[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

              Available via the GPO Website: www.fdsys.gov




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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

                              ----------                              


                         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.
---------------------------------------------------------------------------
    \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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    [GRAPHIC] [TIFF OMITTED] 81199.054
    
    [GRAPHIC] [TIFF OMITTED] 81199.055
    
    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.
[GRAPHIC] [TIFF OMITTED] 81199.056

    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.

                                 
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