[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]



 
                  CONTRACTING AND THE INDUSTRIAL BASE III: 
                    REVERSE AUCTIONS, VERIFICATION AND THE 
                    SBA'S ROLE IN RULEMAKING

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

                                HEARING

                               BEFORE THE

               SUBCOMMITTEE ON CONTRACTING AND WORKFORCE

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             MARCH 19, 2015

                               __________

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               

            Small Business Committee Document Number 114-007
              Available via the GPO Website: www.fdsys.gov
              
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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. Richard Hanna...............................................     1
Hon. Nydia Velaazquez............................................     2

                               WITNESSES

Mr. Daniel I. Gordon, Senior Advisor, Government Procurement Law 
  Program, The George Washington University Law School, 
  Washington, DC.................................................     3
Ms. Amber Peebles, President, Athena Construction Group, Inc., 
  Dumfries, VA, testifying on behalf of Women Impacting Public 
  Policy.........................................................     5
Mr. Davy G. Leghorn, Assistant Director, National Veterans 
  Employment & Education Division, The American Legion, 
  Washington, DC.................................................     7
Ms. Margot Dorfman, CEO, United States Women's Chamber of 
  Commerce, Washington, DC.......................................     9

                                APPENDIX

Prepared Statements:
    Mr. Daniel I. Gordon, Senior Advisor, Government Procurement 
      Law Program, The George Washington University Law School, 
      Washington, DC.............................................    19
    Ms. Amber Peebles, President, Athena Construction Group, 
      Inc., Dumfries, VA, testifying on behalf of Women Impacting 
      Public Policy..............................................    25
    Mr. Davy G. Leghorn, Assistant Director, National Veterans 
      Employment & Education Division, The American Legion, 
      Washington, DC.............................................    30
    Ms. Margot Dorfman, CEO, United States Women's Chamber of 
      Commerce, Washington, DC...................................    39
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.


CONTRACTING AND THE INDUSTRIAL BASE III: REVERSE AUCTIONS, VERIFICATION 
                    AND THE SBA'S ROLE IN RULEMAKING

                              ----------                              


                        THURSDAY, MARCH 19, 2015

                  House of Representatives,
               Committee on Small Business,
         Subcommittee on Contracting and Workforce,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. Richard Hanna 
[chairman of the subcommittee] presiding.
    Present: Representatives Hanna, Hardy, Velaazquez, Chu, 
Clark, Meng, and Lawrence.
    Chairman HANNA. I will call this hearing to order. Welcome 
to our third hearing looking at businesses and our industrial 
base. Today we are going to focus on three important issues. 
First, we will hear about ongoing issues with veterans and 
Service disabled veterans' contracting programs. Second, we 
will discuss reverse auctions. Last Congress, I introduced 
legislation addressing reverse auctions for construction 
service contractors.
    However, today we are going to hear about the systemic 
issues in reverse auctions. Finally, we will hear about 
challenges to timely implementation of small business 
contracting and legislation.
    Each of these issues is important to inclusion of small 
business in our industrial base. With a process for verifying 
as a Service disabled veteran owned small business being overly 
burdensome, legitimate veterans choose to be absent themselves 
from the federal marketplace.
    For example, having two different definitions of Service 
disabled veterans' owned small businesses means we are forcing 
our veterans to resolve the tensions that lawmakers and 
regulators cannot solve or will not solve.
    Likewise, when reverse auctions are used properly, they can 
save taxpayers dollars. Unfortunately, some agencies have used 
reverse auctions in a manner that evades vigorous competition 
in contractor professions.
    Finally, the SBA and its Federal Acquisition Council, when 
they fail to act, it means contracting officers and small 
businesses have two conflicting sets of rules. Consequently, 
small businesses cannot plan and they often cannot compete for 
work.
    While the rulemaking process takes time, there is simply no 
excuse for the fact that nearly five years after Congress 
passed the Small Business Jobs Act, small business is still 
waiting for regulation. Given the bureaucratic delay, it is no 
surprise that many small businesses opt out.
    I expect as a result of the testimony we receive today, the 
Subcommittee will accurately pursue ways to increase 
opportunities for small businesses to compete for contracts.
    I look forward to hearing from each of you, and I want to 
welcome our witnesses. I now yield to Ranking Member 
Velaazquez, for her opening statement.
    Ms. VELAAZQUEZ. Thank you, Mr. Chairman, for holding this 
hearing. Today's discussion continues our ongoing work to help 
more small businesses compete in the Federal marketplace.
    Earlier this week, the Subcommittee examined small 
companies' participation in Federal procurement. Today's 
hearing examines another set of barriers that stop small and 
disadvantaged companies from winning their fair share of 
contracts.
    One practice that this Committee had previously examined is 
so-called ``reverse auctions,'' which are meant to pit 
potential contractors against one another to lower prices. 
Unfortunately, reverse auctions have in many cases failed to 
introduce or enhance competition.
    The Government Accountability Office, for instance, found 
that in a single year, Federal agencies conducted 3,617 of 
reverse auctions where only one vendor participated and 
submitted bids. In this case, the Federal Government is 
spending money on a process that does not lower prices or 
increase the quality of goods and services.
    Beyond reverse options, there are other areas that need 
close scrutiny by the Committee if we are to grow small 
business' role in the Federal marketplace. Congress has rightly 
created a program of targeting projects to veteran owned small 
businesses, especially those disabled during their time of 
service. In addition to SBA's program, the VA launched an 
initiative. However, there are serious concerns about how VA 
verifies small businesses operated by eligible veterans. It is 
important this program functions effectively.
    With bad actors gaming the system, legitimate veteran owned 
businesses lose out on contracting opportunities.
    More generally, the Committee must examine how well SBA's 
rulemaking process functions. Many of the rules the agency has 
formulated will boost small business' ability to compete for 
Federal contracts. Yet, previous acts of Congress and Executive 
Orders have largely hamstringed the SBA's rulemaking process.
    Mr. Chairman, this Committee has a long track record of 
working in a bipartisan manner, particularly when it comes to 
procurement issues. It is my hope we can continue that 
tradition to further small business' role as Federal 
contractors.
    I thank the witnesses for being here today, and I yield 
back the balance of my time.
    Chairman HANNA. Thank you. Our first witness is Daniel 
Gordon, Senior Advisor to the Government Procurement Law 
Program at George Washington University Law School.
    Mr. Gordon previously served as President Obama's 
Administrator for Federal Procurement Policy. Prior to serving 
at the Executive Branch, he worked 17 years in the Office of 
General Counsel for the Government Accountability Office.
    Sitting next to him is Amber Peebles, President of Athena 
Construction Group, Inc. Athena Construction Group is a Service 
disabled veteran owned HUBZone and woman owned small business 
located in Dumfries, Virginia. She is a Marine Corps Service 
disabled veteran, and we thank you for your service. She 
testifies today on behalf of Women Impacting Public Policy.
    Our third witness is Davy G. Leghorn, Assistant Director of 
the National Veterans Employment & Education Division, The 
American Legion. Mr. Leghorn served as a mortar infantryman in 
the Army, and then as a civil affairs specialist. Thank you for 
your service, sir.
    I now yield to Ranking Member Velaazquez to introduce our 
fourth witness.
    Ms. VELAAZQUEZ. Thank you, Mr. Chairman. It is my pleasure 
to introduce Ms. Margot Dorfman. Ms. Dorfman is the Founder and 
CEO of the United States Women's Chamber of Commerce. The 
Women's Chamber represents 500,000 members, three-quarters whom 
are small business owners and Federal contractors. Through her 
leadership, this organization has championed opportunities to 
increase women's business careers.
    In addition, Ms. Dorfman has an extensive background in 
business, including over 10 years in executive positions with 
General Mills and other Fortune 500 firms.
    Welcome, Ms. Dorfman.
    Chairman HANNA. Thank you. Mr. Gordon, you may begin.

  STATEMENTS OF DANIEL I. GORDON, SENIOR ADVISOR, GOVERNMENT 
 PROCUREMENT LAW PROGRAM, THE GEORGE WASHINGTON UNIVERSITY LAW 
 SCHOOL; AMBER PEEBLES, PRESIDENT, ATHENA CONSTRUCTION GROUP, 
   INC.; DAVY LEGHORN, ASSISTANT DIRECTOR, NATIONAL VETERANS 
EMPLOYMENT AND EDUCATION DIVISION, THE AMERICAN LEGION; MARGOT 
    DORFMAN, CEO, UNITED STATES WOMEN'S CHAMBER OF COMMERCE

                 STATEMENT OF DANIEL I. GORDON

    Mr. GORDON. Thank you, Mr. Chairman, and Ranking Member 
Velaazquez, members of the Committee, very much. It is an honor 
to be here this morning.
    My name is Daniel Gordon. I am the Senior Advisor to the 
Government Procurement Law Program at The George Washington 
University. As you probably know, G.W.'s Procurement Law 
Program has for more than 50 years been the premier institution 
granting degrees in procurement law.
    I am going to talk about electronic reverse auctions this 
morning. I have had the benefit of learning about them both in 
the U.S. context and in a good number of countries overseas 
that use reverse auctions frequently, from Russia, to Brazil, 
to Bangladesh, to Macedonia.
    In many ways, the best document about reverse auctions in 
the U.S. is the one you mentioned, Ranking Member Velaazquez, 
and that is the December 2013 GAO report. The report is full of 
interesting information. For one, the report agrees that 
reverse auctions save us money, but points out that we do not 
really know how much money, and the data about the savings is 
largely not in the hands of our Federal agencies.
    Moreover, although small businesses win the majority of our 
reverse auctions, GAO points out rightly that it is not clear 
that the reverse auctions are increasing the amount of work 
going to small businesses. That is to say what would have 
happened if we had done it the old fashioned way, without 
reverse auctions.
    GAO also points out some of the challenges about reverse 
auctions, and I would like to focus on them this morning, in 
the next couple of minutes.
    In my experience, the more you are dealing with commodity, 
the more likely there is a good candidate for reverse auction, 
but the more you are dealing with something that is a service 
and not a commodity service, the more likely you are to be 
running into trouble.
    Related to that is the way you are going to pick the 
winner. If all you care about is price, the reverse auction 
probably makes sense. If you are worried about other things, 
like performance, quality, staffing, a reverse auction can be a 
very problematic way to proceed.
    Moreover, GAO gave us good data that shows us important and 
problematic developments. As Ranking Member Velaazquez pointed 
out, in far too many cases that GAO found, there was no 
competition. There was either only one bidder or even if there 
was more than one bidder, each one of them submitted only one 
bid. The Government was paying a fee to a private vendor even 
though it really was not getting any benefit from the reverse 
auction.
    That brings me to my final significant point, which I wrote 
about quite a bit in my written testimony, and that is the cost 
and benefits of relying on a private sector company to run 
electronic reverse auctions.
    In fact, GAO said that one company, FedBid, ran more than 
99 percent of the reverse auctions that GAO found on 
FedBizOpps, the Government-wide portal. That is pretty darn 
close to a monopoly, and it raises some questions. Not that 
FedBid has not done a good job.
    I have to tell you in my experience, FedBid has done an 
excellent job. They have been efficient. They have been 
helpful. They helped the Government get savings. They provided 
a good platform that works well. They provided administrative 
training support. FedBid has done an excellent job.
    It is performing a function which is closely associated to 
the inherently governmental one, that is to say award of 
Federal contracts, and that raises issues. Not only that, in my 
experience, FedBid has something of an organizational conflict 
of interest. They control the data. They control the 
information. They have a financial interest in having as many 
reverse auctions as possible, regardless of whether the 
procurement is suitable, regardless of whether there is real 
competition. They get their fee. It is actually not a high fee, 
and as I point out in my testimony, they sometimes waive the 
fee.
    It is still troubling that Federal agencies, according to 
GAO, often do not know they are paying FedBid. That is not a 
healthy situation. In my experience, we need to ensure that 
these functions are under the control of Federal officials. We 
need to have contracting officers with training in running 
reverse auctions before they conduct one. They need to be 
trained on what we need in reverse auctions, how to conduct a 
reverse auction.
    As I explained in my testimony, I am not sure that 
statutory guidance is always necessary, but at the very least, 
we need Government-like guidance, as GAO points out, so that 
these reverse auctions, which can be an useful tool, are used 
properly.
    I would note that GSA now has a reverse auction at no fee 
to the users. We need to explore that.
    I want to thank you very much for your time this morning. 
Obviously, if we have time, I will be delighted to answer 
questions.
    Chairman HANNA. Thank you very much. Ms. Peebles?

                   STATEMENT OF AMBER PEEBLES

    Ms. PEEBLES. Good morning, Chairman Hanna, Ranking Member 
Velaazquez, and distinguished members of the Subcommittee. 
Thank you the opportunity to testify today.
    My name is Amber Peebles. I am President of Athena 
Construction Group, a Service disabled veteran/woman owned, 
HUBZone, construction company based in Northern Virginia, 
founded in 2003. I served eight years in the Marine Corps.
    Last year, Federal contracts accounted for more than half 
of Athena Construction Group's revenues. Currently, we have 42 
employees.
    I am also here today representing Women Impacting Public 
Policy, where I serve on its Executive Advisory Board.
    First, let me say thank you to the Subcommittee and staff 
for improving the contracting rules and regulations pertaining 
to small businesses. Under your leadership, the Congress has 
enacted much needed changes, increasing access to Federal 
contracts for all small businesses, but especially women.
    Nonetheless, these hearings make clear more can be done, 
including changes to help women meet their contracting goals 
for the first time.
    While construction related reverse auctions were the 
subject of a previous hearing, I would like to briefly share 
two experiences Athena Construction Group had with this 
procurement process that raises concerns.
    In one instance, after significant and costly preparation, 
an auction was closed with only seconds remaining. The 
contracting officer simply withdrew the requirement. While this 
happens occasionally in normal procurements, the additional 
costs of preparation for a reverse auction meant the loss was 
greater for my company.
    In another instance, several rounds of pricing for metals 
were required. Not to be overly technical, but a formula is 
used to address different price points for different times. 
This is standard in the industry. The Web site could not 
process the pricing structure accurately. Had this gone through 
a normal procurement, the opportunity would not have been 
wasted.
    We have previously submitted concerns on reverse auctions 
in testimony before this Committee, well cited in the GAO 
report. We support additional requirements to prevent the 
inappropriate use of reverse auctions. In fact, we believe 
small business set-asides should not be eligible for reverse 
auctions.
    Legislation in the last Congress sponsored by Chairman 
Hanna and Congresswoman Meng made these changes. We were 
disappointed the changes did not make it into law. We encourage 
you to reintroduce the bill and persist in its passage.
    Many of WIPP's members, including myself, are veterans 
running Service disabled veteran owned businesses. WIPP 
supports the Federal contracting programs that assist veterans 
in engaging in the Federal marketplace.
    Given the strong presence of veterans' advocates here 
today, WIPP defers to them on the specifics of improving 
contracting opportunities for SDVOSBs and veteran owned small 
businesses. WIPP encourages this Committee to work with them to 
improve the contracting environment for veterans.
    Let me take a few minutes to address an issue that 
frustrates many WIPP members, the time that lapses between a 
law passing and the FAR Council adopting the change in many 
instances is too long. While we know the rulemaking process 
takes time, it is just common sense that it should not take 
years to put a contracting change in place. We should know. 
WIPP spent 11 years getting the WOSB program implemented.
    Another example is SBA's recent proposed rule on 
subcontracting, which took two years to reach a proposed rule 
stage. Many women contractors have been waiting for those 
changes passed by this Committee because it would result in 
additional subcontracting opportunities.
    Even after final rules are promulgated by the agency, the 
wait for FAR Council adoption could take months if not years. 
While we are grateful the implementation of legislation to 
remove dollar caps on awards in the Women Owned Small Business 
Federal Contract Program was done quickly, it is not always the 
case. Currently, women entrepreneurs stand to gain with a 
speedy implementation of sole source authority in the WOSB 
Program. Every day this policy cannot be utilized is another 
day women business owners are disadvantaged by the contracting 
process.
    Members of Congress, along with the women's business 
community have asked SBA to move expeditiously. It is our hope 
that when the time comes, the FAR Council will do so as well.
    WIPP has two recommendations. One, in our view, it is 
logical that FAR Council adoption of a change should happen 
concurrently with the promulgation of the SBA's final rule 
implementing that change.
    Two, SBA should be added to the FAR Council. It seems to us 
appropriate that SBA charged with looking after small business 
procurements be included in the Council.
    Expanding beyond the scope of this contracting hearing, I 
want to close with a contracting concern of WIPP. The increased 
Federal strategic sourcing efforts in our view represents a 
serious threat to the small business contracting community. In 
a name, strategic sourcing sounds like a good idea, akin to 
good governance. For small businesses, including WOSBs, 
however, the trend is eroding the industrial base.
    The efforts to maximize short term savings through large, 
limited competition contract vehicles have pushed small 
businesses out of competition and picked a select group of 
winners.
    One solution may be to revise how small business 
participation is measured by the agencies. Currently, small 
business goals only measure the dollars awarded to small 
businesses. Equally important is how those dollars are 
distributed among small businesses. SBA should consider 
expanding its goal criteria to include a participation rate. In 
doing so, it will help ensure that a diverse group of 
businesses, including women, are engaged in the Federal 
marketplace.
    Thank you for holding this hearing today, and for making 
the contracting environment better for women owned businesses. 
I am happy to answer any questions.
    Chairman HANNA. Thank you. As you can see, we have votes. 
We will just adjourn for about 20 minutes. There are two votes. 
Relax, and we will be right back. Thank you.
    [Recess]
    Chairman HANNA. Thank you. Mr. Leghorn?

                   STATEMENT OF DAVY LEGHORN

    Mr. LEGHORN. Good morning, Chairman Hanna, Ranking Member 
Velasquez, and members of the Subcommittee, on behalf of our 
National Commander, Michael D. Helm, and the 2.3 million 
members of The American Legion, we thank you for this 
opportunity to testify today.
    The American Legion identifies three main issues that pose 
obstacles for veteran owned small businesses: reverse auctions, 
differences between Small Business Administration and 
Department of Veterans Affairs standards, and exclusion of 
veterans from Disadvantaged Business Enterprise Programs in the 
Department of Transportation.
    On reverse auctions, the Government has a fiduciary 
responsibility to treat small businesses fairly and not take 
advantage of its buying power and become predatory.
    The American Legion appreciates the goal of lowering 
Federal expenditures through competitive contracting 
initiatives, but we are concerned that misuse of non-
governmental platforms could put veteran small businesses at 
risk and limit job creation.
    The American Legion is also concerned that reverse auctions 
will lead to decreased quality because these platforms 
encourage vendors to provide the cheapest product and services 
and only to maintain the smallest profit margins to stay 
competitive.
    The Government is therefore purchasing substandard products 
and services because reverse auctions steer agencies to shop 
for lowest pricing and not for best value.
    These business models favor home based businesses that 
primarily operate online with no customer support. Businesses 
like these rely on Federal procurement as their sole source of 
income and their tight profit margins do not incentivize job 
creation.
    When something is bad for small business, The American 
Legion recommends simply doing away with it. The Federal 
dollars spent in purchasing reverse auction services are better 
utilized in hiring more contracting officers to do market 
research to ensure that procurements are made at fair market 
value. A reverse auction is a shortcut contracting officers 
resort to because there simply are not enough of them.
    On VA verification, the American Legion supports 
verification. Contracting officers are risk adverse and they 
prefer giving contracts to firms that have undergone third 
party vetting, so we understand why contracting officers have 
started asking SDVOSBs if they are CVE certified.
    However, this has added to the confusion of having two 
vetting processes for two agencies for relatively the same 
purpose. To cut down on the confusion, we ask the Committee to 
consider a single set of standards for all SDVOSBs who contract 
with the Federal Government. We would defer to the Committee's 
expertise in selecting the agency most capable of undertaking 
this task.
    The American Legion also believes that SBA and VA need to 
work together to minimize inconsistencies in decisions being 
made. The main challenge with VA verification is striking the 
balance between the amount of intrusion necessary to 
substantiate size, ownership, and control, and the requisite 
amount of oversight to protect the integrity of the program.
    Including SBA in the appeals process would ensure 
consistency in the final decisions being made and provide 
impartiality in not having the agency of original jurisdiction 
review their previously denied applications.
    Further, SBA has the legal expertise, experience, and ample 
base of precedential case law that can be applied to a 
formalized appeals process.
    Lastly, regarding the Department of Transportation's DBE 
Program. By law, the Federal Government is mandated to award no 
less than three percent of all Federal contracts to SDVOSBs. 
For a number of reasons, a few agencies have not met this goal.
    One of the most egregious exclusions of veteran owned small 
businesses occurs in the Department of Transportation's 
Disadvantaged Business Enterprise Program, which mandates that 
states receiving Federal dollars for infrastructure repairs 
have to set aside 10 percent for preferred groups of small 
businesses.
    It is a misconception that this 10 percent is solely 
relegated to road and infrastructure construction firms, and 
there are a variety of industries involved, such as 
engineering, landscaping, remediation, utilities, and 
information technology. This is an issue that affects all 
veteran owned small businesses.
    The American Legion worked closely with Congressman Mike 
Fitzpatrick from Pennsylvania to amend the current legislation 
to add ``veteran owned small business concerns'' as a separate 
line to the list of candidates eligible in the program, and 
such an addition would not presume that veterans are socially 
and economically disadvantaged, instead, VOSBs would be 
considered independently eligible for participation in the DBE 
Program.
    In previous Congresses, Congressman Fitzpatrick has 
introduced the Fairness to Veterans for Infrastructure 
Investment Act that makes this change. The American Legion and 
numerous other veteran service organizations support this bill 
and will ask again for this Committee's support when Congress 
reauthorizes the Federal Highway bill.
    Thank you, and I look forward to any questions you may 
have.
    Chairman HANNA. Thank you. Ms. Dorfman?

                  STATEMENT OF MARGOT DORFMAN

    Ms. DORFMAN. Chairman Hanna, Ranking Member Velaazquez, and 
members of the Subcommittee, thank you for the opportunity to 
provide testimony on behalf of our over 500,000 members of the 
U.S. Women's Chamber of Commerce.
    While reverse auctions have the potential to deliver 
savings for the Government, we have concerns with the process 
and outcomes.
    Small business owners may be pushed to lower bids to their 
own detriment. The complexity and risks involved in an auction 
may drive down competition by causing potential bidders to not 
participate. There is a risk of circumventing regulations 
related to the small business requirements. In many instances, 
it may be more efficient and cost effective to simply purchase 
off a schedule.
    Regarding verifications, our members are concerned about 
the failure of the SBA to verify firms claiming to be small and 
meeting the socioeconomic requirements. Congress established 
programs to support our nation's efforts to reach full 
productive capacity and assure a fair portion of Federal 
contracts are placed with the full spectrum of small 
businesses.
    The SBA is charged with accurately identifying and 
verifying eligible firms as small, veteran owned, women owned, 
et cetera. Unfortunately, the Small Business Administration has 
failed at the most basic requirement. For the last decade, the 
Inspector General's annual report, Report on the Most Serious 
Management and Performance Challenges, listed the top challenge 
of the SBA as allowing large firms to obtain small business 
contracts and allowing agencies to count these contracts toward 
their small business goals.
    The SBA's failure to verify small business and 
socioeconomic claims became a major issue when the Service 
Disabled Veteran Owned Small Business Set-Aside was created. 
The SBA did not establish any eligibility verification for the 
program, creating fraud and abuse as contracts went to 
ineligible firms.
    This issue became more complicated when the VA began their 
own Vets First Contracting Program with its own certification. 
The Vets First Contracting Program is only for specific 
contracting opportunities within the VA, and has different 
eligibility requirements from the SBA's SDVOSB Program.
    Some members of Congress have suggested the VA's 
verification for the Vets First Program should be moved to the 
SBA and paid for by the VA. The idea stems from a lack of 
understanding that the SDVOSB Program, which is under the SBA's 
management and enforcement, has a different purpose and 
different requirements from the VA's Vet First Program.
    Since the SBA failed to create the verification process for 
the SDVOSB, businesses and agencies are confused, and 
legitimate Service disabled veteran owned firms have lost 
hundreds of millions of dollars.
    More recently due to the SBA's poor regulatory 
implementation and enforcement of the Women Owned Set-Aside 
Program, the Government Accountability Office found that more 
than 40 percent of businesses securing women owned set-asides 
were ineligible.
    Thankfully, Congress and the President acted through recent 
passage of the National Defense Authorization Act to remove 
self certification from the Women Owned Set-Aside Program, 
which when implemented, will elevate the verification for this 
program.
    We appreciate Congress stepping up to force the SBA to do 
what it should have done all along, and ask this Committee to 
hold the SBA accountable for the expedient creation of strong 
regulations to improve verification.
    As Congress passes legislation to achieve these goals, we 
rely on the SBA to prepare and enforce regulations that 
successfully fulfill your intent. In this area, the SBA has 
failed woefully.
    The regulations developed and enforced by the SBA for the 
Women Owned Set-Aside Program were flawed from the start. The 
SBA ignored stakeholder input on the inability of the processes 
to ensure that only qualified women owned firms received set-
asides, created a grossly complex document management process, 
and turned contracting officers into de facto certifiers, 
driving down their desire to use the program.
    We ask that the House Small Business Committee hold a full 
Committee hearing with the SBA to understand how this plan will 
be implemented.
    The SBA failed to establish verification for the SDVOSB 
Program, causing hundreds of millions of dollars to be lost, 
fraud and abuse, and setting up confusion between SBA's program 
and the VA's program.
    The SBA has also failed to staff an appropriate number of 
procurement center representatives, PCRs, to enforce the 
requirement for small business set-asides in their regions, the 
most crucial front line team to assure that a fair portion of 
purchases are placed with small business concerns. It is not a 
regulatory enforcement priority for the SBA.
    We agree with the budget views of the Committee, the SBA 
must allocate greater use of their funds to core 
congressionally mandated activities, rather than funding the 
SBA's extra layers of non-essential management and non-mandated 
programs. We recommend funds be directed to regulatory 
enforcement and direct small business services.
    Thank you.
    Chairman HANNA. Thank you. I will yield to Ranking Member 
Velaazquez for our first questions.
    Ms. VELAAZQUEZ. Thank you, Mr. Chairman. Ms. Dorfman, some 
of the issues with self verification of veterans are also 
present in the Women's Program due to the ability to self 
certify. However, due to legislation I offered last year, 
businesses would no longer be able to self certify their 
eligibility for the Women's Program.
    Yet, we know some damage has already been done. Can you 
discuss some of the ramifications that the allowance of self 
verification has done to these programs, the Women's Program, 
in particular?
    Ms. DORFMAN. Certainly. Thank you. As the GAO report 
mentioned, it was 2012 or 2013, for both years, 40 percent of 
the contracts awarded to ``women owned firms'' actually went to 
ineligible firms. That is billions of dollars of lost 
opportunities.
    The U.S. Women's Chamber of Commerce is a third party 
certifier. We did a similar quick review probably a year ago 
where we found that out of all those applications that had come 
in, we had denied 39 percent, and 53 percent of those ended up 
self certifying, so they are receiving contracts, and there is 
no way the SBA has been trying to--the SBA has not followed up 
at this point to mitigate that situation.
    Ms. VELAAZQUEZ. Thank you. Ms. Peebles?
    Ms. PEEBLES. Speaking on behalf of WIPP, we are absolutely 
against any fraud in any of these small business programs. I do 
think a concern or a focus of ours would be to ensure the sole 
source authority moves along, but not at the expense of the 
certification process intervening with that.
    Ms. VELAAZQUEZ. Thank you. As the SBA develops its own 
verification process, what are some key factors you think the 
agency should be focusing on to reduce instances of fraud in 
the program? Ms. Dorfman?
    Ms. DORFMAN. There certainly needs to be much more follow 
up when they are actually doing the process to be able to 
identify those that are truly women owned firms versus those 
that are masquerading as women owned firms, and I think they 
need to make sure that their regulations and their processes 
are in compliance with their own regulations.
    Ms. VELAAZQUEZ. Thank you. Mr. Gordon, since the use of 
reverse auctions, they have been calls from various 
stakeholders to ensure regulations and guidelines as to how and 
when the reverse auctions should be used.
    However, while there have been several rounds of data 
collection, we have yet to see the issuance of any policies. 
Why do you believe there is such hesitation to publish this 
much needed guidance on regulations?
    Mr. GORDON. As a former administrator, I would have some 
sympathy for the workload that very small office has, they have 
very few people, and they have an enormous responsibility.
    I would say we need Government-wide guidance. I am not sure 
we need statutes that go into any detail. I am not sure we need 
an amendment to the Federal Acquisition Regulations. I worry 
that technology changes very quickly, so I would say whatever 
goes into a statute or the FAR should be at a very high level, 
but you have basic principles, that you need training, et 
cetera.
    We absolutely need to get Government-wide guidance. Our 
contracting officers across the Government do not know what 
procurements are suitable for these. The training is critical.
    Ms. VELAAZQUEZ. Training. Thank you, Mr. Gordon. Mr. 
Leghorn, I am really happy to hear in your testimony that you 
are stating there have been some improvements to VA's 
verification process, including they have decreased the time it 
takes for a business to receive its initial decision.
    Also, you noted you have seen fewer requests for counseling 
services in the verification process. Do you think this means 
the VA has finally turned some things around for the 
certification process?
    Mr. LEGHORN. Thank you for your question. VA, yes, they are 
coming around. I do not think they have completely turned the 
corner yet. There is still some discrepancies in the quality of 
the decisions that are being made, but by far, when it comes to 
time alone, it has had success and done a really good job.
    Ms. VELAAZQUEZ. How do you feel about a call made by some 
to move the VA process to SBA completely?
    Mr. LEGHORN. Again, as in our testimony, we do not have a 
preference. We believe there needs to be certification agency-
wide, and we would rely on this Committee's expertise to tell 
us whether that is going to be an agency or third party.
    Ms. VELAAZQUEZ. Thank you. My time has expired. Thank you, 
Mr. Chairman.
    Chairman HANNA. Mr. Gordon, if you had the opportunity to 
eliminate in its entirety reverse auctions except for 
commodities versus us trying to figure out all the nuances and 
dynamics of the different types of businesses, where would you 
go?
    Mr. GORDON. Mr. Chairman, I want to make sure I understand 
the question. Eliminate reverse auctions for commodities?
    Chairman HANNA. For everything but commodities. Would that 
produce an outcome that is more desirable than trying to work 
through what we have in front of us?
    Mr. GORDON. It might make sense. Of course, defining 
``commodities'' is not just a simple thing. I am very concerned 
that (a) our people across the Government do not know how 
problematic it is to do a reverse auction when you are focused 
on quality and past performance, et cetera, and they do not 
realize that buying services, especially professional services, 
you do not want to be doing a reverse auction.
    What happens, sir, is you can have situations where a 
company wins the auction but does not get the contract. You are 
driving down price even though price is not really your focus.
    I often tell people if you want to do a reverse auction to 
buy surgery services, make sure you do not particularly like 
the patient, because you are going to be driving down the price 
on something where you should be focused on other than price.
    I think it would be a step forward, at least as a 
cautionary move, to say do not use reverse auctions for non-
commodities.
    Chairman HANNA. Take the time to define what we mean by 
``commodities'' and throw the rest. What do you think, Ms. 
Peebles?
    Ms. PEEBLES. I think the Professor is fascinating. My 
knowledge of reverse auctions is not as in-depth as the 
Professor's. There are concerns that I as a private citizen and 
as a business owner who has attempted to use FedBid have about 
the process, and one of my concerns is the lag feature, which 
if I am not mistaken, according to the GAO report, is an 
arbitrary feature, meaning when you submit a price, it will 
immediately show that you are lagging, indicating somebody else 
is bidding against you.
    Chairman HANNA. Which may not be the reality.
    Ms. PEEBLES. Which may not be the case. If I may just speak 
as a private citizen, as a taxpayer, and as a business owner, 
if I used this feature and responded to that lag feature, I 
have concerns because every time my company receives a prime 
contract, I, as President, sign a document, Truth in 
Negotiations Act, which has penalties if I have done that in 
bad faith.
    I, frankly, think we are a better country than that, to use 
deception in a Federal procurement.
    Chairman HANNA. Does anyone else want to weigh in?
    I kind of agree with you. Weaving through this, what is 
obvious is the very, very subjective nature and the complexity 
of so many different types of products and outcomes we are 
looking for, it defies reason that we would even use reverse 
auctions.
    I appreciate that, and I am going to yield to Ms. Chu for 
five minutes. Thank you.
    Ms. CHU. Mr. Leghorn, you testified that the American 
Legion has found that instead of fostering positive partnership 
relationships between Government and industry, the use of 
reverse auctions has actually cultivated resentment between 
buyers and sellers, ruining any potential for a constructive 
relationship to be had.
    Can you give us an example of a time when you have seen 
this partnership deteriorate?
    Mr. LEGHORN. I am not an expert on reverse auctions for the 
American Legion. Can I take that one for the record and get a 
specific example back to you at a later date?
    Ms. CHU. Sure.
    Mr. LEGHORN. Thanks.
    Ms. CHU. Mr. Gordon, you brought up many points about 
problems with reverse auctions, including something that I had 
not heard of before, the use of a private company, FedBid, to 
administer the data which could be a conflict of interest.
    Can a reverse auction be fair, and if so, what would an 
ideal reverse auction look like?
    Mr. GORDON. Thank you for the question. Again, I want to 
emphasize that FedBid does a very good job. The problem is 
their situation creates, as you said, a conflict of interest.
    If I can give you an example. If a company is bidding and 
they bid $100 in a reverse auction, what shows up on the screen 
for everybody, including the agency, is not the $100, it is 
$103, because FedBid adds its bid automatically, and people do 
not realize that the figure they are seeing on the screen is 
not what the company is bidding. It is what they are bidding 
plus the private company's fee.
    What GAO found was when GAO asked the agencies are you 
paying a fee to FedBid, there were agency personnel that said 
no, we do not pay any fee to FedBid. It is extraordinary that 
the data is completely under the control of FedBid.
    I worked at GAO for 17 years. I do not recall ever seeing a 
GAO report or when you go through it, every charge, every 
graph, where they list a source, FedBid data, FedBid data. GAO 
did not have access to agency data because the agencies do not 
have the data.
    You want to have a system where there is not a conflict of 
interest, where the decision about whether to use a reverse 
auction is based on what makes sense for the Government in that 
procurement, unencumbered by some private company's corporate 
interest, where they get a fee, regardless of whether it makes 
sense to use a reverse auction, regardless of whether you have 
competition, even if you only get one bid, they are going to 
get their fee. You want to avoid any sort of conflict of 
interest.
    Ms. CHU. You are saying that our Federal Government does 
not even have the data with which to make a sensible decision?
    Mr. GORDON. As GAO pointed out, and I think they are right, 
agencies cannot decide whether it makes sense to use a reverse 
auction because they do not have the data. At the very least, 
agencies need to be in control of the data, they need to have 
the training, they need to realize they cannot advocate their 
responsibility.
    I think the reasons agencies let FedBid make the decisions 
is because it is easier. It is not because FedBid is doing 
anything wrong, on the contrary, they are so good that the 
agencies say okay, FedBid says this is a good procurement for a 
reverse auction, let's go for it.
    That is our Federal officials advocating their 
responsibility, and we need to avoid that.
    Ms. CHU. Thank you for that. Switching gears, Ms. Peebles 
and Ms. Dorfman, I have consternation constantly about the fact 
that we never met the five percent goal for women owned 
businesses, and in fact last year it was 3.6 percent. Once 
again, we did not make it.
    Finally, women owned businesses will get the designation 
they deserve through the sole sourcing provision passed in last 
year's NDAA. Do you believe that implementing this provision 
for women owned small businesses is enough to rectify the lack 
of access that female entrepreneurs have to Government 
contracts?
    Ms. DORFMAN. First off, it is actually the removal of the 
self certification that will make it better for women owned 
firms so they are competing against women owned firms. The sole 
source is something the contracting officers need because in 
some industries, there is only one woman owned firm that can 
perform that work, so they need to have that.
    I think that impacts the program a far less percentage than 
the women owned small business certification being the SBA 
having to do it or making sure it is done properly with a 
follow up, however they are planning to implement it.
    I am hoping that gets implemented very quickly. I do not 
know that it will. I am looking toward this Committee to help 
hold them accountable, to make sure that they do implement it 
fairly speedily. Thank you.
    Ms. CHU. Ms. Peebles?
    Ms. PEEBLES. Thank you. We are very optimistic that the 
five percent set-aside will certainly go a long way in helping 
to eliminate these gaps in the percentages of meeting 
procurement goals. Having said that, I think the additional 
impact is that now, women owned businesses plan strategically 
for their marketing and their procurement strategy now that 
this is in place.
    The way to make it most impactful is to get the regulations 
in place quickly so that women owned businesses can start 
utilizing it and taking advantage of it now.
    Ms. CHU. Thank you. I yield back.
    Chairman HANNA. Ms. Lawrence?
    Ms. LAWRENCE. Thank you, Chairman, and Ranking Member, for 
calling this hearing. The 2013 goals for awarding contracts to 
Service disabled veteran owned businesses has surpassed the 
three percent statutory goal. This is a positive development, 
but the unemployment rate for veterans who served since 2001 
currently is at nine percent. We have a long way to go.
    Mr. Leghorn, the disparity in the verification systems for 
veteran owned businesses at the SBA and the Department of 
Veterans, the VA, I am concerned that it may lead to awarding 
of contracts to some fraudulent parties. Do you believe veteran 
owned businesses may have lost out on contracts that normally 
would have been received, and this would be due to the lack of 
clarity in the verification system? Answer that and then tell 
me what do you recommend we do to correct it?
    Mr. LEGHORN. Thank you for the question. With there being 
two procurement policies in terms of how SDVOSBs participate in 
Federal procurements, on the self certification side, you are 
always going to find fraud, and on the verification side, if 
you are a bad actor and you want to defraud the Government, 
there is still a way around it because it is a very document 
driven process.
    My answer to the first part of the question is the 
Government can only do so much to check up on people. If you 
were somebody that is out there purposely trying to defraud the 
Government, you are going to know the way around the system.
    What can we do about it? SBA or VA, they need the resources 
to do more onsite visits, that is one way to catch people in 
the act. It is about moving the agencies to take reporting or 
allegations when somebody is trying to defraud the Government, 
to take those allegations seriously and look into it, in a 
prompt manner.
    Ms. LAWRENCE. I want to thank the Committee and those of 
you who are testifying. The women owned and veteran owned 
businesses and our commitment through the SBA is something that 
I am very committed to, but we must find ways to validate and 
eliminate as much fraud as we can. Unfortunately, enforcing the 
research and the processes so we can identify fraud is the 
first step, but also to have our systems and verifications in a 
way that it rises to the top for the women's and veterans' 
businesses.
    I thank you for your expertise in this. I yield my time.
    Chairman HANNA. Ms. Meng?
    Ms. MENG. Thank you all for being here and for sharing your 
experiences with us. First, I want to thank Congressman Hanna 
for introducing his legislation to ban reverse auctions in 
certain areas. I believe the legislation is a good step 
forward, and I hope there will be even more we can do to 
protect small businesses from the use of reverse auctions.
    Although some will argue that reverse auctions benefit the 
Government by offering lower prices, we have often been left 
with junk bidders who provide subpar service.
    My question is as a follow up to something that was 
mentioned at Tuesday's Subcommittee hearing. Where do you see 
contracting goals headed? Do you believe there has been too 
much emphasis on dollars for our prime and subcontracting 
goals, and not enough emphasis on the diversity and quantity of 
businesses receiving these opportunities? Of course, any 
recommendations. For anyone who wishes to answer.
    Ms. DORFMAN. I will jump in. It has been a frustration that 
there continues to be double counting within the socioeconomic 
categories because what that does is the person with the most 
certifications gets the contracts. It would be far better to 
make sure that as the agencies are counting their goals, that 
they are saying okay, if you are 8(a), HUBZone, Service 
disabled veteran, woman owned, which one is that going to, so 
that more small businesses have access to those contracts. 
Thank you.
    Chairman HANNA. Thank you. We are going to open it up for 
another round of questions for anyone who may have any.
    This is a screen shot from FedBizOpps, from the Federal Web 
site where all Federal contracts are advertised. I am sure you 
all have seen it. This lets you search by contracting office, 
so if you wanted to do business with GSA in D.C., you can 
choose that option.
    However, what this screen shot does is show that the 
Federal Government has classified FedBid--a private company--as 
a contracting office of the Federal Government. I am just 
curious if anyone thinks that is appropriate or inappropriate, 
and if you think it leads to confusion.
    Go ahead, Mr. Gordon.
    Mr. GORDON. Mr. Chairman, it is a real problem. Again, it 
is not that FedBid does not do a good job, they do a great job. 
They are doing work that is closely associated with inherently 
governmental work, and the line is getting blurred. You are 
seeing mission creep. When you are looking on FedBizOpps, which 
is a Federal Web site, you are looking for a Government office. 
There is FedBid.
    I think we need to think long and hard if we are going to 
have a private company running these auctions, we have to have 
adequate Federal supervision so you do not have this sort of 
confusion.
    If I can tell you one quick anecdote, other people when 
they have a spring break at a law school go to like Florida, 
Ft. Lauderdale or whatever, I spent my spring break a couple of 
weeks ago in Macedonia, in Southeast Europe, learning about 
procurement and speaking about procurement to government 
officials there.
    They do electronic reverse auctions in Macedonia, a small 
country, not a rich or sophisticated one. I said to them do you 
have a private company running your reverse auctions. They 
looked at me like I was crazy. They said of course not, we have 
our government officials who run the reverse auctions.
    I thought a little point about maybe what the country of 
Macedonia could do is maybe something the Committee may want to 
reflect on.
    Chairman HANNA. Who bids against FedBid?
    Mr. GORDON. In theory, there are other sources of reverse 
auctions, but I was not at all surprised when I saw in the GAO 
report that more than 99 percent of the reverse auctions on 
FedBizOpps that GAO found were done by FedBid.
    Chairman HANNA. Do you happen to know anything about the 
probability that a particular company that is listed is part of 
the Army, incidentally?
    Mr. GORDON. No.
    Chairman HANNA. Thank you very much. Anything else? Ms. 
Velaazquez?
    Ms. VELAAZQUEZ. Yes. I just would like to ask the panel 
about the reverse auction process. We have to be so very 
careful that we do not cause harm and make the programs whole 
and be effective, but we have found that the reverse auction 
process may move too quickly for competitors to accurately 
reassess their costs or the way they will actually do the work.
    There have been reports where the buyer has to step in to 
prevent a supplier from submitting a price that will harm the 
company.
    Do you believe contractors are actually able to perform the 
contract at the price they bid or are some putting the 
viability of the company at risk? Ms. Peebles?
    Ms. PEEBLES. Thank you, Congresswoman Velaazquez. If I 
understand the question correctly, it is basically how is a 
company going to respond to this purchasing mechanism, and I 
will speak as a business owner in this regard, for myself, and 
not on behalf of WIPP with regard to this particular issue.
    There are so many unknown's when submitting pricing to 
FedBid as compared to a standard procurement process, that it 
leads basically to a bifurcated decision.
    One, if you are somewhat unsophisticated with the process 
and you see the lag time hit, and you are like I want to win a 
Federal contract, you see someone is competing against you, you 
think okay, well, I can do it for less, because apparently that 
is what the market will bear, without knowing everything 
involved, you can bid so low and make a commitment, that you 
are causing damage to your company financially.
    The flip side is because there are so many unknown's, you 
can inflate the price to cover against what you do not know, 
and if you are the only bidder, you have not given the 
Government a good price that you would have given under normal 
channels.
    Ms. VELAAZQUEZ. Mr. Gordon?
    Mr. GORDON. It is interesting. I think it may be worth 
pursuing this area one way or the other, and with some 
hesitation because of the workload of GAO, that GAO might be 
able to do a study about the impact of this low pricing on 
small businesses.
    That said, I have a lot of confidence in our small 
businesses and their sophistication. I am a little bit 
skeptical when people tell me companies are bidding so low that 
they are putting their company at risk.
    I understand that in an auction, people in a normal 
auction, people sometimes bid higher than they should. I 
appreciate that. I have actually gone down that path personally 
without disclosing any details here.
    I trust our companies, the fact is in a Federal procurement 
of any sort--we had sealed bids in the procurements we have 
been doing for more than 100 years, companies submit bids. Do 
they sometimes submit bids that are foolishly low? Yes. I trust 
their judgment. They are business people. I think we can trust 
them to make judgments about how low they should or should not 
bid.
    Ms. VELAAZQUEZ. Thank you.
    Chairman HANNA. What you are really describing is a race to 
the bottom, an opportunity to bid virtually against yourself, 
taking a risk that may be inappropriate in the moment. 
Everybody wants to work. Contracting companies have overhead 
they need to cover. Sometimes they do work below their costs, 
they do not always do it on purpose. The other side is people 
can actually bid at a much higher price, just randomly, taking 
an opportunity.
    To your point, I personally probably have bid on over 3,000 
jobs, big and small, in my life, and believe me it is often the 
case in a very competitive market that the low bidder is the 
guy that never finishes the job, which is another issue having 
to do with a lot of other things.
    The goal is to get the product we want at a reasonable 
price and let companies make money, and thrive, and take 
advantage of all the opportunities the Government has for small 
businesses.
    It seems to me that a reverse auction is often antithetical 
to the outcome, the pricing, and to competition.
    With that, we have a couple of minutes if anyone wants to 
say anything else that has not been said or that we have not 
heard, go ahead. Anyone?
    Ms. PEEBLES. Previously, I was asked a question regarding 
meeting the woman owned small business goals, and if I could 
just take a moment and elaborate on the answer. This is my 
first time to testify, so I wanted to get my thoughts together.
    Two points that I wanted to make and then I am done. Sole 
source was a phenominally good law for women owned businesses. 
It allows access to contracts for women in business and it is a 
very good vehicle for contracting officers.
    We do not want to raise the WOSB goal. We want to meet it 
first. Thank you.
    Ms. VELAAZQUEZ. If I can make a comment about that, it has 
always been my position that the Federal Government struggled 
for so many years, and this is why I initiated a Government-
wide report that I issued for almost 14 years, measuring 
contracting goals and achievements for all the Federal 
agencies, Government-wide.
    What good does it do if we increase it if for the first 
time this year, this year and last year, for the first time 
Government-wide, yet there are those that claim that ineligible 
firms were qualified as small businesses.
    Let's do this right. Let's achieve those goals, and then we 
will move from there to increase those goals. I agree with you.
    Chairman HANNA. Thank you. I want to thank you all for 
being here. You have done a marvelous job. These are not easy 
questions, they are complicated, but you have helped us and 
given us a lot of opportunity for direction, and I would ask 
you to watch this Committee if you can and see what comes out 
in some legislation shortly.
    I will recommend to Chairman Chabot a full Committee markup 
on legislation addressing verification and reverse auctions and 
the process for implementing small business contracting 
reforms.
    I ask unanimous consent that members have five days to 
submit statements and supporting materials for the record. 
Without objection, so ordered.
    This hearing is now adjourned. Thank you very much.
    [Whereupon, at 10:55 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X


              STATEMENT OF THE HONORABLE DANIEL I. GORDON


          SENIOR ADVISOR, GOVERNMENT PROCUREMENT LAW PROGRAM,


              THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL


               BEFORE THE HOUSE SMALL BUSINESS COMMITTEE


               SUBCOMMITTEE ON CONTRACTING AND WORKFORCE


                             March 19, 2015


    Chairman Hanna, Ranking Member Velaazquez, Chairman Chabot, 
Members of the Committee, good morning. I am grateful for the 
honor of being invited to testify before you today about 
electronic reverse auctions and other important procurement 
issues. I am the Senior Advisor to the Government Procurement 
Law Program at the George Washington University Law School, 
which has, for more than 50 years, been the premier venue for 
the studying and teaching of procurement law in this country.

    Let me begin by commending you for focusing on the 
important topic of electronic reverse auctions, which are 
essentially auctions run through the Internet in which bidders 
offer successively lower prices. I have seen the importance of 
these reverse auctions in both the U.S. acquisition system and 
in procurement systems around the world in recent years, 
including in countries as diverse as Bangladesh, Macedonia, 
Brazil, and Russia.

    In the U.S., perhaps the best report on the subject is the 
Government Accountability Office's December 2013 report, 
Reverse Auctions: Guidance Is Needed to Maximize Competition 
and Achieve Cost Savings, GAO-14-108. In that report, GAO 
looked at the use of reverse auctions in fiscal year 2012, and 
found that more than $1 billion had been awarded in contracts 
through use of reverse auctions during that year. GAO focused 
on the five federal agencies that together used about 70 
percent of the auctions in 2012: the Departments of the Army, 
Homeland Security, Interior, and Veterans Affairs, and the 
Defense Logistics Agency (DLA). Of those five, the first four 
all used the same vendor to run the auctions, and GAO was able 
to obtain detailed information on their use of auctions from 
that vendor; the fifth agency, DLA, bought a license to run its 
auctions without reliance on a vendor, but it lacked detailed 
data for GAO to review.

    Both from my review of the GAO report and from what I have 
seen and heard, in the U.S. and abroad, I would suggest that 
use of electronic reverse auctions has brought benefits in 
three areas: savings, speed, and small businesses.

          Savings: While GAO expressed concern that the exact 
        amount of savings obtained is uncertain, there is no 
        doubt that reverse auctions have led to a reduction in 
        the amount of taxpayer funds spent on the commodity 
        goods and services for which auctions were used. I have 
        been estimates of savings on the order of 10 to 20 
        percent, and sometimes higher, though GAO is right to 
        point out that the way savings are measured can be 
        problematic.
          Speed: Reverse auctions can be conducted quickly, and 
        they have contributed to a substantial improvement in 
        efficiency in government procurement systems over the 
        past 10 years, both in the U.S. and abroad.

          Small businesses: GAO reported that 86% of the 
        procurements in which reverse auctions were conducted 
        were won by U.S. small businesses, which translated to 
        80% of the dollar value of the procurements. In its 
        report, GAO notes this is consistent with the 
        presumptive set-aside for U.S. small businesses under 
        federal law for procurements under $150,000. While it 
        is thus not clear that use of reverse auctions 
        increased the percentage of these procurements that 
        would have otherwise been won by small businesses, the 
        fact is that the great majority of the procurements 
        went to U.S. small businesses.

    In its report, GAO identified some challenges associated 
with use of electronic reverse auctions, and my experience, 
both in the U.S. and overseas, confirms that many users, or 
potential users, of auctions have wrestled with these issues. 
While I do not think that amending the Federal Acquisition 
Regulation is needed (in part because technology moves faster 
than the regulatory process), I very much concur with GAO's 
recommendation that the Office of Management and Budget issue 
guidance related to the issues discussed below (and in the GAO 
report).

    Identifying procurements suitable for use of reverse 
auctions: Some users are tempted to conduct reverse auctions in 
almost every procurement; most recognize, however, that some 
procurements are suitable for auctions, while others are not. 
In terms of what is being bought, most people agree that 
auctions make the most sense when the government is buying 
commodities. Thus, GAO found that reverse auctions were used 
largely for commodity goods, in particular, information 
technology (IT) and medical equipment and supplies. Use of 
reverse auctions for the purchase of services is more 
controversial. While GAO was told that their use for buying 
services was increasing, in my view, auctions may not be a 
sensible way to conduct a procurement for services unless the 
services being bought are commodities, such as overnight 
delivery of packages.

    Another metric, in terms of which procurements are suitable 
for auctions, is the dollar value of the procurement, but here 
the picture is somewhat complicated. GAO found that the four 
agencies for which it obtained detailed data were using 
auctions primarily for procurements valued below $150,000--
while the guidance of the fifth agency, DLA, was to use 
auctions for purchases above that level. My sense is, in terms 
of whether a reverse auction is appropriate, that the question 
of what is being bought is more important than the value of the 
procurement.

    Another metric, though, also needs to be considered. Some 
people believe that electronic reverse auctions can be used 
regardless of whether the government is focused on buying the 
lowest-price acceptable good or service, or whether, instead, 
the government wants to be able to conduct a tradeoff between 
multiple award criteria, including price and another factor, 
such as the bidder's past performance or the quality of its 
product. In my experience, auctions make the most sense when 
the government is focused on obtaining the lowest price--that 
is why commodities are the best candidates. As soon as the 
government is considering doing a tradeoff with a non-price 
factors, such as quality or past performance, I believe that 
the auction risks causing mischief. Where the government is 
concerned about quality, rather than simply buying a commodity, 
the auction's focus on price may run counter to the 
government's goals. Especially when the government is buying 
professional services, the auction's focus on low price may be 
inconsistent with the government's interest. Moreover, if the 
company that wins the price auction may lose the competition 
for the contract, one needs to ask what the point of an auction 
is.

    Addressing limited competition in the auctions: In the 
auctions that GAO reviewed for its report, and in procurement 
systems that I have looked at overseas, concerns have arisen 
due to limited competition in the auctions, which can call into 
question the value of the auctions. GAO found that in more than 
a third of the auctions it studied no competitive bidding took 
place at all: in 27 percent of the auctions, there was only one 
bidder, and in another 8 percent, while there was more than one 
bidder, none of them submitted more than one bid. In all of 
those cases, use of the Internet-based auction technique seems 
to have provided no benefit beyond that of the ``sealed 
bidding'' competition that the federal government has used for 
more than 100 years. Similarly, I learned that in one European 
country that I visited recently to discuss its procurement 
system, a high percentage of reverse auctions obtain only one 
bid. In my opinion, any competition for a government contract, 
whether run electronically or ``the old fashioned way,'' that 
gets only one bid should be considered a failure. If the 
government is paying a fee to use an electronic reverse auction 
and only one bid is received, the government is paying a fee 
for that failed procurement. In that regard, GAO found that 
agencies had paid $3.9 million in fees for reverse auctions in 
which there was no competitive bidding.

    Considering the costs and benefits of using a private firm 
to run the auctions: Many U.S. agencies rely on a single 
private firm to conduct electronic reverse auctions for them. 
While in theory more than one company could provide that 
service, my experience is consistent with what GAO found, which 
is that one firm--FedBid, Inc.--conducted more than 99 percent 
of the reverse auctions listed in the government-wide database, 
FedBizOpps. FedBid has clearly brought benefits to the federal 
government: not only does it provide a good, ready-to-use 
platform for reverse auctions, but, as GAO notes, FedBid also 
relieves agencies of various administrative duties and it 
offers training and technical support. Overall, FedBid has 
played a key role in helping agencies obtain the cost and 
efficiency savings that reverse auctions can bring. Moreover, 
the fee that FedBid charges for its services may be viewed as 
quite reasonable: they are capped at three percent of the 
contract value, and the company waives its fee entirely in 
various situations.

    The benefits that FedBid brings, however, need to be 
compared to the risks of use of a private-sector company 
playing a central role in a function that is closely associated 
with an inherently governmental function, the award of federal 
contracts. See Office of Federal Procurement Policy, 
Performance of Inherently Governmental and Critical Functions, 
Policy Letter 11-01 (Oct. 2011). As is often the case in 
situations where contractors perform functions closely 
associated with inherently governmental ones, the risks do not 
arise because of any defect or flaw in the company. On the 
contrary, the contractor--FedBid, in this case--may perform so 
well that agencies tend to defer to it even when they should 
not. Thus, FedBid correctly makes clear that the contracting 
agencies make all key acquisition decisions, from whether to 
use a reverse auction at all to what the award criteria are to 
which company actually wins the contract. Yet that deference, 
which is completely appropriate, is eroded when the company is 
plainly the expert in this areas, and agency personnel are 
inclined to defer to the company--indeed, I suspect that many 
federal contracting officials consider that letting FedBid take 
the lead is the whole point of using the company's services. 
Put another way, FedBid does its job so well that federal 
officials allow its role to expand into areas that should be 
the federal officials' responsibility.

    Examples of this pattern are identified in GAO's report. 
For example, GAO found that agencies rely on FedBid to maintain 
data related to their reverse auctions, so that even GAO had to 
turn to FedBid to obtain the data that it needed for its 
report. Similarly, while FedBid clearly knows how much it is 
charging and who pays its fees, GAO found that agencies using 
FedBid's services often did not know how much they were paying, 
nor did they know, if some cases, that the agencies were paying 
FedBid at all. GAO also identified situations where agencies 
are paying two fees (one to FedBid, another to the agency that 
awarded the overarching contract being used), but the agencies 
were unaware of this.

    These matters are not simply questions of confusion. 
Instead, they raise concern that any private-sector vendor 
fulfilling a function so closely associated with an inherently 
governmental one may have an organizational conflict of 
interest. FedBid, for example, has not corporate interest in 
clarifying confusion about whether agencies or vendors are 
paying its fees. Similarly, FedBid has a corporate interest in 
claiming that its services lead to large savings--but GAO 
questioned the accuracy of those claims. With regard to the 
important questions, explained above, of deciding whether a 
particular procurement is a good candidate for a reverse 
auction, a company that obtains a fee only if a reverse auction 
is conducted obviously has an interest in encouraging the use 
of auctions. Moreover, while an auction that obtains only one 
bid may be a failure for the competitive procurement system, it 
may not be a failure for a private-sector auction provider that 
obtains its fee, even in that flawed competition.

    Regarding the reasonableness of FedBid's fee, agency 
personnel's misunderstanding of the fee and fee structure 
impedes their ability to judge whether the fee is reasonable. 
In the language of GAO's report, agencies ``are not able to 
independently assess the cost effectiveness of reverse 
auctions.'' In this regard, I would point out that, while a fee 
capped at 3 percent may seem very reasonable for an auction 
that can lead to savings of 20 percent, those large savings are 
for the first time the auction is conducted. Obviously, the 
second time an auction is conducted for a particular item, it 
is unlikely that the price paid will drop an additional 20 
percent, so that the savings will drop--but FedBid's fee will 
not, and paying 3 percent to obtain a much smaller amount of 
savings may seem less reasonable.
    GAO also found that other companies had concerned related 
to FedBid's role in the federal acquisition process. 
Specifically, GAO heard complaints from vendors that FedBid 
``creates an additional layer between the vendor and the end 
user that can inhibit [vendors'] efforts to clarify detailed in 
the solicitation.'' Moreover, FedBid requires vendors that want 
to participate in a reverse auction to register with FedBid, 
and GAO heard that some vendors did not want to register with 
another vendor. GAO noted that this issue could reduce 
competition for federal contracts.

    In my judgment, we would be well advised to re-visit the 
role that a private-sector company should play in the conduct 
of federal reverse auctions. I say that will full appreciation 
for the excellent work that FedBid has performed for the 
federal government for many years. The Committee may be 
interested to know that in many other countries, large and 
small, electronic reverse auctions for government contracts are 
successfully conducted without reliance on a private-sector 
company to run them. For example, I learned recently that the 
small nation of Macedonia routinely conducts a large number of 
reverse auctions each year, run solely by government staff. 
Closer to home, I am pleased to see that GSA has now launched 
its own reverse auctions program, within the context of the 
Federal Supply Schedule. Notably, GSA has announced that user 
agencies will not pay any additional fee for use of the reverse 
auction platform.

    If a private-sector company continues to conduct reverse 
auctions for federal agencies, I believe that it is critical 
that agencies ensure that their staff are properly trained and 
equipped to supervise the private-sector provider. That 
training must ensure that agency personnel do not abdicate 
their responsibility for key decisions, such as deciding which 
procurements are appropriate candidates for reverse auctions 
and what the award criteria should be, as well as for 
collecting and maintaining data. Agency personnel must also 
ensure that they have the information needed to make informed 
decisions about the cost and benefits of conducting reverse 
auctions.

    In conclusion, I would again commend the Committee for your 
work in this important, but challenging area, and thank you for 
the opportunity to appear before you today. I would be pleased 
to respond to any questions you may have.
[GRAPHIC] [TIFF OMITTED] T3733.001

    Good morning. Chairman Hanna, Ranking Member Meng and 
distinguished Members of the Subcommittee, thank you for the 
opportunity to testify.

    My name is Amber Peebles. I am President of Athena 
Construction Group, Inc. a service-disabl3ed veteran-owned, 
HUBZone, and woman-owned small business based in northern 
Virginia founded in 2003. I am a service-disabled veteran, 
serving eight years in the United States Marine Corps. Last 
year, federal contracts accounted for more than half of Athena 
Construction Group's revenues. Currently, we have forty-two 
employees.

    I am also here today representing Women Impacting Public 
Policy (WIPP) where I serve on its Executive Advisory Board. 
WIPP is a national nonpartisan public policy organization 
advocating on behalf of its coalition of 4.7 million business 
women including 78 business organizations. WIPP plays a key 
role in developing women-owned businesses into successful 
federal government contractors through its Give Me 5 and 
ChallengeHER programs.

    First, let me say thank you to the Subcommittee and staff 
for improving the contracting rules and regulations pertaining 
to small businesses. Under your leadership, the Congress has 
enacted much needed changes, increasing access to federal 
contracts for all small businesses, but especially women. 
Nonetheless, these hearings make clear more can be done. This 
is underscored by the fact that twenty years after establishing 
a five percent contracting goal for women-owned small 
businesses, that goal has never been met. As this discussion 
begins, we value the Congressional direction already given on 
this issue in the Small Business Act (P.L. 85-536), which notes 
that the government should:

          Insure that a fair proportion of the total purchases 
        and contracts or subcontracts for property and services 
        for the Government be placed with small-business 
        enterprises...to the maximum extent practicable.\1\
---------------------------------------------------------------------------
    \1\ 15 U.S.C. Sec. 631

---------------------------------------------------------------------------
    Reverse Auctions

          1. Withdrawal at close of auction. In one instance, 
        after significant and costly preparation, an auction 
        was closed with only seconds remaining. The contracting 
        officer simply withdrew the requirement. While this 
        happens occasionally in normal procurements, the 
        additional costs for my business of a reverse auction 
        meant that additional resources were wasted.

          2. Auction site not suitable for complex bidding. In 
        another instance, several rounds of pricing for metals 
        were required. Not to be overly technical - but a 
        formula is used to address different price points for 
        different times. This is standard in our industry. The 
        website could not process the pricing structure. This 
        became a wasted opportunity that is normally handled 
        effectively through other procurement methods.

    Beyond my experiences, WIPP has testified before this 
Committee with concerns on reverse auctions that were well 
cited in the GAO report.\2\ Additional requirements should be 
added to prevent the inappropriate use of reverse auctions. 
Similarly, as these auctions require resources from competing 
companies, we believe small business set-asides, including set-
asides made through all the disadvantaged small business 
contracting programs, should not be eligible for reverse 
auctions.
---------------------------------------------------------------------------
    \2\ GAO-14-108.

    Legislation in the last Congress, the Commonsense 
Contracting Act of 2013, sponsored by Chair Hanna and Ranking 
Member Meng, made these changes. While WIPP was excited to see 
reverse auction education requirements added to the FY15 NDAA, 
the removal of certain sections passed by the House means the 
need for such legislation remains. We encourage you to 
---------------------------------------------------------------------------
reintroduce the bill.

    SDVOSB Verification

    Many of WIPP's members, including myself, are veterans 
running service-disabled veteran-owned small businesses 
(SDVOSBs). WIPP supports the federal contracting programs that 
assist veterans in engaging the federal marketplace. Moreover, 
as with many procurement issues, the procurement process should 
be streamlined to ensure that companies could access the 
federal market easily and effectively.

    Given the strong presence of veterans' advocates 
nationwide, and even at this hearing, WIPP defers to them on 
the specifics of improving contracting opportunities for 
SDVOSBs and veteran-owned small businesses. WIPP encourages 
this Committee to work with them to improve the contracting 
environment for veterans.

    SBA's Role in Rulemaking

    Turning to the largest focus of this testimony, WIPP 
believes the delay in implementation of important small 
business contracting provisions is an ongoing frustration of 
women business owners. While we understand the rulemaking 
process and do not expect implementation overnight, many of the 
changes we seek are fixes that WIPP members who are contractors 
have asked us to fix.

    The timeline for implementing these changes can be lengthy. 
For example, SBA's recent proposed rule on subcontracting 
limitations took two years to reach a proposed rule stage.

    The needed changes proposed in those rules - implementing 
provisions authored, debated, and passed by this Committee - 
should not require years of missed opportunities for small 
businesses. That is simply unfair to the businesses burdened by 
outdated, ineffective, or damaging policies Congress saw fit to 
change.

    Even after final rules are promulgated, the wait for actual 
implementation may continue for months, if not years. That is 
because of additional time required for Federal Acquisition 
Regulation (FAR) adoption by the FAR Council. While the recent 
implementation of legislation to remove dollar caps on awards 
in the Women-Owned Small Business (WOSB) Federal Contract 
Program is a good example of how SBA and the FAR Council can 
move quickly, that is not always the case.

    Currently, women entrepreneurs stand to gain with a speedy 
implementation of sole source authority in the WOSB program. 
Every day this policy cannot be utilized is another day women 
business owners are disadvantaged by the contracting process. 
Members of Congress, along with the women's business community 
have asked SBA to move expeditiously. It is our hope that when 
the time comes, the FAR Council will move in a similar manner.

    WIPP has two recommendations with regards to the timeline 
of SBA rule promulgation and FAR adoption. In our view, there 
is no reason these cannot be done concurrently. Any diversions 
between the proposed rules could be best addressed through 
increased cooperation between SBA and the FAR Council. One 
solution could be adding SBA to the FAR Council. WIPP supports 
this option because it would also give small businesses an 
advocate on the Council charged with maintaining acquisition 
procedures.

    Additional Recommendations to the Committee

    Expanding beyond the scope of this contracting hearing, I 
want to take this opportunity to raise a related concern of 
WIPP. The increased federal ``strategic sourcing'' efforts, in 
our view, represent a serious threat to the small business 
contracting community. In a name, strategic sourcing sounds 
like a good idea - akin to good governance. For small 
businesses, included WOSBs, however, the trend is eroding the 
industrial base this Committee seeks to protect.

    These efforts to maximize short-term savings through large, 
limited-competition contract vehicles have pushed small 
businesses out of competition and picked a small group of 
``winners.'' These efforts are happening across all agencies 
and all industries and come at the direction of the Office of 
Management and Budget (OMB).

    This movement does not align with Congressional directives 
to keep a diverse set of businesses in the procurement 
community nor does it mirror the private sector strategic 
sourcing practices. Examples include the increased, and at 
times mandated use of IDIQ vehicles (e.g. EAGLE II), GWACs, 
FSSI contracts, and recent GSA awards (e.g. OS3). Many 
industries, including office products, technology, janitorial 
and sanitation products, building maintenance and operations 
and furniture, have already been subject to strategic sourcing 
and face fewer awards and increased barriers to federal 
business--ultimately hurting their bottom line.

    To be sure, some small businesses will benefit in the 
short-term. Many, however, at the end of these five-year 
contracts will exceed their small business size, and no longer 
be able to compete for small business contracts. They may not 
have a separate revenue stream to continue at their size let 
alone continue to grow. Instead they may collapse over the 
longer term, to their detriment. Equally important, the limited 
competition for these goods and services will, over time, 
diminish any realized savings by the government.

    One solution may be to revise how small business 
participation is measured by the agencies. Currently small 
business goals measure the dollars awarded to small businesses. 
By adding a participation rate, i.e. the number of businesses 
awarded prime contracts, will ensure that a diverse group of 
businesses are engaged in the federal marketplace.

    Thank you for holding this hearing today and for making the 
contracting environment better for women-owned businesses. It 
is our hope that our recommendations are helpful. I am happy to 
answer any questions.
                              STATEMENT OF


       DAVY LEGHORN, ASSISTANT DIRECTOR, VETERANS' EMPLOYMENT AND


                         EDUCATION DIVISION OF


                          THE AMERICAN LEGION


                               BEFORE THE


               SUBCOMMITTEE ON CONTRACTING AND WORKFORCE


                      COMMITTEE ON SMALL BUSINESS


                 UNITED STATES HOUSE OF REPRESENTATIVES


                             MARCH 19, 2015


    Good morning Chairman Hanna, Ranking Member Velazquez and 
members of the subcommittee. On behalf of our National 
Commander, Michael D. Helm, and the 2.3 million members of The 
American Legion, we thank you for this opportunity to testify 
at this hearing on the challenges facing veteran owned small 
businesses seeking federal contracts.

    The American Legion identifies three main issues that poses 
obstacles for veteran owned small businesses and service-
disabled veterans seeking federal contracts: reverse auctions, 
differences between Small Business Administration (SBA) and 
Department of Veterans Affairs (VA) procurement policy 
standards, and exclusion of veterans from Disadvantaged 
Business Enterprise (DBE) programs.

    Reverse Auctions Reduce Quality:

    The Small Business Act applies government wide, not just to 
the Small Business Administration (SBA). Government has a 
fiduciary responsibility and legal obligation to treat small 
business fairly, and to not take advantage of its buying power 
and become predatory.

    The American Legion appreciates the goal of the government 
contracting community to lower federal expenditure through 
competitive contracting initiatives, but we are concerned that 
misuse of non-governmental platforms that have not suffered the 
scrutiny of the appropriations process, are putting veteran 
owned small businesses at risk and could also be serving to 
undermine the entire procurement process.

    Reverse auctions end up giving a false valuation of fair 
market product pricing, and will eventually create a disparity 
between a thorough procurement vehicle processes, where value 
is made part of the decision matrix, versus the reverse auction 
- where value or added value is often omitted from bid 
consideration. Further, reverse auctions appear to undermine 
the Government Services Administration's (GSA) application 
process that requires the government be offered the best 
possible in the first place. If that is true, then how can GSA 
contract holders consistently compete in the reverse auction 
process at offers lower than their established GSA contract?

    An example of added value would be a printer and copier 
vendor that, through their negotiated license agreement with 
the manufacturer, is required to provide training and technical 
support on the products they sell. This added value increases 
the market price of the product, but may not be reflected in 
the automated environment of the reverse auction bid process. 
Reverse auctions create a disproportionate disparity in the 
federal procurement industry while American Legion resolution 
321 \1\ specifically calls for equal parity in federal 
procurement, and according to the Federal Acquisition 
Regulation (FAR); `` `Fair market price' means a price based on 
reasonable costs under normal competitive conditions and not on 
lowest possible cost''.\2\ Further, Fair Market Price is 
mentioned in nearly every part of the FAR and that exact term 
can be found more than 30 times.
---------------------------------------------------------------------------
    \1\ Resolution No. 321: Support reasonable set-aside of federal 
governments and contracts for business owned and operated by veterans, 
American Legion. National Convention August 2012 http://
archive.legion.org/handle/123456789/2190

    \2\ Federal Acquisition Regulation, March 2005, http://
www.acquisition.gov/far/current/pdf/FAR.pdf

    FAR part 19 Sec. 807 gives a definition of Estimating Fair 
---------------------------------------------------------------------------
Market Price;

    ``(c) In estimating a fair market price for a repeat 
purchase, the contracting officer shall consider recent award 
prices for the same items or work if there is comparability in 
quantities, conditions, terms, and performance times. The 
estimated price should be adjusted to reflect differences in 
specifications, plans, transportation costs, packaging and 
packing costs, and other circumstances. Price indices may be 
used as guides to determine the changes in labor and material 
costs. Comparison of commercial prices for similar items may 
also be used.

    FAR part 15 Sec. 404-1 discusses proper Proposal Analysis 
Technique:

    ``(a) General. The objective of proposal analysis is to 
ensure that the final agreed-to price is fair and 
reasonable.''\3\
---------------------------------------------------------------------------
    \3\ Ibid

    Finally FAR part 19.1405 outlines Service-Disabled Veteran-
---------------------------------------------------------------------------
Owned Small Business Set-Aside Procedures;

    ``(b)(2) Award will be made at a fair market price.'' \4\
---------------------------------------------------------------------------
    \4\ Ibid

    While reverse auctions may have a limited capacity place in 
federal procurement, The American Legion believes that the 
federal contracting office has the primary responsibility to 
ensure that every product that the government spends tax payer 
dollars on, is purchased at fair market value. This assurance 
---------------------------------------------------------------------------
protects the tax payer, the small business, and the market.

    The American Legion is concerned that reverse auctions will 
lead to decreased quality and decreased employment 
opportunities for veterans, which is in direct violation of 
American Legion resolution number 50 that supports more hiring 
opportunities for veterans.\5\ Reverse auctions encourage 
vendors to provide the cheapest products and services in order 
to maintain the smallest possible profit margins in order to 
maintain a competitive edge. Government will then be stuck 
purchasing poor-quality products and services because reverse 
auction platforms do not provide the ability for an agency to 
shop for best value and relegate their decision solely on a 
best price basis. These types of business models favor home-
based businesses that primarily operate online and have no 
employees, aside from the owner, and no customer support. 
Businesses of this type end up relying solely on federal 
procurement as their only source of income. This type of 
business model severely disadvantages other small businesses 
and do not create jobs, because with employees there comes 
increased overhead expenses.
---------------------------------------------------------------------------
    \5\ Resolution No. 50: Support legislation that bolsters the hiring 
of veterans in the public and private sectors, American Legion, 
National Convention, August 2012 http://archive.legion.org/bitstream/
handle/123456789/2212/2012N050.pdf?sequence=1

    An article in Contract Management magazine points out a 
case study, conducted by the Department of State, reveals 
reverse auctions are already losing market share and have 
dropped 30 percent between 2007 and 2010, despite an increase 
in bid notifications of more than 225 percent.\6\
---------------------------------------------------------------------------
    \6\ Contract management Magazine, Reverse Auctions: Turning Winners 
into Losers, October 2012 http://www.nxtbook.com/nxtbooks/ncma/
cm--201210/index.php#/4

    There is a belief that use of reverse auctions by 
government contracting officers will save billions of dollars. 
However, The American Legion has not been able to find evidence 
that this process contributes to business innovation, economic 
growth, or positive partner relationships between government 
and industry. Instead, we have found that reverse auctions 
foster resentment between sellers and buyers and leave the 
seller with an attitude counter to providing anything more than 
exactly what was paid for, thus obliterating any harmonious 
---------------------------------------------------------------------------
relationship that should be developed between buyer and seller.

    The American Legion also learned that businesses answering 
solicitations for services find that customers rarely, if ever, 
include all necessary requirements in the original 
solicitation. What is wanted versus what was asked for 
continues to be a source of frustration between contractors and 
vendors. The American Legion has received numerous complaints 
from veteran business owners who routinely argue that their 
customers are dissatisfied based not on the work that was 
performed, but more importantly, based on the work that wasn't 
performed because it wasn't specified in the original 
solicitation.

    When something is bad for small business, The American 
Legion recommends simply doing away with it. The federal 
dollars spent in purchasing this reverse auction services are 
better utilized in hiring more contracting officers to do 
market research to ensure that goods and services are purchased 
at the fair market value. A reverse auction is a shortcut 
contracting officers resort to because there simply aren't 
enough of them.

    However, if federal contracting officers are allowed the 
continued use of reverse auctions, The American Legion 
reiterates the recommendations we have provided in the past:

          1. More outreach training for small veteran owned 
        businesses.

          2. Eliminate the LEAD or LAG indicators. This creates 
        an unrealistic stressor for the seller and can be 
        extremely detrimental for the nascent business.

          3. Collect fees directly from customer (buyer).

          4. Build a fair market price list into the process 
        for commonly purchased items, and prevent sellers from 
        going below the established fair market price.

          5. Make buyers attest that they have conducted proper 
        and adequate market research to determine fair market 
        price.

          6. Eliminate the ability of the buyer to set a 
        minimally acceptable price, or clearly state to the 
        seller what the starting price is.

          7. Requests for debrief, protests, and any other 
        dispute resulting between the seller and the federal 
        government needs to be handled directly by the federal 
        government, not handled through a civilian commercial 
        company who has no authority to represent the federal 
        government.

          8. Exact match bids need to be more interactive. 
        Government has unique needs and requirements, and even 
        items under the same National Stock Numbers provide 
        variation that can cause end user difficulties.

          9. Limit contracting officers' use reverse auctions 
        to contracts over $150,000 for supply contracts that 
        excluding services.

    VA Center for Verification and Examination (CVE) 
Verification:

    Many veterans find VA's Veterans First Contracting Program 
verification process to be overly burdensome, which is why The 
American Legion passed a resolution titled: Support 
Verification Improvements for Veterans' Businesses within the 
Department of Veterans Affairs.\7\
---------------------------------------------------------------------------
    \7\ American Legion Resolution No. 108.

    The American Legion believes that Public Law 106-50 made 
all federal agencies stakeholders in supporting veterans' 
entrepreneurship.\8\ A subsequent law passed in 2006 provides 
VA with the authority in setting higher agency standards for 
SDVOSB and VOSB set-asides.\9\ A new procurement hierarchy 
within VA was created, which places the highest priority with 
SDVOSBs followed by VOSBs. VA refers to this program as the 
Veterans First Contracting Program (Veterans First).
---------------------------------------------------------------------------
    \8\ The Veterans Entrepreneurship and Small Business Development 
Act of 1999.
    \9\ The Veterans Health Care, Benefits and Information Technology 
Act of 2006; PL 109-461.

    The process of verification involves a review of a 
business' governance documentation and a determination as to 
whether the documentation is in compliance with VA's Center for 
Verification and Examination's (CVE) legal requirements for 
admittance into the Veterans First Contracting Program.\10\ The 
main challenge with the program is striking the appropriate 
balance between the amount of government intrusion necessary to 
verify a business and the amount of government oversight 
necessary to protect the integrity of the program. This is not 
an easy task and VA is still trying to find that balance.
---------------------------------------------------------------------------
    \10\ 38 CFR Sec. 74.

    The American Legion has been involved with VA verification 
since the program's inception. Most notably, The American 
Legion is a participant in the Verification Assistance 
Counseling Program and for the last two years, we have worked 
with numerous small business owners who have received 
verification status. The American Legion would be remiss if we 
did not mention that CVE has significantly cut down the time it 
takes for a small business owner to receive an initial decision 
to less than 30 days. This is a stark contrast to the situation 
in October 2012, when it took approximately 85 days for CVE to 
---------------------------------------------------------------------------
make a determination on an initial application.

    In 2012 and 2013, The American Legion counseled nearly 50 
small business owners with questions about the verification 
process. In 2014 that number was halved, as less small business 
owners sought counseling services. This could be an indicator 
that CVE has implemented changes that have improved the process 
and cut down on wait time. This trend could also be the product 
of a combination of VA diminishing the backlog of applications 
in the queue and extended the time a small business can remain 
on verified status from one to two years.

    SBA Involvement in Appeals:

    The American Legion believes that SBA and VA need to work 
closer together to minimize the inconsistencies in the 
decisions being made. Currently, VA's Office of General Counsel 
(OGC) makes the final determinations; OGC does not utilize 
SBA's case laws in their decisions nor do they publish their 
decision. SBA has the legal expertise, 60 years of long-
standing experience, and an ample base of precedential case law 
that can be applied to future rulings. VA does not. Further, 
SBA's Office of Hearings and Appeals (OHA) has a 15 day 
turnover rate for final decisions on appellate claims and OHA 
does so with substantially less resources. The American Legion 
believes there is added value for VA to fall back on SBA's 
expertise and case law.

    Last year, VA submitted changes to 38 CFR Sec. 74 to make 
it so that their case reviewers could reconcile requirements 
for the growth of small businesses with the requirements for 
proof of ownership and control. Having taken part in the 
discussion of the final proposal of changes that went to VA 
Office of General Counsel, The American Legion can attest that 
these changes drastically differ from SBA's 13 CFR Sec. 125. If 
these changes are adopted, it would defeat the purpose of 
having appellate hearings conducted at SBA OHA as OHA judges 
would then have to make adjudications based off a new set of 
standards.

    Further, the current funding mechanism proposed for the 
appeals to be heard at SBA OHA should not be seen as one agency 
funding a new program within another. Instead, it is a funding 
mechanism that incentivizes VA to minimize their appeals and 
make correct initial decisions. Under the proposed funding 
mechanism, VA would pay SBA by the case load; therefore, VA 
could potentially stop having to pay for appeals that go to SBA 
OHA, when VOSB and SDVOSBs no longer have reasons to appeal.

    There has been push-back for moving of appellate hearings 
of VOSB and SDVOSB statuses to SBA out of concerns that this 
would add VOSBs as a new set-aside program government wide. The 
American Legion wants to be clear that this is absolutely not 
the case and not our intention when we supported the bill last 
year that proposed moving the appeals process from VA to SBA. 
We believe that the language was clear that VOSB appellate 
claims are merely being heard by SBA OHA as they pertain to 
contracting within VA's Veterans First Contracting Program and 
nowhere else.

    The American Legion impresses upon the Committee that (1) 
including SBA in the appellate process would ensure more 
consistency in the final decisions being made and ensure 
impartiality in not having the agency of original adjudication 
review their previously denied claim and (2) moving appeals to 
SBA does not create a new preference group within the federal 
small business set-aside program.

    Differences between Self Certification and CVE 
Verification:

    The American Legion supports verification. Government 
contracting officers are busy, risk averse and they prefer 
certifications. This is why within the realm of set-aside 
procurement; there is a preference for 8(a) and women-owned 
small businesses. When a contract is awarded, a contracting 
officer can rest-assured knowing that the recipient of the 
award has been vetted for ownership and control.

    SBA's model and VA's model for verifying a small business 
currently follows similar regulations, except where SBA allows 
firms to self certify as SDVOSBs and VA does not. VA requires a 
firm to enter a rigorous process on the front end, where every 
issue that may arise from the present and the future would have 
to be resolved before a firm is verified. SBA's process of self 
certification policies itself through status protests from the 
small business community once a contract has been awarded. SBA 
would then subject the protested firm to rigorous scrutiny. 
Whereas VA's rigorous verification is necessary for entry into 
the Veterans First Contracting Program within VA, SBA's self 
certification process is government wide.

    The American Legion understands why contracting officers, 
agency-wide, have started asking SDVOSBs if they are CVE 
verified. However, this has added to the confusion of having 
two types of vetting processes for two agencies for relatively 
the same purpose. To cut down on the confusion, the Committee 
should consider a single set of standards for all SDVOSBs to 
contract with the federal government. The American Legion 
recognizes the importance of having a single set of standards 
and vetting practices, but we would defer to the Committee's 
expertise in selecting the agency most capable of undertaking 
this task. The American Legion asks the Committee to weigh past 
performance, expertise and resources in determination which 
verifying body would be best suited for this job.

    Exclusion of Veterans from DOT DBE Program:

    By law, the federal government is mandated to award no less 
than three percent of all federal contracts to SDVOSBs. For a 
number of reasons a few agencies have not met this goal. One 
major reasons is because some contract funding streams exist 
outside the realm of regular appropriations and therefore are 
not susceptible to SBA's small business goal tracking.

    One of the most egregious exclusion of veterans owned small 
businesses occurs in the budget for the U.S. Department of 
Transportation's Disadvantaged Business Enterprise (DBE) 
program, which mandates that states receiving federal dollars 
for highway infrastructure repairs have to set aside 10 percent 
for preferred groups of small businesses through the Moving 
Ahead for Progress in the 21st Century Act (MAP-21). It is a 
misconception that this 10 percent is solely relegated to road 
and infrastructure construction firms. There are a variety of 
industries involved in infrastructure repairs, such as 
engineering, landscaping, remediation, utilities and 
information technology. This is an issue that affects all 
veteran owned small businesses and not just those in 
construction.

    Section 1101(b) of MAP-21 currently provides that:

          Except to the extent that the Secretary determines 
        otherwise, not less than 10 percent of the amounts made 
        available for any program under divisions A and B of 
        this Act and section 403 of title 23, United States 
        Code, shall be expended through small business concerns 
        owned and controlled by socially and economically 
        disadvantaged individuals.

    Section 1101(b) adopts the definition of socially and 
economically disadvantaged individuals given in Section 8(d) of 
the Small Business Act and its implementing regulations, which, 
in turn, establish a presumption that specific groups of 
minorities are socially and economically disadvantaged. Section 
1101(b) also establishes a presumption that women are socially 
and economically disadvantaged individuals for purposes of the 
DBE program. Since veterans are not explicitly listed in 
Section 1101(b), they are excluded from the DEB program.

    Recently, Congressman Mike Fitzpatrick from Pennsylvania 
has successfully added an amendment to rail infrastructure 
legislation which passed the House on March 4, 2015. 
Fitzpatrick's amendment, passed as part of the Passenger Rail 
Reform and Investment Act,\11\ directs the Secretary of 
Transportation to conduct ``a nationwide disparity and 
availability study on the availability and use of certain 
classes of small businesses--including veteran-owned 
businesses.''
---------------------------------------------------------------------------
    \11\ H.R. 749

    The American Legion believes that this is a crucial step in 
leveling the playing field for our veteran small business 
owners that are not currently eligible to go after these set-
---------------------------------------------------------------------------
asides.

    The American Legion works closely with Congressman 
Fitzpatrick to advocate for the amending of Section 1101(b) to 
add ``veteran-owned small business concerns'' as a separate 
line to the list of entities eligible. Such an addition would 
not presume that veterans are ``socially and economically 
disadvantaged.'' Instead, VOSBs would become independently 
eligible for the DBE program by establishing two categories of 
entities who count for purposes of the 10 percent goal: (1) 
small businesses owned and controlled by presumed socially 
disadvantaged individuals \12\, and (2) VOSBs.
---------------------------------------------------------------------------
    \12\ Includes Women Owned Small Businesses.

    In previous Congresses, Fitzpatrick has introduced the 
bipartisan Fairness to Veterans for Infrastructure Investment 
Act which seeks to add veterans as a separate category of small 
businesses they can use to meet their 10 percent goal. The 
American Legion and numerous other Veteran Service 
Organizations support this bill and asks again for this 
Committee's support this summer when Congress reauthorizes the 
---------------------------------------------------------------------------
federal highway bill.

    Conclusion:

    The American Legion appreciates the opportunity to testify 
today. Thank you again to Chairman Hanna, Ranking Member 
Velazquez and members of the subcommittee for directing your 
attention to this critical issue facing veterans. For 
additional information regarding this testimony, please contact 
Mr. Larry Provost at The American Legion's Legislative 
Division, 202-263-5755 or [email protected].
                             BIOGRAPHY FOR


                              DAVY LEGHORN


                           ASSISTANT DIRECTOR


                      NATIONAL ECONOMIC COMMISSION


                          THE AMERICAN LEGION


    Davy Leghorn was appointed to the position of Assistant 
Director of the Economic Division of The American Legion in 
January, 2012. Mr. Leghorn oversees veterans' employment and 
small business issues and administers The American Legion's 
National Veterans Hiring Initiative. He also represents The 
American Legion on the Small Business Administration's Advisory 
Committee on Veterans Business Affairs.

    He previously worked as a National Appeals Representative 
for The American Legion at the Department of Veterans Affairs' 
Board of Veterans' Appeals, where he provided representation to 
veterans, their spouses and dependents in appellate hearings 
before the Veterans Law Judges.

    Mr. Leghorn served as a mortar infantryman in the Army with 
the 2/72 Armored Battalion, 4/7 Cavalry and 3/15 Infantry, then 
as a Civil Affairs Specialist with 450th Civil Affairs 
Battalion.

    He currently serves as Second Vice Commander for George 
Washington Post #1 in The American Legion Department of the 
District of Columbia.
[GRAPHIC] [TIFF OMITTED] T3733.002

    Chairman Hanna, Ranking Member Velaazquez and Members of 
the Committee. Thank you for the opportunity to provide 
testimony this morning on behalf of the over 500,000 members of 
the U.S. Women's Chamber of Commerce, three-quarters of whom 
are American small business owners and federal contractors. 
Today, as the Committee discusses contracting and the 
industrial base, I will address our views on the use of reverse 
auctions, size and socio-economic verifications and the SBA's 
role in rulemaking and enforcement.

    Reverse Auctions

    While reverse auctions have the potential to deliver 
savings for the federal government when purchasing supplies, 
commodities and other services, we have a number of concerns 
with the reverse auction process and outcomes:

          1. Given the complexity of pricing and delivery of 
        supplies and commodities, small business owners may be 
        pushed in the moment to lower bids to their own 
        detriment.

          2. Low bidders may try to win a contract and then 
        seek to make up lost profits through price adjustments.

          3. When procurements include a mix of products and/or 
        services, the variables may be too complex to be 
        adequately managed through the pressures of reverse 
        auction.

          4. The complexity and risks involved in an auction 
        environment may actually drive down competition by 
        causing potential bidders to not participate.

          5. There is a risk of circumventing regulations 
        related to the small business and socio-economic 
        requirements.

          6. Past performance is not given consideration.

          7. Due to the extreme focus on lowering pricing, 
        there is a risk that defective products or counterfeit 
        parts may be provided.

          8. With the 3% fee to the reverse auction provider, 
        it may often be more efficient to simply purchase off a 
        schedule.

    Verifications

    Our members are very concerned about the failure of the 
Small Business Administration to verify the veracity of firms 
claiming to be small and meeting certain socio-economic 
requirements for set-asides and other programs.

    Congress has established a number of programs to assist 
small businesses competing for federal contracts. These 
programs support our nation's efforts to reach full productive 
capacity and assuring that a fair portion of the total 
purchases and contracts for property and services for 
Government in each industry category are placed with small 
business concerns. These focused programs require that the SBA 
accurately identify and verify eligible firms. This 
verification includes determining if the business is small, the 
business is veteran-owned, women-owned, disadvantaged-owned, in 
a HUBZone, etc.

    Unfortunately, the SBA has failed at this most basic 
requirement for more than a decade. For the last decade, the 
SBA Inspector General's annual ``Report on the Most Serious 
Management and Performance Challenges Facing the Small Business 
Administration,'' has listed as SBA management's top challenge 
- flaws in the procurement process allow large firms to obtain 
small business awards, and allow agencies to count contracts 
performed by large firms toward their small business goals. 
Yes, a decade.

    The SBA's failure to verify small business and socio-
economic claims became a major issue when the Service Disabled 
Veteran-Owned Small Business set-aside was created. During the 
process to create regulations, the SBA did not establish any 
eligibility verification for the SDVOSB program. This 
regulatory failure lead to hundreds of millions of dollars in 
fraud and abuse as contract went to ineligible firms.

    The veteran's contracting issue became more complicated 
when the U.S. Department of Veterans Affairs began their own 
Vets First Contracting Program with its own verification. The 
Vets First Contracting Program is only for specific contracting 
opportunities within the U.S. Department of Veterans Affairs. 
It is wholly separate from the SBA and has different 
eligibility requirements from the SBA's Service Disabled 
Veteran Small Business program which is used all across the 
federal government.

    Now, we understand some members of Congress have suggested 
the VA's verification of veteran-owned firms for the Vets First 
Contracting Program should be moved to the SBA and paid for by 
the VA. This idea comes from a lack of understanding that the 
Service Disabled Veteran-Owned Small Business set-aside 
program, which is under the SBA's management and enforcement, 
has a different purpose and different requirements from the 
VA's Vets First Contracting Program. Since the SBA failed to 
create a verification program for the Service Disabled Veteran-
Owned Small Business set-aside program, businesses and agencies 
are confused and hundreds of millions of dollars have been lost 
to legitimate SDVOSB firms due to fraud and abuse.

    Additionally, if the SBA took on the VA's verification for 
the Vets First Contracting Program and the VA paid for this 
program, what would happen when the VA runs into budgetary 
challenges and doesn't want to pay for the services anymore?

    More recently, due to the SBA's poor regulatory 
implementation of the Women-Owned Small Business set-aside 
program, the Government Accountability Office found that more 
than forty-percent of businesses (that previously received 
contracts) it examined for program eligibility should not have 
attested they were WOSBs or EDWOSBs at the time of review.

    Thankfully, Congress and the President acted together 
through the recent passage of the FY15 National Defense 
Authorization Act to remove self-certification from the Women-
Owned Small Business set-aside program which, when implemented, 
will certainly elevate the scrutiny of verification for this 
program. We appreciate Congress stepping up to force the SBA to 
do what it should have done all along. We strongly implore this 
committee to hold SBA accountable for the creation of strong 
regulations to improve the verification and use of this 
program.

    SBA's role in the Rule Making Process

    The SBA's role in the rule making process includes the 
development and enforcement of regulations to enact federal 
laws. Both steps are vitally important to our nation's goal to 
reach full productive capacity and assure that a fair portion 
of the total purchases and contracts are placed with small 
business concerns.

    So, as Congress passes legislation aiming to achieve these 
goals, we must rely upon the SBA to prepare and enforce 
regulations that successfully fulfill your intent. In this 
area, the SBA has failed woefully.

          1. The regulations developed and enforced by the SBA 
        for the implementation of the Women-Owned Small 
        Business set-aside program were flawed from the very 
        start. The SBA ignored the input from stakeholders on 
        the inability of the processes brought about through 
        the regulations to effectively insure that only 
        qualified women-owned firms received access to set-
        asides. The SBA created a grossly complex method of 
        managing the documents secured from firms seeking 
        access to the program. The SBA turned contracting 
        officers into de facto certifiers - driving down their 
        desire to use the program. And, the SBA devoted very 
        limited resources and funding to the implementation of 
        the program, education of contracting officers and 
        oversight/enforcement of the regulations.

          2. The SBA failed to create a verification program 
        for the Service Disabled Veteran-Owned Small Business 
        set-aside program. The consequence has been that 
        hundreds of millions of dollars have been lost to 
        legitimate SDVOSB firms due to fraud and abuse and 
        there is a great deal of confusion between the SBA's 
        SDVOSB and the VA's Vets First program.

          3. We also see the failings of the SBA in the failure 
        of the agency to staff an appropriate number of 
        Procurement Center Representatives. PCR's work all 
        across the U.S. to enforce the requirement for small 
        business set-asides in their regions. The most crucial, 
        front-line teams that acts to assure that a fair 
        portion of the total purchases and contracts are placed 
        with small business concerns - is clearly not a 
        regulatory enforcement priority of the Small Business 
        Administration.

    The U.S. Women's Chamber of Commerce agrees with the budget 
views of this committee: the SBA must allocate greater use of 
their funds to the core, Congressional mandated activities of 
the agency. And, this Committee must provide strong oversight 
and accountability. Rather than funding the SBA's extra layer 
of non-essential national and regional management and non-
mandated programs - we recommend funds be directed to 
regulatory enforcement and services provided directly to assist 
and protect small business owners.

    And, I ask you to help us assure that the SBA properly 
implements the provisions in the FY15 National Defense 
Authorization Act that will bring greater verification and 
accountability to the Women-Owned Small Business set-aside 
program.

    Thank you for the opportunity to provide this input.

                                 [all]