[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



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                      CHUCK FLEISCHMANN, Tennessee
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

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


                            C O N T E N T S

                              ----------                              

                           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.
    [Whereupon, at 12:45 p.m., the Subcommittee hearing was 
adjourned.]

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