[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
.
CONTRACTING AND THE INDUSTRIAL BASE
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
FEBRUARY 12, 2015
__________
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Small Business Committee Document Number 114-001
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
TOM RICE, South Carolina
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAAZQUEZ, New York, Ranking Member
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
Kevin Fitzpatrick, Staff Director
Stephen Dennis, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velaazquez............................................ 2
WITNESSES
Mr. Randall D. (Randy) Gibson, President, Whitesell-Green, Inc.,
Pensacola, FL, testifying on behalf of the Associated General
Contractors of America......................................... 3
Mr. James P. Hoffman, PE, President, Summer Consultants Inc.,
McLean, VA, testifying on behalf of the American Council of
Engineering Companies.......................................... 5
Mr. John McNerney, General Counsel, Mechanical Contractors
Association of America, Rockville, MD.......................... 6
Mr. Andrew Hunter, Director, Defense-Idustrial Group and Senior
Fellow, Center for Strategic and International Studies,
Washington, DC................................................. 8
APPENDIX
Prepared Statements:
Mr. Randall D. (Randy) Gibson, President, Whitesell-Green,
Inc., Pensacola, FL, testifying on behalf of the Associated
General Contractors of America............................. 22
Mr. James P. Hoffman, PE, President, Summer Consultants Inc.,
McLean, VA, testifying on behalf of the American Council of
Engineering Companies...................................... 42
Mr. John McNerney, General Counsel, Mechanical Contractors
Association of America, Rockville, MD...................... 50
Mr. Andrew Hunter, Director, Defense-Industrial Group and
Senior Fellow, Center for Strategic and International
Studies, Washington, DC.................................... 60
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
The Design-Build Institute of America (DBIA)................. 69
The National Association of Surety Bond Producers (NASBP) and
The Surety & Fidelity Association of America (SFAA)........ 74
CONTRACTING AND THE INDUSTRIAL BASE
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THURSDAY, FEBRUARY 12, 2015
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:30 a.m., in Room
2360, Rayburn House Office Building. Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, Gibson, Radewagen,
Velaazquez, Chu, Hahn, Meng, Adams and Lawrence.
Chairman CHABOT. Good morning. While I am beginning my 19th
year as a member of the Small Business Committee, this is my
first hearing as chairman. In that capacity, I look forward to
working with my friend and colleague, the ranking member, Ms.
Velaazquez, and all of my colleagues on both sides of the aisle
in an effort to improve the plight of American small
businesses. I am particularly pleased to see that we will begin
that endeavor today by discussing a subject that has much
promise for small businesses and taxpayers alike, federal
contracting reform.
As you know, the government has a goal of awarding at least
23 percent of federal prime contract dollars to small
businesses, and in Fiscal Year 2013, we met that goal for the
first time in many years. Early indications are that we met the
goal again last year. However, it is not enough to simply meet
the goal; we have to focus on why Congress created those goals
in the first place.
The goals exist as a tool. They are intended to make sure
we have a broad spectrum of small businesses working with the
government across industries. Having a healthy small business
industrial base means the taxpayers benefit from increased
competition, innovation, and job creation. It also means that
we can securely support programs crucial to our national
defense. The percentage of dollars awarded to small businesses
is a good measure of success, but it is not the only measure.
Indeed, it appears that over the last four years, while the
percentage of dollars being awarded to small businesses was
increasing, the number of contract actions with small
businesses fell by almost 60 percent. At the Department of
Defense, the number fell by almost 70 percent. The size of the
average individual small business contract action increased by
230 percent during that same period, and by nearly 290 percent
at DoD. These statistics are all alarming in their own way, but
one of the more clear cut and disturbing figures is that there
are over 100,000 fewer small businesses registered to do
business with the Federal Government than there were in 2012.
These data points suggest we have a problem with our small
business industrial base.
Today's witnesses are going to address specific
recommendations to improve the competitive viability of our
small business contractors. This is only the first of a series
of Full Committee and Subcommittee hearings we will be having
on this topic. As chairman, I expect that the Committee will
actively pursue ways to increase opportunities for small
businesses to access capital and contracts, while removing
barriers to small business success. And I am quite confident
that our Subcommittee chair, Mr. Hanna, and his Subcommittee on
Contracting and Workforce, will be thoroughly exploring this
issue in the very near future. And I look forward to working
with each of you and want to welcome our witnesses here this
morning.
I now would yield to the ranking member for the purpose of
making an opening statement.
Ms. VELAAZQUEZ. Thank you, Mr. Chairman.
For several decades now, the federal government has looked
to the private sector to provide services and supplies for its
day-to-day operations. As such, a vibrant industrial base has
become essential to the U.S. economy and our national security.
It comes as no surprise to those in this room that small
businesses are at the heart of the supply chain. With a strong
presence in a variety of different industries, from
construction to manufacturing, small businesses continue to
play a vital role in providing our government with goods and
services. In order for this sector to continue its resurgence,
we need to ensure that small businesses are able to compete
both globally and here in America.
Here at home this means ensuring that small firms can gain
access to the nearly $500 billion federal procurement
marketplace. Numerous policies and protections have been put in
place to ensure their continued participation in this arena.
This includes goals, set-aside programs, and the assignment of
federal personnel to work on behalf of small contractors. Many
of these initiatives have evolved over the years to reflect the
changing needs of small firms. In many regards, these efforts
have paid off as small businesses last year won nearly $100
billion in awards. However, it appears that we have stalled,
and in many ways the goal is becoming a ceiling rather than a
floor.
And with regard to set-aside programs, we continue to see
over and over again non-small businesses gaining access to
small business awards, whether it is HUBZone, service disabled
veterans, or 8A awards, we need stronger protections to keep
bad actors out of the federal marketplace or trying to gain
access to federal contracts that were designed for small
businesses in the first place.
Another trend is occurring that may also impact small
contractors. Data shows that the average contract size is
increasing. On first take, this appears to be promising as
larger contracts might be more profitable for small companies.
However, it might suggest that more contracts are being
consolidated, resulting in fewer opportunities for small
businesses. I am particularly interested in the witnesses'
perspective on this during today's hearing.
What is important for this committee to keep in mind is
that these developments are part of a bigger picture, which is
that the federal procurement marketplace is always evolving.
Whether it is sequestration, reductions in federal procurement
staff, or the rise of multiple award contracts, there will
always be new issues for small businesses to overcome. And
against this backdrop, we must ensure small businesses are not
left behind and that procurement laws evolve with this changing
landscape.
During today's hearing, I look forward to learning about
the challenges facing small contractors and possible solutions.
Doing so is not only essential for small firms and our nation's
industrial base, but the economy overall. Small firms bring new
ideas to the table which in turn generate new jobs and even new
industries. Taken together, this is a key part of what has made
the U.S. the leader in today's economy.
I thank all the witnesses for being here today, and I yield
back the balance of my time. Thank you, Mr. Chairman.
Chairman CHABOT. Thank you. The gentlelady yields back. And
if Committee members have opening statements prepared, I would
ask that they submit them for the record.
And I would like to take just a moment to explain the time
rules that we operate under here, which is the same that the
other Committees do. It is the five-minute rule. You will have
five minutes to testify. We will have five minutes, each of us,
to ask questions. We even have a lighting system set up for
that. The green light will come up. You can talk for four
minutes. The yellow light comes on to let you know you have one
minute to wrap up. When the red light comes on, we would ask
that you try to terminate your testimony as close to that as
possible. So we give you a little leeway, but not much. I
appreciate your cooperation.
And I will now introduce our first witness, who is Randall
Gibson--or Randy Gibson, our son's name; not Gibson, but
Randy--who is president of Whitesell-Green, Inc., a general
contractor in Pensacola, Florida. He is also the chairman of
the Associated General Contractors (AGC), Naval Facilities
Engineering Command Committee, and a member of the United
States Army Corps of Engineers Committee. He is testifying
today on behalf of AGC.
We thank you for being here, and you are recognized for
five minutes.
STATEMENTS OF RANDALL D. GIBSON, PRESIDENT, WHITESELL-GREEN,
INC.; JAMES P. HOFFMAN, PRESIDENT, SUMMER CONSULTANTS,, INC.;
JOHN MCNERNEY, GENERAL COUNSEL, MECHANICAL CONTRACTORS
ASSOCIATION OF AMERICA; ANDREW HUNTER, DIRECTOR, DEFENSE-
INDUSTRIAL GROUP AND SENIOR FELLOW CENTER FOR STRATEGIC AND
INTERMNATIONAL STUDIES
STATEMENT OF RANDALL D. GIBSON
Mr. GIBSON. Chairman Chabot, Ranking Member Velaazquez, and
members of the Committee, thank you for inviting the Associated
General Contractors of America to testify on reforms to the
Federal Government's contracting laws important to our
industry.
My name is Randy Gibson. I am president of Whitesell-Green,
Incorporated, a small business based in Pensacola, Florida,
providing general contracting and design-build service to
Department of Defense and other federal agency clients
throughout the Southeastern region of the United States.
Since our founding in 1970, my company has constructed over
400 heavy commercial projects, resulting in nearly one billion
dollars in completed contracts.
While my written testimony covers all the topics for
today's hearing, I will use the time allotted today to address
the need for Congress to (1) prohibit all federal agencies from
procuring construction services through reverse auctions; and
(2) encourage sensitive consideration of past performance
records in joint venture and teaming context.
AGC strongly supports full and open competition for
construction contracts; however, reverse auctions for
constructions services have the effect of turning away
qualified and experienced contractors, especially small
business firms like mine, for a host of reasons. Procurement of
construction services is different than for manufactured goods
like pens and paper. Construction services are complex, most
often requiring the participation of numerous trade
subcontractors and vendors in lower-tier arrangements with the
general contractor. They are project-specific and inherently
variable. And they require a large degree of professional
expertise.
In a reverse auction, nonprice factors of consequence to
the owner, such as quality of relationship, past performance,
scheduling, long-term maintenance, and unique needs are
deemphasized by the process. In a reverse auction, a bidder has
no incentive to offer its best price. Winning bids may simply
be an established increment below the second lowest bid, not
the lowest responsible and responsive price. In a reverse
auction, discipline is difficult to maintain. General
contractors can underbid the contract simply to win the award,
putting the government at significant risk to receive lower
quality construction and even contractor default. This also
exposes subcontractors to risk for nonpayment.
It is my belief that AGC's position on reverse auctions is
shared by other important stakeholders to the procurement
process. The U.S. Army Corps of Engineers, the White House
Office of Federal Procurement Policy, and even the largest
reverse auction vendor to the Federal Government, FedBid, have
all publicly stated that reverse auctions for construction are
not appropriate. Yet, agencies like the Department of Veterans
Affairs, the Department of the Interior, and the General
Services Administration continue to conduct them. Considering
this inconsistency, AGC urges members of this Committee and
Congress to enact a law that prohibits reverse auction
procurement for construction services government-wide.
Turning to the joint venture and teaming issue, AGC and its
members are increasingly finding that federal agencies will
disqualify small businesses from competition when they seek to
partner with another business for the first time. In an
environment where agencies are bundling contracts worth upwards
of $100 million, and specifically setting them aside for small
business, it is often beyond the capacity of a small business
alone to bond and perform such large-dollar projects.
Consequently, small businesses, like my firm, often seek to
partner with other small or nonsmall businesses to win such
awards.
Some federal agencies are not allowing small businesses and
their partners to submit the relevant past experience of each
individual company to prove qualification for the contract.
Rather, agencies demand that the small business and partner
submit only past experience that they have performed together,
or otherwise be disqualified from consideration. This
limitation often prevents the governments from receiving the
benefit of project-specific experiences and resources which the
first-time collaboration of these teams may offer.
AGC strongly supports a sensible legislative solution to
ensure that federal agencies reasonably consider the individual
past performances of construction contractors seeking to joint
venture or team, even if they are teaming for the first time.
Thank you again for the opportunity to testify. I look
forward to answering your questions to the best of my
abilities.
Chairman CHABOT. Thank you very much. And thank you for
staying within the time constraints.
Our next witness is James Hoffman, who is president of
Summer Consultants, Inc., in McLean, Virginia. Prior to
starting with Summer over 22 years ago, Mr. Hoffman served as a
platoon leader and company executive officer in the 317th
Engineer Battalion in the United States Army. He is testifying
on behalf of the American Council of Engineering Companies.
We thank you for being here today. We thank you for your
service, and you are recognized for five minutes.
STATEMENT OF JAMES P. HOFFMAN
Mr. HOFFMAN. Chairman Chabot, Ranking Member Velaazquez,
and members of the Committee, I appreciate the opportunity to
testify before you today about the issues surrounding
contracting and the industrial base.
My name is James Hoffman, and I am the president of Summer
Consultants, a consulting mechanical, electrical, and plumbing
engineering firm located in McLean, Virginia. Summer
Consultants is a small business with 30 employees. Our practice
focuses on the federal market for the past 50 years. My firm is
an active member of the American Council of Engineering
Companies, the voice of America's engineering community. ACEC
oversees over 5,000 member firms, represents hundreds of
thousands of engineers and other specialists throughout the
country, are engaging a wide range of engineering works that
propel the nation's economy, and enhance and safeguard
America's quality of life. Almost 85 percent of these firms are
small businesses.
Design build is a type of construction where engineers team
with industry professionals. There are two forms of design
build--two-step and one-step. Two-step requires the team submit
qualification packages to the contracting officer in the first
round. The contracting officer reviews them and notifies the
teams if they are selected for the second round. At this point,
the design build team develops expensive and detailed plans for
the contractor to bid, generally without any reimbursement.
Industry best practice has three to five finalists in the
second round. In the recent years, there have been more than 10
finalists at some competitions as current law allows the
contracting officer to increase the number of finalists without
limitation. This causes problems for both the industry and for
the government. My firm's marketing risk is inversely
correlated to the number of finalists, and the contracting
officer must review all the proposals and give feedback to each
team member that does not win the project, which is time-
consuming. This issue has driven many, including small
businesses, out of the federal market.
One-step design build creates an even more precarious
environment. One-step allows the owner to solicit complete
proposals from the construction market without a qualifications
review. This forces out small businesses as they cannot spend
dollars on projects where there are too many competitors, many
of which may not have the qualifications for the project. It is
an inefficient process for the Federal Government as it asks
the contracting officer to review multitudes of proposals. This
Committee has been a strong supporter of this issue, and we ask
the Committee to continue to improve the design build market by
supporting the reintroduction of H.R. 2750.
The second issue, the Court of Federal Claims ruling on the
nonmanufacturer rule, poses a challenge for the construction
industry, as it is a service industry that typically did not
have to address this rule in the past. The rule exists to
ensure that a contract for goods is restricted to small
businesses, rather than act as a pass-through for large
entities. The course interpretation would require that any firm
who is a prime contractor be responsible for their
subcontractors' use of small business products, and
potentially, the many different tiers of subcontractors as is
undefined at this time.
The burden on this rule is staggering as I, as a business
owner, would have to take the most conservative view to make
sure that I am complying with the law. We have concerns that
due to the unknown nature of this rule, that we can be
penalized by an overbroad court ruling. ACEC asks the Committee
to work with SBA on language to make sure that construction
services and products continue to be excluded from the rule.
I urge Congress to reintroduce H.R. 2750 and enact it into
law. I also encourage Congress to work with the SBA to limit
the scope of the nonmanufacturing rule on service industries.
These bills can help my firm and other engineering firms to
serve our clients' needs and thrive.
Thank you for the opportunity to participate in today's
hearing, and I would be happy to respond to any questions from
the Committee members.
Chairman CHABOT. Thank you very much for your testimony.
I would now like to introduce our next witness, John
McNerney, who is general counsel of the Mechanical Contractors
Association of America, the MCAA. The MCAA represents about
2,500 firms involved in heating, air conditioning,
refrigeration, plumbing, piping, and mechanical service. We
thank you for your testimony here that you will be giving this
morning, and you are recognized for five minutes.
STATEMENT OF JOHN MCNERNEY
Mr. MCNERNEY. Thank you, Mr. Chabot. Good morning, Ms.
Velaazquez.
On behalf of the 2,500 members of MCAA, thank you very much
for the opportunity to be here. I am general counsel, and I
have been involved in the work of this Committee for several
years now, as have our members. We testified here several times
on the old 3 percent withholding tax on Federal Government
contracts, and we commend your work on that. You were
persistent, and we hope it does not come back again. That was a
big threat to cash flow and prompt payment for all our members.
We also would commend you for your recent activity having a
naming rule for small businesses in prime contract, small
business contracting plans, and allowing those firms some
assurance that they will be selected or have recourse to the
contracting officer if they are not.
Having said that, we also admire your persistence on the
reverse auction rule. The Federal Government lags the private
sector in recognizing just how bad that practice is. So we hope
this time we can pursue that until we get it where it should
be.
The Corps of Engineers Pilot Study on Reverse Auction came
in more than 10 years ago. They studied nine projects, and they
came out with a conclusion in about a 95-page report that said
it was totally unacceptable for low bid awards. But since then
it has been fitful by getting this Congress to do something
about it. Our statement on it is attached to my written
statement. In summary, it says simply this. There is a strong
discipline in the sealed bid, low bid process that protects the
project owner's best interest in well-considered judgments by
its bidders, and all that discipline is lost in the publicly
disclosed price auction with hasty and frenzied judgments
imperiling careful offers and awards.
You know, back in 2004, when this started, a lot of private
sector industries took this up. Most of them have given up the
project, and those who have not have been fired by customers,
fired by the contractors as their customers. And we think that
the persistence of some government agencies to do this is
impairing competition.
So in all, I think there are three problems with the
reverse auction. Number one, it shows that some bad ideas, like
the 3 percent withholding tax, for example, have a habit of
recurring. Projects that are mischaracterized as commodity
purchases then are subject to the lack of discipline of the
sealed low bid, and when construction projects are
misclassified as commodity purchases, the government and the
contractor are deprived of protections and benefits of the many
standards for construction contract clauses that serve to
allocate risk fairly. The unforeseen conditions cause, the
equitable change clause, the prompt payment clause, and some of
the warranty clauses, too.
So in summary on that point, we commend the Committee for
pursuing this and trying to finally implement the Corps'
categorical assessment that this is a bad practice. Nothing has
changed since then that would mitigate that conclusion, so we
look forward to your reintroduction of that bill.
We would also suggest when you do that, that you consider
expanding it Part 15, Negotiated Procurement. And Part 14,
Sealed Bid, is where we are looking at it now, but we
understand that many agencies are going to a species of
negotiated procurement, low priced technically acceptable where
once the team is evaluated it becomes a low bid process. So we
need to legislate those kind of controls into that process. Our
members are having anecdotal evidence that there are selection
abuses in LPT awards as well.
On the individual surety reform, we are fully in support of
the industry consensus. There is no harm and only benefit to
closing the individual surety loophole where there can be
elusory assets and fraud and bad practice there. Your reform
preserves the possibility of individual surety but protects
against the abuses, so we think that can only increase
competitiveness in that market.
And on the nonmanufacturing rule, I talked to my members
and they said they cannot buy a tiller from a small business
company or an air handling unit or mechanical equipment. It is
entirely inapt for our industry.
So with that, sir, I will stop and look forward to your
questions.
Chairman CHABOT. Thank you very much. I appreciate your
testimony.
I would like to yield to the ranking member.
Ms. VELAAZQUEZ. I guess that you started out on the wrong
track today.
Mr. Chairman, it is my pleasure to introduce Mr. Andrew
Hunter. Mr. Hunter is the director of the Defense-Industrial
Initiatives Group and a senior fellow for the International
Security Program at the Center for Strategic and International
Studies here in Washington, D.C. He focuses on issues affecting
the industrial base, including sequestration, acquisition
policy, and industrial policy. Prior to joining CSIS, Mr.
Hunter served as a senior executive at the Department of
Defense, including as chief of staff to Ashton B. Carter and
Frank Kendall, while each was serving as under-secretary of
defense for Acquisition, Technology, and Logistics.
Welcome, Mr. Hunter.
STATEMENT OF ANDREW HUNTER
Mr. HUNTER. Well, thank you, Chairman Chabot, and Ranking
Member Velaazquez. Thank you for the opportunity to testify to
you today about contracting and the industrial base.
I am Andrew Hunter from CSIS, and as mentioned, prior to
being at CSIS, I worked at the Department of Defense under two
undersecretaries of defense for Acquisition. And prior to that,
I spent 17 years working in various capacities in the House of
Representatives. So this is a little bit of a homecoming, and a
happy one.
A major focus of my work at CSIS involves understanding the
evolving partnership between the Federal Government and the
industrial base. This partnership is critical to the successful
execution of the more than $400 billion in federal contracting
that occurs annually. I have a particular focus on how this
partnership is evolving between industry and the Department of
Defense; however, CSIS performs in-depth analysis on data from
all federal agencies, and I will try to keep that hat on today.
The industrial base is important because without it the
Federal Government cannot function. The health of the
industrial base, therefore, is of critical importance to the
nation as a whole. While federal contracting is only a small
portion of the overall economy, it is nonetheless very
important to certain sectors of the economy and the industrial
base, especially those that focus on government-intensive
areas, such as defense, transportation, and healthcare, not
least of great importance to many small businesses.
Contract obligations represent the overwhelming majority of
the federal spending that is received by industry, and
examining the contracting data is essential to understanding
what is happening in the industrial base.
I will briefly summarize some of the chief findings of the
analysis that CSIS has done on this data and try to provide
some context for the discussion today and hopefully for the
Committee's work in this Congress.
Our first central finding is that sequestration is
currently the dominant force in federal contracting. With
repercussions that have been particularly severe in defense
contracting, but also across the board. We are in the midst of
a significant reduction in federal contract obligations that
are affecting every sector of the contracting world in the
industrial base.
Within that overarching story, secondly, there is an
important dynamic going on specific to research and
development. Federal contracting for research and development
performed by industry is particularly challenged under
sequestration, potentially impacting the historical role that
small businesses have played in technology innovation that
Ranking Member Velaazquez referred to in her opening statement.
A great deal of the cutting-edge innovation has its source in
small business. They are frequently incentivized to pursue
innovative technologies that larger businesses do not have the
same incentive to pursue. And that has been important to the
nation over many years.
R&D contract obligations are declining much more rapidly
than overall contract obligations, and we have not reached the
bottom yet, even though we are likely approaching the bottom
for contract obligations overall.
Third, small business contracting is highly sensitive to
changes in the overall federal contracting environment. Small
businesses are likely to be significantly affected therefore by
return to sequestration levels, spending levels in 2016.
Contract obligations with small businesses plunged in the first
year of sequestration, 2013, then happily, but somewhat
unexpectedly, recovered very well in 2014. I believe the
reality for small business in truth is somewhere between the
crisis picture that the 2013 data presents and the relatively
healthy picture that the 2014 data presents. But I suspect that
a return to full sequestration would send us, again, in a
sharply downward directly.
And then lastly, the composition of small businesses
participating in federal contracting has been significantly
reshaped since 2000, which is when a lot of the federal data
started to become widely publicly available contracting data.
And much of this has been the result of policies established in
the Small Business Act. And I mention this to point out that
the future direction chosen by this Committee will shape the
future of small business contracting over the next 10 to 15
years, so it is very important. The work of this Committee is
very important.
And lastly, I just want to emphasize that the continuing,
in some cases increasing complexity of the federal contracting
process referenced by many of my colleagues here, remains the
most significant barrier to entry for firms of all sizes in the
industrial base, particularly small business. And small
businesses are challenged to absorb the overhead required to
successfully navigate through this vast complexity. And I would
say when you are making these decisions, I would suggest that
you tend to err as much as possible on the side of reducing
complexity in all of these approaches.
So thank you, and I stand ready to address your questions.
Chairman CHABOT. Thank you, Mr. Hunter. We thank all the
panel members for their excellent testimony here this morning.
And I will begin with myself with five minutes of questioning.
How can we get more small business construction companies
to compete for federal work as either prime contractors of
subcontractors? And Mr. Gibson, if you do not mind, I will
start with you. And anybody else that would like to weigh in is
welcome to do so.
Mr. GIBSON. Taking from my own experience, sir, as a small
business, I would say the way to invite more firms to get
interested and involved in federal contracting would be to
hopefully take some of the regulations away that sometimes
deter firms from entering the marketplace. And also to enhance
the teaming and partnering ideas that we have been talking
about in my testimony today. Lots of times a firm needs a
mentor or somebody who has been in the federal construction
process. Allowing them to team, show their own qualifications,
share the qualifications of their partner, get involved, learn
the ropes, that would be an opportunity for them to ease their
way into the marketplace.
Chairman CHABOT. Thank you very much.
Mr. Hoffman, did you want to weigh in on that?
Mr. McNerney?
Mr. MCNERNEY. My members would agree with that ability to
partner and team more. My very small members, of which I have
many, do that and they would like to do more of it. And the
idea that all the team members would be evaluated is a good
idea. Any more discerning selection criteria is highly favored
by my members because they prosper when the selection criteria
is high.
Chairman CHABOT. Okay. Thank you.
Mr. Hunter, did you want to weigh in?
Mr. HUNTER. I would just say I think this gets a little bit
to the design build discussion that happened earlier; that the
more you can make it easier for companies to get in the front
door and participate, the better. I think having more companies
engaged in the front end of the process is a good thing, and it
is true that the bid and proposal costs can be one of the major
barriers to entry. I think the trick a little bit in that is
for the government having to evaluate based on a list of
qualifications makes it a little bit hard on the contracting
officer to withstand bid protests. And bid protests are
something that we are seeing has a very pervasive influence
throughout the contracting process. It is driving many more of
the decisions that get made than I think it was ever really
intended to be driving. And so I think sort of that larger
story is playing out in the design bid and the construction
context.
Chairman CHABOT. Okay. Thank you.
Let us see, Mr. Hoffman, I think I will start off with you
on this one. Some would argue that by only having five teams
submit full bids on a design build project we are limiting
competition. Could you explain why the two-step process is
actually pro-competition? Arguably pro-competition?
Mr. HOFFMAN. Yes, sir.
First of all, the first phase of competition is open to
everyone. So everyone is able to participate. And then with
respect to the second step, what we are going to find is that
the most experienced architect, engineers, and construction
contractors are going to step out if there are more than five
construction contractors. So we are going to have less
qualified people participating in federal projects because the
opportunity to win that project with significant investments is
dramatically diminished once you go beyond the three to five
recommended in industry practices.
Chairman CHABOT. Thank you.
And then I will have each of you just address this very
briefly, if you would. If you could just tell us legislatively
what you would like to see us do; if there were one or two
things that we could do that would really make a difference?
Maybe I will start with Mr. Hunter this time and go in the
opposite direction.
Mr. Hunter, if you want to suggest one or two things.
Mr. HUNTER. Yeah. I am going to make a suggestion that may
be slightly hard to implement. But as I mentioned, I think
trying, wherever you can, to reduce complexity in the system is
the way to go.
Chairman CHABOT. I would go with Mr. Gibson's reducing the
regulations basically.
Mr. HUNTER. Yes. And of course, you have to be careful.
Many of these regulations have a history. They exist for a
reason, but I think there are frequently less complex ways to
implement the statute and regulations and to get the same job
done.
Chairman CHABOT. Okay. Mr. McNerney?
Mr. MCNERNEY. Mr. Hunter's comment about the roadblocks and
the complications from bid protests is a good one. And I do not
know how you would legislate that, but our members prefer a
more robust evaluation, a past performance evaluation on
completed contracts, more robust than exists now. If you had
that and more widespread use of the federal awarded past
performance information system, I think would help bolster
selection criteria, exclusions, if you will. Again, I think
that our members on the main would like to see the selection
process be more discerning, and I think that would increase
competition. Some of my members say they will not compete in
the federal market because of not so careful selection
procedures.
Chairman CHABOT. In order to enforce my five-minute rules
against myself, I am going to cut it off at that point. And I
will either talk with you briefly or in a second round or we
will get back to it. But I now recognize the ranking member for
five minutes.
Ms. VELAAZQUEZ. Thank you.
Mr. Hunter, in evaluating the awards to small businesses
over the last few years, there seems to be a trend in which the
dollar value of small business contracts has increased. What
effect does this concentrated dollar value have on the small
businesses' industrial base?
Mr. HUNTER. It is a very interesting point. As someone who
spends a lot of time analyzing contract data, it would be great
if we could dig deeper into that and understand. Is it because
the locus of where the awards are happening within the space of
federal contracting? In other words, is it because it is more
construction happening and less in the world of supplies?
Because that can affect contract size. Construction projects
are going to be bigger than most commodity purchases.
But having not carefully analyzed it at this point, my
suspicion is that it is not that; that it is, in fact, that the
average awards are growing bigger across the board, because our
data shows that small businesses are generally succeeding in
the areas where they have always succeeded in the contracting
process. And I do not know if that is being driven by the way
the government is putting out solicitations and proposals. That
would generally probably be the first place to look.
Ms. VELAAZQUEZ. Do you think that bundling has a lot to do
with that?
Mr. HUNTER. It certainly could. It could also be that some
of the smaller purchases which may have historically been done
with small businesses, if they are now being done with a
purchase card at Walmart, you know, that may be driving some of
that. Smaller business and directions away from small
businesses. And I think if it is an issue of interest, having
someone take a deeper look at that, those trends, would be
good.
Ms. VELAAZQUEZ. Thank you. Thank you.
Mr. McNerney, during its pilot program of reverse auction,
the Corps found that the process might move too quickly for
competitors to actually reassess their costs or the way they
will actually do the work. There have even been reports in
which the buyer had to step in to prevent a supplier from
meeting a price that would harm the company. Do you believe
that contractors are actually able to perform the contract at
the price they beat or are some of them putting the viability
of their company at risk?
Mr. MCNERNEY. All of that, Ms. Velaazquez. I read the
report on the subway down here and the Corps of Engineers says
all of that very empathically. And I talked to some of my
members yesterday who were involved in--the pharmaceutical
industry was a big adopter of this back in 2002-2003. I will
not name the company, but I asked him, I said, `` Did you
continue to bid that work as either prime or sub?'' And he
said, `` No, I fired that customer.'' Because when the hasty
judgments--the first Corps of Engineer Pilot Study ended up in
a bid protest because the prime contractor who won said he did
not mean to push the button the last time, ironically. So that
tells you, what is that, an error in judgment or a clerical
error?
Ms. VELAAZQUEZ. Do you believe then that some of the same
concerns that we see in construction reverse auctions will
exist in other industries?
Mr. MCNERNEY. I think it is very likely. You know, the
Corps of Engineers report said that for commodities it can be
done well and it can help you find the lowest price. But the
hearing you held last year with the VA did not prove that out.
Ms. VELAAZQUEZ. Right. Okay, thank you.
Mr. Hunter, the contribution of small businesses to R&D has
long been recognized as critical to our economy and national
security as these firms have developed some of the most
innovative technology. You noted in some areas of your
testimony the decline in R&D contracting at the Department of
Defense, indicating that this is a worrisome trend that is
incompatible with achieving national objectives. Can you
explain this statement and what this trend means for the
industrial base?
Mr. HUNTER. Yes. What we found is that the magnitude of the
reduction in contract obligations for R&D is much greater than
what you see overall. I think that is a result of the fact that
for many--for the Department of Defense for certain, and for
many federal agencies, there is a lot of rigidities within
their budget that make it very hard to cut in other areas. And
obviously, in the case of the Department of Defense, there is a
strong desire to avoid cuts to things like military
compensation. And so then the cuts have to be taken elsewhere.
And R&D is inherently something that can be rescheduled and
retasked fairly quickly because you are inventing things and
you cannot invent on a schedule. The contracts are all designed
to reflect, to be rewritable or adjustable as work proceeds.
And that is good in a R&D context, but it also means it is very
easy to, when the budget cut comes, to take money out of that
contract.
Ms. VELAAZQUEZ. But let me ask you a last point. Given the
fact that when it comes to R&D spending, the agency has so much
flexibility. How can we reverse that trend?
Mr. HUNTER. I think it is making it clear that this remains
a priority. And I mentioned in my testimony that the goals and
objectives that have been set in statute have actually reshaped
the way that contracting is being performed. And so I think
continuing to emphasize the importance of research and
development and innovation is a key thing.
Ms. VELAAZQUEZ. Thank you.
Chairman CHABOT. The gentlelady's time has expired.
The gentleman from New York, Mr. Hanna, is recognized for
five minutes.
Mr. HANNA. Thank you, Chairman.
Boy, there is a lot to talk about. The 3 percent rule is
gone. Relax. I cannot imagine it coming back.
In the last Congress, we worked on some of the subjects you
mentioned, Mr. Gibson, in particular, reverse auctioning is, I
mean, you all stated it one way or another, but it is a race to
the bottom. I think we worked with the Department of Defense. I
think with the chairman's permission, we can--I would like to
continue on that path because I could not agree with you more.
When all you have to do is click a button to be lower than the
guy a moment before you, it does add, as you said, a degree of
irrationality, and everyone wants to work. So everyone always
thinks they can do a little bit better than they thought. So I
get that.
And in terms of the overall conversation though about
bidding in general, one of the problems with the whole process
is, and one of the reasons for bid protests is the very
subjective nature of everything you do, which feeds back to the
conversation over reverse auctioning and why it is such a bad
thing. But how do you protect the interest of the public and at
the same time limit the number of bidders? How do you take out
those elements that cause people to protest bid? Because it is
easy to do and it is easy to find a reason to do that.
I personally was in that business for many years, so I have
seen a lot of that. I guess it is hard to have everything.
Like, with Mr. Hunter, how do you have a vibrant industrial
base, have sequester, and have an efficient R&D, an effective
R&D, and still have the right to cut back on the cost of doing
business? I mean, you cannot just fund an industrial base
because you always want them to be there. You cannot just pay
people to manufacture things because someday you may need them,
although you could argue that you might. I wonder how you
balance all that.
Mr. Hoffman, maybe you would like to say something about
it. And anyone else.
Mr. HOFFMAN. With respect to competition, the issue for us
would be the design build piece. So everyone has the
opportunity through sources--and small businesses can
participate in that and it can be set aside. Irregardless of
whether it is small business or it is unrestricted, small
businesses can participate as part of larger teams, and
everyone would benefit and the standard to follow the best
practices of three to five bidders so that we can go ahead and
make sure the best qualified teams are pursuing things.
Mr. HANNA. So really what you are saying is you need a
better way to qualify bidders, limit the number of bidders, and
frankly, let the government have a more thoughtful and
deliberate process for deciding not just how many, but how and
what.
I am interested though, Mr. Hunter, what do you think of--
how do you maintain all that?
Mr. HUNTER. Well, I would say, you know, I think this issue
of how does the government basically arbitrate amongst
proposals, and if it is a list of qualifications, it may be a
case that everyone has great qualifications and it is very
difficult to discern the difference. Or it may be the case that
it defaults to whoever has the longest history of past
performance, which again, is not going to necessarily get new
entrants into the process. I know the Department of Defense and
in the R&D context, a lot of times they use an approach that is
referred to as a `` white paper.'' And so you are asking folks
to give you at a relatively low cost, something that is fairly
short, but some description of what the approach that they
would take to the problem would be. And that at least can
provide a middle ground. I am not sure how well it works in the
construction contracts because how far can you go into talking
about a construction project before you are into some
significant expense? In other contexts that can provide I think
a way for the government to distinguish and to kind of call out
the best folks to do the more expensive proposal.
And I would say on your question about innovation, I think
prototyping can be something that is a good middle ground, if
you will, that allows for you to do work on innovative
technologies without going to the expense of, again, designing
an entire system that the government probably does not have the
funding to actually purchase.
Mr. HANNA. Thank you.
Chairman CHABOT. The gentleman's time has expired.
The gentlelady from California, Ms. Chu, is recognized for
five minutes.
Ms. CHU. Well, this question is for anybody on the panel,
and it has to do with reverse auctions. You have all been
pretty vociferous in being against reverse actions for the
construction industry, and you have said that it does not
guarantee the lowest price, may encourage imprudent bidding,
does not allow for a thorough evaluation of value, and does not
ensure that the successful bidder is responsive and responsible
and may, in fact, go against federal procurement laws. And in
fact, the Army Corps of Engineers study found that it did not
even offer marginal savings over a sealed bid process. I find
that very interesting because the reason for reverse auctions
in the first place was to get to the lowest price. So I would
like your comments on any of these factors that have come out
because of the reverse auctions.
Mr. GIBSON. Yes, ma'am. As a construction contractor, I can
tell you that you might have what you think is the lowest price
at time of award but it is the price you pay at the outcome
that determines the real price of the job. If you have losses,
if you have under proposals in there, they are going to come to
life during the performance of that contract, and they are
going to cause the government buyer a lot of problems. So I
think it is putting up a smokescreen as to what real cost is
when you invite that type of imprudent bidding.
And I will give you one example. As a construction
contractor, most typical jobs I bid involve about 30 to 50
crafts, other companies coming to me to offer their services, 5
to 10 offers in each craft. There are several hundred people
offering prices on bid day. Sixty percent of those prices come
in within the last two hours prior to the bid deadline. So in
the reverse auction process, how does the contractor have the
opportunity to go back to those people and say, `` Can you do
better?'' He is making a guess, and those guesses end up
costing the government in the long run.
Mr. HOFFMAN. I might add that with respect to engineering
services, reverse auctions, they do not look at lifecycle cost
analyses and total cost of ownership. So the lowest cost is not
necessarily the best cost. So if we look at construction in
facilities, that cost is a small fraction of the total
ownership costs once you go ahead and look at ongoing operation
and maintenance. And I would urge the Committee to consider
that, and I think you can only focus on first cost reverse
auctions. I have no idea how you are able to understand what
the total cost is of ownership when you do that.
Mr. MCNERNEY. I would just emphasize what Mr. Gibson said.
Reverse auction is the antitheses of a best value selection
process, which I think is also the answer to Mr. Hanna's
question. You know, the government has gone to design build
best value to get away from the problems that existed in
contract claims and dispute and defense of contract
administration back when all projects were low bid, before 1994
Competition and Contracting Act.
So I think Mr. Hanna, the answer to your question is, too,
you have got to, you know, you have got to allow the CO to have
governed discretion. He has the contracting warrant. He has to
make discretionary judgments, and the bid protest agencies have
to back him up.
Ms. CHU. If I may change topics, Mr. Gibson, the SBA has
two surety bond guarantee programs that guarantee 70 to 90
percent of the bonds up to $6.5 million in value to assist
small businesses. However, many construction companies are not
using the program and the individual sureties have filled the
void. Why do you believe construction companies are not
utilizing the program, and what are the steps that could make
this program more attractive? Like, for instance, if they were
guaranteed by 100 percent or if the total guaranteed value is
increased from $6.5 million?
Mr. GIBSON. Ma'am, I have to tell you that I am not a
surety expert. I have had the relationship with my same surety
for 40 years, one surety. So I know very little about their
operations. I trust the solid company that I have been working
with for 40 years, and I would prefer to defer to somebody else
on the panel that might be able to talk about those
distinctions.
Ms. CHU. Okay. Anybody else on the panel?
Mr. HUNTER. Well, I would just say about surety bonds, I
think it is reflective of another issue in federal contracting,
which is access to capital. And I think historically, when the
Federal Government was sort of a bigger part--federal
procurement was a bigger part of the overall economy, there was
always just an assumption that it was a gold standard; that the
private sector would always be willing to front the capital to
make a federal contract work, and what we are finding is that
that is not as true anymore. The margins to be made on
government business are not as attractive in many cases as what
companies can find in the tech sphere. So it is just not as
attractive to a lot of companies to engage in this business,
and it takes a little more effort on the part of the government
to get companies involved.
Chairman CHABOT. The gentlelady's time is expired.
The gentleman from New York, Mr. Gibson, is recognized for
five minutes.
Mr. GIBSON. Well, thanks, Mr. Chairman.
Just to start off, to both chairman and ranking member, I
am excited to join the Committee. Looking forward to our work
together. Small business, a huge part of upstate New York. And
so to get this opportunity to provide a voice for our small
business owners is a real privilege.
Good session here. I am learning quite a bit and I
appreciate the comments. Definitely taking notes here with
regard to reverse auction, the bidding process, and how we are
proceeding with protests, insights that you are providing for
improvements.
I am going to make a couple of observations of things that
I have heard in my time moving around the 19th Congressional
District and somewhat informed by the 29 years I had in uniform
before I came to Congress. I would be interested in your
commentary or perhaps policy recommendations that may be able
to address some of these things. I do not think there will be
anything surprising about what I am going to mention here. Just
given your expertise, I would love to hear if you have some
thoughts on how we could change law or insights on regulation
to do better.
The first is, I had a company in Kingston that I thought
was really doing excellent work with regard to protection for
our troops. Body armor and protection of both people and
equipment. But they were having a hard time getting the
attention of the DoD. And so sort of the first phenomenon, is
there something about the processes, RFP and whatnot, that
would cast a net a little wider and allow for small businesses
who are doing really creative stuff, to make sure that they
knew what the government was looking for, and for the
government to get a better appreciation or even situational
awareness on what small businesses are doing; number one.
And number two is somewhat related. I have, and I do not
think this is an epiphinal comment, but one of the value added
of small businesses is that you really see agility. You see
responsiveness and you see boldness in terms of pulling things
together. Then the issue becomes one of scale. You go ahead and
you really hit it and you hit it well, but then how do you
compete? What I saw in my time in the military is it almost
seemed like the DoD would rather safe side it and go to a
bigger company, even if they might have been impressed with
some of the ideas of a smaller company, because they did not
want to take on the risk. And so there was this issue of scale.
I do not know, maybe there is a finer point on design build on
this score, but I would be interested in anyone from the panel
commenting on those two general points. And then if you have
any policy recommendations, I would love to hear them.
Mr. GIBSON. I can just speak from personal experience on
your scale issue. As a small business contractor, I have
observed an inclination over the past several years for the
purchasing agencies of the government to prefer the larger
contractors. I actually had it said to me by agency
representatives that they think they are buying down risk when
they hire the larger contractors. And we have had to be
creative to work--as a small business, to work around that. We
have had to go outside of our marketplace, our custom
marketplace to find work.
Mr. HOFFMAN. Actually, with respect to scale, I think if we
talk to the various agencies, it is interesting. Many times the
contracting officers and some of the project managers appear to
be willing to embrace the utilization of small businesses, but
then they also need to sell it to their customers, and their
customers can be more risk adverse. Certainly, we have seen a
good many sources sought and a good many opportunities for
small businesses, at least in our sector, to participate, and
we appreciate that.
With respect to policy changes, again, in our testimony, we
would suggest the reintroduction of H.R. 2750 and the
clarification of the nonmanufacturing rule.
Mr. HUNTER. I think your example actually about troop
protection is a really great case. Because that is one where
the government tends to want to take a low-risk approach for
very understandable reasons that you can certainly appreciate.
And it is expensive to test some of the items and to prove out
that they meet the specs that the government is looking for
which are fairly stringent.
Interestingly enough, there is a program at the Department
of Defense called the Foreign Comparative Test Program that
exists for a similar reason, to allow the department to test
out equipment from overseas that may be something that we do
not have here, and to pay for the testing just so that it can
show what its capabilities are. And I think having some small
amount of budget to sort of demonstrate, allow small companies
to demonstrate what their products can do so that the buyer
then does not have the fear that a smaller firm may not have
designed something that is going to stand up over time or meet
the spec. And the Army has done good work on this with field
testing, essentially, of articles in the electronics realm that
has really expanded the envelope of people able to participate.
I think in troop protection that could be a very valuable
example.
Chairman CHABOT. The gentleman's time has expired. Thank
you, gentleman.
We will go to a second round at this time, and I will
recognize myself for five minutes. I am not sure if I am going
to take the whole five minutes.
But my last question in the previous round, I had asked
what legislatively would you like us to do, and we heard from
Mr. Hunter and Mr. McNerney, so I would like to give Mr.
Hoffman and Gibson an opportunity to suggest what maybe
legislatively you would like to see us take up. I will prompt
you by giving a couple of bills that I know that we are
considering now, and I think you may be somewhat familiar with.
One is Chairman Hanna's bill relative to surety bonds. And
another is H.R. 2750, which is a design build bill; H.R. 2751,
which has to do with reverse auctions. These were in the last
Congress introduced, and I am sure we will be working on them
this Congress as well. Another was the nonmanufacturing rule
and also teaming and joint venture legislation. So those are
some of the things. So you can either comment on those if you
would like to or other things if you would like to bring to our
attention, what you would actually like to see us do. And maybe
I will begin with either one of you.
Mr. Hoffman, do you want to go?
Mr. HOFFMAN. Thank you.
Actually, each one of those rules are in our written
testimony, and we would encourage the Committee to pursue and
pass those proposed reforms. And that would be what we would be
looking for, sir.
Chairman CHABOT. Okay. You cannot be much more specific
than that. Thank you.
Mr. Gibson?
Mr. GIBSON. Absolutely the same. We support all of those,
and have added that to our testimony as well today.
Chairman CHABOT. Okay. Thank you very much.
I think I am going to stop there. I got the answer I
wanted, so thank you.
I will now yield to the gentlelady from New York, the
ranking member, Ms. Velaazquez.
Ms. VELAAZQUEZ. Yes, I would like to go back to Mr. Hunter.
We are now reviewing the budget for Fiscal Year 2016. In your
testimony you mentioned that your data shows small business
contracting numbers increased in the last fiscal year, despite
the cuts imposed by sequestration. Can you give us an
explanation as to why that happened? What can you tell us
regarding the spending levels that are proposed for Fiscal Year
2016 and whether they represent a significant risk for small
business growth?
Mr. HUNTER. I will do my best. The same answer would be to
say we need more data. What we have seen in several areas, and
I will try to maybe highlight a little and not be cryptic. For
example, we saw big differences between the military services
and the way that their contracts were playing out. So the
Army's contract obligations have sort of fallen off a cliff.
The Navy showed surprisingly little variation in their contract
obligations. And then the Air Force was somewhere in the middle
and it was very hard to understand how you could have three
such different outcomes when they are all facing relatively the
same level of cuts. The 2014 data has now come in. We find
that, in fact, it is the Navy whose contract obligations have
gone down now quite a bit in 2014, much more so than 2013, and
the other services not as much. And I think what is happening
is that things are shifting around. So there is a semi-
artificial barrier there which is the end of the fiscal year--
one fiscal year, the start of another. And to some extent the
appropriations in terms of when they go on contract can be
fungible across that boundary. And so I think there is a lot of
shifting that is going on. And so I think work from 2013 got
shifted essentially into 2014, partly probably due to the
uncertainty when sequestration kind of came down in the middle
of the fiscal year, and partly because of strategies that
different agencies adopted. And so I suspect that if you were
to sort of take the two years and average them out, that might
be--and assume that in reality sort of that, there was more of
a steady state trend line there and that those two numbers are
extremes and the reality is somewhere in the middle, I suspect
that is the case.
So taking you then to 2016, this question of does it go
back down to the full sequester levels and another drop? Or
does it now start to go in a positive direction in terms of the
total federal obligations? It is going to, I think, again, kind
of, you know, it will be--in some ways it surprised agencies
whichever outcome occurs because they have budgeted now for
what the president's level is, which is higher, and if it ends
up going back to sequestration, there is going to be that
surprise again. And that is why I think it will be a sharp drop
if that happens.
Ms. VELAAZQUEZ. Thank you, Mr. Chairman.
Chairman CHABOT. The gentlelady yields back.
The gentleman from New York, Mr. Hanna, is recognized.
Mr. HANNA. Thank you.
Surety bonding. You know there was a bill in the last
Congress that almost made it. It died but for one person in the
Senate. You are familiar with that. Basically, it meant that
bonding had to be backed by real assets. It is not that
complicated and it is not that much to ask. We know that it has
not always been that way. I would just like to give you a
chance to talk about that, Mr. McNerney and Mr. Gibson. You are
both in that racket, so.
Mr. MCNERNEY. There are those notorious cases that you have
all heard from the NASBP and the surety and fidelity, the
individual surety who pledged coal waste as the security for a
bond. If there were a claim made on that, my contractor would
have been out of luck. He would have been on the hook for all
his payroll and everything else when the prime failed. So I
just think it is a very good government abuse. It is just a
transparently bad loophole in the law. The contracting officers
do not deal with it properly. It is more prevalent than you
would think, I am afraid. What I hear from NASBP, it is just--I
do not think you lose the virtues of independent----
Mr. HANNA. Bonding has always been based on a zero loss
ratio. As soon as you factor in any loss at all, you are
degrading the contractor and you are degrading the process.
Mr. MCNERNEY. Right.
Mr. HANNA. You would agree with that, Mr. Gibson?
Mr. GIBSON. Yes. And I would say that we are here talking
about small businesses. That loophole is very dangerous for
small businesses who are thinking about getting into the
Federal Marketplace. You do not want to step into the Federal
Marketplace without a solid surety behind you, and you cannot
get a solid surety unless you are solid yourself financially.
So this Committee should help protect small businesses by
closing that loophole.
Mr. HANNA. Mr. Hunter, implicit in your statement--and I
will just admit, just for myself, that sequestration is pretty
ham-fisted and not nearly as discriminate as any thoughtful
person would want it to be. But knowing that and knowing the
other issues with the debt and the deficit and the way people
feel about all that, and I agree with that, how do you maintain
research and development and how do you maintain these
companies without just throwing money at them to make sure they
are in business when you need them? Because that is implicit in
your statement, and yet, that is not logical necessarily to
everyone, and certainly not to me.
You have got two minutes. I mean, I would kind of like to
know about that dynamic because we have, in my district,
companies that are deeply invested in doing work for the
government and find themselves through sequestration in trouble
right in the middle of things that they are doing that
everybody thinks are important. It is an interesting problem.
Mr. HUNTER. It is. And I think the government needs to be
very discriminating about how it approaches and how it invests
its R&D dollars. And so I think that is kind of the answer in
both directions to your question I would argue.
Mr. HANNA. But you would agree; you just cannot throw money
at the problem.
Mr. HUNTER. You cannot throw money at the problem, and we
do not need to be investing government dollars where the
private sector is going to invest its own dollars. And
generally, they are probably going to, I mean, history shows
they are going to be successful in that in enough cases to make
it not worth the government investment. So I think the
government then needs to focus. When R&D budgets are declining
and the government has to focus very hard, there is a tendency
to say, well, we are going to invest in an area because we
invested in it last year. We thought it was good then, it must
still be good now. At a time like this, you really need to
revisit those assumptions and say maybe the world has moved on.
And in some cases it has. And in communications technology, the
advancements on the commercial side are so rapid, it is highly
unlikely the government investment is ever going to----
Mr. HANNA. So do you mind, can I speculate and say that
sequestration is not all bad because it has made some people
more thoughtful about how they do things and how they manage
their total budgets?
Mr. HUNTER. I would say the government should be thoughtful
without sequestration.
Mr. HANNA. But maybe it helped?
Mr. HUNTER. And part of the problem with sequestration is
it does not allow a lot of thought. So we end up cutting
everything, even the things that are critical and necessary,
and yes, we may have cut some of the things that are less
critical and necessary, but we cut them exactly 10 percent, not
100 percent as maybe we should have. And so I think it is those
rigidities and that mechanism.
Mr. HANNA. Except in the last, they did allow for
discretion in terms of that. That was the original way it went.
But that changed, so.
Mr. HUNTER. Well, but there are still rigidities within the
budget process that tend to drive the cuts to certain areas,
R&D in particular, more so than places where we maybe should be
cutting.
Mr. HANNA. Thank you. My time is expired. Thank you,
Chairman.
Chairman CHABOT. Thank you very much. The gentleman's time
has expired.
We want to thank all of the witnesses for their
participation here this morning. It has been very helpful I
think to the Committee. The testimony we heard I believe shows
that there are changes this Committee can make to improve the
competitive viability of small construction and A&E contractors
and improve the health of our industrial base. We look forward
to working closely I think on this issue and all issues.
And I want to ask unanimous consent that members have five
legislative days to submit statements and supporting materials
for the record.
Without objection, so ordered. And if there is no further
business to come before the Committee, we are adjourned.
Thank you.
[Whereupon, at 11:45 a.m., the Committee was adjourned.]
A P P E N D I X
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A C E C
AMERICAN COUNCIL OF ENGINEERING COMPANIES
Introduction
Chairman Chabot, Ranking Member Velaazquez, and members of
the committee,
The American Council of Engineering Companies (ACEC)
appreciates the opportunity to testify before you today about
the issues surrounding Contracting and the Industrial Base and
specifically about the unique considerations within engineering
services and construction more broadly. ACEC believes that
small businesses can flourish in the federal market, but there
must be continued oversight by this and other committees to
reduce barriers to market entry. There must be a focus on
improving the marketplace for design and construction services
by eliminating wasteful spending by both the federal government
and contract participants during the procurement process. ACEC
will address issues that are present in federal design-build
procurement, the potential issues with the implementation of a
new court decision in the Nonmanufacturer Rule, the use of
reverse-auctions, federal agency use of joint venture and
teaming qualifications and surety improvement.
My name is James Hoffman and I am President of Summer
Consultants, a consulting mechanical, electrical, and plumbing
engineering firm located in McLean, Virginia. Summer
Consultants is a Small Business with 30 employees. We are
committed to providing our clients sound engineering designs
for various sized projects. Our practice focuses on the federal
market and we have worked on many federal projects in the past
50 years.
My firm is an active member of ACEC - the voice of
America's engineering industry. ACEC's over 5,000 member firms
employ more than 380,000 engineers, architects, land surveyors,
and other professionals, responsible for more than $500 billion
of private and public works annually. Almost 85% of these firms
are small businesses. Our industry has significant impact on
the performance and costs of our nation's infrastructure and
facilities.
We are at a critical juncture in our nation's history as
the risk to the public is growing at an alarming rate, as there
has been ongoing neglect of the nation's infrastructure. At the
same time, we are coming out of the largest economic crisis
that affected all professional engineering firms. The
construction industry, which bore the brunt of the recession,
is finally coming back to fiscal health. Procurement
improvements that facilitate greater efficiency for both the
industry and the government will help these entities create
better public infrastructure while increasing good paying jobs.
Design-Build Improvement
Design-build is a method of construction where engineers
team with other industry professionals on proposed work. It
requires the design team, comprised of engineers and
architects, to develop detailed drawings and specifications for
the contractor so that construction suppliers can submit
detailed prices for the final proposal. This method has become
popular in recent years and the federal government has moved to
expand its use in construction.\1\
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\1\ Press Release, H. Comm. on Small Bus, Graves, Hanna Introduce
Bipartisan Legislation to Benefit Small Construction Contractors. (July
19, 2013) (on file with author).
There are two forms of design-build procurement: two-step
and one-step. Two-step design-build requires that teams submit
relatively inexpensive qualifications packages to the
contracting officer in the first round. The contracting officer
reviews the qualifications and notifies the teams if they are
selected for the next phase. In the second round, the design
team develops expensive detailed and extensive plans for the
contractor to use in their bidding. The design group develops
these plans, generally without any reimbursement by the federal
government or other participants, resulting in firms risking
funds to participate in the project.\2\
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\2\ Building America: Challenges for Small Construction
Contractors: Hearing Before the Subcomm. on Contracting & Workforce of
the H. Comm. on Small Bus 113th Cong. 113-109 (2013). (statement of
Helene Combs Dreiling, President, the American Institute of
Architects).
It is the industry standard for three to five finalists to
be in the second round. However, in recent years, industry has
reported often more than 10 finalists in that round. The
current civilian statute states that the federal contracting
officer should follow the industry standard, but the officer,
at her or his own discretion, may increase the number of
finalists when it is ``in the Federal Government's interest and
is consistent with the purposes and objectives of the two-phase
selection process.'' \3\ This exception causes issues for both
the industry and for the contracting officer. Industry is
risking greater exposure as more firms; small, medium, and
large, are spending valuable resources developing expensive
plans and specifications that have a lower chance for a
successful bid. The contracting officer must review each of the
plans and be prepared to give feedback to each team that does
not win the project. With the increase in finalists, the
government spends more time on proposal review, and introduces
greater opportunity for errors or underbidding which impacts
the project later. This issue has driven many, including small
businesses, to stay out of the federal market. This makes the
market less competitive and drives down industry participation.
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\3\ 41 U.S.C. 3309(d).
One-step design-build creates an even more precarious
environment for the industry as the qualifications step is
eliminated. ACEC is staunchly opposed to this form of
procurement as it eliminates the qualifications process,
increases cost for all participants, and reduces market
participation for engineers. One-step design-build allows the
owner to solicit complete proposals from the construction
market without a review of the team's past performance and
qualifications. This mechanism forces teams to compete in large
pools without any focus on technical capability, quality, or
savings within the design. Due to this type of unqualified
competition, many firms cannot justify the expenditures to
compete against an unknown pool of applicants. This selection
forces out small firms as they cannot spend valuable marketing
dollars on projects where there are too many competitors--many
of which that may not have the qualifications for the project.
It is an inefficient process for the federal government as it
asks contracting officers to review multitudes of proposals
without the framework of qualifications to focus the
evaluation. The U.S. Corps of Engineers has taken steps
recently to limit one-step design-build, requiring high level,
advanced approval for any projects over $750,000.\4\ When the
government's largest construction agency implements limits on
the process, other agencies should follow their precedent.
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\4\ James Dalton, PES, Limitations on the Use of One-Step Selection
Procedures for Design-Build, Directive No. 2012-23 (2012) (on file with
the author).
Chairman Hanna held a haring on this issue on May 23, 2013
and the House Oversight and Government Reform Subcommittee on
Federal Workforce, US Postal Service and Census, also held a
hearing on this issue on December 3, 2013. Former Small
Business Committee Chairman Graves sponsored H.R. 2750, the
Design-Build Jobs and Efficiency Act of 2013, which was amended
into the National Defense Authorization Act (NDAA) of 2015. The
NDAA implemented a limitation on military design-build
procurements over $4 million whereby the contracting officer
must ask for permission to expand the finalist pool in a two-
phase procurement beyond five finalists. However, the
limitations including the prohibition on one-step design-build,
reporting on any exceptions to the five finalists, or any
limitations for either single or two-step design build were not
extended to the federal civilian market. The Congressional
Budget Office (CBO) found that H.R. 2750 ``would not have a
significant net effect on the federal budget'' \5\ in their
analysis of the bill. CBO determined that it would help to
``analyze fewer construction bids'' \6\ which would balance any
additional costs that may be involved in the bill. We ask the
Committee to continue to pursue the proposed efficiencies found
in H.R. 2750, which will help small businesses compete in the
federal market, while also harmonizing the language between
military and civilian design-build construction.
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\5\ Matthew Pickford, Cong. Budget Office, H.R. 2750 Design-Build
Efficiency and Jobs Act of 2014 (2014), available at http://
www.cbo.gov/sites/default/files/hr2750.pdf.
\6\ Id.
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Proposed Nonmanufacturer Rule Changes
The updated interpretation of the Nonmanufacturer Rule
(NMR) poses a challenge for the construction industry as it is
a service industry that typically did not have to address this
rule in the past. The NMR exists to ensure that when
competition for a contract for goods is restricted to small
businesses that the good ultimately purchased was from a small
business. Otherwise, the government risks restricting
competition only to have the awardee provide a product it has
simply passed along from a large manufacturer or international
contractor. In a recent Court of Federal Claims ruling on
Rotech Healthcare, Inc. v. United States \7\, the Court changed
the common understanding of the rule. The Court found that the
Small Business Act references ``any procurement for goods'' and
that the SBA must apply that interpretation broadly across both
services and commodities \8\.
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\7\ Case No. 14-502C (September 19, 2014)
\8\ Id. at 6-8.
ACEC has grave concerns with this interpretation.
Currently, over 85 percent of all construction dollars are
subcontracted to third parties.\9\ The Court's interpretation
would require that any firm who is a prime contractor be
responsible for their subcontractors' use of small business
products. The paperwork burden on this concept is staggering.
An example of the unintended result of this rule could require
that engineering firms use paper made by small businesses to
print out their correspondence for a federal construction job.
Many businesses do not know who made their paper nor do firm
owners concern themselves with the small business aspect of its
production. The interpretation could require that the ink and
any other materials, like specialized seismic machinery, that
are not exempted through the regulations, must be obtained
through a small business. The result of this ruling cannot be
implemented without great cost to the businesses who work on
and the taxpayers who fund federal construction projects.
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\9\ 13 C.F.R. Sec. 125.6.
Second, in many instances, specific items may be
manufactured in a foreign country. If an engineer specifies a
part that has a foreign origin, or is made by a large
manufacturer, it is most often because of necessary performance
specifications that are essential to the project's long-term
success. This ruling would have the engineer concerned with
minutiae that is not relevant the responsibilities outlined
above. This decision will result in the inefficient and
wasteful use of taxpayer funds. ACEC asks the Committee to work
with the SBA on language to make sure that construction
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services and products continue to be excluded from the NMR.
Reverse Actions
Reverse auctions are on-line sales where the bidders
compete for work by lowering their price against other
competitors in a specified time.\10\ Typically, agencies pay a
variable fee, ``which is no more than 3 percent of the winning
bid'' \11\ to the reverse action contractor. Reverse auctions
force design professionals to bid on price, which is strictly
prohibited by the Brooks Act and by many state professional
licensing standards. It also fails to encourage any participant
in the design and construction industry to focus on providing
innovative and strategic solutions to the nation's
infrastructure. It forces the competitors to focus solely on
lowering their price. This often leads to errors or
underbidding during the auction, without the ability to verify
costs with subcontractors, who are often small businesses. The
potential damage to a construction project and firms involved
can be significant as project costs may increase beyond the bid
or businesses could go out of business due to a mistake in the
frenzy of bidding. Also of consideration is the fact that over
``a third of the...2012 reverse auctions...had not interactive
bidding'' \12\ which means that no other vendor drove down the
price. In short, the competition was sole-sourced out to a
single bidder.
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\10\ U.S. Gov't Accountability Office, GAO-14-108 Reverse
Actions--Guidance Is Needed to Maximize Competition and
Achieve Cost Savings 6 (2004).
\11\ Id. at 19.
\12\ Id. at 26.
Reverse actions have been used by the federal government in
the past with commodities, with a noted lack of success in
construction. The U.S. Corps of Engineers conducted a year-long
study whereby they found that reverse auctions ``offered not
even marginal edge in savings over the sealed bid process for
construction service projects'' \13\. The Corps found that
sealed bids for construction, typically the domain of
contractors, was a better method than reverse auctions.\14\
Moreover, former OFPP Administrator Mr. Joseph Jordan, who is
the current FedBid CEO stated, ``An agency might want to use
FedBid to find a contractor to paint a wall, he said, but not
to construct an office building.'' \15\ It is telling that both
the Corps and the third-party vendor for reverse auctions do
not advocate their use in construction.
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\13\ USACE, Final Report regarding the USACE Pilot Program on
Reverse Auctioning 34-37 (2004).
\14\ ACEC advocates for qualifications based selection (QBS) in the
selection of the architect and engineer, but that is not the subject of
this hearing.
\15\ Danielle Ivory, `Reverse Actions' Draw Scrutiny, N.Y. Times,
April 6, 2014 at B1.
H.R. 2751, the Commonsense Construction Contracting Act of
2013, introduced by Rep. Richard Hanna (R-NY), sought to
restrict the use of so-called reverse auctions as a means of
procuring construction and design-related services. Like H.R.
2750, it was incorporated into the NDAA, but the prohibition
was limited to the use of reverse auctions in design-build
procurements. At this time, there are no programs that can be
found by the industry that used this procurement method. While
federal procurement law already prohibits the use of reverse
auctions for engineering activities, we view the full
legislation as necessary to protect firms of all sizes in our
industry when they provide services in support of construction
efforts. ACEC asks the committee to reintroduce H.R. 2751, to
build stronger prohibitions against the use of this commodities
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based program for construction services.
Joint Venture Rules
Joint ventures and teams are important to construction and
small businesses in the federal market.\16\ Teams are important
to the design-build process as each discipline works together
to compete on construction projects. Joint ventures allow for
organizations new to federal procurement to work with
experienced partners to gain entry to the market. It is
important for teams to add or change firms to enhance their
qualifications, to offer the best services for a particular
project in the pre-competition phase. These practices allow the
federal government to obtain innovative private sector talent
while also increasing capable competition on federal projects.
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\16\ Joint ventures and teams are used interchangeably in this
submission. Joint ventures are contractual relationships between
entities while teams are groups of professionals working together
towards a single project. They are very similar in nature, but differ
in the legal sense.
Current law states that small businesses may ``submit an
offer that provides for the use of a particular team of
subcontractors for the performance of the contract'' \17\ and
that requires the contract be evaluated, ``in the same manner
as other offers, with due consideration for the capabilities of
all proposed subcontractors.'' \18\ There are recent reports
that some agencies are requiring joint ventures or teams to
present joint past performance in their qualification. This
practice demonstrates that some contracting officers do not
understand the rationale and benefit of teaming. Some agencies
require that ``an [o]fferor must have proven experience and
performance as an existing CTA (Contractor Team Arrangement) in
the form of a Partnership or Joint Venture in accordance with
the proposal submission requirements' \19\, or that past
performance may only be considered if it is that of ``a parent
company, affiliate, division, and/or subsidiary.'' \20\ Under
present statute, the contracting officer must look at the
qualifications of the individual organizations comprising a
team rather than the past performance of the group as a whole.
Requiring that the team have common past performance reviews
discourages the use of new teams, new partners, and the
inclusion of new small businesses in the federal market.
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\17\ Id.
\18\ Id. at Sec. 15(e)(4), 15 U.S.C. Sec. 644(e)(4).
\19\ GSA OASIS Request for Proposal (2013) available at http://
www.fbo.gov/
?s=opportunity&mode=form&tab=core&id=df05de3d9c9cafle7943d278094eefbl&--
cview=1.
\20\ HCaTS RFI APPENDIX 3 - DRAFT RFP SECTION L (2015) (on file
with author).
ACEC strongly encourages the Committee to amend the Small
Business Act to protect the development of joint ventures and
teams. Federal agencies are losing their opportunity for
innovation and small business participation when contracting
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rules are not followed by federal agencies.
Surety Improvements
A surety is a third party product that guarantees payment
if one party defaults on the agreement. In federal
construction, there are two key bonds--payment bonds and
performance bonds. The Miller Act requires that the contractor
must provide a surety for payment and performance bonds on
contracts greater than $150,000. This provides performance
protection to the federal government that the taxpayer will not
be damaged if the contractor fails to complete a project, while
also guaranteeing payment to subcontractors if the contractor
defaults. H.R. 776, the Security in Bonding Act of 2013, was
introduced by Chairman Hanna to address the issues of bonding
availability for small businesses and problems with individual
surety guarantees. The bill increases the guarantee rate for
the Preferred Surety Bond Program, which will help more small
business obtain a bond at a reasonable rate, and requires
verifiable collateral for the issuance of surety bonds. While
ACEC members typically do not obtain surety bonds, with the
exception of some of our larger members who are also
construction contractors, we recognize the importance of this
product for the taxpayer and the subcontractors. ACEC asks the
Committee to reintroduce H.R. 776 in this Congress.
Conclusions and Recommendations
The engineering services industry is unique in how firms
are established, perform work, selected for the project, and
work with each other. Most firms in the industry are small,
specialized, and have a business plan to remain that way to
assure performance and reputation. These factors result in the
need for special considerations when trying to ensure
appropriate small business participation in federal
procurements.
We ask that the committee consider the following actions
for the 114th Congress:
Reintroduce H.R. 2750 and enact it into law.
Work with the SBA on appropriate language to
limit the scope of the NMR on service industries.
Reintroduce H.R. 2751 and enact it into law.
Strengthen the Joint Venture and teaming
past performance rules.
Reintroduce H.R. 776 and enact it into law.
ACEC and I thank the Committee for the privilege and
opportunity to address engineering and construction industry
issues with current federal procurement and I am pleased to
answer any questions.
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MCAA Statement on the Use of
Internet Reverse Auctions for
Construction Services
MCAA considers the use of Internet reverse auctions for
procurement of construction services to be problematic for
owners and contractors alike.
While most applications of various e-commerce and Internet
use (project websites, for example) have demonstrated or hold
great promise for productivity and service improvements for
owners and the industry at large, the same cannot be said for
Internet reverse auctions. MCAA considers them to be little
more than a form of electronic bid shopping; that is,
disclosing the proprietary bid price of a competitor to all
others for the purpose of obtaining even lower bids.
While reverse auctions may be judged appropriate by some
owners for certain well defined projects on a case-by-case
basis, an across-the-board policy dictating reverse auction,
price-only selection for all projects would be just as short
sighted as dictating a single type of project delivery system
for projects of all types.
MCAA, along with the industry overall, long ago recognized
the long-term detrimental impact of an across-the-board policy
of low-bid, price-only selection criteria, and the bid shopping
and chopping practices that are inherent in that system and
undermine project success, such as: fragmented scopes of work
and scope disputes, unnecessary changes and inordinate delays,
and overhead waste relating to defensive contract
administration, claims, disputes and lawsuits.
In fact, many of the innovations in construction
procurement, contracting and project administration over the
past 20 years have been in direct response to the
inefficiencies that stem from low-bid, price-only selection
criteria. Those innovations include value-based selection
criteria, careful past performance evaluations,
prequalification screening of competitors, project partnering,
integrated project contracting and delivery systems, design-
build services delivery, and other positive contract
administration procedures, including dispute avoidance
mechanisms and measures to reduce project dispute overhead
costs. Overall, these developments have represented a better
investment in overall project quality and life-cycle cost
effectiveness.
Unfortunately, Internet reverse auctions can be seen as a
way to adapt new technology to return to many of the problems
of the past and give back the project efficiency gains that
have resulted from innovative, value-added contracting
procedures. Nevertheless, given recent experience with reverse
auctions, MCAA members have encountered certain approaches that
tend to ameliorate the more difficult aspects of the process as
discussed below.
> Well-defined scope of work - Reverse auctions are least
likely to lead to problem jobs in those cases where the owner
has firm, detailed design drawings and specifications. Recent
studies strongly indicate that project planning up front is the
best predictor of project success and problem avoidance.
> Use of best-value prequalification criteria - Best-value
prequalification criteria should be rigorously applied. The
criteria should include demonstrated superior past performance
related to project performance overall, including cost and
schedule delivery, project safety experience, workforce
training and development investments, and project management
and site supervision expertise relating to equipment purchasing
and other aspects of contract administration.
> Transparency of auction procedures - The reverse auction
procedures should provide maximum transparency in the interest
of fairness for all competitors. The identity of all
participants should be disclosed, as well as the dollar amount
and ranking of all bids. Similarly, the owner should disclose
the existence and amount of any reserved price above which the
project would not be let. Just as laws pertaining to the
auctions of goods are designed to protect fairness in the
process and prevent fraud and abuse, the owner and Internet
service provider for reverse auctions of construction contracts
should make sure that all competitors are extended the same
privileges under the auction rules.
> Provide adequate procedures for redress of errors - The
auction procedures should provide careful safeguards against
both imprudent and administrative mistakes in bidding, as
overall project success is strongly compromised by mistakes in
selection decisions. Even at this early stage, it is widely
recognized that the reverse auction process often tempts hasty
and imprudent bidding given the tight time frame and
competitive context of the auction procedure. The industry
recognizes that selection based on competitive frenzy as
opposed to more discerning judgment is a high risk factor for
project success. Bid decrements and the time intervals for bid
adjustments should be appropriate for the scope and size of the
project. Clerical mistakes also should be excused in the
auction process in the manner of treatment of those mistakes in
the sealed bidding context. Overall the owner should not design
the process as though construction service auctions can be
conducted in the same way as commodities procurement.
> Provide adequate safeguards against other abuses - The
reverse auction procedures should also contain adequate
safeguards against fraud and abuse, including express
warranties against fictitous (``phantom bidders'') bidders and
other conditions that would constitute fraud in the inducement
of the contract award. Moreover, any procedure for post-bid
negotiated awards should be disclosed up front so competitors
can fairly judge whether they can afford to compete. Similarly,
if post-bid price increases are to be permitted, that too
should be disclosed up front.
> Policy reservations - Notwithstanding adherence to the
suggestions listed above, MCAA member experience suggests that
reverse auctions remain a relatively new, untested and unproven
method to actually lower construction costs without
compromising project success.
MCAA contractor experience with Internet reverse auctions
suggests that the last bid in a reverse auction is not always
the lowest and best price that may have been submitted even
under sealed bidding procedures. Owners should be aware that a
comparison of the opening bid with the last bid is not a valid
indicator of actual cost savings on the project. Moreover,
while open competition is good policy generally, even with
careful prequalification screening, the auction process prompts
fast and furious competitive judgments more than prudent
decision-making. Negative experiences could significantly
shrink the pool of willing competitors, and deliver negative
project outcomes.
In conclusion, early experience suggests that the risks of
mistakes, misjudgments and the added costs of Internet services
may well in many cases outweigh the perceived costs savings
realized through the use of reverse auctions.
MCAA will continue to monitor experience with reverse
auctions for a continuing factual assessment of their costs and
benefits and effect on project outcomes.
Footnote - This statement does not address the many ways
that public and private contracting practices vary with respect
to contractor selection rules and procedures generally and
reverse auctions in particular. In the main, Federal, state,
and local open competition/sealed bidding rules prohibit
reverse auctions for construction. The Federal procurement
policy is to continue to use sealed bidding/competitive
negotiations without price disclosure for construction
services, even though one agency has Congressional
authorization to test pilot reverse auctions. Another agency is
attempting to categorize some construction/repair/alteration
projects as ``commercial items'' to avoid construction
procurement rules. At the state level, a growing number of
states are amending procurement laws to permit reverse auctions
for commodities, but are careful to rule out reverse auctions
for construction services.
Approved by the MCAA Board of Directors, February 28, 2004
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INTRODUCTION
Chairman Chabot, Ranking Member Velaazquez and members of
the committee, thank you for holding this hearing examining
contracting and the industrial base. Further, thank you for the
opportunity for the Design-Build Institute of America (DBIA) to
submit the following testimony.
DBIA is an institute representing leaders in the design and
construction industry utilizing design-build and integrated
project delivery methods to achieve cost and time savings on
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 in the delivery of
projects from all sectors in communities across the country.
Since we are design-build professionals focused on defining and
teaching best practices, we will limit our comments today to
the ``failure to properly use a two-step procurement process
for design-build contracts'', as indicated in the February 5,
2015 hearing announcement.
WHAT IS DESIGN-BUILD?
Design-Build is a method of project delivery in which one
entity - the design-build team - works under a single contract
with the project owner to provide design and construction
services. With design-build there is one entity with a single
point of responsibility, one contract, one unified flow of work
from initial concept through completion - thereby integrating
the roles of designer and constructor.
Design-build is a more efficient and better quality
alternative to the traditional design-bid-build project
delivery method. Under the traditional approach, design and
construction services are split into separate entities,
separate contracts, and separate work.
[GRAPHIC] [TIFF OMITTED] T3326.020
Design-build project delivery provides benefits for both
owners and practitioners. Owners experience faster delivery,
cost savings and better quality than with other contracting
methods. Research shows costs can be six percent lower with
project delivery speed increased by as much as one-third \1\.
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\1\ Construction Industry Institute (CII)/Penn State 1999
Further, 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 litigation claims for
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all parties involved.
Practitioners reap the benefits of a higher profit margin
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.
The advantages of design-build have become clear in recent
years which is why today nearly 40% of all non-residential
construction in the U.S. is done design-build, with the
military using it for more 80% of its construction \2\.
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\2\ Design-build Project Delivery Market Share and Market Size
Report, RS Means, May 2014
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SINGLE-STEP VS. TWO-STEP DESIGN-BUILD
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
first issued, and any and all participants then respond with a
statement of qualifications. The RFQ response is a relatively
simple and inexpensive procedure where the design-build teams
submits, for example, 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 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.
Small Business Are Far Better Served By the Two-Step
Process
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 dollars or even
millions - many design-build teams 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 federal government and
the American taxpayer who can be sure the most qualified
design-build teams were not scared away from a project simply
due to the costs and risks of applying.
Consider and Pass the Design-Build Efficiency and Jobs Act
During the 113th Congress, legislation endorsed by DBIA,
the Design-Build Efficiency and Jobs Act (H.R. 2750) was
introduced by Congressman Graves and a version passed the House
of Representatives. This bill was written to limit the use of
single-step design-build procedures, and assure the proper use
of two-step procedures as originally mandated by Congress. That
legislation should be reintroduced, considered and passed into
law.
H.R. 2750 would have done two primary things:
1. To limit the use of single-step, H.R. 2750 would
have limited its use 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. H.R. 2750 also would have encouraged better use of
the preferred two-step procedures and by requiring
agencies to better justify and report when their
agencies short-list more than five finalists on a
specific project in the two-step process.
CONCLUSION
Thank you again for the opportunity to submit this
statement. We look forward to working with this committee on
improving design-build procedures so the advantages of design-
build delivery can be more fully realized and American small
business can thrive.
We are ready to answer any questions you may have.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
The National Association of Surety Bond Producers (NASBP)
is a national trade association of firms employing licensed
surety bond producers who place bid, performance, and payment
bonds throughout the United States and its territories.
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 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.
Our written statement begins with a brief description of
the important role surety bonds play in the federal procurement
arena. Our statement then addresses our support of three bills
introduced in the 112th and 113th Congresses, H.R. 3534 and
H.R. 776, and H.R. 838. H.R. 838 was introduced in the 114th
Congress on February 10, 2015, by Representative Richard Hanna,
and cosponsored by the Chairman of the House Small Business
Committee, Steve Chabot and Representative Grace Meng. These
bills concern the use of individual surety bonds on federal
construction projects and reforms to the Small Business
Administration's (SBA) Surety Bond Guarantee Program, and are
representative of needed legislation on small business matters
that NASBP and SFAA wish to bring to the attention of the
Committee on Small Business for support.
The Importance of Surety Bonds: Sound Public Policy
Corporate surety bonds are three-party contract agreements
by which one party (a surety company) guarantees or promises a
second party (the obligee/federal government) the successful
performance of an obligation by a third party (the principal/
contractor). In deciding to grant surety credit, the surety
underwriter conducts in-depth analysis, also known as
prequalification, of the capital, capacity, and character of
the construction firm during the underwriting process to
determine the contractor's ability to fulfill contractual
commitments. Surety bonds are an essential means to discern
qualified construction companies and to guarantee contracts and
payments, ensuring that vital public projects are completed,
subcontracting entities are paid, and jobs are preserved.
The federal government has relied on surety bonds for
prequalification of construction contractors and for
performance and payment assurance since the late nineteenth
century. In 1894, the U.S. Congress passed the Heard Act which
codified the requirement for surety on U.S. government
contracts and institutionalized the business of surety. In
1935, the Heard Act was superseded by the Miller Act, which
required the continuation of these vital assurances so that
U.S. taxpayer funds were protected and subcontractors and
suppliers would receive payment for their labor and materials.
Currently, the federal Miller Act requires performance and
payment bonds from prime contractors awarded construction
contracts exceeding $150,000.00, and payment security for
contracts between $30,000.00 and $150,000.00.
Types of Surety Bonds
The bid bond assures that the bed has been submitted in
good faith and the contractor will enter into the contract at
the bid price and provide the required performance and payment
bonds. A performance bond protects the project owner from
financial loss should the contractor fail to perform the
contract in accordance with its terms and conditions. The
payment bond protects subcontractors and suppliers, which do
not have direct contractural agreements with the public owner
and which would be unable to recover lost wages or expenses
should the contractor be unable to pay its financial
obligations. Often, small construction businesses must access
the federal procurement marketplace at subcontractor and
supplier levels, and the payment bond is their primary recourse
and protection in the event of prime contractor nonpayment or
insolvency.
The Construction Industry Supports of H.R. 3534 (112th
Congress) H.R. 776 (113th Congress) and H.R. 838 (114th
Congress)
NASBP and SFAA along with many other organizations such as:
the American Council of Engineering Companies (ACEC), the
Associated General Contractors of America (AGC), the American
Institute of Architects (AIA), the American Subcontractors
Association (ASA), the Mechanical Contractors Association of
America (MCAA), the Sheet Metal and Air Conditioning
Contractors' National Association (SMACNA), the Construction
Financial Management Association (CFMA), and the American
Insurance Association (AIA), view H.R. 3534, H.R. 776, and H.R.
838 as critical means (1) to protect taxpayers, federal
contracting entities, and construction businesses by assuring
the integrity of surety bonds on federal contracts when issued
by unlicensed individuals using a pledge of assets and (2) to
provide additional opportunities for small and emerging
construction contractors, which otherwise do not qualify for
surety credit in the standard market, to utilize the Surety
Bond Guarantee Program of the US Small Business Administration,
so that such businesses will receive surety credit from
regulated markets.
Enact legislation to protect taxpayers, and small
businesses
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 certified and approved surety insurance company. As
noted earlier, the Federal Miller Act requires contractors to
furnish surety bonds on federal construction projects to ensure
that prospective contractors are qualified to undertake federal
construction contracts and that bonded contracts will be
completed in the event of a contractor default, thereby
protecting precious U.S. taxpayer dollars and subcontractors
and suppliers, many of which are small businesses. The
financial strength and stability of the surety is the key to
the success of the surety bonding system.
Presently, there are three methods construction firms may
use to furnish security on a federal construction project:
1. By securing a bond written by a corporate surety,
that is vetted, approved, and audited by the U.S.
Department of Treasury and listed in its Circular 570;
2. By using their own assets to post an ``eligible
obligation,'' i.e. a U.S.-backed security, in lieu of a
surety bond. The security is pledged directly and
deposited with the federal government until the
contractor is complete; or
3. By securing a bond from an unlicensed individual,
if the bond is secured by an ``acceptable asset,''
which includes stocks, bonds, and real property owned
in fee simple.
It is this third alternative that has proven consistently
problematic to the financial detriment of contracting
authorities and of subcontractors and suppliers performing on
federal projects. NASBP, SFAA, along with the other
organizations supporting these bills, believe, based on
substantial evidence and past testimony, that the current
regulations pertaining to use of individual sureties on federal
construction projects are fundamentally flawed, allowing
gamesmanship by unlicensed persons acting as sureties. Such
existing requirements need to be superseded by the statutory
approach delineated in H.R. 3534/776/838.
Federal Acquisition Regulation (FAR) 28.203-2(b)(3) permits
federal contracting officers to accept bonds from natural
persons, not companies, if the bond is secured by an
``acceptable asset,'' which includes stocks, bonds, and real
property. These individuals neither are subject to the same
scrutiny and vetting given to corporate sureties nor are they
required to provide physical custody of the asset to the
government that they pledge to secure their bonds to the
contracting authority.
This lack of thorough scrutiny of individual sureties and
control over their pledged assets has resulted in a number of
documented situations where assets pledged by individual
sureties have proven to be illusory or insufficient, causing
significant financial harm to the federal government, to
taxpayers, and to subcontractors and suppliers, many of whom
are small businesses wholly reliant on the protections of
payment bonds to safeguard their businesses.
Federal requirements do mandate a level of documentation
and information from individual sureties. Individual sureties
are required to complete, sign, and have notarized an affidavit
of individual surety (SF 28), which is a standardized form for
the purpose of eliciting a description of the assets pledged
and the contracts on which they are pledged. SF 28, however,
does not elicit other pertinent information, such as that about
the character or fitness of the individual acting as surety,
like criminal convictions, state insurance commissioner cease
and desist orders, outstanding tax liens, or personal
bankruptcies.
Under FAR requirements, the pledged assets also are
supposed to be placed in an escrow arrangement by the
individual surety, subject to the approval of the contracting
officer. The individual surety, however, is not required to
turn the assets over to the physical care and custody of the
contracting authority. Each contracting officer, not the
Department of Treasury, shoulders the entire burden of
determining the acceptability of the individual surety, its
documentation, the escrow or security arrangement, and the
value and adequacy of pledged assets, and must do so in
relatively short order to progress the contract procurement. A
missed, incorrect, or forsaken step may mean the acceptance of
a fraudulent or insufficient bond, rendering its apparent and
much needed protection worthless.
This burden of assessing individual sureties is added to
the already considerable responsibilities of contracting
officers. They are required to determine the authenticity of
the documentation of the assets pledged to support the
individual surety's bond obligations and to verify that the
pledged assets actually exist, are sufficient, and are
available to the federal government. They have to know that a
particular financial document is what it purports to be and to
understand and to assess the different types of collateral,
such as stocks and real estate located anywhere in the United
States.
It is not clear if and how often federal contracting
officers receive specific training to understand and to perform
the needed tasks of examination concerning individual sureties.
Documents of federal agencies suggest that there are occasions
when federal contracting officers may not have a complete
understanding of what is required of them to safeguard
taxpayers and small businesses from individual surety fraud.
The Financial Management Service of the U.S. Department of
Treasury issued a ``Special Informational Notice to All Bond-
Approving (Contracting) Officers'' \1\ on February 3, 2006,
still posted at http://www.fiscal.treasury.gov/fsreports/ref/
suretyBnd/special--notice.pdf. This informational
notice was directed to federal contracting officers to remind
them of the applicable FAR requirements governing individual
sureties. Specifically, the notice, a copy of which is attached
to this testimony, states in part:
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\1\ United States Treasury Department. Financial Management
Service. ``Special Informational Notice to All Bond-Approving
(Contracting) Officers''. February 3, 2006.
``Although FMS is not substantively responsible for
approving individual sureties, we believe it prudent to
issue this Special Informational Notice on a FYI basis
to Agency Bond-Approving (Contracting) Officers who do
---------------------------------------------------------------------------
have that responsibility under the FAR.
Recently, FMS has been made aware of instances where
individual sureties are listing corporate debenture
notes and other questionable assets on their `Affidavit
of Individual Surety', Standard Form 28. In some
instances, the individual sureties used a form other
than the Standard Form 28 as their affidavit.''
Likewise, the U.S. Department of the Interior issued a
notice to its contracting officers in 2009 to remind them of
FAR requirements associated with acceptance of individual
surety bonds. This notice, titled ``Department of the Interior
Acquisition Policy Release (DIAPR) 2009-15,'' states that the
Department of the Interior Office of Inspector General
conducted an investigation of contracting personnel practices
concerning individual sureties and found concerns.\2\
Specifically, the release, a copy of which is attached to this
testimony, states in part:
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\2\ United States. Department of the Interior. ``Department of the
Interior Acquisition Policy Release (DIAPR) 2009-15''. September 8,
2009.
``The investigation identified several areas of
concern that require our attention. There is concern
that Contracting Officers (COs) are: (1) unfamiliar
with the FAR requirements for individual surety; (2)
accepting individual surety bonds without knowing or
verifying the assets backing the bonds; (3) not vetting
questions about individual surety bonds through the DOI
Office of the Solicitor; and (4) not verifying
individual sureties against the General Services
---------------------------------------------------------------------------
Administration's Excluded Parties List System.''
If a contracting officer fails to perform adequately the
necessary investigation of an individual surety, and the
individual surety pledges assets that do not exist, are
insufficient, or are not readily convertible into cash to pay
the obligations of the defaulted general contractor, everyone
on the project from the contracting agency on down is left
unprotected and at risk for financial loss. If the assets
pledged to support the bonds are uncollectible, unpaid
subcontractors and suppliers protected by the bond, many of
which typically are small businesses, will suffer financial
hardship and could, in turn, default and become insolvent.
Examples of Improper Individual Surety Activity
There is no one place to go to find statistical data on
individual surety problems because individual sureties
typically operate outside of state insurance regulatory
structures, despite the fact that they are required under
almost all state insurance codes to obtain certificates of
authority to act as a surety insurer from state insurance
commissioners. Moreover, the federal government does not
require individual sureties writing bonds on federal contracts
to furnish proof of licensure or authority to operate in a
state jurisdiction as a surety insurer. Consequently, little or
no regulatory oversight may ever be exercised over persons
acting as individual sureties on federal projects apart from
the modicum of scrutiny undertaken, if at all, by the federal
contracting officer.
Nonetheless, in recent years, illustrations of individual
surety problems abound. These situations usually involve
individual surety bond assets that turned out to be inadequate,
illusory, or unacceptable. One illustration is United States ex
rel. JBlanco Enterprises Inc. v. ABBA Bonding, Inc, where, in
spite of a March 11, 2005 cease and desist order from the
Alabama Insurance Department, Mr. Morris Sears, doing business
as ABBA Bonding, was able to submit bonds on a federal contract
in Colorado supported by an affidavit (Standard Form 28)
stating that ABBA Bonding had assets with a net worth of over
$126 million. Although no assets were placed in escrow for the
benefit of the government, the U.S. General Services
Administration accepted the bonds anyway. JBlanco Enterprises,
a small business 8a subcontractor performing work on federal
contracts, nearly was forced to declare bankruptcy as a result
of a deficient individual surety bond placed by Mr. Sears on a
federal project that later proved to have no assets to support
the bond. Ms. Jeanette Wellers, a principal of JBlanco
Enterprises, provided oral and written testimony \3\ about this
situation during a hearing on H.R. 3534.
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\3\ Wellers, Jeanette. Written Testimony before U.S. House
Committee on the Judiciary Subcommittee on Courts, Commercial and
Administrative Law. March 5, 2012.
Sears eventually sought bankruptcy protection against
numerous creditors (100+) arising from defaulted bond
obligations, including protection against bond debts owed to
three federal contracting agencies. Chief Bankruptcy Judge
Margaret A. Mahoney, U.S. Bankruptcy Court, Southern District
of Alabama held that Sears had ``knowingly made
misrepresentations regarding collateral he pledged in support
of surety bonds.'' \4\ Judge Mahoney also found that Sears
falsely stated that the real estate had not been pledged to any
other bond contract within three years prior to the execution
of any Affidavit and that Sears made misrepresentations to
numerous agencies. Thus, the Bankruptcy Court determined that
the Sears' debts to the government were nondischargeable. His
false statements then formed the basis of a criminal indictment
against Sears, who died while undergoing criminal prosecution
in the U.S. District Court for the South District of Alabama.
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\4\ United States. Department of Justice. US Attorney's Office.
Southern District of Alabama. ``Pennsacola Man Indicted in Government
Contract Survey Bond Fraud Scheme''. June 28, 2012.
In another example, Edmund Scarborough, the owner of IBCS
Fidelity, another individual surety, filed for bankruptcy in
Tampa, Florida. IBCS issued countless individual surety bonds
on federal, state, and private construction projects using
suspect assets. In his bankruptcy petition, Scarborough listed
$4.5 million in assets and $16.2 million in liabilities; IBCS
had used a speculative commodity, mined coal waste, which it
valued at $191 million, to back its individual surety bonds.
That mined coal waste was valued at $120,000 in the bankruptcy
filing.\5\
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\5\ Richard Korman, Controversial Individual Surety Files for
Bankruptcy Protection, Engineering News-Record, August 5, 2014
available at: http://enr.construction.com/
business--management/finance/2014/0805-Outspoken-Individual-
Surety-Files-for-Bankruptcy-Protection.asp?
The above individuals operated nationally and across state
boundaries, victimizing public and private entities, small
construction businesses, and businesses of all sizes. These
examples, unfortunately, are not isolated instances. Other
examples exist, both past and present, showing where individual
surety bond assets proved illusory, uncollectible, or
deficient. More businesses, many of whom are likely to be small
businesses, will be victimized unless Congress acts to correct
these flawed requirements, which permit unscrupulous
individuals, many with criminal, personal insolvency, and tax
lien histories, to issue worthless surety bonds on taxpayer-
---------------------------------------------------------------------------
funded federal construction contracts.
Common-Sense Legislative Solution
Legislation like H.R. 3534, H.R. 776, and H.R. 838 are
simple, common-sense legislative solutions that will eliminate
opportunities for fraud by mandating that real assets be placed
in the care and custody of the contracting authority. These
bills require individual sureties to pledge solely those assets
defined as eligible obligations by the Secretary of the
Treasury. An eligible obligation is a public debt obligation of
the U.S. Government and an obligation whose principal and
interest is unconditionally guaranteed by the U.S. Government,
such as U.S. Treasury bills, notes, and bonds, certain HUD
government guaranteed notes and certificates, and certain
Ginnie Mae securities, among other federally guaranteed
securities. These safe and stable assets then are provided to
the federal contracting authority, which will deposit them in a
federal depository designated by the Secretary of the Treasury,
ensuring that pledged assets are real, sufficient, convertible,
and in the physical custody and control of the federal
government. This is nothing more than what now is statutorily
required of contractors who wish to pledge collateral as
security on a federal contract in lieu of a surety bond.
If enacted, it would eliminate the gamesmanship and
opportunities for fraud endemic in the current regulatory
system governing individual surety bonds and pledged assets and
will remove a considerable administrative burden from federal
contracting officers. Federal contracting officers no longer
will need to assess a range of pledged assets, as all pledged
assets will be limited to assets unconditionally guaranteed by
the federal government; they simply will need to gain custody
over the asset to deposit the asset in a federal depository,
such as the Federal Reserve Bank, St. Louis. The asset will be
released upon successful performance of the bonded obligation,
with any accrued interest inuring to the benefit of the
individual surety pledging the government-backed asset.
Construction businesses working on a construction project--
either as subcontractors, suppliers, or workers on the job--
have no control over the prime contractor's choice of security
provided to the federal government, but they suffer the most
harm financially if the provided security proves illusory. The
impact is particularly acute on small construction businesses,
which may not have the strength to weather a significant
disruption to their cash flow. Passage of legislation like such
as H.R. 838 will mean that contracting agencies and the
numerous subcontractors and suppliers on federal construction
projects, in the event of a performance or payment default will
know that adequate and reliable security is in place to
guarantee that they will be paid for their valid claims.
Increase the Guarantee to 90% for Surety Companies in SBA
Program
Background
The U.S. Small Business Administration's (SBA) Surety Bond
Guarantee Program (Program) was created to ensure that small
and emerging contractors who do not qualify for surety credit
in the standard market have the opportunity to bid on public
construction work, grow their businesses and remain a viable
part of the U.S. economy. Small businesses must have access to
these bonds to obtain federal construction contracts after a
certain dollar threshold, and the Program assists them in
obtaining these bonds.
As the 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 guarantee 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.
Enhancements to Program
Over the years, the Program has gone through several
enhancements to increase participation and remove burdensome
regulatory requirements. For example, a provision in the 2013
National Defense Authorization Act (NDAA) increased the
guarantee limit from $2 million to $6.5 million to align the
Program with the simplified acquisition threshold and with the
needs of other SBA small business contracting programs, such as
the 8a Minority Small Business and Capital Ownership
Development Program. Additional reforms will provide greater
enhancement opportunities for small businesses and to ensure
participation from sureties.
Legislative Recommendation
NASBP and SFAA recommend amending Section 411(c)(1) of the
Small Business Investment Act of 1958 (15 U.S.C. 694b(c)(1)) by
increasing the guarantees afforded to surety companies that
participate in the Program from 70% to 90%. This revision will
likely stimulate greater corporate surety and surety bond
producer participation, providing access to the corporate
surety markets to small businesses which otherwise do not
qualify for surety credit in the standard market. These small
businesses are often the ones that may turn to unlicensed
individual sureties, where they can be duped by unscrupulous
persons seeking vulnerable businesses and offering surety
credit to anyone, regardless of the firm's qualifications,
financial wherewithal, or experience, and at rates many times
higher than the filed rates charged by corporate surety
markets.
No Added Cost to the Government or Risk to Taxpayers
According to the 2014 House Small Business Committee Report
(REPT. 113-462, Part 2, pgs. 5-6) the Congressional Budget
Office (CBO) ``estimates that implementing this change would
not have a significant effect on discretionary spending because
we expect the agency would raise fees to cover any additional
costs arising from the higher guarantee percentage. Enacting
such legislation would not affect direct spending or revenues;
therefore, pay-as-you-go procedures would not apply.''
According to the SBA Office of Surety Guarantees, increased
liability to the government does not seem to be a significant
issue. Under the 2009 American Recovery and Reinvestment Act
(ARRA), the SBA issued 218 final surety bonds for a contract
value of $663 million, which resulted in only two defaults. The
National Defense Authorization Act for Fiscal Year 2013
increased the eligible contract amount to $6.5 million, and up
to $10 million with a Federal contracting officer's
certification that the guarantee is necessary for the small
business to obtain bonding. Since the increase in contract size
amount, SBA has guaranteed over 170 total bonds with a contract
value of over $500 million, which have resulted in no defaults.
Conclusion
NASBP and SFAA appreciate the opportunity to provide the
Committee with information about the compelling need to enact
legislation such as H.R. 838: (1) to protect taxpayer funds and
construction businesses performing as subcontractors and
suppliers on federal construction contracts and (2) to provide
small businesses with greater access to regulated surety
markets through the SBA Surety Bond Guarantees Program. NASBP
and SFAA hope this statement proves beneficial and welcomes any
inquiries from the Committee on the points raised in this
written testimony or on other matters pertinent to small
businesses and surety bonding.
[all]