to 
take that chance on a small business, that is part of the SBIR 
[Small Business Innovation Research] program, too, SBIR--which, 
by the way, thank you very much for reauthorizing that. It has 
made a huge difference to our members, and we are really 
appreciative. So SBIR is a good way to get some of the new 
technology into DOD.
    How to get new services and approaches and get DOD program 
managers to take that chance? Maybe it is part of the culture 
and rewarding them for taking chances and bringing in small 
business and creating a different kind of incentive program.
    You know, those are all things we have been thinking about. 
There is no clear-cut answer. It is a tough one. It is a tough, 
tough nut to crack.
    Mr. Runyan. I agree. And you hear it at every field hearing 
we have, and that is a frustrating aspect. And it is a big 
reason why this panel was put together.
    Ms. Hillmer. And I can tell you, with the bundling issue 
and IDIQs, the increasing use of IDIQs, you are not getting 
those small businesses involved who haven't had past 
performance with DOD. None of those companies are invited to 
the table. So you are missing out on an entire possible 
industrial base there.
    Mr. Shuster. Which companies are not invited did you say?
    Ms. Hillmer. Small businesses who don't have any experience 
in doing business with DOD. Because the primes who are going 
after these large IDIQs, the small businesses they want on 
their teams, just like everybody, they want them to have 
experience and past performance that they can use to win the 
work. And if you don't have past performance with DOD, you 
don't get invited to the party.
    Mr. Runyan. Thanks.
    I yield back, Chairman.
    Mr. Shuster. Ms. Sutton.
    Ms. Sutton. Thank you very much, Mr. Chairman. I was sorry 
I had to miss the field hearings. I know that they were 
tremendously informative, and I am looking forward to 
gathering----
    Mr. Shuster. If you will yield for 1 second?
    Ms. Sutton. Certainly.
    Mr. Shuster. We brought up, you know, one of the topics--I 
think we brought up a number of times the topics we learned 
about corrosion. And, in fact, we brought it up to the 
chairman, and he looked at us and said, ``How much?''
    Ms. Sutton. I know. I am telling you, I am so proud. Thank 
you so much for doing that. There is a lot of money to be saved 
and progress to be made by mitigating and preventing corrosion.
    But I digress. This has been very informative, as well, and 
I appreciate it.
    And I just want to clarify, Ms. Hillmer, I think that you 
said a few moments ago that you notice that the focus on small 
business in the past couple of years has been better, has been 
notably better. Is that correct?
    Ms. Hillmer. Within DOD, since they have the new director, 
there is a focus. And they have actually elevated him, directly 
reporting to the AT&L [Acquisition, Technology and Logistics].
    Ms. Sutton. Well, I appreciate hearing that. That is always 
the kind of news we want to know.
    There were some things that were discussed already that I 
would just like a little more clarification.
    Ms. Hillmer, let me ask you, on page 3 of your testimony, 
you talk about how the whole, the IDIQ contracts based on 
lowest price, the large primes are putting the squeeze on their 
smaller subcontractors. I would just like to explore that a 
little bit more. You talk about how that may reduce the quality 
or leave the defense market--they may leave the defense market 
space entirely.
    But could you just give me, without naming names, some sort 
of example of how quality might be at risk and anything else 
you want to talk about along these lines?
    Ms. Hillmer. Actually, I would like to give you a personal 
example of my own company, if I could.
    Ms. Sutton. Certainly.
    Ms. Hillmer. We spent $8,000 to participate in a proposal, 
an IDIQ proposal. And the large prime won, and as soon as they 
won, the first thing they did was come back to us and say, ``We 
need to slash your rates.''
    My company prides itself on the quality of the products and 
services that we provide to DOD. It is very different than some 
of the large contractors. We are very focused on what we do and 
very much personally involved and very creative. Doing low-
quality work doesn't interest us, and, quite frankly, I think 
it hurts the Department of Defense.
    Ms. Sutton. Sure.
    Ms. Hillmer. And in order for us to continue with that 
contract, we would have had to cut our salaries, cut 
everything, and hire people who are not as creative and 
talented as the people that we have. And so we simply removed 
ourselves from the contract. So we will not be participating 
and providing our services under that contract to the Air 
Force.
    Ms. Sutton. I appreciate that. Does anyone else have a 
comment on that? Okay.
    Sir, you were talking about the ratings when goals aren't 
met, and Ms. Hillmer, you were also talking about the need to 
change, it starts at the top, and the need to sort of implement 
effective measures to make sure that those goals are met. Can 
you tell me how the ratings translate? I guess part of being an 
incentive or disincentive for certain behavior, so if a goal 
isn't met, what is the result? What happens?
    Mr. Shoraka. Well, first of all, I should say that since 
there is emphasis on this from higher, from the White House 
down, there is a huge incentive, I think, for the agencies to 
meet the goals. But having said that, the score cards are 
published. If the goal is not met, their grade reflects that. 
However, the agency is also required to develop a plan, which 
we negotiate and which we agree to, on how they will meet their 
goals moving forward. In other words, we didn't meet our goals 
last year; this is why, and this is how we are going to meet 
them next year. And that plan is developed in consultation with 
us.
    One point that I would add with regards to the 
subcontracting, I just wanted to add that under the Small 
Business Jobs Act, it does provide four additional provisions 
for prime contractors to meet their subcontracting goals, so 
there is more teeth for prime contractors to meet their own 
subcontracting goals that they present in their proposals.
    Ms. Sutton. Would you like to add anything, Ms. Hillmer?
    Ms. Hillmer. I think your question was, what are the 
ramifications if they don't meet?
    Ms. Sutton. Right.
    Ms. Hillmer. And what I am hearing is that the 
ramifications are you have to report back and come back with a 
plan. I think that money talks, and if you affect a budget, 
they will feel it.
    Ms. Sutton. Thank you.
    Mr. Shuster. Thank you.
    With that, Mr. West is recognized for questions.
    Mr. West. Thank you, Mr. Chairman, and also Ranking Member, 
thanks to the panel for being here.
    You know, one of the important things you brought up was 
the invite to the table. I did, you know, 22 years with a fun 
organization called the Army. You know, when you go to the 
Association, the United States Army trade show, if you want to 
call it that, one of the things that I think we need to focus 
on, you don't see a lot of the small businesses there, you 
know.
    Do we have something or can we start something like this 
AUSA [Association of the United States Army] that you see up in 
Washington, DC, or down in Fort Lauderdale, that can go around 
regionally, and we can start--instead of focusing on the big 
contracts, can we focus on, you know, small businesses, and we 
can highlight them, and especially some small businesses that 
don't have the experience so they can get that invite to the 
table; is that something that we are looking at doing with some 
of these trade organizations?
    Mr. Shoraka. Thank you.
    If I just may add, with regards to sort of matchmaking 
events, et cetera, we are working with the Department of 
Defense to ensure that we increase matchmaking events. As has 
been mentioned, they have a new Office of Small Business 
Programs director. I should also mention that the 
Administration has asked that senior level officials, Senate-
confirmed officials participate in at least two small business 
matchmaking events from each agency, so that should increase 
the opportunities for small businesses to participate. And I 
think that level of commitment from the agency would encourage 
small businesses, would encourage program buyers at the agency 
to be present, but it would encourage small businesses to 
participate as well.
    Mr. West. Well, the AUSA winter symposium is coming up for 
Fort Lauderdale, which happens to be our district. Is there any 
kind of way that we can say to AUSA, you need to earmark out, 
you know, ``X'' amount of space on that floor for some of these 
local small businesses that do DOD type of contracts? I can 
name about 10 off the top of my head. But is that something 
that we can go to them and, you know, try to get them to do?
    Mr. Shoraka. I wouldn't know the answer to that right off 
the top of my head, but I can certainly work on that when I get 
back to the office and get an answer to you.
    Mr. West. Ms. Hillmer.
    Ms. Hillmer. Well, I can speak from NDIA's perspective. 
Actually, what we are doing this year, because NDIA has an 
annual small business conference, we are actually making it 
more regionalized, so we do attract the regional small 
businesses.
    Speaking from a small business point of view, the reason 
you don't see those small businesses at these bigger events is 
because of the cost. When I first started my business, I spent 
a lot of money attending a lot of events, a lot of matchmaking, 
things like that. Didn't result in any business.
    So I think what we have to do, and to the Department's 
credit, Department of Defense, they are actually looking at 
this as well, how do you make these events a return on 
investment for small businesses who participate? How do you 
measure that? And, quite frankly, just ask them, did you get 
any business out of this, a year later, 2 years later, things 
like that?
    Regarding your specific question, can you ask an 
association to set aside some space or some time for small 
businesses? I say, try it. Let's see what happens.
    Mr. West. Okay. You guys try that, and I will try it on my 
end.
    The other question I have real quickly, a good friend of 
mine, Colonel Pete Newell, started a great organization with 
the Army, called the Rapid Force Initiative, where they go over 
into these combat theaters of operation, they find out 
immediately the type of things that the men and women on the 
ground need. And they come back, and they go looking for small 
businesses that can provide those type of goods and services 
right off the shelf. What are we doing to try to, you know, use 
that type of small business innovation to cut down on this 
procurement and acquisition process that we have that, you 
know, can go from, you know, until ad infinitum, ad nauseam, so 
is there something we can do with that to take what Colonel 
Newell has with the Army and extend that out for the other 
branches of service or maybe make that a DOD type of, you know, 
agency?
    Mr. Shoraka. If I can answer, with regards to the SBA, we 
have several cluster initiatives where we have some of them 
focused on the Department of Defense, which provides incentives 
for identifying opportunities, as you have mentioned. Also, as 
was mentioned earlier, the SBIR and STTR [Small Business 
Technology Transfer Program] initiatives, and with the 6-year 
extension that provides, you know, a level of comfort for small 
businesses and certainty. I think that encourages them to 
participate in the program, and I would say that with the 
increase in the grants, that should also encourage them to 
participate in the program.
    Ms. Hillmer. I believe DOD has something called a Rapid 
Innovation Fund [RIF], where they are specifically targeting 
some small businesses and helping them get through--they have 
really neat products and services--and helping them get through 
the procurement process without having to jump through all the 
hoops. But I like your idea very much, and I think we should 
try to do it.
    Mr. West. Very well.
    Thank you, Mr. Chairman. I yield back.
    Mr. Shuster. Thank you.
    As we talked a little bit about here, I said in my opening 
statement and a couple other members mentioned about the 
Department of Defense, the project, the program managers being 
risk-averse, something was said, put some teeth into the 
mandates. I always get a little concerned when we are more 
forcing things down, sometimes you force bad decisions, and I 
think somebody was talking a little, how do you reward taking 
those risks? And in Washington, DC, everybody is concerned 
about taking a risk because The Washington Post or the Los 
Angeles Times or one of these newspapers pile on and say how 
terrible it was that this program manager or this Member of 
Congress or this company took a risk to try to do something, 
and obviously, it didn't succeed. So as I am going through this 
process, and I will just try to throw this idea out there. You 
know, we have heard about, today we talked a lot about not 
enough market research out there, you know, DOD has to, they 
want to deal with somebody they have got experience with 
because they have experience and they know they can perform 
something. We have heard a lot about the DCAA [Defense Contract 
Audit Agency] and their auditing and how difficult that is, and 
so as I am thinking about this and trying to think a little bit 
outside the box, is it possible that--there are industries in 
America that self-regulate, the financial services industry, 
FINRA [Financial Industry Regulatory Authority] is self-
regulatory, CPAs [Certified Public Accountants]; even, God 
forbid, the lawyers I think self-regulate to a certain degree. 
Is it possible to have an organization that is funded by 
industry that, you know, for one thing maybe certifies a 
company? Because a lot of the work when you go into--in Hawaii, 
we went into, and the arsenal and other places, we have gone 
into where a lot of the work they do, they are machine shops, 
and you are machining things, but industry all across America, 
not Department of Defense, they get things machined and built 
all the time that isn't specialized to the Department of 
Defense. And sometimes we try to make it that, oh, it has got 
to be machined exactly this way or it is not going to fit where 
if you are manufacturing any kind of high-performance vehicle 
or item, it has got to be machined properly. So is it possible 
in your minds to set up an organization that maybe certifies 
companies and says, yeah, this company can machine or this 
company can manufacture this? Is it possible in that 
organization to sort of self-regulate and go in and do the 
audits on smaller businesses? And of course, you would still 
have--for instance, FINRA has the SEC [Security and Exchanges 
Commission] over top of it, and when FINRA goes in, the SEC 
sometimes goes in behind and says, no, not good enough or you 
need to change.
    And I think we do two things, you know, I am saying this 
and across the street, if people hear me saying this, you know, 
we are going to eliminate a lot of DCAA employees, but push 
them out into the private sector, let them self-regulate. I 
believe they are going to have a better understanding of small 
businesses and, again, funded by, but FINRA's been working for 
70 years very well, as well as some of these other agencies, so 
when you talk about changing the culture over there, when you 
talk about how do we look at this differently, does that--when 
I say this thing to you, though not fully created in my mind, 
but is it completely out of the box, it is too crazy, or is 
that something that you see as potentially workable?
    Ms. Hillmer. It is an interesting thought. I hadn't thought 
about self-regulation. The biggest negative I could see to that 
would be competition. Once you start regulating, giving the 
seal of approval, then those companies that don't have that or 
don't know how to get it or can't afford it because there will 
be a price associated with it, then you kind of maybe knock 
them out.
    Mr. Shuster. But we are doing that already, aren't we, if 
you don't know how to get into DOD? And this is, you know, when 
I look at the FINRA model, I keep coming back to the industry, 
you want to be a financial broker in this country, you have got 
to go through the process and get certified by FINRA, and then 
you can sell the various products, where same thing, 
especially--you know, I am not concerned about the Boeings and 
the Lockheeds of the world, they have got it figured out. But 
it is very difficult for, and I have got small businesses come 
to me in my district all the time, how do I get business with 
DOD? And they think there is some magic, but it is get in there 
and pound away and go through the process, and it may take 3 
years, 5 years, you know, 10 years to get business.
    Mr. Shoraka. The only comment that I would make is, you 
know, my concern would be an additional layer of work for the 
small business. I mean, we hear about small businesses and 
getting on a schedule or small businesses and getting into the 
8(a) program, as an example. Another layer of certification I 
would maybe be concerned about that or costs associated 
thereof.
    Another thing, just with my perspective, I come out of the 
small business government contracting world myself before I was 
appointed to the SBA, and I know, as a small business that was 
a government contractor, I know that the DCAA oftentimes gets 
thrown under the bus, but they are for--and, you know, this is 
the perspective of the SBA, they are, you know, stewards of the 
taxpayer dollars, and I do know that the DCAA has certain 
restrictions that don't necessarily always apply to small 
businesses under contracts, from contract-to-contract 
provisions, but as stewards of the taxpayer dollars, they are 
sort of tasked with doing that work, but again, with the 
comment with regards to a certification process, that is the 
only thing I think that I would add.
    Mr. Shuster. Ms. Schubert.
    And with that, I believe Ms. Hanabusa has further 
questions.
    Ms. Hanabusa. I just had a follow-up for Ms. Schubert.
    Ms. Schubert, is there like a percentage that is the cost 
of a surety bond on a project?
    Ms. Schubert. There is. A premium on a surety bond is 
somewhere about 1 percent of the contract price or below.
    Ms. Hanabusa. So according to your testimony, you know, you 
were taking issue with the fact that the council went from 
$100,000 to $150,000, and you felt that it was going to leave 
unprotected any sub [subcontractor] that was doing work, I 
guess, on a $150,000 contract, am I reading that correctly?
    Ms. Schubert. Yes, that is correct.
    Ms. Hanabusa. That would be a sub to a contractor is a 
$150,000 contract?
    Ms. Schubert. Right.
    Ms. Hanabusa. So what if we were to go to a situation where 
we unbundled and they all became general contractors, then 
wouldn't a lot of the smaller guys also have to come up, if 
they were all about $150,000, that they would then all have to 
come with their own surety bond and payment bonds attached to 
them versus a general contractor who we assume would have that? 
Though I do know some generals who actually require certain 
large subs to carry subcontracting bonds as well, and the ones 
I was referring to are really the smaller subcontractors who, 
under the terms of their contract with the general, have to 
also carry surety and payment bond requirements, but if we were 
to, quote, unbundle it, wouldn't we result with more surety 
bonds out there, too?
    Ms. Schubert. There wouldn't be more surety bonds, you 
would just have different contractors who had the contracts up 
to the 150, you are talking about the $150,000.
    Ms. Hanabusa. Right, but if they were in this normal 
structure, you probably would have one large contractor who 
would have a surety bond, and the subs, probably depending on 
how their general felt, may or may not be required to carry the 
bonds, correct?
    Ms. Schubert. Right. And you could end up actually, as 
backwards as it sounds, you could end up with more surety bond 
requirements that way. The bond requirement covers the entire 
contract price, so say you have a $500,000--make something 
easy, a million dollar contract, you have one surety bond, and 
it is based on a million dollars. You divide it up into 
$150,000 contracts, you would still have the same overall value 
of surety bonds out there, it is just they would be provided by 
smaller contractors.
    Ms. Hanabusa. Different?
    Ms. Schubert. From different people, yes.
    Ms. Hanabusa. Do you know what the percentage rate on the 
call on those bonds are, from your industry standpoint? 
Military construction, for example, what is the failure rate 
that we are looking at that has called upon the bonds?
    Ms. Schubert. I can provide those statistics for you. That 
is one of the things our organization does, and one of the 
things to keep in mind is the point of--there are two points to 
the bond. One is the prequalification, as you described it very 
accurately.
    Ms. Hanabusa. Right.
    Ms. Schubert. And then the second is to pay if, in fact, 
the surety is wrong with their prequalification, they then turn 
around and pay, so I can provide the loss ratios for you.
    Ms. Hanabusa. Yes.
    Ms. Schubert. And the premium volume, and we can--the way 
it is divided up is Federal versus non-Federal. I don't believe 
that we have statistics specifically on military, but I can get 
you as much detail as we have.
    Ms. Hanabusa. Do you by any chance have statistics--this 
has been a curious thing for me. When they were in Hawaii, they 
got to see our example of corrosion, which was the stadium. And 
having been part of that litigation, I can tell you the 
litigation costs on many of it--I had a surety company--on the 
surety issues far exceeded the actual original construction 
costs, so do you have statistics that when we start to do all 
of this, at what point is it, you know--did all--everything 
associated with the bond exceed the actual benefit that we 
receive? In other words, did government ever have to step in, 
finish the project anyway? Do you have any statistics like 
that?
    Ms. Schubert. No. We have plenty of cases, I am sure, going 
both ways on that, and I would be happy to sit down and talk 
with you about that.
    Ms. Hanabusa. Sure, I would appreciate it. Thank you.
    Thank you, Mr. Chair.
    Ms. Schubert. Could I also--one suggestion that might 
address not these questions but the earlier question, the SBA 
surety bond guarantee program is a very useful tool for small 
contractors to get the bonds, so we work very closely with SBA 
on that, and if you would like, we could also sit down with you 
about the changes that are necessary so we can help increase 
the number of contractors who can get the benefit of the bond 
guarantee program.
    Ms. Hanabusa. I would appreciate that. Thank you.
    Ms. Schubert. You are welcome.
    Mr. Shuster. Thank you, Mrs. Hanabusa, and thank you for 
hosting us out there in Hawaii.
    And also, Ms. Sutton, we also saw examples of corrosion in 
Palmdale with some of our Air Force fighters, and they are 
telling us that coming in from Hawaii from Hickam Air Force 
Base, F-22s are going to come in, and because of the climate 
there, as well as some other places in the country, corrosion 
is a huge problem, so you were on our mind.
    No, I think of solving problems, and that is a big problem 
to solve.
    Mr. Larsen. No, we don't have problems like that in the 
Northwest also, if anybody wants to send the stuff there, it is 
fine.
    Ms. Sutton. It is good because we can actually--we do it in 
the United States.
    Mr. Shuster. Absolutely, absolutely.
    Well, again, I want to thank all of our panelists for being 
here. Appreciate you taking the time and providing us with your 
insights. And again, we are going to continue to do our work 
here. We are charged with coming up with some concrete language 
for legislation to help improve the environment for the folks 
that are working in the defense industrial base. And it is my 
thought that this--we were set up for 6 months. It is my 
thought this is going to take more than 6 months to really get 
at the core because when we talk about things like changing the 
culture and how do you get people to not be risk-averse, it is 
a difficult challenge. But it is something I think we are going 
to need to do, especially facing the kind of budget constraints 
we are going to have for the foreseeable future and also the 
need to continue to come up with new and better ways to defend 
our country, to give our warfighters the tools they need to 
keep America safe and secure.
    So, again, thank you for being here today. Appreciate your 
time.
    And the hearing is adjourned.
    [Whereupon, at 4:17 p.m., the panel was adjourned.]
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