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93–326 2015

CONTRACTING AND THE INDUSTRIAL BASE 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

FEBRUARY 12, 2015 

Small Business Committee Document Number 114–001 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

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 VELA ́ ZQUEZ, 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 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Steve Chabot ................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Mr. Randall D. (Randy) Gibson, President, Whitesell-Green, Inc., Pensacola, 

FL, testifying on behalf of the Associated General Contractors of America ... 3 

Mr. James P. Hoffman, PE, President, Summer Consultants Inc., McLean, 

VA, testifying on behalf of the American Council of Engineering Companies 5 

Mr. John McNerney, General Counsel, Mechanical Contractors Association 

of America, Rockville, MD ................................................................................... 6 

Mr. Andrew Hunter, Director, Defense-Idustrial Group and Senior Fellow, 

Center for Strategic and International Studies, Washington, DC ................... 8 

APPENDIX 

Prepared Statements: 

Mr. Randall D. (Randy) Gibson, President, Whitesell-Green, Inc., Pensacola, FL, testifying on behalf of the Associated General Contractors 

of America ...................................................................................................... 22 

Mr. James P. Hoffman, PE, President, Summer Consultants Inc., 

McLean, VA, testifying on behalf of the American Council of Engineering Companies ............................................................................................... 42 

Mr. John McNerney, General Counsel, Mechanical Contractors Association of America, Rockville, MD .................................................................... 50 

Mr. Andrew Hunter, Director, Defense-Industrial Group and Senior Fellow, Center for Strategic and International Studies, Washington, DC .... 60 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

The Design-Build Institute of America (DBIA) .............................................. 69 

The National Association of Surety Bond Producers (NASBP) and The 

Surety & Fidelity Association of America (SFAA) ..................................... 74 

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(1) 

CONTRACTING AND THE INDUSTRIAL BASE 

THURSDAY, FEBRUARY 12, 2015 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:30 a.m., in Room 

2360, Rayburn House Office Building. Hon. Steve Chabot [chairman of the Committee] presiding. 

Present: Representatives Chabot, Gibson, Radewagen, Vela ́zquez, 

Chu, Hahn, Meng, Adams and Lawrence. 

Chairman CHABOT. Good morning. While I am beginning my 

19th year as a member of the Small Business Committee, this is 

my first hearing as chairman. In that capacity, I look forward to 

working with my friend and colleague, the ranking member, Ms. 

Vela ́zquez, and all of my colleagues on both sides of the aisle in an 

effort to improve the plight of American small businesses. I am 

particularly pleased to see that we will begin that endeavor today 

by discussing a subject that has much promise for small businesses 

and taxpayers alike, federal contracting reform. 

As you know, the government has a goal of awarding at least 23 

percent of federal prime contract dollars to small businesses, and 

in Fiscal Year 2013, we met that goal for the first time in many 

years. Early indications are that we met the goal again last year. 

However, it is not enough to simply meet the goal; we have to focus 

on why Congress created those goals in the first place. 

The goals exist as a tool. They are intended to make sure we 

have a broad spectrum of small businesses working with the government across industries. Having a healthy small business industrial base means the taxpayers benefit from increased competition, 

innovation, and job creation. It also means that we can securely 

support programs crucial to our national defense. The percentage 

of dollars awarded to small businesses is a good measure of success, but it is not the only measure. Indeed, it appears that over 

the last four years, while the percentage of dollars being awarded 

to small businesses was increasing, the number of contract actions 

with small businesses fell by almost 60 percent. At the Department 

of Defense, the number fell by almost 70 percent. The size of the 

average individual small business contract action increased by 230 

percent during that same period, and by nearly 290 percent at 

DoD. These statistics are all alarming in their own way, but one 

of the more clear cut and disturbing figures is that there are over 

100,000 fewer small businesses registered to do business with the 

Federal Government than there were in 2012. These data points 

suggest we have a problem with our small business industrial base. 

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Today’s witnesses are going to address specific recommendations 

to improve the competitive viability of our small business contractors. This is only the first of a series of Full Committee and Subcommittee hearings we will be having on this topic. As chairman, 

I expect that the Committee will actively pursue ways to increase 

opportunities for small businesses to access capital and contracts, 

while removing barriers to small business success. And I am quite 

confident that our Subcommittee chair, Mr. Hanna, and his Subcommittee on Contracting and Workforce, will be thoroughly exploring this issue in the very near future. And I look forward to 

working with each of you and want to welcome our witnesses here 

this morning. 

I now would yield to the ranking member for the purpose of making an opening statement. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

For several decades now, the federal government has looked to 

the private sector to provide services and supplies for its day-to-day 

operations. As such, a vibrant industrial base has become essential 

to the U.S. economy and our national security. It comes as no surprise to those in this room that small businesses are at the heart 

of the supply chain. With a strong presence in a variety of different 

industries, from construction to manufacturing, small businesses 

continue to play a vital role in providing our government with 

goods and services. In order for this sector to continue its resurgence, we need to ensure that small businesses are able to compete 

both globally and here in America. 

Here at home this means ensuring that small firms can gain ac- cess to the nearly $500 billion federal procurement marketplace. 

Numerous policies and protections have been put in place to ensure 

their continued participation in this arena. This includes goals, setaside programs, and the assignment of federal personnel to work 

on behalf of small contractors. Many of these initiatives have 

evolved over the years to reflect the changing needs of small firms. 

In many regards, these efforts have paid off as small businesses 

last year won nearly $100 billion in awards. However, it appears 

that we have stalled, and in many ways the goal is becoming a ceiling rather than a floor. 

And with regard to set-aside programs, we continue to see over 

and over again non-small businesses gaining access to small business awards, whether it is HUBZone, service disabled veterans, or 

8A awards, we need stronger protections to keep bad actors out of 

the federal marketplace or trying to gain access to federal contracts 

that were designed for small businesses in the first place. 

Another trend is occurring that may also impact small contractors. Data shows that the average contract size is increasing. On 

first take, this appears to be promising as larger contracts might 

be more profitable for small companies. However, it might suggest 

that more contracts are being consolidated, resulting in fewer opportunities for small businesses. I am particularly interested in the 

witnesses’ perspective on this during today’s hearing. 

What is important for this committee to keep in mind is that 

these developments are part of a bigger picture, which is that the 

federal procurement marketplace is always evolving. Whether it is 

sequestration, reductions in federal procurement staff, or the rise 

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of multiple award contracts, there will always be new issues for 

small businesses to overcome. And against this backdrop, we must 

ensure small businesses are not left behind and that procurement 

laws evolve with this changing landscape. 

During today’s hearing, I look forward to learning about the challenges facing small contractors and possible solutions. Doing so is 

not only essential for small firms and our nation’s industrial base, 

but the economy overall. Small firms bring new ideas to the table 

which in turn generate new jobs and even new industries. Taken 

together, this is a key part of what has made the U.S. the leader 

in today’s economy. 

I thank all the witnesses for being here today, and I yield back 

the balance of my time. Thank you, Mr. Chairman. 

Chairman CHABOT. Thank you. The gentlelady yields back. And 

if Committee members have opening statements prepared, I would 

ask that they submit them for the record. 

And I would like to take just a moment to explain the time rules 

that we operate under here, which is the same that the other Committees do. It is the five-minute rule. You will have five minutes 

to testify. We will have five minutes, each of us, to ask questions. 

We even have a lighting system set up for that. The green light 

will come up. You can talk for four minutes. The yellow light comes 

on to let you know you have one minute to wrap up. When the red 

light comes on, we would ask that you try to terminate your testimony as close to that as possible. So we give you a little leeway, 

but not much. I appreciate your cooperation. 

And I will now introduce our first witness, who is Randall Gibson—or Randy Gibson, our son’s name; not Gibson, but Randy— 

who is president of Whitesell-Green, Inc., a general contractor in 

Pensacola, Florida. He is also the chairman of the Associated General Contractors (AGC), Naval Facilities Engineering Command 

Committee, and a member of the United States Army Corps of Engineers Committee. He is testifying today on behalf of AGC. 

We thank you for being here, and you are recognized for five 

minutes. 

STATEMENTS OF RANDALL D. GIBSON, PRESIDENT, 

WHITESELL-GREEN, INC.; JAMES P. HOFFMAN, PRESIDENT, 

SUMMER CONSULTANTS,, INC.; JOHN MCNERNEY, GENERAL 

COUNSEL, MECHANICAL CONTRACTORS ASSOCIATION OF 

AMERICA; ANDREW HUNTER, DIRECTOR, DEFENSE-INDUSTRIAL GROUP AND SENIOR FELLOW CENTER FOR STRATEGIC AND INTERMNATIONAL STUDIES 

STATEMENT OF RANDALL D. GIBSON 

Mr. GIBSON. Chairman Chabot, Ranking Member Vela ́zquez, 

and members of the Committee, thank you for inviting the Associated General Contractors of America to testify on reforms to the 

Federal Government’s contracting laws important to our industry. 

My name is Randy Gibson. I am president of Whitesell-Green, 

Incorporated, a small business based in Pensacola, Florida, providing general contracting and design-build service to Department 

of Defense and other federal agency clients throughout the Southeastern region of the United States. 

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Since our founding in 1970, my company has constructed over 

400 heavy commercial projects, resulting in nearly one billion dollars in completed contracts. 

While my written testimony covers all the topics for today’s hearing, I will use the time allotted today to address the need for Congress to (1) prohibit all federal agencies from procuring construction services through reverse auctions; and (2) encourage sensitive 

consideration of past performance records in joint venture and 

teaming context. 

AGC strongly supports full and open competition for construction 

contracts; however, reverse auctions for constructions services have 

the effect of turning away qualified and experienced contractors, 

especially small business firms like mine, for a host of reasons. 

Procurement of construction services is different than for manufactured goods like pens and paper. Construction services are complex, 

most often requiring the participation of numerous trade subcontractors and vendors in lower-tier arrangements with the general contractor. They are project-specific and inherently variable. 

And they require a large degree of professional expertise. 

In a reverse auction, nonprice factors of consequence to the 

owner, such as quality of relationship, past performance, scheduling, long-term maintenance, and unique needs are deemphasized 

by the process. In a reverse auction, a bidder has no incentive to 

offer its best price. Winning bids may simply be an established increment below the second lowest bid, not the lowest responsible 

and responsive price. In a reverse auction, discipline is difficult to 

maintain. General contractors can underbid the contract simply to 

win the award, putting the government at significant risk to receive lower quality construction and even contractor default. This 

also exposes subcontractors to risk for nonpayment. 

It is my belief that AGC’s position on reverse auctions is shared 

by other important stakeholders to the procurement process. The 

U.S. Army Corps of Engineers, the White House Office of Federal 

Procurement Policy, and even the largest reverse auction vendor to 

the Federal Government, FedBid, have all publicly stated that reverse auctions for construction are not appropriate. Yet, agencies 

like the Department of Veterans Affairs, the Department of the Interior, and the General Services Administration continue to conduct them. Considering this inconsistency, AGC urges members of 

this Committee and Congress to enact a law that prohibits reverse 

auction procurement for construction services government-wide. 

Turning to the joint venture and teaming issue, AGC and its 

members are increasingly finding that federal agencies will disqualify small businesses from competition when they seek to partner with another business for the first time. In an environment 

where agencies are bundling contracts worth upwards of $100 million, and specifically setting them aside for small business, it is 

often beyond the capacity of a small business alone to bond and 

perform such large-dollar projects. Consequently, small businesses, 

like my firm, often seek to partner with other small or nonsmall 

businesses to win such awards. 

Some federal agencies are not allowing small businesses and 

their partners to submit the relevant past experience of each individual company to prove qualification for the contract. Rather, 

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agencies demand that the small business and partner submit only 

past experience that they have performed together, or otherwise be 

disqualified from consideration. This limitation often prevents the 

governments from receiving the benefit of project-specific experiences and resources which the first-time collaboration of these 

teams may offer. 

AGC strongly supports a sensible legislative solution to ensure 

that federal agencies reasonably consider the individual past performances of construction contractors seeking to joint venture or 

team, even if they are teaming for the first time. 

Thank you again for the opportunity to testify. I look forward to 

answering your questions to the best of my abilities. 

Chairman CHABOT. Thank you very much. And thank you for 

staying within the time constraints. 

Our next witness is James Hoffman, who is president of Summer 

Consultants, Inc., in McLean, Virginia. Prior to starting with Summer over 22 years ago, Mr. Hoffman served as a platoon leader and 

company executive officer in the 317th Engineer Battalion in the 

United States Army. He is testifying on behalf of the American 

Council of Engineering Companies. 

We thank you for being here today. We thank you for your service, and you are recognized for five minutes. 

STATEMENT OF JAMES P. HOFFMAN 

Mr. HOFFMAN. Chairman Chabot, Ranking Member Vela ́zquez, 

and members of the Committee, I appreciate the opportunity to testify before you today about the issues surrounding contracting and 

the industrial base. 

My name is James Hoffman, and I am the president of Summer 

Consultants, a consulting mechanical, electrical, and plumbing engineering firm located in McLean, Virginia. Summer Consultants is 

a small business with 30 employees. Our practice focuses on the 

federal market for the past 50 years. My firm is an active member 

of the American Council of Engineering Companies, the voice of 

America’s engineering community. ACEC oversees over 5,000 member firms, represents hundreds of thousands of engineers and other 

specialists throughout the country, are engaging a wide range of 

engineering works that propel the nation’s economy, and enhance 

and safeguard America’s quality of life. Almost 85 percent of these 

firms are small businesses. 

Design build is a type of construction where engineers team with 

industry professionals. There are two forms of design build—twostep and one-step. Two-step requires the team submit qualification 

packages to the contracting officer in the first round. The contracting officer reviews them and notifies the teams if they are selected for the second round. At this point, the design build team 

develops expensive and detailed plans for the contractor to bid, 

generally without any reimbursement. Industry best practice has 

three to five finalists in the second round. In the recent years, 

there have been more than 10 finalists at some competitions as 

current law allows the contracting officer to increase the number 

of finalists without limitation. This causes problems for both the industry and for the government. My firm’s marketing risk is inversely correlated to the number of finalists, and the contracting ofSBREP-219 with DISTILLER

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ficer must review all the proposals and give feedback to each team 

member that does not win the project, which is time-consuming. 

This issue has driven many, including small businesses, out of the 

federal market. 

One-step design build creates an even more precarious environment. One-step allows the owner to solicit complete proposals from 

the construction market without a qualifications review. This forces 

out small businesses as they cannot spend dollars on projects 

where there are too many competitors, many of which may not 

have the qualifications for the project. It is an inefficient process 

for the Federal Government as it asks the contracting officer to review multitudes of proposals. This Committee has been a strong 

supporter of this issue, and we ask the Committee to continue to 

improve the design build market by supporting the reintroduction 

of H.R. 2750. 

The second issue, the Court of Federal Claims ruling on the nonmanufacturer rule, poses a challenge for the construction industry, 

as it is a service industry that typically did not have to address 

this rule in the past. The rule exists to ensure that a contract for 

goods is restricted to small businesses, rather than act as a passthrough for large entities. The course interpretation would require 

that any firm who is a prime contractor be responsible for their 

subcontractors’ use of small business products, and potentially, the 

many different tiers of subcontractors as is undefined at this time. 

The burden on this rule is staggering as I, as a business owner, 

would have to take the most conservative view to make sure that 

I am complying with the law. We have concerns that due to the unknown nature of this rule, that we can be penalized by an 

overbroad court ruling. ACEC asks the Committee to work with 

SBA on language to make sure that construction services and products continue to be excluded from the rule. 

I urge Congress to reintroduce H.R. 2750 and enact it into law. 

I also encourage Congress to work with the SBA to limit the scope 

of the nonmanufacturing rule on service industries. These bills can 

help my firm and other engineering firms to serve our clients’ 

needs and thrive. 

Thank you for the opportunity to participate in today’s hearing, 

and I would be happy to respond to any questions from the Committee members. 

Chairman CHABOT. Thank you very much for your testimony. 

I would now like to introduce our next witness, John McNerney, 

who is general counsel of the Mechanical Contractors Association 

of America, the MCAA. The MCAA represents about 2,500 firms involved in heating, air conditioning, refrigeration, plumbing, piping, 

and mechanical service. We thank you for your testimony here that 

you will be giving this morning, and you are recognized for five 

minutes. 

STATEMENT OF JOHN MCNERNEY 

Mr. MCNERNEY. Thank you, Mr. Chabot. Good morning, Ms. 

Vela ́zquez. 

On behalf of the 2,500 members of MCAA, thank you very much 

for the opportunity to be here. I am general counsel, and I have 

been involved in the work of this Committee for several years now, 

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as have our members. We testified here several times on the old 

3 percent withholding tax on Federal Government contracts, and 

we commend your work on that. You were persistent, and we hope 

it does not come back again. That was a big threat to cash flow and 

prompt payment for all our members. 

We also would commend you for your recent activity having a 

naming rule for small businesses in prime contract, small business 

contracting plans, and allowing those firms some assurance that 

they will be selected or have recourse to the contracting officer if 

they are not. 

Having said that, we also admire your persistence on the reverse 

auction rule. The Federal Government lags the private sector in 

recognizing just how bad that practice is. So we hope this time we 

can pursue that until we get it where it should be. 

The Corps of Engineers Pilot Study on Reverse Auction came in 

more than 10 years ago. They studied nine projects, and they came 

out with a conclusion in about a 95-page report that said it was totally unacceptable for low bid awards. But since then it has been 

fitful by getting this Congress to do something about it. Our statement on it is attached to my written statement. In summary, it 

says simply this. There is a strong discipline in the sealed bid, low 

bid process that protects the project owner’s best interest in wellconsidered judgments by its bidders, and all that discipline is lost 

in the publicly disclosed price auction with hasty and frenzied judgments imperiling careful offers and awards. 

You know, back in 2004, when this started, a lot of private sector 

industries took this up. Most of them have given up the project, 

and those who have not have been fired by customers, fired by the 

contractors as their customers. And we think that the persistence 

of some government agencies to do this is impairing competition. 

So in all, I think there are three problems with the reverse auction. Number one, it shows that some bad ideas, like the 3 percent 

withholding tax, for example, have a habit of recurring. Projects 

that are mischaracterized as commodity purchases then are subject 

to the lack of discipline of the sealed low bid, and when construction projects are misclassified as commodity purchases, the government and the contractor are deprived of protections and benefits of 

the many standards for construction contract clauses that serve to 

allocate risk fairly. The unforeseen conditions cause, the equitable 

change clause, the prompt payment clause, and some of the warranty clauses, too. 

So in summary on that point, we commend the Committee for 

pursuing this and trying to finally implement the Corps’ categorical 

assessment that this is a bad practice. Nothing has changed since 

then that would mitigate that conclusion, so we look forward to 

your reintroduction of that bill. 

We would also suggest when you do that, that you consider expanding it Part 15, Negotiated Procurement. And Part 14, Sealed 

Bid, is where we are looking at it now, but we understand that 

many agencies are going to a species of negotiated procurement, 

low priced technically acceptable where once the team is evaluated 

it becomes a low bid process. So we need to legislate those kind of 

controls into that process. Our members are having anecdotal evidence that there are selection abuses in LPT awards as well. 

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On the individual surety reform, we are fully in support of the 

industry consensus. There is no harm and only benefit to closing 

the individual surety loophole where there can be elusory assets 

and fraud and bad practice there. Your reform preserves the possibility of individual surety but protects against the abuses, so we 

think that can only increase competitiveness in that market. 

And on the nonmanufacturing rule, I talked to my members and 

they said they cannot buy a tiller from a small business company 

or an air handling unit or mechanical equipment. It is entirely 

inapt for our industry. 

So with that, sir, I will stop and look forward to your questions. 

Chairman CHABOT. Thank you very much. I appreciate your 

testimony. 

I would like to yield to the ranking member. 

Ms. VELA ́ ZQUEZ. I guess that you started out on the wrong 

track today. 

Mr. Chairman, it is my pleasure to introduce Mr. Andrew 

Hunter. Mr. Hunter is the director of the Defense-Industrial Initiatives Group and a senior fellow for the International Security Program at the Center for Strategic and International Studies here in 

Washington, D.C. He focuses on issues affecting the industrial 

base, including sequestration, acquisition policy, and industrial policy. Prior to joining CSIS, Mr. Hunter served as a senior executive 

at the Department of Defense, including as chief of staff to Ashton 

B. Carter and Frank Kendall, while each was serving as under-secretary of defense for Acquisition, Technology, and Logistics. 

Welcome, Mr. Hunter. 

STATEMENT OF ANDREW HUNTER 

Mr. HUNTER. Well, thank you, Chairman Chabot, and Ranking 

Member Vela ́zquez. Thank you for the opportunity to testify to you 

today about contracting and the industrial base. 

I am Andrew Hunter from CSIS, and as mentioned, prior to 

being at CSIS, I worked at the Department of Defense under two 

undersecretaries of defense for Acquisition. And prior to that, I 

spent 17 years working in various capacities in the House of Representatives. So this is a little bit of a homecoming, and a happy 

one. 

A major focus of my work at CSIS involves understanding the 

evolving partnership between the Federal Government and the industrial base. This partnership is critical to the successful execution of the more than $400 billion in federal contracting that occurs 

annually. I have a particular focus on how this partnership is 

evolving between industry and the Department of Defense; however, CSIS performs in-depth analysis on data from all federal 

agencies, and I will try to keep that hat on today. 

The industrial base is important because without it the Federal 

Government cannot function. The health of the industrial base, 

therefore, is of critical importance to the nation as a whole. While 

federal contracting is only a small portion of the overall economy, 

it is nonetheless very important to certain sectors of the economy 

and the industrial base, especially those that focus on governmentintensive areas, such as defense, transportation, and healthcare, 

not least of great importance to many small businesses. 

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Contract obligations represent the overwhelming majority of the 

federal spending that is received by industry, and examining the 

contracting data is essential to understanding what is happening 

in the industrial base. 

I will briefly summarize some of the chief findings of the analysis 

that CSIS has done on this data and try to provide some context 

for the discussion today and hopefully for the Committee’s work in 

this Congress. 

Our first central finding is that sequestration is currently the 

dominant force in federal contracting. With repercussions that have 

been particularly severe in defense contracting, but also across the 

board. We are in the midst of a significant reduction in federal contract obligations that are affecting every sector of the contracting 

world in the industrial base. 

Within that overarching story, secondly, there is an important 

dynamic going on specific to research and development. Federal 

contracting for research and development performed by industry is 

particularly challenged under sequestration, potentially impacting 

the historical role that small businesses have played in technology 

innovation that Ranking Member Vela ́zquez referred to in her 

opening statement. A great deal of the cutting-edge innovation has 

its source in small business. They are frequently incentivized to 

pursue innovative technologies that larger businesses do not have 

the same incentive to pursue. And that has been important to the 

nation over many years. 

R&D contract obligations are declining much more rapidly than 

overall contract obligations, and we have not reached the bottom 

yet, even though we are likely approaching the bottom for contract 

obligations overall. 

Third, small business contracting is highly sensitive to changes 

in the overall federal contracting environment. Small businesses 

are likely to be significantly affected therefore by return to sequestration levels, spending levels in 2016. Contract obligations with 

small businesses plunged in the first year of sequestration, 2013, 

then happily, but somewhat unexpectedly, recovered very well in 

2014. I believe the reality for small business in truth is somewhere 

between the crisis picture that the 2013 data presents and the relatively healthy picture that the 2014 data presents. But I suspect 

that a return to full sequestration would send us, again, in a 

sharply downward directly. 

And then lastly, the composition of small businesses participating in federal contracting has been significantly reshaped since 

2000, which is when a lot of the federal data started to become 

widely publicly available contracting data. And much of this has 

been the result of policies established in the Small Business Act. 

And I mention this to point out that the future direction chosen by 

this Committee will shape the future of small business contracting 

over the next 10 to 15 years, so it is very important. The work of 

this Committee is very important. 

And lastly, I just want to emphasize that the continuing, in some 

cases increasing complexity of the federal contracting process referenced by many of my colleagues here, remains the most significant barrier to entry for firms of all sizes in the industrial base, 

particularly small business. And small businesses are challenged to 

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absorb the overhead required to successfully navigate through this 

vast complexity. And I would say when you are making these decisions, I would suggest that you tend to err as much as possible on 

the side of reducing complexity in all of these approaches. 

So thank you, and I stand ready to address your questions. 

Chairman CHABOT. Thank you, Mr. Hunter. We thank all the 

panel members for their excellent testimony here this morning. 

And I will begin with myself with five minutes of questioning. 

How can we get more small business construction companies to 

compete for federal work as either prime contractors of subcontractors? And Mr. Gibson, if you do not mind, I will start with you. And 

anybody else that would like to weigh in is welcome to do so. 

Mr. GIBSON. Taking from my own experience, sir, as a small 

business, I would say the way to invite more firms to get interested 

and involved in federal contracting would be to hopefully take some 

of the regulations away that sometimes deter firms from entering 

the marketplace. And also to enhance the teaming and partnering 

ideas that we have been talking about in my testimony today. Lots 

of times a firm needs a mentor or somebody who has been in the 

federal construction process. Allowing them to team, show their 

own qualifications, share the qualifications of their partner, get involved, learn the ropes, that would be an opportunity for them to 

ease their way into the marketplace. 

Chairman CHABOT. Thank you very much. 

Mr. Hoffman, did you want to weigh in on that? 

Mr. McNerney? 

Mr. MCNERNEY. My members would agree with that ability to 

partner and team more. My very small members, of which I have 

many, do that and they would like to do more of it. And the idea 

that all the team members would be evaluated is a good idea. Any 

more discerning selection criteria is highly favored by my members 

because they prosper when the selection criteria is high. 

Chairman CHABOT. Okay. Thank you. 

Mr. Hunter, did you want to weigh in? 

Mr. HUNTER. I would just say I think this gets a little bit to 

the design build discussion that happened earlier; that the more 

you can make it easier for companies to get in the front door and 

participate, the better. I think having more companies engaged in 

the front end of the process is a good thing, and it is true that the 

bid and proposal costs can be one of the major barriers to entry. 

I think the trick a little bit in that is for the government having 

to evaluate based on a list of qualifications makes it a little bit 

hard on the contracting officer to withstand bid protests. And bid 

protests are something that we are seeing has a very pervasive influence throughout the contracting process. It is driving many more 

of the decisions that get made than I think it was ever really intended to be driving. And so I think sort of that larger story is 

playing out in the design bid and the construction context. 

Chairman CHABOT. Okay. Thank you. 

Let us see, Mr. Hoffman, I think I will start off with you on this 

one. Some would argue that by only having five teams submit full 

bids on a design build project we are limiting competition. Could 

you explain why the two-step process is actually pro-competition? 

Arguably pro-competition? 

SBREP-219 with DISTILLER

11 

Mr. HOFFMAN. Yes, sir. 

First of all, the first phase of competition is open to everyone. So 

everyone is able to participate. And then with respect to the second 

step, what we are going to find is that the most experienced architect, engineers, and construction contractors are going to step out 

if there are more than five construction contractors. So we are 

going to have less qualified people participating in federal projects 

because the opportunity to win that project with significant investments is dramatically diminished once you go beyond the three to 

five recommended in industry practices. 

Chairman CHABOT. Thank you. 

And then I will have each of you just address this very briefly, 

if you would. If you could just tell us legislatively what you would 

like to see us do; if there were one or two things that we could do 

that would really make a difference? Maybe I will start with Mr. 

Hunter this time and go in the opposite direction. 

Mr. Hunter, if you want to suggest one or two things. 

Mr. HUNTER. Yeah. I am going to make a suggestion that may 

be slightly hard to implement. But as I mentioned, I think trying, 

wherever you can, to reduce complexity in the system is the way 

to go. 

Chairman CHABOT. I would go with Mr. Gibson’s reducing the 

regulations basically. 

Mr. HUNTER. Yes. And of course, you have to be careful. Many 

of these regulations have a history. They exist for a reason, but I 

think there are frequently less complex ways to implement the 

statute and regulations and to get the same job done. 

Chairman CHABOT. Okay. Mr. McNerney? 

Mr. MCNERNEY. Mr. Hunter’s comment about the roadblocks 

and the complications from bid protests is a good one. And I do not 

know how you would legislate that, but our members prefer a more 

robust evaluation, a past performance evaluation on completed contracts, more robust than exists now. If you had that and more 

widespread use of the federal awarded past performance information system, I think would help bolster selection criteria, exclusions, if you will. Again, I think that our members on the main 

would like to see the selection process be more discerning, and I 

think that would increase competition. Some of my members say 

they will not compete in the federal market because of not so careful selection procedures. 

Chairman CHABOT. In order to enforce my five-minute rules 

against myself, I am going to cut it off at that point. And I will either talk with you briefly or in a second round or we will get back 

to it. But I now recognize the ranking member for five minutes. 

Ms. VELA ́ ZQUEZ. Thank you. 

Mr. Hunter, in evaluating the awards to small businesses over 

the last few years, there seems to be a trend in which the dollar 

value of small business contracts has increased. What effect does 

this concentrated dollar value have on the small businesses’ industrial base? 

Mr. HUNTER. It is a very interesting point. As someone who 

spends a lot of time analyzing contract data, it would be great if 

we could dig deeper into that and understand. Is it because the 

locus of where the awards are happening within the space of fedSBREP-219 with DISTILLER

12 

eral contracting? In other words, is it because it is more construction happening and less in the world of supplies? Because that can 

affect contract size. Construction projects are going to be bigger 

than most commodity purchases. 

But having not carefully analyzed it at this point, my suspicion 

is that it is not that; that it is, in fact, that the average awards 

are growing bigger across the board, because our data shows that 

small businesses are generally succeeding in the areas where they 

have always succeeded in the contracting process. And I do not 

know if that is being driven by the way the government is putting 

out solicitations and proposals. That would generally probably be 

the first place to look. 

Ms. VELA ́ ZQUEZ. Do you think that bundling has a lot to do 

with that? 

Mr. HUNTER. It certainly could. It could also be that some of 

the smaller purchases which may have historically been done with 

small businesses, if they are now being done with a purchase card 

at Walmart, you know, that may be driving some of that. Smaller 

business and directions away from small businesses. And I think 

if it is an issue of interest, having someone take a deeper look at 

that, those trends, would be good. 

Ms. VELA ́ ZQUEZ. Thank you. Thank you. 

Mr. McNerney, during its pilot program of reverse auction, the 

Corps found that the process might move too quickly for competitors to actually reassess their costs or the way they will actually 

do the work. There have even been reports in which the buyer had 

to step in to prevent a supplier from meeting a price that would 

harm the company. Do you believe that contractors are actually 

able to perform the contract at the price they beat or are some of 

them putting the viability of their company at risk? 

Mr. MCNERNEY. All of that, Ms. Vela ́zquez. I read the report 

on the subway down here and the Corps of Engineers says all of 

that very empathically. And I talked to some of my members yesterday who were involved in—the pharmaceutical industry was a 

big adopter of this back in 2002–2003. I will not name the company, but I asked him, I said, ‘‘ Did you continue to bid that work 

as either prime or sub?’’ And he said, ‘‘ No, I fired that customer.’’ 

Because when the hasty judgments—the first Corps of Engineer 

Pilot Study ended up in a bid protest because the prime contractor 

who won said he did not mean to push the button the last time, 

ironically. So that tells you, what is that, an error in judgment or 

a clerical error? 

Ms. VELA ́ ZQUEZ. Do you believe then that some of the same 

concerns that we see in construction reverse auctions will exist in 

other industries? 

Mr. MCNERNEY. I think it is very likely. You know, the Corps 

of Engineers report said that for commodities it can be done well 

and it can help you find the lowest price. But the hearing you held 

last year with the VA did not prove that out. 

Ms. VELA ́ ZQUEZ. Right. Okay, thank you. 

Mr. Hunter, the contribution of small businesses to R&D has 

long been recognized as critical to our economy and national security as these firms have developed some of the most innovative 

technology. You noted in some areas of your testimony the decline 

SBREP-219 with DISTILLER

13 

in R&D contracting at the Department of Defense, indicating that 

this is a worrisome trend that is incompatible with achieving national objectives. Can you explain this statement and what this 

trend means for the industrial base? 

Mr. HUNTER. Yes. What we found is that the magnitude of the 

reduction in contract obligations for R&D is much greater than 

what you see overall. I think that is a result of the fact that for 

many—for the Department of Defense for certain, and for many 

federal agencies, there is a lot of rigidities within their budget that 

make it very hard to cut in other areas. And obviously, in the case 

of the Department of Defense, there is a strong desire to avoid cuts 

to things like military compensation. And so then the cuts have to 

be taken elsewhere. And R&D is inherently something that can be 

rescheduled and retasked fairly quickly because you are inventing 

things and you cannot invent on a schedule. The contracts are all 

designed to reflect, to be rewritable or adjustable as work proceeds. 

And that is good in a R&D context, but it also means it is very easy 

to, when the budget cut comes, to take money out of that contract. 

Ms. VELA ́ ZQUEZ. But let me ask you a last point. Given the fact 

that when it comes to R&D spending, the agency has so much flexibility. How can we reverse that trend? 

Mr. HUNTER. I think it is making it clear that this remains a 

priority. And I mentioned in my testimony that the goals and objectives that have been set in statute have actually reshaped the way 

that contracting is being performed. And so I think continuing to 

emphasize the importance of research and development and innovation is a key thing. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman CHABOT. The gentlelady’s time has expired. 

The gentleman from New York, Mr. Hanna, is recognized for five 

minutes. 

Mr. HANNA. Thank you, Chairman. 

Boy, there is a lot to talk about. The 3 percent rule is gone. 

Relax. I cannot imagine it coming back. 

In the last Congress, we worked on some of the subjects you 

mentioned, Mr. Gibson, in particular, reverse auctioning is, I mean, 

you all stated it one way or another, but it is a race to the bottom. 

I think we worked with the Department of Defense. I think with 

the chairman’s permission, we can—I would like to continue on 

that path because I could not agree with you more. When all you 

have to do is click a button to be lower than the guy a moment before you, it does add, as you said, a degree of irrationality, and everyone wants to work. So everyone always thinks they can do a little bit better than they thought. So I get that. 

And in terms of the overall conversation though about bidding in 

general, one of the problems with the whole process is, and one of 

the reasons for bid protests is the very subjective nature of everything you do, which feeds back to the conversation over reverse 

auctioning and why it is such a bad thing. But how do you protect 

the interest of the public and at the same time limit the number 

of bidders? How do you take out those elements that cause people 

to protest bid? Because it is easy to do and it is easy to find a reason to do that. 

SBREP-219 with DISTILLER

14 

I personally was in that business for many years, so I have seen 

a lot of that. I guess it is hard to have everything. Like, with Mr. 

Hunter, how do you have a vibrant industrial base, have sequester, 

and have an efficient R&D, an effective R&D, and still have the 

right to cut back on the cost of doing business? I mean, you cannot 

just fund an industrial base because you always want them to be 

there. You cannot just pay people to manufacture things because 

someday you may need them, although you could argue that you 

might. I wonder how you balance all that. 

Mr. Hoffman, maybe you would like to say something about it. 

And anyone else. 

Mr. HOFFMAN. With respect to competition, the issue for us 

would be the design build piece. So everyone has the opportunity 

through sources—and small businesses can participate in that and 

it can be set aside. Irregardless of whether it is small business or 

it is unrestricted, small businesses can participate as part of larger 

teams, and everyone would benefit and the standard to follow the 

best practices of three to five bidders so that we can go ahead and 

make sure the best qualified teams are pursuing things. 

Mr. HANNA. So really what you are saying is you need a better 

way to qualify bidders, limit the number of bidders, and frankly, 

let the government have a more thoughtful and deliberate process 

for deciding not just how many, but how and what. 

I am interested though, Mr. Hunter, what do you think of—how 

do you maintain all that? 

Mr. HUNTER. Well, I would say, you know, I think this issue 

of how does the government basically arbitrate amongst proposals, 

and if it is a list of qualifications, it may be a case that everyone 

has great qualifications and it is very difficult to discern the difference. Or it may be the case that it defaults to whoever has the 

longest history of past performance, which again, is not going to 

necessarily get new entrants into the process. I know the Department of Defense and in the R&D context, a lot of times they use 

an approach that is referred to as a ‘‘ white paper.’’ And so you are 

asking folks to give you at a relatively low cost, something that is 

fairly short, but some description of what the approach that they 

would take to the problem would be. And that at least can provide 

a middle ground. I am not sure how well it works in the construction contracts because how far can you go into talking about a construction project before you are into some significant expense? In 

other contexts that can provide I think a way for the government 

to distinguish and to kind of call out the best folks to do the more 

expensive proposal. 

And I would say on your question about innovation, I think 

prototyping can be something that is a good middle ground, if you 

will, that allows for you to do work on innovative technologies without going to the expense of, again, designing an entire system that 

the government probably does not have the funding to actually purchase. 

Mr. HANNA. Thank you. 

Chairman CHABOT. The gentleman’s time has expired. 

The gentlelady from California, Ms. Chu, is recognized for five 

minutes. 

SBREP-219 with DISTILLER

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Ms. CHU. Well, this question is for anybody on the panel, and 

it has to do with reverse auctions. You have all been pretty vociferous in being against reverse actions for the construction industry, 

and you have said that it does not guarantee the lowest price, may 

encourage imprudent bidding, does not allow for a thorough evaluation of value, and does not ensure that the successful bidder is responsive and responsible and may, in fact, go against federal procurement laws. And in fact, the Army Corps of Engineers study 

found that it did not even offer marginal savings over a sealed bid 

process. I find that very interesting because the reason for reverse 

auctions in the first place was to get to the lowest price. So I would 

like your comments on any of these factors that have come out because of the reverse auctions. 

Mr. GIBSON. Yes, ma’am. As a construction contractor, I can tell 

you that you might have what you think is the lowest price at time 

of award but it is the price you pay at the outcome that determines 

the real price of the job. If you have losses, if you have under proposals in there, they are going to come to life during the performance of that contract, and they are going to cause the government 

buyer a lot of problems. So I think it is putting up a smokescreen 

as to what real cost is when you invite that type of imprudent bidding. 

And I will give you one example. As a construction contractor, 

most typical jobs I bid involve about 30 to 50 crafts, other companies coming to me to offer their services, 5 to 10 offers in each 

craft. There are several hundred people offering prices on bid day. 

Sixty percent of those prices come in within the last two hours 

prior to the bid deadline. So in the reverse auction process, how 

does the contractor have the opportunity to go back to those people 

and say, ‘‘ Can you do better?’’ He is making a guess, and those 

guesses end up costing the government in the long run. 

Mr. HOFFMAN. I might add that with respect to engineering 

services, reverse auctions, they do not look at lifecycle cost analyses 

and total cost of ownership. So the lowest cost is not necessarily 

the best cost. So if we look at construction in facilities, that cost 

is a small fraction of the total ownership costs once you go ahead 

and look at ongoing operation and maintenance. And I would urge 

the Committee to consider that, and I think you can only focus on 

first cost reverse auctions. I have no idea how you are able to understand what the total cost is of ownership when you do that. 

Mr. MCNERNEY. I would just emphasize what Mr. Gibson said. 

Reverse auction is the antitheses of a best value selection process, 

which I think is also the answer to Mr. Hanna’s question. You 

know, the government has gone to design build best value to get 

away from the problems that existed in contract claims and dispute 

and defense of contract administration back when all projects were 

low bid, before 1994 Competition and Contracting Act. 

So I think Mr. Hanna, the answer to your question is, too, you 

have got to, you know, you have got to allow the CO to have governed discretion. He has the contracting warrant. He has to make 

discretionary judgments, and the bid protest agencies have to back 

him up. 

Ms. CHU. If I may change topics, Mr. Gibson, the SBA has two 

surety bond guarantee programs that guarantee 70 to 90 percent 

SBREP-219 with DISTILLER

16 

of the bonds up to $6.5 million in value to assist small businesses. 

However, many construction companies are not using the program 

and the individual sureties have filled the void. Why do you believe 

construction companies are not utilizing the program, and what are 

the steps that could make this program more attractive? Like, for 

instance, if they were guaranteed by 100 percent or if the total 

guaranteed value is increased from $6.5 million? 

Mr. GIBSON. Ma’am, I have to tell you that I am not a surety 

expert. I have had the relationship with my same surety for 40 

years, one surety. So I know very little about their operations. I 

trust the solid company that I have been working with for 40 years, 

and I would prefer to defer to somebody else on the panel that 

might be able to talk about those distinctions. 

Ms. CHU. Okay. Anybody else on the panel? 

Mr. HUNTER. Well, I would just say about surety bonds, I think 

it is reflective of another issue in federal contracting, which is access to capital. And I think historically, when the Federal Government was sort of a bigger part—federal procurement was a bigger 

part of the overall economy, there was always just an assumption 

that it was a gold standard; that the private sector would always 

be willing to front the capital to make a federal contract work, and 

what we are finding is that that is not as true anymore. The margins to be made on government business are not as attractive in 

many cases as what companies can find in the tech sphere. So it 

is just not as attractive to a lot of companies to engage in this business, and it takes a little more effort on the part of the government 

to get companies involved. 

Chairman CHABOT. The gentlelady’s time is expired. 

The gentleman from New York, Mr. Gibson, is recognized for five 

minutes. 

Mr. GIBSON. Well, thanks, Mr. Chairman. 

Just to start off, to both chairman and ranking member, I am excited to join the Committee. Looking forward to our work together. 

Small business, a huge part of upstate New York. And so to get 

this opportunity to provide a voice for our small business owners 

is a real privilege. 

Good session here. I am learning quite a bit and I appreciate the 

comments. Definitely taking notes here with regard to reverse auction, the bidding process, and how we are proceeding with protests, 

insights that you are providing for improvements. 

I am going to make a couple of observations of things that I have 

heard in my time moving around the 19th Congressional District 

and somewhat informed by the 29 years I had in uniform before 

I came to Congress. I would be interested in your commentary or 

perhaps policy recommendations that may be able to address some 

of these things. I do not think there will be anything surprising 

about what I am going to mention here. Just given your expertise, 

I would love to hear if you have some thoughts on how we could 

change law or insights on regulation to do better. 

The first is, I had a company in Kingston that I thought was 

really doing excellent work with regard to protection for our troops. 

Body armor and protection of both people and equipment. But they 

were having a hard time getting the attention of the DoD. And so 

sort of the first phenomenon, is there something about the procSBREP-219 with DISTILLER

17 

esses, RFP and whatnot, that would cast a net a little wider and 

allow for small businesses who are doing really creative stuff, to 

make sure that they knew what the government was looking for, 

and for the government to get a better appreciation or even situational awareness on what small businesses are doing; number one. 

And number two is somewhat related. I have, and I do not think 

this is an epiphinal comment, but one of the value added of small 

businesses is that you really see agility. You see responsiveness 

and you see boldness in terms of pulling things together. Then the 

issue becomes one of scale. You go ahead and you really hit it and 

you hit it well, but then how do you compete? What I saw in my 

time in the military is it almost seemed like the DoD would rather 

safe side it and go to a bigger company, even if they might have 

been impressed with some of the ideas of a smaller company, because they did not want to take on the risk. And so there was this 

issue of scale. I do not know, maybe there is a finer point on design 

build on this score, but I would be interested in anyone from the 

panel commenting on those two general points. And then if you 

have any policy recommendations, I would love to hear them. 

Mr. GIBSON. I can just speak from personal experience on your 

scale issue. As a small business contractor, I have observed an inclination over the past several years for the purchasing agencies of 

the government to prefer the larger contractors. I actually had it 

said to me by agency representatives that they think they are buying down risk when they hire the larger contractors. And we have 

had to be creative to work—as a small business, to work around 

that. We have had to go outside of our marketplace, our custom 

marketplace to find work. 

Mr. HOFFMAN. Actually, with respect to scale, I think if we talk 

to the various agencies, it is interesting. Many times the contracting officers and some of the project managers appear to be 

willing to embrace the utilization of small businesses, but then 

they also need to sell it to their customers, and their customers can 

be more risk adverse. Certainly, we have seen a good many sources 

sought and a good many opportunities for small businesses, at least 

in our sector, to participate, and we appreciate that. 

With respect to policy changes, again, in our testimony, we would 

suggest the reintroduction of H.R. 2750 and the clarification of the 

nonmanufacturing rule. 

Mr. HUNTER. I think your example actually about troop protection is a really great case. Because that is one where the government tends to want to take a low-risk approach for very understandable reasons that you can certainly appreciate. And it is expensive to test some of the items and to prove out that they meet 

the specs that the government is looking for which are fairly stringent. 

Interestingly enough, there is a program at the Department of 

Defense called the Foreign Comparative Test Program that exists 

for a similar reason, to allow the department to test out equipment 

from overseas that may be something that we do not have here, 

and to pay for the testing just so that it can show what its capabilities are. And I think having some small amount of budget to sort 

of demonstrate, allow small companies to demonstrate what their 

products can do so that the buyer then does not have the fear that 

SBREP-219 with DISTILLER

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a smaller firm may not have designed something that is going to 

stand up over time or meet the spec. And the Army has done good 

work on this with field testing, essentially, of articles in the electronics realm that has really expanded the envelope of people able 

to participate. I think in troop protection that could be a very valuable example. 

Chairman CHABOT. The gentleman’s time has expired. Thank 

you, gentleman. 

We will go to a second round at this time, and I will recognize 

myself for five minutes. I am not sure if I am going to take the 

whole five minutes. 

But my last question in the previous round, I had asked what 

legislatively would you like us to do, and we heard from Mr. 

Hunter and Mr. McNerney, so I would like to give Mr. Hoffman 

and Gibson an opportunity to suggest what maybe legislatively you 

would like to see us take up. I will prompt you by giving a couple 

of bills that I know that we are considering now, and I think you 

may be somewhat familiar with. One is Chairman Hanna’s bill relative to surety bonds. And another is H.R. 2750, which is a design 

build bill; H.R. 2751, which has to do with reverse auctions. These 

were in the last Congress introduced, and I am sure we will be 

working on them this Congress as well. Another was the nonmanufacturing rule and also teaming and joint venture legislation. So 

those are some of the things. So you can either comment on those 

if you would like to or other things if you would like to bring to 

our attention, what you would actually like to see us do. And 

maybe I will begin with either one of you. 

Mr. Hoffman, do you want to go? 

Mr. HOFFMAN. Thank you. 

Actually, each one of those rules are in our written testimony, 

and we would encourage the Committee to pursue and pass those 

proposed reforms. And that would be what we would be looking for, 

sir. 

Chairman CHABOT. Okay. You cannot be much more specific 

than that. Thank you. 

Mr. Gibson? 

Mr. GIBSON. Absolutely the same. We support all of those, and 

have added that to our testimony as well today. 

Chairman CHABOT. Okay. Thank you very much. 

I think I am going to stop there. I got the answer I wanted, so 

thank you. 

I will now yield to the gentlelady from New York, the ranking 

member, Ms. Vela ́zquez. 

Ms. VELA ́ ZQUEZ. Yes, I would like to go back to Mr. Hunter. 

We are now reviewing the budget for Fiscal Year 2016. In your testimony you mentioned that your data shows small business contracting numbers increased in the last fiscal year, despite the cuts 

imposed by sequestration. Can you give us an explanation as to 

why that happened? What can you tell us regarding the spending 

levels that are proposed for Fiscal Year 2016 and whether they represent a significant risk for small business growth? 

Mr. HUNTER. I will do my best. The same answer would be to 

say we need more data. What we have seen in several areas, and 

I will try to maybe highlight a little and not be cryptic. For examSBREP-219 with DISTILLER

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ple, we saw big differences between the military services and the 

way that their contracts were playing out. So the Army’s contract 

obligations have sort of fallen off a cliff. The Navy showed surprisingly little variation in their contract obligations. And then the Air 

Force was somewhere in the middle and it was very hard to understand how you could have three such different outcomes when they 

are all facing relatively the same level of cuts. The 2014 data has 

now come in. We find that, in fact, it is the Navy whose contract 

obligations have gone down now quite a bit in 2014, much more so 

than 2013, and the other services not as much. And I think what 

is happening is that things are shifting around. So there is a semiartificial barrier there which is the end of the fiscal year—one fiscal year, the start of another. And to some extent the appropriations in terms of when they go on contract can be fungible across 

that boundary. And so I think there is a lot of shifting that is going 

on. And so I think work from 2013 got shifted essentially into 2014, 

partly probably due to the uncertainty when sequestration kind of 

came down in the middle of the fiscal year, and partly because of 

strategies that different agencies adopted. And so I suspect that if 

you were to sort of take the two years and average them out, that 

might be—and assume that in reality sort of that, there was more 

of a steady state trend line there and that those two numbers are 

extremes and the reality is somewhere in the middle, I suspect that 

is the case. 

So taking you then to 2016, this question of does it go back down 

to the full sequester levels and another drop? Or does it now start 

to go in a positive direction in terms of the total federal obligations? It is going to, I think, again, kind of, you know, it will be— 

in some ways it surprised agencies whichever outcome occurs because they have budgeted now for what the president’s level is, 

which is higher, and if it ends up going back to sequestration, there 

is going to be that surprise again. And that is why I think it will 

be a sharp drop if that happens. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Chairman CHABOT. The gentlelady yields back. 

The gentleman from New York, Mr. Hanna, is recognized. 

Mr. HANNA. Thank you. 

Surety bonding. You know there was a bill in the last Congress 

that almost made it. It died but for one person in the Senate. You 

are familiar with that. Basically, it meant that bonding had to be 

backed by real assets. It is not that complicated and it is not that 

much to ask. We know that it has not always been that way. I 

would just like to give you a chance to talk about that, Mr. 

McNerney and Mr. Gibson. You are both in that racket, so. 

Mr. MCNERNEY. There are those notorious cases that you have 

all heard from the NASBP and the surety and fidelity, the individual surety who pledged coal waste as the security for a bond. 

If there were a claim made on that, my contractor would have been 

out of luck. He would have been on the hook for all his payroll and 

everything else when the prime failed. So I just think it is a very 

good government abuse. It is just a transparently bad loophole in 

the law. The contracting officers do not deal with it properly. It is 

more prevalent than you would think, I am afraid. What I hear 

SBREP-219 with DISTILLER

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from NASBP, it is just—I do not think you lose the virtues of independent—— 

Mr. HANNA. Bonding has always been based on a zero loss 

ratio. As soon as you factor in any loss at all, you are degrading 

the contractor and you are degrading the process. 

Mr. MCNERNEY. Right. 

Mr. HANNA. You would agree with that, Mr. Gibson? 

Mr. GIBSON. Yes. And I would say that we are here talking 

about small businesses. That loophole is very dangerous for small 

businesses who are thinking about getting into the Federal Marketplace. You do not want to step into the Federal Marketplace 

without a solid surety behind you, and you cannot get a solid surety unless you are solid yourself financially. So this Committee 

should help protect small businesses by closing that loophole. 

Mr. HANNA. Mr. Hunter, implicit in your statement—and I will 

just admit, just for myself, that sequestration is pretty ham-fisted 

and not nearly as discriminate as any thoughtful person would 

want it to be. But knowing that and knowing the other issues with 

the debt and the deficit and the way people feel about all that, and 

I agree with that, how do you maintain research and development 

and how do you maintain these companies without just throwing 

money at them to make sure they are in business when you need 

them? Because that is implicit in your statement, and yet, that is 

not logical necessarily to everyone, and certainly not to me. 

You have got two minutes. I mean, I would kind of like to know 

about that dynamic because we have, in my district, companies 

that are deeply invested in doing work for the government and find 

themselves through sequestration in trouble right in the middle of 

things that they are doing that everybody thinks are important. It 

is an interesting problem. 

Mr. HUNTER. It is. And I think the government needs to be very 

discriminating about how it approaches and how it invests its R&D 

dollars. And so I think that is kind of the answer in both directions 

to your question I would argue. 

Mr. HANNA. But you would agree; you just cannot throw money 

at the problem. 

Mr. HUNTER. You cannot throw money at the problem, and we 

do not need to be investing government dollars where the private 

sector is going to invest its own dollars. And generally, they are 

probably going to, I mean, history shows they are going to be successful in that in enough cases to make it not worth the government investment. So I think the government then needs to focus. 

When R&D budgets are declining and the government has to focus 

very hard, there is a tendency to say, well, we are going to invest 

in an area because we invested in it last year. We thought it was 

good then, it must still be good now. At a time like this, you really 

need to revisit those assumptions and say maybe the world has 

moved on. And in some cases it has. And in communications technology, the advancements on the commercial side are so rapid, it 

is highly unlikely the government investment is ever going to—— 

Mr. HANNA. So do you mind, can I speculate and say that sequestration is not all bad because it has made some people more 

thoughtful about how they do things and how they manage their 

total budgets? 

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Mr. HUNTER. I would say the government should be thoughtful 

without sequestration. 

Mr. HANNA. But maybe it helped? 

Mr. HUNTER. And part of the problem with sequestration is it 

does not allow a lot of thought. So we end up cutting everything, 

even the things that are critical and necessary, and yes, we may 

have cut some of the things that are less critical and necessary, but 

we cut them exactly 10 percent, not 100 percent as maybe we 

should have. And so I think it is those rigidities and that mechanism. 

Mr. HANNA. Except in the last, they did allow for discretion in 

terms of that. That was the original way it went. But that changed, 

so. 

Mr. HUNTER. Well, but there are still rigidities within the budget process that tend to drive the cuts to certain areas, R&D in particular, more so than places where we maybe should be cutting. 

Mr. HANNA. Thank you. My time is expired. Thank you, Chairman. 

Chairman CHABOT. Thank you very much. The gentleman’s 

time has expired. 

We want to thank all of the witnesses for their participation here 

this morning. It has been very helpful I think to the Committee. 

The testimony we heard I believe shows that there are changes this 

Committee can make to improve the competitive viability of small 

construction and A&E contractors and improve the health of our 

industrial base. We look forward to working closely I think on this 

issue and all issues. 

And I want to ask unanimous consent that members have five 

legislative days to submit statements and supporting materials for 

the record. 

Without objection, so ordered. And if there is no further business 

to come before the Committee, we are adjourned. 

Thank you. 

[Whereupon, at 11:45 a.m., the Committee was adjourned.] 

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A P P E N D I X 

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A C E C 

AMERICAN COUNCIL OF ENGINEERING COMPANIES 

Introduction 

Chairman Chabot, Ranking Member Vela ́zquez, and members of 

the committee, 

The American Council of Engineering Companies (ACEC) appreciates the opportunity to testify before you today about the issues 

surrounding Contracting and the Industrial Base and specifically 

about the unique considerations within engineering services and 

construction more broadly. ACEC believes that small businesses 

can flourish in the federal market, but there must be continued 

oversight by this and other committees to reduce barriers to market entry. There must be a focus on improving the marketplace for 

design and construction services by eliminating wasteful spending 

by both the federal government and contract participants during 

the procurement process. ACEC will address issues that are 

present in federal design-build procurement, the potential issues 

with the implementation of a new court decision in the Nonmanufacturer Rule, the use of reverse-auctions, federal agency use of 

joint venture and teaming qualifications and surety improvement. 

My name is James Hoffman and I am President of Summer Consultants, a consulting mechanical, electrical, and plumbing engineering firm located in McLean, Virginia. Summer Consultants is 

a Small Business with 30 employees. We are committed to providing our clients sound engineering designs for various sized 

projects. Our practice focuses on the federal market and we have 

worked on many federal projects in the past 50 years. 

My firm is an active member of ACEC - the voice of America’s 

engineering industry. ACEC’s over 5,000 member firms employ 

more than 380,000 engineers, architects, land surveyors, and other 

professionals, responsible for more than $500 billion of private and 

public works annually. Almost 85% of these firms are small businesses. Our industry has significant impact on the performance 

and costs of our nation’s infrastructure and facilities. 

We are at a critical juncture in our nation’s history as the risk 

to the public is growing at an alarming rate, as there has been ongoing neglect of the nation’s infrastructure. At the same time, we 

are coming out of the largest economic crisis that affected all professional engineering firms. The construction industry, which bore 

the brunt of the recession, is finally coming back to fiscal health. 

Procurement improvements that facilitate greater efficiency for 

both the industry and the government will help these entities create better public infrastructure while increasing good paying jobs. 

Design-Build Improvement 

Design-build is a method of construction where engineers team 

with other industry professionals on proposed work. It requires the 

design team, comprised of engineers and architects, to develop deSBREP-219 with DISTILLER

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1Press Release, H. Comm. on Small Bus, Graves, Hanna Introduce Bipartisan Legislation to 

Benefit Small Construction Contractors. (July 19, 2013) (on file with author). 2 Building America: Challenges for Small Construction Contractors: Hearing Before the 

Subcomm. on Contracting & Workforce of the H. Comm. on Small Bus 113th Cong. 113–109 

(2013). (statement of Helene Combs Dreiling, President, the American Institute of Architects). 3 41 U.S.C. 3309(d). 

tailed drawings and specifications for the contractor so that construction suppliers can submit detailed prices for the final proposal. 

This method has become popular in recent years and the federal 

government has moved to expand its use in construction.1

There are two forms of design-build procurement: two-step and 

one-step. Two-step design-build requires that teams submit relatively inexpensive qualifications packages to the contracting officer in the first round. The contracting officer reviews the qualifications and notifies the teams if they are selected for the next phase. 

In the second round, the design team develops expensive detailed 

and extensive plans for the contractor to use in their bidding. The 

design group develops these plans, generally without any reimbursement by the federal government or other participants, resulting in firms risking funds to participate in the project.2

It is the industry standard for three to five finalists to be in the 

second round. However, in recent years, industry has reported 

often more than 10 finalists in that round. The current civilian 

statute states that the federal contracting officer should follow the 

industry standard, but the officer, at her or his own discretion, may 

increase the number of finalists when it is ‘‘in the Federal Government’s interest and is consistent with the purposes and objectives 

of the two-phase selection process.’’ 3 This exception causes issues 

for both the industry and for the contracting officer. Industry is 

risking greater exposure as more firms; small, medium, and large, 

are spending valuable resources developing expensive plans and 

specifications that have a lower chance for a successful bid. The 

contracting officer must review each of the plans and be prepared 

to give feedback to each team that does not win the project. With 

the increase in finalists, the government spends more time on proposal review, and introduces greater opportunity for errors or underbidding which impacts the project later. This issue has driven 

many, including small businesses, to stay out of the federal market. 

This makes the market less competitive and drives down industry 

participation. 

One-step design-build creates an even more precarious environment for the industry as the qualifications step is eliminated. 

ACEC is staunchly opposed to this form of procurement as it eliminates the qualifications process, increases cost for all participants, 

and reduces market participation for engineers. One-step designbuild allows the owner to solicit complete proposals from the construction market without a review of the team’s past performance 

and qualifications. This mechanism forces teams to compete in 

large pools without any focus on technical capability, quality, or 

savings within the design. Due to this type of unqualified competition, many firms cannot justify the expenditures to compete against 

an unknown pool of applicants. This selection forces out small 

firms as they cannot spend valuable marketing dollars on projects 

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4 James Dalton, PES, Limitations on the Use of One-Step Selection Procedures for DesignBuild, Directive No. 2012–23 (2012) (on file with the author). 5MATTHEW PICKFORD, CONG. BUDGET OFFICE, H.R. 2750 DESIGN-BUILD EFFICIENCY AND JOBS

ACT OF 2014 (2014), available at http://www.cbo.gov/sites/default/files/hr2750.pdf. 6 Id. 

7 CASE NO. 14–502C (SEPTEMBER 19, 2014)

where there are too many competitors—many of which that may 

not have the qualifications for the project. It is an inefficient process for the federal government as it asks contracting officers to review multitudes of proposals without the framework of qualifications to focus the evaluation. The U.S. Corps of Engineers has 

taken steps recently to limit one-step design-build, requiring high 

level, advanced approval for any projects over $750,000.4 When the 

government’s largest construction agency implements limits on the 

process, other agencies should follow their precedent. 

Chairman Hanna held a haring on this issue on May 23, 2013 

and the House Oversight and Government Reform Subcommittee 

on Federal Workforce, US Postal Service and Census, also held a 

hearing on this issue on December 3, 2013. Former Small Business 

Committee Chairman Graves sponsored H.R. 2750, the DesignBuild Jobs and Efficiency Act of 2013, which was amended into the 

National Defense Authorization Act (NDAA) of 2015. The NDAA 

implemented a limitation on military design-build procurements 

over $4 million whereby the contracting officer must ask for permission to expand the finalist pool in a two-phase procurement beyond five finalists. However, the limitations including the prohibition on one-step design-build, reporting on any exceptions to the 

five finalists, or any limitations for either single or two-step design 

build were not extended to the federal civilian market. The Congressional Budget Office (CBO) found that H.R. 2750 ‘‘would not 

have a significant net effect on the federal budget’’ 5 in their analysis of the bill. CBO determined that it would help to ‘‘analyze 

fewer construction bids’’ 6 which would balance any additional costs 

that may be involved in the bill. We ask the Committee to continue 

to pursue the proposed efficiencies found in H.R. 2750, which will 

help small businesses compete in the federal market, while also 

harmonizing the language between military and civilian designbuild construction. 

Proposed Nonmanufacturer Rule Changes 

The updated interpretation of the Nonmanufacturer Rule (NMR) 

poses a challenge for the construction industry as it is a service industry that typically did not have to address this rule in the past. 

The NMR exists to ensure that when competition for a contract for 

goods is restricted to small businesses that the good ultimately 

purchased was from a small business. Otherwise, the government 

risks restricting competition only to have the awardee provide a 

product it has simply passed along from a large manufacturer or 

international contractor. In a recent Court of Federal Claims ruling 

on Rotech Healthcare, Inc. v. United States 7, the Court changed 

the common understanding of the rule. The Court found that the 

Small Business Act references ‘‘any procurement for goods’’ and 

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8 Id. at 6–8. 

9 13 C.F.R. § 125.6. 

10 U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-14-108 REVERSE ACTIONS—GUIDANCE IS NEEDED

TO MAXIMIZE COMPETITION AND ACHIEVE COST SAVINGS 6 (2004). 11 Id. at 19. 

that the SBA must apply that interpretation broadly across both 

services and commodities 8. 

ACEC has grave concerns with this interpretation. Currently, 

over 85 percent of all construction dollars are subcontracted to 

third parties.9 The Court’s interpretation would require that any 

firm who is a prime contractor be responsible for their subcontractors’ use of small business products. The paperwork burden on this 

concept is staggering. An example of the unintended result of this 

rule could require that engineering firms use paper made by small 

businesses to print out their correspondence for a federal construction job. Many businesses do not know who made their paper nor 

do firm owners concern themselves with the small business aspect 

of its production. The interpretation could require that the ink and 

any other materials, like specialized seismic machinery, that are 

not exempted through the regulations, must be obtained through a 

small business. The result of this ruling cannot be implemented 

without great cost to the businesses who work on and the taxpayers who fund federal construction projects. 

Second, in many instances, specific items may be manufactured 

in a foreign country. If an engineer specifies a part that has a foreign origin, or is made by a large manufacturer, it is most often 

because of necessary performance specifications that are essential 

to the project’s long-term success. This ruling would have the engineer concerned with minutiae that is not relevant the responsibilities outlined above. This decision will result in the inefficient and 

wasteful use of taxpayer funds. ACEC asks the Committee to work 

with the SBA on language to make sure that construction services 

and products continue to be excluded from the NMR. 

Reverse Actions 

Reverse auctions are on-line sales where the bidders compete for 

work by lowering their price against other competitors in a specified time.10 Typically, agencies pay a variable fee, ‘‘which is no 

more than 3 percent of the winning bid’’ 11 to the reverse action 

contractor. Reverse auctions force design professionals to bid on 

price, which is strictly prohibited by the Brooks Act and by many 

state professional licensing standards. It also fails to encourage any 

participant in the design and construction industry to focus on providing innovative and strategic solutions to the nation’s infrastructure. It forces the competitors to focus solely on lowering their 

price. This often leads to errors or underbidding during the auction, 

without the ability to verify costs with subcontractors, who are 

often small businesses. The potential damage to a construction 

project and firms involved can be significant as project costs may 

increase beyond the bid or businesses could go out of business due 

to a mistake in the frenzy of bidding. Also of consideration is the 

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12 Id. at 26. 13 USACE, FINAL REPORT REGARDING THE USACE PILOT PROGRAM ON REVERSE AUCTIONING

34–37 (2004). 14 ACEC advocates for qualifications based selection (QBS) in the selection of the architect and 

engineer, but that is not the subject of this hearing. 15Danielle Ivory, ‘Reverse Actions’ Draw Scrutiny, N.Y. Times, April 6, 2014 at B1. 16 Joint ventures and teams are used interchangeably in this submission. Joint ventures are 

contractual relationships between entities while teams are groups of professionals working together towards a single project. They are very similar in nature, but differ in the legal sense. 

active bidding’’ 12 which means that no other vendor drove down 

the price. In short, the competition was sole-sourced out to a single 

bidder. 

Reverse actions have been used by the federal government in the 

past with commodities, with a noted lack of success in construction. 

The U.S. Corps of Engineers conducted a year-long study whereby 

they found that reverse auctions ‘‘offered not even marginal edge 

in savings over the sealed bid process for construction service 

projects’’ 13. The Corps found that sealed bids for construction, typically the domain of contractors, was a better method than reverse 

auctions.14 Moreover, former OFPP Administrator Mr. Joseph Jordan, who is the current FedBid CEO stated, ‘‘An agency might 

want to use FedBid to find a contractor to paint a wall, he said, 

but not to construct an office building.’’ 15 It is telling that both the 

Corps and the third-party vendor for reverse auctions do not advocate their use in construction. 

H.R. 2751, the Commonsense Construction Contracting Act of 

2013, introduced by Rep. Richard Hanna (R-NY), sought to restrict 

the use of so-called reverse auctions as a means of procuring construction and design-related services. Like H.R. 2750, it was incorporated into the NDAA, but the prohibition was limited to the use 

of reverse auctions in design-build procurements. At this time, 

there are no programs that can be found by the industry that used 

this procurement method. While federal procurement law already 

prohibits the use of reverse auctions for engineering activities, we 

view the full legislation as necessary to protect firms of all sizes 

in our industry when they provide services in support of construction efforts. ACEC asks the committee to reintroduce H.R. 2751, to 

build stronger prohibitions against the use of this commodities 

based program for construction services. 

Joint Venture Rules 

Joint ventures and teams are important to construction and 

small businesses in the federal market.16 Teams are important to 

the design-build process as each discipline works together to compete on construction projects. Joint ventures allow for organizations 

new to federal procurement to work with experienced partners to 

gain entry to the market. It is important for teams to add or 

change firms to enhance their qualifications, to offer the best services for a particular project in the pre-competition phase. These 

practices allow the federal government to obtain innovative private 

sector talent while also increasing capable competition on federal 

projects. 

Current law states that small businesses may ‘‘submit an offer 

that provides for the use of a particular team of subcontractors for 

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17 Id. 

18 Id. at § 15(e)(4), 15 U.S.C. § 644(e)(4). 

19GSA OASIS REQUEST FOR PROPOSAL (2013) available at http://www.fbo.gov/ 

?s=opportunity&mode=form&tab=core&id=df05de3d9c9cafle7943d278094eefbl&—cview=1. 20 HCaTS RFI APPENDIX 3 - DRAFT RFP SECTION L (2015) (on file with author). 

the performance of the contract’’ 17 and that requires the contract 

be evaluated, ‘‘in the same manner as other offers, with due consideration for the capabilities of all proposed subcontractors.’’ 18 There 

are recent reports that some agencies are requiring joint ventures 

or teams to present joint past performance in their qualification. 

This practice demonstrates that some contracting officers do not 

understand the rationale and benefit of teaming. Some agencies require that ‘‘an [o]fferor must have proven experience and performance as an existing CTA (Contractor Team Arrangement) in the 

form of a Partnership or Joint Venture in accordance with the proposal submission requirements’ 19, or that past performance may 

only be considered if it is that of ‘‘a parent company, affiliate, division, and/or subsidiary.’’ 20 Under present statute, the contracting 

officer must look at the qualifications of the individual organizations comprising a team rather than the past performance of the 

group as a whole. Requiring that the team have common past performance reviews discourages the use of new teams, new partners, 

and the inclusion of new small businesses in the federal market. 

ACEC strongly encourages the Committee to amend the Small 

Business Act to protect the development of joint ventures and 

teams. Federal agencies are losing their opportunity for innovation 

and small business participation when contracting rules are not followed by federal agencies. 

Surety Improvements 

A surety is a third party product that guarantees payment if one 

party defaults on the agreement. In federal construction, there are 

two key bonds—payment bonds and performance bonds. The Miller 

Act requires that the contractor must provide a surety for payment 

and performance bonds on contracts greater than $150,000. This 

provides performance protection to the federal government that the 

taxpayer will not be damaged if the contractor fails to complete a 

project, while also guaranteeing payment to subcontractors if the 

contractor defaults. H.R. 776, the Security in Bonding Act of 2013, 

was introduced by Chairman Hanna to address the issues of bonding availability for small businesses and problems with individual 

surety guarantees. The bill increases the guarantee rate for the 

Preferred Surety Bond Program, which will help more small business obtain a bond at a reasonable rate, and requires verifiable collateral for the issuance of surety bonds. While ACEC members 

typically do not obtain surety bonds, with the exception of some of 

our larger members who are also construction contractors, we recognize the importance of this product for the taxpayer and the subcontractors. ACEC asks the Committee to reintroduce H.R. 776 in 

this Congress. 

Conclusions and Recommendations 

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The engineering services industry is unique in how firms are established, perform work, selected for the project, and work with 

each other. Most firms in the industry are small, specialized, and 

have a business plan to remain that way to assure performance 

and reputation. These factors result in the need for special considerations when trying to ensure appropriate small business participation in federal procurements. 

We ask that the committee consider the following actions for the 

114th Congress: 

• Reintroduce H.R. 2750 and enact it into law. 

• Work with the SBA on appropriate language to limit the 

scope of the NMR on service industries. 

• Reintroduce H.R. 2751 and enact it into law. 

• Strengthen the Joint Venture and teaming past performance rules. 

• Reintroduce H.R. 776 and enact it into law. 

ACEC and I thank the Committee for the privilege and opportunity to address engineering and construction industry issues with 

current federal procurement and I am pleased to answer any questions. 

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MCAA Statement on the Use of 

Internet Reverse Auctions for 

Construction Services 

MCAA considers the use of Internet reverse auctions for procurement of construction services to be problematic for owners and contractors alike. 

While most applications of various e-commerce and Internet use 

(project websites, for example) have demonstrated or hold great 

promise for productivity and service improvements for owners and 

the industry at large, the same cannot be said for Internet reverse 

auctions. MCAA considers them to be little more than a form of 

electronic bid shopping; that is, disclosing the proprietary bid price 

of a competitor to all others for the purpose of obtaining even lower 

bids. 

While reverse auctions may be judged appropriate by some owners for certain well defined projects on a case-by-case basis, an 

across-the-board policy dictating reverse auction, price-only selection for all projects would be just as short sighted as dictating a 

single type of project delivery system for projects of all types. 

MCAA, along with the industry overall, long ago recognized the 

long-term detrimental impact of an across-the-board policy of lowbid, price-only selection criteria, and the bid shopping and chopping 

practices that are inherent in that system and undermine project 

success, such as: fragmented scopes of work and scope disputes, unnecessary changes and inordinate delays, and overhead waste relating to defensive contract administration, claims, disputes and 

lawsuits. 

In fact, many of the innovations in construction procurement, 

contracting and project administration over the past 20 years have 

been in direct response to the inefficiencies that stem from low-bid, 

price-only selection criteria. Those innovations include value-based 

selection criteria, careful past performance evaluations, 

prequalification screening of competitors, project partnering, integrated project contracting and delivery systems, design-build services delivery, and other positive contract administration procedures, including dispute avoidance mechanisms and measures to 

reduce project dispute overhead costs. Overall, these developments 

have represented a better investment in overall project quality and 

life-cycle cost effectiveness. 

Unfortunately, Internet reverse auctions can be seen as a way to 

adapt new technology to return to many of the problems of the past 

and give back the project efficiency gains that have resulted from 

innovative, value-added contracting procedures. Nevertheless, 

given recent experience with reverse auctions, MCAA members 

have encountered certain approaches that tend to ameliorate the 

more difficult aspects of the process as discussed below. 

> Well-defined scope of work - Reverse auctions are least likely to lead to problem jobs in those cases where the owner has firm, 

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detailed design drawings and specifications. Recent studies strongly indicate that project planning up front is the best predictor of 

project success and problem avoidance. 

> Use of best-value prequalification criteria - Best-value 

prequalification criteria should be rigorously applied. The criteria 

should include demonstrated superior past performance related to 

project performance overall, including cost and schedule delivery, 

project safety experience, workforce training and development investments, and project management and site supervision expertise 

relating to equipment purchasing and other aspects of contract administration. 

> Transparency of auction procedures - The reverse auction 

procedures should provide maximum transparency in the interest 

of fairness for all competitors. The identity of all participants 

should be disclosed, as well as the dollar amount and ranking of 

all bids. Similarly, the owner should disclose the existence and 

amount of any reserved price above which the project would not be 

let. Just as laws pertaining to the auctions of goods are designed 

to protect fairness in the process and prevent fraud and abuse, the 

owner and Internet service provider for reverse auctions of construction contracts should make sure that all competitors are extended the same privileges under the auction rules. 

> Provide adequate procedures for redress of errors - The 

auction procedures should provide careful safeguards against both 

imprudent and administrative mistakes in bidding, as overall 

project success is strongly compromised by mistakes in selection decisions. Even at this early stage, it is widely recognized that the 

reverse auction process often tempts hasty and imprudent bidding 

given the tight time frame and competitive context of the auction 

procedure. The industry recognizes that selection based on competitive frenzy as opposed to more discerning judgment is a high risk 

factor for project success. Bid decrements and the time intervals for 

bid adjustments should be appropriate for the scope and size of the 

project. Clerical mistakes also should be excused in the auction 

process in the manner of treatment of those mistakes in the sealed 

bidding context. Overall the owner should not design the process 

as though construction service auctions can be conducted in the 

same way as commodities procurement. 

> Provide adequate safeguards against other abuses - The 

reverse auction procedures should also contain adequate safeguards 

against fraud and abuse, including express warranties against 

fictitous (‘‘phantom bidders’’) bidders and other conditions that 

would constitute fraud in the inducement of the contract award. 

Moreover, any procedure for post-bid negotiated awards should be 

disclosed up front so competitors can fairly judge whether they can 

afford to compete. Similarly, if post-bid price increases are to be 

permitted, that too should be disclosed up front. 

> Policy reservations - Notwithstanding adherence to the suggestions listed above, MCAA member experience suggests that reverse auctions remain a relatively new, untested and unproven 

method to actually lower construction costs without compromising 

project success. 

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MCAA contractor experience with Internet reverse auctions suggests that the last bid in a reverse auction is not always the lowest 

and best price that may have been submitted even under sealed 

bidding procedures. Owners should be aware that a comparison of 

the opening bid with the last bid is not a valid indicator of actual 

cost savings on the project. Moreover, while open competition is 

good policy generally, even with careful prequalification screening, 

the auction process prompts fast and furious competitive judgments 

more than prudent decision-making. Negative experiences could 

significantly shrink the pool of willing competitors, and deliver negative project outcomes. 

In conclusion, early experience suggests that the risks of mistakes, misjudgments and the added costs of Internet services may 

well in many cases outweigh the perceived costs savings realized 

through the use of reverse auctions. 

MCAA will continue to monitor experience with reverse auctions 

for a continuing factual assessment of their costs and benefits and 

effect on project outcomes. 

Footnote - This statement does not address the many ways that 

public and private contracting practices vary with respect to contractor selection rules and procedures generally and reverse auctions in particular. In the main, Federal, state, and local open competition/sealed bidding rules prohibit reverse auctions for construction. The Federal procurement policy is to continue to use sealed 

bidding/competitive negotiations without price disclosure for construction services, even though one agency has Congressional authorization to test pilot reverse auctions. Another agency is attempting to categorize some construction/repair/alteration projects 

as ‘‘commercial items’’ to avoid construction procurement rules. At 

the state level, a growing number of states are amending procurement laws to permit reverse auctions for commodities, but are careful to rule out reverse auctions for construction services. 

Approved by the MCAA Board of Directors, February 28, 

2004 

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INTRODUCTION 

Chairman Chabot, Ranking Member Vela ́zquez and members of 

the committee, thank you for holding this hearing examining contracting and the industrial base. Further, thank you for the opportunity for the Design-Build Institute of America (DBIA) to submit 

the following testimony. 

DBIA is an institute representing leaders in the design and construction industry utilizing design-build and integrated project delivery methods to achieve cost and time savings on high performance projects. DBIA promotes the value of design-build project delivery and teaches the effective integration of design and construction services to ensure success for owners and design and construction practitioners in the delivery of projects from all sectors in communities across the country. Since we are design-build professionals focused on defining and teaching best practices, we will 

limit our comments today to the ‘‘failure to properly use a two-step 

procurement process for design-build contracts’’, as indicated in the 

February 5, 2015 hearing announcement. 

WHAT IS DESIGN-BUILD? 

Design-Build is a method of project delivery in which one entity 

- the design-build team - works under a single contract with the 

project owner to provide design and construction services. With design-build there is one entity with a single point of responsibility, 

one contract, one unified flow of work from initial concept through 

completion - thereby integrating the roles of designer and constructor. 

Design-build is a more efficient and better quality alternative to 

the traditional design-bid-build project delivery method. Under the 

traditional approach, design and construction services are split into 

separate entities, separate contracts, and separate work. 

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Design-build project delivery provides benefits for both owners 

and practitioners. Owners experience faster delivery, cost savings 

and better quality than with other contracting methods. Research 

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1 Construction Industry Institute (CII)/Penn State 1999 

2Design-build Project Delivery Market Share and Market Size Report, RS Means, May 2014 

shows costs can be six percent lower with project delivery 

speed increased by as much as one-third 1. 

Further, dealing with a single entity decreases owners’ administrative burden and allows them to focus on the project, rather than 

managing separate contracts. The approach also reduces their risk 

and results in fewer litigation claims for all parties involved. 

Practitioners reap the benefits of a higher profit margin since an 

integrated team is fully and equally committed to controlling costs. 

Like owners, the design-builder benefits from a decreased administrative burden because the communication between designers and 

builders is streamlined. 

The advantages of design-build have become clear in recent years 

which is why today nearly 40% of all non-residential construction in the U.S. is done design-build, with the military using 

it for more 80% of its construction2. 

SINGLE-STEP VS. TWO-STEP DESIGN-BUILD 

Federal regulation allows for the use of design-build project delivery, including both a single-step process and a two-step process. 

In the single-step process, a request for proposals (RFP) is issued 

for a project. It is issued to an unlimited number of participants 

and any and all parties can respond with a proposal. A selection 

process is then used to determine the proposal that is best from 

both a cost and technical perspective. 

In a two-step process a request for qualifications (RFQ) is first 

issued, and any and all participants then respond with a statement 

of qualifications. The RFQ response is a relatively simple and inexpensive procedure where the design-build teams submits, for example, documents detailing their past performance, staff resumes, and 

examples of similar projects they’ve completed. Based on these 

statements a short list of three to five of most qualified respondents is determined. The RFP is then issued only to these 

‘‘shortlisted’’ firms which then develop full proposals including cost, 

schedule, and technical response. 

Small Business Are Far Better Served By the Two-Step 

Process 

In a single-step process, all design-build teams are asked to 

spend time and resources creating detailed proposals immediately, 

as opposed to simply submitting their qualifications. Due to the 

high costs of this first step - often reaching hundreds of thousands 

of dollars or even millions - many design-build teams decide not to 

apply since their chances of final selection are so low. Small businesses in particular do not have the luxury to spend limited resources to apply for a project when the chance of being chosen may 

be less than ten percent. 

If small businesses were only required to initially provide their 

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posal under the single-step process, many more would be able to 

participate. This is not only good for American small businesses, it 

also benefits the federal government and the American taxpayer 

who can be sure the most qualified design-build teams were not 

scared away from a project simply due to the costs and risks of applying. 

Consider and Pass the Design-Build Efficiency and Jobs 

Act 

During the 113th Congress, legislation endorsed by DBIA, the 

Design-Build Efficiency and Jobs Act (H.R. 2750) was introduced 

by Congressman Graves and a version passed the House of Representatives. This bill was written to limit the use of single-step design-build procedures, and assure the proper use of two-step procedures as originally mandated by Congress. That legislation should 

be reintroduced, considered and passed into law. 

H.R. 2750 would have done two primary things: 

1. To limit the use of single-step, H.R. 2750 would have limited its use to projects that are less than $750,000. This 

threshold is based on U.S. Army Corps of Engineers guidance 

which was issued in August 2012. Further, it will assure that 

for larger more complex projects risks for all firms are held in 

check, thus allowing small firms a greater chance to compete 

in the marketplace. 

2. H.R. 2750 also would have encouraged better use of the 

preferred two-step procedures and by requiring agencies to better justify and report when their agencies short-list more than 

five finalists on a specific project in the two-step process. 

CONCLUSION 

Thank you again for the opportunity to submit this statement. 

We look forward to working with this committee on improving design-build procedures so the advantages of design-build delivery 

can be more fully realized and American small business can thrive. 

We are ready to answer any questions you may have. 

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The National Association of Surety Bond Producers (NASBP) is 

a national trade association of firms employing licensed surety 

bond producers who place bid, performance, and payment bonds 

throughout the United States and its territories. 

The Surety & Fidelity Association of America (SFAA) is a District of Columbia non-profit corporation whose members are engaged in the business of suretyship. SFAA member companies collectively write the majority of surety and fidelity bonds in the 

United States. The SFAA is licensed as a rating or advisory organization in all states, as well as in the District Columbia and Puerto 

Rico, and it has been designated by state insurance departments as 

a statistical agent for the reporting of fidelity and surety data. 

Our written statement begins with a brief description of the important role surety bonds play in the federal procurement arena. 

Our statement then addresses our support of three bills introduced 

in the 112th and 113th Congresses, H.R. 3534 and H.R. 776, and 

H.R. 838. H.R. 838 was introduced in the 114th Congress on February 10, 2015, by Representative Richard Hanna, and cosponsored 

by the Chairman of the House Small Business Committee, Steve 

Chabot and Representative Grace Meng. These bills concern the 

use of individual surety bonds on federal construction projects and 

reforms to the Small Business Administration’s (SBA) Surety Bond 

Guarantee Program, and are representative of needed legislation 

on small business matters that NASBP and SFAA wish to bring to 

the attention of the Committee on Small Business for support. 

The Importance of Surety Bonds: Sound Public Policy 

Corporate surety bonds are three-party contract agreements by 

which one party (a surety company) guarantees or promises a second party (the obligee/federal government) the successful performance of an obligation by a third party (the principal/contractor). In 

deciding to grant surety credit, the surety underwriter conducts indepth analysis, also known as prequalification, of the capital, capacity, and character of the construction firm during the underwriting process to determine the contractor’s ability to fulfill contractual commitments. Surety bonds are an essential means to discern qualified construction companies and to guarantee contracts 

and payments, ensuring that vital public projects are completed, 

subcontracting entities are paid, and jobs are preserved. 

The federal government has relied on surety bonds for 

prequalification of construction contractors and for performance 

and payment assurance since the late nineteenth century. In 1894, 

the U.S. Congress passed the Heard Act which codified the requirement for surety on U.S. government contracts and institutionalized 

the business of surety. In 1935, the Heard Act was superseded by 

the Miller Act, which required the continuation of these vital assurances so that U.S. taxpayer funds were protected and subcontractors and suppliers would receive payment for their labor and materials. Currently, the federal Miller Act requires performance and 

payment bonds from prime contractors awarded construction contracts exceeding $150,000.00, and payment security for contracts 

between $30,000.00 and $150,000.00. 

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Types of Surety Bonds 

The bid bond assures that the bed has been submitted in good 

faith and the contractor will enter into the contract at the bid price 

and provide the required performance and payment bonds. A performance bond protects the project owner from financial loss should 

the contractor fail to perform the contract in accordance with its 

terms and conditions. The payment bond protects subcontractors 

and suppliers, which do not have direct contractural agreements 

with the public owner and which would be unable to recover lost 

wages or expenses should the contractor be unable to pay its financial obligations. Often, small construction businesses must access 

the federal procurement marketplace at subcontractor and supplier 

levels, and the payment bond is their primary recourse and protection in the event of prime contractor nonpayment or insolvency. 

The Construction Industry Supports of H.R. 3534 (112th 

Congress) H.R. 776 (113th Congress) and H.R. 838 (114th 

Congress) 

NASBP and SFAA along with many other organizations such as: 

the American Council of Engineering Companies (ACEC), the Associated General Contractors of America (AGC), the American Institute of Architects (AIA), the American Subcontractors Association 

(ASA), the Mechanical Contractors Association of America (MCAA), 

the Sheet Metal and Air Conditioning Contractors’ National Association (SMACNA), the Construction Financial Management Association (CFMA), and the American Insurance Association (AIA), 

view H.R. 3534, H.R. 776, and H.R. 838 as critical means (1) to 

protect taxpayers, federal contracting entities, and construction 

businesses by assuring the integrity of surety bonds on federal contracts when issued by unlicensed individuals using a pledge of assets and (2) to provide additional opportunities for small and 

emerging construction contractors, which otherwise do not qualify 

for surety credit in the standard market, to utilize the Surety Bond 

Guarantee Program of the US Small Business Administration, so 

that such businesses will receive surety credit from regulated markets. 

Enact legislation to protect taxpayers, and small businesses 

Every contractor that bids and obtains a federal construction contract must secure its obligations under that contract. The most 

common form of security is a surety bond from a certified and approved surety insurance company. As noted earlier, the Federal 

Miller Act requires contractors to furnish surety bonds on federal 

construction projects to ensure that prospective contractors are 

qualified to undertake federal construction contracts and that 

bonded contracts will be completed in the event of a contractor default, thereby protecting precious U.S. taxpayer dollars and subcontractors and suppliers, many of which are small businesses. The 

financial strength and stability of the surety is the key to the success of the surety bonding system. 

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Presently, there are three methods construction firms may use to 

furnish security on a federal construction project: 

1. By securing a bond written by a corporate surety, that is 

vetted, approved, and audited by the U.S. Department of 

Treasury and listed in its Circular 570; 

2. By using their own assets to post an ‘‘eligible obligation,’’ 

i.e. a U.S.-backed security, in lieu of a surety bond. The security is pledged directly and deposited with the federal government until the contractor is complete; or 

3. By securing a bond from an unlicensed individual, if the 

bond is secured by an ‘‘acceptable asset,’’ which includes stocks, 

bonds, and real property owned in fee simple. 

It is this third alternative that has proven consistently problematic to the financial detriment of contracting authorities and of subcontractors and suppliers performing on federal projects. NASBP, 

SFAA, along with the other organizations supporting these bills, 

believe, based on substantial evidence and past testimony, that the 

current regulations pertaining to use of individual sureties on federal construction projects are fundamentally flawed, allowing 

gamesmanship by unlicensed persons acting as sureties. Such existing requirements need to be superseded by the statutory approach delineated in H.R. 3534/776/838. 

Federal Acquisition Regulation (FAR) 28.203–2(b)(3) permits federal contracting officers to accept bonds from natural persons, not 

companies, if the bond is secured by an ‘‘acceptable asset,’’ which 

includes stocks, bonds, and real property. These individuals neither 

are subject to the same scrutiny and vetting given to corporate 

sureties nor are they required to provide physical custody of the 

asset to the government that they pledge to secure their bonds to 

the contracting authority. 

This lack of thorough scrutiny of individual sureties and control 

over their pledged assets has resulted in a number of documented 

situations where assets pledged by individual sureties have proven 

to be illusory or insufficient, causing significant financial harm to 

the federal government, to taxpayers, and to subcontractors and 

suppliers, many of whom are small businesses wholly reliant on 

the protections of payment bonds to safeguard their businesses. 

Federal requirements do mandate a level of documentation and 

information from individual sureties. Individual sureties are required to complete, sign, and have notarized an affidavit of individual surety (SF 28), which is a standardized form for the purpose 

of eliciting a description of the assets pledged and the contracts on 

which they are pledged. SF 28, however, does not elicit other pertinent information, such as that about the character or fitness of the 

individual acting as surety, like criminal convictions, state insurance commissioner cease and desist orders, outstanding tax liens, 

or personal bankruptcies. 

Under FAR requirements, the pledged assets also are supposed 

to be placed in an escrow arrangement by the individual surety, 

subject to the approval of the contracting officer. The individual 

surety, however, is not required to turn the assets over to the physSBREP-219 with DISTILLER

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1 United States Treasury Department. Financial Management Service. ‘‘Special Informational 

Notice to All Bond-Approving (Contracting) Officers’’. February 3, 2006. 

ical care and custody of the contracting authority. Each contracting 

officer, not the Department of Treasury, shoulders the entire burden of determining the acceptability of the individual surety, its 

documentation, the escrow or security arrangement, and the value 

and adequacy of pledged assets, and must do so in relatively short 

order to progress the contract procurement. A missed, incorrect, or 

forsaken step may mean the acceptance of a fraudulent or insufficient bond, rendering its apparent and much needed protection 

worthless. 

This burden of assessing individual sureties is added to the already considerable responsibilities of contracting officers. They are 

required to determine the authenticity of the documentation of the 

assets pledged to support the individual surety’s bond obligations 

and to verify that the pledged assets actually exist, are sufficient, 

and are available to the federal government. They have to know 

that a particular financial document is what it purports to be and 

to understand and to assess the different types of collateral, such 

as stocks and real estate located anywhere in the United States. 

It is not clear if and how often federal contracting officers receive 

specific training to understand and to perform the needed tasks of 

examination concerning individual sureties. Documents of federal 

agencies suggest that there are occasions when federal contracting 

officers may not have a complete understanding of what is required 

of them to safeguard taxpayers and small businesses from individual surety fraud. The Financial Management Service of the U.S. 

Department of Treasury issued a ‘‘Special Informational Notice to 

All Bond-Approving (Contracting) Officers’’ 1 on February 3, 2006, 

still posted at http://www.fiscal.treasury.gov/fsreports/ref/ 

suretyBnd/special—notice.pdf. This informational notice was directed to federal contracting officers to remind them of the applicable FAR requirements governing individual sureties. Specifically, 

the notice, a copy of which is attached to this testimony, states in 

part: 

‘‘Although FMS is not substantively responsible for approving 

individual sureties, we believe it prudent to issue this Special 

Informational Notice on a FYI basis to Agency Bond-Approving 

(Contracting) Officers who do have that responsibility under the 

FAR. 

Recently, FMS has been made aware of instances where individual sureties are listing corporate debenture notes and other 

questionable assets on their ‘Affidavit of Individual Surety’, 

Standard Form 28. In some instances, the individual sureties 

used a form other than the Standard Form 28 as their affidavit.’’ 

Likewise, the U.S. Department of the Interior issued a notice to 

its contracting officers in 2009 to remind them of FAR requirements associated with acceptance of individual surety bonds. This 

notice, titled ‘‘Department of the Interior Acquisition Policy Release 

(DIAPR) 2009–15,’’ states that the Department of the Interior OfSBREP-219 with DISTILLER

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2 United States. Department of the Interior. ‘‘Department of the Interior Acquisition Policy Release (DIAPR) 2009–15’’. September 8, 2009. 

fice of Inspector General conducted an investigation of contracting 

personnel practices concerning individual sureties and found concerns.2 Specifically, the release, a copy of which is attached to this 

testimony, states in part: 

‘‘The investigation identified several areas of concern that require our attention. There is concern that Contracting Officers 

(COs) are: (1) unfamiliar with the FAR requirements for individual surety; (2) accepting individual surety bonds without 

knowing or verifying the assets backing the bonds; (3) not vetting questions about individual surety bonds through the DOI 

Office of the Solicitor; and (4) not verifying individual sureties 

against the General Services Administration’s Excluded Parties 

List System.’’ 

If a contracting officer fails to perform adequately the necessary 

investigation of an individual surety, and the individual surety 

pledges assets that do not exist, are insufficient, or are not readily 

convertible into cash to pay the obligations of the defaulted general 

contractor, everyone on the project from the contracting agency on 

down is left unprotected and at risk for financial loss. If the assets 

pledged to support the bonds are uncollectible, unpaid subcontractors and suppliers protected by the bond, many of which typically 

are small businesses, will suffer financial hardship and could, in 

turn, default and become insolvent. 

Examples of Improper Individual Surety Activity 

There is no one place to go to find statistical data on individual 

surety problems because individual sureties typically operate outside of state insurance regulatory structures, despite the fact that 

they are required under almost all state insurance codes to obtain 

certificates of authority to act as a surety insurer from state insurance commissioners. Moreover, the federal government does not require individual sureties writing bonds on federal contracts to furnish proof of licensure or authority to operate in a state jurisdiction 

as a surety insurer. Consequently, little or no regulatory oversight 

may ever be exercised over persons acting as individual sureties on 

federal projects apart from the modicum of scrutiny undertaken, if 

at all, by the federal contracting officer. 

Nonetheless, in recent years, illustrations of individual surety 

problems abound. These situations usually involve individual surety bond assets that turned out to be inadequate, illusory, or unacceptable. One illustration is United States ex rel. JBlanco Enterprises Inc. v. ABBA Bonding, Inc, where, in spite of a March 11, 

2005 cease and desist order from the Alabama Insurance Department, Mr. Morris Sears, doing business as ABBA Bonding, was 

able to submit bonds on a federal contract in Colorado supported 

by an affidavit (Standard Form 28) stating that ABBA Bonding had 

assets with a net worth of over $126 million. Although no assets 

were placed in escrow for the benefit of the government, the U.S. 

General Services Administration accepted the bonds anyway. 

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3Wellers, Jeanette. Written Testimony before U.S. House Committee on the Judiciary Subcommittee on Courts, Commercial and Administrative Law. March 5, 2012. 4 United States. Department of Justice. US Attorney’s Office. Southern District of Alabama. 

‘‘Pennsacola Man Indicted in Government Contract Survey Bond Fraud Scheme’’. June 28, 2012. 5 Richard Korman, Controversial Individual Surety Files for Bankruptcy Protection, ENGINEERING NEWS-RECORD, August 5, 2014 available at: http://enr.construction.com/business—management/finance/2014/0805-Outspoken-Individual-Surety-Files-for-Bankruptcy-Protection.asp? 

JBlanco Enterprises, a small business 8a subcontractor performing 

work on federal contracts, nearly was forced to declare bankruptcy 

as a result of a deficient individual surety bond placed by Mr. 

Sears on a federal project that later proved to have no assets to 

support the bond. Ms. Jeanette Wellers, a principal of JBlanco Enterprises, provided oral and written testimony 3 about this situation 

during a hearing on H.R. 3534. 

Sears eventually sought bankruptcy protection against numerous 

creditors (100+) arising from defaulted bond obligations, including 

protection against bond debts owed to three federal contracting 

agencies. Chief Bankruptcy Judge Margaret A. Mahoney, U.S. 

Bankruptcy Court, Southern District of Alabama held that Sears 

had ‘‘knowingly made misrepresentations regarding collateral he 

pledged in support of surety bonds.’’ 4 Judge Mahoney also found 

that Sears falsely stated that the real estate had not been pledged 

to any other bond contract within three years prior to the execution 

of any Affidavit and that Sears made misrepresentations to numerous agencies. Thus, the Bankruptcy Court determined that the 

Sears’ debts to the government were nondischargeable. His false 

statements then formed the basis of a criminal indictment against 

Sears, who died while undergoing criminal prosecution in the U.S. 

District Court for the South District of Alabama. 

In another example, Edmund Scarborough, the owner of IBCS Fidelity, another individual surety, filed for bankruptcy in Tampa, 

Florida. IBCS issued countless individual surety bonds on federal, 

state, and private construction projects using suspect assets. In his 

bankruptcy petition, Scarborough listed $4.5 million in assets and 

$16.2 million in liabilities; IBCS had used a speculative commodity, 

mined coal waste, which it valued at $191 million, to back its individual surety bonds. That mined coal waste was valued at $120,000 

in the bankruptcy filing.5

The above individuals operated nationally and across state 

boundaries, victimizing public and private entities, small construction businesses, and businesses of all sizes. These examples, unfortunately, are not isolated instances. Other examples exist, both 

past and present, showing where individual surety bond assets 

proved illusory, uncollectible, or deficient. More businesses, many 

of whom are likely to be small businesses, will be victimized unless 

Congress acts to correct these flawed requirements, which permit 

unscrupulous individuals, many with criminal, personal insolvency, 

and tax lien histories, to issue worthless surety bonds on taxpayerfunded federal construction contracts. 

Common-Sense Legislative Solution 

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Legislation like H.R. 3534, H.R. 776, and H.R. 838 are simple, 

common-sense legislative solutions that will eliminate opportunities for fraud by mandating that real assets be placed in the care 

and custody of the contracting authority. These bills require individual sureties to pledge solely those assets defined as eligible obligations by the Secretary of the Treasury. An eligible obligation is 

a public debt obligation of the U.S. Government and an obligation 

whose principal and interest is unconditionally guaranteed by the 

U.S. Government, such as U.S. Treasury bills, notes, and bonds, 

certain HUD government guaranteed notes and certificates, and 

certain Ginnie Mae securities, among other federally guaranteed 

securities. These safe and stable assets then are provided to the 

federal contracting authority, which will deposit them in a federal 

depository designated by the Secretary of the Treasury, ensuring 

that pledged assets are real, sufficient, convertible, and in the 

physical custody and control of the federal government. This is 

nothing more than what now is statutorily required of contractors 

who wish to pledge collateral as security on a federal contract in 

lieu of a surety bond. 

If enacted, it would eliminate the gamesmanship and opportunities for fraud endemic in the current regulatory system governing 

individual surety bonds and pledged assets and will remove a considerable administrative burden from federal contracting officers. 

Federal contracting officers no longer will need to assess a range 

of pledged assets, as all pledged assets will be limited to assets unconditionally guaranteed by the federal government; they simply 

will need to gain custody over the asset to deposit the asset in a 

federal depository, such as the Federal Reserve Bank, St. Louis. 

The asset will be released upon successful performance of the bonded obligation, with any accrued interest inuring to the benefit of 

the individual surety pledging the government-backed asset. 

Construction businesses working on a construction project—either as subcontractors, suppliers, or workers on the job—have no 

control over the prime contractor’s choice of security provided to 

the federal government, but they suffer the most harm financially 

if the provided security proves illusory. The impact is particularly 

acute on small construction businesses, which may not have the 

strength to weather a significant disruption to their cash flow. Passage of legislation like such as H.R. 838 will mean that contracting 

agencies and the numerous subcontractors and suppliers on federal 

construction projects, in the event of a performance or payment default will know that adequate and reliable security is in place to 

guarantee that they will be paid for their valid claims. 

Increase the Guarantee to 90% for Surety Companies in 

SBA Program 

Background 

The U.S. Small Business Administration’s (SBA) Surety Bond 

Guarantee Program (Program) was created to ensure that small 

and emerging contractors who do not qualify for surety credit in 

the standard market have the opportunity to bid on public construction work, grow their businesses and remain a viable part of 

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the U.S. economy. Small businesses must have access to these 

bonds to obtain federal construction contracts after a certain dollar 

threshold, and the Program assists them in obtaining these bonds. 

As the Program has evolved, there are two plans under which 

sureties can participate in the Program. The Prior Approval Program (Plan A) was the original SBA bond guarantee program. In 

this Program, the surety must obtain SBA approval for each bond 

prior to writing the SBA guaranteed bond. The SBA maximum indemnification of the surety’s loss as a result of a bond claim in 

Plan A is 80%, and 90% for bonds written for socially and economically disadvantaged contractors and bonds written for contracts 

under $100,000. The second program is the Preferred Surety Bond 

Program (Plan B). Under this plan, sureties apply to participate, 

submitting information up front on their underwriting practices 

and financial strength. Once a surety becomes a participant in Plan 

B, it is given an aggregate limit of bonds that it can write within 

the Program. As long as the surety complies with all of the requirements of Plan B, all bonds written within the Program qualify for 

reimbursement of losses. The SBA does not review or approve each 

individual bond before it is written and the guarantee attaches. In 

Plan B the surety receives a maximum 70% indemnification. 

Enhancements to Program 

Over the years, the Program has gone through several enhancements to increase participation and remove burdensome regulatory 

requirements. For example, a provision in the 2013 National Defense Authorization Act (NDAA) increased the guarantee limit from 

$2 million to $6.5 million to align the Program with the simplified 

acquisition threshold and with the needs of other SBA small business contracting programs, such as the 8a Minority Small Business 

and Capital Ownership Development Program. Additional reforms 

will provide greater enhancement opportunities for small businesses and to ensure participation from sureties. 

Legislative Recommendation 

NASBP and SFAA recommend amending Section 411(c)(1) of the 

Small Business Investment Act of 1958 (15 U.S.C. 694b(c)(1)) by increasing the guarantees afforded to surety companies that participate in the Program from 70% to 90%. This revision will likely 

stimulate greater corporate surety and surety bond producer participation, providing access to the corporate surety markets to 

small businesses which otherwise do not qualify for surety credit 

in the standard market. These small businesses are often the ones 

that may turn to unlicensed individual sureties, where they can be 

duped by unscrupulous persons seeking vulnerable businesses and 

offering surety credit to anyone, regardless of the firm’s qualifications, financial wherewithal, or experience, and at rates many 

times higher than the filed rates charged by corporate surety markets. 

No Added Cost to the Government or Risk to Taxpayers 

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According to the 2014 House Small Business Committee Report 

(REPT. 113–462, Part 2, pgs. 5–6) the Congressional Budget Office 

(CBO) ‘‘estimates that implementing this change would not have a 

significant effect on discretionary spending because we expect the 

agency would raise fees to cover any additional costs arising from 

the higher guarantee percentage. Enacting such legislation would 

not affect direct spending or revenues; therefore, pay-as-you-go procedures would not apply.’’ 

According to the SBA Office of Surety Guarantees, increased liability to the government does not seem to be a significant issue. 

Under the 2009 American Recovery and Reinvestment Act (ARRA), 

the SBA issued 218 final surety bonds for a contract value of $663 

million, which resulted in only two defaults. The National Defense 

Authorization Act for Fiscal Year 2013 increased the eligible contract amount to $6.5 million, and up to $10 million with a Federal 

contracting officer’s certification that the guarantee is necessary for 

the small business to obtain bonding. Since the increase in contract 

size amount, SBA has guaranteed over 170 total bonds with a contract value of over $500 million, which have resulted in no defaults. 

Conclusion 

NASBP and SFAA appreciate the opportunity to provide the 

Committee with information about the compelling need to enact 

legislation such as H.R. 838: (1) to protect taxpayer funds and construction businesses performing as subcontractors and suppliers on 

federal construction contracts and (2) to provide small businesses 

with greater access to regulated surety markets through the SBA 

Surety Bond Guarantees Program. NASBP and SFAA hope this 

statement proves beneficial and welcomes any inquiries from the 

Committee on the points raised in this written testimony or on 

other matters pertinent to small businesses and surety bonding. 

Æ 

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