[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
UNDER THE MICROSCOPE: REVIEWING THE SBA'S SMALL BUSINESS SIZE STANDARDS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
FEBRUARY 6, 2024
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-039
Available via the GPO Website: www.govinfo.gov
_______
U.S. GOVERNMENT PUBLISHING OFFICE
54-711 WASHINGTON : 2024
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
CELESTE MALOY, Utah
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MARIE GLUESENKAMP PEREZ, Washington
SHRI THANEDAR, Michigan
MORGAN MCGARVEY, Kentucky
HILLARY SCHOLTEN, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
Ben Johnson, Majority Staff Director
Melissa Jung, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Hon. Roger Williams.............................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Mr. Jay V. Lambke, President, Government Acquisitions, Inc.,
Cincinnati, OH................................................. 5
Mr. Brad Moore, Chief Executive Officer, Sterling Computers,
North Sioux City, SD........................................... 7
Mr. Andrew V. Christ, Chief Operating Officer, Compass
Constructors, Kansas City, MO.................................. 9
Ms. Erin Allen, President, Contemporaries, Inc., Silver Spring,
MD............................................................. 10
APPENDIX
Prepared Statements:
Mr. Jay V. Lambke, President, Government Acquisitions, Inc.,
Cincinnati, OH............................................. 30
Mr. Brad Moore, Chief Executive Officer, Sterling Computers,
North Sioux City, SD....................................... 34
Mr. Andrew V. Christ, Chief Operating Officer, Compass
Constructors, Kansas City, MO.............................. 51
Ms. Erin Allen, President, Contemporaries, Inc., Silver
Spring, MD................................................. 55
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Airport Minority Advisory Council (AMAC)..................... 60
Global Small Business Sustainability Coalition............... 63
UNDER THE MICROSCOPE: REVIEWING THE SBA'S SMALL BUSINESS SIZE STANDARDS
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TUESDAY, FEBRUARY 6, 2024
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:08 a.m., in Room
2360, Rayburn House Office Building, Hon. Roger Williams
[chairman of the Committee] presiding.
Present: Representatives Williams, Stauber, Meuser,
Molinaro, Alford, Crane, LaLota, Maloy, Velazquez, McGarvey,
Gluesenkamp Perez, Scholten, Thanedar, Davids, and Pappas.
Chairman WILLIAMS. Before we get started, I want to
recognize Congressman Stauber from the great state of Minnesota
to lead us in the Pledge and a prayer.
Mr. STAUBER. Dear Lord, thank you for this wonderful day.
And thank you for this Committee, the good work they do. And I
want to thank you for my colleagues on both sides of the aisle
that are doing your work and trying to make this nation an even
better place. And let us share our love with one another, even
when we disagree. It is your commandment, Lord. In your name we
pray. Amen.
And join me in the Pledge. I pledge allegiance to the flag
of the United States of America. And to the Republic for which
it stands, one nation under God, indivisible, with liberty and
justice for all.
Chairman WILLIAMS. Good morning, everyone, and I want to
thank all of you for being here this morning. Appreciate it.
And I now call the Committee on Small Business to order.
Without objection, the Chair is authorized to declare a recess
of the Committee at any time.
I now recognize myself for my opening statement.
Welcome to today's hearing, where we will be taking a close
look at how the SBA defines small businesses and the impact it
has in the federal contracting marketplace. To start off, I
would like to thank our witnesses for attending today's
hearing. We know that you have other work you could be focusing
on, and we greatly appreciate your input.
Size standards were established over 70 years ago to
protect small businesses by ensuring that only small business
firms received SBA assistance in addition to determining
eligibility for federal contracts. While size standards may
seem like a topic that shouldn't garner too much attention, it
is no secret to anyone here that determining what classifies as
a small business is more complicated than it seems. And
accurate size standards from the SBA are critical because they
impact the eligibility of small businesses for contracts across
the entire government, not just one specific branch or agency.
At the beginning in 2010, it was decided the SBA would
reassess their size standards, industry by industry, every 5
years. While there are many different opinions about whether
the standards are too low or too high, one thing is abundantly
clear, the SBA's size standards have a drastic impact on who
can compete in the small business market.
A common issue this Committee has observed is the boxing
out of small businesses from the federal procurement space.
Since 2010, the number of small businesses winning federal
contracts has decreased by 50 percent, which is unacceptable
and an issue we cannot and we must correct.
Moreover, like anything in the federal government, the
federal procurement space is home to fraud. Despite being faced
with harsh penalties, fraudsters misrepresent themselves as
small businesses to gain access to lucrative contracts.
The other larger concern is a real small business losing
their small status. Many agencies is a receipt-based standard,
and if it is too low, it may prevent the business from fully
participating because they can lose their size status due to
high revenue. Generating contracts in today's dollars is all
what it is. This is nothing more than punishment for a business
succeeding which is antithetical to the American dream.
Additionally, small businesses that lose their status are
often left to compete with large firms that dominate the
industry. We must ensure the SBA standards are not so rigid
that they exclude thousands of small businesses.
Outside of size standards, the theme of today's hearing is
ensuring the small businesses are not left behind. At the end
of the day, the federal government is the largest customer in
the world. Our small businesses deserve to compete fairly in
this lucrative market. Federal procurement is incredibly
complex and any small business can get lost in it. It is the
job of this Committee to give main street a voice at the table.
And exactly what we are here to do today is that.
I would like to once again thank our witnesses for being
here with us. I look forward to today's discussion. It is my
hope we can find some common ground so as we can best help our
nation's small businesses during this time.
And with that, I will yield to our distinguished Ranking
Member from New York, Ms. Velazquez.
Ms. VELAZQUEZ. Sorry, I was at the financial services
hearing but I am here now. Thank you. Thank you, Mr. Chairman,
and thank you to our witnesses for traveling here today.
The demands on a small business owner's time are already
immense. I appreciate that you are using some of your time to
help this committee address these important issues.
How the Small Business Administration defines ``small'' can
have an enormous impact on the success of an individual small
business, as well as the collective success of small businesses
across the country. This hearing gives us an opportunity to
better understand the standards, their application for
government contractors, the environments that they create, and
the challenges for small businesses who approach or exceed
their industry's standard. Right sizing the size standard is
critical to ensure fairness, promote competition, and encourage
small businesses to enter and remain in the industrial base.
The federal government needs to both recruit and retain
small businesses like those on our panel. Yet both tasks are
becoming increasingly challenging. Fewer small businesses are
signing up to work with the government, and many more are
exiting the market sooner than expected. This is increasingly
prominent in the small business market. The government has
roughly 40 percent fewer small businesses in its ecosystem than
it did a decade ago, and it has always been a challenge in the
mid-tier.
A GAO report I requested in 2019 found that most small
businesses do not successfully graduate. Only 2.5 percent of
former small businesses receive contracts as mid-tier companies
nine years later. This Committee has regularly reviewed the
size standards and tried to ensure that companies that want to
grow can.
We have at times provided additional runway to do it, to
give small businesses additional time to build their capacity,
portfolio, and workforce for long-term success. Yet changes to
small size standards and policies can be a double-edged sword
if not done correctly. We do not want to disincentivize or
punish growth, but must also carefully ensure we do not
prematurely push small businesses into a market where they
cannot compete.
The stability of contracting with the federal government
provides smaller businesses with the opportunity to plan, grow,
and hire at a pace that is appropriate for them. It is
important to ensure any changes to government policies account
for the impact on all small businesses.
As we will hear today, the federal government imposes
unique and complex requirements on government contractors.
These rules impact small business structure, cash flow, and
workforce, as well as strategic decisions about size growth and
ultimately whether to continue to participate in the federal
marketplace.
I look forward to hearing from the panel on past
performance requirements, subcontracting processes, and
bundling policies that will help improve the environment for
small business government contractors. I again thank all of the
witnesses for joining us today.
I yield back.
Chairman WILLIAMS. Yields back. And I now will introduce
our witnesses.
Our first witness here with us today is Mr. Jay Lambke. Mr.
Lambke is the president of Government Acquisitions,
Incorporated, located in Cincinnati, Ohio. At Government
Acquisitions, Mr. Lambke is responsible for leveraging his over
20 years of experience leading the organization specialized in
the IT needs of governments to guide the company through its
ongoing needs.
Prior to joining Acquisitions, Mr. Lampke was president of
the Prism Pointe Technologies as well as GovConnection, where
he was responsible for turning around the company following the
loss of their federal GSA schedule and negative earnings. He
has also held executive roles at Gateway, Ingram Micro, and
Tech Data.
Mr. Lambke attended Central State University for 2 years,
where he studied business management before dropping out to
help his parents save their business. Despite being
unsuccessful in that, he managed to grow quickly through the
ranks of larger companies thanks to the entrepreneurial
thinking and strict business discipline.
Thank you for joining us today. We look forward to the
conversation ahead.
Our next witness here with us today is Mr. Brad Moore. Mr.
Moore is the CEO of Sterling Computers, located in North Sioux
City, South Dakota. I have been there. It is cold. Founded by
Mr. Moore's cousin in 1996, Mr. Moore joined Sterling Companies
in 2004, after over a decade at his previous job, where he
served as vice president of sales.
From early on, Sterling Companies focused on contracting
with the federal government because they knew the government
would always pay when the work was done. Now, government
entities from the three letter agencies down to local
governments make up the majority of the company's business.
Federal government contracts alone represent 75 percent of
their business. Sterling Companies now has nearly 300
employees, with over half of them working locally in North
Sioux City.
Mr. Moore attended Dana College where he earned his
Bachelor of Arts in business marketing. Thank you for joining
us today. We look forward to speaking with you.
Our next witness who is here with us today is Mr. Andrew
Christ. Mr. Christ is COO of Compass Constructors located in
Kansas City, Missouri. Prior to joining Compass Constructors in
September of 2020, Mr. Christ worked for two large general
contracting and roofing firms where he worked as a project
manager and field superintendent.
Mr. Chris has extensive experience with the U.S. Army Corps
of Engineers and National Guard, including as a Member of the
leadership team which oversaw construction of over $350 million
in new barracks buildings at Fort Riley. He also is the
president of the American Subcontractor Association of Greater
Kansas City and is also a Member of the Executive Committee of
the National Organization of the American Subcontractors
Association.
Mr. Christ attended Kansas State University, home of the
Wildcats, where he earned his Bachelor of Science in
construction science and management. Thank you for joining us
today. We look forward to conversing with you.
And I now recognize the Ranking Member from New York, Ms.
Velazquez, to briefly introduce our last witness appearing
before us today.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
It is my pleasure to introduce Ms. Erin Allen, the
President of Contemporaries, a Maryland-based company providing
human capital solutions for federal agencies focused on public
health. Ms. Allen has grown her women-owned and family-run
company since taking over for her parents, who started the
company in 1991. Under her leadership, Contemporaries, Inc. has
consistently served as the largest provider of staffing
services to the National Institute of Health under their small
business program and grown to become one of the most successful
staffing suppliers to the Department of Health and Human
Services.
They are also ranked as one of the top 10 vendors in their
respective GSA schedule and have been recognized as one of the
top 100 small businesses of the year by the state of Maryland.
She co-chairs the Small Business Committee for the
Montgomery Chamber of Commerce and volunteers with the Women
President's Educational Organization.
Thank you for participating today, Ms. Allen. We look
forward to your testimony.
Chairman WILLIAMS. Thank you, Ranking Member. And we
appreciate again all of you being here today.
So before recognizing the witnesses, I want to remind them
that their oral testimony is restricted to 5 minutes in length.
That is a big number here, 5 minutes. Okay?
If you see the light turn red in front of you, it means
your 5 minutes have concluded and you should wrap up your
testimony. If you try to go over, you will hear me do this.
That means shut it down. Okay?
And so with that being said, I now recognize Mr. Lambke for
5-minute opening remarks.
STATEMENTS OF JAY V. LAMBKE, PRESIDENT, GOVERNMENT
ACQUISITIONS, INC.; BRAD MOORE, CHIEF EXECUTIVE OFFICER,
STERLING COMPUTERS; ANDREW V. CHRIST, CHIEF OPERATING OFFICER,
COMPASS CONSTRUCTORS; AND ERIN ALLEN, PRESIDENT,
CONTEMPORARIES, INC.
STATEMENT OF JAY LAMBKE, PRESIDENT, GOVERNMENT ACQUISITIONS,
INC.
Mr. LAMBKE. Thank you. Chairman Williams, Ranking Member
Velazquez, and Members of the Committee, it is an honor to
appear before you today on behalf of my firm, Government
Acquisitions. Most people call us GAI.
My name is Jay Lambke. I am the president of GAI. We are a
HUBZone-certified small business that has been providing the
government with IT services and solutions for over 30 years.
GAI is a Member of GovEvolve, an advocacy organization for
small and midsized businesses that promote public policies
encouraging innovation and competitiveness in the IT industry.
At GAI, we have built a special company. And I don't just
say that as the president. I say that because I believe we
embody everything that is great about American small
businesses. Our success is the result of deliberately building
a strong family culture full of people who are heavily involved
in supporting their local communities.
We also all share a powerful commitment to serving the most
important customer on planet Earth, and that is the U.S.
federal government. We understand the unique needs of each of
our federal customers, and we work to leverage best of breed
technologies, such as AI, robotic process automation, and
cybersecurity, to better enable them to deliver their mission.
My personal aspiration is to build this company into the best
the industry has ever seen.
Now, over the course of my years at GAI, I have seen how
acquisition policies shape the environment for small businesses
in both positive and negative ways. GAI has experienced great
success as a federal IT value-added reseller, or VAR, but we
have also faced continual challenges regarding size standards
for the industry. So let me set the stage for the enormous
shift that has happened in government purchasing of technology
over the past two decades, which is when our current NAICS code
was put in place.
Twenty years ago, an ITVAR sale to the federal government
was basically buy a box, sell a box. It was not a very
complicated business, required far fewer employees than it does
today. And the business is so much--and today the business is
so much more complex, requires far more people and cost. And I
will try to demonstrate.
Nearly everything we do for our customers as a small
business innovator involves providing complex solutions that
require numerous hardware and software technologies that have
to be integrated together. This requires large numbers of very
specific engineering resources. Twenty years ago, we did not
have teams of people who had to go onsite to deploy these
systems. Today, we employ large teams of people who go onsite,
install the solution, integrate it with customers' existing
systems, and then remain onsite, often for many years to
continue development inside of those systems.
Twenty years ago, the contracting environment was also very
different. There were far fewer contracts to bid on and the
bids were fairly straightforward. Today, our proposal efforts
are often extremely large and very complex and require a
significant proposal staff in order to be successful.
Also, the contract opportunities in the industry today are
regularly for 5 or 10 years. So if you don't win a slot on one
of those contracts, you are probably not doing business with
that agency for many years. Because each contract these days
are so long, they are that much more important for companies
like ours, which has led to an incredible increase in protests.
This causes delays in contracts for many years.
All of this to say, the stakes today are much higher. The
contracting complexities I described create the need for more
government contracting professionals on our staff, including
lawyers, technical writers, and subject matter experts. Not
only does this add significant expense to the business, but it
also adds a number of employees, which is the significant
challenge in a headcount-based NAICS code.
To protect against the ever present cyber threats and
ensure secure supply chains, federal contractors are required
to comply with a number of ongoing specific requirements. While
we believe these are great moves from the government and it is
doing the right thing to protect the defense industrial base,
these requirements and certifications, like others, also add
significant cost, complexity, and people to the business.
The method of calculating whether a small business is small
you would think would be pretty straightforward in our
industry, but it is not. For IT resellers there is only one
NAICS code that easily fits all the products and services we
provide. Often a contract for IT-related acquisition involves
both products and service. Checking my time.
For each contract, the contracting officer can only assign
a single classification code for the component that accounts
for the greatest percentage of the contract value. Recognizing
traditional rules and regulations cannot properly be applied to
ITVAR procurements; the federal agencies seek numerous
workarounds. The rules have not adapted to the quickly changing
technology related procurements, and ultimately this piecemeal
approach is failing. It is time for the system to change.
If the federal government intends to continue to leverage
innovative and cutting-edge technologies, which it must, the
size standards and corresponding NAICS codes must be modernized
to address small ITVARs.
I greatly appreciate you holding the hearing today, and its
focus on critical component of determining success in selling
to the federal government. Thank you again for having me. I am
happy to answer any questions.
Chairman WILLIAMS. Let the record show you talked for 5
minutes.
Mr. LAMBKE. Exactly, right? Yes.
Chairman WILLIAMS. Let me inject one thing, too. You are
going to see some of my colleagues on both sides of the aisle
move in, move out. It is because we have other hearings we will
go to and no reflection on this.
Now I recognize Mr. Moore for his 5-minute remarks.
STATEMENT OF BRAD MOORE, CEO, STERLING COMPUTERS
Mr. MOORE. Chairman Williams, Ranking Member Velazquez, and
esteemed Members of the Committee, thank you for your
opportunity to testify--my opportunity to testify before you
today. My name is Brad Moore and I am the CEO of Sterling
Computers Corporation, an information technology value-added
reseller also known as an ITVAR.
As a family owned and operated company headquartered in
North Sioux City, South Dakota, we serve an intermediary
between our customers and the wide-ranging manufacturers of IT
hardware, software, and services, the largest of whom are Dell,
Cisco, and Microsoft. We serve as a reliable, nimble, and
secure partner for our government customers in their quest for
operational excellence through the use of modern technology.
My aim today is to present testimony regarding a select
issue within the ITVAR industry, namely around the 541519 size
standard, and to propose the adoption of a new NAICS code, one
specific to ITVARs, allowing for a new size standard of 500
employees.
Twenty years ago, when the SBA first established the
industry standard of 150 employees for ITVARs, the IT landscape
was vastly different than it is today. Our industry has, of
course, evolved, some might say exploded, in the years since.
Alongside such an evolution has come an increase in the breadth
and complexity of the compliance burdens placed upon ITVARs,
including the enhanced focus on supply chain risk management,
ISO certifications, and the cybersecurity maturity model
certification.
To meet those requirements, ITVARs must now hire specialist
employees who can effectively manage the growing slate of
compliance obligations. For example, today Sterling employs 35
individuals who are dedicated solely to government program
management and compliance, and another 130 other individuals
who hold over 400-plus required certifications from the
technology manufacturers we represent. It quickly becomes
evident that the allocated 150 employees is an insufficient
headcount when stacked against the complex demands of the
federal government.
As such, there is currently a trend of consolidation in our
industry. It is common for ITVARs, once they have exceeded 150
employees, to sell their business, typically to large companies
or private equity firms, thus eroding the supplier base of
highly qualified and experienced VARs who have so valuably
serviced the government. Why? Because to go from successfully
competing as a small business to suddenly going up against
companies with tens of thousands of employees is an improbable
endeavor.
The number of small businesses receiving government awards
has steadily decreased from 121,000 companies in 2010 to less
than half that number in 2022. This is an indication, in part,
that the complexity of government contracting and compliance is
making the barrier to entry much more difficult than it was 10
to 15 years ago.
Furthermore, 541519 is at its core of services code, which
means ITVARs are lumped into the same designation as IT
services companies, even though the two business types are
vastly different, with dramatically varying solutions and
employee headcount needs. It is a square peg for a round hole.
Compounding the issue is the fact that ITVARs often don't
charge separately for their value-added services, meaning the
build services generally do not account for 15 percent of the
total contract price, a threshold outlined by code 541519. We
estimate as few as 2 to 5 percent of ITVARs are able to achieve
this benchmark.
While there are a number of possible solutions, I believe
the most sensible to be the creation of a new NAICS code, one
that accurately captures the core competency of ITVARs and
includes the introduction of an appropriate SBA size standard
of 500 employees, thus eliminating the exception under code
541519, at footnote 18, assigning a new, applicable and more
appropriate code will solve the aforementioned issue. It will
also increase small business participation, enhance supplier
qualifications, and benefit federal government customers
through more competitive pricing.
Once again, I appreciate the opportunity to speak to you
today, and I am grateful for the Committee's thoughtful
consideration. And I look forward to answering any questions
today or in the future. Thank you.
Chairman WILLIAMS. Thank you, Mr. Moore.
And I now recognize Mr. Christ for his 5-minute opening
remarks.
STATEMENT OF ANDREW CHRIST, COO, COMPASS CONSTRUCTORS
Mr. CHRIST. Chair Williams, Ranking Member Velazquez,
Members of the Committee, thank you again for the opportunity
to testify in front of you today. My topics are going to
include federal government requirements for past performance
and qualifications, the use of payment and performance bonds,
the impact of continuing resolutions on small business, and the
bundling of contracts into MATOCs and SATOCs, which are
multiple award task order contracts and single award task order
contracts.
My name is Andrew Christ. I, along with my business
partner, Mr. Allan Arias, operate Compass Constructors. We are
a small construction business located in Kansas City, Missouri,
that delivers high-quality and efficient construction projects
to the federal government. A lot of our current clients are the
Corps of Engineers, the Air Force Civil Engineering Center, the
Naval Facilities Engineering Systems Command, or NAVFAC, and
GSA.
I am testifying not only as the COO of Compass
Constructors, but also as an Executive Board Member for the
American Subcontractors Association. We are an association of
trade and suppliers that represent over 3,800 individuals since
1966.
Compass Constructors views the strict requirement for past
performance and qualifications as the largest hurdle for small
businesses to enter the federal market. We have witnessed
unfair competition toward private contractors who are outside
of the federal construction space that have similar past
performance not receive a similarly favorable rating for
federal government. This makes it extremely difficult for a new
contractor to enter into the market.
Through this experience, we have learned the value of the
myriad of SBA resources offered to small businesses to operate
within the federal government's contracting system. federal
contracts require often a detailed management plan. They offer
specific project staffing and qualifications of key members of
the execution team, and if the company does not have these
individuals or qualifications, it forces them to enter into the
market for additional employees with federal construction
experience. This can be a significant and very cost-prohibitive
barrier of entry into the federal market.
All federal projects, all federal projects, are mandated to
have payment and performance bonds. These must be in place in
order for a contract to be executed as required by the Federal
Miller Act.
The surety, they are going to evaluate many factors when
determining whether or not to issue a guarantee to the obligee.
This often includes operating capital, income statements, cash
flow, debts, work in progress. You'll see that there are many
parallels to the considerations that a surety recognizes versus
what the federal government is evaluating from a performance
and financial standpoint.
We purport that the rigorous evaluation that the surety
performs is far greater than what the government is going to
evaluate in a small business' solicitation response. So we
would recommend that less emphasis be placed on documented past
government performance and more emphasis placed on whether or
not the contractor can perform a bid, payment, or performance
bond.
ASA supports House Bill 1740. It is bipartisan legislation
authored by Representatives Bost and Pappas that would ensure
these bonding protections are applied to water infrastructure
projects where federal funds are being allocated to government
contracts.
The instability caused by continuing resolutions also make
it difficult for federal agencies to have certainty on funding
for projects. There are many times that we put together
solicitation responses, submit them, only to find out that the
funds are no longer available. We put together these large
proposals that can be tens of thousands of dollars. That is
cash right out of our pocket. And then all of a sudden, due to
a continuing resolution, the money is gone. The project no
longer executes.
My final concern is bundling of contracts into MATOCs and
SATOCs. This can be where a 5- to 10-year project that they are
going to award to four to five contractors. Now, again, the
emphasis on past performance is often scrutinized. And if those
small businesses don't have that, they are not going to be
allowed to be a part of those MATOCs and SATOCs, which can be 5
to 10 years.
I would like to conclude my testimony by recognizing
Representatives Stauber and Scholten, both Members of this
Committee, for their leadership as co-chairs of the
Construction Procurement Caucus. Again, I thank everyone at
this Committee.
Chair Williams, Ranking Member Velazquez, I will now take
any questions. Thank you.
Chairman WILLIAMS. Thank you very much.
I now recognize Ms. Allen for her opening remarks.
STATEMENT OF ERIN ALLEN, PRESIDENT, CONTEMPORARIES, INC.
Ms. ALLEN. Thank you. Thank you, Chairman Williams and
Ranking Member Velazquez and Members of the Committee. Thank
you for the opportunity to testify today.
My name is Erin Allen. I am the president of
Contemporaries. We are an SBA-certified woman-owned small
business located in Silver Spring, Maryland. I also serve as
the Chair of the Montgomery County Chamber of Commerce, where I
am proud to represent the many businesses that make up our
robust Maryland economy.
As a Member of the Women's Procurement Circle, which is a
group that advocates for policies that strengthen women-owned
businesses that do business with the federal government, I
appreciate the Committee's focus on the topic of size standards
and pathways to growth for small businesses. This issue is one
that has become increasingly relevant to my company as we have
grown significantly over the last several years.
So I am a second-generation business owner. My parents
started a company back in '91 when they cashed in their
retirement and took out a home equity line of credit and
started the business. As a family, we have worked really hard
to grow our business, bootstrapping every piece of it. And now
we find ourselves teetering on the edge of our small business
size standard, which puts our business in a very difficult
position. I only see really two options. One is that we sell
off part of our business or we find a small business to team
with, but teaming means giving away 49 percent of our business
that we have worked so hard for.
By every measure, we are still a small business and only
have 95 employees. Now, that might seem like a large for a
local mom-and-pop, but in my industry, that is still teensy.
If we lose our small business status, I anticipate we will
have to lay off about 30 percent of our employees. And while
some might get picked up by another contracting firm, others
may not.
Our size standard is revenue-based. And however, revenue is
not really an indicator of present competitiveness, but really
one of future competitiveness.
A challenge in the federal market is that size standards
vary widely across the different NAICS codes. We primarily win
contracts under a code with $12.5 million size standard, but
there is other NAICS codes in my industry that have a $34
million size standard. So this wide disparity means that I can
be a small business in one and large in another, doing exactly
the same work.
So bigger small businesses that are about to graduate from
the set-aside world need time to build their infrastructure to
compete against the mammoth companies that are in there. A firm
like mine simply cannot compete with large federal contractors
overnight.
Government contractors experience a unique pattern in their
growth, which is causing an industry-wide midsized business
crisis. This pattern of sudden growth is increasingly common
because the government's frequent use of large contract
vehicles due to contract management.
The SBA program that I have been able to utilize is the
WOSB program. It allows agencies to set aside contracts
exclusively for small women-owned businesses. The government
has the goal of awarding just 5 percent of all prime contracts
to WOSBs, and yet since 2011, they have only met that goal
twice.
Agencies are authorized to sole source contracts to WOSBs.
However, these awards are few and far between. And as I teeter
on the edge of sizing out of being small, increased
effectiveness of this program would really, really help. It
would enable me to secure contracts faster, thus allowing me to
be in a better position to make the transition into the full
and open marketplace.
So SBA is required to review all size standards every 5
years. I feel like the SBA should look at industries more
holistically and seek engagement through live forums with
businesses. This increased engagement would give the agency a
more accurate picture of how federal buying is really impacting
small businesses in the market, rather than just using a
formula to determine the size. While there are many policies
that contribute to small business success, there are also many,
many areas where the federal government really could improve.
I don't pretend to have all the answers to this problem.
All I know is that I cannot compete with large contractors like
Booz Allen. I am way too young to retire and way, way too old
to start over.
Adjusting the size standards isn't about maintaining my
business. It is about helping my employees earn a sustainable
living in the middle class.
I appreciate the Committee's continued efforts to support
small businesses, and I am so grateful for the opportunity to
share my experience today and thank you. And I look forward to
answering any questions.
Chairman WILLIAMS. Thank you, Ms. Allen.
And now we recognize myself for 5 minutes.
Mr. Lambke, small businesses are disproportionately
affected by the government's increased compliance burdens. We
have talked about that. The staffing costs alone to navigate
tens of thousands of pages of regulations, in addition to
abiding by contract rules, can be extremely difficult and
expensive. In some industries, compliance officers end up being
a built-in cost to doing business.
So my question is, can you discuss how compliance
requirements and navigating red tape can impose a burden on
your business?
Mr. LAMBKE. Happy to. Thank you.
Compliance for us comes in many forms. One of the most
recent ones is the CMMC, the cyber maturity model
certification, which I referenced in my opening remarks, which
we, the industry, believe is the right thing to do. The threat
has never been higher at the defense industrial base. We are
obviously being attacked daily. And so it is really important
that we have the right infrastructure and protections in place
from a cyber standpoint and for our cleared personnel and so
forth.
The challenge is that--so I will give you an example on our
side. My IT staff has gone from a few people 3 or 4 years ago
to a small army today. And the cost and complexity and that
headcount is going to increase as CMMC actually starts to take
place. Right? So we are in a ramping phase. It hasn't been
fully implemented. So great requirement, but adds people and
complexity to the business. That is just one.
We have ISO certifications. We have all of those. And then
there is the certifications that go with many of the bids will
come out with requirements for, Brad mentioned Dell and Cisco,
and those manufacturing partners that we have, many of the bids
will come out and say you have to have this many certified
engineers at this level to bid on this contract and so forth.
And if you are in a certain size standard, there is just no way
you can have those numbers of certified engineers on staff.
Thank you.
Chairman WILLIAMS. This is a sunk cost that could be better
spent elsewhere in their operations. I am concerned that for
small businesses in the contracting space, the effect of
additional compliance officer is even worse. So not only does
it add a cost to business, but also takes away a spot in the
business size standards metric that puts them on one more
employee away from not being able to compete for small business
set-aside contracts.
So I am going to just go down the line and ask each one of
you this, starting with Mr. Lambke. Do you see initial
reactions to an idea that is this, do you think we should
exempt compliance officers from a business employee count when
the SBA examines their size?
Mr. LAMBKE. That would be wonderful.
Chairman WILLIAMS. Okay. Mr. Moore?
Mr. MOORE. Yes, that would be great, but compliance is
going to be a lot more than one person. It is going to be
dozens of people.
Chairman WILLIAMS. Thank you. Mr. Christ?
Mr. CHRIST. Yes, I agree. I believe the definition of
compliance officer will be something that could be scrutinized
and would offer up that a clear definition is present.
Chairman WILLIAMS. Okay.
Ms. ALLEN. For my business it wouldn't really make a big
impact because we are not really in the IT space. We don't have
a lot of--other than, though, the normal reporting that we have
to do, you know, or outsource to maybe an attorney or a CPA,
and some of my staff will sort of share the roles and
responsibilities for that.
But I would agree with Andrew that there might be some
complications in what is the definition of a compliance
officer? Because you could say, really, that all of my
headquarters staff are in some way involved in headquarters--or
in compliance. So then you get into, like, well, what
percentage of the time are they doing compliance? And so that
would be the challenge.
Chairman WILLIAMS. That is if we make it hard on you. We
want to make it easy on you.
All right. Real quick, from time I have remaining. Mr.
Moore, well, your firm is less than 500 employees. The SBA size
decisions determined that you are not a small business. For any
small business owner, you never want to cap your success. If
business is booming, you want to capitalize on it as much as
possible and not think about how growth could negatively affect
your business. So getting big and growing is good?
Mr. MOORE. Yes.
Chairman WILLIAMS. So, can you discuss quickly the
challenges that you face when your business outgrew the SBA
small size standards? And do you feel that the SBA size
standards accurately reflect your industry's needs?
Mr. MOORE. Thank you. So the size standard in our industry
is 150 employees. So once you are at 151, you become large and
you are competing against IBM and Dell and everyone else with
10,000 employees. You know, there are very few businesses in
our industry between 151 and 500 employees. And you do the best
you can to compete, but, in actuality, 60 percent to 70 percent
of the opportunities that you were once working on are no
longer available.
Chairman WILLIAMS. Thank you very much. My time is up.
I now recognize the Ranking Member for 5 minutes for
questions.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Ms. Allen, you state that you have teetered on the edge of
graduation a number of times, and it appears largely due to
factors that are outside of your control. What would the
appropriate size standard policy be that would bring you and
other small businesses sufficient predictability and allow you
to plan and grow if you choose?
Ms. ALLEN. That is a complex question. So it depends. I
know in my industry, you know, as I mentioned in my testimony,
that there are several different NAICS codes that we could use.
One is teensy, $12.5 million, but another one is $34 million,
which, you know, for the work that I am doing in support
services, is maybe reasonable. But if I were doing, you know,
some of the work that these guys are doing in the IT space,
those salary ranges are crazy high.
And so it is sort of like--it is almost like if you look at
a car dealer, like, are you large because you have sold, you
know, $10 million worth of cars? Well, what if you are selling
a Ford versus if you are selling Lamborghinis? Right. What is
your profit margin in those, right? So it becomes a complex
question in that and how do you work that out. Yeah.
Ms. VELAZQUEZ. Thank you. In your testimony, you highlight
that a more effective WOSB program would have put you in a
better position to make the transition from small to midsized.
Do you think that contracting officers understand how to use
the existing authorities to maximize awards through WOSB?
Ms. ALLEN. Not even kind of. When I am talking to a lot of
my clients, I am having to educate them on the WOSB program. A
lot of them don't understand it, haven't been educated on how
to utilize it. And those that have been educated, you know, it
is more cumbersome than some of the other programs, so it makes
it harder for them to utilize.
Ms. VELAZQUEZ. Do you think that if we require federal
agencies to only count certified WOSB toward their small
business goal, more contracting officers might be compelled to
learn how to use the authorities?
Ms. ALLEN. For sure, yeah. Yeah.
Ms. VELAZQUEZ. Mr. Christ, you write that continuing
resolutions can cause instability. How damaging are CRs or
government shutdowns?
Mr. CHRIST. They are extremely damaging. Thank you for the
question, first of all.
And the challenge is, you know, keeping projects in the
pipeline, keeping consistent revenue. We live every day off of
that revenue. That is how we pay our employees. And if we get
into a scenario where the faucets all of a sudden shut down,
and we have been providing a lot of front end work, whether it
be design or whether it be budgetary estimates, we are out that
money and we can't recoup it. And so that is really the damage,
is that we need to have that consistency in the revenue and
allowing the contracts to be executed.
Ms. VELAZQUEZ. You cite a loss of $10,000 per proposal
based on instability. Does the government reimburse you?
Mr. CHRIST. No, ma'am.
Ms. VELAZQUEZ. Does the agency have to tell you anything
about why it canceled the solicitation if the work is moved or
if there are similar opportunities for which you might be
qualified?
Mr. CHRIST. No, ma'am.
Ms. VELAZQUEZ. Ms. Allen, the Rule of Two has been critical
to leveling the playing field for small businesses. Will you
elaborate on the changes you mentioned in your written
testimony and how they will impact small businesses?
Ms. ALLEN. Yeah. So the Rule of Two currently only applies
to a very small percentage of the acquisitions that are
happening in the world in the federal space. If that Rule of
Two was expanded to, you know, things well above the simplified
acquisitions, of which small businesses are able to compete in
and are qualified for, it would really open so many doors and
really be a game-changer.
Ms. VELAZQUEZ. Thank you. I yield back.
Chairman WILLIAMS. Yields back.
I now recognize Representative Stauber from the great state
of Minnesota for 5 minutes.
Mr. STAUBER. Thank you very much, Mr. Chair.
And Ms. Allen, between a Lamborghini and a Ford, I will
take the Ford pickup all day long in northern Minnesota.
Minnesota's and this country's small businesses are
powerhouses of innovation and resilience. They create jobs,
fuel our local economy, and contribute to the unique character
of our states and nation. Yet when it comes to federal
contracting, their potential is often stifled by a complicated
process that favors large corporations with the vast resources.
Mr. Christ, as you mentioned in your testimony, there are
concerns with how small businesses are paid following change
orders or modifications to the original contract. How do these
changes affect your businesses differently than a large
business?
Mr. CHRIST. Thank you for that question. You know, as far
as change order work goes, oftentimes the change order is
executed by the contracting official. Contractually, we have to
then begin on that work. We don't necessarily sit there and
have to say, oh, here is upfront costs to go ahead and cover
all the work that you have done and completed to date. A lot of
times those change orders and contract modifications, they can
take many, many months to go through.
Mr. STAUBER. Do you hold the monies, then?
Mr. CHRIST. We do, yes, sir. Yes, sir.
Mr. STAUBER. What does that cost you?
Mr. CHRIST. We are working on one right now that we have
got probably $250,000 that we are holding. We have expended the
monies, but we have no contract vehicle to actually bill for
the funding.
Mr. STAUBER. Well, we are working on that.
Mr. CHRIST. Thank you.
Mr. STAUBER. You know, the various issues that you have
highlighted encapsulate why I introduced the Small Business
Payment for Performance Act, and you are well aware of that.
This legislation is not just about protecting individual
businesses. It is about safeguarding the future of our
infrastructure and our small businesses.
When small contractors go bankrupt, the impact is far-
reaching. Projects stall, skilled workers leave the industry,
and the very foundation of our nation suffers. Similarly, when
small businesses outgrow their small status and are
recategorized as a large business, they are forced to compete
with big corporations, sometimes with a disproportionate gap in
total employees.
Mr. Moore, having experienced the transition after
outgrowing your small business status, could you elaborate on
some of the difficulties and regulations you have seen since
your transition?
Mr. MOORE. You know, the majority of the difficulties are
you work at a lot lower margin than the large businesses. We
are in a very low-margin business. And with the increased
government regulations, that takes a bigger percentage of your
net profit, which makes it harder to really scale and hire your
employees. So you are caught in this no man's land of you are
not small, but yet you are not big, you are not able to
compete.
So the size standards and the regulations are very
impactful on U.S. midsized businesses.
Mr. STAUBER. You know, some businesses view their status
changes as the government penalizes them for growth. Would
there have been a benefit to your company to restrict growth
and remain classified as a small business, Mr. Moore?
Mr. MOORE. Yes, for sure. It would have helped us stay more
profitable. But we just felt like to our employees, we couldn't
tell them to now forevermore be stagnant. So we broke through
the barrier. But there is definitely--that line in the sand of
that small business size standard is definitely motivation not
to grow your business.
Mr. STAUBER. Right, right. In 2019, the House passed my
bill clarifying the Small Business Runway Extension Act. The
SBA utilizes a 3-year average of gross receipts to determine
whether a company should be classified as small and considered
for SBA benefits.
The Small Business Runway Extension Act extended the 3-year
average to the 5 years. And thankfully, the SBA took it upon
themselves to do the right thing, and they did not need further
congressional action. However, as many of you mentioned is
clear, we need to really foster an environment of growth, and,
you know, I look forward to this Committee doing just that.
Mr. Christ, I have to say that you, as a business, you are
holding a quarter of a million dollars because a change order
that the federal government forced upon you, it is almost like
you have got to do that. I don't know how many businesses
across this nation that would have the capability to do that,
and it is simply just wrong. And thank you for your testimony,
all of you.
And I yield back, Mr. Chair.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative McGarvey from the great
state of Kentucky for 5 minutes.
Mr. MCGARVEY. Thank you, Mr. Chairman.
And I am fond of saying on this Committee, small businesses
do big things, and the work you all do is so important. But
what is a small business? Small businesses come in all
different shapes and sizes. And so what we are trying to do on
this Committee is give all these different entrepreneurs the
support to start businesses and the tools that they need to
help them grow. That is what we want to have with our small
businesses. So I am glad to have the opportunity to discuss
these size standards today with this panel.
I can tell you I have heard from people in my district on
this very issue who just grow frustrated. They are trying to do
a good job with their business. What happens when they are
dealing with these standards from the SBA, and how can we make
it better?
We know the current structure of small business contracting
programs, while necessary to ensure entities can compete for
appropriate federal contracts, can sometimes be discouraging,
especially for the more advanced small businesses that are
ready to grow to that medium size or maybe a little beyond. So
these concerns stem from the fact that surpassing their size
standard will lead to a loss of eligibility for set-aside
contracts, increase compliance obligations, and direct
competition against billion-dollar companies.
So, given these realities, not enough companies
successfully make that transition from small, again, whatever
that means, to other than small business status. The Department
of Defense has referred to this as the ``Valley of Death'' for
small firms that want to grow.
According to a 2019 GAO report, over 93 percent of
businesses that received only set-aside contracts in fiscal
year 2008 and were still federal contractors by year 2017
remained small. Only about 2-1/2 percent of those businesses
managed to graduate to midsize by fiscal year 2017.
So, Ms. Allen, I will start with you. You mentioned that
your company teeters on this edge of small to medium-sized
business standard. Are there adjustments to the size standard
rules or methodology that would ease the transition for small
businesses like yours that are ready to move away from that
kind of smallish business standard?
Ms. ALLEN. Yeah, you know, the Runway Act was a really
great start, so thank you for that. There are several things.
I think, making the size standard more consistent in the
industry, in my industry in particular, because there are
multiple NAICS codes that I could operate under, and it really
varies wildly. But additionally, the number just needs to be
higher across the board.
I think that, you know, as these gentlemen have pointed
out, you can't go from 500, even 150 employees to 10,000
employees overnight. And that is what it takes to really be
competitive.
And so the numbers, whether it be dollars or people, that
number just needs to be increased.
Mr. MCGARVEY. Is it possible to incentivize growth given
the current framework?
Ms. ALLEN. No, it is completely not incentivizing growth.
It is doing completely the opposite of figuring out how do I,
you know, operate in this really limiting environment.
Mr. MCGARVEY. Got it. Mr. Moore, I am going to come to you
with the next question. Before I do that, though, I do just
want to say to Mr. Christ, I married a Missouri girl and have a
12-year-old daughter, so there is some interest in the Super
Bowl this upcoming weekend.
Mr. CHRIST. I may be wearing my Patrick Mahomes socks.
Mr. MCGARVEY. There we go. I figured that might be the
case.
Mr. Moore, in your testimony, you spoke to the challenges
your company faced when you began to outgrow the small size
category under that definition. Do you feel that an off ramp
program dedicated to making the transition out of small
business, again, as it is defined, making that less burdensome
and daunting could have helped your business?
Mr. MOORE. Definitely.
Mr. MCGARVEY. You know what? My grandpa said, don't sell
past the close, so definitely is the answer.
Mr. Chairman, I yield back.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Representative Alford from the great state
of Missouri for 5 minutes.
Mr. ALFORD. Thank you, Mr. Chair. Good to have everyone
here today, especially Mr. Christ from Kansas City.
I tell you what, it is an honor to be on this Committee
working to really help the fabric of America. As a former small
business owner in the Kansas City region, I understand some of
the hurdles, nowhere near the size of your business or some of
the issues you are dealing know.
You know, we are here to help champion Main Street America
under the direction of our Chairman Williams, to lower the
barriers to creating small businesses, and to support small
businesses that already exist. However, we know that federal
procurement is incredibly complex, leading to massive
compliance costs, as you guys have spelled out here, can
prevent small businesses from even trying to compete for bigger
contracts. And beyond the burdensome compliance cost, out-of-
date SBA size standards and agency decisions can also leave
small businesses behind.
While small businesses are supposed to have unique
contracting opportunities, agency decisions can prohibit
qualified small businesses. I want to get right into the
questions here. I want to start with you, Mr. Moore.
Since 2010, the number of small businesses winning federal
contracts has dropped by 50 percent. That is a stark decline,
and I think it can be attributed to several factors, including
the sizing standards. The great thing about it, I hear from
both sides of the aisle here, these standards are out of date.
We need change on page 15 and 16.
By the way, your testimony is unbelievable. I encourage
everyone to read it very thorough. On 15 and 16, you offer some
solutions. Run through those real quick, just thumbnail
solutions for us, please.
Mr. MOORE. I don't have that in front of me, but the
solution has got to be either a ramp off or several things that
we have talked about, getting credit for certain compliance
people. But I think really an increased size standard, if we
have gone from half--121,000 down to less than half that, small
businesses, something is not working. You know, the businesses
are going out of business, and the small businesses are not
surviving long term. So there is got to be some sort of change
in the NAICS codes, the size standards, or there is got to be
an off ramp.
Mr. ALFORD. So I am trying to wrap my head around this.
What would be the opposition to this? What do you think?
Mr. MOORE. If you go ask very small businesses, they are
all against expanding the size standards, and I think they are
the loudest. And there hasn't been detailed industry studies
around some of these NAICS codes.
Mr. ALFORD. Thank you. Mr. Christ from Kansas City,
congratulations on becoming the National Vice President for the
American Subcontractors Association.
Mr. CHRIST. Thank you.
Mr. ALFORD. Great work in our region. In your testimony,
you talked about how strict requirements for past performance
and qualifications are the largest hurdle for small businesses
to enter the federal construction market. What are some of your
recommendations? How do we fix this?
Mr. CHRIST. So, in our industry, small business is
classified based off of a revenue basis. We are one of those
very small businesses. And our concern with raising the small
business threshold is that it creates a glass ceiling still.
Right now that is one of the issues that we see, is that there
is a glass ceiling and no transition period.
If there was a transition period outside of the small
business designation, we feel that that would be successful. If
you just raise the size standards, all you have done is raise
that glass ceiling. People want to get right up to it, but they
never want to make that jump, because the jump from small
business to open competition is so drastic that you are going
to get smothered. And that is why only 2-1/2 percent of
businesses that graduate small business don't go on to get
another contract. You know, it is insane. We are playing with
the thousand-pound gorilla at that point, and we can't compete.
Mr. ALFORD. All right. Real quick.
Mr. CHRIST. Yes, sir.
Mr. ALFORD. We got about a minute left. I know you do
private projects as well as federally funded. If you build a
private project in the Kansas City region, it is X dollars. If
you are building pretty much the same project on the federal
level, what is the added cost for that, for compliance and
other factors?
Mr. CHRIST. You know, on average, it is probably about 25
percent to 30 percent.
Mr. ALFORD. More?
Mr. CHRIST. Yes.
Mr. ALFORD. Plus 30 percent?
Mr. CHRIST. Yes, sir.
Mr. ALFORD. That is incredible.
Mr. CHRIST. Yes, sir.
Mr. ALFORD. Because the taxpayers are paying for that.
Mr. CHRIST. Yes, sir. However, on that, they do have a
proven three-phase quality control program that, I can attest,
does work. Right now, the Corps of Engineers and their quality
control requirements and program, it does mandate quality on
those projects.
Mr. ALFORD. All right. In your professional opinion, who
will win the Super Bowl?
Mr. CHRIST. Kansas City Chiefs.
Mr. ALFORD. Go, Chiefs.
Mr. CHRIST. Yes, sir.
Mr. ALFORD. Thank you. I yield back.
Chairman WILLIAMS. The gentleman yields back.
I now recognize Ms. Scholten from the great state of
Michigan for 5 minutes.
Ms. SCHOLTEN. Thank you so much, Mr. Chairman. And thank
you to all of our witnesses for being here today.
As the Ranking Member on the Subcommittee on Contracting
and Infrastructure, I see how small businesses get boxed out of
the federal marketplace by agency size standard decisions.
Everything you are talking about here today, spot on.
I am particularly concerned with the ability of women-owned
small businesses, WOSBs, to compete and be prepared to succeed
if they outgrow these size definitions. That jump is so
extreme.
In my home state of Michigan, as our recently departed
football coach Jim Harbaugh would say, business is booming. It
is particularly booming for WOSBs, which represent over 40
percent of businesses in our state. Can you believe that? Isn't
that incredible? I am thrilled that last week this Committee
passed bills to support the WOSB program, but there is still so
much more to be done.
My first question for you, Ms. Allen. As a certified WOSB,
can you discuss your experience with the program and if there
are any tools that Congress can facilitate to help businesses
like yours with growth and the graduation.
Ms. ALLEN. Yeah. So, you know, recently I was thinking
about this. We went after a solicitation, and I will be really
brief as I can, that was a small business set-aside. But it had
a scorecard that we had to self score, and it was things like
ISO certification. Have you had a DCA audit? Do you have a
security clearance? Also, the threshold insofar as the size of
the contracts was huge, and yet it was still a small business
set-aside.
And so I feel like it might be useful not only if the SBA
were out helping to educate contracting officers, that would
really go a long way to helping the program, but also, you
know, if there was some sort of education insofar as--or
training or something to help small businesses get those DCA
audits, get our ISO certifications, get, you know, all those
different pieces that would enable us to get a higher score
because we are qualified to do the work. I don't need a DCAA
audit to say that I am--you know, my CPA is auditing me all the
time. I promise we are good. Right, whole other conversation.
So I think that that would really go a long way to help
insofar as small businesses. And that would help teensy, tiny
companies and, you know, larger smalls.
Ms. SCHOLTEN. Thank you. It is almost too practical, almost
too commonsense. Thank you very much. Very, very helpful.
Another concerning barrier to entry that I see in the
contracting space is the absolute muck of ambiguity that small
businesses are forced to navigate in applying for project
funding. While the federal government is operating under
continuing resolutions in particular, so unclear, no guidance.
If we make small businesses complete a lengthy and costly
application process, we should be able to provide some
certainty around the funding, regardless of the threat of a
shutdown. We feel this is a keen and pressing need for a lot of
our small businesses.
This question is for Mr. Christ. Can you please speak to
your experience competing for contracts under a CR? And what
recourse could the SBA implement for firms to weather the
uncertainty of a shutdown?
Mr. CHRIST. We would love to be able to have some sort of
compensation guaranteed, but we understand that that is
probably very far-reaching.
We do understand that the costs involved with procurement
is simply the cost of doing business. However, what has become
ever-changing and increasing are the requirements for these
solicitations, you know, the vast information that has to be
provided, and it takes having to hire a graphic artist. We
build buildings, we don't do pretty proposals, right? And so
now we have the added costs of this additional individual, and
we don't even know if the projects are going to be funded. And
that is a challenge. It really is.
But again, we understand it is a cost of doing business,
but it has become a substantial cost at a risk of, potentially,
projects not even being funded.
Ms. SCHOLTEN. Thank you. Very helpful and informative.
I yield back.
Chairman WILLIAMS. Yields back.
I now recognize Representative Crane from the great state
of Arizona for 5 minutes.
Mr. CRANE. Thank you, Mr. Chairman. I appreciate the
opportunity to participate in this important hearing.
Does anybody on the panel know what the national debt of
the United States is? Mr. Moore, you look like you were hitting
your button first.
Mr. MOORE. It is a lot, 37 trillion, maybe.
Mr. CRANE. Thirty-four trillion. You guys know that we
spent about a trillion dollars in the last 90 days that we
don't have? You guys know what the annual deficit is every
single year up here? Two trillion dollars-plus, about 200
billion a month.
So when you hear, excuse me, one of my colleagues just
talked about continuing resolution. Does anybody know what that
means? What does it mean, Mr. Lambke?
Mr. LAMBKE. It means that the agencies get funded at a base
level from the previous year----
Mr. CRANE. Yep.
Mr. LAMBKE.--with no incremental funding.
Mr. CRANE. So you guys--right. So basically, funding at the
same level, right? So you guys are all business owners, right?
You guys understand budgeting. If you had something similar to
a $2 trillion deficit annually, what do you think you would be
doing as a business owner?
Mr. LAMBKE. That is pretty easy. If you----
Mr. CRANE. Would you continue funding your business at the
same level you were last year?
Mr. LAMBKE. Absolutely not.
Mr. CRANE. What about you, Mr. Moore?
Mr. MOORE. Definitely not.
Mr. CRANE. Mr. Christ?
Mr. CHRIST. No, sir.
Mr. CRANE. Ma'am?
Ms. ALLEN. No.
Mr. CRANE. Why do you think we do that up here? Because it
is so easy to spend your money. Nobody wants to say no. Right?
A lot of you rely on government contracts, is that correct?
Mr. LAMBKE. We are 100 percent federal contractor.
Mr. CRANE. When this whole thing goes bust, how many
government contracts do you think you are going to get?
Mr. LAMBKE. I am guessing zero.
Mr. CRANE. Yeah. What about you, Mr. Moore?
Mr. MOORE. None.
Mr. CRANE. Do you think that is possible or do you think we
can just continue to print money that we don't have?
Mr. MOORE. I hope that we don't continue to print money
that we don't have.
Mr. CRANE. Well, do you see that changing? Do you guys
spend any amount of time up here on Capitol Hill?
Mr. MOORE. A Little bit, yeah.
Mr. CRANE. Do you see that changing, Mr. Lambke, with the
conversations you have had?
Mr. LAMBKE. I haven't seen a change in the time I have been
watching.
Mr. CRANE. I have meetings all the time. Nobody ever asked
that we quit giving them money or give them less money.
Mr. LAMBKE. No, sir. The hole gets bigger.
Mr. CRANE. The only reason I bring that up is because there
is obviously--you know, I honestly wish the best for you and
your businesses and your employees. I really do. As a small
business owner myself, and a very small business owner,
probably about 20, 30 employees, I think 50 or 60 at most, I
understand how tough it is to start a small business, maintain
it, you know, make sure my employees are taken care of. But
there is a bigger problem up here that very rarely gets talked
about, and that is our spending problem up here.
And it concerns me because, you know, when I look at
business owners like you that rely on the government and
government contracts, because what we do up here is not
sustainable. It is just not sustainable. And you even hear when
people talk about, oh, these CRs, these continuing resolutions,
with disdain, right? The problem is these CRs are spending at
the same level. And you just had four business owners that have
all been successful say that is not sustainable. We couldn't do
that in our own business. Yet we arrogantly do that every
single time up here.
Go ahead, sir.
Mr. LAMBKE. May I add something? CRs are one thing,
shutdowns are another.
Mr. CRANE. Yeah.
Mr. LAMBKE. CRs are easier to deal wiyh, we have operated
under CRs for so long, so many years. That is one thing. But it
is the shutdowns that scare us to death. Right? Because then we
are having to make really hard decisions about what we do with
the families that rely on our companies, you know, to feed
their families. Right?
Mr. CRANE. Right.
Mr. LAMBKE. And so those are testy times. And the longer
they go, and there is been a few good ones, those are the ones,
I think, that bother us the most. Scare us.
Mr. CRANE. Well, on this same train of thought, if you guys
had one bit of advice that you could give us on how to make
sure that we don't completely destroy our national economy and
cause your businesses to go completely under because there is
no more government contracts, do you guys have anything that
you would like to say to the Members of Congress on this panel?
Go ahead, Mr. Lambke.
Mr. LAMBKE. Oh, not in 5 seconds. No.
Mr. CRANE. Go ahead, Mr. Moore. Anything? Mr. Chairman
might give us a few extra seconds.
Mr. MOORE. Create more jobs, more prosperity, bigger tax
base would be my advice.
Mr. CRANE. Pro growth?
Mr. MOORE. Pro growth.
Mr. CRANE. Gotcha. Mr. Christ?
Mr. CHRIST. I would recommend taking a look at the small
business standards and distributing some of that revenue
throughout that organization reasonably, not to the gorillas in
the room that are just underneath that glass ceiling that I
mentioned----
Mr. CRANE. Yep.
Mr. CHRIST.--that can destroy these small businesses. You
can imagine----
Mr. CRANE. Yep.
Mr. CHRIST.--us going up against $200 million a year
company.
Mr. CRANE. Okay.
Mr. CHRIST. We are never going----
Mr. CRANE. I think we ran out of time. Sorry, ma'am. We
would have given you time, but we ran out of time.
Thank you, Mr. Chairman, for letting me go over.
Chairman WILLIAMS. Thank you. Yields back.
I now recognize Mr. Meuser, Representative Meuser, from the
great state of Pennsylvania for 5 minutes.
Mr. MEUSER. Thank you, Chairman. Thank you all very much
for being here with us today.
So I spent about 25 years helping grow a small business
into a larger business. And what was interesting as well, 90
percent of our customer base were all, you know, mom-and-pop
size small businesses. So I have real good understanding of
things, private sector contracting, primarily, but some federal
government.
And as my colleague was bringing out, you know, it has
actually been remarkable where you mentioned, Mr. Moore, the
pro growth initiatives. Our revenues in the United States of
America have increased almost 40 percent in the last 5 years,
$5 trillion versus 3.5 trillion. But we are spending 6.5
trillion. So that is a little bit of a disparity, a little bit
of a problem that would, you know, wipe any of your businesses
out likely in a hurry. I don't think your bank would last too
long there.
So it is certainly a combination of just good business
management. Right? I mean, effective reductions, but pro
growth. Pro growth. That is what brought the United States out
of the debts that we had after World War II. And we can do it
again.
So on this, your businesses are based upon federal
contracting. The size of the federal government is not your
fault. I mean, everything you see around here is contracted. I
mean, the size of our federal government is wildly excessive,
and supplies and computers and you name it, need to be provided
to it. So that is just the way it is.
And it is great that the SBA works towards making small
businesses receive their fair share so you don't have to
compete against those that are hundreds of millions of dollars
and such. So I am listening very closely to everything taking
place here.
Clearly, the formula for small business contracting needs
to be reviewed, right? A hundred and fifty if the revenues are
worked into that as well, based upon the different NAICS codes,
it could be what, computer sales could be different than desks
or furniture and such. And you all expressed a fair amount of
ideas.
I will just start, though, what should be done with the
formula? Okay, you said just raise the standard from 150 up.
Now that is fine, but then that could encroach upon small
business startups.
Now, let's face it as well, some businesses like yours
could go from, you know, as soon as you hit 140 employees, you
say, my new marketing department is now going to be under a new
LLC, and they're not going to have to necessarily count towards
my revenues. I will serve as a customer to them and they will
be a vendor.
You are shaking your head, so I am sure that is one of the
oldest tricks in the book, so that is prohibited. But I
wouldn't doubt that goes through people's minds as you are
considering how to handle all this.
So, a couple of questions. One, how do you think the
formula should be better set up, revenues, size? And as well
are you asked? Did the SBA ask you? Do you do surveys?
And also consider this. When you are at a--you receive a
contract, and as you stated again, that it takes time to grow,
there should be in the formula maybe a 3-year or 4-ear, and
these are things that I look forward to speaking with the
Chairman of this Committee on, of assurity. Right? If you do
grow to 200 employees, you don't lose the contract that year.
There is at least a 3-, maybe even 4-year statute which permits
you to continue serving in that way.
So, Mr. Lambke, I will start with you.
Mr. LAMBKE. Yeah. So I am fine with the headcount-based
NAICS codes for our industry personally. I think that the
number, though, has got to look at what has happened to the
complexity of the business over the last 20 years, and so 500
to me is the right number.
If you look at what is happening in AI and large language
models and robotic process automation, it is a team sport. It
is a very complex business. It requires a lot of very smart
people working together across multiple systems and platforms.
And so it is really just if the government intends, and I know
they do, to continue to compete with our adversaries, both
offensively and defensively, then you have got to be able to
have small business innovators that can get to a sufficient
size that they can still innovate.
I would argue that many of the larger businesses are not as
motivated by innovation. If we don't innovate, we are out of
business. I think when you get to a certain size, you cannot
innovate as much.
Mr. MEUSER. They look at it only every 18 months. I ran----
Mr. LAMBKE. Yes, sir
Mr. MEUSER.--our of time. My apologies for speaking too
long. I wanted to hear from you, but perhaps we can continue
this conversation.
I yield back, Mr. Chairman.
Chairman WILLIAMS. Yields back. I now recognize
Representative Maloy from the great state of Utah for 5
minutes.
Ms. MALOY. Thank you all for being here. I want to start
with Ms. Allen.
Rep. Scholten talked about a bill we are working on
together to protect WOSBs. And the businesses already have to
certify that they are women-owned, but they don't have to
certify that they are small. And what I am hearing from you is
that could be very confusing. A business may not even know if
they qualify as small, depending on which contract they are
going for.
And I have sat here listening, trying to decide what to ask
all of you, because you have defined the problem very clearly,
and we have asked a lot of follow-up questions. So I just want
to give each of you a minute. Is there anything you were
prepared to tell us as part of a solution that you haven't had
a chance to talk about yet?
I will start with Mr. Lambke and work my way down.
Mr. LAMBKE. Look, I think it obviously takes time, energy,
and resources on behalf of the government, but look at the
industry. Spend some time with the companies that do what we do
specific to IT and recognize that there needs to be something
very specific. But you can spend some time with each of us,
look at our receipts, look at our business, look at how we get
things done and the results we deliver for the customer. I
think you can quickly determine where the size standards should
be.
Ms. MALOY. Thank you.
Mr. LAMBKE. Yes, ma'am.
Ms. MALOY. Mr. Moore?
Mr. MOORE. So our business is changing at lightspeed. And
in our primary NAICS code 541519, we are basically providers of
technology. There is a limitation on the subcontracting rule
which says that we can only subcontract 50 percent or less of
the value of the contract.
There is a nonmanufacturing rule which says that, OEM--if
we are awarded a contract and it is small business set-aside,
then you have to procure that product from a small business,
which is a manufacturer that is small, which there are none.
Footnote 18 says that in our code there needs to be 15 to
50 percent of services, 15 to 50 percent of contract value, and
that is never the case. Product is usually the greatest value.
So, in my opinion, I just think that the SBA has come
together with industry. We are put in an impossible position.
There is a lot of regulations that there is no way that we can
meet. So I just think it takes more dialogue and understanding,
truly, what it is that we do.
Ms. MALOY. Thank you. Mr. Christ?
Mr. CHRIST. Thank you. So what I would encourage, again, I
had mentioned a transition period. I feel that the transition
period promotes continuous growth for businesses. Do I have a
definition on that transition period and what it looks like?
No, that is for additional conversations and I would love to
have those conversations with you.
But the goal is, to promote innovation, is for businesses
to continue to grow, and without that transition period, there
is no incentive for growth. They want to get right to that
point, be the large gorilla in the room, and they don't want to
get out of there.
So one other thing that that forces is small businesses
to--very small businesses to look to team up with larger
ventures and create a joint venture agreement. Right? These can
be fantastic mentor-protege agreements. we are living proof
that they work, because we are in one right now.
However, there are some bad characters out there that will
utilize those joint ventures and those mentor protege
agreements to just have an avenue to continue to play in that
small business. So, you know, being very diligent and
scrutinizing that, we feel, is also another thing that could be
extremely helpful. Thank you for your question.
Ms. MALOY. Thank you. Ms. Allen?
Ms. ALLEN. Thank you very much for this question. So, for
us, these guys, I think that their NAICS codes are all based on
the number of employees that they have, whereas mine is based
on revenue, which to me, doesn't make any sense, because for
me, my cost of goods sold is huge, right? I mean, my biggest
cost is my labor. So, you know, I am paying this much money,
but my margins are a little, teeny tiny.
And so when you are looking at my revenue as whether or not
I am large or small, my revenue might be up here, but if, you
know, my margin is this little, teeny tiny bit, it doesn't make
a lot of sense to me personally in those labor categories.
I agree with Mr. Christ that I think that a transition
period would be hugely helpful. As I mentioned, helping small--
especially WOSB companies, close to my heart, to get their DCAA
audits done, to be able to get security clearances, to be able
to the ISO certifications, helping them with that process, I
think would be huge insofar as helping them to make those
transitions that is incredibly expensive and time-consuming for
us.
Ms. MALOY. Speaker B: Thank you. My time has expired. I
yield back.
Chairman WILLIAMS. The gentlelady yields back.
I now recognize Representative Gluesenkamp Perez from the
great state of Washington for 5 minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Mr. Chairman, and thank
you all to the witnesses for being here today.
So we know that the SBA is tasked with ensuring that small
businesses are given a fair shot at competing for federal
contracting dollars. These federal contracts can be an
incredible opportunity for small businesses and our
entrepreneurs. And Congress has established goals to award a
percentage of all prime and subcontracts to women-owned small
businesses, small disadvantaged businesses, service-disabled
veterans-owned small businesses, and HUBZone certified small
businesses.
I want to make sure that we are holding agencies to these
standards, which is why I cosponsored the Corrective Action
Report Oversight and Accountability Act with Representative
Meuser, which would hold agencies accountable for actually
hitting these benchmarks. But today, I am really interested in
how we make sure that the benefits of these important programs
that give small businesses opportunity to compete for federal
contracts are actually going to small businesses.
Mr. Christ, I am interested in one of the problems you
mentioned in your testimony. You talk about acquisitions where
small businesses are solicited by larger firms to join joint
ventures in which the small business holds 51 percent and the
big guys hold 49.
You mentioned that these joint ventures can be extremely
beneficial for small businesses to tap into the larger firm's
bonding program, employee pool, previous government network,
but you also know the problems arise when these big guys simply
utilize the small businesses as a vehicle to get federal work
otherwise set aside for small businesses. This is concerning to
me because it means large businesses are getting this advantage
that Congress intentionally set aside for the small guys who
can't otherwise compete.
So in your view, how should we improve the program to make
sure that the small businesses receiving these benefits are
actually small?
Mr. CHRIST. That is a very great question and it is
difficult to answer because there is always going to be bad
characters no matter what we do. And I feel that the program
itself is established in a very good manner, but examining the
ownership structure of the joint venture is extremely critical.
We know personally of several firms where the larger
businesses have actually required them to give up ownership in
some of the smaller business. So now they are not getting 49
percent. They may be getting 54 percent of the revenue, because
from the joint venture entity standpoint, they may only be 49.
But when you factor in the ownership in the small business, it
is more than that.
So I feel that, you know, examining the ownership structure
of both companies and making sure that there is no cross-
pattern or cross-pollination in there, I feel that that is one
way that you can help kind of clean that up.
Ms. GLUESENKAMP PEREZ. Thank you. Mrs. Allen, you also
mentioned some of these issues in your testimony, including the
problems that arise when certain companies fraudulently
claiming to be women-owned to benefit from these set-asides.
Can you expand on this process for self-certification, how that
works and how you think it could be improved?
Ms. ALLEN. Yeah, self certification, I mean, you can just
check a box and say, oh, yes, I am woman-owned. You really need
to have, you know, as Mr. Christ is saying, as with small
businesses, also women and small businesses, to look at the
structure, who is doing what, who is actually day-to-day? You
know, is--you know, Joe Jim Bob's wife, the one who is the
figurehead, but she has nothing to do with the business. She is
not involved. She is not running it. That really does a
disservice to women like me who are out there, you know, doing
the things every day and really, you know, slugging it out with
companies that are not woman-owned and not always small.
Ms. GLUESENKAMP PEREZ. Yeah. Thank you.
Before coming to Congress, I ran an auto repair and machine
shop. And COVID, obviously, we were largely impacted. And that
year, I had a bunch of different projects running. We worked on
air improvement quality projects. We worked on taking our
intake process online, all these big projects. Some of our good
friends who own an auto body repair shop, that whole year her
entire project was figuring out how to navigate a city's
contract process, you know.
And when you see these big hurdles, you really grasp like
when the bureaucracy becomes so extreme, it is the small
business, it is actually the women-owned that create these
issues.
So I sincerely thank you all for being here today. I thank
the Committee for your attention to this.
Chairman WILLIAMS. Yields back.
I now recognize Mr. Molinaro, Representative Molinaro, from
the great state of New York for 5 minutes.
Mr. MOLINARO. Thank you, Mr. Chairman, and thank you all
for being here this morning still.
I think I am going to continue in sort of that line of
questioning, only to acknowledge that in my previous life in
local government, we certainly recognized that small businesses
were so much more ably--or able to navigate the local
procurement policies and, of course, state and federal becoming
much more complex. We recognize that the bureaucracy is too
overwhelming in many cases. Small businesses, by definition,
have lesser resources and time to make the commitment to
navigate that labyrinth of regulatory oversight and outdated
standards that I think this Committee has been fairly earnest
in attempting to address.
The problem hasn't been that small business is too small,
it is that big government is too big, and navigating that field
has become even more challenging. And yeah, big business has
found ways to circumvent.
And I would also offer the certification of women- or
minority-owned businesses are challenging for those who
earnestly and appropriately qualify, and far too easy for those
who wish to act in a nefarious way.
Obviously, so I want to get to NAICS codes in a moment. I
do want to reference, however, the posted act, which this
Committee unanimously adopted. It is a bill I sponsored, passed
the House, meant to demand the SBA open up a more greater
transparency for small businesses to know regulation and how to
navigate that regulation. All of you have testified to this to
some degree, but I would like to just narrow it into or at
least like to focus in on the issue of transparency.
Given your experience, the work you have done, obviously
interacting with the federal regulatory oversight and your own
work with the federal government, what should we do to
appropriately address the issue of lack of transparency? That
is where it starts.
What would be a good first step for actual transparency to
make it easier for you all small businesses across this country
to navigate the SBA?
Not a single thought?
Mr. MOORE. I just think that the SBA has been wonderful and
very helpful during our 8(a) certification. There is many
programs, a lot of assistance, and, you know, a lot of learning
sessions, educational sessions, and I think that is all great.
Once you move out of the small business category, there is
very little, if no, support. And I would like to see more
collaboration continuing between the small business
administration and industry.
Mr. MOLINARO. So greater collaboration. Anyone else?
Mr. CHRIST. Utilization of the business opportunity
specialists. It is amazing to me that these small businesses
don't know that that resource is out there. And Our business
opportunity specialist has been fundamental in helping us
navigate through all of these programs and really helping us
understand what is required and expected of us as a small
business.
So, you know, getting that out there and getting small
businesses to participate with their business opportunity
specialist, and probably looking at extending that and making
it a little larger, because I know just in our region, we have
had issues with turnover on the business opportunity
specialists and not having enough of them to take the need that
is out there. Thank you.
Mr. MOLINARO. Thank you.
Ms. ALLEN. I would agree. And you can imagine we are here
in Maryland and, you know, we are kind of a company town. So
you can imagine how many government contractors there are that
could really benefit from those small business specialists, and
there just are not enough of them to really be able to make an
impact. If Kansas City is struggling, the Maryland-D.C. area,
those guys are overwhelmed.
But there is just not enough to be able to really make a
dent in the amount of help that small businesses could use
insofar as, you know, getting themselves off the ground and
also making that transition, that they have a lot of knowledge
and just, they are up to their eyeballs.
Mr. MOLINARO. Let's do this, Mr. Lambke. I am going to let
you jump in, but it will be my last question. Hopefully, with
20 seconds, you will be able to get to it. But you speak and
you all have dealing with the challenges that businesses not
quite fitting neatly into the NAICS codes offered by the SBA.
You obviously referenced the continuing resolution. The SBA
has found is to continue to add footnotes to types of
businesses that are emerging. And as a result, we all recognize
there are now over 41 pages of different NAICS codes, which
indicates, obviously, the ongoing problem.
Based on your experience, do you feel the current rigidity
of the system can shut out innovative companies, I think you
do, and ultimately, limit competition for government
contracting? And you may have to answer that in writing later.
Mr. LAMBKE. Indeed.
Mr. MOLINARO. Thank you.
Chairman WILLIAMS. Thank our witnesses for their testimony
for appearing for us today. And I think you can see that at
least there is one Committee, truly is bipartisan. We get it.
We are going to fix it.
And without objection, Members have 5 legislative days to
submit additional materials, written questions for the
witnesses to the Chair, which will be forwarded to the
witnesses. So I ask the witnesses to please respond promptly.
If that happens.
If there is no further business. Without objection, the
Committee is adjourned and thank you.
[Whereupon, at 11:35 a.m., the committee was adjourned.]
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