[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
BUILDING AMERICA: CHALLENGES FOR SMALL CONSTRUCTION CONTRACTORS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONTRACTING AND TECHNOLOGY
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 23, 2013
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 113-019
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Richard Hanna............................................... 1
Hon. Grace Meng.................................................. 2
WITNESSES
Mark McCallum, Chief Executive Officer, National Association of
Surety Bond Producers, Washington, DC.......................... 4
Thomas J. Kelleher, Jr., Senior Parnter, Smith, Currie & Hancock,
Atlanta, GA, testifying on behalf of the Associated General
Contractors of America......................................... 6
Helene Combs Dreiling, First Vice President, The American
Institute of Architects, Roanoke, VA, testifying on behalf of
the American Institute of Architects........................... 7
Felicia James, President, Primestar Construction, Dallas Texas,
testifying on behalf of the United States Women's Chamber of
Commerce....................................................... 9
James C. Dalton, Chief of the Engineering and Construction
Division, Directorate of Civil Works, United States Army Corp
of Engineers, Washington, DC................................... 17
Jeanne Hulit, Associate Administrator for Capital Access, United
States Small Business Administration, Washington, DC........... 19
APPENDIX
Prepared Statements:
Mark McCallum, Chief Executive Officer, National Association
of Surety Bond Producers, Washington, DC................... 25
Thomas J. Kelleher, Jr., Senior Parnter, Smith, Currie &
Hancock, Atlanta, GA, testifying on behalf of the
Associated General Contractors of America.................. 57
Helene Combs Dreiling, First Vice President, The American
Institute of Architects, Roanoke, VA, testifying on behalf
of the American Institute of Architects.................... 71
Felicia James, President, Primestar Construction, Dallas
Texas, testifying on behalf of the United States Women's
Chamber of Commerce........................................ 76
James C. Dalton, Chief of the Engineering and Construction
Division, Directorate of Civil Works, United States Army
Corp of Engineers, Washington, DC.......................... 79
Jeanne Hulit, Associate Administrator for Capital Access,
United States Small Business Administration, Washington, DC 85
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
American Subcontractors Association, Inc. (ASA).............. 92
The Design-Build Institute of America........................ 99
H.R. 776 Bill................................................ 103
H.R. ----: On Design Build Contracts......................... 105
H.R. ----: On Reverse Auctioning............................. 108
H.R. ----: On Subcontracting Goals........................... 111
Mechanical Contractors Association of America (MCAA)......... 114
Surety & Fidelity Association of America..................... 146
BUILDING AMERICA: CHALLENGES FOR SMALL CONSTRUCTION CONTRACTORS
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THURSDAY, MAY 23, 2013
House of Representatives,
Committee on Small Business,
Subcommittee on Contracting and Technology,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building, Hon. Richard Hanna
[chairman of the Subcommittee] presiding.
Present: Representatives Hanna, Bentivolio, Clarke, and
Meng.
Chairman Hanna. Morning, everyone.
This hearing will come to order. We are here today to talk
about the role that small businesses play in construction
contracting and how Congress can act to increase the
opportunities for small businesses. To that end, we are going
to talk about four different problems facing small businesses
in construction and potential legislative solutions to each of
these.
I am familiar with many of these issues we will discuss
today because of my personal experience as a general
contractor. Over the course of 30 years in private business, I
have grown a small business where I worked alone, employed over
450 people over time, and successfully completed over 3,000 big
and small jobs in upstate New York.
Given that experience, I know how important small business
construction contracting is. It is an industry where a small
business can grow to a large business. Construction contracting
builds communities. As you will hear today from our private
sector witnesses, Federal construction contracting plays a big
part in creating these opportunities. In the Federal space,
construction and architecture and engineering, A&E, contracting
represents about 1 in every 6 prime contract dollars awarded to
small businesses. That amounted to over $17 billion last year
alone.
However, as construction projects get larger, it becomes
harder for small businesses to obtain the necessary bonding to
bid these projects. In these cases, they sometimes turn to
disreputable sureties who issue worthless bonds that place
taxpayers at risk. That is why I am the sponsor of H.R. 776,
which we will discuss today. This is a no-cost bill that makes
it easier for small businesses to get legitimate bonds and that
makes sure that all bonds are worth more than the paper on
which they are written. The Small Business Administration is
joining us to discuss making bonds accessible to small firms.
Sometimes the way we buy construction A&E is as important to
small businesses as what we are buying.
So we are going to also discuss two procurement
methodologies: First, reverse auctions, which may work for
commodities but I question whether it is appropriate for
construction-related services; the second methodology is the
two phase approach to design build contracts. Given the cost of
bidding for design work, the two-phased approach allows more
small businesses to compete, yet it isn't always used properly.
The Corps of Engineers have looked at both methodologies. And I
look forward to hearing more about their findings.
Construction contracting more than almost any other
industry creates opportunities for small businesses and
subcontractors. For that reason, the law requires that prime
contractors and large subcontractors track and report how they
use small business subcontractors. We give large businesses
credit toward their subcontracting goals if they use small
businesses at their first tier of subcontracting but not small
businesses at the second tier of contracting. Today we are
going to examine whether we can create more opportunities for
small businesses if we are allowed to count these lower tier
subcontractors.
I look forward to a good conversation today so that we can
give the subcommittee recommendations on how to proceed
legislatively. I want to thank you all for your testimony today
and your time. And I would like to yield to the ranking member.
Ms. Meng. Thank you, Mr. Chairman.
And thank you all for being here this morning. As you know,
recently, the economy has showed promising signs of recovery,
adding 6.8 million jobs private sector jobs in the past 3 years
with more than 800,000 being created in the last 4 months
alone. Consumer confidence has reached a 6-year high and the
stock market has set new records. In many regards, it is small
businesses leading the way as they increase hiring and
expansion. A key part of this resurgence is the construction
sector, which is dominated by small firms with less than 20
employees. In fact, the unemployment rate for construction
workers fell to the lowest April level in 5 years as
contractors added more than 150,000 employees in the past year.
This recovery appears to be fairly broad-based, as nearly
all types of construction specialties are growing, with
architectural and engineering services employment up 2 percent
from a year earlier. While this is welcomed progress, more work
needs to be done. The unemployment rate in the construction
industry remains at 17 percent, more than double the national
rate. And while jobs have been added recently, it masks the
reality that employment in the sector remains stagnant at 1996
levels.
The reason is clear: Construction spending--both private
and public--has decreased dramatically over the last 5 years,
with the recent sequester only adding to this challenge.
But declining spending is not the only hurdle this sector
faces. Winning Federal construction work continues to be
difficult for many small firms. Contracting bundling continues
to be among the largest obstacles, as last year more than 150
contracts were consolidated, worth over $260 billion. As a
result, many small firms missed out on lucrative opportunities,
opportunities that could have been the difference between
staying in business and closing. By bundling large contracts
such as these, the government effectively shuts out many
smaller firms from competing for work that they have the skills
and expertise to perform. Splitting these megacontracts into
smaller pieces would enable more construction firms to
participate in these projects. By doing so, the government
would avail itself of more qualified companies and the high
quality craftsmanship they bring to the table.
Another challenge that small construction firms face is
receiving a surety bond which is required by the government and
guarantees contractor performance. While the SBA operates a
program to fill this gap, it is failing to achieve its full
potential. This is due to a lack of consistency with industry
practices and a failure to market this program effectively to
construction companies. These concerns, as well as the fee
increases required to fund the program, are preventing small
firms from competing for Federal construction contracts. While
bundling and bonding are the most notable obstacles to a small
firm's participation in Federal construction projects, other
issues are also impeding their involvement. New innovative
procurement methods, such as the two-step design build process
and reverse auctions, may be well suited for a certain
contracts but have to be evaluated for their impact on small
businesses specifically. After all, it is important to ensure
that the odds are not stacked against smaller firms and that,
instead, there is a level playing field for them to compete
fairly for a contract.
During today's hearing, I am looking forward to hearing
from both agency officials and industry experts on these
issues. Making certain that small construction and A&E firms
can fully compete in the Federal marketplace is crucial not
just for them but for the country, as this sector is literally
the foundation for so much of our Nation's economy.
In light of the sequestration, declining private sector
investment, and reductions in State and local infrastructure
investments, Federal contracts have become an increasingly
important source of revenue for small businesses. With such
spending doubling over the last decade to more than $500
billion, doing business with the Federal Government is no
longer simply a nice option to have but is, instead, a critical
factor in small businesses' ability to succeed.
Thank you and I yield back.
Chairman Hanna. If additional members have an opening
statement prepared, I ask that they submit it for the record.
I would like to explain quickly our timing system.
Everybody has 5 minutes. We will be flexible. We are interested
in what you have to say. And then when the yellow light goes
on, you have got a minute. So that is how it works.
STATEMENTS OF MARK MCCALLUM, CHIEF EXECUTIVE OFFICER, NATIONAL
ASSOCIATION OF SURETY BOND PRODUCERS, WASHINGTON, D.C.; THOMAS
J. KELLEHER, JR., SENIOR PARTNER, SMITH, CURRIE & HANCOCK,
ATLANTA, GA, TESTIFYING ON BEHALF OF THE ASSOCIATED GENERAL
CONTRACTORS OF AMERICA; HELENE COMBS DREILING, FIRST VICE
PRESIDENT, THE AMERICAN INSTITUTE OF ARCHITECTS, ROANOKE, VA,
TESTIFYING ON BEHALF OF THE AMERICAN INSTITUTE OF ARCHITECTS;
AND FELICIA JAMES, PRESIDENT, PRIMESTAR CONSTRUCTION, DALLAS,
TEXAS, TESTIFYING ON BEHALF OF THE AMERICAN INSTITUTE OF
ARCHITECTS
Chairman Hanna. Our first witness today is Mr. Mark
McCallum. Mr. McCallum is the chief executive officer of the
National Association of Surety Bond Producers, NASBP, an
international association of companies employing professional
surety bond producers and brokers.
Thank you for being here. You may begin.
STATEMENT OF MARK MCCALLUM
Mr. McCallum. Thank you Chairman Hanna, Ranking Member
Meng. I am here today in support of H.R. 776, the Security and
Bonding Act of 2013, a needed bill that will prevent the
continued victimization of construction businesses, many of
which often are small businesses, by unscrupulous and
unregulated individuals, who promise surety guarantees without
valid or sufficient assets backing those guarantees. Surety
bonds are an essential component of the Federal procurement
process. They are required by the Miller act on Federal
construction contracts. Bonds preserve taxpayer funds by
ensuring only that qualified companies seek award of publicly
funded contracts and by providing a third-party guarantee of
performance to contracting agencies and payment remedies to
subcontractors and suppliers should the prime contractor fail
to pay them or become insolvent. Without recourse to a valid
payment bond, unpaid substance suppliers--especially small
businesses--may not continue as viable businesses.
Performance and payment bonds are only as good as the
financial soundness of the company or person issuing the bonds.
A surety that is not sound financially cannot add to the credit
standing of the firm to which it is bonded. It also is more
likely to default on its obligation to supply the needed
protection promised by the bond. For these reasons, well
regulated and stable surety markets are imperative. But the
words ``well regulated'' and ``stable'' only apply in the
context of corporate sureties. They do not apply to the
individual surety bond market.
Let me explain. Corporate sureties writing on Federal
projects must possess a certificate of authority from the U.S.
Treasury Department, which conducts a thorough financial review
of the surety and sets a single bond size limit for that
surety. Corporate sureties are licensed in the States in which
they conduct surety business and must obtain certificates of
authority from State insurance commissioners. They are
regularly audited. They file financial reports with regulators.
They file the rates they intend to charge for their bonds and
are subject to market conduct investigations. Individual
sureties do not receive the same high level of scrutiny. Under
applicable Federal regulations, they are vetted solely by
contracting officers, who often are overburdened and under-
resourced and are not trained to evaluate surety assets.
Federal regulations do not require individual sureties to
possess a certificate of authority as an insurer in any State.
They are not required to furnish character information, such as
information about criminal convictions, tax liens,
bankruptcies, or cease and desist orders levied against them.
If a contracting officer fails to perform the investigation of
the individual surety adequately and the assets backing the
individual surety bond prove insufficient or nonexistent,
unpaid substance suppliers are denied their statutory payment
remedy and contracting agencies are denied their guarantee of
contract performance. The history of Federal procurement offers
many examples of harmed small businesses which discover too
late that no real assets back the individual surety bond
furnished to the government. You can find such examples in my
written testimony.
H.R. 776 offers a straightforward solution to this problem.
It requires individual sureties to pledge solely those assets
that are public debt obligations unconditionally guaranteed by
the U.S. Government, such as U.S. Treasury bills and notes.
These assets are given to the Federal contracting authority
which deposits them in a Federal depository, ensuring that
pledge assets are real, sufficient, convertible to cash and in
the physical custody and control of the Federal Government.
Passage of H.R. 776 will close the door left open for
unscrupulous individuals to place worthless bonds on Federal
contracts. Contracting agencies and construction businesses of
all sizes then will have confidence that the protections
promised by individual surety bonds are, indeed, genuine and
are backed with existent valuable assets. H.R. 776 also
contains an additional benefit for small businesses. It will
bolster the regulated surety markets available to small
contractor participants in the U.S. SBA Surety Bond Guarantee
Program, which provides guarantees to surety companies which
extend surety credit to small, often emerging businesses which
otherwise might not qualify for surety credit. These small
firms then can pursue award of Federal contracts and do not
have to resort to securing surety credit from unregulated and
unsafe markets.
H.R. 776 increases the guarantee against losses given the
surety companies from 70 percent to 90 percent as an inducement
for them to participate in the program. I encourage every
member of the subcommittee to support H.R. 776, and I would be
pleased to answer any questions you may have of me. Thank you
so much.
Chairman Hanna. Thank you.
Our next witness is Thomas Kelleher.
Mr. Kelleher is the senior partner for Smith, Currie &
Hancock LLP in Atlanta, Georgia, where he specializes in
Federal Government contracting and construction. He is
testifying here today on behalf of the Associated General
Contractors of America. Mr. Kelleher proudly served in the
United States Army from 1968 to 1973, and we thank you for your
service.
Sir, you may begin.
STATEMENT OF THOMAS J. KELLEHER, JR.
Mr. Kelleher. Thank you. For 4 years, since I left the
service, I have counseled contractors large and small on a wide
variety of small business issues. From my experience, AGC
members, a majority of whom have less than 20 employees,
recognize the benefits that the various small business programs
provide for the industry as a whole as well as for those firms
that qualify to participate in the small business programs.
However, the AGC believes that the current rules are structured
in a manner that causes firms to perform in a way that meets
the technical requirements but may not fulfill the spirit and
intent underlying these small business programs. Consequently,
we thank the committee for its consideration and urge it to
continue efforts to allow awards to lower tier small business
subcontractors to count against prime contractor goals for
small business subcontracting; secondly, to prohibit the use of
reverse bid auctions or reverse auctions in the procurement of
the construction or construction-related services. We agree
with Mr. McCallum's views on the bonding, and we fully support
the notion that two-step design bill, which the AIA will
address, should be the way that design bill procurement is
obtained.
Now turning first to reverse auctions, we concur with the
position of the Corps of Engineers, and we recommend
consideration of the Corps' July 26, 2004, report on its pilot
program with reverse auctions. Basically, the Corps found that
it was not appropriate for construction-related services. I
have got two personal observations.
If bidders fail to exercise discipline in the reverse
auction and get caught up in the auction atmosphere, they are
going to bid under cost. Under cost results in problems for the
owner, the contractors, and the subcontractors. Lawyers may
benefit because there are more claims and disputes, but the
quality of the project will suffer. Consequently, we support
legislation to prohibit the use of reverse auctions in
construction.
Small business credits. The current small business program
provides goals for general contractors who are large businesses
to make the percentage of their awards as subcontracts to small
business firms. However, they don't allow the large general
contractors to count any awards to small businesses at the
second, third, and so forth lower tiers. Consequently, the
prime's focus is on the first tier only because that is what is
getting counted. While there is a requirement to lower tier
large business contractors have subcontracting plans, the
members' experience is that the adherence to the letter of that
is spotty. The reporting is spotty. Consequently, it is
entirely possible that the government--your committee--don't
have a full picture of what is being awarded to small
businesses. We need transparency. And in my personal view, you
need a single point of responsibility.
Looking at the slides--and you have copies of these in your
folders--the first one is the transparency slide.
If the small business awards are made at the second and
third tier, the general contractor, even though it has a plan,
is not focused on second and third tiers. These may well get
lost. Now under the current program, if we look at the next
slide, we have a hypotheses of a $100 million project; 70
percent is going to be subcontracted. The agency has set a 40
percent goal, meaning $28 million. The general contractor makes
an award to a small business for $28 million at the first tier
because that is what is counted and then its focus ends. It
moves on to other topics. It may or may not be awards below
that first tier made by these large businesses. It may not be
reported.
What we are proposing is that the general contractor be
given the overall responsibility for the program. So the last
chart, sir, is the same $100 million project. But the goal has
been increased from 40 percent for small business
subcontracting to 60 percent small business subcontracting.
A good question is, what is the general contractor going to
do? In my view, they are going to still first emphasize small
business subcontracting at the first tier because they control
that more directly. And if they can count second and even third
tier, we may well have more subcontracting achieved than
otherwise would be achieved. And that is the purpose of our
supporting legislation to allow counting at lower tiers.
The current electronic reporting system is capable of
handling that. What we need is legislation to permit general
contractors to award and count at lower tiers. In my view--I
was managing partner in my law firm--when you have one person
or one entity responsible, you get far better performance than
when you split it up into a diverse group. Thank you.
Chairman Hanna. Thank you. Thank you very much.
Our third witness today is Ms. Helene Combs Dreiling.
Ms. Combs Dreiling is the principal at Plum Studio, which
she founded in 2009. In addition to this, she currently serves
as vice president and president-elect for the American
Institute of Architects, who she is testifying on behalf of
today. Thank you for being here. You may begin.
STATEMENT OF HELENE COMBS DREILING
Ms. Combs Dreiling. Chairman Hanna, Ranking Member Meng,
and members of the committee, I am Helene Combs Dreiling, FAIA,
executive director of the Virginia Center for Architecture and
the 2013 first vice president of the American Institute of
Architects. I want to thank you for the opportunity to testify
today on behalf of the AIA and its more than 81,000 members.
The economic crisis has affected every American, and it hit
the design and construction industry particularly hard.
Architects are small business people: 95 percent of firms
employ 50 or fewer individuals, and over 76 percent of firms
make less than $1 million per year. The recovery seems to be
fragile at best, as the construction industry lost 6,000 jobs
just last month. The AIA's April architectural billings index
shows a downward trend at 48.6 which is the lowest result since
July 2012. This figure indicates a potential for reduced
construction activity in the next 9 to 12 months.
Public sector work has been a lifeline for many small firms
during this recession, but there is a significant financial
burden to participate. When teams are short-listed an
architecture firm spends roughly $260,000 to compete for a
project. In almost 87 percent of Federal design build
competitions, there are no stipends provided to the firm.
Agencies would typically short list up to five teams for a
design build project, but there have been recent reports where
some short list as many as eight to 10 teams. In these cases,
the odds of being selected drop significantly.
Due to the current economic climate, small- and medium-
sized firms face the Hobson's choice of betting it all on a
contract they may not get or self-selecting out of the Federal
design build market altogether. Unfortunately, Federal law
enables agencies to create longer short lists. Under current
law, agencies are required to short list between three and five
teams. However, the law states that contracting officers have
the flexibility to increase the number of finalists if doing so
is in the government's interest. This exception is so broad
that agencies use it without giving it a second thought.
Therefore, we ask the committee to look at tightening the
statute so that all firms can accurately determine the risks
and rewards of participating in this market.
Another issue is when agencies use a one-step selection
process. Agencies eliminate the preselection step and open the
solicitation to all respondents. This allows the government to
review as many responses as are submitted without reviewing the
qualifications of the bidders prior to receiving a bid. This
concept sounds attractive, but when a contracting officer
receives multiple responses, this selection method becomes
inefficient and costly to the Federal Government.
That is why we respectfully ask that the committee consider
limiting the use of single step design build to projects that
are less than $750,000. This threshold is based on U.S. Army
Corps of Engineers' guidance issued in August of 2012. By
limiting single step procurement to these projects, there will
be less risk for teams who want to pursue this work, and it
will allow for more small businesses to participate in the
process.
In conclusion, I would like to thank Chairman Hanna,
Ranking Member Meng, and members of the subcommittee for giving
me this opportunity to testify before you today. The AIA
commends you for your commitment to addressing the challenges
that small businesses face in this economy and your leadership
in advancing legislation that help small businesses drive the
recovery. The challenges that we, as small business people,
face are serious, but so is our commitment to play a leading
role in rebuilding our country. Thank you.
Chairman Hanna. Thank you.
I now yield to Ranking Member Meng to introduce our final
witness.
Ms. Meng. It is my pleasure to introduce Ms. Felicia James.
Ms. James is the president of Primestar Construction located in
Dallas, Texas. Primestar is a participant in several small
business contracting programs, including the women-owned 8(a)
and HUBZone programs. The construction firm specializes in
tenant commercial improvements, parks, site improvements, and
design build projects.
Ms. James is testifying on behalf of the U.S. Women's
Chamber of Commerce, an organization that represents 500,000
members, three-quarters of whom are small business owners and
Federal contractors.
Welcome Ms. James.
STATEMENT OF FELICIA JAMES
Ms. James. Thank you.
Good day, Chairman Hanna and Ranking Member Meng and
additional committee members. I am Felicia James, and I am the
president of Primestar Construction Corporation.
Primestar is an 8(a) women-owned HUBZone full service
construction firm having executed and successfully completed
several trades identified in various construction projects. I
am a member of the United States Women's Chamber of Commerce
and was recently appointed as the agency liaison for the U.S.
Navy and Air Force.
And we are a half a million member network of highly
qualified, viable women-owned firms. I come to you today both
having performed as a subcontractor and a general contractor
with major specialty industries' self-performance capabilities.
To elaborate on the two-step design build contracting vehicle,
the reverse auction bidding, the ability to acquire critical
tiers other than the first as it relates to subcontracting
small businesses, Primestar Construction supports the use of
two-step design build contracts.
Most design build public projects today are procured via a
two-step approach. First, request for qualifications, RFQs, are
sent to potential design build teams. Based on the responses to
the RFQs, three to five design builders are short-listed and
given request for proposals seeking competitive submittals,
resulting in an award of a design build contract.
Unfortunately, due in part to competition with large
construction firms, many small businesses are not selected for
inclusion among qualifying offerers at the second phase.
For small businesses to be successful in the two-step
design build process, there needs to be a percent allocation
reserve for small business groups like women-owned business and
other small business set-asides within the second phase
contract report. Primestar Construction is in strong opposition
towards using reverse auction for construction projects.
Reverse auction was originally designed to procure commodities
and manufactured goods.
The procurement method should not be used for the following
reasons: Reserve auctions do not necessarily guarantee lowest
bid. Set-aside programs are nonexistent and could potentially
violate Federal procurement laws, particularly the specified
acquisition threshold, which helps small businesses currently.
Small businesses are unable to compete with incumbents,
typically large primes, who have multiple awards and can afford
to reduce pricing.
Primestar Construction believes that prime contractors
should not receive credit for small businesses used as second-
and third-tier contractors. Prime contractors should be
credited for first tier subcontractors only. Changing the
credit process to include second and third tier contractors
will encourage bundling projects into larger portions and
diminish the amount of first tier subcontract awards to small
businesses, thus making it harder to access larger portions of
Federal projects and thereby making it difficult for small
businesses to grow and become more competitive in the
marketplace.
Including these tiers into the subcontracting plan would
lower the number of first tier contracts awarded to small
businesses that desperately need and are qualified to perform
the work. The current system allows for mentor protege
relationships that will enhance my firm's capability to more
successfully compete for larger projects. Changing the program
will dilute the leverage of small business entities within the
mentor protege program, and their participation and completion
of larger construction projects would significantly be reduced.
Including second and third tier subcontractors in
subcontracting plans would violate the intended purpose for the
small business program, which is to maintain and strengthen the
Nation's economy by enabling establishment and viable small
businesses. Why? Because essentially one large prime would
utilize a second large prime at the first tier, thereby
creating the first tier void of any small business
participation.
Primestar supports H.R. 776, the Security Bond Act of 2013.
This bill adds transparency to the security assets. By
increasing the guarantee to 90 percent, more small business and
emerging businesses, like me, will have added opportunities to
participate in the SBA's Surety Bond Guarantee Program. The
provisions to increase SBA guarantee from $2 million to $6.5
million will help make bonds available to more small and
minority contractors. Being able to clearly assess the backing
of a bond will allow contractors and Federal contracting
officers to know that the guarantee promises on paper are
backed by honest companies pledging real assets.
Thank you for the opportunity to share my experience and
provide my feedback on these key issues to the Small Business
Committee.
Chairman Hanna. Thank you.
As you can see, we have a few minutes to get down to the
floor and vote. And also there are 368 people who haven't. So
we will be fine. But take a break. I am imagining 15, 20
minutes do you think? So we will be right back for questions.
Thank you very much.
[Recess.]
Chairman Hanna. I call this committee back to order. And I
will take the first question.
Mr. Kelleher, the law currently requires that a prime
contractor's subcontracting goals reflect the maximum
practicable utilization of small business on that contract. If
we allow prime contractors to count lower tiers, would that
mean more or less--and a lot of this was in your statement--
opportunity for small businesses?
Mr. Kelleher. Mr. Chairman, the law and the focus of the
goals is set by the agencies in the procurements. For the
general contractors, it is first tier. We fully expect that if
lower tiers were counted, that those goals would increase and
would also reflect awards to 8(a)s, service disabled firms, and
so forth, as were reflected in the goals that were included in
the 2013 NDAA for small business subcontracting.
So I think the opportunities would increase. And as I said
earlier, I don't think the awards at the first tier will
decrease simply because that is where the general contractor
has the most control over the award process.
Chairman Hanna. Can I infer from what you are saying that
you actually think the second tier group will have a faster
track to become first tier contractors?
Mr. Kelleher. I think they can. And I think the more that
we can stimulate small businesses at every tier, we are going
to help the industry. Construction is a small business-based
industry.
Chairman Hanna. Can you see a reason to differentiate
between small businesses and tiers in and of themselves?
Mr. Kelleher. I think it is done simply because the
industry thinks in terms of tiers. The Miller act is tier-
oriented, as interpreted by the Supreme Court. And we tend to
think in terms of tiers. The lawyers are somewhat to blame
because we have the privity of contract concept ingrained in
our head from the first day of law school. And consequently, we
see privity and tiers somewhat parallel. But on a construction
project, where you essentially have a team effort, the second
and third tiers are certainly elevated enough that the general
contractor knows who he has, who is out there and can work with
them.
Chairman Hanna. Thank you very much.
Mr. McCallum, just from my own experience, what I think a
lot of people understand about the bonding business is that, in
a very real way, you are the regulators of who does or does not
enter the competitive environment that requires a bond. There
is not a government agency that does this. We rely on the
surety bonds incentive not to lose money to get qualified
people who are financially and experientially capable of
completing what it is they start at the level of bidding they
are doing. Therefore, it takes years sometimes to get a $1
million bond, a multimillion dollar bond and many, many assets.
Is that fair?
Mr. McCallum. Yes, Mr. Chairman. The central purpose behind
surety bonding is to make sure that there is qualification,
meaning a prequalification process that is undertaken by the
surety to evaluate a construction firm to see if they will be
qualified, in the surety's opinion, to pursue award of a
particular contract. And they want companies to be successful
and they want them to have measured growth so that they can
assume those obligations and then gradually grow so that they
are successful over the long term.
Chairman Hanna. So, to extrapolate then, to allow people
into the market that do not have the financial capability or
the experience--either one, but have to have both, in any way
to pay a higher fee for a bonding order to get in, to have
specious assets to get in or a bonding company to do the same,
all of that kind of steps over the system that keeps people at
a level that they are capable of competing at and completing.
Is that fair?
Mr. McCallum. Yes. You have to remember, surety bonds are
insurance. However, they are very much different from a
traditional insurance policy. So they are more in the nature of
a credit arrangement. And the importance there is that they are
written so that there is no expectation of loss, unlike a
typical insurance policy that it is actuarially determined
because it assumes a loss.
Chairman Hanna. So the zero loss ratio means that when you
identify a company that you are willing to bond, you are
virtually saying, we are 100 percent sure you can finish?
Mr. McCallum. They are confident that that is a company
qualified to undertake----
Chairman Hanna. Right. So you become that wall that
protects the public by your not wanting to lose money or have a
bond defaulted on.
Mr. McCallum. Correct. So it is to protect the taxpayer
dollars that are being invested in these public contracts in
the first instance to make sure that these are qualified
companies. And to the extent if there is a loss, if there is a
default, in that event, they stand behind that, and they make
sure that that contract will be completed. And also, very
importantly, that the subs and suppliers, the lower tiers have
a payment remedy. You have to remember on public work, there
are no mechanics liens because it is public property. So the
only remedy in the event of nonpayment by the sub and the
supplier is recourse to a valid payment bond. And if that is
not valid, then they are without that remedy and can go
insolvent themselves, losing those jobs.
Chairman Hanna. Thank you.
I yield to Ranking Member Meng.
Ms. Meng. Thank you. I have a question for Mr. McCallum. We
have heard of instances in which sureties have used inadequate
or nonexistent assets to secure multimillion dollar project
bonds. What repercussions does this type of fraud have on the
Federal Government and on the contractors that rely on these
bonds?
Mr. McCallum. Thank you. It actually has very significant
repercussions. So, again, if those assets aren't there, then
the contracting agency, in the event that the prime contractor
defaults, has no recourse. They are going to have to use
additional taxpayer funds to complete that work, where
otherwise they would be able to place that risk on the surety
who stands there to provide that protection. But on an
individual surety context if there are no assets, then that
paper is worthless. So you have more taxpayer dollars being
expended. And again, as I said earlier, the downstream parties
will be without payment because they are likely not paid by the
prime because they may have defaulted, become insolvent and
then there is no payment. They have no direct recourse against
the government. They are not in privity of contract so that
payment bond is the only remedy they have and there is nothing
there, then they are out of payment and may be out of business.
Ms. Meng. And you have also advocated for increasing the
SBA guarantee to upwards of 90 percent. If this occurred, how
many more small business bonds would your members issue?
Mr. McCallum. My members are the bond producers, so they
are the agents that work with the companies to get them in
position to be bonded to qualify for bonding. We believe that
increasing the guarantee would add greater participation by
surety companies in the program. Currently, the program is
divided into two programs. There is the prior approval and the
preferred program. And we have seen I think approximately 17
companies now participate in the prior approval program. But
the preferred program only has four companies, and it currently
provides a 70 percent guarantee. And we think that it would be
important to increase that guarantee--one, to attract those
companies, and two, to make a larger business case for their
success in participating in the program. So, in certain
instances, they may actually be able to go to a reinsurer and
get a better situation than the guarantee that would be offered
by the SBA. You increase the guarantee in the preferred
program, and then now you have a better case--a business case
for them to participate and write more bonds to small
businesses that they otherwise wouldn't and increase the
regulated market for those small businesses.
If I might add, one of the things that surety companies
take great pride in as well as bond producers is maturing the
businesses. So it is a relationship that they have. And they
want to see those businesses succeed, and they provide all
sorts of assistance, including referrals to professional
service providers and others. They don't make money unless
these businesses make money. And it is very important for them
to have measured growth for success in the long term.
Ms. Meng. Do you think if there are more applicants for
these bonds with an increase, that the SBA would be able to
handle the workload?
Mr. McCallum. One of the things that we have been very
encouraged about in the last I would say 5 years or so is that
the SBA has really made tremendous outreach to industry,
working on a dialogue and how they can improve their processes.
And it wasn't just listening. They have done things. So they
have increased and streamlined their application. They have
looked at making sure that the program responds in a design
build context. A lot of different improvements that they have
done. Plus there have been legislative enhancements to the
program as well.
All that, they have maintained a very low loss ratio. I
think any surety would be proud to have the loss ratio that SBA
has experienced. So I think we have, with growing confidence,
believed that that program could continue to achieve, to
achieve the potential that you alluded to and would be able to
handle the increased business with a higher guarantee.
Ms. Meng. Another question for Mr. Kelleher and Ms. James
maybe.
The proposed legislation for bid listing at the Federal
level is modeled after laws that currently exist in many
States. However, despite the effectiveness of these provisions,
some argue that there are privy of contract issues within these
laws. Do you find this criticism to be accurate?
Mr. Kelleher. I think the general criticism of bid listing
at the Federal level needs to be looked at with one step
removed from the privy issue. When I got out of the service,
which was a long time ago, we were in the midst of a large GSA
courthouse and Federal office building construction program all
throughout the United States. The GSA instituted bid listing.
It was a disaster, except for the lawyers, because you couldn't
fill out the forms without creating an opportunity for an
ambiguity and a bid protest. Ultimately, GSA dropped the
program after--I am going to say 5 or 6 years. And I can get
the information and provide it to the AGC as to what GSA said
at the time. Privity issues I don't think are as important as
the impracticality of doing it within the context of the
Federal program if it is seal bids in a negotiated area.
What I am seeing the agencies doing, Corps of Engineers and
the Naval Facility Engineering Command is asking contractors
to--both large and small--to submit with their proposals on
negotiated contracts what they are calling small business
participation plans. In those RFPs, the agencies are setting
forth goals for awards to small business firms at all tiers--
multiple tiers, not just first tier. And they are saying
contractor understand. That is different from the
subcontracting plan. The labels are close but they are
different plans, different goals.
And then they tell the contractors, you will get greater
evaluation credit when you review the proposal if you provide
higher numbers at the various tiers, including every type of
small business preference program that is there, and you will
get a higher valuation if you give us evidence of a binding
commitment to the firms that you designate. That allows the
team to be put together, not in a shotgun marriage, and it
incentivizes the contractors to stimulate small business
contracting at every tier and involve every type of firm,
women-owned, 8(a), service-disabled regular small business.
That is a good approach to addressing the problem. When you
have mandatory listing, you have a problem that--do I list A or
B? They have given me different prices, different scopes; I
don't know if they are bondable or insurable the day. If it is
done as part of a proposal where the team has worked together,
then those issues take care of themselves. I think it can be
done but listing in a seal bid, you are responsive or you are
not responsive, is an invitation to go back to the late 1970s
early 1980s, when every project that I was aware of in the
southeast got protest. And then we rebid, and guess what
happened the second time around? There would be a protest again
because the underlying problem with the listing system was
still there.
Ms. James. I can concur with Mr. Kelleher in that at the
various tiers, when we provide that information with proposals,
speaking from a general contractor now, what I do in providing
that information with my proposal is provide the LOIs, the
letter of intents, to be able to show that I have secured that
subcontractor and the subcontractors beneath me, I make it a
requirement to be sure that they have a committed letter as
well, and therefore, I am able to manage both tiers and provide
additional services to other small businesses.
Ms. Meng. I have a question for Ms. Combs.
Each construction project offers its own unique set of
factors that will help determine its cost. For example, a
company constructing a building in my district in New York will
not face the same conditions as a firm with a project in
Florida. Do you believe that the reverse auction process allows
the agencies to consider the variables that construction
projects face?
Ms. Combs Dreiling. I am afraid I am not the reverse
auction specialist, Ms. Meng. Mr. Kelleher would be the one
to--I would be able to answer more questions in the design
build realm, but that I think is probably better answered by
him if that is okay.
Ms. Meng. Thank you.
Mr. Kelleher. I am going to answer your question, Ms. Meng,
with yes and then explain why I am saying yes without
qualification. The reverse auction approach doesn't reflect the
conditions in any locale. It is designed--and the first time I
heard it explained, the agency representative said, we have had
success buying lettuce. And I thought lettuce is not a
construction project. Design bid build or design build. There
are so many variables whether you are in New York or Florida.
The labor market, the team is going to be different. A
contractor from New York could go down to Florida if it is
licensed and bid on work, but the subcontractors would probably
be different. The labor market is different the labor weather
is different. The site conditions. So even if you take the same
building and move it from here to there, it is not the same
project. And reverse bid auctions assume that all the variables
are fixed, like you are in a manufacturing plant turning out
widgets, and that is why, in my opinion, it does not fit. It is
the squarest peg in the roundest hole.
Ms. Meng. I yield back.
Chairman Hanna. Thank you.
Mr. Bentivolio.
Mr. Bentivolio. Thank you, Mr. Chairman.
Thank you all for coming here today. I apologize. I had to
leave to go vote, and I missed part of your introductions, but
as a former vocational education teacher teaching computer
design, I have an interest in the design build process. And I
thought the industry like design build, what has changed?
Ms. Combs Dreiling. As you well know, any project delivery
has challenges of its own, but I think what occurs with the
particular use of design build with Federal Government projects
here is that it requires architects, engineers, subcontractors,
contractors to perform a great deal of work in order to even
secure the project. Even with two step, what we are seeing is
that our firms are--just architecture firms, and of course,
this is multiplied when you consider the other members of the
design construction industry who participated in the team, but
just the architects are expending in the neighborhood of
$260,000 of their own resources within their firms to sort of
take the chance of getting a project. And if it is three firms,
it is a one in three chance. If it is five teams, it is one in
five. And with some of the one-steps, it is way up there in
terms of how much they are risking to secure this work.
Additionally, most of our firms are small; 95 percent of
firms in the AIA are fewer than 50 employees--this happened
when all the buzzing was occurring so I will say it again
because I want to make sure that you all caught this--and 76
percent of these firms have gross revenues of under $1 million
a year. Well, to think of sort of spending a quarter of that
just on the chance of getting one project is just something
that a lot of folks are not willing to do just to get the keep
the doors open, so I think it is cutting out a lot of potential
firms that could participate and narrowing the auctions that
the government has on who could perform this work in terms of
the teams.
Mr. Bentivolio. Okay. So let's see if I understand this
right. What somebody's proposing-- and I will have to go
through my notes--but is that--well, how did it used to get
done? Did the general contractor contract to the design firm
and then make the proposal? How did that work before?
Ms. Combs Dreiling. Well, typically, in the historic past,
the project methodology design bid would have been utilized
where there was not a sort of teaming effort between and among
a number of players in the design and construction industry. So
the architect would have designed the project and then sent it
out for a bid, and contractors would have bid on it. And then
it would have proceeded to construction. So design build was
adopted in order to hopefully save time and hopefully save
money for the Federal Government, which is what we all want as
taxpayers. But it has resulted in some cases in a very
difficult situation for architecture firms, contracting firms,
engineering firms, and small subcontractors, and I would
mention small and large, to be quite truthful, in doing so much
work on the chance of actually being awarded the project.
You are familiar with the construction process. So these
firms are now--these teams are going through what would be in
former design bid build terms well into design development
because they have to know how much the project is going to
cost. Well, in order to do that, you must have a notion of the
heating, ventilating, and air conditioning systems, all the
other building systems, the building components, the cost of
those, and it requires a fairly detailed set of documents to
get to that point to provide the actual bid.
Mr. Bentivolio. Because the contractor has a better feel
for what the costs are in actual construction where the firm
traditionally doesn't because they are design.
Ms. Combs Dreiling. That is right.
Mr. Bentivolio. Thank you. I appreciate it.
I yield back, Mr. Chairman. Thank you.
Chairman Hanna. I saw everyone's head nodding when you
spoke. Anybody disagree with that? The $750,000 limit and the
sort of two-tier system or two-process system, what you are
really saying, to paraphrase, so correct me if I am
misinterpreting, is that it will increase opportunity because
it will add certainty to the process and reduce the potential
cost. So it is really venture capital that you are putting out
there that you may never see again so it encourages you to get
involved.
Therefore, the limit, the 76 percent, under a million, all
of that opens up the market to people--Ms. James and anyone
else who falls under that headline, so in a very real way, it
adds to competition. It adds certainty to the process, and it
lowers your upside risk and gives you an opportunity to look at
the process and say, do I want to go to the next step.
Ms. Combs Dreiling. That is exactly it.
Mr. McCallum. That is right.
Mr. Kelleher. And Mr. Chairman, it applies across the board
to the general contractors and the specialty trade contractors.
They are incurring substantial costs developing the bids. They
work closely with the design team to come up with a concept
that they think the agency would accept. So they are investing
money too. So there is a deterrent here in a one-step design
build proposal for smaller contractors to participate. They
don't have the assets. And if the total cost of a proposal is
$400,000 and you are doing $10 million a year, how much money
do you have to invest?
Chairman Hanna. So what you are really saying, the way we
keep it actually limits competition and un-invites or rather
invites large companies who have venture capital and really
severely prohibits smaller people from getting involved because
they can't begin to compete at that bigger level. Is that fair?
Mr. Kelleher. Yes, sir.
Mr. McCallum. That is fair.
Chairman Hanna. Thank you.
Just quickly, reverse bidding. Let me give you an
interpretation of what I am getting at. If I were to say it
encourages people to go to the least common denominator; it
encourages people, in the frenzy of bidding, that people make
mistakes on things that are subjective, pencils and lettuce,
probably not that subjective. People know their exact costs;
they know how close they can get to the bottom line. They know
everything they need to know. So the reverse bidding
construction projects as opposed to things does not make sense,
that--and that is--does anybody disagree with that? Would
anyone like to say anything about that?
Mr. Kelleher. May I add one comment, Mr. Chairman? In that
reverse bid auction, the contractor sees the lowest prevailing
price on a computer screen. It can opt to see the lower price
or walk away. What he can't do in that tightened bidding
environment is sit down, think about its cost, coordinate with
its contractors, who have a large piece of this action. So it
is putting the number in. And maybe it works, and maybe it
doesn't work. But when it doesn't work, I can assure you, Mr.
Chairman, the disputes and the problems between the
contractors, the sureties and the agencies are going to incur,
and the only people who benefit are the lawyers.
Chairman Hanna. So you are saying we encourage, by doing
this in construction, people to do irrational things and
reactive things.
Mr. Kelleher. Dumb. Dumb things.
Chairman Hanna. And dumb things.
Ms. Combs Dreiling. Yes, sir.
Chairman Hanna. Thank you very much.
I will close this panel. Thank you for your time today. And
quickly, is there anything you want us to ask the next panel?
If not, you are dismissed. Thank you for your time and
service.
Ms. Combs Dreiling. Thank you so much.
Chairman Hanna. The second panel, you can proceed if you
like.
STATEMENTS OF JAMES C. DALTON, CHIEF OF THE ENGINEERING AND
CONSTRUCTION DIVISION, DIRECTORATE OF CIVIL WORKS, UNITED
STATES ARMY CORP OF ENGINEERS, WASHINGTON, D.C.; AND JEANNE
HULIT, ASSOCIATE ADMINISTRATOR FOR CAPITAL ACCESS, UNITED
STATES SMALL BUSINESS ADMINISTRATION, WASHINGTON, D.C.
Chairman Hanna. Thank you. I would like to welcome our next
panel.
Our next witness today is Mr. James Dalton. Mr. Dalton
serves as chief engineering and construction directorate at the
United States Army Corps of Engineers. In his role, he is
responsible for the execution of over $10 billion of design and
construction programs for the Army, Air Force, Department of
Defense, and other Federal agencies and over 60 foreign
nations. You may begin, sir.
STATEMENT OF JAMES C. DALTON
Mr. Dalton. Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, as you just
said, my name is James Dalton. I am the chief of engineering
and construction for the Corps of Engineers. I guide the
development of engineering and construction policy for the
Corps' worldwide civil works and military missions programs. I
certainly thank you for the opportunity to testify here today
for this important issue.
The Corps fully recognizes the value small businesses bring
to our national economy, and each year, we typically award over
40 percent of the prime contract dollars to small business. My
testimony will address the Corps' policy regarding two-step
design build contracts use of reverse auctions for
construction, the Corps' experience with accepting surety bonds
provided by noncorporate sureties and whether allowing prime
contractors to receive credit for lower tiered subcontractors
will improve the use of small business.
The Corps employs various acquisition strategies and
contract types to perform its mission. The Corps uses the
design build project delivery system for many construction
requirements and prefers the use of a two-step or two-phase
selection procedure. This allows offerers to submit experience
and past performance information in step one, and then only the
qualified offerers advance to phase two or step two of the
competition. These offerers did have a much more favorable
chance of winning, as the previous panel just discussed, and
that also provides an incentive for them to submit superior
proposals.
With regard to reverse auctions, the Corps has limited
experience in the use of reverse auctions. The Corps conducted
a pilot study and found no basis to determine that reverse
auctions provide significant savings over traditional
acquisition methods for construction. Reverse auctions provide
benefit when the acquisition is of a controlled and consistent
nature with little or no variability. Construction is not a
commodity, has variability, and it is more similar to a
professional service.
With regard to the Miller Act, it requires construction
contracts to furnish a performance and payment bond for
contracts greater than $150,000. The Corps considers the
acceptability of noncorporate sureties when offered by a
contractor. While we do not collect data requiring--regarding
the use of noncorporate sureties generally, they are proposed
much less frequently than the corporate sureties are. The use
of noncorporate sureties requires an expenditure of government
resources from the contracting officer and his or her team to
investigate the susceptibility of pledge assets. Failure to
establish the pledged assets claim value or the asset's
ownership generally causes rejection of the surety. It is
unknown if allowing large primes--large prime contractors to
claim credit for small businesses used by their second and
third tier subcontractors would lead to improved usage of small
business firms on Corps contracts.
Subcontracting dollars are currently being reported
regardless of their tier level. A contract with a
subcontracting plan requires a prime to flow down the
requirement to its subcontractors and for subcontractors to do
the same to their subcontractors. Allowing prime contractors to
receive credit, however, for subcontracting activity at all
tiers would require a change in the method of accounting for
subcontracting activities across the entire Federal Government.
Mr. Chairman, thank you for inviting the Corps to appear
before this subcommittee to address challenges faced by small
businesses, and I look forward to answering any questions from
you or members.
Chairman Hanna. Thank you.
Thank you, Mr. Dalton.
Our next witness is Jeanne Hulit. Ms. Hulit is the
associate administrator for the Office of Capital Access at the
Small Business Administration.
Prior to her Federal Government service Ms. Hulit was the
senior vice president for commercial lending at citizens bank.
She also worked for key bank as a middle market lender.
Welcome. You may begin.
STATEMENT OF JEANNE HULIT
Ms. Hulit. Thank you. Thank you Chairman Hanna, Ranking
Member Meng, and members of the committee. I am pleased to
testify before you today on the topic of surety bonds.
The Small Business Administration Surety Bond Guarantee
Program was established in 1971 to help small businesses obtain
the surety bonds that are often required as a condition for
awarding a construction contract or subcontract. For example,
the Federal Government requires a surety bond on any
construction contract valued $150,000 or more. Most State and
local organizations have similar bonding requirements, as do
private construction projects.
SBA's program helps small and emerging firms become bonded
by guaranteeing a portion of the bond issued by a participating
surety company. The SBA guarantee acts as an incentive for
surety companies to bond eligible small businesses that might
not otherwise fit traditional surety bonding criteria.
There are two types of SBA surety bond guarantees. First,
those made through our Prior Approval Program, which provide an
80 or 90 percent guarantee, depending on the size of the
contract or the type of the small business; and second, those
made under SBA's preferred program which provides a 70 percent
guarantee. There are 20 surety companies participating in the
SBA program, 17 in the Prior Approval Program, and four in the
Preferred Program. Currently, about 86 percent of our bonds are
issued through the Prior Approval Program, while 14 percent are
made through the Preferred Program.
I am pleased to report that in fiscal year 2013, it is on
track to be the seventh consecutive year in program growth. To
date, we have issued 7,595 bond guarantees, representing
contracts valued at approximately $3.5 billion. This is
approximately 49 percent ahead of last year's volume in terms
of the number of bonds issued and about 75 percent ahead of
last year's number in terms of the total contract value. The
SBA values its partnership with the surety industry and knows
that it is fundamental to the program's success.
We continue to refine our processes and procedures to
strengthen this partnership. We are currently completing work
on our regulatory changes that address several industry
concerns while simplifying and clarifying processes for our
surety partners. In August, we implemented a new Quick App
guarantee application, known as Quick App, for contracts valued
at $250,000 or less. The streamlined process adopts an industry
best practice by eliminating much of the paperwork on smaller
contracts without increasing performance risk. So far this
year, Quick App accounts for approximately 19 percent of
eligible applications. And since implementation, over 685 quick
bond guarantees have been issued. Based on our experience over
the past 8 months as well as feedback from our surety partners,
we are further refining the Quick App process and expect its
use to increase substantially during fiscal year 2014.
In terms of legislative changes within our program, the
National Defense Authorization Act of 2013 raised the
individual contract ceiling in the program from $2 million to
$6.5 million. The new law also permits bonding of Federal
contracts up to $10 million where the contracting officer
certifies an SBA surety bond guarantee is in the best interest
of the government. Additionally, the Defense Authorization Act
provides SBA with broader discretion when it assesses bond
liability.
These changes have been well received across the surety
industry and among small businesses. So far, we have issued 97
bond guarantees on contracts valued at $2 million or more. This
represents approximately $290 million in new construction
contracts. In addition, we have seen the number of
participating surety agents increase by 15 percent and have
admitted two new surety companies to the program in just the
past few months. With respect to the key program performance
measures, the average contract default rate over the past 5
years is approximately 3 percent. It is noteworthy that we have
not seen any defaults on the larger contracts authorized under
the Defense Authorization Act, and we have had zero defaults on
the quick app contracts. Additionally, the program has
experienced a positive cash flow in each of the past 6 years.
The SBA Surety Bond Guarantee Program is helping the small
business community grow and prosper during the critical time in
our Nation's economic recovery. We look forward to working
closely with you and your staff on any changes to the program
as well as other SBA initiatives that support small and
emerging firms. I appreciate the opportunity to testify before
you today. And I welcome any questions that you may have.
Chairman Hanna. Thank you.
So we are thinking of going, in H.R. 776, from 70 to 90.
You said you had a positive cash flow. Can you interpret for me
what that marginal increase would do? And do you think it would
be a problem? And do you think you can absorb it if there is a
problem, a proportionate problem?
Ms. Hulit. Sure. We are looking very closely at the
program. We have seen a decline in the preferred sureties going
down from 50 percent to 14 percent of our program, which is a
very small number. We would like to see more participation in
that program. Because of the additional cash flow we have, we
do not expect it to increase our costs. And we have some
history in our other programs that demonstrate that having the
same guarantee level is not a disincentive.
Chairman Hanna. So, to sum, you believe that you could
absorb it, that there would be additional cash flow. Because
certainly you write bigger bonds, perhaps more bonds.
Ms. Hulit. Correct. In our historic track record, the
default rate under the Preferred Program and the Prior Approval
Program is not materially different. So I think that with
appropriate analysis and resources that address oversight of
any Preferred Program, we think that it is worth considering.
Chairman Hanna. Thank you.
Mr. Dalton, you mentioned that you currently keep track of
all tiers of subcontractors. And then you went on to say that
it would require--but you actually score somehow by the first
tier. Is that fair?
Mr. Dalton. Yes, Mr. Chairman. What we require from our
contractors is--the previous panel talked about the small
business participation and sort of that tiering process of
keeping up with first tier, second tier, all the way down to
the last sub. We actually require that of our contractors. What
we report out, though, for the agency's small business goals
are just the first tier.
Chairman Hanna. Sure. I guess what I am driving at is that
it wouldn't be an enormous burden to--since you already have
the information--to count it differently.
Mr. Dalton. We have the electronic small business system
software that we would actually have to make changes to. I am
not exactly sure what and how involved that would be. But that
is what it would require is changes to that system, which is
really an accounting system that keeps up with the numbers,
percentages of small business per contract. We could right now
tell you if you pointed to a specific contract, we can look in
that ESRS and identify what the amount of small business
participation is.
Chairman Hanna. So you already know, it would just be a
different way of adding the total.
Mr. Dalton. That is correct.
Chairman Hanna. Thank you very much.
You have mentioned you have had limited experience with
reverse auctions. I am assuming that means you have had some.
And maybe feel free to talk about that.
Mr. Dalton. Okay. We had a pilot program in which we looked
at--I think it was, if I have got the numbers correct, five
construction contracts and then a couple of--I will say--
service type or commodity type contracts. And we looked at that
as part of a pilot done during the--I think it was the fiscal
year, maybe, 2008 program--I am not sure of the year. But we
did a pilot program. And the purpose of that pilot was to
actually look and determine if there were advantages in using
reverse auction. Most notably is, was it a better way to get a
better price for the government? Was it a better system in
which we would actually secure contracts? The conclusion of
that study, the pilot study, was that we did not find any
substantial or even moderate advantage of using reverse
auction. One of the problems with using reverse auction for
construction--that is what I am referring to--is that because
it is not a commodity, because it does have variability, it is
difficult to measure one project or one solicitation against
another. And so we could not conclude that there was a
substantial savings in using reverse auction over, for
instance, seal bidding. I would agree with some of the comments
made by the previous panel that when you are in a reverse
auction environment, there is a tendency for--you know, you are
trying to get to a lower bid so you don't have time to go back
and check with subcontractors. So you could, in fact, have bids
that need to later go back and you need to validate and sort of
renegotiate.
The other thing we found with reverse auctions is that--and
I am going to compare it to seal bidding because in seal
bidding, what we are looking at is price as the determining
factor. And so the same thing is the objective of reverse
auctioning. But the reverse auctioning comes with a lot more
administrative requirements and burden because of what has to
be done by the contracting officer and that whole contracting
community over and above just seal bidding.
Chairman Hanna. So what evidence you have is negative, and
it is anecdotal in some ways but----
Mr. Dalton. Chairman, it was inconsistent. We could not
conclude to you in that study that--here is an advantage in
using reverse auction.
Chairman Hanna. Were you able to conclude the reverse, that
it wasn't an advantage, or it is not the same thing?
Mr. Dalton. We do not think it is a good option for
construction. We still maintain it as part of our--I will say
toolkit. But we use it if we need commodities to go out and
buy--if I was trying to buy bulk sand and stockpile bulk sand,
then I could of course do it. But I would not recommend that
for construction of facilities.
Chairman Hanna. Thank you very much.
Mr. Bentivolio.
Mr. Bentivolio. Thank you very much, Mr. Chairman.
I probably need additional time because I have a lot of
questions. I especially have an interest in how this might
benefit some of the contractors in my district, of course.
So walk me through this. I remember, years ago, if I wanted
a government contractor, I would go to the Commerce Business
Daily and look up what bids were out there, and I would, you
know, petition or submit documents. I forget what it was, 30
years ago. What about now? I have to get a bond or a surety
bond, correct? And then I have to go through a bidding process.
Could you kind of walk me through that? And mainly, if one of
my constituents asked me, what is the process? To be perfectly
honest, I would be kind of like--well, I don't know exactly. So
what would be the first thing I would do? What are the steps,
if you would, on how a contractor could bid on a government
project in construction and the process--what you look for in a
contractor getting a surety bond so they would qualify to get
one, right? You have to go through an approval process, I am
assuming, right? Could you explain that between the both of
you?
Mr. Dalton. Well, I will try to start that if you don't
mind. And I may miss some of these steps. But generally
speaking, what happens is, instead of Commerce Business Daily
right now, where you would go is you would look on the
FedBizOpps, which is a Web site where we post all solicitations
for Federal projects.
Mr. Bentivolio. BizOpps.
Mr. Dalton. FedBizOpps.
Mr. Bentivolio. I am sorry.
Mr. Dalton. Federal business opportunities.
Mr. Bentivolio. Great.
Mr. Dalton. And you would look at that. And that would
include a multitude of different types of contracts. The design
builds that we were talking about earlier or simply
construction contracts, service contracts, whatever type
contract is out there that you are interested in. And you
simply--at that time, you would contact--for instance, our
district offices if you needed to talk with them or identify
the fact that you are interested in proposing on a particular
project. And you would receive a set of the bid documents so
that you could take a look at those, do your own estimate,
determine if it is something that you really would be
interested in bidding on. Now the only bonding required if you
actually solicit or submit a proposal is, you would have to
propose--I think it is a bid bond because what we are after
there is the government needs assurance that people are not
just submitting proposals with no intent to follow through with
actually making good on those proposals. So that bid bond is
different than the surety bonds that we are talking about once
you secure a contract. And so once you decide you actually are
interested in bidding on or proposing on a particular contract,
you submit your proposal. Depending on if it is best value,
meaning a negotiated procurement, or if it is a seal bid. If it
is a seal bid, you submit your proposal and wait for the
results. If it is negotiated procurement, meaning best value,
something other than price is as important as price, then you
would actually find out if you were within that competitor
zone. And we would actually negotiate, take a look, evaluate
your proposal against the conditions in the contract, determine
if you are the best value for the government. After which, at
that time, if you are the--I will say the selected firm, then
you would have to provide a payment and performance bond or a
surety bond because what that does is it says to the government
that, one, the performance part of it says that you will
perform; and if you don't perform, then the government has a
place to go to actually get another contract or someone will
ensure the performance is done. And the payment bonding is to
assure that you are paying the subcontractors. If you don't pay
your suppliers or subcontractors, then that bond is called into
active.
Mr. Bentivolio. Thank you.
Ms. Hulit, how would I go about getting a surety bond? And
what are the requirements?
Mr. Dalton. Well, the SBA provides a surety bond guarantee.
We don't provide the bond. So you would have to get a surety
from a surety company, the bond from the surety company. The
surety company would come to us to get the bond guarantee when,
for reasons for their own underwriting purposes, they wouldn't
do it without the additional support of the government
guarantee. That could be because it is in a particular industry
or because it is a relatively new business, startup. They may
not have had experience with a contract of that size for
whatever reason. So we would look at the underwriting criteria
provided by the surety company, do our own assessment, and look
at the reasons that they are asking for the government support.
Mr. Bentivolio. Thank you very much.
I yield back.
Chairman Hanna. Thank you.
So, Mr. Dalton, just to sum up, the critical nature of this
bonding, you have made it very clear how important it is--both
of you--to the process.
So, in terms of what Mr. Mark McCallum said generally, you
agree that to maintain the integrity of the bonding process, it
is critical to the functioning of what both of you do?
Ms. Hulit. Clearly, because of the Miller Act, the
government does require surety bonds for contracts over
$150,000. We would like to see more small businesses be able to
compete for government contracts, and the SBA Surety Bond
Program works very closely in partnership.
Chairman Hanna. So, to that end, to have capable,
competent, solvent institutions issuing these bonds is
absolutely critical to your ability to do your jobs and provide
certainty all across the spectrum of what you do.
Mr. Dalton. Yes, it is. In fact, there is a risk, and it is
most of our district officers, our contracting officers, as was
mentioned by the previous panel, have the burden of actually
trying to determine if a noncorporate surety actually has the
assets, the appropriate assets. If we are able to do the work
and investigation that we should do up front, then that surety
is rejected. We have got, I am sure, as others do, examples of
where we may have had not fully investigated. So, therefore, we
are in a bond when you find out that if you get to that point,
that that surety----
Chairman Hanna. If we can find what those assets are, where
they are coming, how they are secured, then your job is easier.
Mr. Dalton. Yes, sir.
Chairman Hanna. Thank you very much. I want to thank all
our witnesses today. I appreciate your insights regarding the
proposed legislative solutions. As we move forward, your
insights, I am sure, will be invaluable.
I ask unanimous consent that all members have 5 legislative
days to submit statements and supporting materials for the
record.
Without objection, so ordered.
This hearing is now adjourned. Thank you again.
[Whereupon, at 11:55 a.m., the subcommittee was adjourned.]
A P P E N D I X
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Introduction
Chairman Hanna, Ranking Member Meng, and members of the
Committee, I am Helene Combs Dreiling, FAIA, Executive Director
of the Virginia Center for Architecture and the 2013 First Vice
President of the American Institute of Architects (AIA). I want
to thank you for the opportunity to testify today on behalf of
the AIA and its more than 81,000 members.
Federal Design Build Construction
The current economic crisis has affected every American,
but, as this Committee knows all too well, it has hit small
businesses and the design and construction industry
particularly hard. Architects are, by and large, small business
people; 95 percent of U.S. architecture firms employ 50 or
fewer people.\1\ In fact, the vast majority practice is one or
two person firms. The recession has accelerated this trend as
medium sized firms have been purchased by large firms, and some
architects, having been laid off by their firms, have begun
their own businesses.
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\1\ http://info.aia.org/aiarchitect/thisweek09/1009/
1009b--firmsurvey.cfm
The health of the architectural profession matters greatly
to the overall state of the economy. Architects are the
starting point for the design and construction industry, which
accounts for one in nine dollars of U.S. gross domestic
---------------------------------------------------------------------------
product.
Architects are job catalysts--they are the first workers to
be involved in the construction process when they develop
designs for homes, offices, retail spaces, hospitals,
educational institutions, government buildings, and more.
Hiring an architect leads to employment in other construction-
related fields, from engineers and manufacturers, to steel and
electrical contractors. In fact, there is one architectural
service worker for every 34 construction industry workers in
this country,\2\ creating over $1 trillion in economic activity
in 2008.\3\ A study by the George Mason University Center for
Regional Analysis found that every $1 million invested in
design and construction creates 28.5 new full-time jobs.\4\
---------------------------------------------------------------------------
\2\ U.S. Department of Labor
\3\ www.census.gov/const/C30/total.pdf
\4\ www.naiop.org/foundation/contdev.pdf
Recently there has been good news on the unemployment front
for the construction industry, but the recovery seems to be
fragile at best. The most recent job numbers show that the
construction industry lost 6,000 jobs last month \5\ even when
the unemployment rate dropped. Because of a lack of financing
in the private market since the start of the economic crisis in
2008, public sector work has literally been a lifeline for many
small design firms. Government procurement, including at the
federal level, has helped to keep the doors open at numerous
firms across the nation. However, small firms are losing some
of the contracts available because larger firms are ``bottom
feeding.'' They are going after projects they never would have
even considered several years ago just to pay their bills. In
addition, clients are also negotiating fees downward, using the
threat that they can always find someone to do the project for
a greatly reduced price.
---------------------------------------------------------------------------
\5\ http://money.cnn.com/2013/05/03/news/economy/construction-jobs/
index.html (last visited on May 16, 2013)
These factors, coupled with smaller construction budgets at
federal agencies, have severely intensified the competition for
federal contracts. This struggle has given the federal
government undue strength in the negotiations and has enabled
them to demand more from candidates. Although competition helps
ensure that the taxpayer receives good value, there is a
difference between getting a fair deal for the government and a
procurement process that forces architects, engineers,
contractors, subcontractors and suppliers to spend more money
for a smaller chance of getting the job. The taxpayer does not
win when government contracting leaves small businesses in
---------------------------------------------------------------------------
difficult economic straits.
Design Build Construction
Federal agencies are able to use a number of different
project delivery methods to design and construct buildings,
including design-bid-build, design-build, and joint ventures,
among others. These methodologies allow agencies the
flexibility to choose the right method for a specific project.
According to a survey by the AIA Large Firm Roundtable, almost
66 percent of all domestic buildings from 2007 through July
2011 were built using the design-build method.\6\
---------------------------------------------------------------------------
\6\ AIA Large Firm Roundtable, Competition Survey Results, May 31,
2012 at 9.
When agencies choose design-build, they post a solicitation
on Fed Biz Ops. Interested teams, typically comprised of an
architect, engineer, contractor and subcontractors, submit
their qualifications to the pre-selection board. In this first
step, the board will review the teams' qualifications, which
include past performance, resumes of key personnel, and
examples of relevant projects, to create a short list for the
---------------------------------------------------------------------------
second step in the competition.
At this point, the short-listed teams develop a more in-
depth proposal based on the programmatic requirements within
the solicitation. In order to develop an accurate cost, teams
must complete approximately 80 percent of the design work in
advance. The design work is considerable, as each team must
determine space needs; mechanical, electrical, HVAC and other
systems; building supplies and materials; and the cost of
construction. Without this information, there is simply no way
to determine a final price. This design work takes a
considerable amount of time from the large group of
professionals on each team, which places enormous economic
burdens on each design-build team on the short list.
Design-Build Competition Issues
Another procurement issue small design firms face is the
financial burden of the federal design-build construction
process on architects. On average, the federal design build fee
is approximately $1.5 million \7\. The rewards are high for
these projects, but the cost to enter the federal market is
increasingly prohibitive for small firms.
---------------------------------------------------------------------------
\7\ Ibid at 9.
When teams are shortlisted in two-step design-build, an
architecture firm spends a median of $260,000 to compete for a
design-build project, by making plans, models and other
materials.\8\ In almost 87 percent of federal design-build
competitions, there are no stipends provided to the
architectural firm.\9\ The firm must hope that they win, with
their team, to make up the costs they expend in competing for
the job.
---------------------------------------------------------------------------
\8\ Ibid at 9.
\9\ Ibid at 12.
When teams decide whether to compete for a design-build
project, they weigh the costs of competing with the odds of
winning. Agencies have taken advantage of their purchasing
power during the recession to expand the number of short-listed
teams. In the past, agencies would typically shortlist three
teams for a design build project. Now, there are reports that
some agencies are shortlisting as many as eight-to-10 teams. In
these cases, the odds of being selected drop significantly,
even as the cost to compete continues to rise. This is an
especially difficult situation for small firms, which are less
able to absorb the costs of competitions than larger firms. Due
to the current economic climate, small and medium firms face
the Hobson's choice of ``betting it all'' on a contract they
may not get, or self-selecting out of the federal design-build
---------------------------------------------------------------------------
market.
Unfortunately, federal law enables agencies to create ever-
longing short lists. Under current law, agencies are required
to short list between three and five teams. However, he law
states that contracting officers have the flexibility to
increase the number of finalists if increasing the number is
``in the Federal Government's interest and is consistent with
the purposes and objectives of the two-phase selection
process.'' \10\ This exception is so broad that agencies use it
without given it a second thought.
---------------------------------------------------------------------------
\10\ 11 USC Sec. 3309(d)
Therefore, we ask the Committee to look at tightening the
statute so that all firms can accurately determine the risks
---------------------------------------------------------------------------
and rewards of participating in this market.
One-Step vs. Two-Step Design Build
Although many agencies employ the two-step design-build
process outlined above, some agencies use a one-step design-
build process. In a one-step process, agencies eliminate the
pre-selection step and open the solicitation to all
respondents. This allows for the government to review as many
responses as they receive without reviewing the qualifications
of the bidders prior to receiving a bid.
This concept sounds attractive, but when a contracting
officer receives 30, 40, or 50 responses, this selection method
becomes an inefficient use of limited federal government time
and resources. Moreover, one-step selection allows for teams
that do not have experience, effective past performance, or
accurate bids to participate in the process. Contracting with
teams that do not have the qualifications for the specialized
work that is required on government projects frequently creates
problems in the execution of the project. This leads to higher
costs and longer delivery time which is not in the best
interest of the government. In addition, inexperienced or
under-qualified teams could become legally obligated to fulfill
contractual promises they simply cannot meet--or a mistake in a
bid will cause them devastating liability.
That is why we respectfully ask that the Committee consider
limiting the use of single-step design-build to projects that
are less than $750,000. This threshold is based on U.S. Army
Corps of Engineers guidance which was issued in August 2012. By
limiting single step procurement to these projects, there will
be less risk for teams who want to pursue this work, and it
will allow for more small businesses to participate in the
process. This limit allows smaller firms to gain valuable
experience and exposure to the federal construction process,
while also limiting federal agencies' burdens in reviewing a
large number of proposals.
In conclusion, I would like to thank Chairman Hanna,
Ranking Member Meng, and members of the Subcommittee for giving
me the opportunity to testify before you today. The AIA
commends you for your commitment to addressing the challenges
that small businesses face in this economy and your leadership
in advancing legislation that helps small businesses drive the
recovery. The challenges that we as small businesspeople face
are serious, but so is our commitment to play a leading role in
rebuilding our country.
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RECORD VERSION
STATEMENT BY
JAMES C. DALTON, P.E.
CHIEF, ENGINEERING AND CONSTRUCTION
U.S. ARMY CORPS OF ENGINEERS
BEFORE THE
COMMITTEE ON SMALL BUSINESS
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
UNITED STATES HOUSE OF REPRESENTATIVES
FIRST SESSION, 113TH CONGRESS
ON THE CORPS' POLICIES REGARDING TWO-STEP DESIGN BUILD CONTRACTS, THE
USE OF REVERSE AUCTIONS FOR CONSTRUCTION, CORPS' EXPERIENCE WITH
ACCEPTING SURETY BONDS PROVIDED BY NON-CORPORATE SURETIES, AND WHETHER
ALLOWING THE PRIME CONTRACTOR TO RECEIVE CREDIT FOR LOWER TIERED
SUBCONTRACTORS WILL IMPROVE THE USE OF SMALL BUSINESSES
May 23, 2013
NOT FOR PUBLICATION UNTIL RELEASED BY THE COMMITTEE ON SMALL BUSINESS
Mr. Chairman and Members of the Subcommittee, I am James
Dalton, Chief of Engineering and Construction for the U.S. Army
Corps of Engineers (Corps). I provide engineering and
construction leadership to nine divisions, 45 districts, and
guide the development of engineering and construction policy
for our world-wide Civil Works and Military Programs missions.
Thank you for the opportunity to testify today to discuss
construction contracting and improved small business
participation.
The Corps fully recognizes the value that small businesses
bring to our national economy, and is committed to using small
businesses in performing our work. We use Small, Small-
Disadvantaged, Women-Owned, HUBZone, Veteran-Owned, and
Service-Disabled Veteran Owned firms to the maximum extent
possible, and typically, each year the Corps of Engineers
awards over 40 percent of its prime contract dollars to small
businesses.
My testimony will address the Corps policies regarding two-
step design build contracts, the use of reverse auctions for
construction, Corps experience with accepting surety bonds
provided by non-corporate sureties and whether allowing the
prime contractor to receive credit for lower tiered
subcontractors will improve the use of small businesses.
Use of Two-Step Design-Build Contracts
The Corps employs various acquisition strategies and
contract types to perform its mission whether the effort is for
construction, engineering, environmental services, or operation
and maintenance of facilities. During the last ten years the
Design-Build project delivery system has been used for many of
the Corps' construction requirements. The Federal Acquisition
Regulation (FAR) Part 36.102 definition of Design-Build is the
combination of design and construction in a single contract
with one contractor responsible for the design and
construction. The FAR further defines Two-Phase Design-Build,
also known as Two-Step Design Build, as a source selection
procedure in which a limited number of offerors (normally five
or fewer) are selected during Phase One to submit detailed
proposals for Phase Two. The Corps utilizes the Two-Phase
Design-Build process and has developed policy implementing the
Federal Acquisition Regulation. The Corps also utilizes a One-
Step Design-Build for Turn-Key process as authorized by Statute
10 USC 2862. The Corps policy discourages the use of One-Step
Design Build procedures for most construction requirements.
The Two-Phase selection procedure allows offerors to submit
(relatively inexpensively) information related to experience
and past performance in step one. Based on this information,
the source selection authority selects a limited number of the
most qualified offerors to advance to Phase Two of the
competition, where the down-selected offerors (generally three
to five) submit much more resource intensive price and
technical proposals for evaluation. The offerors advancing to
Phase Two have a much more favorable chance of winning the
competition and are therefore incentivized to submit superior
technical and price proposals, which reduces overall costs to
the government and industry.
Use of Reverse Auctions for Construction
The Corps conducted a pilot program to evaluate the use of
reverse auctioning at eight separate Corps Districts
(Louisville, Ft. Worth, Norfolk, Omaha, Philadelphia, Savannah,
Huntsville Center, and Pittsburgh). Contracting Officers used
the reverse auction process on nine individual projects for
construction (5), commodities (3), and supplies and services
(1). The Corps received protests on two of the construction
projects and one of the protests was sustained due to a problem
with the software used to implement the auction.
A reverse auction is conducted utilizing an online tool
where buyers can procure commodity-type commercial items or
services and satisfy competition, publicizing, and reporting
requirements as part of the process. A vendor cannot view the
name of other vendors during the bidding period, but knows the
relative position of its price to those of its competitors and
sometimes may be able to view the prices of other competitors.
A vendor can reduce its bid and underbid another vendor until
the bidding period closes.
Vendors may be allowed to ask questions directly to the
contracting officer during the bidding period and in that event
the system allows the contracting officer to respond directly
to the vendor that submitted the question. Vendors can only
view other vendor's questions and answers if these questions
and answers are posted as an attachment to the RFQ.
The Corps, through its pilot study, found no basis to
determine that reverse auctioning provided any significant or
marginal savings over a traditional contracting process for
construction. Reverse auctioning provides benefit when the
commodities or manufactured goods procured are of a controlled
and consistent nature with little or no variability.
Construction is not a commodity and is more closely related to
a professional service. Procuring construction by reverse
auction neither ensures a fair and reasonable price nor
selection of the most qualified contractor.
Our most recent experience with contracting using reverse
auctions was in 2008 when the Corps solicited for clay borrow
material in New Orleans. Using reverse auctions was intended to
expedite the contracting process and ultimate delivery of the
project. The outcome was poor as the contractor was unable to
perform to the contract requirements and the contract was
partially terminated for convenience. The requirement had to be
reprocured using traditional construction contracting
procedures where the prime construction contractors were
responsible for the procurement of clay borrow materials. This
experience did not reflect poorly on the reverse auction
process itself, but rather on the scope of services procured.
The scope of services required the delivery of a construction
material (clay borrow material) to multiple construction sites
for use by multiple prime construction contractors in the
construction of embankment levees. The coordination efforts
proved to be more difficult than anticipated by either the
Corps or the material supplier.
Surety Bonds Provided by Non-Corporate Sureties
Pursuant to the Miller Act as implemented by Regulation,
before a construction contractor is allowed to start work on a
contract of more than $150,000, it generally must furnish
performance and payment bonds. A performance bond with a surety
satisfactory to the contracting officer is required in an
amount the contracting officer considers adequate for the
protection of the Government. Generally, the penal amount--the
penalty the principal could incur--of the bond is 100 percent
of the contract price. A payment bond is also required for the
protection of all persons supplying labor and material. The
amount of the payment bond is the same as the amount of the
performance bond. If the surety does not have the ability to
pay in the event the contractor cannot perform, the project and
the suppliers and subcontractors are put at risk.
For contracts exceeding $30,000 but not exceeding $150,000,
alternative payment protection (e.g. irrevocable letter of
credit) may be provided in the amount of the contract price.
The Corps complies with the Miller Act as implemented by
the FAR. Performance and Payment Bonds are required on the vast
majority of all construction requirements in excess of $150,000
prior to the issuance of a Notice to Proceed.
Sureties make money through volume, not by taking risks.
Solid relationships with sureties and brokers remain the key to
any construction companies attempting to obtain bonds.
Approximately two thirds of the surety market is
effectively controlled by fewer than a dozen companies (fewer
for environmental contracting). This limited presence of market
providers present small companies with financial challenges,
such as bonding availability, pricing and risk evaluation.
Smaller companies are more vulnerable than large companies as a
result of this industry concentration.
The FAR does contemplate the use of non-corporate sureties,
but this option presents its own set of unique challenges. For
example, a non-corporate surety must be creditworthy, and
present acceptable security to support its promise to step into
the contractor's shoes, so to speak, to perform the work
contracted for by the Government and to pay any subcontractors
in accordance with the terms of the performance and payment
bonds the surety has presented to the Government.
In accordance with the FAR, the Corps gives full
consideration to the acceptability of non-corporate sureties,
referred to in the FAR as individual sureties. The Corps does
not collect data regarding the frequency with which non-
corporate sureties are proposed or accepted. Generally, non-
corporate sureties are proposed much less frequently than
corporate sureties. The use of non-corporate sureties requires
the expenditure of Government resources to investigate the
acceptability of pledged assets. In our experience, proposals
to use non-corporate sureties are generally rejected by the
contracting officer for two basic deficiencies: either the
claimed value of the pledged asset cannot be established, or
the asset's ownership may be in question. The Corps will not
accept sureties that do not meet the requirements of the FAR
and that present an unacceptable risk to the Government.
Prime Contractor Small Business Credit for Lower Tiered Subcontractors
Present regulations allow only the prime contractor to
report the dollars it awards directly to its subcontractors.
However, regulations also require a subcontractor to report the
dollars it awards directly to its subcontractors. So in effect,
subcontracting dollars are being reported from the prime
contractor and subcontractors regardless of their tier-level
under the prime contract.
The Corps requires small business subcontracting plans in
negotiated acquisitions for construction contracts, which are
expected to exceed $1.5M and have subcontracting possibilities
(FAR 19.702). The Corps also requires each large business
contractor with such type contract to also require the same for
their large business subcontractors. The subcontractors are
required to do the same to their subcontractors. As a result, a
contract with a subcontracting plan requires the prime to flow-
down the same requirement to its subcontractors, and for its
subcontractors to do the same to their subcontractors.
A subcontracting plan is contract specific to a contract
and requires the contractor to provide goals ($ and %) it plans
to subcontract to small business, small disadvantaged business,
HUBZone business, women-owned small business, veteran-owned
small business and service-disabled small business. The
subcontracting plan also requires the contractor (prime and
subcontractor) to report annually the dollars they award to
their subcontractors. The reporting is accomplished via the
federal Electronic Subcontracting Reporting System (eSRS). As a
result, subcontracting can be determined cumulatively for a
contract. This represents the subcontracting dollars reported
by the prime contractor and all of the lower-tier contractors
under the same prime contract. However, eSRS has some
limitations; as a result, determining the subcontracting
achievements for a department/agency/organization is difficult
based on the contracts they award. Nonetheless, these issues
are being addressed between the Department, GSA (system
manager) and SBA.
Allowing prime contractors to count all reported activity
towards their goals would require a change to the processes for
negotiating subcontracting goals, a change in the systems to
collect the data and change in the method accounting for
subcontracting activity across the entire Federal Government.
Although these changes would still not guarantee improvement in
subcontracting opportunities for small businesses, they would
provide better data to manage subcontracting. It is unknown if
allowing large primes to claim credit for small businesses used
by their second and third tier subcontractors would lead to
improved usage of small business firms on Corps contracts.
Mr. Chairman, this concludes my statement. Thank you again
for allowing me to be here today to discuss the Corps small
business construction contracting. I would be happy to answer
any questions you or other Members may have.
U.S. SMALL BUSINESS ADMINISTRATION
WASHINGTON, D.C. 20416
TESTIMONY OF
JEANNE A. HULIT
ASSOCIATE ADMINISTRATOR
OFFICE OF CAPITAL ACCESS
U.S. SMALL BUSINESS ADMINISTRATION
BEFORE THE
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
HOUSE COMMITTEE ON SMALL BUSINESS
U.S. HOUSE OF REPRESENTATIVES
MAY 23, 2013
Thank you Chairman Hanna, Ranking Member Meng and members
of the Subcommittee. I am pleased to testify before you today
on the topic of surety bonds.
The Small Business Administration (SBA) Surety Bond
Guarantee Program was established in 1971 to help small
businesses obtain the surety bonds that are often required as a
condition of awarding a construction contract or subcontract.
For example, the Federal government requires a surety bond on
any construction contract valued at $150,000 or more. Most
state and local organizations have similar bonding
requirements, as do many private construction projects.
The Small Business Administration (SBA) Surety Bond
Guarantee Program was established in 1971 to help small
businesses obtain the surety bonds that are often required as a
condition of awarding a construction contract or subcontract.
For example, the Federal government requires a surety bond on
any construction contract valued at $150,000 or more. Most
state and local organizations have similar bonding
requirements, as do many private construction projects.
SBA's program helps small and emerging firms become bonded
by guaranteeing a portion of the bond issued by a participating
surety company. The SBA guarantee acts as an incentive for
surety companies to bond eligible small businesses that might
not otherwise fit traditional surety bonding criteria.
There are two types of SBA surety bond guarantees: (1)
those made through our Prior Approval Program, which provide an
80% or 90% guarantee (depending on the size of the contract and
the type of small business); and (2) those made under SBA's
Preferred Program, which provide a 70% guarantee. There are 21
surety companies participating in SBA's program--17 in the
Prior Approval Program and 4 in the Preferred Program.
Currently, about 86% of our bonds are issued through the Prior
Approval Program, while about 14% are made through the
Preferred Program.
I am pleased to report that Fiscal Year 2013 is on track to
be the seventh consecutive year of program growth. To date, we
have issued 7,595 bond guarantees representing contracts valued
at over $3.5 billion. This is approximately 49% ahead of last
year's volume in terms of the number of bond guarantees issued,
and about 65% ahead of last year's numbers in terms of total
contract value.
SBA values its partnership with the surety industry and
knows that it is fundamental to the program's success. We
continue to refine our processes and procedures to strengthen
this partnership. We are currently completing work on
regulatory changes that address several industry concerns while
simplifying and clarifying processes for our surety partners.
In August, we implemented a new Quick Bond Guarantee
Application--known as Quick App--for contracts valued at
$250,000 or less. This streamlined process adopts an industry
``best practice'' by eliminating much of the paperwork on small
contracts without increasing performance risk. So far this
year, Quick App accounts for approximately 19% of eligible
applications. And since implementation, over 685 Quick Bond
guarantees have been issued. Based on our experience over the
past eight months, as well as feedback from our surety
partners, we are further refining the Quick App process and
expect its use to increase substantially during FY 14.
In terms of legislative changes within our program, the
National Defense Authorization Act of 2013 raised the
individual contract ceiling in the program from $2 million to
$6.5 million. The new law also permits bonding of Federal
contracts up to $10 million where the contracting officer
certifies that an SBA surety bond guarantee is in the best
interest of the government. Additionally, the Defense
Authorization Act provides SBA with broader discretion when it
assesses bond liability.
These changes have been well received across the surety
industry and among small businesses. So far, we have issued 97
bond guarantees on contracts valued at $2 million or more. This
represents approximately $290 million in new construction
contracts. In addition, we have seen the number of
participating surety agents increase by 15%, and we have
admitted two new surety companies to the program in just the
past few months.
With respect to key program performance measures, the
average contract default rate over the past five years is
approximately 3%. It is noteworthy that we have not seen any
defaults on the larger contracts authorized under the Defense
Authorization Act, and we have had zero defaults on Quick App
contracts. Additionally, the Program has experienced a positive
cash flow in each of the past six years.
The SBA Surety Bond Guarantee Program is helping the small
business community grow and prosper during a critical time in
our nation's economic recovery. We look forward to working
closely with you and your staff on any changes to the program,
as well as other SBA initiatives that support small and
emerging firms.
I appreciate the opportunity to testify before you today,
and I welcome any questions you may have.
Thank you.
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Chairman Hanna, Ranking Member Meng, and Members of the
Subcommittee, the American Subcontractors Association, Inc.
(ASA) expresses its thanks for your clear commitment to
assuring small business participation on Federal Government
construction procurement. We ask that this statement be
included in the hearing record.
ASA is a national trade association representing
subcontractors, specialty trade contractors, and suppliers in
the construction industry. ASA members work in virtually all of
the construction trades and on virtually every type of
horizontal and vertical construction. ASA members frequently
contract directly with the Federal Government. More often, they
serve as subcontractors dealing with the Federal Government
through a prime contractor. More than 60 percent of ASA members
are small businesses.
Construction contractors and subcontractors face numerous
obstacles to participating on Federal projects. Two of the
biggest obstacles are the bidding/proposal process itself, and,
getting paid promptly for work properly performed. To address
these obstacles, ASA recommends that Congress:
Deter bid shopping and bid peddling by prohibiting
the use of reverse auctions for construction and construction-
related services at both the prime and subcontract levels.
Deter bid shopping at the subcontract level by
requiring the prime contractor to submit with its bid, a list
of the subcontractors it intends to use.
Encourage small business participation on design-
build contracts by requiring the use of the two-step method for
the procurement on all but the smallest contracts.
Increase access to surety bonds by small firms by
increasing to 90 percent the guarantee available to sureties
under the SBA Surety Bond Guarantee Program.
Assure subcontractor and supplier payment by
applying to individual sureties the same standards currently
applied to corporate sureties.
Assure subcontractor and supplier payment on the
construction components of projects financed by public-private
partnerships by requiring surety bonds on such contracts.
Assure payment to the smallest of subcontractors
and suppliers by exempting the Miller Act from periodic
inflation adjustments.
Prohibit Reverse Auctions
A reverse auction essentially is an online, real-time
dynamic auction between a buying entity (e.g., owner,
contractor) and pre-qualified vendors who compete against each
other to win a contract. These vendors compete by bidding
against other, usually over the Internet, by submitting
successively lower-priced bids during a specified bid period,
usually about one hour.
Electronic reverse auctions have brought ever greater
efficiency to the abhorrent practice of ``bid shopping'' in the
construction industry. Bid shopping occurs when an owner or
prime contractor divulges the general contractor's or
subcontractor's bid to secure a lower bid from a competitor.
According to a joint statement issued by the Associated General
Contractors of America, ASA, and the Associated Specialty
Contractors:
``Bid shopping and bid peddling are abhorrent
business practices that threaten the integrity of the
competitive bidding system that serves the construction
industry and the economy so well.''
ASA concurs with AGC, in its May 23 statement to the
Subcommittee:
``Reverse auctions create an environment in which bid
discipline is critical yet difficult to maintain. The
competitors have to deal with multiple rounds of
bidding, all in quick succession. The process may move
too quickly for competitors to accurately reassess
either their costs or the way they would actually do
the work. If competitors act rashly and bid
imprudently, the results may be detrimental to
everyone, including the owner. Imprudent bidding may
lead to performance and financial problems for owners
and successful bidders, which may have the effect of
increasing the ultimate cost of construction as well as
the cost of operating and maintaining the structure.''
The same problems arise when a prime contractor uses a
reverse action to obtain bids from subcontractors.
Thus, ASA supports legislation prohibiting reverse auction
procurement for construction and construction-related services
at both the prime contractor and subcontractor levels.
Require Subcontractor Bid Listing
ASA also supports the implementation of a requirement that
a prime construction contractor on a low-bid solicitation for
construction and construction-related services submit with its
bid a list of the subcontractors it intends to use if it is
awarded the contract.
On those contracts for which the Federal Government relies
on a procurement system in which the lowest responsible and
responsible bidder prevails, the cost to the Government is
firmly established on the date of contract award. Should the
successful prime contractor subsequently be able to reduce its
cost of performance by persuading prospective subcontractors to
submit ever lower bids--either slowly through individual
telephone calls or quickly with an electronic reverse auction--
the prime contractor alone reaps the cost savings. ASA believes
that allowing a prime contractor to bid shop after it has been
awarded a contract by the Government potentially leads to a
lower quality of work, materials and equipment for the Federal
customer. Further, the risk of prime contractor bid shopping
deters the most qualified subcontractors from ever competing
for such contracts.
Thus, ASA strongly supports legislation, such as H.R. 1942,
the ``Construction Quality Assurance Act of 2013,'' which would
require subcontractor bid listing on Federal construction
projects exceeding $1 million procured through sealed bids.
Essentially, subcontractor bid listing requires a prime
contractor to submit a list of the subcontractors it intends to
use on the Government project along with its bid. Subcontractor
bid listing is, perhaps, the strongest deterrent to the
``abhorrent'' practices of bid shopping and bid peddling at the
subcontract level.
Subcontractor bid listing also will serve to further
several other goals of the Federal Government. First,
subcontractor listing will help protect homeland security by
assuring that the Government knows in advance what firms are
actually working on its projects, Second, subcontractor listing
will help the Government better encourage and monitor the use
of small and other historically underutilized businesses on its
contracts, before the prime contractor awards subcontracts to
other firms.
ASA notes that the Congress already enacted, as part of the
Small Business Jobs Act of 2010 (Pub. L. 111-240), a
requirement that a large business prime contractor must
represent that it will make a good faith effort to award
subcontracts at the same percentage as indicated in the
subcontracting plan submitted as part of its proposal for a
contract and that if the percentage is not met, the large
business primate contractor must provide a written
justification and explanation to the contracting officer.
Unfortunately, the U.S. Small Business Administration has still
not implemented that statutory requirement, even though it
issued a Notice of Proposed Rulemaking in Oct. 2011 (RIN 3245-
AG22). That proposed rule would require a prime contractor
awarded a Federal construction contract valued at more than
$1.5 million to ``notify the contracting officer in writing
whenever the prime contractor does not utilize a subcontractor
used in preparing its bid or proposal during contract
performance.'' ASA asks that the Committee direct SBA to
expeditiously issue and implement a final rule.
Encourage Two-Step Procurement for Design-Build Contracts
ASA joins other construction associations in urging the
Congress to use the two-step method of procurement for most
design-build projects. By assuring that there is a first
qualification step for such projects, before a design-builder
or design/contractor team must submit a full proposal, the
Government will help assure that smaller firms can afford to
participate in its procurement process.
Enhance the SBA Surety Bond Guarantee Program
ASA remains a strong supporter of the programs operated by
the Small Business Administration (SBA) to facilitate access to
surety bonds issued by corporate sureties that have been vetted
and approved by the Department of the Treasury. SBA's Surety
Bond Guarantee Program has helped many small business concerns
to obtain the surety bonds that they needed to compete for
Federal prime contract opportunities in construction. ASA was a
major participant in the coalition that supported the
legislation sponsored by former Senator Sam Nunn of Georgia
that provided a statutory basis for the SBA's Preferred Surety
Bond Guarantee Program. The Preferred Surety Bond Guarantee
Program broadened the pool of corporate sureties willing to
participate in the SBA Program assisting yet additional numbers
of small business concerns. SBA has made marked strides to
improve the application process for surety bonds provided under
the Program. However, ASA believes that the Program could be
further improved by enactment of Section 3 of H.R. 776, the
``Security in Bonding Act,'' which would increase to 90 percent
the guarantee offered to participating sureties.
Require Individual Sureties to Meet the Same Standards as
Corporate Sureties
One of the principal obstacles to small business
participation on Federal Government procurement is the concern
that payment for work performed will not be forthcoming. On a
typical construction project, subcontractors extend a
significant amount of credit to their prime contractor clients.
Thus, the American dream of winning a federal contract can
quickly turn into an American nightmare if payment is not
timely received. ASA strongly supports H.R. 776, the ``Security
in Bonding Act,'' which is designed to deter those individual
sureties who succumb to the temptation to misrepresent the
assets being pledged in support of the surety bonds that they
are furnishing.
Since the 1980's, ASA has participated actively in the
various regulatory efforts to assure that the payment bonds
furnished by individual sureties actually provide the real
payment protections for subcontractors and suppliers intended
by the statutory mandate of the Miller Act. The use, and abuse,
of individual sureties have tended to be episodic in nature.
Unfortunately, the construction industry, and especially small
subcontractors and suppliers, are currently facing another
sustained episode. The potential for inadequate or worthless
payment bonds to be furnished by individual sureties has been
exacerbated by the advent of increasingly convoluted forms of
financial instruments and the sustained overload of
responsibilities that currently are being required of a deeply
understaffed corps of Federal contracting officers and
supporting acquisition professionals.
The current coverage of the Government-wide Federal
Acquisition Regulation (FAR) Subpart 28.2 (Sureties and Other
Security for Bonds) provides the contracting officer very solid
guidance, but implementation can be compromised by severe
challenges, especially if the individual surety is determined
and skilled in gaming the system. The core challenge for the
contracting officer relates to assessing the assets being
pledged by the individual surety in support of the surety bonds
being furnished to the Government. Do the assets being pledged
actually exist? What is the real value of the pledged assets?
Can the pledged asset, although real and properly valued, be
readily liquidated? Claims against a payment bond under the
Miller Act are generally paid in cash, not, for example, timber
``available'' to be harvested for milling.
By training and experience, even the most seasoned
contracting officer in the acquisition of construction is
likely at a distinct disadvantage in making these
determinations with regard to the broad array of assets
acceptable under FAR Part 28.203-2. The challenge is presented
not only with regard to real property and raw commodities,
often in locations remote from the contracting officer's
location, but also by increasingly opaque forms of ``secure''
financial instruments. The determined individual surety has the
ability to mount a focused and lengthy effort to get the
contracting officer to accept the proffered assets. Today, the
typical contracting officer has too many contract award and
contract administration actions on-going simultaneously and too
few supporting staff resources. To get forward motion on the
award of a particular construction contract for the benefit of
the ultimate Federal user, the contracting officer may be
willing to acquiesce, especially if the exposure to the
Government is relatively small due to the small likely contract
award value of the contract, especially in this era of
contracts valued in hundreds of millions of dollars, if not
billions. A payment bond from an individual surety providing
only illusory protection can, however, easily result in a
catastrophic loss to a small subcontractor or supplier on the
``small'' contract.
Given the Government's responsibility as steward of the
taxpayers' money, as well as the practical limitations of the
current FAR-based system for the protection of subcontractors
and suppliers, ASA believes that Congress needs to enact
remedial legislation to deter those individual sureties who
succumb to the temptation to misrepresent the assets being
pledged in support of the surety bonds that they are
furnishing.
H.R. 776, the ``Security in Bonding Act,'' is such a
targeted Congressional intervention. It simply applies to
individual sureties the same standards currently permitted by
the Miller Act (31 U.S.C. 9303) for a prime contractor choosing
to furnish ``eligible obligations'' rather than a surety bond.
When H.R. 776 becomes law, Federal contracting officers will be
able to have certainty that the assets pledged by an individual
surety are real, sufficient in amount, and readily available
should any payment claims arise. For ASA, construction
subcontractors and suppliers will be able to have confidence
that the bonds furnished by the individual surety will provide
the payment protection of last resort intended by the Miller
Act.
Require Surety Bonds on Public-Private Partnerships (P3)
ASA strongly urges Congress to take steps to assure that
contracts with construction components financed by public-
private partnerships (P3) that include Federal support, provide
payment protections to subcontractors and suppliers at least as
effective as those provided by the Miller Act on construction
undertaken directly by a Federal agency or by the so-called
Little Miller Acts of the various States for construction
projects undertaken by a state agency. The reality of
construction contracting, whether public or private, has been
for many, many years that subcontractors do the vast
preponderance of the work. The use of a P3 does not change this
practical reality. The successful undertaking and timely
completion of a P3, with substantial contributions of public
resources, including Federal assets or financial support, will
require that construction subcontractors and suppliers be fully
and timely paid, in accordance with the contract, for work
performed.
Given the unpredictable diversity of public-private
partnerships, subcontractors and suppliers too frequently
encounter a dangerous void in essential payment protections for
work performed. The severe risk inherent in the absence of
reliable payment protection can only reasonably be expected to
increase costs for the overall construction project being
undertaken through the public-private partnership as
subcontractors and suppliers seek to accommodate the increased
risk or even completely deter bidding by the most skilled
subcontractors and suppliers, whose resources can be directed
at projects in which solid payment protections are available.
Exempt the Miller Act from Inflation Adjustments
Finally, ASA urges the Congress to add the Miller Act to
procurement thresholds exempted from the periodic inflation
adjustments required by 41 U.S.C. Sec. 431. In 2010, the
Federal Acquisition Regulatory Council increased the threshold
for payment security for subcontractors and suppliers on
Federal construction contracts from $100,000 to $150,000, thus
leaving many more small business subcontractors and suppliers
exposed to the risk of non-payment. Each additional increase in
the threshold will expose even more small business
subcontractors and suppliers to non-payment for work performed.
Chairman Hanna, thank you for so promptly scheduling this
legislative hearing. ASA urges equally prompt, and favorable,
action by the Full Committee on Small Business, under the
leadership of Chairman Graves.
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INTRODUCTION
Chairman Hanna, Ranking Member Meng, and members of the
committee, thank you for holding this hearing examining
barriers to the maximum practicable utilization of small
business construction and architecture and engineering
contractors. Further, thank you for the opportunity for the
Design-Build Institute of America to submit this testimony.
The Design-Build Institute of America (DBIA) is an
institute of leaders in the design and construction industry
utilizing design-build and integrated project delivery methods
to achieve high performance projects. DBIA promotes the value
of design-build project delivery and teaches the effective
integration of design and construction services to ensure
success for owners and design and construction practitioners.
DESIGN-BUILD
Design-build is an integrated approach that delivers design
and construction services under one contract with a single
point of responsibility. Owners select design-build to achieve
best value while meeting schedule, cost and quality goals. Best
value ensures competitive proposals from industry that
considers many factors as opposed to simply awarding contracts
to the cheapest offer.
Design-build provides benefits for both owners and
practitioners. Owners experience faster delivery, cost savings
and better quality than other contracting methods. Dealing with
a single entity decreases owners' administrative burden and
allows them to focus on the project, rather than managing
separate contracts. The approach also reduces their risk and
results in fewer delays, disputes, claims and subsequent
litigation for all parties involved.
Practitioners reap benefits since an integrated team is
fully and equally committed to controlling costs. Like owners,
the design-builder benefits from a decreased administrative
burden because the communication between designers and builders
is streamlined.
When DBIA was founded 20 years ago design-build authority
for government agencies and municipalities was very limited. In
fact, at the state level design-build authority for government
projects was only authorized in two states. Today, design build
is permitted in every state in some fashion, and the number of
projects has doubled in the last five years. We've had similar
success at the federal level with many key agencies using
design-build in more than 75% of their projects, including the
Army Corps of Engineers, State Department, Navy Facilitates
Engineering Command, and Bureau of Prisons.
DESIGN-BUILD DONE RIGHT: QUALIFICATIONS BASED SELECTION
(QBS)
DBIA supports Qualifications Based Selection as a highly
effective way of procuring a design-build services and ensuring
project success, and encourages Congress to approve Design-
Build QBS for all federal projects.
QBS is a method of selecting a design-build team for a
given project in which the final criteria for selection are
qualifications and demonstrated competence. price and cost are
important factors, but under QBS they are considered when they
should be, during contract negotiations, not during design-
build team selection. Under QBS, the focus of the project and
the entire team is on quality and value. It rewards teamwork,
innovation, and proactive problem solving and ultimately the
tax-payer is the winner.
In other words, QBS provides a competitive environment
where offerors must compete on quality, past performance,
schedule, experience, etc., and not just ``low bid''.
Successful design-builders must be ``good'' and provide a
competitive price to the government.
QBS exists in federal law today, also known as the Brooks
Act (Public Law 92-582), but is limited to the selection of
architects and engineers for federal projects. Further, full
Design-Build QBS authority exists in three states, Florida,
Arizona and Colorado, and several more have the authority in
some way. QBS has proven to be a success on the state and
federal levels, is strongly supported by architects and
engineers who operate under it, and should be expanded to
include design-build teams.
DBIA is actively supporting federal Design-Build QBS
legislation. We will have draft legislation during this
Congress, and look forward to working with the members of this
committee on its passage.
DESIGN-BUILD DONE RIGHT: BEST VALUE SELECTION (BVS)
Single-Step vs. Two-Step
Federal regulation allows for the use of design-build
project delivery, including both a single-step process and a
two-step process. In the single-step process a request for
proposals (RFP) is issued for a project. It is issued to an
unlimited number of participants and any and all parties can
respond with a proposal. A selection process is then used to
determine the proposal that is best from both a cost and
technical perspective.
In a two-step process a request for qualifications (RFQ) is
issued first, and any and all participants then respond with a
statement of qualifications. The RFQ response is a simple and
inexpensive procedure where the design-build teams submit
documents detailing their past performance, staff resumes, and
examples of similar projects they've completed. Based on these
statements a short list of three to five of the most qualified
respondents is determined.
The RFP is then issued only to these ``shortlisted'' firms
which then develop full proposals including cost, schedule, and
technical response. (This should not be confused with Design-
Build QBS discussed above.)
As part of BVS, DBIA supports stipends paid to the
unsuccessful shortlisted proposers. These modest payments--
usually between 0.01 percent and 0.25 percent of the project
budget--help defray costs of proposal development incurred by
design-build teams. Consistent with OMB Circular No. A-11
(2006), stipends enhance competition and increase value by
generating market interest and encouraging design-build teams
to spend the time, money, and resources to provide creative,
innovative, and complete proposals.
Two-Step Is Better For Small Business
In a single-step process, all design-build teams are asked
to spend time and resources creating detailed proposals
immediately, as opposed to simply submitting their
qualifications. Due to the high costs of this first step--often
reaching hundreds of thousands of dollar or even millions--many
companies decide not to apply since their chances of final
selection are so low. Small businesses in particular do not
have the luxury to spend limited resources to apply for a
project when the chance of being chosen may be less than ten
percent.
If small businesses were only required to initially provide
their qualifications under the two-step process, as opposed to
a full proposal under the single-step process, many more would
be able to participate. This is not only good for American
small businesses, it also benefits the American taxpayer, and
federal government who can be sure the most qualified companies
were not scared away from a project simply due to the costs and
risks of applying.
Best Value Selection Recommendations
1) To limit the use of single-step, DBIA joins with other
organizations, including the American Institute of Architects
testifying here today, and recommends that Congress limit the
use of single-step design-build to projects that are less than
$750,000. This threshold is based on U.S. Army Corps of
Engineers guidance which was issued in August 2012. Further, it
will assure that for larger more complex projects risks for all
firms are held in check, thus allowing small firms a greater
chance to compete in the marketplace.
2) We recommend Congress amend current law to encourage
true short-listing of finalists in two-step design build. Under
current law, agencies are required to shortlist between three
and five teams. However, the law gives the agencies flexibility
to increase the number of finalists if such an increase is ``in
the Federal Government's interest and is consistent with the
purposes and objectives of the two-phase selection process.''
This exception is proving to be too broad and agencies
regularly ``shortlist'' far more than five finalists. DBIA
would like to work with this committee on appropriate
legislative language to address this problem.
CONCLUSION
Thank you again for the opportunity to submit this
statement. We look forward to working with this committee on
the issues discussed and are ready to answer any questions you
may have.
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The Surety & Fidelity Association of America (SFAA) is a
District of Columbia non-profit corporation whose members are
engaged in the business of suretyship. SFAA member companies
collectively write the majority of surety and fidelity bonds in
the United States. The SFAA is licensed as a rating or advisory
organization in all states, as well as in the District of
Columbia and Puerto Rico, and it has been designated by state
insurance departments as a statistical agent for the reporting
of fidelity and surety data.
H.R. 776 is a key tool in eliminating fraud, increasing the
effectiveness of federal procurement and helping small
contractors obtain government contracts
Every contractor that bids and obtains a federal
construction contract must secure its obligations under that
contract. The most common form of security is a surety bond
from a surety insurance company.
Over the years what originally may have been a viable
option to a surety bond for securing obligations to the federal
government has not kept up with the changes in federal
procurement and the economy. H.R. 776 would ensure that all
security pledged to the federal government to secure an
obligation is functionally equivalent, whether such assets
pledged in lieu of a corporate surety are from the contractor
or an individual surety on behalf of the contractor.
Likewise, since the early 1970s, the Small Business
Administration has operated its Surety Guarantee Program (SBA
Bond Program) to assist small and emerging contractors obtain
bonding in order to be able to bid on federal construction
projects. This has been especially true in times of economic
downturn when bonding sometimes becomes more scarce and
difficult to obtain. This program needs updating to keep up
with the changes in procurement. H.R. 776 would increase the
maximum bond guarantee from the SBA Bond Program to the
sureties from 70% to 90% in the Preferred Surety Program. This
will help the SBA Bond Program to reach its full potential in
this new economy.
Background on Individual Sureties in the Federal
Procurement Process
Under current federal law and regulations, construction
contractors for the federal government have three options for
securing their obligations. They can obtain a surety bond from
an insurance company that is vetted and approved by the U.S.
Department of Treasury and licensed by a state insurance
regulator. In lieu of a bond, contractors can pledge and
deposit assets with the federal government until the contract
is complete. Only assets backed by the federal government can
be pledged. The third option permits individuals to pledge
their assets to back the contractor. These individuals are
called ``individual sureties.'' Only individual sureties are
permitted to pledge assets not backed by the federal
government. In fact, individual sureties are allowed to pledge
stocks, bonds, and real property, and also are not required to
deposit such assets with the federal government for the
duration of the contract. All individual sureties need to give
federal contracting officers is a document listing the assets
and their value and representing that theya re pledged in an
escrow account to secure the contractor's obligations.
The original concept of an individual surety was a person
with sufficient wealth that was willing to pledge his/her
assets as security to the federal government if the contractor
was awarded a federal construction project. Such individual
sureties knew the contractor that they were backing personally.
The individual surety many times was relative or close
acquaintance of the contractor. All the individual surety
needed to do was provide a sworn affidavit, verified by another
party, that his or her net worth was sufficient to cover the
contractor's bond obligations.
As the economy developed, the vast majority of bonds were
provided by corporate insurers, and people who were providing
individual surety bonds based on sworn affidavits began to do
so for profit. They were individuals who were in the business
of being an individual surety and were unknown or unrelated to
the contractor providing the bond. Increasingly, the affidavits
of such individual sureties were backed by insufficient and
illusory assets and claims on the bond went unpaid. In 1990,
the Federal Acquisition Regulation (FAR) was amended in an
attempt to correct these abuses. The FAR now requires that
individual sureties pledge specific assets in an escrow account
at a federally insured financial institution equal to the penal
amount of the bond. The affidavit that individual sureties now
provide must include a specific description of the assets
pledged, and represent that they are not pledged for other
bonds. These rules, however, have not solved the problem of
illusory and insufficient assets.
Why H.R. 776 is Needed Now
The individual surety concept has evolved over time from an
uncompensated individual who was known to the contractor into
an independent third party who agrees to post assets for the
contractor for profit. While it may have made sense decades ago
to permit individual sureties to post a variety of assets--real
estate, stocks, bonds--it no longer makes sense in the current
context of individual sureties as persons unknown to the
contractor who pledge assets that are often non-existent or
hard to value, fluctuate in value or are impossible to
liquidate to pay claims. As noted above, in 1990, the FAR was
amended to tighten the requirements for assets pledged by
individual sureties in response to fraud. Those amendments did
not solve the problem. The assets that individual sureties can
pledge to the federal government continue to be problematic.
Contracting officers today cannot enforce the existing
requirements. They are presented lists of assets pledged that
include assets that are not in an escrow account, are hard to
verify, hard to value, that fluctuate in value, and that would
be hard to liquidate if needed upon default. It is often
difficult to determine whether the individual surety actually
owns the assets, and whether the individual surety is pledging
the assets for just the project in question or whether the same
assets have been pledged for many projects in different federal
agencies. This remains a significant problem in federal
construction projects.
After one individual surety filed for bankruptcy and the
United States asked the court to declare his debts to it non
dischargeable, the court found, ``The Debtor knew that he was
pledging the same properties as bond collateral multiple times,
and yet he patently denied doing so on each Affidavit . . . the
Debtor repeatedly pledged property he did not own in support of
his surety bonds . . . Moreover the Debtor made those false
statements in order to induce the United States to accept him
as a surety.'' (United States v. Sears (In re Sears), Case No.
09-11053, Adv.Proc.No. 09-1070 (Bankr.S.D.Ala. February 16,
2012)).
Under H.R. 776 federal contracting officers no longer will
have to attempt to determine whether the assets that individual
sureties pledge exist, are owned by the individual surety, and
are worth the actual value claimed. Just like the assets that
the contractor must pledge, the assets that individual sureties
pledge will have to be eligible obligations as determined by
the US Treasury, and handed over to the federal government and
held and scrutinized in the same manner.
Why Congress Should Act Now
The general contractor on federal construction projects is
required to provide performance and payment bonds for the
protection of the taxpayers and subcontractors, suppliers and
workers on the job. If the general contractor's bonds are
backed by supposed assets of an individual surety that in fact
do not exist, are difficult to verify, or are not readily
convertible into cash to pay the obligations of the general
contractor in case of default, everyone on the project is left
unprotected. Experience has shown that if the assets pledged
are uncollectible, subcontractors, suppliers, and workers on
the job are left with no payment remedy if the contractor fails
to pay them. These potential claimants cannot place a lien on
public property or seek redress from the federal government for
not obtaining a meaningful bond. The federal government is left
with unfunded expenses to complete the construction projects
and the persons who furnished labor and materials are left
unpaid.
For example, see judgments entered in U.S. for the use of
Fuller v. Zoucha, C.A. No. 2:05-cv-325 (E.D. Cal.); U.S. for
the use of Norshild Security Products LLC v. Scarborough, C.A.
No. 8:09-cv-1349 (D. Md.); and United States v. Sears (In re
Sears), Case No. 09-11053, Adv.Proc.No. 09-1070 (Bankr.S.D.Ala.
February 16, 2012).
Under federal law and regulations, a contractor pledging
assets directly to the federal government is subject to far
more stringent rules than an individual, acting for profit, who
pledges his or her own assets to back the contractor for a fee.
Major contracting groups support H.R. 776 because it would
create clarity and certainty in any collateral given to the
federal government. There would be either a surety bond from a
croporate surety vetted by the U.S. Treasury Department to do
business with the federal government and licensed by a state
regulator, or collateral provided to the designee of the
Secretary of the Treasury by a contractor or individual surety
in a readily identifiable form and value. All such collateral
would be deposited with and vetted by the designee of the
Secretary of the Treasury (currently the Federal Reserve Bank
of St. Louis).
The uncertainty of the current system increases the cost to
the federal government. First, individual sureties charge more
for bonding than corporate sureties. Corporate surety rates are
regulated by state regulators. No one regulates individual
sureties. Second, if a contracting officer rejects an
individual surety bond the resulting bid protest is costly and
delays the project. Of course there also is the cost of
attempting to track down and liquidate an asset if a claim must
be made on the bond. This holds true for claimants under the
payment bonds as well.
Individuals and small businesses working on a federal
construction project--either as subcontractors, suppliers, or
workers on the job--have no control over the general
contractor's choice of security provided to the federal
government, but they suffer the most harm financially if the
provided security proves illusory. The result of H.R. 776 is
that laborers, subcontractors, and suppliers on federal
construction projects will know that adequate and reliable
security is in place to guarantee that they will be paid.
Why H.R. 776 Makes Sense
H.R. 776 is just common sense. The security that stands
behind every federal contractor's obligations to the federal
government should be governed by the same rules. There should
be either a corporate surety bond in place from a company
approved by the U.S. Treasury and licensed by a state
regulator, or assets with readily identifiable value pledged
and relinquished to the federal government while the
construction project is ongoing. The same rules should apply to
the individual sureties that apply to any federal contractor
that is securing obligations to the federal government.
It does not make sense to permit an individual surety to
post collateral that the contractor could not post on its own
behalf. H.R. 776 would require the collateral that the
contractor can post and that the individual surety can post on
its behalf, to be equivalent. If individual sureties have the
assets they claim, they could easily provide U.S. debt
obligations and turn them over to the contracting officer for
deposit for the duration of the construction project. The
individual would earn interest on that obligation while it is
in the custody of the federal government.
H.R. 776 makes the government procurement process more
effective and efficient in a way that saves government
resources and taxpayer dollars, reduces fraud, and will have no
additional costs.
Background on the SBA Surety Bond Guarantee Program
The SBA Bond Program provides surety bond companies with
partial repayment of losses from bonds that they would not
ordinarily write for less qualified small and emerging
contractors. The purpose of the SBA Bond Program is to obtain
surety bonds for small and emerging contractors so that they
can develop a track record of success. As these contractors
grow and establish themselves, they can already have a
relationship with a surety company. This surety company then
can provide the bonds they need as government contractors,
either with or without the SBA's bond guarantee. The goal of
the SBA Bond Program is to graduate contractors into the
standard surety market, making the SBA bond guarantee funds
available for new small and emerging contractors.
It is essential to understand why this is important. For
most public construction projects, contractors are required to
provide surety bonds to the government. These bonds guaranty
that the contractor will perform the work and will pay the
subcontractors, suppliers and workers on the project. Since the
surety will be required to pay if the contractor cannot perform
its contract and pay its bills, a surety carefully examines the
contractor's capability, experience and financial situation
when determining whether or not to put its own financial
wherewithal behind the contractor. Establishing a track record
and building capital is a challenge for small and emerging
contractors. Therefore, in order to assist these small
businesses to obtain work on public projects, the federal
government determined that it would act as a reinsurer for
sureties willing to write bonds for these contractors.
As the SBA Bond Guarantee Program has evolved, there are
two plans under which sureties can participate in the Program.
The Prior Approval Program (Plan A) was the original SBA bond
guaranty program. In this program, the surety must obtain SBA
approval for each bond prior to writing the SBA guaranteed
bond. The SBA maximum indemnification of the surety's loss as a
result of a bond claim in Plan A is 80%, and 90% for bonds
written for socially and economically disadvantaged contractors
and bonds written for contracts under $100,000. The second
program is the Preferred Surety Bond Program (Plan B). Under
this plan, sureties apply to participate, submitting
information up front on their underwriting practices and
financial strength. Once a surety becomes a participant in Plan
B, it is given an aggregate limit of bonds that it can write
within the Program. As long as the surety complies with all of
the requirements of Plan B, all bonds written within the
Program qualify for reimbursement of losses. The SBA does not
review or approve each individual bond before it is written and
the guarantee attaches. In Plan B the surety receives a maximum
70% indemnification.
Why H.R. 776 is Needed
Over the years, surety participation in the SBA Bond
Guarantee Program has ebbed and flowed. One primary driver is
the economy, which includes the profitability of the surety
industry and the appetite for bonding small and emerging
contractors. The SBA's current data shows that most of the
bonds it guarantees comes from the Prior Approval Program,
which has the higher bond guarantee. In the past in better
economic times, the Preferred Surety Program accounted for over
50% of SBA Bond Program's premiums, which now is less than 15%.
In this economy, taking this additional risk for such a low
guarantee is not fiscally sound.
Another factor of change in participation in the SBA Bond
Program is the administration of the program. Increases in the
SBA's fees to sureties for participation and some internal
problems have discouraged some sureties from participation in
the SBA Bond Program, and caused others that do still
participate to limit their participation. In recent years,
however, the SBA has undertaken incremental efforts to improve
the functioning and the appeal of the Program, such as
improving its application process and procedures, its response
time to claims and expanding the Program's reach to include
design-build contracts. Most recently, the SBA announced a rule
to fast track bonding applications for $250,000 or less. The
bottom line still is that the SBA Bond Program no longer makes
financial sense to many sureties.
The examples of the increases in the SBA's loan programs
for small businesses demonstrates that the increase in the
maximum SBA bond guarantee under H.R. 776 would go a long way
in making participation in the SBA Preferred Surety Program
more attractive again. In the 111th Congress, the SBA's
appropriations bill included $125 million to continue
enhancements made to the SBA's 7(a) and 504 loan programs in
February 2009. The SBA was allowed to eliminate fees on 7(a)
and 504 loans, the maximum government guarantee to banks that
make these loans was increased to 95% and the maximum loan that
could be guaranteed was increased from $2 million to $5
million. These enhancements to the loan program led to an
immediate nationwide increase in lending.
In June 2010, the SBA reported that its weekly dollar
volume of SBA-backed loans had risen 90% in its 7(a) and 504
loan programs during the period of Feburary 17, 2009, until
April 23, 2010. In October 2011, SBA reported that in fiscal
year 2011, the SBA supported $30.5 billion (61,789 loans), a
return to pre-recession levels.
It is clear that an increase in the guarantee amount and
the reduction or waiver of fees increases participation in
government guarantee programs. Such reforms should be
implemented in the SBA Bond Program to provide a boost to the
bonding program.
Why Congress Needs to Act Now
The SAA believes that the SBA Bond Program is vital to the
growth of small and emerging contractors in America. One, well-
run Surety Bond Program assures consistency of participation
requirements and administrative procedures. Without the SBA
Bond Program, many federal agencies may initiate their own
program to assist small and emerging contractors. Some already
have done so. States also have begun this process. Duplicative
efforts among federal and state agencies waste time and
resources that should instead be used to help small businesses.
Congress has and continues to express its support for the
SBA Bond Program. After Hurricane Katrina, Congress first
looked at temporary increases in the maximum amount of the bond
that SFAA is permitted to guarantee. The SBA's maximum bond
guarantee was increased for two years under the American
Recovery and Reinvestment Act of 2009. Just last year, Congress
enacted legislation that permanently raises the maximum amount
of the bond that the SBA can guarantee from $2 million to $6.5
million and prevents the SBA from unraveling bond guarantees
made with the SBA's prior approval. Another new provision
permits the SBA to guarantee a bond up to $10 million if a
contracting officer of a federal agency certified that such a
bond guarantee is necessary.
The President also recently issued a waiver from rescission
from the unobligated funds from the American Recovery and
Reinvestment Act (ARRA) for certain programs, including the SBA
Bond Guarantee Program. Currently, $15 million in funding
remains unobligated for the Surety Bond Guarantees Revolving
Fund. The amount will remain in the Program. The President's
order states that the retention of these unobligated balances
will allow the executive agencies to continue to execute
projects vital to the national interest in a fiscally
responsible manner.
Enactment of H.R. 776 is another logical and necessary step
in the process towards the SBA Bond Program reaching its
potential.
Why H.R. 776 Makes Sense
H.R. 776 would enhance the SBA Bond Program just the way
the SBA loan programs were enhanced when needed in the economic
downturn. This can be done right now for the SBA Bond Program
with no additional cost. It does not make sense that the SBA
Bond Program should be operating at less than full capacity
now, at a time when small and engineering contractors need help
all the more. Congress has acted to assist small and emerging
contractor obtain the needed loans for construction projects
and it only makes sense to enhance the SBA Bond Program to
assist them in like manner with the required bonding as well.