[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
BARRIERS TO SMALL BUSINESS PARTICIPATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
FEBRUARY 9, 2012
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
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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
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
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
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
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OPENING STATEMENTS
Page
Hon. Mick Mulvaney............................................... 1
Hon. Judy Chu.................................................... 2
WITNESSES
Mr. Dirk D. Haire, Partner, Fox Rothschild, Washington, DC....... 4
Ms. Rosie Privitera Biondo, President of Women Construction
Owners and Executives (WCOE), Mark One Electric Co., Inc.,
Kansas City, MO................................................ 6
Mr. Mark McCallum, Chief Executive Officer, National Association
of Surety Bond Producers, Washington, DC....................... 8
Mr. Miguel Galarza, President, Yerba Buena Engineering &
Construction, San Francisco, CA................................ 10
Mr. James C. Dalton, P.E., Chief, Engineering and Construction,
U.S. Army Corps of Engineers, Washington, DC................... 27
Ms. Jeanne Hulit, Acting Associate Administrator for Capital
Access, Small Business Administration, Office of Surety
Guarantees, Washington, DC..................................... 28
Mr. William Guerin, Assistant Commissioner of the Office of
Construction Programs, General Service Administration, Public
Buildings Service, Washington, DC.............................. 30
APPENDIX
Prepared Statements:
Mr. Mark McCallum, Chief Executive Officer, National
Association of Surety Bond Producers, Washington, DC....... 38
Ms. Rosie Privitera Biondo, President of Women Construction
Owners and Executives (WCOE), Mark One Electric Co., Inc.,
Kansas City, MO............................................ 49
Mr. Dirk D. Haire, Partner, Fox Rothschild, Washington, DC... 55
Mr. Miguel Galarza, President, Yerba Buena Engineering &
Construction, San Francisco, CA............................ 65
Ms. Jeanne Hulit, Acting Associate Administrator for Capital
Access, Small Business Administration, Office of Surety
Guarantees, Washington, DC................................. 71
Mr. James C. Dalton, P.E., Chief, Engineering and
Construction, U.S. Army Corps of Engineers, Washington, DC. 73
Mr. William Guerin, Assistant Commissioner of the Office of
Construction Programs, General Service Administration,
Public Buildings Service, Washington, DC................... 87
Questions for the Record:
Questions for James Dalton................................... 143
Questions for William Guerin................................. 146
Questions for Jeanne Hulit................................... 149
Answers for the Record:
Response from William Guerin................................. 151
Response from Jeanne Hulit................................... 159
Additional Materials for the Record:
San Francisco Human Rights Commission Summary of Findings.... 93
Presentation on Bonding Assistance Programs by Merriwether &
Williams Insurance Services................................ 108
Special Informational Notice to All Bond-Approving
(Contracting) Officers..................................... 124
Sheet Metal and Air Conditioning Contractors' National
Association Letter for the Record.......................... 126
National Association of Surety Bond Producers and The Surety
& Fidelity Association of America Letter for the Record.... 128
The Barbour Group Testimony of Karen Pecora-Barbour.......... 130
U.S. Department of the Interior Policy Release from Debra
Sonderman.................................................. 141
CONSTRUCTION CONTRACTING: BARRIERS TO SMALL BUSINESS PARTICIPATION
---------- --
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THURSDAY, FEBRUARY 9, 2012
House of Representatives,
Committee on Small Business,
Subcommittee on Contracting and Workforce,
Washington, DC.
The Committee met, pursuant to call, at 10:45 a.m., in room
2360, Rayburn House Office Building. Hon. Mick Mulvaney
(chairman of the subcommittee) presiding.
Present: Representatives Mulvaney, West, Hanna, Chu,
Schrader.
Chairman Mulvaney. I apologize in advance on behalf of
myself and Ranking Member Chu for being 44 minutes late. But at
least this way we will not be interrupted by votes. And we do
hope that we will have other members of the Committee,
Subcommittee, coming and going. But we are going to go ahead
and get started now.
We are here today to discuss the impediments that small
businesses face when competing for federal government
construction contracts. The federal sector is an extremely
important portion of the construction market, accounting for 40
percent of the value of ongoing overall private and public
sector construction activity in 2010, compared to an average of
about 20 percent in the prior decade. However, in our current
economic climate, the construction industry faces extremely low
profit margins and an incredibly high rate of unemployment. It
was over 18 percent just last month, which is, as high as that
is, the lowest the unemployment rate has been for the last two
years. Against that backdrop, we have regulatory requirements
of the federal contracting process that are costly, burdensome,
and often prohibit small businesses from successfully competing
on contracts, especially construction contracts. This is not
satisfactory.
You will hear testimony today that brings to the forefront
issues that small businesses cope with on a daily basis: as
prime construction contractors and subcontractors on
construction projects, from numerous statutory and regulatory
changes, to obstacles dictating how construction work will be
solicited and awarded. For example, the bundling of
construction requirements often prevents small entities from
competing for contracts that only large entities have the
resources to perform. However, as a former small home builder
myself, I know that small construction companies have the
resources and expertise to build in their communities at
competitive prices.
We will also examine challenges involved with the sealed
bidding methods of contract awards, the manner in which SBA
calculates the prime contractor's credit for subcontracting
goals, the prompt payment of prime contractors and
subcontractors on construction contracts, the government's
retention of contract payment on some construction contracts,
and the desirability of having a local preference in some
circumstances for construction contracts. Finally, we will
address the effectiveness of the SBA's Surety Bond Program and
take a look at the individual surety bond market's role in
securing bonds for government contracts.
The testimonies today should help the Committee determine
if legislative changes or policy clarifications are needed to
further maximize small business participation in construction
contracting. I would like to thank everybody for being here
today. We look forward to your testimony on construction.
At some point during the day we hope to have two nonmembers
of the Committee participate, the gentleman from New York, Mr.
Hanna, and the lady from Washington, Ms. Herrera Beutler. And
if there is no objection we will allow them to sit today.
With no objection being heard, we will do that assuming
they show.
So for that, before we begin, I will turn to the Ranking
Member for her opening comments. Ms. Chu.
Ms. Chu. Thank you, Mr. Chairman.
In recent months, the nation has finally seen some enduring
glimmers of economic hope. The unemployment rate has fallen for
five straight months and the 3.7 million new jobs have been
created over the last two years. In my home state of
California, optimism is picking up as a measure of a state's
economic activity is now 12 percent above its cyclical low. And
while there is much progress that still must be made, these are
promising developments.
Part and parcel to this recovery is the revival of the
construction industry. According to the Associated General
Contractors of America, year-over-year construction employment
improved in 28 states last month, including California, which
led the way to creating more than 21,000 new jobs. This is the
largest such increase since November 2007.
While this is positive news, the truth is that the
unemployment rate in the construction industry is more than 17
percent, double that of the total population. In fact,
according to AGC, employment remains at 1996 levels. The reason
is simple. Private sector spending, as well as that of state
and local governments, has declined substantially over the last
few years. Compounding this are several challenges that small
businesses face in winning federal construction work.
Among these problems is the continued bundling of
contracts. Last year more than 150 contracts worth over $50
billion were consolidated. As a result, nearly 200 small
businesses missed out on contracting opportunities worth more
than $15 billion. By bundling large contracts such as these,
the government effectively shuts out smaller companies from
competing for work that they have the skills and expertise to
perform. Splitting these mega contracts into smaller pieces
would enable more construction firms to participate in these
projects. By doing so, the government would avail itself of
more qualified companies and the high quality craftsmanship
that they bring to the table.
Another challenge that small construction firms face is
receiving a surety bond which is required by the government and
guarantees contractor performance. While the SBA operates a
program to fill this gap, the agency found that only 1,000 of
the 72,000 small construction businesses that are less than two
years old used it last year.
Why is this? Small businesses cite too much paperwork and a
guarantee rate that is not high enough as problems plague this
initiative. These concerns, as well as those requiring the
adequacy of bond sizes themselves are preventing small firms
from competing for federal construction contracts.
While bundling and bonding are the most notable obstacles
to small firms' participation in federal construction projects,
other issues impede their involvement. Subcontractor
protections are important in the bidding process as are
requirements that all contractors, both primes and subs,
receive prompt payment for their services. After all, many
small businesses do not have the deep financial pockets of
larger firms and need to receive payment to make payroll and
pay their own vendors.
During today's hearing I am looking forward to hearing from
both industry experts and agency officials on these matters.
Ensuring that small construction firms can fully compete for
federal contracts is critical, not just for them but for the
country as this sector underpins much of our nation's economy.
In light of declining private sector and state and local
infrastructure investments, federal contracts have become
increasingly an important source of revenue for small
businesses. With such spending more than doubling over the last
decade, the reality is that doing business with the federal
government is no longer simply an option but rather a critical
requirement for small firms' long term success.
Thank you, and I yield back.
Chairman Mulvaney. Thank you, Ms. Chu.
Just a couple of housekeeping matters. The way we work it
in here is that when we ask you to begin speaking you will see
a timer in front of you and the basic time allotment is five
minutes. You will see a green light for four minutes and then
the yellow light for the last minute. However, our practice,
since we have been doing this this year, is to try and give you
as much leniency as possible. Please do not feel the need to
rush through your presentation. We are very interested. Many of
you have come long distances. So we will give you as much time
as you need. If for some reason you do start to get a little
longwinded, which is not unusual in this room, mostly from us
more than it is from you, you will hear me lightly tap the
gavel and that is just an invitation to please start to wrap
things up. And then what we will do is we will have everybody's
testimony at one time and then we will turn to the members for
questions.
STATEMENTS OF DIRK D. HAIRE, PARTNER, FOX ROTHSCHILD,
TESTIFYING ON BEHALF OF THE ASSOCIATED GENERAL CONTRACTORS OF
AMERICA; ROSANA PRIVITERA BIONDO, PRESIDENT, MARK ONE ELECTRIC
CO., INC., TESTIFYING ON BEHALF OF WOMEN CONSTRUCTION OWNERS
AND EXECUTIVES; MARK MCCALLUM, CHIEF EXECUTIVE OFFICER,
NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS; MIGUEL GALARZA,
PRESIDENT, YERBA BUENA ENGINEERING AND CONSTRUCTION
Chairman Mulvaney. So with that I will introduce some of
the members of the first panel. We will start with Mr. Dirk
Haire. He is the managing partner with Fox Rothschild and he
practices in the area of construction law and government
contracts. Mr. Haire is testifying on behalf of the Associated
General Contractors of America, for whom he is the federal--
excuse me, serves on the Federal Acquisition Regulation
Committee.
Sitting next to him is Mrs. Rosana Privitera Biondo. She is
the founding employee, now the president, of Mark One Electric
Company. She is testifying as the President of Women
Construction Owners and Executives. Welcome, Ms. Biondo.
Following her is Mr. McCallum. Mark McCallum is the chief
executive officer of the National Association of Surety Bond
Producers, an international association of companies employing
professional surety bond producers and brokers.
And I will yield now to Ms. Chu for the introduction of our
final panel member.
Ms. Chu. Thank you, Mr. Chairman, for allowing me to
introduce Miguel Galarza, who is president of Yerba Buena
Engineering and Construction, which is a multimillion dollar
civil and environmental engineering firm. He successfully
managed contracts for the U.S. Navy, the U.S. Army Corps of
Engineers, the U.S. Air Force, National Park Service, as well
as for the California Department of Transportation [CALTRANS].
Mr. Galarza has been honored by the Small Business
Administration, the California Hispanic Chamber of Commerce,
Ernst and Young, Inc. Magazine, and the Minority Business
Development Agency. He received a B.S. in construction
management and attended UCLA's Anderson School of Business and
Dartmouth's Tuck School of Business.
Mr. Galarza, I thank you for being here and I welcome you
to the hearing.
Chairman Mulvaney. You should have him sit up here.
Goodness gracious.
Mr. Haire, fire away. We will just go right down the aisle.
STATEMENT OF DIRK D. HAIRE
Mr. Haire. Thank you. Good morning.
Although I am in a private law firm, private practice
representing contractors involved in federal small business
issues, my testimony here today involves or is on behalf of the
Associated General Contractors of America and their 33,000
member companies, many of which are small or closely held
businesses. As you mentioned, Mr. Chairman, I am on a number of
leadership roles in the AGC and an active member.
The federal government has many different programs and
services to support small business contracting. Agency applauds
this Subcommittee for holding today's hearing to examine ways
to improve the delivery of federal construction services
involving small businesses. AGC's members recognize the
potential benefits that federal small business programs provide
to contractors who qualify for these programs.
However, the programs as currently regulated sometimes do
not achieve the important goal of developing successful small
businesses that can compete and succeed on their own.
SBA's affiliation role provides a good example of the
challenge. In recent years, many federal agencies have
increased their goals for small business participation in
construction to the point where small businesses are regularly
given the opportunity to compete for projects that stretch
their resources and capabilities. While this can be very
positive for growing a small business, these small businesses
often need to subcontract some of the work to a larger business
which may have more expertise or resources. One would think
that SBA publishes a clear set of rules for affiliation so that
contractors would know what they can and cannot do with respect
to business relationships between small prime contractors and
their large business subcontractors. That is not the case.
SBA polices the affiliation rule on a case-by-case basis
with no set of safe harbors that contractors can rely on to
know if they are in compliance or not in compliance. This ad
hoc approach has thrown the construction industry into disarray
when it comes to small business contracting issues. I have
clients who routinely receive inconsistent advice on small
business issues by different agencies, and even by different
geographic offices within the same agencies. Agency believes
that one way to solve this problem is to adopt a consistent set
of safe harbor activities with respect to affiliation so that
all contractors, large and small, know what they can and cannot
do with respect to small business contracting issues.
The construction industry has historically supported and
provided opportunities for small businesses and is proud of its
efforts to include small businesses and allow small businesses
to develop.
Consequently, agencies often over-rely on the construction
industry to shoulder the burden for other industries that have
not encouraged small business involvement. Agencies try to meet
their entire goal by limiting competition almost only to small
businesses in construction. In effect, the construction
industry has been penalized for their success encouraging the
utilization of small businesses.
The same concern holds true for small business
subcontracting. I routinely see solicitations for $100 million
and even billion dollar construction projects with small
business subcontracting goals of 70 percent or more. Rather
than force unrealistic subcontracting goals on very large
projects where an extremely high level of small business
subcontracting is simply not feasible. The government should
adopt its agency-wide goals and subcontracting goals to be more
consistent with what the market typically provides.
We thank the Committee for recognizing the need to begin to
address the issue of allowing prime contractors to fully report
and receive credit for small business subcontracting activities
at all tiers. This will increase transparency and demonstrate
whether an agency has actually met its utilization goals.
Another major challenge for contractors over the past
several years is how federal agencies have addressed the
consolidation of multiple construction contracts into a single
contract, the bundling issue. One of the major reasons bundling
on construction contracts has proliferated is that there is
currently no provision in federal law that requires
construction contracts to be reviewed for a bundling
determination. Incidentally, from our members' perspective, the
utilization of multiple award task order contracts [MATOC] or
multiple award construction contracts, also known as MACs as
they have been called, fit within the parameters--from our view
fit within the parameters of contract bundling.
AGC thanks this Committee for its consideration of revising
the bundling definition to clarify the contracting building
rules apply to construction procurements and that these
procurements must be reviewed for any negative impacts on small
companies.
Another trend that we have seen at the state and local
level is the proliferation of local geographic preferences. AGC
believes that these preferences can, in fact, be very
detrimental because they encourage retaliatory measures from
other local surrounding jurisdictions and can have the effect
of hurting small and local construction companies that
typically are limited by geography.
Thank you for the opportunity to provide our views on
working with the federal market. AGC strongly recommends
Congress reform the federal procurement process to: (1) create
safe harbor standards that do not penalize contractors for
making good faith efforts to abide by the SBA rules and
regulations, and specifically the affiliation rule; (2) limit
overreliance on construction to achieve overall agency small
business subcontracting goals; (3) ensure that small business
goals take into consideration small business capacity in the
relevant markets; (4) count all small business participation at
all contracting tiers; and (5) revise the bundling definition
to clarify that contract bundling rules apply to construction
procurements.
Thank you. I appreciate the time.
Chairman Mulvaney. Thank you, Mr. Haire. And we are going
to have several questions but we will go through all the
testimony first and then come back one at a time.
Ms. Biondo.
STATEMENT OF ROSANA PRIVITERA BIONDO
Ms. Biondo. Mr. Chair, Ranking Member Chu, and members of
the Subcommittee. Good morning.
I am Rosana Privitera Biondo, president of Mark One
Electric Company, headquartered in Kansas City, Missouri. Our
company does both prime and subcontracting work. I can see the
issues from both sides.
Today I am testifying in the capacity as president of Women
Construction Owners and Executives (WCOE). Our mission is to
create contracting opportunities for our members. Our members
are women. We have just completed our 28th annual leadership
conference here in DC, and we had women business owners from
across the country discuss these important issues.
Let me begin with size standards. The SBA's size standards
in construction are based on either revenue or number of
employees. We at WCOE would like the SBA's office to change the
process from revenue to number of employees. Here is why:
A small specialty contractor is capped at $14 million
revenue. Then once they exceed those numbers they are now a
large company. Yet, a company that you may buy material
supplies from may have revenue that exceeds that same $14
million number, yet their company is not considered small--they
are still considered small. And the reason they are still
considered small is that they are done by the number of
employees. So in this very avenue you have companies who have
all types of dollar ranges that differ, yet number of employees
seems to be a better way to calculate whether a company is
large or small. So we urge them to look at calculating the size
of a company based on number of employees.
Bid shopping--We need this to shop. This hurts women in all
small businesses. We would like the agency to implement a
process that on all sealed bids that the prime contractor would
submit, that they would be required to list their major
subcontractors by name, scope, and dollar value at the time of
bid. This would eliminate the after-the-fact low bid
substitution. This happens both in the private and public
sector.
Example: I bid a job and on that day the general contractor
comes back to me and says we used you on this project; you are
the low bidder. Weeks go by; You never hear any more from them
and then you are asked what happened? You are told, after-the-
fact, that a lower bid came in and so they used that bid. So
the question is at the time of bid, if this was the federal
government, and I was low at the time of bid, did they use--
they used my number. Where did that money go? Did the federal
government get that savings? And it is just not a fair process.
So we would like to see, again, I will say it again, we
would like to see on sealed bids that the majority
subcontractors be listed by name, value, and scope of work.
This would give the contracting officers the ability to police
this through their contract process and this would help small
businesses of all kinds.
WOSB, Women-Owned Small Business Program. They refer to
this as 8M. This was implemented last year. This program is
intended for restricted competition for women-owned businesses
seeking prime contracts, very much like the 8A program and the
service-disabled veterans program. This is not what we got. It
is restricting our women to a $4 million cap on the size of
projects. That statistic shows that the $4 million dollar value
created by 165,000 projects, that the size of the contracts end
up being $118,000 for 165,000 procurements.
Well, companies that do $118,000, may or may not make a few
thousand dollars at the end of the day. That is not a way to
grow new businesses, especially for women. The women have
waited 11 years for this program to be enacted and then we are
being capped right out of the chute. But the other two, 8A and
service-disabled vets are not.
And just to give you some further statistics, contracts
that are over the $4 million value created about 2,125 projects
with a base contract of $16.6. This is what women need to grow
their companies in order for them to become more successful;
not this $4 million cap. Now, we understand that this has
already started to be addressed but we urge you to remove these
caps.
Retention and bonding. In the federal government
contracting, it says that retention is at the discretion of the
contracting officer. We think that retention should only be
held on work in question and nothing else. We feel that if a
bond is in place, for sure no retention should be held as that
is double dipping. The bond should protect the owner.
Bundling. Bundling or the grouping together of different
requirements into one enormous contract. They may or may not--
let me start over.
Bundling or grouping together of different requirements
into one enormous contract means small businesses cannot
compete as primes. They may or may not be getting
subcontracting work but do not get prime work. However, the
current unbundling rules do not apply to new construction
contracts, so many small construction firms do not get the
protection given to the small business in other industries . .
. we need these protections. Bundling hurts the women-owned
business.
In conclusion, given the importance of contracting, WCOE,
we applaud Chairman Graves for introducing the Government
Efficiency through Small Business Act of 2012. We also express
our support and thanks to you, Chairman, for introducing H.R.
3893 on Subcontracting, and you, Ranking Member Chu, for your
work on Mentor Protege Programs. We also want to thank
Congressman Hanna for his Bonding Bill and the other Committee
members who have been, or are, in the process of introducing
small business contracting legislation. Thank you.
Chairman Mulvaney. Thank you, Mr. McCallum.
STATEMENT OF MARK MCCALLUM
Mr. McCallum. Chairman Mulvaney, Ranking Member Chu,
members of the Subcommittee on Contracting and Workforce. Thank
you for the opportunity to speak with you this morning.
NASBP members are companies employing licensed surety bond
producers who assist businesses of all sizes to obtain surety
credit and to grow as competitive businesses. Surety bonds
assure that businesses seeking award of federal contracts are
qualified to undertake the contract obligations sought and they
provide guarantees of payment and performance if the business
awarded the contract defaults on its contract obligation. Bonds
are statutorily required and they preserve vital taxpayer funds
and provide payment remedies to downstream parties, the
subcontractors and the suppliers, in the event the prime
contractor fails to pay them. Without recourse to a payment
bond remedy, unpaid subcontractors and suppliers, particularly
small construction firms, may not be able to continue as viable
businesses, threatening the jobs that they create. Sureties
underwrite to assure qualifications and to prevent losses. They
assess the character, the capacity, and the capital of the
firm, to determine if the business is capable of performing
each contract.
An important SBA program exists to assist small businesses
having difficulty qualifying in the standard market. Started in
1971, the SBA Bond Guarantee Program provides guarantees
ranging from 70 to 90 percent to surety companies as an
inducement to extend surety credit, the firms that otherwise do
not qualify in the standard surety market. This program has
helped thousands of small construction firms over the years,
but it could be helping even more.
The SBA recently has undertaken efforts to improve the
program, such as streamlining its bond application process and
improving its response time to claims and expanding its
outreach to design build contracts. It is a good federal
program that deserves to get better to continue to achieve its
mission. Among the enhancements that we propose are increasing
the guaranteed percentage to a uniform 95 percent, reducing the
fees charged businesses and sureties to access the program,
increasing the contract maximum from $2 million to $5 million,
vesting discretion in the program administrator to assume
program liabilities, and eliminating regulations out of keeping
with prevailing practices of the construction and surety
industries. Further recommendations are detailed in our written
testimony.
Revitalizing this program with statutory and regulatory
enhancements will increase its effectiveness, directly
benefitting small businesses seeking access to the public
contract market.
I now turn your attention to a bill, the Security in
Bonding Act of 2011, H.R. 3534, which was introduced on
December 1, by Representative Hanna and co-sponsored by
Chairman Mulvaney. NASBP, along with 10 other national
organizations, many of which are represented in this room,
support H.R. 3534 as a critical and commonsense measure to
protect small businesses and to ensure the integrity of surety
bonds on federal construction projects when issued by
individuals using a pledge of assets.
Currently, construction firms may use one of three methods
to furnish security on a federal construction project. They may
secure a bond written by a corporate surety listed in Treasury
Circular 570. They may use their own assets to purchase and to
post an eligible obligation, which is a public debt obligation
of the U.S. government in lieu of a surety bond, or they may
obtain a bond from an individual if the bond is secured by an
acceptable asset which includes stocks, bonds, and real
property.
The role of the surety is predicated on its financial
standing. Corporate sureties writing on federal projects must
possess a certificate of authority from the Department of the
Treasury, which conducts a financial review of the surety and
sets a single bond size limit for that surety. Corporate
sureties are licensed in the states in which they conduct
business and are required to obtain certificates of insurance
in those states from state insurance departments. They are
rated by private rating organizations, such as A. M. Best,
which publicize their financial strength and size.
Individual sureties are not subject to the same level of
scrutiny and oversight as corporate sureties and are vetted
solely by contracting officers. No third-party rating
information is available on individual sureties. If the assets
backing an individual surety bond prove insufficient or
nonexistent, unpaid subs and suppliers are denied their
statutory payment remedy.
H.R. 3534 solves this problem. It requires individual
sureties to pledge solely those assets defined as eligible
obligations by the Secretary of the Treasury and provide those
assets to the federal contracting authority, who in turn will
deposit them in a federal depository, ensuring that pledged
assets are sufficient, readily convertible to cash, and in the
physical custody and control of the federal government. This is
nothing more than what now is statutorily required of
construction firms that wish to pledge assets as security on a
federal contract in lieu of a surety bond.
Small firms working on federal construction projects,
either as subs or suppliers, have no control over the prime
contractor's choice of security provided to the federal
government, but they suffer the most harm financially if that
provided security proves illusory. H.R. 3534 will give them the
confidence that on all federal projects adequate and reliable
security is in place to guarantee that they will be paid.
Thank you very much for your time and attention this
morning. I look forward to answering any questions you may
have.
Chairman Mulvaney. Thank you, Mr. McCallum. Finally, Mr.
Galarza.
STATEMENT OF MIGUEL GALARZA
Mr. Galarza. Thank you, Chairman Mulvaney and Ranking
Member Chu and other members of the Subcommittee for the
opportunity to speak to you today.
My name is Miguel Galarza. I am from San Francisco,
California. And I am the owner and founder of Yerba Buena
Engineering and Construction. We have branch offices in Salt
Lake City also. And in addition to all the accolades that
Ranking Member Chu gave me, in addition to my family and
daughter, some of the most proud things are being a state
director for AGC and also a board of directors for ICA or the
Inner City Advisors, which is a nonprofit providing assistance
to smaller inner city companies.
As the founder of Yerba Buena Engineering, I have had a
long road starting from in the field as a laborer to working my
way up through a mid-management level and then becoming an
owner of a company. And so I think I provide a unique
perspective to what it means to be a small business from the
eyes of an employee, from the eyes of a manager, and in the
eyes of an owner. And having learned the ropes the hard way and
understanding what it means to be a small business and
understand the rules that are involved in playing in the game
of surety and bonding and lines of credit.
So I am hoping that today through this discussion,
obviously small business is a nonpartisan issue. Having this
open discussion to be able to discuss how we can improve some
of the subcontracting issues that are prevalent in federal
contracting, the small business bonding issues that prevail and
other bundling issues are prominent and how we can come to some
resolution and some at least meaningful exchanges.
One of the things that being in eight states throughout the
United States and having done well in excess of over $100
million worth of work, we have had this unique perspective of
having had Aerofunded projects. And these Aerofunded projects,
Yerba Buena was the recipient of 21 of them. And we were able
to create a lot of projects and a lot of jobs to keep people
busy and keep people employed. And that is one of the main
reasons why I can see why bundling is important because when
that funding came in place it was important that there was an
avenue that silver-rated projects can be implemented quickly
and efficiently and expediently to get people to work.
And so while there is a need for bundling in the form of an
IDIQ or MATOC or as-needed contracts through IDIQ, there are
other opportunities that are not being used now to create
opportunities not only for those prime contractors but for
those subcontractors that do not get that main prime contract.
And that is where I see there is a big lack in opportunity.
Currently today, through FAR Subpart 19, there are
requirements for subcontracting. Unfortunately, those numbers
do not really become numbers. The reporting mechanism for
subcontracting is done under, I believe, Note Form 244 or 294.
That number or that form basically talks about percentages. It
does not talk about dollars. So when you have a $100 million
contract, you do not talk about--you talk about 60 percent.
Sixty percent of subcontracting. But what really makes up that
60 percent? It is the portion of which the prime contractor
designates he is going to subcontract.
So in that $100 million contract, if he decides he is only
going to subcontract $2 million and he says he met his goal of
60 percent, what is 60 percent of $2 million? In the big scheme
of things he can say he did 60 percent and he met his goal, but
he really did not do much other than meet his minimum standard
that was required contractually.
I think the City of San Francisco, the State of California,
and other state agencies provide a true roadmap of how
subcontracting should be done. It should be done based on
dollars and on total contract value. That way you have an
obligation to meet a certain requirement. If it is a $100
million contract, we want 20 percent subcontract; that is $20
million worth of opportunity. And developing a real statutory
penalty for not enforcing and meeting those obligations that
you set forth as we need the contract.
There is nothing worse than to win a contract and then say
you are nonresponsive because you failed to meet your statutory
requirement. That is the penalty that needs to be imposed. Only
then when there are real teeth in enforcement will contractors
begin to understand that that is the real price of doing
business for the federal government. And they will start to
reach out and look for opportunities for subcontractors.
There are other issues regarding bundling, subcontracting,
but my time is short so let the Committee talk to me in
questions if you feel free. Thank you again for the
opportunity.
Chairman Mulvaney. Thank you, Mr. Galarza. And thank you to
all the panelists. As is my custom, I will defer my questions
to the end and ask Ms. Chu now to take her opportunity to ask
the panelists questions.
Ms. Chu. Thank you. I will start with Mr. Galarza. You
highlight the City of San Francisco and many of its practices,
and one of those things that you highlight, certainly in your
written testimony, is the Surety Bond Program that they have,
which is a model of their strong commitment to including the
small business community in a major procurement program. How
does this program differ from SBA's Surety Bond Program?
Mr. Galarza. I think fundamentally the main difference is
the mechanism, to be quite candid, reimbursement. Under the SBA
funding you are still dealing with a broker who still needs to
commit to a certain level of effort to get this contractor
bondable and to make sure that he has all the steps in place,
his financials and so forth. There is no guarantee that he is
going to be successful and/or in other words earn a commission
or increase some income for the level of effort that he has put
into it.
So what ends up happening, unfortunately, is those thousand
contractors that you mention utilizing are those that have been
somewhat the low hanging fruit, the easy ones that have been
cherry picked that are easy to access. They have financials.
They have the tools in place already to be an easy target to be
used.
The City of San Francisco does not use that methodology.
They use the contract. The agency that is used to initiate the
bonding program is paid a flat fee. And their job is to get the
contractor ready to do business the right way. In other words,
build their foundation so that at some point in time they no
longer need the Surety Bond Program. They are in the game with
the rest of contractors. Ultimately, this is supposed to be a
developmental stage to get them to the next level. Not that
they should depend on this 5, 6, 7, 8, 10 years down the road.
They should be able to build their capacity, learn how it means
to be in business, to report, to pay their taxes, to do what it
needs to be part of the taxpaying community. And then you will
be able to get bonding a lot easier. Those are all simple--
bonding has not changed in 50 years. It is the same rules that
have always applied. Ultimately, you choose as a contractor
whether you want to play by the rules or not play by the rules.
Unfortunately, so many small businesses do not understand what
the rules are and so they are lacking that understanding so
that they can play by the rules.
Ms. Chu. Well, for Mr. Galarza and also our expert on
surety bonds, Mr. McCallum, should Congress consider scaling up
or piloting this type of bonding program? If so, which agency
would be the best to run this program?
Mr. McCallum. I would think it would be through the Small
Business Administration. I think there could be additional
enhancements made. The industry itself has done a lot of
outreach, particularly in the last three years, given the
economic climate. And as Mr. Galarza points out, oftentimes one
of the initial difficulties is that businesses just do not know
where to go. They are not aware of what a surety bond is, how
to go about it, and so forth. And so the industry has done a
number of what they call contractor development programs which
were programmed by the Surety and Fidelity Association of
America and have been partnering with the USDOT, for example.
They did 11 different programs last year. I think they are on
track to do 11 or 12 this year, and it is designed to go out
there into the small business community and give them initial
awareness and education about bonding and other things, such as
risk management, that they need to know in order to qualify not
just for bonding credit but for financial credit as well. And
there needs to be more investment, I think, by any contracting
agency of the federal government in trying to put on these
types of awareness and education programs.
Mr. Galarza. If I might add, in the 15 years that the city
program has been in place, the millions of dollars of contracts
that they have had, they have been able to collateralize these
bonds with as little as 40 percent. And one of the key reasons
that it works in San Francisco is because the city itself has
put $5 million in escrow. And that $5 million means that the
city has a vested interest in making sure the contractor is
successful. After all, it is their money that is backing their
own bond.
And so to make sure that we are all in together, so to say,
rather than having an adversarial role, the city comes to the
table and says how can we make sure you as a contractor are
successful? What is it that is going on in this project that is
preventing you and the project itself from meeting success. So
given that it is their money they have a vested interest in
making sure that it succeeds.
Mr. McCallum. If I may add an additional point, one of the
things that our members seem to find out that a lot of times
with an emerging business there is a reticent to take their
hard-earned capital and apply it for the services of a
construction attorney or a construction accountant. That can be
a significant fee for them when they are just getting started.
At the same time that is exactly what they need to be doing to
make sure that they are building their business infrastructure
so they can succeed and go to the next level. And there are
sometimes local programs that will, through a grant of funds,
help them with securing those kinds of professional services.
Or alternatively there may be opportunities through, for
example, the SCORE program where you have retirees who are
construction lawyers or accountants come and provide those
kinds of services for businesses.
Ms. Chu. Thank you. Those are great suggestions.
Now I would like to direct a question to Ms. Privitera
Biondo. I was very interested in your recommendations because,
of course, in federal government we have this 5 percent goal
for women-owned businesses but we are only at 4.04 percent,
which is a huge amount if you think about the fact that we have
over $500 billion worth of federal contracts. So we really need
to improve this situation. And in your testimony you bring up
the practice of prime contractors bid shopping subcontractors
and they will submit their proposal with the women-owned
business or other small firms. But once they get the contract
then they make this last minute substitution with a business
that offers a lower bid and then they will pocket the
difference. It is a terrible practice and has a negative effect
on women-owned small businesses. How could we stop prime
contractors from this ``bait and switch''? I know you talked
about requiring a listing of subcontractors but if you could
expand upon that.
Ms. Biondo. Sure. In Kansas City, at the city level, they
have implemented a program so when you even bid on a traffic
signal project and if they ask for small business, minority
participation, other venues inside that, you actually list that
information at the time of bid. And then it goes back to a
Human Relations Department. So in this case it would be a
contracting officer. They review that information. At the time
of bid those subcontractors actually sign an affidavit saying
this is my number, this is how much my bid is; I am good for
it. And so when it is submitted to the city, the city sees
these are the major subcontractors listed so that way they know
unless something happens after the fact, at least the city can
vet out what happened. If the company needs to remove
themselves from the project or whatever that may be, but we
have found that that has eliminated a lot of the after-the-fact
shopping.
Ms. Chu. Now I would like to ask about the bond limit, the
maximum bond limit. The American Recovery and Reinvestment Act
temporarily increased the maximum bond limit from $2 million to
$5 million. And bonds of up to $10 million could be authorized
if a contracting officer certified that a bond over $5 million
was necessary. Unfortunately, this provision has expired and I
know, Mr. McCallum, you talked about how increasing it would
certainly help small businesses compete for bigger contracts.
Should Congress permanently extend the bond limit? And what
maximum bond limit should be available? Anybody on this panel.
Ms. Biondo. The women believe that it should be extended at
the R rate that was in existence prior to this. It has expired.
So at a minimum where it was before.
Mr. McCallum. You know, as you recounted, it was $5 million
increase during the economic stimulus and then up to $10
million should a contracting officer certify that there were
appropriate circumstances. We think a $5 million limit would be
a good limit. I think it is recognizing that even for smaller
procurements they are getting larger. And it would give the
small businesses who are participating in that program the
opportunity to seek more federal work. But you have to remember
the program itself is helpful in other contexts, not just
federal work but other public work contexts as well where they
may need that credit line.
Ms. Chu. My final question is for Mr. Galarza and Ms.
Privitera Biondo. Agencies are required to review contracts and
bundle requirements of two or more goods or services where it
is previously provided or performed under separate contracts.
However, since construction contracts are new requirements
there are those that argue that these contracts do not need to
undergo the same bundling scrutiny. Courts have yet to rule
definitively on this issue but I think we should focus our
attention on contracts that are more likely to be bundled. What
types of contracts do you see bundled that could clearly be
broken up and bid on by small businesses?
Mr. Galarza. Obviously there are reasons for bundling,
either capacity, the nature of the work. For example, in our
home state of California there are often large environmental
contracts that require extreme expertise that are not available
to small business. And so I can see that. The reason for having
a bundled contract, those are typically $500 million to a
billion dollar programs involving environmental clean-up in
BRAC facilities. However, on the other side, the opportunity to
create a smaller, say baby RAC (Remediation Action Contract) so
that you, although you have a bundled contract for the large
prime contractors, you enable smaller prime contractors to gain
traction and to learn how to do that similar work and so that
they can build their capacity at that same level.
Ultimately, these large businesses were small at one time
and they obviously built their bonding capacity to get to that
level. And obviously, that would be an excellent opportunity.
Agencies, like the Corps of Engineers, the Navy, they have
BOAs, they have MATOCs, they have smaller procurements that
give expertise to smaller contractors. All I would say is it is
create an opportunity. If the contract needs to be bundled,
create an opportunity where there is a similar myriad
opportunity for small business so that they can indeed do the
same thing.
Ms. Biondo. And I would say that I believe that the women
have an opportunity to get more prime contracts. If you have a
$5 million contract I guarantee you they can easily take $20
million out of that and scope it out so a woman or a minority
can go and be a prime contractor and achieve that. The problem
is once you bundle it they do not reach down that far to you.
But those large projects, they can break scopes down. The
larger the project, the easier to break the scope down. The
smaller the project, the harder to break the scope down because
there is so much more to work with. So I just think it is a
choice and I think they need to break them down further.
Ms. Chu. Thank you. And I yield back.
Chairman Mulvaney. Thank you, Ranking Member. I turn now to
the gentleman from Florida, Mr. West.
Mr. West. Thank you, Mr. Chairman and Ranking Member. And
thanks for the panel for being here.
I just have one basic question. I think it is great today
that we have the private sector representatives here and then
also we have public sector representatives here. We have folks
that are here from the SBA, from the Office of Surety
Guarantees. We have the chief of Engineering Construction from
the Corps of Engineers. And we also have from the GSA their
representative as far as construction. So what I would ask is
this. What would be the one or two recommendations, concerns
that you would like to say to them from the SBA, from the GSA,
and from the Corps of Engineers as far as policies,
regulations, processes, best practices, procedures since we
have all of these players in the same room at the same time?
Mr. Galarza. If I may, thank you.
As we all know, construction is about building a good
foundation. And that foundation starts with training and starts
with a teaching program. And as we move forward, the issues
involving defunding organizations like Department of Commerce
and NBDA, either succumbing them into other organizations, let
us not make sure that those training opportunities do not
disappear. And that SBA and their budget does not get shrunken
any further. They are in a tenuous position trying to do too
many things with too far few people. And without, as we all
know the old proverb, I can give you all the fish you want but
until I teach you how to fish you will not sustain yourself.
And ultimately, the responsibility is to give an opportunity to
a contractor, not give him a contract, not give him the
opportunity but teach him how he could sustain himself and then
continue to grow to the next level once he moves out of an 8A
program, out of a HubZone program. So he can bring
opportunities to his own community. Without that training and
without that effort then they will always be looking for the
opportunities that are given to them rather than those that
they can reach out for themselves.
Ms. Biondo. I would like to go back to the size standard
issue. This has been an antiquated program in place for many
years that there has been a lot of discussion on. And you know,
to ask for something as simple as move from a number of
employees to revenue and to not get much movement is very
difficult. But if we could have some consideration in that area
because it is done so many different ways it is not consistent.
Mr. Haire. From AGC's view, we would like to see some clear
rules, safe harbors, if you will, on how SBA evaluates the
affiliation rule, particularly with respect to subcontracting
between small business prime contractors and large business
subcontractors. There is a lot of confusion in the marketplace.
There is a huge amount of bid protest activity going on right
now. And we would like to see some clarity. We think if SBA
could clarify for everyone what small and large businesses can
do in a subcontract relationship it would benefit the industry
and the agency's and the SBA's programs and goals.
Mr. McCallum. And I would add in terms of training just
internally, that they make a commitment to train their
procurement officers. There is a lot of concern in the private
sector that there are a lot of retirements that will happen for
very skilled procurement officers. They have a tough job. They
do a wonderful job out there. But as new folks come in they
need to have the training to carry on with their complex tasks
that they have. So I would urge them to do that. And from my
own perspective, as well, an adherence to the Miller Act
requirements. We sometimes see that they are not adhered to.
They are there for very good public policy reasons and that
needs to happen.
Mr. West. Last quick thing each one of you. If there was
one onerous federal regulation that you would want to see
repealed what would it be?
Mr. Haire. I will take that one. AGC for several years has
asked to have a line from FAR 52.219-9L removed. It is FAR
clause 52.219-9L as in Larry. There is a sentence in that
particular FAR clause that places a restriction against
counting lower tier subcontracting in the small business
subcontracting goals. Obviously, Congress could choose on its
own to take care of that issue but also the FAR Council if it
so chose could simply go in and delete that reference.
And I would also point out the government's Electronic
Subcontractor Reporting System now has the capability to easily
allow tracking at all levels. It is not the paperwork
complication it was before it was all computerized. So AGC
would like to see that.
Ms. Biondo. There is--I am trying to think how to say
this--there is a bid process in place where you submit your bid
on-line and then they come back and they ask you to counter
your bid and counter your bid and counter bid. It is sort of,
in my mind, similar to this bid shopping. So I am concerned how
that works because basically you are giving your price and you
are asked to continually think about lowering your price. And
you are bidding against a blind computer that you do not know
why you are doing it. What is the logic behind it? If you are
taking out scope. So I would like to see that changed.
Mr. McCallum. Since you have rattled my memory on that, and
I think you are referring to a reverse action process, we feel
that it is very problematic anytime you commoditize
construction, because construction is unique in every instance.
You have unique site requirements. You have unique owner
requirements, and all the rest. And so a process or a
procurement process that does not recognize that is I think
very problematic. And particularly so for a small business who
cannot finance the risk. So if you commoditize it, you are
cutting the margin. You are putting difficulty on letting them
compete, and that should not happen.
Mr. Galarza. In regards to legislation, but more of a
practice, the Committee has talked about bid shopping. And
unfortunately we had the example of the government bid shopping
in the form of BAFOs (Best and Final Offers). I have been
involved in rounds of BAFOs for the same contract five and six
times over and over and over again. It seems that some agencies
are not quite happy with what the competition has felt is a
fair and reasonable price and they want a lower price. And they
continue to ask for a lower price. And so if there was going to
be a meaningful change, maybe a reason for one BAFO, but
multiple BAFOs on the some solicitation seems unfair and
unrealistic and unreasonable.
Mr. West. Thank you very much. Thank you, Mr. Chairman. I
yield back.
Chairman Mulvaney. Thank you, Mr. West.
I turn now to the gentleman from New York, Mr. Hanna, the
primary sponsor of a bill that I am associated with. So Mr.
Hanna.
Mr. Hanna. Boy. It sounds like nobody here likes to
compete. Let me just play devil's advocate for a moment.
What is wrong? I mean, if you do not want to sit at your
computer and have a reverse action all you have to do is shut
the darn thing off and not bid it. Those are your options. Or
stop--put your price out there and leave it there.
I do not--I have never--I mean, I have never been offended
by anybody who sought the best price for anything. It is a
brutal world out there. We know that. And I do not know that
the government should necessarily be in the business of taking
that marketplace away, but I absolutely sympathize with that
because I understand what you mean.
The other thing I would like to say is that in terms of
having an auction or you putting a price in on bid day and
somebody changes it later, Ms. Biondo, you may have answered
this but what do you think is wrong with that?
Ms. Biondo. To change the bid later?
Mr. Hanna. No, for somebody to come back to you and say--or
not come back to you a week later and say, you know what? We
had someone call and their price was lower. Or let us say, for
example, they say to you, you know what? Your price was the
lowest price but we want to pay more because we know someone
who we feel is more qualified. I mean, that also could happen.
Ms. Biondo. Okay. Well, I will try to be pretty clear here.
First, when you said I could stop bidding. Well, you already
took three bids or more so you already had multiple choices of
multiple numbers from right out of the box. You always have a
minimum of three bids if I recall. So you had three multiple
choices so you had three different people who bid. I think that
should be enough.
Mr. Hanna. I do not, well, I am not here to argue against
you.
Ms. Biondo. Okay. So then----
Mr. Hanna. Let me just say this though. First of all, why
is it enough? Why is one not enough?
Ms. Biondo. So now I am going to go to your next thing that
you said about--I do not know how you said it, but why do I
think that is not fair? I think that is what you said.
Mr. Hanna. Yes, ma'am.
Ms. Biondo. This is government money. So this is our money.
It is not private money. If it is private money and the owner
chooses to go with a lower bid, I can understand that. But this
is the government's money so every person in this room has the
ability to go after that. And I do not think that the process
that they have makes that fair.
Mr. Hanna. Should not the government be in a position to
get the best price it can? Is that not the ultimate
responsibility for the government to find the same goods or
service or both at the lowest possible price?
Ms. Biondo. Yes. And that is why you go for multiple bids.
You had multiple choices. But when people put those numbers
together and companies spend thousands of dollars putting bids
together and are unsuccessful in that way, I mean, there is a
lot--it is not like you just put your number out there and it
did not cost your company any money to put the job together. I
mean, how about when your company spends $100,000 putting the
bid together and you did not get it?
Mr. Hanna. That is life. Some other company did. And
somebody got a better deal. And I assume that the ultimate goal
of all your companies is to be competitive. Or no matter what
we do from this seat or in this House, we cannot control how
competitive you are. Only you can. And the work is getting done
and somebody is doing it. And that person presumably is the
most qualified at the lowest price.
So I appreciate that you like not to have to compete as
much. I appreciate that you like not to have a prime contractor
to be able to go to someone after the fact and shop your price
which I would agree with anybody here there is something
unethical about that. I do not disagree. But it does not make
it illegal, and certainly it may be the case that somebody
actually found a great deal better price. And we have to
remember this is the beginning of the job and a prime
contractor, if it is a big job that is bundled, there is no
guarantee that the profit he took by getting a lower contractor
will actually help him finish that job. He may need that money
to be successful.
Ms. Biondo. Well, let me say that speaking on behalf of my
own personal company, we bid thousands of jobs every year and
we compete on a day in, day out basis. So for you to insinuate
that I do not like to compete, I take offense to that because
we compete constantly and we understand what competition means.
And I welcome it.
Mr. Hanna. You must be doing well. I mean, obviously you
are competitive or you would not be here. So I give you credit.
It was not meant to offend you. It is a simple question. I have
lived in your world for 30 years and dealt with the same
circumstances.
Mr. Galarza.
Mr. Galarza. Yes, sir.
Mr. Hanna. If I may? I am out of time.
Chairman Mulvaney. No objection.
Mr. Hanna. Thank you. Thank you very much, Mr. Chairman.
What do you build?
Mr. Galarza. We are a heavy civil contractor. Roads,
bridges, pipelines, things of that nature.
Mr. Hanna. And so I have to ask you. If you can do all of
that, and this is meant in the kindest way because I understand
the nature of accounting and bonding. Everything you go through
is awful. But if you can do all that and you are an engineer,
why can you not figure out your own bonding needs?
Mr. Galarza. I certainly can. This issue is not about me.
This is about the tens of thousands of contractors that do not
know what to do. Just because you are a contractor does not
make you a builder. It just means you passed the test. And just
because you are in business does not make you a business owner.
It just means that you signed up for a business license. And so
unfortunately, when you get into environments like a reverse
auction you have that contractor who has no clue what that
means. So he gets sucked into the competition just like playing
poker. And unfortunately, he has found the quickest way down to
bankruptcy and not understanding what he has gotten himself
into. And yes, I got the job but I cannot pay my bills. I
cannot pay my vendors. I cannot pay my taxes. I cannot pay my
FICA, my FUTA, my SUI. But I got the job. And unfortunately,
that is what happens when you open up a competition where you
have people that are not knowledgeable enough to understand the
ramifications.
Mr. Hanna. But is that not exactly the point, that the
bonding is that firewall between those people and more
qualified people? And by removing some portion of that firewall
that has existed for so many years, 50 years, and I would argue
bonding has changed in the last 10, 20 years to its detriment
because it does let marginal people in. Not that I am not
supportive of minority bidding, et cetera, but do you see in
your mind a point at which there is too much of that where
severely marginal people get into a business that frankly they
are not qualified for? That there is so much assistance it
actually encourages their own demise? There has to be some kind
of bottom-line limit where a person has to have more than a
pickup truck and a hammer.
Mr. Galarza. No question. And I would agree with you. I
think the point that you have made earlier about
competitiveness is tailored to the large business. He gets a
preferential bonding credit. He gets a preferential line of
credit. So his cost of money is cheaper than the small
business. His cost of bonding is cheaper than a small business.
His tax rates may be sweeter. He has a better tax accountant.
All those things play in favor of the large business who is
able to bring his bottom-line so that he can be competitive at
2 percent. Whereas, the companies that are trying to get to
that next level have a higher cost of money. Have a higher cost
of bonding. Have a not so good CPA. Not so good banking
alliance. And so their cost of doing business, while they have
made as little profit as the other company, it cost them----
Mr. Hanna. You know, let me just agree with you 100
percent. The process is this. That a guy starts small. A woman
starts small. They learn. They build up resources. They build
up knowledge, skill. Employees with the same. They get a better
lawyer. They get a better accountant. They start to make a few
bucks. They get cash reserves. They get a bigger bond. They do
it all over again the next year and they get a bigger bond and
a bigger bond. And ultimately, you can do exactly what anyone
else can do and that is to grow a large $10, $20, $50 million
business and bid work appropriately. But personally I like the
fact that you learn as you go and you require and attain
bonding and credit as your binding and credit capacity grows
based on your knowledge, your skill, your income, and your
financial statement.
That is why bonding has worked so many years. And the
problem with bonding today is that it is supposed to be a zero
loss ratio. Is that correct, Mr. McCallum?
Mr. McCallum. Yes. That it is written under a theory that
there will not be loss.
Mr. Hanna. Right. So it is not a zero loss ratio anymore.
And because marginal people get in it adds difficulty. I am way
over my time so I will end there but thank you for your
tolerance.
Chairman Mulvaney. No, that is fine, Mr. Hanna. I am glad
you had a chance--I want to begin my questioning on something
you raised which I think bears further discussion because no
one here I think is against competition. You make an excellent
point. But I would think having been through this process
myself, both as an owner and as a bidder, one of the
difficulties that I always faced was knowing what the rules
were in advance. That if I was going to bid on anything,
whether it be a contract, a piece of land, a building, I wanted
to know if I was in a reverse action, I wanted to know how many
rounds of bidding there would be. I would want to know if there
would be multiple best and last offers because if I ended up
with the rules changing as I got into the process, over the
long term it has a chilling effect. And the next time a bid
comes up from that particular or that same organization or a
similar organization, I might be much less likely to bid. And I
think in the long run, if we allow that environment to prevail
when it comes to government contracting, what you will see is
folks like Ms. Biondo or other organizations simply drop out of
the process and decide if I do not know what the rules are in
advance, if I am going to waste all my time and my money to go
through these multiple rounds of bidding, then I am not going
to do it. And I think in the long term that may have a
detrimental effect on the price the taxpayer ultimately pays.
Everybody up here, and you and I know each other very well,
are interested in seeing the best deal for the taxpayer. But I
also think there is a long-term consideration over the system
that we create as opposed to looking at everything as a one off
kind of deal.
I will start with my questions and then maybe we can come
back and throw it up under further discussion. I want to start
with--we will just go in order, Mr. Haire. You had mentioned
that there were no rules on subcontracting by small business to
large businesses. There are no safe harbors. It was done on a
case-by-case basis. As someone who used to practice law I can
tell you that the world of case-by-case basis is the world in
which the lawyers thrive. We love that kind of thing because it
simply drives litigation.
Give me some suggestions. When we talk about that world of
small businesses subcontracting to larger businesses, which we
know not only happens but has to happen in certain
circumstances. Give us some suggestions for safe harbor rules
that you would like to see.
Mr. Haire. The two biggest challenges, and you probably are
all aware, but how this typically comes up is through the bid
protest process. So a competitor will protest a bid of another
contractor who is the apparent awardee on the basis that the
business relationship between a small prime contractor and one
of its subcontractors who happens to be a large business is in
violation of SBA's affiliation rules. So a lot of the reason
why there is a basis for the protest is because of allegations
related to the bonding relationships that are utilized in the
project. The prime contractor is required on nearly every
federal project--I think Mark would say every federal project
to his Miller Act point--about making sure that you post a
bond. And oftentimes the size of the small business set-aside
project is so large that the subcontractor may be looked for to
provide some assistance in the form of maybe an indemnification
or things like that to help the small business subcontractor
provide the bond.
AGC's view and our view, my view is, you know, that is not
something that in and of itself should be improper. You have to
look at other things. And I think you could develop a set of
rules where, you know, that is something that is specifically
remitted. For example, in the Mentor Protege Program, allowing
the mentor to help support the bonding program of the protege
is specifically allowed and often included. And I think it
helps build, you know, a level of relationship for the small
business that it can develop with its surety that in some cases
is very helpful. But that is a very heavily litigated area
right now in this type of work.
Another example of a safe harbor that I think would be
useful is some kind of, you know, clear rule on whether or not
different parties can utilize employees of different companies.
Just some clarity. You know, so that everybody is playing by
the same set of rules because different competitors will choose
to do different things related to how they get labor and
executives onto a contractor's staff. And if one contractor is,
you know, because of the absence of rules is doing something
and another contractor is not, that often can make the
difference as to who gets the job based on competitiveness and
a whole range of factors.
And I guess my last point, the reason why this has become
such an issue is because the Small Business Act has a provision
in it that says if you misuse the goals of the Small Business
Program you potentially are subject to False Claims Act
liability. And there is no clear guidance on what is and is not
an improper practice relative to the small business rules. And
we are starting to see both offices of inspector generals and
in some cases U.S. attorneys who are taking a look at what we
think are legitimate business practices and taking a different
view of that and saying that is improper. And now all of a
sudden you have got, you know, investigations ongoing with a
lack of clarity as to what is permitted.
Chairman Mulvaney. And by the way, to the next panelists,
Mr. West hit on this, a lot of times what we would rather see
is a back and forth between folks in the private sector and the
folks in the SBA and the GSA. So to the extent the next panel
is in place, I encourage you to listen as we go through all of
these questions but specifically these because what we would
like you to do is respond specifically to things such as the
recommendations, the request that Mr. Haire just made.
Let us talk about bundling for a second because I was
surprised when you get down to the weeds of bundling, one of
the--it is not a loophole but it is a gray area in the law that
essentially removes or could be determined to remove new
construction from the prohibition zone bundling. Tell us a
little bit why that is and how you think we can fix that.
Mr. Haire. Well, I am not exactly sure why that is.
Chairman Mulvaney. No, the definitional issues.
Mr. Haire. Well, AGC, and I am not even sure I am going to
be able to answer your question the way you want it for lack of
understanding on my part. But I think AGC's view is that there
are a variety of contracting vehicles that are used by the
federal government and several of the panelists here have
touched on the bundling issue. We think that bundling in
general, as long as you--I think what I heard Mr. Galarza say
is that perhaps you could take a series of smaller projects
which could be placed in an IDIQ or a multiple award vehicle,
and as long as you, you know, set those aside for small
businesses, even though that is technically bundling it, it
would not hurt small businesses is perhaps the way to say it.
And the flipside of that is, you know, what AGC looks at
are these larger, multiple award contract vehicles where maybe
you are taking, you know, $500 million down in New Orleans and
you are sticking it into a multiple award vehicle. And only
large businesses are going to qualify for that even though you
may have 50 projects that could come out of that and a per
project average size of, you know, $5 to $10 million. And I
think the concern is if you are taking that type of bundling
and sticking it into a vehicle it does hurt small businesses.
Chairman Mulvaney. Bundling is a many splintered thing it
seems sometimes. One of the issues that we came across in one
of our field hearings was that new construction, there is a
prohibition on bundling in many circumstances. But because of
the way the language is written, new construction is often
excluded from that prohibition so that you are allowed to
bundle contracts on new construction that oftentimes
effectively remove small businesses from allowing to bid.
Which leads me to my next question because one of the
things we heard, both in California and in South Carolina when
Ms. Chu and I conducted our field hearings, was frustration
over the amount of contract work that stayed local. The example
I remember from my district, was $103 million project of which
less than $200,000 actually went to local businesses. Now, you
mentioned during your testimony that generally you are
concerned about a local preference, that you think it might
have a negative impact. Tell me why that is and tell me your
thoughts generally on local preferences.
Mr. Haire. The concern with local preferences and many
other preferences often is the reduction in competition and the
price pressures that naturally occur as a result of that. I
mean, taking the flipside, I was in Puerto Rico at an agency
meeting last month and the Puerto Rico AGC constantly is
concerned about the fact that the larger mainland United States
contractors come down there and compete in Puerto Rico for GSA
projects, Corps of Engineers projects, things like that. You
know, it is a--sometimes a challenging set of circumstances to
balance, you know, cost with the desire to provide more
opportunity for local businesses. And I think sometimes there
is a tension there.
Chairman Mulvaney. There is tension. Certainly, again, as
Mr. Hanna said and I think as everybody on this panel agrees,
we are interested in getting the best deal for the taxpayers in
both the short run and the long run to the extent that is
possible. But I cannot remember if it was your testimony or Mr.
McCallum's, that one of the things we struggle with in the
construction business generally is the attempts to commoditize
the product, recognizing that it is not a commodity product.
The construction in California is different from construction
in South Carolina. And that sometimes, maybe under limited
circumstances that could still protect the taxpayer, I do want
to continue to explore the possibility of looking at local
preferences. But we will deal with that as it comes.
Mr. McCallum, you talked about the size standard, which,
listen, we ran a small business that had very high revenues
with very few number of people because we were able to
subcontract out of a lot of our business. If you build houses
you could do that. Plus, if you are selling something that
sells for a relatively large amount of money, regardless of the
size of the profit margins, and if you measure by revenue you
might be large; if you measure by number of employees you might
be small.
So while I share your concern, and I sympathize with you to
a certain extent, tell me how to deal with the other
circumstance where I might be a business that sells something
that does not cost very much but employs a large number of
people. And that is why we run into this because we want to
treat them as a small business as well. So help us walk that
fine line between counting something that is a small business,
is a large business, and vice versa.
Ms. Biondo. Well, in construction, what we find is a great
number--a great deal of our money is spent on material.
Subcontractors, equipment. So if you actually look at the size
of a company, is it valued by their gross revenues, their net
income? How are you really looking at that? There is not a
clear definition as why they are looking at the top revenue.
So if you were to look at what I actually expend in labor,
that might be a better indicator. If you were allowed to maybe
exclude out your material and subcontractors, because this is
work that was actually performed by your own forces. So it
would perform a commercial useful function in the construction
industry. That would make sense to me. But to just say that
because you do $7 million a year you are a big business, I do
not understand that. I do not think it makes sense when other
companies can do $100 million and still be considered small
because they had an employee count of less than 1,500 people.
So how can someone who has 1,500 people still be considered
small but--I am just going to use my own company's example--if
I do more than $14 million, I am not considered small. And I
have less than 500 people. I cannot understand that.
Chairman Mulvaney. We struggle with it as well. As somebody
who used to be in the private sector and then ended up on this
Committee, I was stunned to find out that not only do we do
that but we change the definition from industry to industry. So
while we are here today talking about general construction
industry, there is a different measure for what is small within
pharmaceuticals versus construction versus transportation. So
we sympathize with you and I can assure you we are trying to
figure out a way to bring some reason to that system as well.
Talk to me about retainage. Again, a circumstance where I
am sympathetic to the plight that you brought to us today
because I have been on your side of contracts. I have also been
on the other side of the contracts and I found retainage to be
a really, really good way to make sure the job gets finished.
And while your claim is correct that I, as the owner or as the
prime contractor, I could always turn to the bond. I could
assure it was much easier to make sure you finish the job by
keeping at least a little bit of retainer. So how do we balance
that?
Ms. Biondo. Well, as you know, it will be difficult to give
you all the different scenarios in our testimony because there
was a lot of controversy in regard to the retainage. But the
retainage we understand when you are a general----
Chairman Mulvaney. By the way, am I using--because we call
it retainage. It is called retention. Are we talking about the
same thing?
Ms. Biondo. Yes.
Chairman Mulvaney. Good. Thank you very much.
Ms. Biondo. Yes. You know, in a lot of instances when you
work in the private sector, if you are performing a large
contract and you go back to your general contractor and say,
hey, you know, I am just about done with this job. Can you
reduce my retention by 5 percent or at the 50 percent mark, you
know, is it necessary for you to continue to hold 10 percent?
Most of the time in the private sector our own will come back
and say, ``Hey, yes. You are doing a great job. I will reduce
your retention.'' If you are not doing a good job, obviously
they are going to hold your retention. So the problem is how do
you do this with the federal government so it is clear? And the
way the rules currently read, it says they do not have to
charge that.
Well, look at it from another perspective. Business is not
all that great for most contractors these days. At the end of
the day on their financial statement, maybe they might make 1
percent. Okay? If you are holding 10 percent of that project
until six, seven months after a job is completed, you have
officially become that company's bank for them because they
have had to go and borrow the money before they get that last
10 percent of their job.
Chairman Mulvaney. Yeah, but when I dealt with retention it
was simply until the work was completed on the contract, not
the overall job was completed.
Ms. Biondo. Well----
Chairman Mulvaney. That circumstance I could see it would
be a problem but how could--if I am the owner and you are the
contractor, how could you object to me withholding 10 percent
until the final piece of work on your contract is finished?
Ms. Biondo. Okay. So say you finished your job in September
and the entire project was finished in September, all scopes.
Chairman Mulvaney. Okay.
Ms. Biondo. And you do not get paid for a whole year
because the owner does not choose to pay you for a whole year.
Chairman Mulvaney. Okay. Maybe we are talking about
something else. To me that would be a breach of the contract.
But I see what you are saying.
Ms. Biondo. But again----
Chairman Mulvaney. Let me ask you one more question and
then we will move on, which is bid shopping, because it is
something I struggle with as well. I do not care for it. My
state has banned--several states have banned. What is the
experience within the industry? Have the states banned? I think
it is 10 or 12 states that have done it. Has that proved
successful? Have we managed to solve this problem in the states
that have banned bid shopping?
Ms. Biondo. I do not know the answer to that. I am sorry.
Chairman Mulvaney. And neither do I. Very quickly, I have--
early on in the process Mr. McCallum, or earlier on this year I
became aware of some of the issues that deal with surety bonds
through something that happened back in my district. An spent a
little bit of time getting up to speed on the issue, only to
find that Mr. Hanna had already done a considerable amount of
work on it. So I would like at this point to yield four minutes
to Mr. Hanna to ask questions of Mr. McCallum specifically on
H.R. 3534.
Mr. Hanna. Is there anything you want to say about it?
Mr. McCallum. We touched on it I think earlier in my
testimony. Right now, particularly in the difficult
environment, it is very difficult for construction firms. They
have been very much impacted in this environment. And so
sometimes their balance sheets are not what they used to be.
And there are times, whether they are tempted to seek a market
that they should not seek, or what have you, they can be preyed
upon by individuals who are not licensed at the state level.
They are not vetted by the Department of Treasury. They just
exist and will sometimes proffer their assets to act as an
individual surety.
It is a caveat emptor situation. And I think small
businesses cannot and should not be victimized. There is a
simple solution, and the solution is just make sure that the
assets are real; that they are convertible into cash so if a
claim happens, that it can be readily rectified. And that it is
in the care and custody of the federal contracting agency and
the federal government.
Currently, under the FAR, which I believe is fundamentally
flawed, the contracting officer shoulders the entire burden.
They are very busy folks who have a lot thrown at them. This is
a burden that they should not necessarily have to bear or at
least it should be lightened.
Individual surety. The program has actually been
problematic over a number of decades and they tried to fix it--
in the fall of 1989 and in 1990. But we are still having
problems currently in that regard. And there is plenty of
documented cases about that.
Again, H.R. 3534 is a simple solution that would basically
make sure that parties, if they are subcontractors or suppliers
that they have a valid payment bond in the event they are
unpaid.
And on top of that, individual sureties, if they use
eligible obligations, meaning a public debt obligation of the
U.S. government, could actually use the interest off that once
the obligation is completed.
Mr. Hanna. I hated retentions but I always, I mean,
whatever the contract was when I started the job. I never
assumed that it would change after I finished the job. So it
was about 10 percent. You would always ask for less but you
never got it and moved on.
The fundamental problem is that it is the one thing that
protects all of us against bad actors. And when you let someone
in that business in the bonding business, as an insurance
company you are actually saying we accept you over them. And if
they are no good, you have got nothing. And the problem with
bonding is it is the one of the few areas of law where we rely
almost completely on history on the bonding companies' desire
not to lose money. Hence, the zero laws ratio.
What has happened is people have gotten in the business and
they forced other insurance companies to raise the cost of
bonding, even though there is implicit there will be no losses
because there actually are losses. The goal is not to limit
people's access to bonding; it is to try to keep it so that
good actors are in that business. And what ultimately does is
it lets good people who are good intentioned and talented go to
work. And it secures those people who have been in this
business for years who if you earn your way up to the ladder,
who have that million dollars in the bank to do a $20 million
job, who have those three or four hundred employees that know
exactly what you are going to do the say they get there. And
when you do not project bonding, you are not protecting the
contractor, you are not protecting the government or the
taxpayer? And most of all--you are hurting the individual's
ability, who is a good contractor, to stay in that business.
And that is why I am, you know, involved in this.
Chairman Mulvaney. Thank you, Mr. Hanna. Folks, thank you
very much. I appreciate your patience and thank you for your
testimony today.
If we could have the second panel, please, step up. That
would be great.
[Recess.]
Chairman Mulvaney. All right. We will go ahead and get
started with the second panel.
STATEMENTS OF JAMES C. DALTON, P.E., CHIEF, ENGINEERING AND
CONSTRUCTION, U.S. ARMY CORPS OF ENGINEERS; JEANNE HULIT,
ACTING ASSOCIATE ADMINISTRATOR FOR CAPITAL ACCESS, SMALL
BUSINESS ADMINISTRATION, OFFICE OF SURETY GUARANTEES; WILLIAM
GUERIN, ASSISTANT COMMISSIONER OF THE OFFICE OF CONSTRUCTION
PROGRAMS, GENERAL SERVICE ADMINISTRATION
Chairman Mulvaney. The first witness here is Mr. Dalton. He
currently serves as the chief, Engineering and Construction,
for the U.S. Army Corps of Engineers. He is responsible for the
execution of $10 billion of design and construction programs
for the Army, Air Force, Department of Defense, and other
federal agencies, and over 64 nations. Welcome, Mr. Dalton.
Thank you for your service, sir.
Sitting next to him is Mr. William Guerin, the assistant
commissioner of the Office of Construction Programs at the
GSA's Public Buildings Service. Mr. Guerin is responsible for
the construction of the GSA's more than $1 billion per year of
capital construction programs, including the design and
construction of federal buildings, land, ports of entry,
courthouses, and other projects for the nation's landlord. He
is also the recovery program manager and recovery executive,
overseeing the timely delivery of high performance green
building projects worth more than $5.5 billion, which I think
together we have about $20 billion worth of management on this
panel. So thank you gentlemen for being here.
And the final witness is Mrs. Jeanne Hulit, the acting
associate administrator for the Capital Access Office of Surety
Guarantees at the SBA. She manages and oversees the SBA loan
programs and is here today to talk about the Bond Surety
Program and specifically H.R. 3534.
So with that we will begin because it says so on the paper
with Mr. Dalton, even though he is sitting in the middle. Mr.
Dalton, fire away.
STATEMENT OF JAMES C. DALTON
Mr. Dalton. Thank you, Mr. Chairman and Ranking Member Chu.
I really appreciate the opportunity to be here today to testify
before this Committee. I especially appreciate the opportunity
to listen to the previous panel. It is always interesting to
hear what our industry partners think and offer as suggestions.
Certainly, small businesses are a great value to this
nation and we in the Corps will continue to do all we can to
promote those small businesses and to help them to grow. During
the FY11, the Corps exceeded its small business goal of 35
percent and we actually awarded 42 percent of our contracts to
small businesses. This really equates to about $8 billion to
small businesses, and of those $8 billion, 3.3 billion of that
was to small businesses as prime contractors.
In addition to that, the Corps prime contractors awarded a
high degree of their subcontracts to small businesses. About 63
percent of the subcontracts went to small business
subcontractors. But having said that, the Corps continues to
look for ways to improve its relationship, as well as help to
grow those small businesses into large businesses.
Today I would like to just talk about a couple of those,
what I would classify as sort of internal hindrances or
obstacles for small businesses. One would be that in a lot of
cases, certainly not all cases, small businesses may lose out
on opportunities to actually influence the acquisition process,
because they do not respond to sources sought in synopsis. If
we get two or more small business contractors then we will set
aside that acquisition for small businesses. We certainly would
encourage small businesses to pay attention to that.
The second is, in some cases, we have companies that will
focus more on the small business certification or the 8A
certification when they submit proposals rather than focus more
on the qualities they bring to the project. Their past
performance, their current experience, et cetera. These are the
kind of things that we talk to small businesses about to try
and encourage them to put together better proposals.
But, in addition, there is the bundling aspect of it that
you talked about. The Corps of Engineers does not bundle
contracts, but I think what you are referring to is the
consolidation of contracts. We do consolidate contracts, but
the rules we follow are very close to the rules one would
follow if, in fact, you were bundling contracts. I'll probably
get a chance later to discuss that a little bit more.
We require performance and payment bonds or surety bonds,
for acquisitions over $150,000. We have discussions with our
small business community but we are sensitive to this and we
try and adjust our acquisition sizes to ensure that we do not
do something that detracts or takes away from small business
opportunities.
The last thing I will mention here is that with regard to
prompt payments, we actually have paid 98.5 percent of our
contacts in timely payments. We pay prime contractors within 14
days. Construction contracts as required. And for
subcontractors, a certificate is required from prime
contractors to say they have paid their subcontractors before
they submit a request for payment to us.
I would like just to close and say thanks again, Mr.
Chairman, and the Committee, for allowing us an opportunity to
come here and try to help you address the problems that you
have discussed.
Chairman Mulvaney. Thank you, Mr. Dalton. We will come back
and ask questions in a second.
I understand that Ms. Hulit has to leave, and I apologize
again for running over because of votes. Ms. Hulit, we ask you
now to give your testimony. And to the extent you could give
your opinion on H.R. 3534, that may preclude any questions on
that topic.
STATEMENT OF JEANNE HULIT
Ms. Hulit. Sure. Thank you very much, Chairman Mulvaney and
Ranking Member Chu and members of the Subcommittee. I am
pleased to be testifying before you today on the topic of
surety bonds. And I do want to apologize in advance that I have
a flight. I have listened to the other panelists and their
concerns and can follow up with them directly, as well as
members of your staff, as well as refer things to our Office of
Government Contracting and Business Development.
The U.S. Small Business Administration Surety Bond
Guarantee Program was established in 1971 to help small
businesses obtain surety bonds that are often required as a
condition for an award of a construction contract or
subcontract. As you know, the federal government requires
surety bonds on any construction contract valued at $150,000 or
more. Surety bonds are also required for many state and local
government and commercial contracts and subcontracts. In our
Surety Bond Program, the SBA guarantees bid, performance, and
payment bonds for eligible small businesses that cannot obtain
surety bonds through the conventional surety market. SBA's
guarantee gives surety companies an incentive to provide
bonding for small business contractors whom might otherwise be
perceived as too risky to bond without an SBA guarantee. These
bonds help small, emerging firms gain access to contracting
opportunities in the commercial and government markets.
As many of you know, when the economic downturn occurred a
few years ago, construction was one of the hardest hit sectors.
In spite of the downturn, however, the SBA Bond Guarantee
Program volume grew every year over the past five years. We saw
an increase in the number of participating surety companies and
agents. When Congress passed the American Recovery and
Reinvestment Act in February of 2009, the SBA was given the
authority to temporarily increase the Surety Bond Contracting
Program to $5 million as you have heard from some of the other
panelists. This change was well received by the surety industry
and small business community, and we noticed a significant
uptick in bond volume
The Recovery Act infused new life into the Surety Bond
Program as seen by the increase in program activity in fiscal
year 2010. The total number of bonds guaranteed that year
represented a 36 percent increase over the previous fiscal
year. In fiscal year 2010, SBA guaranteed a total of 8,348
bonds representing a contract value of $4 billion.
Building on that success, the SBA has continued to make
outreach and awareness of the Surety Bond Program a priority.
We have been working closely with our local district offices
and industry partners to let small businesses know that they
can take advantage of our program.
We have also been listening closely to our industry
partners and small businesses on how we can make the program
better and more accessible to a greater number of firms.
Recently, we developed an automated tool to complement the
Electronic Bond Guarantee Application, which we implemented a
few years ago. Surety companies, agents, and small businesses
can now upload a variety of underwriting documents and transmit
them electronically to our field offices. This makes the
processing time faster and reduces compliance costs.
This week we published in the Federal Register a proposed
rule that would adopt the streamline application process for
any bond guarantee on a contract valued up to $250,000. This
new ``Quick Application'' process will reduce paperwork
requirements for smaller contracts. As a result, small
businesses and surety agents will navigate the bond application
process more easily and cycle time between application approval
will be compressed.
We are not stopping there, however. In addition to other
agencies in the Administration, the SBA has been tasked with
undertaking a full review of our current regulations. In
response to industry concerns that certain requirements imposed
on surety companies are no longer consistent with industry best
practices, our office is trying to update, streamline, and
simplify the surety bond regulations.
We look forward to working closely with you and your staff
on each of those initiatives. I appreciate the opportunity to
testify before you today, and I welcome your questions.
Chairman Mulvaney. Ms. Hulit, in light of your time I am
going to speak out of order and ask you a very simple question.
Has the SBA taken a formal opinion yet on H.R. 3534? Do they
have any thoughts on it in general?
Ms. Hulit. We have not taken a formal opinion. Our program,
as you know, is only for corporate sureties. We do, however,
hear a lot from small businesses and the surety industry. And
we are happy to talk about what we have learned from those
parties with your staff.
Chairman Mulvaney. Thank you very much.
Ms. Hulit. You are welcome.
Chairman Mulvaney. If you need to be excused, unless
anybody else has any questions, she has a flight, Mr. West.
Ms. Hulit. Well, I can stick around for 10 or so minutes if
you would like.
Chairman Mulvaney. Okay. Mr. Guerin.
I am sorry.
Ms. Chu. We have questions for the record so we do not have
to do them right now but we will direct them to you.
Ms. Hulit. Thank you very much.
STATEMENT OF WILLIAM GUERIN
Mr. Guerin. Good afternoon, Mr. Chairman, Ranking Member
Chu. Thank you for the opportunity to be here today.
I, too, got a lot out of the private sector panel and I
appreciate the opportunity to listen to their comments before
we had a chance to speak.
GSA recognizes the important role small businesses play in
driving our national economy. We value the new and innovative
solutions that small businesses offer to us as we try to meet
today's challenges. GSA has aggressive goals for the
participation of small businesses, including small,
disadvantaged, women-owned, HubZone, and service-disabled
veteran-owned small businesses. In fact, in 2011, GSA awarded
41 percent of all contract dollars to small business. This is
well above our goal of 27 percent, and PBS itself obligated
more than $1.05 billion or approximately 39 percent of our
dollars to small businesses.
In addition, despite the huge Building Modernization
Program that came through the American Recovery and
Reinvestment Act, we awarded fully 26 percent of our
construction dollars to small businesses in 2011.
Today I would like to focus on the role of small businesses
in these new construction major modernization and repair and
alterations projects. As a major public real estate
organization, our goal is to maintain a robust inventory that
meets the long-term needs of federal agencies. We make
investments in this inventory by constructing new buildings and
modernizing or repairing existing ones. For each of the last
five years, our average request for investments in our
inventory was nearly $1.4 billion. Unfortunately, in 2011 and
2012, those numbers are a lot lower than the average.
There are two ways that PBS seeks to provide small business
opportunities in our construction projects. As prime
contractors on minor repair and alteration projects and smaller
capital program projects, and as subcontractors on our major
modernization and new construction projects. Our minor repair
and alterations program provides the perfect venue for small
businesses. In 2011, the majority of small business
construction opportunities were found in our Minor Repair and
Alteration Program.
Whenever possible, GSA provides small businesses with prime
contracting opportunities. For example, we recently structured
a $46 million recovery act modernization project in the Robert
Young Federal Building to allow small businesses to
participate. We had a small business designer break the
contract into three pieces and we were able to award the three
different parts of that contract to small businesses and they
would not have been able to compete for the project had it been
a single project at a much larger dollar amount.
As subcontractors, small businesses also have the
opportunity to work on large new construction and major
modernization projects for GSA. For example, we have a number
of small businesses who are assisting us with the construction
of the new Department of Homeland Security Campus at St.
Elizabeth's. About 42 percent of the total dollar value of
contracts for that project is going to small businesses, and
about 10 percent of those businesses are 8A firms.
All of the large prime contractors on projects exceeding
$1.5 million must have small business plans. These plans and
goals are evaluated during the contract selection process and
then they are confirmed after the award. In addition, GSA
participates in a Mentor Protege Program to assist willing
prime contractors to mentor small businesses. This program
allows smaller firms to team with larger construction
contractors. Through this relationship, small businesses can
gain more direct experience and better transition into larger
projects and contracts.
There are a number of opportunities and challenges going
forward. We track our prime contractors for progress towards
meeting the goals of their small business subcontracting plans.
Commonly in large construction contracts there are many layers
of subcontractors. GSA's projects are no different. Progress
towards small business goals only count first tier, small
business subcontractor. As a result, this creates a challenge
in ensuring that the actual dollars awarded to small businesses
are accurately reflected.
It is generally more cost-effective for us to pursue major
modernization and then to maintain our inventory with numerous
small scale repair and alterations projects. But given the
current budget environment, we think that the large projects
are probably not going to receive much funding and so there
will be a lot of opportunity for small businesses there.
Thank you for inviting me to speak with you today. I
appreciate the opportunity to discuss GSA's encouraging small
business participation on our construction contracts, as both
prime and subcontractors. And I welcome any questions you have.
Chairman Mulvaney. Thank you, Mr. Guerin.
Ms. Chu.
Ms. Chu. Ms. Hulit, do we still have you?
Ms. Hulit. Five minutes.
Ms. Chu. Five minutes. Okay. I will make this quick then.
You talked about the increase of the Bond Guarantee Program
from $2 million to $5 million as a result of the American
Recovery and Reinvestment Act. And, of course, it was a
temporary increase and expired in September 2010.
Now, you talked about an overall increase of 3 percent for
businesses that applied during that period of time. But I
wanted to know how many small businesses took advantage of that
higher ceiling, the amount that was above $2 million?
Ms. Hulit. My apologies. We had about 100 businesses take
advantage of it at that time. And there were over 663 bids--
$663 million in bids, 51 contracts for about $145 million.
Ms. Chu. So the 100 businesses represented, that is what
percentage of the total amount of businesses that were there?
Ms. Hulit. We had about 1,000 businesses annually
participating in the program, so you had 100, so about 10
percent.
Ms. Chu. Okay. And did the SBA see any higher or lower
default rates of those contracts or did the rates stay level?
Ms. Hulit. We only had one default of those higher
contracts so it was actually a little bit less than our regular
rate.
Ms. Chu. That is very good news.
Currently, there are 12 approved surety companies that can
issue bonds in the Prior Approval Program, while there are only
five companies that issue bonds in the Preferred Program.
Ms. Hulit. Yes.
Ms. Chu. Why are there so few surety companies that
participate in the SBA surety bond program?
Ms. Hulit. On the preferred side or on both? On the
preferred side our guarantee level is 70 percent. On the prior
it is 80 to 90 percent depending on the company. And we hear
from industry that the 70 percent guarantee, as you heard from,
Mr. McCallum, is also a detriment, particularly in troubled
economic times. So 70 percent guarantee has decreased the
participation rate on the preferred side. On the prior approval
side we had seen a decline over the last 10 to 15 years in
participation in our program. And that was largely due over an
historical period that we closed some offices. Our cycle times
in terms of application and honoring guarantees were very
delayed and it caused cash flow problems in the industry. As
you see, in the last five years we have turned that corner and
our bond volume is growing again and our surety participation
is growing. So we have addressed those concerns. Our cycle
times are much, much more reasonable. And, you know, we are
hoping to get more surety companies participating.
Ms. Chu. Very good. Thank you.
Mr. Dalton.
Chairman Mulvaney. Ms. Hulit, if you would like to be
excused.
Ms. Hulit. Thank you. I appreciate very much your
understanding.
Ms. Chu. Mr. Dalton, I was surprised to see that you do not
bundle contracts and have not done so in the last two years.
Did you bundle before that time?
Mr. Dalton. I am not aware of us bundling contracts even
before those last two years. I had a chance to go back and
verify and check for the last two years and that was something
I could definitely state in my written testimony. Bundling
contracts within the Corps is something that is certainly
frowned upon. And if we wanted to bundle contracts, the Corps
of Engineers would have to seek and receive approval to do so.
The Corps has a program and a process very similar that we
would follow for consolidation of contracts just as we would
follow if we were bundling contracts. But the specific reason
for mentioning two years is that is as far back as I had a
chance to go back and verify.
Ms. Chu. So it was not necessarily a change in policy?
Mr. Dalton. No. Absolutely not. In fact, I feel pretty safe
in saying that our policy has always been that we do not bundle
contracts.
Ms. Chu. I see. And Mr. Guerin, you do bundle contracts
then in GSA?
Mr. Guerin. No, we do not, ma'am.
Ms. Chu. Oh, you do not either?
Mr. Guerin. No.
Ms. Chu. Okay. And is this a change in policy or you have
never done that?
Mr. Guerin. There are instances in the past where bundling
occurred but it is not a common practice of GSA and it does
require additional levels of approval for us to do that. So we
do not do bundling.
Ms. Chu. Is the disincentive this additional scrutiny?
Mr. Guerin. No. It is the nature of what we build. We have
large projects, typical single building projects where bundling
really is not necessary to accomplish what we need to
accomplish.
Ms. Chu. Okay, very good. Construction contracts can
oftentimes be out of the reach of small businesses because of
the large capacity needed to complete the project, and Mr.
Guerin, in your testimony you gave an example of PBS breaking
up a construction project into three smaller projects that
could be performed by small businesses. Why are not agencies
using this type of acquisition strategy more often so that
small businesses can compete on more solicitations?
Mr. Guerin. I do not know, ma'am. I do not know that they
are not doing that. It is just an example that we had that is
very timely in terms of the discussion today. But we do that
fairly frequently where we have opportunities to break a
project up. There are needs to go for a larger, single contract
where we are doing a large building that is very disruptive to
the building, it is disruptive potentially to the tenants in
the building, so we want to get in and out of that building as
quickly as possible. So we try to go with a general contractor
who marshals the forces, makes sure that all the issues and,
you know, possible challenges that come up are addressed. But
where we have an opportunity we do break the projects down, so
we have opportunities to get small businesses into our
contracts.
Ms. Chu. And Mr. Dalton, do you have any similar experience
with breaking up such kind of contracts?
Mr. Dalton. Absolutely, we do. As a matter of fact, as was
mentioned by or recommended by the previous panel, if you have
a MATOC contract, that we should look for similar opportunities
for small business opportunities the same way we would create
an unrestricted MATOC. We absolutely do the same thing we just
talked about. We work with the small business community, the
SBA as well as with the surety companies and contractors to
determine what is doable by the small business community. And
so, over the past several years what we have done is when we
created those unrestricted MATOCs, we also created small
business MATOCs. For instance, I can remember down at our
southwestern division starting in the Fort Worth area, is that
we worked with the surety companies to determine what amount we
could put out for small business MATOCs. For set-asides I think
we had a limit of $20 million and then we looked for 8A set-
asides of $15 million. And also down to the service-disabled
vets I think that was about $8 million.
When we set up these MATOCs, we include in those MATOCs
those projects on which small business can actually compete. We
also look at the different subcategories within small business
so that we are not just creating one size fits all. And when we
put together our acquisition plans for those large procurements
over the last several years, it is always keeping in mind what
small business can actually execute so that we do not go too
far on one side or the other.
And finally, the last thing I would mention, because we
keep discussing bundling versus consolidation, one of the
things that we look at under consolidation is to make sure that
we do not consolidate projects that used to be available to
small business and consolidate those to where they are no
longer available, executable by small business. So we certainly
try to keep small business in mind.
Ms. Chu. Thank you. I yield back.
Chairman Mulvaney. Thank you, Ms. Chu.
Mr. West.
Mr. West. Thank you, Mr. Chairman and Ranking Member.
Mr. Dalton, we heard a lot of people previously talk about
this reverse auction process or policy. Do you have any policy
on that whatsoever?
Mr. Dalton. We do not believe that, for the type of
projects that we execute within the Corps, that it is
applicable or useful to use reverse auctioning. There are a
couple of cases where we actually tried to use reverse
auctioning when it was mostly based on looking at materials
such as borrow materials in the New Orleans area and we found
we had problems with it. We think reverse auctioning works best
in categories where you are buying products or supplies more so
than construction. Construction is a little hard to do with
reverse auctioning.
Mr. West. The other question is a pretty good payment
schedule, payment rate as far as the prime contracts. Do we
still also have a pretty good, as far as the small business
contractors, an on-time payment plan with those or schedule?
Mr. Guerin. In fact, the numbers that I quoted before the
percentage, the 98.5 percent payments on-time, that includes
both small business as well as large businesses.
Mr. West. All right. And Mr. Guerin, can you give us an
idea as far as percentage that you are trying to include small
businesses in the GSA modernization construction products?
Mr. Guerin. What our goals are?
Mr. West. Yes.
Mr. Guerin. Our goals are 39 percent in PBS for small
business.
Mr. West. How close are we?
Mr. Guerin. We are over that.
Mr. West. Good.
Mr. Guerin. I am sorry. We are at 39 percent. I think our
goal is 27 percent.
Mr. West. Okay. I yield back.
Chairman Mulvaney. Very quickly in the interest of
everybody's time. Gentlemen, you heard first off, actually, Mr.
Dalton, because you are using a term that I am not familiar
with, which is consolidation versus bundling. Can you help me
understand the difference between those two things?
Mr. Guerin. Bundling, the way we look at bundling is that
if we--if opportunities that were previously available to small
business, we take those and add projects together and they are
no longer available to small business, meaning that if before
small business could bid on two barracks at $25 million, we add
those together and now it is a $50 million project beyond a
small business cap there, then that would be--I would consider
that bundling. The consolidation would say combine projects
together but they still do not exceed the amount that was
previously available for small business to bid on.
Chairman Mulvaney. So it is a similar thing; it is just in
a different scope then? Consolidation would be smaller than
bundling?
Mr. Guerin. I do not know that I would say consolidation is
smaller. It is just that when we add those projects together we
do it in such a manner to make sure we do not exclude or
eliminate small business from opportunities that they
previously had.
Chairman Mulvaney. And since it does not violate the
definition of bundling it would be something--okay, that I
understand. Thank you for that clarification.
Gentlemen, both of you heard some testimony earlier today
that was extraordinarily enlightening to me. And one of the
specific reforms that you heard suggested or offered was to
allow you to credit against your small business requirement;
small businesses that participate at lower than first tier
subcontractors. Is there any objection to that? Is there any
reason that that should not have been done already? Is there
something that I am missing because that seems like a fairly
commonsensical reform. But I will throw it open to you as to
whether or not you think that might have any potential pitfalls
that are not readily apparent.
Mr. Guerin. We think it gives a more accurate reflection of
how many dollars are going to small businesses.
Chairman Mulvaney. The way it is now?
Mr. Guerin. No, with the changes that were discussed
earlier. And I do not think GSA would have any objection to
that.
Chairman Mulvaney. Mr. Dalton.
Mr. Dalton. I would say that we would want to move
carefully with making that change. While I certainly would
agree that it gives more visibility to small business awards,
what we would want to be careful I think with is that we do not
want the prime contractor to handoff without any responsibility
for small business or to help mature and train small
businesses' subcontractors on how to do business. And one
concern would be that if I had let us just say a 50 percent
subcontractor to small business responsibility that I as a
prime may hand off all of that to a large business
subcontractor and place the responsibility on that
subcontractor. What we would probably prefer, I think as one
way to look at that is a certain percentage would still and
probably should be required from the prime to that sub, the
first-tier sub. Certainly collecting and adding all of it up
would add more visibility to it but I would just suggest we be
real careful.
Chairman Mulvaney. That is an excellent point. I never
thought about that, effectively delegating your small business
responsibilities through somebody else. Thank you for that. I
appreciate that.
Finally, Mr. West asked about reverse actions. Ms. Biondo,
who was here previously, I do not know if she is still here or
not, had mentioned the multiple best and final offer projects.
And again, all I am really concerned about from the taxpayers'
long-term interest is whether or not those rules are published
in advance. So when you say you do not use reverse auctions, do
you tell people about that before they bid on a service
contract, on a construction contract?
Mr. Dalton. I cannot speak accurately on the service
contracts. I am just not as familiar with those and I am not
sure we use that within the Corps but I can certainly check and
verify.
Chairman Mulvaney. On construction contracts.
Mr. Dalton. On the construction contracts, they are
notified in advance. I can only think of one case that we tried
reverse auctioning and really it is not our policy. In fact,
our policy is to not use reverse auctioning.
Chairman Mulvaney. Is that policy made public?
Mr. Dalton. I do not know that is. Maybe it is more of a
practice than a policy. I would have to verify that. But the
reason why we do not, is because construction is not one of
those type of commodities. In fact, it is not a commodity, but
it certainly makes it difficult to use reverse auctioning for
something where you do not know the qualifications of
companies, et cetera.
With regard to best and final offers, that is something
that companies would know in advance before we would do that.
Chairman Mulvaney. Mr. Guerin.
Mr. Guerin. GSA uses best value. We do not go for reverse
auctioning. I agree with everything my Corps colleague said.
The construction really does not lend itself to that. We go
after technically qualified firms and then we evaluate price
typically.
Chairman Mulvaney. But if I am bidding on a project, do I
know what those rules are in advance?
Mr. Guerin. Yes. In advance you would know how we are
intending to award the contract.
Chairman Mulvaney. Gentlemen, I will just close by saying
this. One of the things that has become apparent to me since I
have been involved in this Subcommittee is that I have been
overwhelmed with the response that many government agencies
have to small business, and both your organizations stand at
the top. I am not surprised to hear the numbers. I was not
familiar with them, but both the GSA and the Army Corps have
done a tremendous job. And I really do appreciate your
commitment to small business. And thank you for allowing us to
help small business succeed.
So with that, unless there is anything else, we will
adjourn. Everyone have a nice weekend. Thanks again. I
apologize for running over.
[Whereupon, at 12:45 p.m., the Subcommittee hearing was
adjourned.]
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