[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 Small Business Committee Document Number 112-053 Available via the GPO Website: www.fdsys.gov U.S. GOVERNMENT PRINTING OFFICE 76-461 WASHINGTON : 2012 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]. 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 ---------- 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 ---------- -- -------- 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. 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