[Senate Hearing 112-144]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 112-144
 
                       SMALL BUSINESS CONTRACTS:
                 HOW OVERSIGHT FAILURES AND REGULATORY
    LOOPHOLES ALLOW LARGE BUSINESSES TO GET AND KEEP SMALL BUSINESS 
                               CONTRACTS

=======================================================================


                                HEARING

                               before the

              AD HOC SUBCOMMITTEE ON CONTRACTING OVERSIGHT

                                 of the

                              COMMITTEE ON

                         HOMELAND SECURITY AND

                          GOVERNMENTAL AFFAIRS

                          UNITED STATES SENATE


                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 26, 2011

                               __________

                   Available via http://www.fdsys.gov

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs



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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           JOHN ENSIGN, Nevada
JON TESTER, Montana                  ROB PORTMAN, Ohio
MARK BEGICH, Alaska                  RAND PAUL, Kentucky
                                     JERRY MORAN, Kansas

                  Michael L. Alexander, Staff Director
      Nicholas A. Rossi, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk
            Joyce Ward, Publications Clerk and GPO Detailee


              AD HOC SUBCOMMITTEE ON CONTRACTING OVERSIGHT

                       CLAIRE McCASKILL, Chairman
THOMAS R. CARPER, Delaware           ROB PORTMAN, Ohio
MARK L. PRYOR, Arkansas              SUSAN M. COLLINS, Maine
JON TESTER, Montana                  JOHN McCAIN, Arizona
MARK BEGICH, Alaska                  JERRY MORAN, Kansas
                     Margaret Daum, Staff Director
                Brian Callanan, Minority Staff Director
                       Kelsey Stroud, Chief Clerk



                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator McCaskill............................................     1
    Senator Portman..............................................     3
    Senator Tester...............................................     5

                               WITNESSES
                         Tuesday, July 26, 2011

Joseph G. Jordan, Associate Administrator, Office of Government 
  Contracting and Business Development, U.S. Small Business 
  Administration.................................................     6
Mauricio P. Vera, Chair, Interagency Council of Federal Office of 
  Small and Disadvantaged Business Utilization Directors, and 
  Director, Office of Small and Disadvantaged Business 
  Utilization, U.S. Agency for International Development.........     8
Mindy Connolly, Ph.D., Chief Acquisition Officer, U.S. General 
  Services Administration........................................    10

                     Alphabetical List of Witnesses

Connolly, Mindy, Ph.D.:
    Testimony....................................................    10
    Prepared statement...........................................    43
Jordan, Joseph G.:
    Testimony....................................................     6
    Prepared statement...........................................    31
Vera, Mauricio P.:
    Testimony....................................................     8
    Prepared statement...........................................    39

                                APPENDIX

Scorecard referenced by Ms. Connolly.............................    49
Questions and Responses for the Record from:
    Mr. Jordan...................................................    51
    Mr. Vera.....................................................    61
    Ms. Connolly.................................................    62
Statement from Congressman Bennie G. Thompson for the Record.....    69


                     SMALL BUSINESS CONTRACTS: HOW



                   OVERSIGHT FAILURES AND REGULATORY



    LOOPHOLES ALLOW LARGE BUSINESSES TO GET AND KEEP SMALL BUSINESS 
                               CONTRACTS

                              ----------                              


                         TUESDAY, JULY 26, 2011

                                   U.S. Senate,    
          Ad Hoc Subcommittee on Contracting Oversight,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:06 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Claire 
McCaskill, Chairman of the Subcommittee, presiding.
    Present: Senators McCaskill, Tester, and Portman.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. The hearing will now come to order. I 
know that Senator Portman will be here, and I know he would 
want us to go ahead and begin, and we will defer to him as soon 
as he arrives. Let me begin with my opening statement.
    This week Washington is focused on the debt ceiling and the 
looming possibility that our country will default on our 
obligations. This is a time for all of us here to take a hard 
look at the way the government is doing business.
    Today's hearing is about restoring honesty, transparency, 
and accountability to one particular part of the government's 
books: The way that the government awards and tracks small 
business contracts.
    Several decades ago, Congress passed legislation 
establishing annual goals for small business contracting. The 
goal is now set at 23 percent. Last year, the government 
announced that it had reached 22.7 percent.
    This is a laudable achievement. Unfortunately, as today's 
hearing will show, it is also an empty achievement. Many of the 
contracts that the government counts when it tallies the awards 
it says have gone to small businesses are, in fact, performed 
by large businesses. Today, we are going to examine how it is 
that a system that should be helping small businesses is, in 
fact, doing little more than helping the government play a 
numbers game.
    This is not the Subcommittee's first hearing on problems 
with small business programs. Two years ago, the Subcommittee 
held a hearing on the multiple preferences for Alaska Native 
Corporations (ANCs) in the Small Business Administration's 
(SBA's) 8(a) program for small and disadvantaged businesses. At 
that hearing we examined how special preferences in the 8(a) 
program allowed Alaska Native corporations--many of which are 
very large businesses indeed, with revenues far in excess of 
$100 million per year and multiple subsidiaries--to be 
considered ``small'' businesses by the Federal Government.
    Today we are going to look at some of the other ways that 
the government's small business rules benefit large 
corporations. Since 2005, the SBA Inspector General (IG) has 
included in their list of the agency's top management 
challenges the fact that many contract awards recorded as going 
to small businesses are actually performed by large businesses.
    In many cases this happens because the current regulations 
allow contracts to be counted this way. In preparation for this 
hearing, we looked closely at the ways that the size standards 
for small businesses allow the government and contractors to 
game the system to their advantage. The SBA sets size standards 
for businesses for each of the more than 1,200 industries 
defined under the North American Industrial Classification 
System (NAICS), a business classification system maintained and 
used by the U.S. Census Bureau for statistical purposes.
    When the Federal Government awards a contract, the 
contracting officer (CO) determines the North America 
Industrial Classification System code to describe the product 
or service being bought. NAICS is the acronym for this code, 
the classification system. The size standard for the NAICS code 
defines the size of business that can be counted as small for 
the contract based on either a business' revenue or the number 
of employees it has.
    Yet even though the contracting officer should have the 
ability to choose a NAICS code that best fits the contract, SBA 
has created a special exception that swallows the whole rule. 
Even if you do not make anything and you are just buying 
products from a large business for resale to the government, 
with a markup, you get to be considered a manufacturer. This 
allows a bigger size standard to be used, which means that a 
business that might be too large to qualify as small can get 
the contract, and the government can count the dollars toward 
meeting their small business goals.
    For example, one contractor, immixTechnology, resells 
commercially available information technology hardware and in 
2009 had approximately $400 million in revenue and 150 
employees. In 2010 immixTechnology received more than $18 
million in new small business contracts for resale and 
wholesale contracts. SBA generally limits wholesale companies 
to a maximum size standard of 100 employees and retail 
companies to a maximum revenue of approximately $7 million to 
$30 million, depending on the industry, both standards that 
immixTechnology far surpassed. But SBA has also created an 
exception which requires the government to use the 
classification for a manufacturing company for contracts like 
this one, which sets the size standard at 500 employees. All of 
a sudden, a big company like immixTechnology, for all intents 
and purposes, is called ``small'' for the government's books.
    In meetings in preparation for this hearing, the 
Subcommittee learned that the NAICS system was not designed for 
use as a government contracting tool. That disconnect may be at 
the root of some of the abuses that we now see in small 
business contracts. I am going to be asking our witnesses today 
whether there is a more rational way of determining size.
    I will also be asking questions today about all the 
complicated ways that small businesses certify that they are 
small and what happens when they grow large or get bought and 
are not small anymore by anyone's standards.
    My biggest concern here is that the system doesn't seem to 
make sense. Small businesses are one of the most important 
parts of the U.S. economy, and government contracts can be an 
important economic opportunity for small businesses and an 
effective way that the government can use its spending power to 
help small businesses succeed. We need to make sure that the 
system provides them the opportunities that they need to be 
successful. We do not need to be spending taxpayer dollars to 
prop up a system that allows the government to take credit and 
large businesses to profit at the expense of the small 
businesses that the system is meant to help.
    I thank the witnesses for being here today, and I look 
forward to their testimony. Senator Portman.

              OPENING STATEMENT OF SENATOR PORTMAN

    Senator Portman. Thank you, Madam Chairman. I appreciate 
your holding this hearing. And as you just said, this is an 
issue that this Subcommittee has looked at before, so I 
appreciate your continued focus on it, and I am glad to be 
joining you today to take it to the next step. I think it is 
critical that this good work you have already started 
continues.
    This hearing on small business comes at a difficult time, 
doesn't it? We are looking at high unemployment, over 9 percent 
nationally, and when you really look at the numbers of people 
who are not looking for work anymore or are underemployed, it 
is closer to 16 percent in Ohio. Those are about our numbers. 
We are looking at not just relatively high unemployment but 
also people being unemployed for a long time. This is a record 
number of folks being unemployed for 6 months or more. So we 
have a lot of challenges in front of us, and small businesses 
are being looked to pull us out of what is a very disappointing 
recovery.
    And that has always been true. When you look back in 
history, whether it is the Great Depression or recessions we 
have been in before, it is small businesses that tend to hire 
first and tend to bring us out, and we are not seeing that in 
the way that we should. I think there are a lot of reasons for 
it. We are not creating the conditions for small businesses to 
be able to grow and prosper. There is a lot of uncertainty out 
there. I think we are talking about that on the floor of the 
Senate and the House this week. Part of that uncertainty is 
where we are going with the budget deficit and the taxes and 
regulations and so on.
    The Small Business Administration, of course, is supposed 
to be helping to create more economic activity among the risk 
takers and innovators and small businesses, so this is an 
appropriate focus for us today.
    I am told that over two-thirds of the new net jobs over the 
past 15 years have been created by small businesses, by the 
way. Those are SBA numbers.
    I grew up in a small business, as did a lot of Americans. 
My dad started a small business when he was 40 years old. He 
left a job as a salesman, and he risked it all. He lost money 
the first few years, but it finally caught on, and he went on 
to be a successful small business person, as is my brother, who 
still works at the company. And if we do not get these small 
business entrepreneurs and innovators back in the game again, 
creating jobs and opportunities, we are not going to be able to 
get out of either the economic issues we are in or also to be 
able to deal with our fiscal challenges because we need more 
growth.
    So this, again, is an appropriate hearing at a time when we 
need to be focused on how do we get these businesses going.
    By the way, U.S. Bank recently did a survey of small 
businesses nationwide, and they reported that 75 percent of 
small businesses have no plans to expand in the next 12 months. 
So we need to do everything we can to try to help them expand.
    One of the things that can be done is to ensure that any 
Federal program that is designed to promote economic 
development and promote small businesses is working, and 
working efficiently and effectively and has measurable results 
to help get us back on track.
    The contracting set-aside programs that the Chair talked 
about a moment ago created by the Small Business Act are among 
the tools we can use to help small businesses. These programs 
open the doors to procurement opportunities, and we are going 
to hear a lot about that from the witnesses today, some of whom 
have been doing this for a long time and can tell us whether it 
is working or not. The Chair just talked about some of the 
definitional problems. What is a small business? How often do 
they have to report? Is once every 5 years adequate? What 
happens when a small business becomes a big business? Should 
they still get the same set-aside?
    And, by the way, this is no small line item. In Fiscal Year 
2010 the SBA reported that Federal agencies awarded nearly $98 
billion of all prime contracts to small businesses. That is 
just shy of that 23 percent yearly target that is established 
by law, and we have to be sure that target is met and that it 
is done, again, in a way that truly helps small businesses. 
Oversight is important here, and, again, that is what this 
hearing is about.
    One of the perennial challenges has been the problem of 
unqualified large businesses profiting from these small 
business contracts. The SBA Inspector General has identified 
this issue as a top management priority every year since 2005, 
and it is appropriately, again, a focus of the hearing today.
    More broadly, we have seen that the enticement of limited 
competition has led to fraud and misrepresentation across 
several small business contracting programs. For example, the 
Government Accountability Office (GAO), reported last year that 
it identified 14 firms that received set-side or sole-source 
8(a) contracts worth $325 million through fraud, and, again, 
this is an appropriate focus of this Subcommittee. These 14 
firms then received another $1.2 billion in other Federal 
obligations since entering the 8(a) program, including $17 
million in awards through the 2009 stimulus bill.
    So fraud and oversight failures like these are 
unacceptable. We need to focus on them and figure out how to 
stop them. They not only short-change the taxpayers but, of 
course, those businesses that should be benefiting are injured.
    I look forward to hearing from our good panel here today, 
Madam Chairman, and, again, thank you for holding this hearing. 
I look forward to a good conversation about the management and 
oversight challenges in these small business contracting 
programs.
    Senator McCaskill. Thank you, Senator Portman.
    Senator Tester, thanks for joining us this morning. Would 
you like to make an opening statement?

              OPENING STATEMENT OF SENATOR TESTER

    Senator Tester. I would. Thank you, Madam Chairman, for 
having this hearing, and I want to thank the witnesses for 
being here today. We all understand how important it is 
creating jobs. We also understand that there is no more proven 
job creator than small businesses. Montana is no exception 
where the vast, vast majority of our businesses are small.
    Right now many of these businesses are struggling. The 
uncertainty of a debt ceiling is probably part of the reason. 
We need to do a better job of coming together here with 
reasonable solutions, but these small businesses are not 
looking for a bailout or a handout. They are looking for a 
level playing field so that they can compete, and one thing 
that we can do here is make sure that level playing field is, 
in fact, level. And we should not allow the large businesses to 
come in and elbow out the small ones to get those contracts 
that are set aside for the small businesses.
    This, quite frankly, from my perspective is going to be 
something that saves the government money, and I think that the 
Chairman talked about approaching the 23 percent, but, in fact, 
that is not what has occurred at all. So we need to do a better 
job making sure that the small business carveout actually does 
go to small businesses, and I am eager to hear from the 
witnesses how we can improve that process, how we can make it 
better, how we can eliminate the loopholes, the waste, the 
fraud, the abuse so that businesses truly do get a fair shake. 
And so I want to thank you for that, Madam Chairman.
    On a side note, I would say it is good to see that you 
still have John LaBombard working on your staff. It is good to 
see that he still has gainful employment.
    Senator McCaskill. He has lasted a couple of weeks. It is 
great.
    This is an inside joke. I stole this staff member from 
Senator Tester, so he is cranky about it. [Laughter.]
    Senator Tester. Actually, I gave him a great 
recommendation.
    Senator McCaskill. You did. You did, in fact, and it is 
great to have him.
    Let me introduce our witnesses for today. Joseph Jordan was 
appointed as Associate Administrator of Government Contracting 
and Business Development at the United States Small Business 
Administration in March 2009. Prior to joining SBA, Mr. Jordan 
was an engagement manager with McKinsey & Company, a global 
management consulting firm.
    Mauricio Vera is the Director of the U.S. Agency for 
International Development's (USAID) Office of Small and 
Disadvantaged Business Utilization (OSDBU). Since October 2009, 
Mr. Vera has served as Chair of the Federal Office of Small and 
Disadvantaged Business Utilization Council. Before joining 
USAID, Mr. Vera managed the small business program at the U.S. 
Nuclear Regulatory Commission. Mr. Vera has also served as a 
Senior Financial Analyst at the Small Business Administration.
    Mindy Connolly was appointed to be the Chief Acquisition 
Officer (CAO) of the General Services Administration (GSA) in 
February 2011. Prior to joining GSA, Ms. Connolly was a Senior 
Procurement Policy Analyst at the White House Office of Federal 
Procurement Policy (OFPP). Before joining the Federal 
Government, she worked in acquisition for Honeywell 
International's Defense Division.
    It is the custom of this Subcommittee to swear in all 
witnesses that appear before us, so if you do not mind, I would 
ask you to stand. Do you swear that the testimony you will give 
before this Subcommittee will be the truth, the whole truth, 
and nothing but the truth, so help you, God?
    Mr. Jordan. I do.
    Mr. Vera. I do.
    Ms. Connolly. I do.
    Senator McCaskill. Thank you very much.
    We will begin our testimony this morning with Mr. Jordan. 
Welcome and thank you for being here.

  STATEMENT OF JOSEPH G. JORDAN,\1\ ASSOCIATE ADMINISTRATOR, 
OFFICE OF GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. 
                 SMALL BUSINESS ADMINISTRATION

    Mr. Jordan. Thank you, Madam Chairman. Chairman McCaskill, 
Senator Portman, and Senator Tester, thank you for inviting the 
U.S. Small Business Administration to testify this morning. And 
having been at the hearing 2 years ago that you referenced, it 
is very nice to be back. My name is Joseph Jordan, and I am the 
Associate Administrator for the SBA's Office of Government 
Contracting and Business Development.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Jordan appears in the appendix on 
page 31.
---------------------------------------------------------------------------
    My office works each day to ensure that small businesses 
receive their fair share of over $400 billion in Federal 
contracts. We are always looking for ways to increase small 
business contracting opportunities, and I am proud to say that 
in the 2\1/2\ years I have been in my position, we have made 
significant improvements.
    Today I would like to share with you three key initiatives 
that my office has been focused on: One, the small business 
procurement goaling process and scorecard; two, our three-
pronged approach to combating fraud, waste, and abuse; and, 
three, the implementation of the Small Business Jobs Act (SBJA) 
of 2010.
    First I will discuss the small business procurement goaling 
process and scorecard. SBA oversees the Federal Government's 
efforts to meet the statutorily mandated small business goals, 
including the goal of awarding 23 percent of prime contracting 
dollars to small businesses.
    The first part of the goaling process is working 
collaboratively with all 24 CFO Act agencies to set small 
business procurement goals for each of them using a fact-based 
and data-driven approach.
    The second part of the process is to continually monitor 
progress toward these goals and to provide training and support 
to agencies wherever needed.
    The last and most public phase of the goaling process is 
the publication of our annual scorecard. Last month we 
published the Fiscal Year 2010 scorecards which showed that the 
government awarded 22.7 percent of contracting dollars to small 
businesses, marking the largest 2-year increase in over a 
decade. While we will always push to do more, we are proud of 
the improvement we have made in the scorecard process and 
methodology. Two years ago we redesigned the methodology to 
provide a clearer, more transparent report of small business 
contracting performance and to ensure the scorecard would 
incentivized the desire outcomes.
    Additionally, although only the agency awarding a contract 
may enter or modify its data, SBA has developed a robust data 
quality review process to identify any potential anomalies. We 
work closely with agencies to resolve these anomalies after 
they have certified their data to the Office of Management and 
Budget's (OMB's) Office of Federal Procurement Policy and GSA 
and before we publish the scorecard.
    It is also important to note that there are many legitimate 
reasons for a small business contract to look like it was 
awarded to a business that is other than small such as: If a 
business grows out of being small during a multi-year contract, 
regulations consider the recipient to be small for up to 5 
years or the length of that contract, whichever is shorter.
    Second, many firms operate in multiple industries and may 
meet the size standard to be considered small for some of them 
and not for others. We work closely with the Office of Federal 
Procurement Policy, the Defense Acquisition University, and the 
Federal Acquisition Institute to ensure contracting officers 
have appropriate training on how to classify and report these 
contracts.
    I would now like to share our approach to combating fraud, 
waste, and abuse in our contracting programs. We have no 
tolerance for fraud, waste, or abuse in these programs and 
have, therefore, implemented a comprehensive, three-pronged 
strategy to identify, prevent, and pursue fraud across all 
government contracting programs.
    The first prong of our strategy is designed to ensure that 
there are effective certification processes on the front end 
and make sure only qualified eligible firms participate in 
these programs.
    The second prong is conducting continued surveillance and 
monitoring on these firms once they are in our programs.
    The last prong of the strategy is taking robust and timely 
enforcement on any non-compliant or fraudulent firms.
    We have made significant improvements in all three phases 
and maintain our focus on ensuring benefits of small business 
contracting programs only flow to the intended recipients.
    Last, I would like to share our efforts to implement the 
Small Business Jobs Act of 2010. We thank Congress for passing 
this important piece of legislation which included 19 
provisions related to small business contracting. We are in the 
process of implementing these provisions and are excited about 
the impact they will have not only on small businesses but also 
in improving the contracting oversight process. These three 
initiatives demonstrate the steps that SBA has taken to 
strengthen our goaling process, data quality efforts, and 
approach to combating fraud, waste, and abuse. These efforts 
are critical in ensuring small businesses gain access to 
Federal contracting opportunities.
    While we have made significant progress, we continue to 
look for ways to identify further opportunities for improvement 
and maximizing small businesses' access to this important 
source of revenue so that they can grow their businesses and 
create jobs.
    Thank you for allowing me to share SBA's views and 
initiatives with you today, and I will be happy to answer any 
questions that you may have.
    Senator McCaskill. Thank you, Mr. Jordan. Mr. Vera.

STATEMENT OF MAURICIO P. VERA,\1\ CHAIR, INTERAGENCY COUNCIL OF 
FEDERAL OFFICE OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION 
  DIRECTORS, AND DIRECTOR, OFFICE OF SMALL AND DISADVANTAGED 
BUSINESS UTILIZATION, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT

    Mr. Vera. Good morning. Chairman McCaskill, Senator 
Portman, Senator Tester, thank you for inviting me to testify 
this morning. My name is Mauricio Vera, and I am the Director 
of the U.S. Agency for International Development's Office of 
Small and Disadvantaged Business Utilization. I also currently 
serve as the Chair of the Federal OSDBU Directors Interagency 
Council, and it is in that capacity, not as a representative of 
USAID, that I was invited to speak to you this morning.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Vera appears in the appendix on 
page 39.
---------------------------------------------------------------------------
    Section 15(k) of the Small Business Act requires that all 
Federal agencies with procurement powers establish an OSDBU. 
OSDBU Directors are the primary small business advocates within 
each Federal executive agency, responsible for promoting the 
maximum practicable use of all designated small business 
categories within the agency's Federal acquisition process. 
OSDBU Directors are tasked with ensuring that their agency and 
its prime contractors comply with Federal laws, regulations, 
and policies related to the award of contracts and subcontracts 
to small businesses. By law, OSDBU Directors shall report 
directly to the agency head or the deputy. This is important 
because it helps to ensure that OSDBU Directors have direct 
access to their agency's top decisionmakers in order to 
advocate effectively.
    The Federal OSDBU Directors Interagency Council is an 
informal organization of Federal small business program 
officials that meets monthly to discuss issues that are 
important to accomplishing our respective missions and share 
best practices for the utilization of small businesses. The 
Council is led by an Executive Committee that is elected 
annually for 1-year terms by the voting membership. At the end 
of September, I will complete my second year as the elected 
Chair of the Council. Although the Chair is elected by the 
group, he or she has no authority to speak for any of the 
individual members of the Council. And while every Director 
formally advocates for the priorities of his or her agency, the 
Council does share some common goals, and these include: 
Ensuring that information is disseminated to small businesses 
so that they can be fully informed as to the Federal laws, 
regulations, and programs that are relevant to their pursuit of 
Federal prime and subcontracts; advocating Federal Government-
wide compliance with laws, regulations, and policies designed 
to maximize the participation of small businesses; advocating 
training of the Federal procurement workforce and community in 
the principles and methodologies to maximize small business 
utilization; and, most importantly, identifying best practices, 
sharing ideas, and experiences among Federal agencies and 
private industry that will help leverage resources and develop 
solutions to more fully utilize small businesses in Federal 
procurement.
    Agencies are mandated to establish small business 
procurement goals and negotiate these with the SBA prior to the 
beginning of each fiscal year.
    For the past several years, as Joe alluded to, the SBA has 
also issued a Small Business Procurement Scorecard to, one, 
measure how well agencies are meeting their small business; 
two, provide accurate and transparent contracting data; and, 
three, report agency-specific progress. Each agency's overall 
grade is comprised of three quantitative measures: Prime 
contract goal accomplishment, subcontracting goal 
accomplishment, and progress plans for meeting its goals.
    One of the measures in the progress plan section of the 
scorecard is that agencies should ``demonstrate that small 
business data is accurately reported in the Federal Procurement 
Data System (FPDS).'' The Federal Acquisition Regulation (FAR) 
and supplemental guidance from OMB's Office of Federal 
Procurement Policy also require agencies to annually verify 
that agency data captured in FPDS are complete and accurate. 
OFPP policy letters require agencies to verify that agency 
policies, procedures, and internal controls include regular 
reviews of procurement data and that agencies are appropriately 
sampling procurement records for accuracy on key data elements.
    SBA provides each of the 24 agencies covered under the CFO 
Act an individualized anomaly report for the previous year. 
These anomalies are evaluated by the agency, and then the 
agencies are instructed to review and investigate each of them 
and either correct those that are in error or provide SBA with 
an explanation of why the transaction should not be corrected.
    A number of OSDBU Council member agencies are taking 
concrete steps to mitigate the possibility of large businesses 
obtaining contracts that are set aside for small businesses and 
ensuring that their small business data are valid. Some of the 
best practices at various agencies include: Adding 
responsibility and accountability for data accuracy as an 
element in contracting officers' and other contracting 
officials' performance plans; mandating that contracting 
professionals participate in training that emphasizes the 
importance of accurate reporting; conducting random sampling of 
procurement actions to determine if businesses are coded 
correctly in FPDS and correcting those that have been 
miscategorized; and, last, encouraging small businesses to 
update their information in the Central Contractor Registration 
(CCR) or Online Representations and Certifications Application 
(ORCA) databases to accurately reflect size and socioeconomic 
business status.
    Thank you again for the opportunity to testify before your 
Subcommittee. Members of the Federal OSDBU Directors 
Interagency Council are committed to helping small businesses 
get their fair share and that our acquisition systems produce 
the good results that our taxpayers deserve. I welcome the 
opportunity to seek your advice and counsel on this important 
matter and am pleased to answer any questions you might have.
    Thank you.
    Senator McCaskill. Thank you, Mr. Vera. Ms. Connolly.

   STATEMENT OF MINDY CONNOLLY, PH.D.,\1\ CHIEF ACQUISITION 
         OFFICER, U.S. GENERAL SERVICES ADMINISTRATION

    Ms. Connolly. Good morning, Chairman McCaskill, Senator 
Portman, Senator Tester, and Members of the Subcommittee on 
Contracting Oversight. It is a pleasure to be here today to 
testify on behalf of the General Services Administration. My 
name is Mindy Connolly, and I am the Chief Acquisition Officer 
of GSA. This morning I will provide a summary of my written 
statement, which was submitted to the Subcommittee.
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    \1\ The prepared statement of Ms. Connolly appears in the appendix 
on page 43.
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    GSA shares the perspective on small business contracting 
and related data quality concerns in the findings of the 
Presidential Interagency Taskforce on Federal Contracting 
Opportunities for Small Business. We are working together with 
our colleagues at SBA to implement the task force 
recommendations while making progress to increase small 
business awards and improve data quality within internal GSA 
operations.
    The task force identified three priority recommendations 
for Federal contracting: First, providing Federal contractors 
with stronger rules; second, developing a better equipped, 
informed, and more accountable workforce; and, third, improving 
outreach and making better use of data.
    It is critical that these improvements be examined at the 
intersection of policy systems, our acquisition workforce, and 
business interests and behavior. Policy drives the regulations 
and business rules around which our systems are managed. The 
harmonization of policy and systems and training is needed to 
ensure only small businesses are the beneficiaries of intended 
contracting policy.
    GSA recently received a grade of A from the SBA for our 
Fiscal Year 2010 small business performance.\2\ Every member of 
the GSA leadership team is proud of the acquisition workforce 
across GSA that led to that success. In addition to meeting our 
own goals, our Federal Acquisition Service (FAS) helps other 
agencies accomplish their mission through our multiple award 
schedule (MAS) contracts, governmentwide acquisition contracts, 
and assisted acquisitions. Across the multiple award schedule 
contracts, over one-third of the orders go to small businesses, 
helping other agencies to meet or exceed their small business 
goals.
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    \2\ The scorecard referenced by Ms. Connolly appears in the 
appendix on page 49.
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    The first priority of the task force is to strengthen rules 
and policies in order to promote contracting opportunities for 
small businesses. Many steps toward strengthening the rules are 
set forth in the Small Business Jobs Act of 2010, which, among 
many changes, promotes the increased transparency in contract 
awards to small businesses. SBA has the programmatic lead to 
issue policy, implementing the changes mandated by the Jobs 
Act. The FAR Council, of which GSA is a signatory agency, is 
paying close attention or is involved in those discussions, and 
I expect we will open a FAR case or cases to address the 
revised SBA regulations.
    One regulatory issue for attention is the snapshot in time 
when a size determination is made to classify a business as 
``small'' and thus eligible for the benefits reserved for small 
businesses.
    When acquisition policy changes, acquisition systems 
changes must follow. Coordinating with the Chief Acquisition 
Officers Council and the Acquisition Committee for Electronic 
Government (ACE), GSA is the managing partner of the Integrated 
Acquisition Environment (IAE). The IAE is a set of 
governmentwide systems used by the Federal community and by 
those who seek to do business with the government. To better 
serve stakeholders, GSA is developing a new System for Award 
Management (SAM), that will replace the current FPDS-NG system. 
Once implemented, SAM will provide a single user-friendly 
interface that will reduce burden and errors among contracting 
officers and vendors alike. Reducing user error and duplicative 
entry improves data quality. In turn, improved data quality 
creates more accurate reporting and fosters improved 
decisionmaking.
    As we move forward, the entire acquisition workforce will 
be critical to ensuring regulatory implementation achieves the 
intended objectives. To assist in meeting this challenge, GSA's 
Federal Acquisition Institute is developing a Small Business 
Programs online continuous learning module, due to launch in 
September 2011. This module helps members of the acquisition 
workforce understand the current tools, processes, and 
resources available to facilitate proper awards to small 
businesses.
    As Chief Acquisition Officer, I am committed to ensuring 
GSA maintains acquisition excellence in all of our activities, 
including small business contracting and reporting.
    Chairman McCaskill, Senator Portman, Senator Tester, I am 
glad to answer any questions of the Subcommittee. Thank you.
    Senator McCaskill. Thank you all for being here.
    We will try to do 7-minute rounds, and we will do as many 
as we need to do to get everyone's questions.
    Let me begin. There are many problems here, and some of it 
is just a matter of complexity, but let me get at one of the 
more simple issues, and that is, should a contract be counted 
as small for the life of the contract? Let me give you an 
example. There is a Virginia-based company called VSE 
Corporation which now has over 2,800 employees and $363 million 
in revenue. VSE is doing quite well and good for VSE. I am glad 
they are. That is not the issue. VSE is no longer listed as a 
small business, obviously. No casual observer would ever claim 
that VSE is a small business. Nevertheless, the Defense 
Department awarded a contract worth up to $2.6 billion in 2008 
to VSE as a small business, and the dollars obligated to VSE 
under that contract today are still counted by the Defense 
Department toward its small business goals. The Department 
likes it. SBA probably likes it. But I do not see how that 
spurs the Department toward looking for small businesses in 
Missouri or other places to fill annual small business 
contracting goals. Today over $30 million--today, with this 
company being the size that it is, over $30 million in task 
orders under this contract are still counted toward small 
business contracting goals.
    Doesn't keeping this contract on the record books as a 
small business contract skew the entire purpose behind keeping 
track of small business contracts, Mr. Jordan?
    Mr. Jordan. I do not believe so, Madam Chairman. I think 
that, as you rightfully said, this company has recertified 
their status, so any future awards that they would receive 
would not be through small business set-asides, and those 
dollars would not be counted as small.
    I think what is behind the current regulations that say 
before your sixth year of a contract--so the length of the 
contract or 5 years, whichever is shorter--the agency may 
continue to receive small business credit for those dollars is 
intended to encourage agencies in an environment where we have 
30,000 contracting officers trying to execute 5 million 
contracts and contract actions annually to do that in an 
effective and efficient way and find these multiple award 
contract vehicles that they can get into the hands of small 
businesses without penalizing that contracting officer and that 
agency by then locking in all those dollars into their spend 
base but not giving them any small business credit in the 
numerator because they did such a good job finding these small 
businesses that those small businesses grew and exceeded the 
size standard.
    So I think it would be wrong if that entity went out and 
competed against other small businesses now and won any award, 
but at the time of their offer for that contract they were 
small. They received that contract--I do not know the 
individual case, but this does happen, as you have noted, more 
than just one time. They were right to receive that contract in 
being a qualified small business, and then at the end of 5 
years or the life of that contract, whichever is shorter, they 
can no longer be counted as small.
    Senator McCaskill. Well, I guess, I understand from your 
perspective you do not want to penalize the agency or the 
business that has grown. On the other hand, it inherently makes 
the number really misleading because they are--I mean, this is 
one example, but there are thousands of these examples where we 
are continuing to count toward a small business goal companies 
that are not small by anybody's measure.
    So I guess what I am saying is by taking the position you 
are taking, you are essentially saying to the public, ``By the 
way, we are saying 22.7, but do not believe it.''
    Mr. Jordan. Well, on that point, I think we all strive for 
perfection, and we definitely want every single dollar that 
says it is going to small businesses to be going to small 
businesses, and we will do more to make sure that happens and 
that we hit the 23 percent, there is no fraud, waste, and 
abuse, small business contracts are going to small businesses.
    When you look at it on a relative basis versus everything 
that has ever happened before, not only is the greatest 2-year 
increase in 10 years, but it is also done with the cleanest 
data ever. So we are very proud of that. What we have done on 
the specific issue is try to balance--keeping a level playing 
field, as Senator Tester said, so at the time of competition 
for a small business set-aside all those businesses are only 
small; do incentivize contracting officers and agencies to get 
contracts in the hands of small businesses; and then, balance 
with things like when there is a merger or acquisition, then 
they do have to recertify; they do have to go back and they 
will not get small business credit for that anymore, and a lot 
of contracting officers and agencies get frustrated because 
they say, Joe, I found this great small business. I locked in a 
5-year contract with them. I am very excited that we are going 
to have all these small business dollars in our spend. But then 
the next day, fill-in-the-blank household large business bought 
them, and now I have locked that 5-year spend into my 
denominator, but I am not going to get any credit for that. I 
am going to, in fact, get penalized for it when you come out 
with the scorecard and show in a transparent way how we have 
done.
    So we try to balance both sides of that to keep the 
behaviors we want incentivized but also, make sure that we feel 
we are confident that the small business contracting numbers we 
report are accurate.
    Senator McCaskill. Yes, well, they are not.
    Let me quickly go through this other question, and I may go 
over a little bit of the 7 because there is just a minute 31 
left. But there are NAICS codes for manufacturing, and then 
there are NAICS codes for retail trade. And there are codes for 
wholesale trade, and there are codes for service. Yet SBA 
directs contracting officials to not use the codes for retail 
and wholesale and requires them to use manufacturing, which has 
much higher size standards.
    For example, if you are in the resale business, if you do 
not make anything, you just buy and resell it, your size will 
be determined, as the case with manufacturers, based on the 
number of people you employ, not on your revenue, which allows 
many companies to be counted as small that might not otherwise 
qualify.
    We looked at a number of examples and found some disturbing 
ones. For example, one business was awarded a contract for 
``other computer peripheral equipment manufacturing,'' which 
lets businesses count up to 1,000 employees before it is no 
longer considered small, even though the business was not 
manufacturing a single thing. That business had a $3 million 
contract to sell toner to the government. So all it was done 
was performing a middleman function selling toner, printer 
toner, to the government, and they were counted as 
manufacturing under the much higher standard.
    How can you justify that?
    Mr. Jordan. So procurements are classified based on what 
you buy, not who provides them. So wholesale and retail NAICS 
codes, North American Industrial Classification System codes, 
do not apply to government procurements. So for a supply 
contract----
    Senator McCaskill. Well, why not?
    Mr. Jordan. Because, again, the procurements are classified 
based on what is being purchased.
    Senator McCaskill. Why? If they are performing a retail 
function, why don't you use the code for retail? Because that 
is what these guys are doing. They are not making anything.
    Mr. Jordan. The theory is that we are trying to get, again, 
small businesses on a level playing field to be able to compete 
while not just having them either inappropriately participate 
or act as a pass-through. So that is why we ask an agency for 
supply contracts to assign the NAICS code. To be eligible for a 
set-aside, the firm must manufacture the product of a small 
business. But you are right. The non-manufacturer size standard 
is 500 employees.
    So it is an issue that we look at quite a bit. When do we 
grant non-manufacturer waivers? How do we make sure that we 
have small businesses in the process wherever they can compete 
and provide the government the best value? But it is definitely 
an issue that we continue to look at.
    Senator McCaskill. Well, it does not make any sense. I 
mean, these guys are just selling toner. They are just a pass-
through. Why in the world would you use the standard for 
manufacturing that is much, much higher? There is no reason to 
do that unless you are trying to pigeonhole people into a small 
business category that really are not a small business 
category. It seems to me that it is as plain as the nose on 
your face that this does not work.
    My time is up, and I want to turn it over to Senator 
Portman, but I need a better answer than this is just the way 
we do it, because all this does is, once again, skew the 
numbers in a way that in the long run harms small businesses, 
because everybody gets complacent and fat and happy that we are 
making our 23-percent goal when in reality we have a monster-
size company that is just selling toner that is beating out a 
whole lot of small businesses that might be able to sell that 
toner for the same price. Senator Portman.
    Senator Portman. Thank you, Madam Chairman.
    Let me followup a little bit on the large business issue. 
You talked, Mr. Jordan, about the 5-year certification, which 
is current law. A simple question. Do you think there ought to 
be a recertification as a small business more frequently than 
the 5-year period?
    Mr. Jordan. Well, yes. As the Small Business Jobs Act has 
instructed us to do and we are now in the process--actually 
those regulations are over at OMB, so we are really getting 
them through the process pretty quickly on a relative basis. 
That dictates that in the Online Representations and 
Certifications Application, ORCA. This is the place that 
contracting officers go look and say, ``Is this business small 
or not?'' Small businesses must recertify now on an annual 
basis.
    Now, for the Chairman's question, that does not affect that 
issue of if they were small at the time of offer and won that 
award that the rule is still 5 years or the length of the 
contract, whichever is shorter. But it will make sure that on 
an annual basis they are updating--on a minimum of an annual 
basis. If they exceed their size standard, they should do it 
like that. If they are bought, they should do it like that. But 
on a minimum of an annual basis, they are going into ORCA and 
updating their certification of size.
    It also instructs us to review all of the size standards, 
which touches all of these issues within a 5-year period, and 
we are undergoing that right now.
    Senator Portman. I am not sure I understand why it doesn't 
address the Chairman's question. It doesn't address it because 
those are contracts that have already been entered into and 
they would not be affected?
    Mr. Jordan. Because the annual recertification of size will 
ensure that when there is a small business set-aside when a 
contract is being awarded, that those businesses that say they 
are small are. If it a typical base-plus-4 option, 5-year 
contract, that will still allow that agency to get small 
business credit for having awarded that contract to a small 
business for the life of that contract or 5 years, whichever is 
shorter. But that entity will not be able to compete once it is 
other than small for any small business set-aside contracts.
    Senator Portman. How about in terms of your goal? Because 
part of the Chairman's question was are these goals as reported 
really accurate. In other words, does this annual 
recertification affect the goals? Is this something that is 
reported through your measurement of the percentage of small 
businesses? I think the answer is no.
    Mr. Jordan. It will affect it by ensuring that there is no 
fraud, waste, or abuse in the system. That is what we are 
pushing on. It will affect it from that way, but not to the 
Chair's question, like you said, not for those types of 
contracts.
    Senator Portman. It does not change your reporting of the 
small business goals? Shouldn't it?
    Mr. Jordan. I think it is a fair discussion to have, but, 
again, the law talks about maximum practicable opportunity, and 
what I have done is, yes, look at what is the optimum way to 
run these things going forward, but also we need some relative 
comparisons. So looking backward, we are already measured 
against a tougher stick. Up until 2006, 2007, if you got that 
multi-year contract in the hands of a small business who was 
then bought by a large business, that contract would still 
count. Now that is no longer true. We have also taken 
significant proactive steps to clean the data so the anomaly 
reports that we generate for all the agencies took $3 billion 
out of----
    Senator Portman. I assume you support----
    Mr. Jordan [continuing]. So I think the numbers are pretty 
good. Sorry, sir?
    Senator Portman. I assume you support all those things. The 
objective here is to be sure that you are meeting whatever your 
criteria area and----
    Mr. Jordan. Yes, meet and exceed every single goal is what 
we would like to do, absolutely.
    Senator Portman. Yes. But you almost sound like you are 
complaining about the fact that now you have better data. So, 
anyway, I think if there is a recertification process, you 
ought to be looking at it in terms of whether you are meeting 
your goals; otherwise, there is not credibility to the 23 
percent. Complexity is one thing that is often cited as a 
reason. We have these set-asides for small businesses, that 
they do not have the ability to deal with the complexity of 
contracting that large businesses do. And I think that is 
sensible. What concerns me is the fact that I am hearing from a 
lot of small businesses that it is incredibly complex to go 
through the process of certifying as a small business. And I do 
not know, Ms. Connolly or Mr. Vera might want to jump in here, 
too, but do you believe there are opportunities to simplify and 
streamline the process for eligibility? Right now folks tell me 
navigating the set-aside program is a whole other level of 
complexity, requiring, for example, identifying the appropriate 
industry code from a list of over 1,000 codes in the NAICS 
classification system, and other complexities. Is there a way 
to simplify and streamline it so that we are actually helping 
small businesses who, after all, are being given this 
opportunity in part because of the concerns about complexity? 
Thoughts?
    Mr. Jordan. I would just say quickly, absolutely, and that 
is something we are using technology to push on. It is 
something we heard a lot----
    Senator Portman. Absolutely we should be doing even more?
    Mr. Jordan. Yes, trying to streamline application 
processes, help automate some of those checks. All these types 
of things we are really pushing to do and are in the process 
collaboratively of doing.
    Mr. Vera. If I may, Senator Portman?
    Senator Portman. Sure.
    Mr. Vera. I would just add I agree wholeheartedly with my 
colleague Joe Jordan in some of the things that the SBA is 
doing in trying to streamline the processes, and certainly 
having been in this business for quite some time, I think it is 
a lot better than it used to be, and the use of technology has 
improved things tremendously. I think the agencies, we all try 
to do as much as we can with our limited resources, but 
certainly I personally think the SBA is doing a very good job 
in terms of educating--they did a tour--once the Jobs Act came 
out, they did a tour, a national tour to try to educate small 
businesses on some of the provisions of the Jobs Act, and I 
think it is better. It is complex. I agree that it is complex. 
But I think they try. On a daily basis they do a good job of 
trying to simplify things for the small businesses.
    Senator Portman. Going to the duplication issue for a 
second, GAO, recently completed an examination of 80 economic 
development programs of four different agencies, including SBA 
and Department of Commerce. GSA was not one. But it assessed 
the potential overlap and duplication in these programs, and 19 
of these 80 were at SBA. I think this GAO report needs to be 
responded to because it talks about how to create savings, how 
to economize, and in this fiscal climate we are all looking for 
ways to save money.
    Can you provide the Subcommittee with any update on the 
SBA's efforts here to identify opportunities for consolidation 
of overlapping programs or cost-saving collaboration that comes 
out of this GAO report?
    Mr. Jordan. I can get back to you. I know that there have 
been conversations. We are always striving to do everything we 
can effectively and efficiently as well. But I would want to 
give you the most up-to-date answer, so I will have to----
    Senator Portman. I think any estimates on potential 
savings, looking at what they have identified, is something 
that the Subcommittee would be very interested in. Will you get 
back to us on that?
    Mr. Jordan. Yes, sir.
    Senator Portman. One final one. My time is expiring here, 
but this goes to the competition issue. Under the Small 
Business Act, a set-aside is permitted if the contracting 
officer determines there is a reasonable expectation that at 
least two responsible small businesses will submit bids and a 
fair market price can be secured, and we want to encourage 
competition. But the Federal Acquisition Regulation permits a 
contracting officer to proceed if only one bid is ultimately 
received, effectively making it a no-bid contract or a sole-
source contract.
    What percentage of contracts that are competed as a small 
business set-aside result in a single offer or a no-bid or 
sole-source?
    Mr. Jordan. I am not sure what the exact percentage is, but 
we can look it up. I can get that back to you.
    Senator Portman. I think it is important for the 
Subcommittee to know and also telling us what is your process 
for evaluating why a single bid was submitted and correcting 
whatever market research methods you need to get more bids, 
because if, in fact, this set-aside program is becoming a sole-
source program, we would like to know that and talk about ways 
to either re-solicit it or provide more opportunities and more 
competition.
    Mr. Jordan. And to that second point, Senator, that is 
where we spend a lot of time on outreach, as Mauricio said, and 
going around the country and making sure the small businesses 
are aware of all the opportunities here, but also the training 
through the Defense Acquisition University and Federal 
Acquisition Institute that the Small Business Jobs Act empowers 
us to now go out and make mandatory will be very helpful at the 
contracting officer level as well. So getting both of those 
folks into the room so that----
    Senator Portman. Any sense of the percentage of non-
competed sole-source contracts, Ms. Connolly or Mr. Vera?
    Mr. Vera. I do not have those numbers.
    Senator Portman. Is it substantial?
    Mr. Vera. In my experience, I can only speak for my agency. 
I do not think there are very many where we actually only get 
one bid on a contract that is a set-aside.
    Senator Portman. Ms. Connolly.
    Ms. Connolly. I agree with you colleagues. I do not have 
the number available, but generally when we set aside for small 
business, it is because we know that there are two or more 
small businesses who can meet that requirement. OFPP has asked 
us to reduce high-risk contracting, and although the FAR 
actually currently States that we can consider a single bid in 
an environment of competition. If all of the vendors thought 
that they were submitting competitive bids, we do not currently 
code that as a sole-source. It is presumed competition. But 
OFPP and especially Dan Gordon has made that a highlight of 
reducing our high-risk contracting, is that we should really 
evaluate. And when we receive only one bid, we should be re-
looking at our solicitation, we should be looking at our 
requirements and really analyzing what we have done as a 
government to signal to industry that our requirements were not 
open for all to bid on or they were not stated in such a way 
that everyone understood them.
    Senator Portman. Thank you.
    Thank you, Madam Chairman.
    Senator McCaskill. Thank you. Senator Tester.
    Senator Tester. Thank you, Madam Chairman.
    This is a question for Ms. Connolly. I just want to talk 
about the bidding process overall. When a project is put out 
for bid, is there a contingency available for cost overruns? 
And is it a basic percentage or how does that work?
    Ms. Connolly. Your question covers, I guess----
    Senator Tester. Let us say it is a building project.
    Ms. Connolly. Five to $6 million--a number of actions, but 
a building project, I think it varies across agencies. One of 
the fundamentals of project management is building in a 
management reserve into your project management process.
    Senator Tester. OK, but let us say, just to get right down 
to it, if a person puts in a bid and there is a cost overrun, 
is that generally accepted if it is under a certain percentage?
    Ms. Connolly. I do not believe there is any provision for 
that to be generally accepted.
    Senator Tester. OK. So it is done with a change order or it 
is not done at all? It is prohibited?
    Ms. Connolly. I guess just to--at an award, I mean, the 
bids would be submitted in a competitive environment, and so 
there would not be a cost overrun at that point. Cost overruns 
happen--hopefully not, but unfortunately too often after award. 
And so, I mean, that is a first issue for the contracting 
officer. The vendor has to support their cost increase, and 
depending on the terms and conditions of the specific contract, 
they will take certain actions. But generally they review that 
and look at the role of the--compare that to what was actually 
required by the contract versus what has happened by the 
performance of the contractor.
    Senator Tester. I got you. Generally speaking, are cost 
overruns common? If it is bid at $100 million, do they usually 
come in at $100 million when they are done, or is it usually 
more than that?
    Ms. Connolly. I do not have that----
    Senator Tester. If you could get back to me on that, that 
would be good.
    Ms. Connolly. I would be glad to.


              information for the record from ms. connolly


    The difference between a bid amount, the award amount, and 
the final payment amount on a very large contract can vary for 
many reasons. Large cost type contracts often have multiple 
simultaneous cost drivers. Reasons that there are differences 
between what was awarded and the final price include: Potential 
cost overruns by the vendor (which must be determined 
allowable, allocable, and reasonable by the contracting 
officer), the government changing its requirements based on 
newly defined needs or due to fluctuations in anticipated 
funding over the life of the contract.
    Delays in a funding timeline can result in cost overruns 
because GSA typically sequences a project by pursuing site and 
design work in a single year and construction work in one or 
more future fiscal years, depending on the size of the project. 
When funding is not allocated in a given fiscal year, costs can 
increase due to cost escalation or updated requirements. 
Designs can also become obsolete over time, which could result 
in costly redesigns. If the time lag is significant, costs 
further increase. This can be contrasted with projects where 
the full cost is provided in one fiscal year. For instance, 
through the American Recovery and Reinvestment Act of 2009, GSA 
was able to pursue over 260 major new construction and 
modernization projects. With the full funding in one year, we 
were able to use more efficient contracting methods to deliver 
the projects faster and with significant savings.

    Senator Tester. Best-value standard takes in the quality of 
the overall packages, takes in price as a part of it, but it is 
not the entire part of it. There was a bid granted in Montana, 
a large firm outside the State, a large firm inside the State, 
which is fine. The bid was given to the large firm outside the 
State. The bid was $8 million higher on a project that was 
considerably less than $100 million. And we were told that the 
reason that bid was given to the other contractor was because 
of best-quality standard, best-value standard.
    It seems to me that large national firms have an advantage 
over large local firms on Federal projects. Do you see it that 
way? The reason is because it comes back, when the bid comes 
back and they say, ``Senator Tester, we were low bidder on this 
by $8 million. Tell me why we did not get the bid.'' And I can 
get a hold of your agency, and you say it is because of best-
value standard. And we say, ``What is best-value standard?'' 
And they say, ``Well, it is the price that we believe to be the 
best value, and we believe that $8 million higher''--which was 
about 14 percent higher--``is a better value.'' Can you give me 
any insight into any of that and how it works?
    Ms. Connolly. I am not familiar with that particular 
transaction, and I have not been----
    Senator Tester. And I do not want to mention names.
    Ms. Connolly. Having been a front-line CO and working many 
source evaluation boards, best value is one of the most 
challenging tasks that we do. I think we have across the 
Federal Government, I think in some ways we have--it was a new 
tool that was provided to us, and I think we have gone into 
using it--we went from only having low-price, technically 
acceptable to best value.
    Senator Tester. Yes.
    Ms. Connolly. And my personal opinion it is probably a tool 
that we have overused and it is time to move back to the 
center.
    Senator Tester. Right. I will tell you, I will be the first 
one to tell you that low bidder is sometimes low bidder for a 
reason. You do not get the best value.
    Ms. Connolly. Right.
    Senator Tester. There needs to be better clarification on 
what you are using. Now, if you are using a contractor that 
does a lot of bids with the Federal Government that we are 
pretty comfortable with doing and somebody wants to bid on that 
project and we say, I would love to, but this guy, I am 
comfortable with this company over here, and so we are going 
with this even if it is 10 or 15 percent higher, that is a non-
starter in my book, and I do not care if it helps a Montana 
company or hurts a Montana company. The fact is you need to 
look at all of it. That is all. And so I would ask you to go 
back and do just as you said, move it more to the middle, 
because I think that it is important. And thank you for your 
answer.
    Mr. Jordan, I think this goes to the Chairman's question 
about miscoding, improper classification of large businesses, 
and some of those large businesses get small business 
contracts. Let me lay out a scenario to you. You have a small 
business that got a 5-year contract and in the process it 
became a big business. And you said each year they recertify 
online. While they are doing that small business contract for 
that 5 years, are they still classified as a small business if, 
in fact, online they have certified that they are bigger than a 
small business?
    Mr. Jordan. They are not classified as a small business for 
any future award. The agency continues to get small business 
credit for that contract that they received when they were 
small.
    Senator Tester. That is fine. And I do not know the 
circumstance you talked about, Madam Chairman, with the 
Department of Defense contract, but it appeared to me that they 
were given a contract as a small business when actually they 
were a big business when the contract was given. Or is that 
incorrect?
    Senator McCaskill. No, I think they were legitimately a 
small business when the contract was given, but now they in a 
short period of time have become a very big business, and their 
number still is counted toward a small business goal.
    Senator Tester. Yes, well, it appears to me that if we are 
really going to utilize small businesses, if we are really 
going to encourage them to be a part of the equation, be part 
of that level paying field that you and I both agreed to, that 
there would be no reason why you could not get more aggressive 
then and move them back. And we all want businesses to grow, 
but the fact is if they have grown because of that contract, 
that is a good thing. And so we need to look for other small 
businesses we can grow.
    Is there a problem with that? Is it too much of a 
bookkeeping headache or what?
    Mr. Jordan. No, I think that the way that we perceive the 
level playing field issue is that once they have grown to be 
other than small, that they are not competing against small 
businesses as if they were a small business themselves. And 
that is not happening. Or that is not what the issue in this 
case would be. The question is: Should that agency who found a 
legitimate small business lock them in for multiple years and 
then became somewhat a victim of their own success as that 
small business did exactly what we hoped they would do--grow 
their business and create jobs. Should that agency continue to 
get small business credit for that contract that they did award 
to a small business that has subsequently grown, that is the 
question at hand, and clearly I think we should have some 
followup conversations with the Committee because that seems to 
be a hot topic. But that is the challenge: How do we incentive 
the contracting officers?
    Senator Tester. I got you. I mean, here is the deal from my 
perspective, and maybe I oversimplify it, but we have tons of 
technology out there, a small business becomes a big business 
pretty quickly. And, by the way, the standards for small 
businesses are pretty damn big, in my book anyway. But the 
bottom line is I think you could easily do it. Then you can get 
more aggressive and offer more small business contracts. That 
is all.
    I want to thank you all for your testimony. I appreciate 
it. Thanks.
    Senator McCaskill. Thank you, Senator Tester.
    Let me make sure that I put on the record--I know the 
answer to this question, but I want it in the record. The giant 
ANCs that are huge and that are multinational corporations that 
do not have to compete and can legally front, which means you 
can hire an ANC to do anything for you and they get the no-
compete status even if the company doing the work is a big 
multinational corporation--all of the money that the ANCs 
contract with the government, they are all counted in this 
small business total, too, are they not?
    Mr. Jordan. I do not believe that is true, no. The ANCs who 
are in the 8(a) program, those contracts are, but not every ANC 
subsidiary is in that program. So I would need to confirm----
    Senator McCaskill. Well, why would they not be in the 
program? Because they get to stay forever. They do not age out.
    Mr. Jordan. The parent is not in 8(a) program. It is that 
their subsidiaries can be in that program. But those 
subsidiaries are held to the same 9-year term that any other 
participant is. It is just that they can put additional 
subsidiaries through the program. So sometimes those 
subsidiaries graduate, become other than small, and still 
compete on full and open competitions and win contracts. I do 
not believe those contracts are counted in the small business 
numbers.
    Senator McCaskill. OK. Well, if you would look at that----
    Mr. Jordan. Absolutely.
    Senator McCaskill [continuing]. Because there is no reason 
for an ANC to ever graduate. They do not have to. They can just 
hand off. They can just do tag team. It is a loophole so big 
that this building could drive through it. And so, I want to 
find out what percentage of the small business number, the 22.7 
percent, is ANC contracts.
    Why are we using the NAICS? Why are we using that code 
classification? The Census Bureau people told staff in 
preparation for this hearing that it was never intended to be a 
contracting tool. So why are we using it? Isn't it complex and 
clumsy and does not really--isn't there some shoe-horning going 
on here? Anybody? This question is open to anybody. Why are we 
using it?
    Ms. Connolly. Senator McCaskill, I know that SBA has built 
their size standards to the NAICS codes, and I will defer to my 
colleagues for that question. But I think it is--if it is not 
NAICS codes, it is necessary for us to have some framework to 
define what the companies are offering. We have frameworks and, 
unfortunately, they are often thousands of numbers that we have 
to--somewhat give us these anomalies of what companies are 
doing. And I do not know. If it were not NAICS codes, it seems 
that we would need something equally as complex or equally 
detailed. The detail gives us more granular ways to identify 
the work that we are spending taxpayer dollars on.
    Senator McCaskill. I get that, but, I mean, commonsense 
here--I have now gotten into the weeds on this, and, frankly, I 
have not really gotten into the weeds in this hearing because I 
feel for the people in the audience. I mean, it is painful. Let 
me give you just one formula here on how you determine small.
    Sigma equals 414IISCR where S1 is greater than S2 greater 
than S3 greater than S4, and that does not count the footnotes. 
And there is a Four-Firm concentration ratio, a Gini 
coefficient, the Herfindahl-Hirschman Index. Really? It seems 
to me that somehow under the rubric of complexity and trying to 
get to a granular level, commonsense is taking a vacation. And 
as we talked about before, we are not even using the NAICS 
codes because we are saying everybody, if they are selling 
stuff, is a manufacturer whether they manufacture anything.
    So it seems to me that we could just step back from this 
and go, OK, if you are retail, this is small; if you are 
manufacturing, this is small. Maybe two classifications for 
manufacturing. I agree that manufacturing widgets is different 
than manufacturing airplanes. And if you are wholesaling, there 
is this. And if it is professional services, it is this. And 
maybe you classify within professional services some broad 
categories of professional services.
    And, you could sit around a room with good acquisition 
personnel and say, OK, we are going to forget---because, 
honestly, I think that the small businesses have to spend a lot 
of time and energy navigating this whole code situation and 
figuring out the formulas and figuring out the computation on 
the formulas. And I think everybody is so used to using it in 
your world that you do not realize how nuts it is and that 
nobody is willing to tackle it because it just seems 
overwhelming.
    Am I off the mark here?
    Mr. Jordan. I do not think so. I think that Dr. Connolly 
appropriately raises the challenge, which is how do we 
separate--where do you draw the line between the various 
industries for which you are setting individual standards? The 
Office of Size Standards that sends these reports up to me--and 
I can assure you not being a Ph.D. economist that learning 
about the Gini coefficient and the Four-Firm concentration 
ratios and those types of things, that we do to set the one 
line--and that is the other challenge. There is one line. There 
is no small and medium businesses. You are small or other than 
small. Where below that you could be--you have special 
preference access and above which you are, out competing with 
everybody else. Those two things present a pretty big 
challenge, and so we go in and look at all the data to say: 
Where is the right place to draw that where we allow small 
businesses to grow up to that point and then through that 
point, and they will successfully be able to compete full and 
open after that, but we are not making it so high we are 
stifling entrepreneurship and new business starts and that sort 
of thing. And it is one of the most challenging things we do. 
Every one of the size standards that we are advising now goes 
out for public comment and those types of things.
    What we do try to do for simplification standpoint--and as 
I said to Senator Portman, we can do more here, and we are 
trying to do more. GSA and SBA are working together actually on 
some things there. But right now all we really need from the 
firm is how many employees do they have and what are their 
trailing 3 years of revenue. And then that determines what the 
size standards are, because they are everyone revenue or 
employee based. They do not need to go through a long, 
complicated multivariate regression to figure out if they are 
small or not. They just need to know what their employees and 
revenues are.
    That being said, the more that we can do to get more small 
businesses into the contracting arena is a win-win, and so 
simplification certainly is something we want to do there and 
is a place we are pushing.
    Senator McCaskill. Well, and I know how much work there is 
to do. We do have real problems with the data. We have real 
problems with training in terms of contracting officials and 
challenges with the acquisition workforce. Taking some of the 
complexity off their plate seems to me--if you are--I mean, I 
think probably I could get some small businesses in this room 
that would tell you--that would argue with you that it is 
simple. But if you are trying to simplify for the companies, 
then all of these complex formulas and so forth, it just seems 
to me that we could clear that out. And I bet you we could save 
some money if we did that.
    My time is up. Senator Portman, do you have more questions?
    Senator Portman. Thank you, Madam Chairman. I should 
probably stop here, but I do have more.
    Again, at the risk of boring the audience, as you said, 
with the technical questions, one thing I found that was 
interesting is that the SBA Inspector General in the 2010 
annual report called a GSA multiple award schedule provision a 
``loophole.'' The report said that in the GSA multiple award 
schedule contracts that contain multiple industrial codes 
creates a loophole. His quote was, ``Currently a company 
awarded such a contract can identify itself as `small' on 
individual task orders, even though it does not meet the size 
criteria for the applicable task. Thus, the agencies may obtain 
small business credit for using a firm classified as small when 
the firm is not small for the specific orders under the 
contract.''
    Ms. Connolly and Mr. Jordan, can you provide the 
Subcommittee with an update on GSA's response to that finding 
and any action GSA has taken or plans to take in response to 
that?
    Ms. Connolly. Senator Portman, I am familiar with the SBA 
IG report, and I was not able to speak to the IG directly to 
understand any nuances of that, but I will continue to answer, 
but I want to first acknowledge that the report was directed to 
SBA to take internal management actions to address those 
regulations. But, of course, whenever it involves our GSA 
multiple award schedules, SBA cannot do it alone. GSA and SBA 
need to work together on that. And what I found out as part of 
coordination for this hearing is I was pleasantly surprised to 
find out the Federal Acquisition Service and SBA have been 
working together closely to fine-tune some of the instructions.
    We have a system now--and if everybody is--people can be 
doing the right thing to apply the predominant NAICS code to 
the schedule, which covers a broad range of usually supplies 
and services. The contracting officer can be doing the right 
thing to code that according to current policy and regulations, 
and the awarding task order or delivery order contracting 
officer can be following appropriate instructions and 
recognizing that NAICS code has already been assigned, and they 
cannot change that in the system. And to the best of my 
understanding, I believe that is what the SBA IG is calling a 
``loophole.'' And I know in--it does happen, and that is what 
GSA and SBA are working on to resolve.
    Senator Portman. Anything further, Mr. Jordan?
    Mr. Jordan. Sure. I agree with everything Mindy said, and I 
really appreciate the collaboration by GSA and the Office of 
Federal Procurement Policy. This ties into the discussions we 
are having as we implement the Small Business Jobs Act 
provision around task order set-asides for multiple award 
contracts and how all these things work together. That law 
asked Administrator Mills, OFPP Administrator Dan Gordon, and 
GSA Administrator Johnson to work together to implement these 
task order set-aside rules and how they will look going 
forward, and this issue that my Inspector General has had for a 
management challenge in my shop for a few years now is 
certainly something that we are working to come to a final 
resolution on and that all parties can agree to.
    Senator Portman. All right. This is why I probably should 
have stopped my questioning earlier because let me just list 
some of the things we talked about today.
    This multiple award contracts issue is the latest in the 
complexity that is around the set-aside program. We have talked 
about, as Senator Tester said, large businesses elbowing out 
small businesses. And the Chair has probed that, as I have, on 
why are large businesses securing some of these contracts that 
should be for small businesses. And, frankly, in a system like 
this, with less competition, it encouraged gaming of the 
system. And there is some gaming of the system we have talked 
about. The complexity we have talked about that makes it very 
difficult for a lot of small businesses to even access this 
opportunity. And, again, what I hear from small businesses is: 
It is supposed to be an opportunity for us because of the 
complexity of Federal contracting, we are small businesses, we 
do not have the sophistication, and yet we are finding that the 
complexity of this program is too much for us; we are trying to 
grow our businesses and not be focused on government 
complexity.
    Duplication we have talked about, the GAO report, and we 
look forward to hearing back from you on that. And then the 
competition issue, which is maybe the most fundamental one, if 
you have, under the FAR, the ability to have only a sole 
source, does that make sense for the taxpayer?
    All this leads to a fundamental question that I want to get 
on the record and get your response to, with the incredible 
fiscal challenges that we face, with this ongoing discussion 
that we are having about how to be sure that everything in 
government is as cost effective as possible. And I think 
knowing--I think it is fair to say, we can stipulate that 
anytime you limit competition for Federal contracting, there is 
going to be a cost to the taxpayer, and whether it is this set-
aside or others, if you restrict competition, it tends to 
increase the contract price.
    Again, $98 billion in prime contracts to small businesses, 
not meeting the 23-percent target but coming close, CRS tells 
us that about $56 billion of that have been awarded through 
some kind of restricted competition or sole-sourcing in 2010, 
and not all sole-sourcing but restricted rather than an open 
competition.
    So I guess I would ask you this question: Is it fair to say 
that the major small business contracting programs come at a 
premium to the taxpayers? Is this an unbudgeted cost that 
follows from the competition? And are you aware of any effort 
to try to estimate what that is? Do you have any cost--what is 
the cost to the taxpayer of having this restricted competition? 
Mr. Jordan.
    Mr. Jordan. I do not have a quantified cost, and I do not 
have a quantified benefit, but I can say unequivocally that 
small business contracting is a win-win. It is a win for the 
small businesses; it is a win for the government. And, it is a 
third win for the taxpayers as well.
    I have been doing this for 2\1/2\ years, and there are 
certainly complexities. We have tried to streamline and will do 
more. There are rules that we did not think made sense, and we 
have changed many of those and will change more. But if there 
is one thing that I have seen and have no question about is 
that these small business set-aside programs are good. They are 
good for the economy. They are good for the growth of small 
business. This revenue is important oxygen these firms need to 
grow and create jobs, and I have no questions about that.
    Senator Portman. Good answer, but has there been any 
evaluation? Are you aware of any evaluation of what the cost--
--
    Mr. Jordan. I am not aware of any.
    Senator Portman. Ms. Connolly.
    Ms. Connolly. Senator Portman, I am not familiar with the 
CRS number, but I wonder if we are having competition set aside 
for groups of small businesses, if that is being calculated 
into the number. And so that is my----
    Senator Portman. I think it is just a number saying that it 
is not an open competition. The general rule, of course, in 
government contracting is it should be open and, that is--open 
and full competition is what the Competition Contracting Act 
says, full and open competition. So when it is not full and 
open competition, it is more restricted. I think that is where 
their number comes from.
    Ms. Connolly. Yes, full and open competition. We also have 
other requirements which require us to set aside----
    Senator Portman. No, I know. That is----
    Ms. Connolly [continuing]. Awards under the simplified 
acquisition threshold for small businesses. So I guess we have 
competing----
    Senator Portman. Exactly. Has anybody ever evaluated what 
the cost is of that?
    Ms. Connolly. I am not aware of that type of evaluation.
    Senator Portman. Do you think SBA would be able to evaluate 
those costs?
    Mr. Jordan. I do not know. I mean, I think that the 
challenge would be you cannot just evaluate a short-term cost. 
You need to evaluate the long-term cost. Building a monopoly 
could in the short term deliver great prices that year, but 
then the reason that our laws are against that is because in 
the long term the power changes and then you do not get good 
price or good value. And by getting rid of the small businesses 
who may be undercut by large businesses----
    Senator Portman. I do not think anybody is talking about a 
monopoly, just----
    Mr. Jordan. It is restricting----
    Senator Portman [continuing]. Open and fair competition.
    Mr. Jordan. Well, I think where the calculation would be a 
factor is the fairness, because a large business may be able to 
eat a lower price now, putting those small businesses out of 
business. Then there are no small businesses to provide those 
goods or services, and large businesses say we are going to 
recoup all those losses, and then some, government, because you 
have nobody else to procure from. And that is what I would need 
to look at if a study like that would be done, and I think it 
would be pretty--well, it would certainly be pretty complex. I 
do not know if we would have all the data available to do it.
    Senator Portman. I just think it is a question to be asked. 
Again, as I said at the outset, I think this is an important 
program, and we need to be sure small businesses who are 
struggling right now and who are going to be the way in which, 
in my view, we get out of this difficult economic situation and 
have the opportunities. But it is also a program, rife with 
inherent issues, and, again, I listed them a moment ago. I will 
not go back over it. But there is complexity involved here, and 
there is a restriction of competition to the point that there 
is sole-source contracting, which is certainly not the 
intention of Federal procurement laws and regulations generally 
where you want to have competition, because ultimately the 
taxpayer pays. Mr. Vera.
    Mr. Vera. If I may, Senator Portman, while I do not have 
any of the quantifiable data that you are seeking, I would just 
say that small businesses absolutely do benefit from the set-
aside programs. We as advocates would argue in most cases--
after doing the appropriate market research that the FAR 
requires, we would argue for a set-aside if it makes sense, and 
the reason being that small businesses have limited resources 
to market to the agencies. So if it is a full and open 
scenario, they may not want to compete against the huge firms 
in a set-side--that they have more ability to pursue the 
contracts, and that is why we advocate for that.
    Senator Portman. Well, again, I think simplification and 
streamlining, dealing with some of these definitional problems, 
are really important to make sure small businesses want to 
compete even under the SBA program because some of the small 
business groups I talk to and small businesses themselves, 
again, are frustrated by it. I think there are probably some 
small business groups represented behind you here. Maybe I am 
not hearing the full story, but some of them tell me, frankly, 
this is not a top priority for them because it is complicated 
and costly. So we need to do a better job of making these 
programs work better for small businesses and ultimately be 
sure it is all working for the taxpayer.
    Thank you, Madam Chairman.
    Senator McCaskill. Thank you, Senator.
    I want to go back and correct the record or clarify the 
record as it relates to the question that Senator Tester asked 
about the business, was it small at the beginning and then grew 
to be so large, the example I used at the opening of my 
questioning. And let me point out that this brings in another 
issue, because VSE benefits from the coding. The code for this 
particular contract was aircraft manufacturing, which sets a 
size standard for a small business at 1,500 employees. That is 
the largest possible business size under the SBA's standards.
    If the government had determined that the code for the 
contract was aircraft maintenance and repair services--which, 
by the way, that is what this contract was for--the size 
standard would have been $7 million and this company would have 
never qualified. Had the government used the appropriate code 
which more closely matches the contract description, they never 
would have the set-aside in the first place.
    So now they have exceeded even the largest standard, but 
they started out being coded at a standard much larger than 
they should have ever been coded. And it gets back to my 
question before: Why is everybody a manufacturer?
    Mr. Jordan. Well, on this issue--I do not know the 
specifics of this case, but on the issue overall I actually 
think that we will have a tremendous amount of common ground 
because I hate NAICS code shopping. I think that contracting 
officers need to select the most appropriate NAICS code for 
that procurement. Now, that is different from the wholesale/
retail issue that we spoke about before, but what you are 
implying--and this is not the only case where that is raised to 
me--is that a contracting officer is choosing a NAICS code 
because they want the higher size standard, not because it is 
the most appropriate for that solicitation. That is something 
that my procurement center representatives that work with the 
buying activities, when they see that happen, they push back 
strongly. I have had protests and other issues come to me on 
that issue, and it is something we work on the training on the 
front end and the accountability on the back end to try to make 
sure does not happen, because I agree, it is very inappropriate 
to NAICS shop because you are looking for a certain size 
standard, and even worse, if it is because you want a certain 
firm or firms to be part of that competition.
    Senator McCaskill. So can you pull this thread and go back 
to the contracting officer that shopped for this code and 
clearly used the wrong code that allowed this huge contract to 
be part of the small business calculation now since 2008? And 
does something happen to that contracting officer that clearly 
decided they wanted this company to be able to qualify for the 
set-aside when they really should not have? What happens?
    Mr. Jordan. With this particular case, I do not know--yes, 
we are happy to look into it, to the first part of your 
question. With how will that play out, I just do not know 
without all the facts of the case. But, in terms of an 
accountability piece of this, which I think you are also 
alluding to, we are now pushing to get small businesses 
achievement, small business contracting included in the 
performance plans for Senior Executive Service (SES) members in 
the contracting officer chain of command, because there are 
30,000 contracting officers doing 5 million contracts a year. 
They make mistakes. And if that is the case, that is one thing.
    Senator McCaskill. I do not think this is a mistake.
    Mr. Jordan. But there are other issues as well, exactly, 
and we want to make sure that all the folks--chief acquisition 
officer, senior procurement executives, heads of contracting 
activities, all the way down--have skin in the game in making 
sure the right thing is done, and the right thing is getting 
small business contracts to small businesses.
    Senator McCaskill. I would love to get a room of 
contracting officers--and maybe you can comment on this, Ms. 
Connolly or Mr. Vera. I would love to get a bunch of 
contracting officers in the room with truth serum and say, ``Do 
you have any fear that if you shopped the code to be able to 
include a company in a small business set-aside, do you have 
any fear that there will be any accountability if clearly you 
have shopped the code and put the wrong code on a company?'' 
What do you think? Anybody afraid of that in the acquisition 
personnel world?
    Ms. Connolly. I am not afraid of that. I think by far the 
majority of our acquisition workforce has the highest 
integrity, is passionate about their work and feels that they 
are doing a very patriotic duty to spend the taxpayer dollars. 
I do acknowledge that between the systems that we have there is 
probably--in the whole continuum, there are probably 
contracting officers and small businesses who are overwhelmed 
by the complexity of the systems that they are required to use, 
and we have training for the contracting officers. We have some 
training for the vendors. There is a continuum of people who 
have trouble selecting the right NAICS code among all the other 
things that they are doing. If they are a small business, they 
are out delivering their products and services.
    Senator McCaskill. Well, don't you think, though, it would 
be pretty easy to figure out whether somebody is manufacturing 
airplanes?
    Ms. Connolly. Yes.
    Senator McCaskill. I mean, with all due respect, either you 
are building airplanes or you are not. I can see where there 
could be some coding issues that would be hard to maybe pick 
which one, but I cannot imagine one that would be much easier 
than figuring out whether somebody is building--whether they 
are repairing airplanes or building airplanes. I mean, those 
are not kissing cousins. Either you are putting an airplane 
together from scratch and selling it or you are not.
    Ms. Connolly. That seems entirely clear-cut.
    Senator McCaskill. Yes.
    Ms. Connolly. But I have to admit, as a contracting officer 
I have been in specific procurements in my career where 
something that originally--let us say it looked like we were 
buying a supply because of--as we developed the statement of 
work, that--and understood really what we needed as an agency, 
I am personally familiar with instances where that supply, 
because of the way we needed it delivered and the services that 
we needed to accompany that delivery, that became a service 
contract. So that is the appropriate action when you have gone 
from a supply to now I need services, I need delivery, I need 
sizing, I need the vendor to determine those for us or deliver 
those services in conjunction with the item. It is appropriate 
to change the NAICS code to a service.
    Senator McCaskill. Well, and I agree that there are going 
to be places where there is gray and it will be hard for the 
contracting officer and hard for the vendor, and I get that. 
But maybe I am somewhat jaundiced by my experience into looking 
into defense contracting. I think that sometimes there is a 
tendency in the defense world that I want what I want from who 
I want it from when I want it, and I am going to use the 
contracting rules and regulations in a way that will allow that 
result. And, by the way, if we are talking about shooting fish 
in a barrel, it probably is the Department of Defense, because 
I think we all know that they are the big gorilla when it comes 
to contracting in the Federal Government.
    So I would certainly encourage you all to pull the thread 
when you see an instance where it appears there has been code 
shopping and make sure that the acquisition force at DOD 
understands that somebody is watching and paying attention.
    Finally, the last thing that we have not covered that I 
wanted to cover briefly was self-representation. Have you found 
contractors that have misrepresented their size status? 
Anybody?
    Mr. Jordan. I can say yes. SBA handles size protests, so 
while your size status is a self-certifying thing, an 
interested party--be that another bidder, the contracting 
officer, whomever--can protest that. And last year, I think SBA 
handled just over 700 of these size protests, and I think just 
under 200 of them were sustained. So we do see that frequently, 
and I have a team of folks who handle those protests very 
quickly so as not to slow down the process but to make sure 
that business who said they are small in fact is.
    Senator McCaskill. And what happens to the people that have 
misrepresented their size status, that have actually lied about 
how big they are?
    Mr. Jordan. We have a range of enforcement actions, and not 
just that we have them, we are actually using them. So there 
are suspensions----
    Senator McCaskill. This is not like debarring, you are 
actually using it?
    Mr. Jordan. We have suspensions and debarments, which we 
are using, and I have the statistics that show that they are 
going up and up. For the first time, for example, this year, 
referrals to SBA suspension and debarment officials from 
internal sources outnumber those that are referred from GAO. So 
we are really driving things through that process.
    Senator McCaskill. Good.
    Mr. Jordan. In addition, the Small Business Jobs Act gave 
us another really important arrow in our quiver around 
presumption of loss, which says if you misrepresent your size 
or status to win an award, then the government can sue you 
civilly for the full value of that contract. So we will keep 
the building you built, we are going to debar you, and we are 
going to sue you and get our 50 million bucks back.
    Senator McCaskill. Have we done that yet?
    Mr. Jordan. We have not implemented them. They are in the 
process of being implemented, but I am very excited about, not 
just the retributive, punishing the bad actors, but 
disincentivize anybody from trying.
    Senator McCaskill. It is a sad day when I have to admit 
that excites me, too. [Laughter.]
    That just shows you how wonky this stuff gets and how 
important I think it is. I think that would be terrific. And I 
really do think one of the things that government does not do 
well is deter. I think we put up with sloppiness because we are 
overwhelmed by the workload, and many times when there are bad 
actors, we do not react swiftly enough or strongly enough, and 
that is something that does deter. As an old prosecutor, there 
are crimes you can deter and there are crimes you cannot deter. 
You all are in an area where you can deter a lot of bad 
activity by the way you handle the code shopping, by the way 
you handle misrepresentation of size, by the way you handle 
some of the twisting and turning that goes on in order to try 
to shoehorn businesses into a small business category. And some 
of this is the pressure that we are putting on these agencies 
to do more business with small business and them trying to 
react to that. So we have to be careful that we do not 
incentivize to the point that we are forcing people to try to 
miscode in order to ``make a number.'' And I think that is the 
other danger we have here.
    Clearly, we did not do 22.7. I do not know what we did, 
because there is a bunch of money in there that is not really 
from small businesses. I would like to see that number go down 
if it meant it was more accurately reflecting the amount of 
business that we were actually doing with small businesses 
across this country.
    That concludes the questions I have. We will look forward 
to the answers to the questions that you all were gracious 
enough to indicate you would get back to us with. Thank you 
all. I do know this is hard stuff. I do know that you guys are 
not going to have a ticker-tape parade in terms of being heroes 
to the American people. You will forever be in a category of 
very important work that does not get enough positive 
attention, but there are people out here--and I know many of 
them serve on this Committee--that really appreciate the work 
you do.
    So thank you for being here, and I will look forward to 
maybe an answer as to why--especially I am anxious to know why 
we cannot change that manufacturing classification.
    Thank you, Mr. Jordan, thank you, Mr. Vera, and thank you, 
Ms. Connolly.
    [Whereupon, at 11:35 a.m., the Subcommittee was adjourned.]

                            A P P E N D I X

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