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[Senate Hearing 108-610]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 108-610

                 DOE CONTRACTING WITH SMALL BUSINESSES

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   to

RECEIVE TESTIMONY REGARDING DEPARTMENT OF ENERGY CONTRACTING WITH SMALL 
                               BUSINESSES

                               __________

                              MAY 18, 2004

                       Printed for the use of the
               Committee on Energy and Natural Resources

                                 ______

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma                JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho                DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming                BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee           RON WYDEN, Oregon
LISA MURKOWSKI, Alaska               TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri            MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana                EVAN BAYH, Indiana
GORDON SMITH, Oregon                 DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky                CHARLES E. SCHUMER, New York
JON KYL, Arizona                     MARIA CANTWELL, Washington

                       Alex Flint, Staff Director
                   Judith K. Pensabene, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                 Pete Lyons, Professional Staff Member
                          Jon Epstein, Fellow

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     7
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Kerry, Hon. John F., U.S. Senator from Massachusetts.............     2
McSlarrow, Kyle E., Deputy Secretary, Department of Energy.......     7
Nazzaro, Robin M., Director, Natural Resources and Environment, 
  Department of Energy...........................................    16
Snowe, Hon. Olympia J., U.S. Senator from Maine..................     5
Sullivan, Ann, on Behalf of Women Impacting Public Policy........    39
Thompson, Robert, Chairman, Energy Communities Alliance..........    42
Woodard, Dr. Joan B., Executive Vice President and Deputy 
  Director, Sandia National Laboratories.........................    33

                               APPENDIXES

                               Appendix I

Responses to additional questions................................    53

                              Appendix II

Additional material submitted for the record.....................    61

 
                 DOE CONTRACTING WITH SMALL BUSINESSES

                              ----------                              

                         TUESDAY, MAY 18, 2004

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:15 a.m. in 
room SD-366, Dirksen Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

          OPENING STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. We're going to try very hard to accommodate 
the witnesses for the main principal issue that's before us. 
But I would ask everybody that is a witness to keep their 
statements brief, and try to make the point that they want to 
make about this hearing.
    This hearing of the Energy Committee on Small Business 
Contracting at the Department is now in order. Prior to fiscal 
year 2000 the Department of Energy reported its small business 
contracting, the performance of that, by including the 
performance of its labs, and the sites of its statistics.
    In 2000 the DOE agreed with the Office of Federal 
Procurement Policy of OMB to stop counting contracts issued by 
the labs and sites in these statistics. This seemingly simple 
change in accounting is having a very serious number of 
effects. This hearing should help us understand the 
implications of this change.
    On the one hand no Senator has pushed as hard as I have for 
DOE labs to excel in their small business contracting 
performance. Frankly, aside from a few major issues with 
reference to advance activities at Sandia I've spent as much 
time with them, and with people in my state on small business 
coming out of the laboratories, as any other issue.
    I want small business to be used wherever it makes sense in 
all the Department's activities. One of the purposes in holding 
this hearing is to assure the small businesses are seeing real 
growth in their opportunities throughout the Department 
activities.
    But when one of the consequences of this recent change is 
to discourage labs from expanding their small business 
contracting, and actually tell them to decrease their small 
business contracting then I fear that something is going wrong.
    That's not the only concern with the change. It would 
encourage activities at a site to be run by lots of small 
businesses all with separate DOE contracts. This would be a 
major change for the single, overall, site management contract 
that we have today. I have difficulty believing that it's wise 
to rely on the Department to coordinate and integrate all these 
small activities to assure that the Department's mission are 
complied with maximum attention to safety and security.
    I hope witnesses can address this complex issue in as 
simple a way as possible, and we can better understand how to 
optimize the use of small business in the Department.
    Now I would yield to Senator Bingaman for opening remarks, 
and then we'll have the Deputy Secretary of Energy as the first 
witness.
    Senator Bingaman.
    [The prepared statements of Senators Kerry and Snowe 
follow:]

        Prepared Statement of Hon. John F. Kerry, U.S. Senator 
                           From Massachusetts

    Mr. Chairman, I would like to thank you for the opportunity to 
address the issue raised today before the Senate Committee on Energy 
and Natural Resources, the allocation of Federal prime contracts to 
small businesses by the U.S. Department of Energy. As the Ranking 
Member of the Senate Committee on Small Business and Entrepreneurship, 
I have heard from many small businesses about the importance of 
reserving prime contracts for small business participation and limiting 
the practice of contract bundling. Contract bundling and the use of 
super-sized contracts, such as those utilized in the Department of 
Energy's maintenance and operation (M&O) contracts, have precluded many 
small businesses from bidding on Federal contracts. This anti-
competitive structure cost this nation's small businesses approximately 
$4 billion in contracts in FY2003.
    Mr. Chairman, these are not ``mom and pop shops'' or corner stores. 
These are successful businesses that have anywhere from 10 to 499 
employees. These are businesses that create jobs, are more likely to 
make new hires, more likely to invest in new technologies and capital 
improvements, exactly what our nation's economy demands in order to 
recover from our current downturn.
    Lack of small business participation not only adversely affects the 
success of those excluded small businesses, but eliminates the 
diversity among suppliers of goods and services needed by the Federal 
government. This increases long-term costs for the government, and 
limits innovation and limits the development of new technologies. 
Further, limiting the availability of competitive contracts to small 
business is contrary to public law and the policies of the Federal 
government.
    The Small Business Act, 15 U.S.C. 631, et seq., states policy of 
Federal government is to ``aid, counsel, assist, and protect, insofar 
as is possible, the interests of small-business concerns in order to 
preserve free competitive enterprise, to insure that a fair proportion 
of the total purchases and contracts or subcontracts for property and 
services for the Government (including but not limited to contracts or 
subcontracts for maintenance, repair, and construction) be placed with 
small business enterprises, to insure that a fair proportion of the 
total sales of Government property be made to such enterprises . . .'' 
To ensure that small firms receive their fair share of Federal 
contracts, the law creates specific goals for small business 
utilization. Section 15(g) of the Small Business Act, 15 U.S.C. 644, 
states, ``The Government-wide goal for participation by small business 
concerns shall be established at not less than 23 percent of the total 
value of all [prime contract] awards for each fiscal year.''
    According to the most recent Small Business Administration annual 
report on Small Business Utilization, the Department of Energy reported 
that only 4.08 percent of all of its contracts were allocated to small 
businesses as prime contractors in FY 2003, the lowest level of all 
fifteen Executive Departments. This poor performance is greatly due to 
the contracting structure in which multiple and diverse tasks and 
duties are essentially bundled into one contract that is too large for 
small businesses to bid on. According to recent GAO report, more than 
80 percent, approximately $18.2 billion of the total $21.6 billion of 
Department of Energy contract dollars, are spent on 37 large contracts 
for the Management and Operation of DoE research facilities.
    I applaud DoE Secretary Spencer Abraham, my former colleague on the 
Senate Committee on Small Business and Entrepreneurship, for 
implementing higher small business goals and for his leadership in 
urging Offices within the Department to ``breakout'' portions of their 
contracts capable of being performed by small firms. However, more work 
still needs to be done to ensure that the Department of Energy makes 
consistent progress towards full compliance with the Small Business Act 
requirements.
    In 1999, during the debate on the DoE's compliance with the 23 
percent government-wide goal for small business contracting, then-
Chairman Kit Bond and I sent a letter to the Office of Federal 
Procurement Policy encouraging the prime and subcontracting achievement 
numbers to remain separate. I have enclosed a copy of this letter for 
your review. In 1999, the Office of Federal Procurement Policy decided 
that the Department of Energy's M&O, M&I and ERMC contractors should be 
counted toward the Agency's small business subcontractor goals, not 
their prime contracting goal. Mr. Chairman, I continue to believe that 
that approach is best for small businesses and for the country and urge 
the Department of Energy to continue and expand their efforts to fully 
utilize small businesses as prime contractors.
    The Department claims that its mission contains four main elements: 
energy, nuclear weapons stockpile, environmental management and 
science. In testimony before this Committee Dr. Martha Krebs, former 
Director of the Office of Science at the Department of Energy stated, 
``contractors for these Laboratories must have the capacity to attract 
and lead the best scientific and engineering talent our nation can 
muster.'' Mr. Chairman, that is why I urge the Department of Energy to 
redouble its efforts to increase the number and dollar amount of prime 
contracts made available for competition to small businesses. Mr. 
Chairman, let us not lose sight of the fact that although the 
Department does manage a great deal of sensitive research with nuclear 
and national security implications, it is the second largest Agency in 
the Federal government and requires the same support services needed by 
all agencies to maintain day-to-day activities. There is no reason 
these contracts should not be made available for small businesses to 
compete.
    In addition to the traditional goods and services provided by small 
firms and utilized by every government body such as office supplies, IT 
and telephony services, building maintenance, and landscaping, 
successful programs such as the Small Business Innovation Research 
(SBIR) and Small Business Technology Transfer programs have 
demonstrated that small firms are important contributors of innovative 
science research and technology, as well as environmental remediation.
    According to the Science and Engineering Indicators released by the 
National Science Foundation in 2004, the private, for-profit sector is 
by far the largest provider of Science and Engineering employment. In 
1999, approximately 73 percent of individuals working as scientists and 
engineers who had bachelor's degrees and 62 percent of persons who had 
master's degrees worked for private, for-profit companies. 
Approximately one third of these individuals are employed in sectors 
other than large firms or academics. The current M&O contracting 
structure places a great emphasis on the relationship between research 
institutions housed at prominent Universities and large corporations 
responsible for the DoE's 37 laboratories, essentially ignoring one 
third of the scientists and researchers that are housed in the nation's 
innovative small firms.
    The National Science Foundation has also reported that many of the 
new technologies and industries seen as critical to the Nation's future 
economical growth are closely identified with small business. The 
Foundation describes biotechnology and computer software as industries 
built around new technologies that were largely commercialized by small 
business. The report on Science and Engineering Indicators specifically 
states that ``small business retains certain advantages over large 
businesses in commercial environments characterized by fast-moving 
technologies and rapidly changing consumer needs.'' Among the 
advantages that small businesses offer to the Federal government, and 
specifically to the Department of Energy, are the kind of speedy, 
innovative research, use of new technologies and cost savings that are 
essential to ensure that this country remains at the forefront of 
science and technology.
    Similarly, in the area of environmental remediation, Mr. Chairman, 
there are a number of small firms with a long history of successfully 
performing such work for other Federal agencies, such as the Army Corps 
of Engineers. These small firms should be afforded the opportunity to 
compete for environmental management contracts at the DoE's 37 research 
facilities.
    One such example is a company located in California and working in 
my home state of Massachusetts, Environmental Chemical Corporation 
(ECC), the lead management contractor for the Massachusetts Military 
Reservation on Cape Cod, one of the Army's highest profile and most 
sensitive sites. ECC is a small firm that has been awarded repeat 
business based on excellent performance. Small businesses also perform 
challenging and high hazard work in D&D of Army ammunition plants 
cheaper and faster than large business. The Army's largest 
environmental contracts (the Total Environmental Restoration Contracts) 
and the Navy's largest environmental contracts (Comprehensive Long Term 
Environmental Actions-Navy) have been performed by small businesses. 
The Army is not the only Federal agency that has confidence in the 
abilities of small firms to perform sophisticated environmental 
remediation projects. The Environmental Protection Agency allocated 
approximately $155.5 million, over 13 percent of its overall prime 
contracting dollars, to small businesses in FY 2003 environmental 
consulting contracts. The DoE itself has sought competent environmental 
remediation (ER) contractors over the past 18 months and has found that 
there were highly qualified small business teams for each one: Los 
Alamos ER, Portsmouth ER, Paducah ER, Portsmouth Site Services, Paducah 
Site Services, Fast Flux Test Facility, Columbus Closure, and 
Nationwide ER and Demolition and Decontamination (D&D). The expansion 
of this effort throughout the Agency will dramatically increase the 
share of contracts being made available for small firms as prime 
contractors and help DoE attain their increasing small business goals.
    Mr. Chairman, the Department also claims that allowing them to 
count subcontracts allocated through a M&O contract toward their prime 
contracting goal would simply return their practice to that permitted 
by the Office of Federal Procurement Policy prior to its 1999 decision. 
What gets lost in this argument, however, is the fact that this 
reporting structure was implemented in 1991 on the grounds that M&O 
contractors had a close relationship with the Department and were 
subject to the protections and requirements described in the Federal 
Acquisition Regulations (FAR). However, as the relationship between the 
M&O contractors and DoE changed, the 1999 decision changing the policy 
governing the counting of small business utilization became necessary. 
M&O contractors are simply not that closely aligned with the policies 
and procedural guarantees of the Department any more. While the 
Department allows GAO protests by prime contractors, it does not allow 
such protests to be made against an M&O contractor by a subcontractor. 
While there are dispute resolution procedures available for prime 
contractors, none exist within the DoE for disputes between M&O 
contractors and their subcontractors. The DoE accepts no liability for 
actions taken by an M&O contractor. Clearly, DoE and the M&O 
contractors have not returned to their close, pre-1999 relationship, so 
why should the small business utilization policy based upon that 
relationship?
    Mr. Chairman, I have been asked by many of my colleagues, ``why 
does it matter if a small business receives a prime contract or a 
subcontract? If the small firm gets the work, that is all that matters, 
right?'' The answer to this question is no. There are three major 
differences between prime contracts and subcontracts.
    First, prime contractors maintain a greater level of oversight and 
control over the performance of the contract, and therefore of their 
own business. The harsh reality of today's subcontracting arena is that 
the prime contractor makes the rules, and because the subcontractor 
does not have a direct contract with the Agency, they are beholden to 
the prime contracts. In the Senate-passed SBA Reauthorization 
legislation, S. 1375, the Committee on Small Business and 
Entrepreneurship addressed many of the issues affecting small business 
subcontractors, including the practice of bait and switch and the 
failure of prime contractors to promptly pay their subcontractors. Even 
with these attempts to resolve the inequities faced by subcontractors, 
it is clear that there is no substitute to being the prime contractor 
and being in control of the performance of the contract.
    Second, more often than not, Federal agencies receive a better 
value by allowing small businesses to compete for prime contracts. When 
a large business receives a contract and simply turns around and awards 
subcontracts to small businesses to perform the tasks, they are 
essentially charging a premium on top of the actual cost of 
performance. As Federal contracts get larger and larger, fewer 
businesses are able to compete for these contracts. This stifling of 
competition eventually leads to higher prices and inadequate supplies.
    Third, prime contractors receive a record of ``past performance'' 
with the agency with which it is doing business. This past performance 
provides a record of the quality and timeliness of work performed under 
a contract that is used to leverage other similar contracts with the 
Federal government. When performing a subcontract, small businesses do 
not receive this past performance record from the Federal government, 
and regardless of the quality and timeliness of the service, a 
subcontractor cannot leverage that service into additional contracts.
    Mr. Chairman, I thank you for the opportunity to express my support 
for small businesses and their desire that the Federal government use 
them as prime contractors to the maximum extent possible. As Senator 
Bond and I have expressed five years ago, the Department should fully 
comply with the Small Business Act and therefore, should report its 
contracting goals and achievements in the same manner and on the same 
basis as all other agencies of the Government: prime contracts as prime 
contracts and subcontracts as subcontracts. Enacting a policy contrary 
to this would undermine the validity of the Government-wide statistics 
used to monitor the Federal government's progress in small business 
utilization. This would jeopardize the government's efforts to expand 
its supplier base, to promote economic growth and innovation, and to 
create jobs by fostering competition by small businesses.
    Secretary Abraham has made some steps in the right direction on 
these issues and I urge him to stay the course, and if possible, speed 
up the projected twenty-year effort to reach the 23 percent goal. As 
Ranking Member of the Senate Committee on Small Business and 
Entrepreneurship, I offer the Secretary our Committee's support and 
assistance in that effort, and I request that the Senate Committee on 
Energy and Natural Resources do the same. By doing so, we will 
simultaneously help DOE achieve its mission, encourage cost-
effectiveness and innovation, and foster the growth and success of 
high-performing small businesses, our nation's biggest job creators.
    Thank you.
                                 ______
                                 
  Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator From Maine

    Chairman Domenici, Ranking Member Bingaman, and Members of the 
Committee, thank you for the opportunity to express my views as Chair 
of the Senate Committee on Small Business and Entrepreneurship on the 
vital subject of small business contracting at the Department of 
Energy.
    It is undisputed that government procurement is a core operational 
function of the Department of Energy (DOE). With over 90% of its budget 
spent on contracts, DOE is a leader among Cabinet departments in terms 
of agency-wide contracting activity. In monetary terms, DOE prime 
contract awards in FY03 amounted to over $19 billion. For these 
reasons, whether small businesses have a fair and meaningful 
opportunity to compete for the DOE contracting dollars is critical both 
to the economic growth of this country and to the integrity of small 
business policies adopted by Congress.
    The DOE's small business contracting goals--a crucial indicator of 
fair and meaningful access--are negotiated by the Department and the 
Small Business Administration, and set forth in accordance with the 
statutory requirements of the Small Business Act. Thus, small business 
contracting goals are a matter under the jurisdiction of the Small 
Business Committee. The specific application of these Small Business 
Act goals at the Department of Energy has been a subject of my 
Committee's continuing interest for a number of years.
    It is worth noting that the DOE only recently began working towards 
compliance with the small business goals. Originally, the Department 
inherited its prime contracting model from peculiar World War II-era 
arrangements concluded by President Harry Truman and a small group of 
American industrialists and academics for the development of the atomic 
bomb in wartime conditions. Under this model, the prime contractors 
managed the laboratory research sites as surrogates for the government, 
the prime contractors' procedures for subcontract awards had to conform 
to the ``federal norm'' of acquisition laws, and subcontract awards 
were protestable to the General Accounting Office (GAO). Citing that 
unusual closeness between the government and the prime contractors, 
also known as Management & Operating contractors, the Office of Federal 
Procurement Policy (OFPP) permitted the DOE to exclude the M&O awards 
from the Small Business Act goals.
    In the mid-1990s, the legal relationship between the DOE and its 
prime contractors fundamentally changed through a series of regulatory 
amendments distancing the DOE prime contractors from the government. In 
September 1999, Chair and the Ranking Member of the Small Business 
Committee advised the OFPP that such changes no longer justified 
counting subcontracts towards DOE's small business prime contracting 
goal. Indeed, during the 1990s the American economy experienced an 
explosive growth of knowledge- and service-based small business sectors 
inconceivable during World War II. The OFPP accepted the Committee's 
advice, and I believe that the Committee's analysis and the capacity of 
America's small business remain sound today.
    It must also be noted that the Department was able to negotiate a 
20-year plan to reach the 23% goal in light of its unusual historical 
contracting structure. Even though the DOE still has a long way to full 
compliance, some have already questioned the necessity of such 
compliance in light of various program management issues at the 
Department. For example, concerns have been raised that the need to 
compete and manage an increased number of prime contracts would 
exacerbate the weaknesses of the DOE acquisition system. It has been 
pointed out by the General Accounting Office (GAO) that the DOE 
procurements may be vulnerable to waste, fraud, and abuse. 
Consequently, the DOE's competence to handle additional contracting 
work has been questioned. Some have also alleged that small businesses 
cannot be trusted to keep our Nation's energy secrets or to be 
effective team players with other contractors. Yet another concern has 
been the weak accountability links between small businesses and the DOE 
contracting officials in Washington, as well as the blurring of 
accountability lines at the sites. Finally, it has been argued that 
small businesses would prefer to deal with ``simplified'' 
subcontracting procedures of the large prime contractors rather than 
immerse themselves into the highly regulated world of direct federal 
procurement.
    I agree that a number of these program management concerns deserve 
Congressional attention and applaud the Energy and Natural Resources 
Committee for convening the hearing to address them. However, as Chair 
of the Small Business Committee, I am firmly convinced that small 
business prime contractors are not a hindrance to good government and 
sound management. Abandoning our commitments to open federal 
procurement to small business is not the answer to the DOE's actual or 
potential management woes. Instead, we should support the dedicated 
acquisition professionals at the Department of Energy by providing 
resources for additional training and hiring. If necessary, Congress 
should also strengthen the capacity of the DOE's Offices of Small and 
Disadvantaged Business Utilization and of Inspector General, as well as 
to direct the GAO to assist the DOE with devising better acquisition 
processes. It is altogether foreseeable that a sizable portion of 
budgetary requirements for internal improvements of the Department's 
procurement system could be realized from redirecting the expenditures 
for overhead costs currently paid out by the Department to its prime 
contractors for developing and administering their subcontracting 
plans.
    Any strain on the DOE could be further lessened by acquisition 
tools and services widely used throughout the Federal government. Some 
of these tools, such as the small business government-wide acquisition 
contracts (GWACs) and the various acquisitions vehicles of the General 
Services Administration, are designed precisely to reduce 
administrative burdens on the buyers. Other tools, such as small 
business teaming agreements, could be utilized to increase the ability 
of small business to compete for contracts with higher dollar values. 
The Small Business Committee stands ready to work with the Energy 
Committee on improving the acquisition practices and procedures at the 
DOE.
    Moreover, the apprehensions that small businesses are not suitable 
to work in operationally complex or security-sensitive environments do 
not appear to be well-justified. Today's small businesses are 
successfully competing for projects from the Advance Research Projects 
Agencies at the Departments of Defense and Homeland Security, for 
funding from the Technical Support Working Group, for work in support 
of military operations overseas, and for a variety of services to 
civilian agencies at home. The security needs of the Departments of 
Defense and Homeland Security are at least as great as those of the 
Energy Department. Yet, those agencies are far ahead of the DOE in 
terms of compliance with the Small Business Act. The collective 
experience of the DOD and the DHS teaches us that if appropriate prime 
contracting opportunities appear at the DOE, qualified and responsible 
contractors from the ranks of small, disadvantaged, women-owned, 
HUBZone, or veteran-owned businesses would want to participate in the 
bidding process. There seems to be little reason for allowing small 
businesses to work on military bases or to develop countermeasures for 
weapons of mass destruction while refusing small businesses the chance 
to work at the government-owned DOE facilities.
    Other concerns implicating contractor accountability and nationwide 
contract administration may be addressed through a combination of 
technology, special contract clauses, and reengineering of DOE 
operations. Finally, ``simplified'' subcontracting awards made by prime 
contractors are exempt from review through the debriefing process 
established in the Federal Acquisition Regulation for competitive 
procurements or through the bid protest process of the GAO and the U.S. 
Court of Federal Claims. Thus, prime contractors are simply not 
accountable to bidders for small business subcontracts in the way that 
the DOE is accountable to bidders for prime contracts.
    Indeed, the 23% prime contracting goal in the Small Business Act 
was premised on the recognition that expanding competitive 
opportunities for small, small disadvantaged, women-owned, HUBZone, or 
veteran-owned businesses stands to provide multiple benefits to these 
bidders, to the procurement system, and to the United States as a 
whole. These benefits include strengthening of the industrial base, 
increasing innovation, and greater accountability in the awards 
process. The economics of competitive small business acquisitions would 
generate better value and lower prices for the government's needs than 
non-competitive subcontracting awards, and competitive forces reduce 
the potential for improper favoritism or the appearance of improper 
favoritism. At the same time, market forces would also ensure that the 
work best performed locally is performed locally despite nationwide 
advertising for small business prime contracts. As Chair of the Small 
Business Committee, I look forward to examining the impact of DOE 
contracting policies on small business and to collaborating with 
Chairman Domenici and the Committee on Energy and Natural Resources on 
solutions benefiting both good government and small business. For the 
sake of American taxpayers and American jobs, Congress should continue 
its work to provide small businesses with meaningful access to prime 
contracting dollars at the Department of Energy.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Thank you very much, Mr. Chairman. I 
agree with you, I think we're all committed to small business 
and to Federal efforts to promote small business. As I 
understand it, the issue that this hearing is mainly focused on 
is the question of how the Department of Energy small business 
contracts, and those of its management and operations 
contractors, count toward the goal that has been set. I think 
that's the main issue, and how we should calculate the efforts 
as progress toward that goal.
    I know this is very important to small business, it's also 
very important to the laboratories and affected communities, 
and to the Department. So I look forward to hearing from the 
witnesses, and I hope we can come up with a way to resolve the 
issue.
    Thank you.
    The Chairman. Thank you very much.
    Now we'll ask the Deputy Secretary. Your remarks, if you 
have them, that are prepared will be made a part of the record. 
Would you please proceed.

       STATEMENT OF KYLE E. MCSLARROW, DEPUTY SECRETARY, 
                      DEPARTMENT OF ENERGY

    Mr. McSlarrow. Thank you, Mr. Chairman, Senator Bingaman, 
I'm pleased to be here. I will briefly summarize these remarks.
    The Department of Energy awards over $19 billion dollars in 
prime contracts each year. Over 85 percent of that, or over $16 
billion, goes to large facility management contractors who then 
award approximately 50 percent of their subcontracts to small 
business.
    The prime contracts awarded to small business by the 
Department currently represent about 5 percent, or nearly $800 
million dollars of the total procurement dollars at the 
Department.
    In fiscal year 2003 the Department made awards to small 
business totaling $783 million dollars in prime contracts, and 
$3.5 billion dollars in subcontracts. This means that about 20 
percent of our total contract funds are awarded to small 
businesses.
    Our success is the result of the Department's aggressive 
efforts to provide opportunities for small business. We've been 
very successful in getting Federal dollars into the small 
business community, and promoting their full participation in 
our contracting efforts.
    And I know, Mr. Chairman, you mentioned Sandia. I also want 
to echo what you said and applaud how well Sandia, which is 
really a flagship laboratory, has done in promoting small 
business in New Mexico.
    Mr. Chairman, you specifically asked me to comment on the 
changes made during the Clinton administration under which 
subcontracts are no longer counted by the Small Business 
Administration toward meeting our small business goals, even 
though the funds go to small businesses and promote their 
prosperity.
    The Chairman. When was that change made?
    Mr. McSlarrow. 1999.
    The Chairman. And we've been living under that to this day?
    Mr. McSlarrow. We have.
    The Chairman. Proceed.
    Mr. McSlarrow. First this change makes it appear, for 
example, that only 4.1 percent of our contract funds go to 
small businesses, when in reality 23 percent went to small 
businesses through prime and subcontracts in fiscal year 2003.
    Second, to comply with the law we will most likely have to 
award, as prime contracts, some portion of the funds previously 
awarded as subcontracts. This will require us to redirect 
resources to contract administration in order to oversee the 
increased number of contracts.
    I would add that prime contracts are activities other than 
M&O contracts total less than 20 percent of the Department's 
total contracting dollars.
    The Chairman. What does M&O mean?
    Mr. McSlarrow. Management and operating contracts.
    Thus even if we were to award all contracts for activities, 
other than facility management, to small business we would not 
reach the government-wide goal of 23 percent. We would have to 
set aside parts of the facility management contracts for small 
business. And the Department is evaluating whether, and to what 
extent, doing so could entail certain risks and concerns, 
especially with regard to program coherence and integrity in 
our nuclear weapons laboratories and our major science research 
facilities.
    Nonetheless, Secretary Abraham and I remain firmly 
committed to supporting small business. Small businesses are 
the heart of the American economy, they are often the leaders 
of innovation. Whatever scoring methodology is used to assess 
our progress, we will continue to award a significant portion 
of our funds to small businesses across America.
    And Mr. Chairman, I'll stop there, and be happy to answer 
any questions you might have.
    [The prepared statement of Mr. McSlarrow follows:]

      Prepared Statement of Kyle E. McSlarrow, Deputy Secretary, 
                       U.S. Department of Energy

    Mr. Chairman, Members of the Committee, I am pleased to be here 
today to discuss the Department of Energy's efforts to support 
opportunities for small business.
    As President Bush said in his Proclamation of Small Business Week 
last September, ``Small businesses create the majority of new jobs in 
our Nation and account for more than half of the output of our economy. 
They lead the way in generating new ideas and creating new 
technologies, goods, and services for our country and for the world.'' 
In his Proclamation he reaffirmed the Administration's ``commitment to 
helping more small business owners and their employees realize the 
American Dream.''
    Secretary Abraham and I are expanding opportunities for small 
business and have taken numerous measures to promote and increase the 
participation of small business in Department of Energy contracts.
    Most of the Department's contracts are awarded to operate the 
multi-billion dollar nuclear weapons laboratories complex and multi-
billion dollar environmental cleanup programs to resolve the legacy of 
the Cold War and to build the Nation's repository for nuclear waste at 
Yucca Mountain. Large contracts also are awarded for our advanced 
scientific laboratories specializing in genomics, scientific 
supercomputing, fusion energy and nanoscience.
    The Department awards over $19 billion in prime contracts each 
year. Over 85 percent of that (or over $16 billion) goes to large 
facility management contractors who then award approximately 50 percent 
of their subcontracts to small business. The prime contracts awarded to 
small business by the Department currently represent about 5 percent 
(or nearly $800 million) of the total procurement dollars at the 
Department.
    To promote the participation of small businesses, Secretary Abraham 
issued a Policy Statement on ``Supporting Small Businesses in 
Implementing DOE Missions'' on September 23, 2002. This DOE policy 
directs all Departmental elements to examine and seek to expand their 
grant and contract opportunities with small businesses. It also tasks 
the Director of the Office of Small and Disadvantaged Business 
Utilization to prepare a Department-wide comprehensive small business 
strategy to ensure that small businesses are provided the maximum 
practicable opportunity to participate in Departmental programs at the 
prime contract level. Additionally, the Secretary directed the plan to 
include a strategy to increase the level and expand the type of 
subcontracts awarded to small businesses by the Department's facility 
management contractors.
    At the Department of Energy, our small business programs are ably 
led by Theresa Alvillar Speake, Director of the Office of Economic 
Impact and Diversity. This office, which directs all of the 
Department's small business efforts, has developed a 20-year Strategic 
Small Business Plan that includes 14 action items intended to increase 
small business contracting at the Department. The plan establishes 
processes by which the Department reviews each upcoming contract to 
identify opportunities for small business. I would note that since 
relatively few of our major contracts come up for consideration each 
year, several years will be required for us to achieve our goal.
    In accordance with that plan:

   The Department launched a national marketing campaign to 
        inform small businesses about the contracting opportunities 
        available both at the prime and subcontract level. A highlight 
        of our recruiting effort is the annual small business 
        conference, which was held last year in New Mexico. I attended 
        and spoke there. The small business conference is scheduled 
        this year for July 7-9 in Philadelphia. This provides us an 
        excellent forum to present the various contracting 
        opportunities available at DOE.
   DOE sets an annual corporate goal (including prime and 
        subcontracts). The goal for prime contracts has climbed from 
        3.7 percent in FY 2003 to 5.0 percent in FY 2004, and 5.5 
        percent in FY 2005.
   Departmental elements are required to formulate a small 
        business goal for the work they will direct to small business. 
        Each element's progress in meeting its goal is rated on a 
        quarterly basis and reported to senior Department officials. 
        Each element is also responsible for insuring the success of 
        their prime contractors in meeting the subcontracting goals.
   The Department promotes mentor-protege relationships between 
        large business and small business in order to increase the 
        number of small businesses that can successfully compete for 
        DOE awards.
   We have established a small business advisory team, a group 
        consisting of small business trade associations, chambers of 
        commerce, and other federal agencies to provide advice and 
        guidance to our Small Business Office on small business 
        programs and activities.
   DOE components sponsor meetings of small and large 
        businesses to discuss upcoming requests for proposals to 
        encourage the establishment of teams to combine the advantages 
        of small and large businesses, or combine the strengths of 
        several small businesses.
   DOE components also conduct market research before issuing 
        an RFP to identify small businesses with capabilities in 
        specific areas.
   We have created a database of interested small businesses 
        for reference in future contracts.
   We have reduced the documentation that small businesses are 
        required to submit in response to RFPs.
   Additionally, we review all of our large contracts to 
        identify opportunities to break out portions of the work for 
        small business.

    In FY 2003, the Department made awards to small business totaling 
$783 million in prime contracts and $3.5 billion in subcontracts; this 
means that about 20 percent of our total contract funds are awarded to 
small businesses. Our success is the result of the Department's 
aggressive efforts to provide opportunities for small business. We have 
been very successful in getting Federal dollars into the small business 
community and promoting their full participation in our contracting 
efforts.
    You specifically asked me to comment on the recent changes under 
which subcontracts are no longer counted by the Small Business 
Administration toward meeting our small business goals, even though the 
funds go to small businesses and promote their prosperity. The 
statutory requirement is that only small business contracts awarded as 
prime contracts count toward achieving small business goals with a 
government-wide goal for small businesses set by law at 23 percent of 
all contract dollars awarded. Between 1992 and 1999, DOE had an 
excepted status granted by the Office of Federal Procurement Policy 
which enabled us to count subcontracts toward achievement of the 
statutory goal for prime contracts. Since 1999, DOE has not had that 
exception. This has made it appear that only 4.1 percent of our 
contract funds go to small businesses, when in Fiscal Year 2003, the 
most recent year for which data is available, 23 percent went to small 
businesses through prime and subcontracts. Second, to comply with the 
law, we will most likely have to award as prime contracts some portion 
of the funds previously awarded as subcontracts. This will require us 
to redirect resources to contract administration in order to oversee 
the increased number of contracts.
    I would add that prime contracts for activities other than facility 
management total less than 20 percent of the Department's total 
contracting dollars. Thus, even if we were to award all contracts for 
activities other than facility management to small business, we would 
not reach the government-wide small business goal of 23 percent. We 
would have to set aside parts of the facility management contracts for 
small business, and the Department is evaluating whether and to what 
extent doing so could entail certain risks and concerns, especially 
with regard to program coherence and integrity in our nuclear weapons 
laboratories and our major science research facilities.
    Nonetheless, our commitment to small business is strong. We have a 
Strategic Plan to increase small business participation. We are 
continuing to reach out to both small and large businesses to encourage 
them to work together. My office reviews contract awards and strongly 
encourages making awards to small businesses. I personally review 
quarterly performance reports that rate the success of departmental 
components in achieving their small business goals. The Department's 
Associate Deputy Secretary and Director, Office of Small and 
Disadvantaged Business Utilization meet with any components that are 
not meeting their goals and work with these components to make 
improvements. We incentivize our senior executive program managers to 
award contracts to small businesses by including standards on expanding 
small business opportunities in their performance agreements. In 
addition, in the Subcontracting Plans that we establish with our prime 
contractors, we negotiate aggressive goals to utilize small businesses. 
As a result of these actions, we anticipate that we will continue to be 
successful in achieving our small business goals and provide greater 
opportunities to small business.
    On May 12, 2004, Secretary Abraham recognized the outstanding 
achievements of 13 departmental elements and facility management 
contractors for their success in expanding small business participation 
at both the prime and subcontract levels. The Department's Office of 
Fossil Energy received the ``Small Business Breakout Award'' for 
breaking out the largest percentage of requirements from its existing 
facility management contracts to provide prime contracting 
opportunities for small business in the area of construction 
management. Bechtel SAIC Company, LLC was presented with the ``Facility 
Management Contractor Small Business Achievement Award'' for attaining 
the highest percent increase in subcontract awards to small business 
concerns from the previous year--from 39.5 percent in FY 2002 to 65.9 
percent in FY 2003.
    In summary, Secretary Abraham and I remain firmly committed to 
supporting small business. Small businesses are the heart of the 
American economy. They are often the leaders of innovation and the 
creators of new technology, new products and improved business 
processes. Whatever scoring methodology is used to assess our progress, 
we will continue to award a significant portion of our funds to small 
businesses across America.
    Mr. Chairman, and Members of the Committee, this concludes my 
prepared statement. I would be happy to answer any questions you may 
have at this time.

    The Chairman. Senator Bingaman.
    Senator Bingaman. As I understand it, GAO has said that the 
Department of Energy would need to increase its small business 
contracting by about six fold in order to meet this 23 percent 
goal if you don't count the contracting that is done by the M&O 
contractors; is my understanding of that right?
    Mr. McSlarrow. That sounds like the right figure.
    Senator Bingaman. You've got to go from 4 percent to 23 
percent----
    Mr. McSlarrow. Twenty-three percent, and----
    Senator Bingaman. Right. Is that a practical--I mean is 
that achievable in your view? Does it make sense to try to have 
that much of an increase, given the way DOE allocates its 
funds?
    Mr. McSlarrow. I'm not convinced it is achievable. And let 
me just step back for a moment. I think it was in 2002, we 
negotiated a goal, and a plan, with the Small Business 
Administration. It was important to them that we have a plan 
that arrived at 23 percent, which is the Government average 
requirement under the law, at some point.
    They wanted it in 10 years, we came back with twenty. I 
frankly was more focused on the next 3 years, and what those 
goals were, which are challenging enough.
    But we agreed that we would reevaluate this on a year-by-
year basis. It was clear to me that we could make changes, and 
some contracts that were currently part of M&O contracts could 
be broken out. But it has never been clear to me, and I frankly 
don't think we know enough today, to say that we could 
definitely get to a 23 percent figure. That is an awfully large 
figure given how we run our complex, if you're only counting 
prime contracts.
    Senator Bingaman. Is there some particular value--I mean as 
long as the work goes to the small businesses, is there some 
reason why having it do that through the M&O contractors is 
less desirable than having it done directly by DOE?
    Mr. McSlarrow. There's obviously a difference of opinion. 
The small business community itself is divided on this point, 
and I've heard from small businesses on either side. There are 
many people who believe that it is important for small 
businesses to serve as prime contractors with a direct 
relationship to the Federal Government because that provides 
them opportunities down the road in future contracting.
    Others believe that it's unnecessarily administrative in 
terms of the burdens that it puts on the complex. The Small 
Business Administration, and the White House OMB office that 
has the responsibility for this, I think also believes, and I 
think there's some truth in this, that one of the differences 
between subcontracting and prime for small businesses is that 
you will tend to see small businesses around a complex in favor 
of the subcontracting because that site will, in most cases, 
not all, in most cases contract directly in that community. And 
so there's obviously a lot of support there.
    If you do a prime contract it's a national--unless it's a 
set aside--it's a nationally advertised bid, and so you're 
pulling from the Nation as a whole, and my view is that you 
probably need some mixture. I mean you want to have strong 
community-based support in small business, but there are 
opportunities on occasion where it would make sense to have a 
nationally bid prime contract.
    Senator Bingaman. So if we wanted to accomplish the goal of 
getting as much of the work done by DOE at laboratories to 
small businesses in that community, your view is that that goal 
is best served by having much of that contracting done through 
the M&O contractors?
    Mr. McSlarrow. I think if the M&O contractor is in turn 
doing the contracting for small business I think in most cases, 
other things being equal, they will tend to reach out to the 
community, or the state, in which that site is located.
    Senator Bingaman. And they'll do that to a greater extent 
than the Department of Energy itself would be able to, if it 
had to let a prime contract?
    Mr. McSlarrow. I think that's correct.
    Senator Bingaman. That's all I have, Mr. Chairman, thanks.
    The Chairman. Thank you, Senator Bingaman. I think you made 
a very good point.
    Let me ask you a couple.
    First, why did DOE agree to the changed accounting? In the 
past DOE argued that the use of prime contracts for management 
of their major facilities required them to incorporate small 
business subcontracting for those facility managers in their 
small business totals.
    Now the DOE has agreed with SBA's guidance to change the 
accounting practice.
    Why did DOE change its view on this very key question? Did 
DOE fully concur with guidance from the Office of Federal 
Procurement Policy?
    Mr. McSlarrow. Mr. Chairman, I don't know precisely, 
because it happened when now Governor Richardson was Secretary 
of Energy. My understanding is that there was a back and forth 
on this point between DOE and the SBA, and the OFPP, the Office 
of Federal Procurement Policy.
    Ultimately the argument was that unlike in the past when 
M&O contractors were thought to have stood in the shoes of the 
Government such that the next contract would itself be a prime 
contract. Some changes to how the Department did its M&O 
contracts in the late 1990's allowed both the Small Business 
Committee chairman, and ranking member, and the White House and 
the SBA, to conclude that they were more properly categorized 
as subcontracts, which would bring us in line with the rest of 
the Government.
    It was already a fait accompli by the time we came into 
office, although we revisited it because we had some concerns 
about it in 2001 and 2002, and the decision was to treat 
everybody in government the same.
    The Chairman. Well, look, I've spent about three decades in 
the Senate encouraging New Mexico labs to increase their small 
business contracting; you know that, and they know that. Yet 
the GAO notes that the DOE takes steps--that as DOE takes steps 
to increase its own small business prime contracting the 
unintended consequences may be that the facility managers do 
less small business contracting.
    Sandia's testimony even points out that they're receiving 
DOE guidance to reduce their small business contracting.
    What confidence do you have that the net result of the 
current DOE attempts to increase the DOE prime contracting with 
small business will result in a net increase in small business 
work?
    Mr. McSlarrow. I think there are two issues. One in terms 
of the net increase, I have no doubt there's a net increase. I 
mean if you just look at the numbers over the last 3 years, the 
total of the primes and the subcontracts, it's going up. And 
it's gone up about 400 million over the last couple of years. 
So we're proud of the total impact on small business. I don't 
think the policy is hurting small business.
    I do think there's a legitimate issue that was the second 
point you made, Mr. Chairman, about whether or not we're 
exulting form over substance, whether or not we're taking 
something that might have been called a subcontract before, and 
now just simply calling it a prime contact. We may not be, with 
that move, adding to the small business pot. But all our other 
policies, and our small business office that's generating 
recruitment and all of those things, those are adding to the 
pool of small business, and we very much want to continue doing 
do that.
    The Chairman. Well, following up on that, I've been 
critical of the poor management at the Department. From the SSC 
to the NIF concerns have been raised in the past about DOE's 
ability to provide adequate management and oversight of its 
contractors. Your Department has committed to increase small 
business contracting by over $5 billion dollars. That's more 
than the total contracts at Los Alamos and Sandia.
    As a number of prime contracts with the DOE increase DOE 
has to manage these contracts, and DOE must assure effective 
integration of work at each site so that cost, mission, safety 
and security are negatively impacted.
    Does the Department have sufficient staff and skills 
necessary to manage these contracts and oversee the work? And 
what steps is the DOE planning to take to mitigate this 
concern?
    Mr. McSlarrow. I have no doubt that currently we have the 
staff necessary to do what we have done in the last couple of 
years, and for the goals in the next few years that are coming, 
which are aggressive but achievable.
    And for example, Mr. Chairman, we're talking about 5 
percent of the procurement dollars for fiscal year 2004 would 
be prime, and 50 percent of those subcontractor dollars would 
go to small business.
    The 23 percent number, just to repeat, that is not written 
in stone, that is a negotiation that's going to take place 
year-by-year between the Department and the SBA, and if need be 
it will be resolved by the White House.
    That's an important goal in terms of the Government-wide 
average of 23 percent. But as I said before, I do have concerns 
as to whether or not the administrative burden that would be 
required to have that many small businesses managed by the 
Federal Government actually makes sense.
    The Chairman. Well I want to close with just a couple of 
examples. The history of DOE is full of examples where poorly 
specified contracts led to vast escalation. NIF and the 
infamous SSC come to mind as examples. NIF is still ongoing, as 
you know.
    In some recent cases contractors are complaining that DOE 
has not fully specified the work required, or the hazards that 
will be encountered. PIT9 is a classic example of this sort of 
problem, and there are others. GAO has listed ``contract 
management'' in quotation marks, and ``high risk'' areas for 
DOE for the past 14 years.
    So as you break off more work for small business don't you 
run a risk that unexpected problems may strain the capabilities 
that a small business company can bear on the problem? And your 
plans to issue subcontracts to handle the entire environmental 
program at Paducah strike me as having some potential to start 
another PIT9 fiasco, and to potentially strain the capabilities 
of small business.
    Do you worry that putting the complex contracts out to 
small business from DOE may lead to a shortage in the type and 
depth of talent that small business can bring to bear on 
complex unforeseen problems that suddenly arise.
    Mr. McSlarrow. Again, if you're talking about the 
challenges that we have in the next couple of years, and the 
very aggressive goals that we have set out with SBA, I'm 
concerned about it, but I don't actually worry that there's not 
the kind of talent in small businesses.
    It is an interesting point to me that almost every one of 
those fiascos, and I certainly take your point about contract 
management, were large businesses. It is not obvious to me that 
small businesses are inherently worse, and in some ways--and 
particularly in the environmental clean-up arena, we believe 
that actually allows us to be a little bit more nimble, that we 
can cut costs and actually boost performance.
    That's not going to be true in every instance, that's why 
we examine case by case to see if it makes sense to go the 
route of small businesses.
    But I'm certainly not prepared to say across the board that 
small businesses can't not only step up and do the job, but in 
some ways do the job better than a big bureaucracy at a large 
corporation.
    The Chairman. Well, retirement and injury benefits have 
haunted this committee, and what I'm going to ask you about is 
not directly related to the program, and where it should be, 
the argument about whether it should go to labor--I think 
you're working on that Senator Bingaman, and we are too to try 
to come up with an agreement that it would be shifted; is that 
not right?
    Senator Bingaman. That's right.
    The Chairman. But this retirement and benefit system that 
I'm talking about is where large companies serve as facility 
managers. They can handle complex and costly retirement 
systems; I wonder if they can is the question.
    Similarly when workers are found eligible for past 
workman's compensation large companies have the resources to 
step forward. But just one example, in the Paducah field 
hearings the DOE manager first testified that current large 
contractors, Bechtel Jacobs, would handle workers' compensation 
payments of past problems. They said the Paducah contract was 
going to be re-competed only for small business.
    Then when Senator Bunting asked Bechtel Jacobs if they had 
been told they were required to cover past workers' 
compensation payments at the same time that they are losing the 
Paducah contract he added that no such discussion had occurred.
    Discussions like this don't lead me to believe that the 
Department has thought through the implication of massive 
shifts to small business operating as facility managers. If you 
break up portions of the facility management contracts into 
smaller pieces how do you expect to handle retirement benefits, 
or workers who continue on the site? How will we pay the 
workers' compensation, how will it be handled? Will a small 
business contractor take over these liabilities for large 
firms?
    I think that that won't work, and I'd like your 
observation.
    Mr. McSlarrow. In general no one who has to step forward, 
who's a candidate for being awarded a contract like that, can 
pass muster without having to make the case through the request 
for proposal process, that they can do what's necessary on 
pensions--whatever benefits are at issue.
    That's true with the large or small businesses, they've got 
to make that case, and we have to be satisfied. There's usually 
a 5-year period I think in most of our contracts where the old 
pension arrangement still stands, and the new person just pays 
into it. And then after that there might be some changes.
    But that's a concern, and a scrutiny, that we have to bring 
to every awarded contract. I think the case in Paducah is 
probably a unique one, and that I probably shouldn't get into 
because there are so many issues related to the USEC 
Privatization Act that may affect those answers. I'd be happy 
to address that more specifically for the record if that would 
be okay.
    The Chairman. That would be all right.
    I have about six additional questions which I will submit; 
would you answer them--I know you're very busy--answer them as 
soon as you can. They have to do with disagreements among 
institutions and entities as to whether your policy will work, 
and still maintain good jobs and safety and the like--good 
workman-like jobs.
    Okay. Anything else, Senator Bingaman?
    Senator Bingaman. No.
    The Chairman. Let's go to the next panel. You're excused.
    Mr. McSlarrow. Thank you, Mr. Chairman.
    The Chairman. All right, panel two. Just sit wherever you'd 
like, and put your name plate up in front of you.
    Dr. Joan Woodard, Deputy Director of Sandia. Thank you for 
coming, sorry you have to come from so far away.
    Robin Nazzaro, Director of Natural Resources and 
Environment, the U.S. General Accounting Office.
    Ann Sullivan, Federal legislative consultant, Women 
Impacting Public Policy.
    Councilmember Robert Thompson, Energy Communities Alliance 
chairman, from Richland, Virginia.
    Mr. Thompson. Richland, Washington actually, Senator.
    The Chairman. Oh, I'm sorry, Richland, Washington. That's 
where you should be from.
    Mr. Thompson. As always.
    The Chairman. We're going to start over here with you, 
Robin, and move this way.

STATEMENT OF ROBIN M. NAZZARO, DIRECTOR, NATURAL RESOURCES AND 
               ENVIRONMENT, DEPARTMENT OF ENERGY

    Ms. Nazzaro. Thank you, Mr. Chairman. I am pleased to be 
here today to discuss the Department of Energy's efforts to 
increase the direct contracting with small businesses.
    Under the Small Business Reauthorization Act of 1997 the 
Federal Government has a goal overall of awarding at least 23 
percent of the prime contract, or direct contract, dollars to 
small businesses each year.
    DOE, like other Federal agencies, share in the 
responsibility for meeting this goal. Before 1999, as was 
mentioned earlier, DOE included in its calculations the small 
business prime contracting achievements, the subcontracts 
awarded to small businesses, and its facility management 
contractors.
    In 1999, however, the Office of Federal Procurement Policy 
determined that to ensure consistent reporting across the 
Federal Government DOE could no longer do so.
    You asked us to examine what has happened as a result of 
this policy change. My testimony will focus first on the effect 
of the 1999 policy change on the amount of prime contracting 
dollars that DOE will be required to direct to small 
businesses.
    Second, the steps that DOE has taken, or plans to take, to 
achieve its small business contracting goals; and third, the 
likely implications of DOE's program resulting from these 
changes.
    In summary, to achieve DOE's near term goals of 
approximately 5 percent in fiscal years 2004 and 2005 DOE will 
have to direct an additional couple hundred million dollars 
above the $847 million dollars it directed to small businesses 
in fiscal year 2003.
    The long-term goal of 23 percent in small business prime 
contracting represents a level significantly beyond what DOE 
has ever achieved, about six times its current rate.
    To address its near term small business prime contracting 
goals DOE has improved its outreach to the small business 
community, and has redirected to small businesses contract 
dollars not associated with the facility management contracts.
    DOE has also begun to review facility management contracts 
to identify work that could be redirected to small business 
prime contracts.
    In the longer term it's less clear how DOE, or if DOE, 
intends to achieve the eventual goal of 23 percent small 
business prime contracting. In 2002 DOE's Office of Small and 
Disadvantaged Business Utilization prepared a 20-year plan 
outlining when and how the Department would achieve this 23 
percent goal. However, the plan provides no details as to which 
offices would provide these dollars.
    DOE's three largest offices, the National Nuclear Security 
Administration, Environmental Management and Science have 
differing views as to how much of that work can be done by the 
facility management contractors that can be directed to small 
businesses without having a negative impact on the Department's 
mission.
    EM is in favor of doing so, if redirecting the work is 
consistent with its overall strategy for clean up.
    In contrast, however, officials at the two offices that 
oversee DOE's research laboratories, NNSA and Science, said 
that their programs are less able to redirect significant 
segments of the work without jeopardizing critical research 
missions.
    DOE has not reconciled these differing views into a 
consistent strategy for achieving its long-term goals.
    DOE's efforts to increase the small business prime 
contracting involve both potential benefits and risks. The 
benefits include increasing the pool of possible contractors, 
which could result in better competition and perhaps better 
prices for the Government, finding new and innovative 
approaches to conducting DOE's work, and providing experiences 
to small businesses that could enhance their capacity to 
compete for other Federal contracts.
    On the other hand the potential risks include difficulties 
integrating and coordinating the activities of a greater number 
of prime contractors at a site to ensure safe, secure, and 
effective operations, and having the adequate Federal resources 
for effective contract management and oversight, two areas that 
already pose significant challenges for DOE.
    Furthermore DOE's efforts to increase small business prime 
contracting, as you noted, could inadvertently result in less 
total contracting dollars for the small business community. 
Facility management contractors generally negotiate annually 
the small business subcontracting goals with the Department. In 
discussions with DOE, contractor officials, and small business 
advocacy groups the concern was raised that if work is 
redirected from a facility management contract the contractor 
may negotiate lower subcontracting goals with the Department, 
and then subcontract less of the remaining work to the small 
businesses.
    The Deputy Secretary mentioned that DOE is evaluating the 
implications of this 1999 policy change, specifically the 
effect on the facility management contracts. We have not seen 
this work, but it's certainly a good idea for them to do such 
an activity.
    Mr. Chairman, this concludes my statement, and I would be 
happy to respond to any questions you may have.
    The Chairman. I assume your written statement has more than 
you have talked about?
    Ms. Nazzaro. Yes, and if that can be submitted for the 
record?
    The Chairman. Right, it will be done.
    Ms. Nazzaro. Thank you.
    [The prepared statement of Ms. Nazzaro follows:]

Prepared Statement of Robin M. Nazzaro, Director, Natural Resources and 
                   Environment, Department of Energy

                             WHAT GAO FOUND

    To meet its share of federal goals, DOE would need to direct 
significantly,more prime contracting ,dollars to small businesses. If 
it is to reach its near-term goals of 5.06 percent in fiscal year 2004, 
and 5.50 percent in fiscal year 2005, DOE must direct to small 
businesses an additional $226 million and $319 million, respectively, 
over the $847 million it directed to small businesses in fiscal year 
2003. Achieving a long-term goal of directing 23 percent of prime 
contracting dollars to small businesses would require DOE to contract 
with small businesses at about 6 times its current rate. Such an 
increase is about equal to the combined annual budgets for Los Alamos 
and Sandia--the two largest national laboratories.
    To address its near-term small business prime contracting goals, 
DOE has improved its outreach efforts and has redirected to small 
businesses some contract dollars not associated with facility 
management contracts. DOE has also begun to review facility management 
contracts up for renewal to identify work that could be redirected to 
small business prime contracts. Achieving a long-terns goal of 23 
percent is much more problematic. Notably, DOE's three largest 
offices--the National Nuclear Security Administration (NNSA), 
Environmental Management (EM), and Science--have differing views as to 
what extent facility management contract work can be redirected to 
small businesses without having a negative impact on accomplishing 
their missions. EM is in favor of doing so if redirecting the work is 
consistent with its accelerated cleanup strategy. NNSA and Science 
officials express concern that redirecting work now done by facility 
management contractors could jeopardize critical research missions at 
the laboratories.
    DOE's efforts to increase small business prime contracting involve 
both potential benefits and risks, which depend on the eventual goal 
DOE attempts to achieve. The potential benefits to DOE of increased 
small business prime contracting include increasing the pool of 
potential contractors, which could result in better competition and 
better prices for the government; finding new and innovative approaches 
to the work developed by small businesses; and providing experiences to 
small businesses to allow them to better compete for other federal 
contracts. The potential risks include integrating and coordinating the 
work of a greater number of contractors at a site in a safe, secure, 
and effective manner, and having adequate federal resources for 
effective contract management and oversight--areas that already pose 
significant challenges for DOE. In addition, DOE's efforts to increase 
small business prime contracting may cause its facility management 
contractors to reduce the amount of subcontracting that they direct to 
local and regional small businesses.
    DOE largely agreed with the information in this testimony. However, 
it disagreed with GAO's characterization of DOE's long-term small 
business prime contracting goal and its strategy to achieve it. GAO 
believes that both the longterm goal and DOE's strategy have been 
accurately described.

                                 ______
                                 
    Mr. Chairman and Members of the Committee, I am pleased to be here 
today to discuss the Department of Energy's (DOE) efforts to increase 
its direct contracting with small businesses. The Small Business Act, 
as amended by the Small Business Reauthorization Act of 1997, 
established a government-wide goal of directing at least 23 percent of 
prime contracting dollars to small businesses each fiscal year.\1\ DOE, 
like other federal agencies, shares in the responsibility for meeting 
this goal. Contracting is particularly significant at DOE, which spends 
more on contracting than any other civilian agency in the federal 
government. More than 90 percent of DOE's total fiscal year 2003 
budget, or $21.6 billion, was spent on prime contracts. The majority of 
this amount--$18.2 billion, or more than 80 percent of the contracting 
dollars--was spent on 37 large contracts for the management of DOE's 
laboratories, production facilities, and environmental restoration 
sites. As a group, these contracts are referred to as facility 
management contracts. Under these facility management contracts, a 
contractor is responsible for performing, managing, and integrating the 
work at a DOE site, often subcontracting specific portions of the work 
to other businesses.
---------------------------------------------------------------------------
    \1\ Prime contracts are direct contracts between the government and 
a contractor.
---------------------------------------------------------------------------
    DOE's approach to reporting its small business prime contracting 
dollars has been affected by a change in federal policy concerning 
whether subcontracts with small businesses can in certain situations be 
counted toward achieving small business prime contracting goals: For 
most of the 1990s, DOE included in its calculations of small business 
prime contracting achievements the subcontracts awarded to small 
businesses by its facility management contractors. The Office of 
Federal Procurement Policy had allowed DOE to include these 
subcontracts because of DOE's unique reliance on facility management 
contractors to operate its facilities and carry out its missions. In 
1999, however, the Office of Federal Procurement Policy\2\ determined 
that to ensure consistent reporting of achievements across the federal 
government, DOE could no longer include the subcontracts under facility 
management contracts when calculating the percentage of prime 
contracting dollars awarded to small businesses.\3\
---------------------------------------------------------------------------
    \2\ The Office of Federal Procurement Policy within the Office of 
Management and Budget, in addition to issuing policy letters, has the 
responsibility for resolving any disagreements between the Small 
Business Administration and another federal agency on small business 
prime contracting goals. 15 U.S.C. Sec. 644(g)(2).
    \3\ The Office of Federal Procurement Policy stated that for fiscal 
year 2000 and beyond, contracts awarded by DOE's facility management 
contractors should instead be counted toward DOE's small business 
subcontracting goals.
---------------------------------------------------------------------------
    You asked us to examine what has happened as a result of this 
policy change. My testimony will discuss (1) the effect of the 1999 
policy change on the amount of prime contracting dollars that DOE will 
be required to direct to small businesses, (2) the steps that DOE has 
taken or plans to take to achieve its small business contracting goals, 
and (3) the likely implications for DOE's programs, if any, resulting 
from these changes.
    My testimony is based on a review of DOE small business contracting 
goals and achievements from fiscal year 1990 through fiscal year 2003. 
Our work included a review of DOE's plans to achieve its near-term 
goals and the projected incremental increases needed to achieve long-
term goals. These goals were developed by DOE's Office of Small and 
Disadvantaged Business Utilization (referred to in this testimony as 
DOE's Small Business Office) within its Office of Economic Impact and 
Diversity. We also reviewed documentation provided by DOE and the Small 
Business Administration (SBA), and completed and current procurements 
for new small business prime contracts.\4\ We interviewed DOE and 
contractor officials at DOE headquarters and selected sites, as well as 
national and regional small business associations and advocacy groups. 
Our scope included DOE's three largest offices-the National Nuclear 
Security Administration (NNSA),\5\ and the Offices of Environmental 
Management (EM) and Science-that account for about 70 percent of DOE's 
annual budget. We conducted our review from February 2004 through May 
2004 in accordance with generally accepted government auditing 
standards. Our review included a data reliability assessment on DOE's 
small business prime contracting and subcontracting results for fiscal 
years 1990 through 2003. These data are being used primarily for 
context. Our assessment of DOE's prime contracting data determined that 
the data are sufficiently reliable for the purposes of this testimony. 
Although we are not as confident of the reliability of the 
subcontracting data as reported to DOE by its facility management 
contractors, we determined that these are the only data available and 
they are sufficiently reliable for the observations presented in this 
testimony.
---------------------------------------------------------------------------
    \4\ DOE awards new small business contracts through a procurement 
process that generally includes issuing a request for proposals, 
evaluating those proposals, and selecting a contractor.
    \5\ NNSA is a separately organized agency within DOE, with its own 
procurement organization and program offices such as Defense Programs 
and Defense Nuclear Nonproliferation. Program offices referred to iii 
this testimony generally include NNSA and its program offices as well 
as DOE's program offices of Environmental Management and Science.
---------------------------------------------------------------------------
    In summary, we found the following:

   To comply with the 1999 federal policy change and to achieve 
        federal small business prime contracting goals, DOE would need 
        to direct significantly more prime contracting dollars to small 
        businesses. To achieve DOE's near-term small business prime 
        contracting goals of 5.06 percent in fiscal year 2004, and 5.50 
        percent in fiscal year 2005, DOE will have to direct an 
        additional $226 million in fiscal year 2004, and $319 million 
        in fiscal year 2005, above the roughly four percent of prime 
        contracting dollars directed to small businesses in fiscal year 
        2003. The long-term goal of 23 percent in small business prime 
        contracting represents a level significantly beyond what DOE 
        has ever achieved--about 6 times the $847 million directed to 
        small businesses in fiscal year 2003. Placed in the context of 
        DOE's current contracting base, such an increase would 
        represent an amount approximately equal to the annual budgets 
        of the two largest laboratories-Los Alamos and Sandia National 
        Laboratories.
   DOE has taken steps to increase its near-term small business 
        prime contracting, but has no consistent strategy for reaching 
        the eventual goal of directing 23 percent of its prime 
        contracting dollars to small businesses. To achieve the near-
        term goals, DOE has focused primarily on improving outreach to 
        the small business community and directing additional contract 
        dollars to small businesses from procurements not associated 
        with facility management contracts. In addition, as certain 
        facility management contracts are due for renewal, DOE, and 
        especially EM, has begun identifying potential work that could 
        be redirected in the form of small business prime contracts. In 
        the longer term, it is less clear how, or if, DOE intends to 
        achieve an eventual goal of 23 percent small business prime 
        contracting. In 2002, DOE's Small Business Office prepared a 
        20-year plan outlining when and how the department would 
        achieve the 23 percent small business prime contracting goal. 
        Since DOE's facility management contracts represent, about 80 
        percent of its total contract dollars, the department cannot 
        mathematically achieve the 23 percent goal without redirecting 
        some of those dollars to small business prime contracts. 
        Although the 20-year plan proposed that eventually DOE would 
        redirect. about a fifth of its facility management contract 
        dollars to small business prime contracts, it provides no 
        details as to which offices would provide those dollars. DOE's 
        three largest offices have differing views as to how much of 
        the work that is done by facility management contractors can be 
        redirected to small businesses without jeopardizing the 
        department's missions. While the EM program has begun to move 
        work from its facility management contracts and redirect these 
        dollars to small business prime contracts, EM officials said 
        that doing so must be consistent with the overall strategy of 
        accelerating cleanup at DOE sites and must be at a level that 
        can be effectively managed by EM contract and project 
        management staff. In contrast, officials in the two offices 
        that oversee DOE's research laboratories--NNSA and Science--
        said that their programs are less able to redirect, significant 
        segments of their work from facility management contracts to 
        small businesses without jeopardizing critical research 
        missions. DOE has not reconciled these differing views into a 
        consistent strategy for achieving its long-term small business 
        contracting goals.
   The implications of increasing small business prime 
        contracts depend on the eventual goals that DOE attempts to 
        achieve. Given the contrasting views of DOE's three largest 
        offices, it is not clear if DOE as a whole will commit to the 
        incremental increases that would eventually lead to a 23 
        percent rate of prime contracting to small businesses. 
        Regardless of how far DOE moves in the direction of providing 
        more prime contracting dollars for small businesses, efforts to 
        increase small business prime contracting involve both 
        potential benefits and risks. In addition to helping the 
        federal government meet the overall goal of 23 percent prime 
        contracting, potential benefits include increasing the pool of 
        possible contractors, which could result in better competition 
        and perhaps better prices for the government; finding new and 
        innovative approaches developed by small businesses; and 
        providing experiences to small businesses that. could enhance 
        their capacity to compete for other federal contracts. The 
        potential risks associated with increasing the number of small 
        business prime contracts include difficulties integrating and 
        coordinating the activities of a greater number of prime 
        contractors at a site to ensure safe, secure, and effective 
        operations and having adequate federal resources for effective 
        contract management and oversight--two areas that, continue to 
        be a challenge for DOE. Furthermore, DOE's efforts to increase 
        small business prime contracting may cause facility management 
        contractors to reduce the amount of subcontracting dollars 
        that, they direct to local and regional small businesses.

    We discussed a draft, of this testimony with DOE officials 
representing DOE's Small Business Office, procurement organizations, 
NNSA, EM, and Science. DOE officials generally agreed with the 
information and observations presented in the testimony, with two 
exceptions. First, DOE said that it disagreed with our statement that 
DOE. has no consistent strategy for reaching an eventual goal of 
directing 23 percent of its prime contracting dollars to small 
businesses. DOE argued that its 20-year plan, its annual goal-setting 
process with SBA, and the individual goal setting that occurs within 
NNSA and the program offices collectively represented a consistent 
strategy. We disagree. Although DOE has a 20-year plan that projects 
incremental increases in small business prime contracting up to 23 
percent by 2022, no strategy is in place that defines how DOE will 
achieve this goal, identifies what the contributions of the various DOE 
organizational components will be, or reconciles the differing views 
within DOE as to what would be an appropriate level of small business 
prime contracting. Second, DOE said that we have mischaracterized its 
23 percent small business prime contracting goal as an eventual long-
term goal, while DOE views it as a goal that it may or may not agree, 
to, based on its annual negotiations with SBA. We believe we have 
appropriately described DOE's goal and we stated that it is not clear 
if DOE will commit to the incremental increases that would lead to 
achieving the goal. Finally, DOE suggested technical corrections, which 
we incorporated as appropriate.

                               BACKGROUND

    DOE has about 50 major sites around the country where the 
department carries out its missions, including developing, maintaining, 
and securing the nation's nuclear weapons capability; cleaning up the 
nuclear and hazardous wastes resulting front more than 50 years of 
weapons production; and conducting basic energy and scientific 
research, such as mapping the human genome. This mission work is 
carried out under the direction of NNSA and DOE's program offices.
    With a workforce of 16,000 federal employees and more than 100,000 
contractor employees, DOE relies primarily on contractors to manage and 
operate its facilities and to accomplish its missions. In addition to 
accomplishing DOE's core mission work, managing and operating the sites 
involves a broad range of support activities, such as information 
technology, safety, security, and purchase of products and services.
    The Small Business Act, as amended by the Small Business 
Reauthorization Act of 1997, directed the President to establish the 
goal that not less than 23 percent of the federal government's prime 
contracting dollars would be directed to small businesses each fiscal 
year. SBA is charged with working with federal agencies to establish 
agency small business contracting goals that, in the aggregate, meet or 
exceed the 23 percent government-wide goal. SBA negotiates an annual 
goal with each agency based on the overall amount of contracting in the 
agency (contracting base) and the agency's past achievements.\6\ SBA 
guidelines for setting individual agency goals specify that certain 
types of federal spending should not be included in the contracting 
base. These exclusions include items such as grants, purchases from 
mandatory sources, or contracts for work done internationally for which 
U.S. small businesses would not be competing. For fiscal year 2003, 
excluding such items resulted in a DOE contracting base of about $21 
billion subject to the small business prime contracting goal. As figure 
1* shows, facility management contracts account for more than 80 
percent of this amount.
---------------------------------------------------------------------------
    \6\ Small Business Administration officials said that it is 
important that the three largest federal contracting agencies--the 
Department of Defense, the National Aeronautics and Space 
Administration, and DOE--meet the 23 percent goal in order for the 
government-wide goal to be achieved.
    * Figures 1-3 have been retained in the committee files.
---------------------------------------------------------------------------
    DOE's Small Business Office negotiates annual small business 
contracting goals with SBA, coordinates outreach efforts with the small 
business community, and works with NNSA and DOE's program offices to 
establish and monitor annual goals for small business contracting. 
DOE's Office of Procurement and Assistance Management and NNSA's Office 
of Acquisition and Supply Management establish policies and guidance 
for conducting procurements according to federal and departmental 
regulations, and maintain the information systems on the department's 
prime contracts, including annual dollars provided to each contract. 
NNSA and DOE's program offices, such as EM and Science, are responsible 
for identifying opportunities for small business contracting and 
providing program oversight and direction to the contractors.
unprecedented levels of small business prime contracting necessary for 

                        DOE TO MEET FUTURE GOALS

    Since the 1999 federal policy change, DOE can no longer include 
subcontracts of its facility management contractors when calculating 
the department's small business prime contracting goals. As a result, 
to achieve even its near-term small business prime contracting goals, 
DOE will have to direct more prime contracting dollars to small 
businesses than it ever has in the past. Further, meeting a long-term 
goal of 23 percent small business prime contracting would represent an 
achievement far beyond what DOE has ever reached--about 6 times the 
$847 million that it directed to small businesses in fiscal year 2003.

Meeting Near-term Goals Requires More Small Business Prime Contracting 
        Dollars Than Previously Achieved
    Now that DOE's facility management subcontracts can no longer be 
counted toward achieving its small business prime contracting goals, 
achieving its near-term goals for fiscal years 2004 and 2005, will 
require DOE to expand the amount of prime contracting dollars it 
provides directly to small businesses. The department has a goal of 
directing to small business prime contracts 5.06 percent of its 
contracting base in fiscal year 2004, and 5.50 percent of its 
contracting base in fiscal year 2005. These goals surpass any of DOE's 
small business prime contracting achievements prior to fiscal year 
2004. As figure 2 shows, the percentage of prime contracting dollars 
DOE directed to small businesses in any year since 1996 ranges from 
2.68 percent to 3.99 percent. During 1991 through 1999, when DOE could 
include in its achievements those dollars going to small business 
subcontractors of facility management contractors, as well as dollars 
going directly to small business prime contractors, DOE's reported 
percentages of prime contracting dollars awarded to small businesses 
ranged from 15.7 percent to 19.9 percent.\7\ However, most of the 
reported achievements during those years came from facility management 
subcontracting dollars going to small businesses. The remainder of the 
reported achievements came from prime contracts to small businesses for 
work not associated with facility management contracts.
---------------------------------------------------------------------------
    \7\ See appendix I for information on DOE's prime and subcontract 
dollars directed to small businesses between 1990 and 2003.
---------------------------------------------------------------------------
    Meeting the small-business prime contracting goals in fiscal years 
2004 and 2005 will require DOE to achieve a substantial increase over 
the $847 million in prince contracting dollars that DOE provided 
directly to small businesses in fiscal year 2003. To meet its fiscal 
year 2004 goal, DOE will need to direct an additional $226 million, or 
26.7 percent, over the 2003 amount. Meeting the department's 2005 goal 
will require directing $319 million more than in 2003, an increase of 
37.7 percent over 2003 levels.\8\
---------------------------------------------------------------------------
    \8\ These estimates assume that the contracting base--or the amount 
of contracting dollars used to calculate achievements--remains the same 
for fiscal years 2004 and 2005 as it was in fiscal year 2003.
---------------------------------------------------------------------------
Meeting the Long-term Goal of 23 Percent Requires Huge Increases in 
        Small Business Prime Contracting
    Although achieving DOE's near-term small business prime contracting 
goals for fiscal years 2004 and 2005 will not be easy, the, long-term 
goal of 23 percent would require an achievement far beyond what DOE has 
accomplished in the past. SBA expects DOE to achieve a small business 
prime contracting goal at least on par with the federal goal of 23 
percent. DOE's response has been to formulate a plan for gradual 
compliance. In 2002, DOE's Small Business Office submitted a plan to 
SBA to. achieve the 23 percent goal in 20 years, by the year 2022.
    According to this 20-year plan, DOE would increase its level of 
small business prime contracting by about 1 percentage point per year 
to achieve the 23 percent goal by 2022. To achieve this, goal, the 
department would need to increase its small business prime contracting 
to about $5 billion, or 6 times its 2003 achievement. Put in terms of 
DOE's current contracting base, the additional amount of contracting 
dollars necessary to achieve the 23 percent goal approximately equals 
the combined annual budgets of the facility management contracts for 
the two largest laboratories-Los Alamos and Sandia National 
Laboratories.
    Meeting the 23 percent goal under DOE's current contracting 
approach means that a substantial portion of dollars now included in 
facility management contracts would have to be redirected to small 
business prime contracts, resulting in more prime contracts for DOE to 
manage. Redirecting these dollars would be necessary because prime 
contracts not associated with facility management, generally account 
for less than 20 percent of DOE's total prime contract dollars. 
Therefore, even if all the dollars not associated with facility 
management contracts were directed to small businesses, the total 
amount would be insufficient to meet the 23 percent small business 
prime contracting goal.

 DOE HAS NEAR-TERM PLANS BUT NO CONSISTENT STRATEGY FOR ACHIEVING LONG-
                 TERM SMALL BUSINESS CONTRACTING GOALS

    Although DOE has an agreed upon organizational strategy to achieve 
its near-term small business prime contracting goals, a consistent view 
does not prevail within the department on whether or how to reach the 
eventual goal of directing 23 percent of prime contracting dollars to 
small businesses. To achieve the near-term goals of 5.06 of prime 
contracting dollars to small businesses in fiscal year 2004, and 5.50 
percent in fiscal year 2005, DOE has focused primarily on improving 
outreach to the small business community, directing more of the dollars 
not associated with facility management contracts toward small 
businesses, and beginning to redirect selected facility management 
contract activities to small business prime contracts. It is less 
clear, however, how DOE intends to achieve the eventual long-term goal 
of 23 percent small business prime contracting. DOE's Small Business 
Office's 20-year plan calls for redirecting about 20 percent of 
facility management contract dollars to small business prime contracts 
but provides no details as to how NNSA and the program offices, such as 
EM and Science, would implement the plan. Officials in these offices 
have differing views as to how much of the work done by their facility 
management contractors can be redirected to small businesses without 
jeopardizing critical agency missions.

Near-Term Plans Focus Primarily on Increasing Awards of Non-Facility 
        Management Contracts to Small Businesses
    DOE's plan for achieving its near-term small business prime 
contracting goals focuses primarily on directing more of the dollars 
not associated with facility management contracts to small businesses. 
To increase the percentage of such dollars going to small businesses, 
DOE has expanded its outreach to the small business community, 
notifying small businesses of contracting opportunities and preparing 
them to compete for these contracts. DOE's Small Business Office has 
developed a variety of outreach and capacity-building activities 
designed to assist small businesses in competing for DOE prime 
contracts. For example, DOE's Small Business Office fosters mentor-
protege relationships between small businesses and DOE's large prime 
contractors to help the small businesses expand their expertise. In 
addition to these department-wide efforts, offices such as NNSA and EM 
have also developed outreach activities, generally related to specific 
prime contract opportunities (see table 1 for examples.)

  Table 1.--EXAMPLES OF OUTREACH EFFORTS BY DOE'S SMALL BUSINESS OFFICE
                           AND PROGRAM OFFICES
------------------------------------------------------------------------
             Approach                            Description
------------------------------------------------------------------------
                      Small Business Office efforts
------------------------------------------------------------------------
Marketing and outreach............  Educate and inform small businesses
                                     about the contracting opportunities
                                     at DOE.
                                    Provide a listing of potential prime
                                     and subcontracting opportunities
                                     for the next 3 years. These
                                     potential opportunities for small
                                     businesses are organized by program
                                     office or state and are posted on
                                     the Small Business Office's Web
                                     site.
                                    Sponsor annual conferences,
                                     workshops, procurement fairs, and
                                     seminars for the small business
                                     community.
------------------------------------------------------------------------
Mentor-protege relationship.......  Foster long-term business
                                     relationships between small
                                     business entities and DOE prime
                                     contractors in order to increase
                                     the overall number of these small
                                     business entities that can
                                     successfully compete for DOE
                                     contract and subcontract awards.
------------------------------------------------------------------------
Small business advisory team......  Established an advisory group
                                     consisting of small business trade
                                     associations, chambers of commerce,
                                     and other federal agencies to
                                     provide advice and guidance to the
                                     Small Business Office on small
                                     business programs and activities.
                                     Purposes of the group include
                                     identifying best practices and
                                     exploring business models that
                                     promote outreach and interaction
                                     with the small business community.
------------------------------------------------------------------------
                         Program Office efforts
------------------------------------------------------------------------
Teaming workshops.................  Sponsor meetings of small and large
                                     businesses to discuss upcoming
                                     requests for proposals to encourage
                                     formation of teams that combine the
                                     advantages of small and large
                                     businesses, or combine the
                                     different strengths of several
                                     small businesses, for proposed new
                                     prime contracts (NNSA and EM).
------------------------------------------------------------------------
Market research...................  Conduct market research before
                                     issuing a request for proposals for
                                     a new contract not associated with
                                     facility management to identify
                                     whether small businesses exist with
                                     capabilities in specific
                                     performance areas (NNSA, EM, and
                                     Science).
------------------------------------------------------------------------
Database of small businesses......  Build a database of interested small
                                     businesses to identify highly
                                     skilled small businesses that meet
                                     program requirements (NNSA).
------------------------------------------------------------------------
Source: GAO analysis of DOE information.

    In addition to its outreach efforts, DOE has taken steps in two 
other major areas. First, it has established internal requirements that 
it believes will help snake progress toward achieving its small 
business prime contracting goals. These internal requirements were part 
of a 14-item plan of action included in the 20-year plan. The plan of 
action includes reviews of upcoming contracts to identify work 
activities that could potentially be awarded to small businesses, and 
regular monitoring of DOE program level and agency-wide achievements 
toward DOE's annual goals. For example, each year DOE's Small Business 
Office requires each program office to develop a small business plan 
that reflects the program's goals for increasing prime contracts with 
small businesses. These program plans arc used to develop DOE's overall 
small business contracting goals, and DOE'S Small Business Office 
tracks progress toward these goals quarterly. Second, DOE has modified 
some of its procurement processes to eliminate certain barriers for 
small businesses, such as bonding requirements, and to help small 
businesses minimize the cost of developing proposals. For example, DOE 
has limited the amount, of documentation that small businesses are 
required to submit in response to a request for proposals to 50 pages 
instead of volumes of supporting documentation.
    To achieve the near-term small business prime contracting goals in 
fiscal years 2004 and 2005, DOE is concentrating primarily on contracts 
not associated with facility management, because doing so does not 
involve significant changes in the way the department does business. 
For contracts not associated with facility management, as new work is 
identified or existing contracts come up for renewal, DOE sets them 
aside for small businesses and awards them as small business prime 
contracts whenever possible. For example, the information technology 
support contract for DOE headquarters came up for renewal in, January 
2002. DOE determined that this contract, which was held by a large 
business, could be carried out by a small business. The new contract, 
for a 5-year term with a total value of $409 million, was awarded in 
January 2003, to a team that included a consortium of 10 small 
businesses.
    NNSA and the program offices have also focused primarily on 
procurements not associated with their facility management contracts. 
NNSA, EM, and Science officials issued policy letters stressing the 
importance of directing contracts for activities not associated with 
facility management to small businesses to the maximum extent possible. 
For example, for any upcoming contract not associated with facility 
management, program office personnel must first conduct market research 
to determine if any small businesses are capable of performing all or 
parts of the work and have the necessary qualifications to do so. If 
the program office finds two small businesses capable of doing the 
work, the policy requires the contract or parts of the contract to be 
``set aside'' from unrestricted competition and instead generally be 
made available for a more restricted competition among small 
businesses. Any exceptions to this policy must be approved by the head 
of the program office.
    Although in the near term DOE is concentrating primarily on 
contracts not associated with facility management, it has also begun to 
look at certain facility management contracts as they come up for 
renewal to identify potential work that could be made available to 
small businesses. DOE's Offices of EM and Fossil Energy have identified 
several specific activities that had been within a facility management 
contractor's scope of work and have set those activities aside for 
small business prime contracts. (See table 2 for examples.)

  Table 2.--STATUS OF SELECTED PROCUREMENTS REDIRECTING FACILITY MANAGEMENT CONTRACT DOLLARS TO SMALL BUSINESS
                                                 PRIME CONTRACTS
----------------------------------------------------------------------------------------------------------------
                                                       Current facility
       Program office/site          Nature of work        management        Contract amount        Status of
                                                          contractor                              procurement
----------------------------------------------------------------------------------------------------------------
                                                  Fossil Energy
----------------------------------------------------------------------------------------------------------------
Strategic Petroleum Reserve,      Construction        DynMcDermott......  $26.5 million for   Contract awarded
 Louisiana.                        management                              2 years, plus       November 2003
                                   services.                               three 1-year
                                                                           options.
----------------------------------------------------------------------------------------------------------------
                                            Environmental Management
----------------------------------------------------------------------------------------------------------------
Fast Flux Test Facility.........  Decontamination,    Fluor Hanford.....  $46.1 million per   Request for
                                   decommissioning,                        year, contract      proposals closed
                                   demolition,                             length not to       March 2004
                                   disposal of                             exceed 8 years.
                                   reactor waste.
----------------------------------------------------------------------------------------------------------------
222-S Laboratory, Hanford, WA...  Laboratory          CH2M Hill.........  $10 million per     Request for
                                   analysis of tank                        year for 5 years,   proposals closed
                                   waste samples.                          plus five           March 2004
                                                                           additional 1-year
                                                                           options.
----------------------------------------------------------------------------------------------------------------
Portsmouth, OH..................  1 contract for      Bechtel Jacobs....  $273 million over   Request for
                                   environmental                           5 years for         proposals closed
                                   remediation.                            remediation.        March 2004
                                  1 contract for                          $129 million over
                                   infrastructure.                         5 years for
                                                                           infrastructure.
----------------------------------------------------------------------------------------------------------------
Paducah, KY.....................  1 contract for      Bechtel Jacobs....  $377 million over   Request for
                                   environmental                           5 years for         proposals closed
                                   remediation.                            remediation.        March 2004
                                  1 contract for                          $100 million over
                                   infrastructure.                         5 years for
                                                                           infrastructure.
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of DOE information.

    Of the examples shown in table 2, the procurement at the Strategic 
Petroleum Reserve in Louisiana is the only one that DOE has completed 
so far. According to DOE officials with the Office of Fossil Energy, 
when the facility management contract was nearing the end of its term, 
DOE's Small Business Office asked the program office to look for 
opportunities for small business prime contracts. DOE officials at the 
Strategic Petroleum Reserve said they identified a number of 
construction projects that could be performed by small businesses, and 
awarded several prime contracts to small businesses for this work. DOE 
officials then decided to remove all the construction management work 
from the facility management contract for the site so that a new small 
business prime contractor for construction management could then award 
and manage subcontracts for individual construction projects. According 
to DOE's contracting officer at the Strategic Petroleum Reserve, having 
the new prime contractor responsible for awarding and managing the 
contracts will reduce the amount of additional work required by DOE 
procurement and program personnel. The prime contract was awarded in 
November 2003.

DOE's Small Business Office and Program Offices Have Different Views on 
        the 
        Extent to Which Facility Management Contract Dollars Can Be 
        Redirected to 
        Small Business
    While DOE's Small Business Office and the three largest offices 
have a consistent approach to their near-term goals--primarily focusing 
on increasing small business prime contracting by using dollars not 
associated with facility management contracts--a consistent view does 
not prevail in the department on whether or how to achieve the eventual 
goal of directing 23 percent of prime contracting dollars to small 
businesses. DOE's Small Business Office's plan to achieve the long-term 
small business prime contracting goals has two main components. The 
first is to continue increasing the small business share of contract 
dollars not associated with facility management contracts. For any new 
contracts not associated with facility management, DOE has a stated 
preference to set aside those contracts for small businesses where 
possible. The three largest offices have been consistent in their 
efforts to do so. However, even this portion of DOE's contracting base 
(about 20 percent of total contract dollars) is not immediately 
available for small business prime contracts. For example, many of the 
contracts not associated with facility management cover multiple years, 
so only a portion of these contracts are up for award or renewal in a 
given year.\9\ In addition, some contracts for work not associated with 
facility management may not be available for award to small businesses, 
for example, if market research determines that there are not at least 
two small businesses capable of performing all or parts of the work in 
an upcoming procurement.
---------------------------------------------------------------------------
    \9\ Of the $3.4 billion in contracting dollars not associated with 
facility management contracts in fiscal year 2003, only about $672 
million, or 20 percent, was available to award as new contracts. The 
remaining $2.7 billion was annual funding for existing contracts.
---------------------------------------------------------------------------
    Because of the limited amount of contracting dollars for work not 
associated with facility management, the second component of DOE's 
Small Business Office's long-term plan is to redirect dollars now going 
to facility management contracts to small business prime contracts. 
DOE's 20-year plan calls for increasing dollars redirected from 
facility management contracts to small business prime contracts from 
less than 1 percent in 2003 to about 20 percent by 2022 (see figure 3).
    Nevertheless, DOE does not have a consistent strategy in place to 
accomplish its plan for redirecting dollars from its facility 
management contracts to small business prime contracts. Officials in 
NNSA, EM, and Science have considerably different views about the 
feasibility of redirecting significant, amounts of funding from their 
facility management contracts to small businesses. For example:

   Both NNSA and Science officials are very concerned about the 
        implications of setting aside for small businesses significant 
        portions of the dollars now going to facility management 
        contractors that operate the weapons and research laboratories. 
        NNSA and Science officials' concerns stem from the large scale 
        of laboratory operations, the integrated nature of the mission 
        and mission support work, and the complexity and critical 
        importance of the laboratory missions. These officials said 
        that fragmenting mission activities among several contractors 
        at the research laboratories, whether the contractors were 
        large or small businesses, was inadvisable. Therefore, 
        according to NNSA's Director of Acquisition and Supply 
        Management and Science's Director of Grants and Contracts, NNSA 
        and Science may never achieve a 23 percent small business prime 
        contracting level because doing so would be inconsistent with 
        accomplishing their missions safely, securely, and effectively.
        Despite the reluctance to fragment core mission activities, 
        NNSA and Science officials said they would explore 
        opportunities to contract separately with small businesses for 
        mission support functions at the laboratories if those mission 
        support functions were not closely integrated with the 
        laboratories' core missions.\10\ For example, NNSA is analyzing 
        its own purchases of goods and services, such as computer 
        hardware, software, and staffing services, as well as similar 
        purchases by its facility management contractors. NNSA is 
        assessing the feasibility of purchasing these items in bulk 
        under a prime contract, rather than multiple separate 
        contracts. An NNSA official said that NNSA is not trying to 
        increase its small business prime contracting numbers by 
        becoming a purchasing agent for its facility management 
        contractors, but rather combining similar requirements as a way 
        to possibly increase NNSA's level of prime contracting to small 
        business. On the basis of this analysis, NNSA is pursuing three 
        potential opportunities, valued at about $80 million, involving 
        technical services and services to provide temporary staff, and 
        is exploring other opportunities.
---------------------------------------------------------------------------
    \10\ Although the facility management contracts for the 
laboratories distinguish between core mission work and mission support 
functions, individual laboratories may differ from one another in the 
extent to which a specific activity is regarded as an integral part of 
accomplishing the mission. At some of DOE's laboratories, for example, 
information technology provides a support function that could 
potentially be separated from the facility management contract and 
awarded to small business without jeopardizing the mission; such a 
separation is being proposed at the Office of Science's Oak Ridge 
National Laboratory in Tennessee. In contrast, NNSA officials have said 
that information technology at NNSA's weapons laboratories represents 
an integral part of simulated testing and certification of the nation's 
nuclear weapons stockpile and cannot. be separated from the mission 
work without jeopardizing the results.
---------------------------------------------------------------------------
   By contrast, EM officials were more optimistic about the 
        potential role of small businesses in accomplishing its core 
        missions. The Assistant Secretary for EM said that part of its 
        initiative to accelerate the cleanup of DOE sites involves 
        greater use of alternatives to traditional facility management 
        contracts, including removing work from facility management 
        contracts and setting that work aside for small businesses. The 
        Assistant Secretary said that these small business procurements 
        are part of EM's overall strategy to clean up sites more 
        quickly and at a lower cost to the government, not just to 
        increase the amount of small business prime contracting.
        EM is also developing a complex-wide contracting arrangement, 
        called indefinite delivery/indefinite quantity, which will 
        result in prime contracts with both large and small businesses 
        for smaller-scale cleanup activities. According to EM's 
        Director of Acquisition Management, the multiple contracts 
        awarded under this initiative will allow EM sites nationwide to 
        quickly purchase cleanup services from small and large 
        businesses without having to conduct a separate procurement, 
        which can take months to complete. Instead, either EM or the 
        facility management contractor will be able to simply write a 
        task order against these existing contracts.
        Finally, it is unclear to what extent EM can expand its use of 
        small business prime contracts to accomplish its core missions. 
        According to the Assistant Secretary, the main constraint is 
        the ability of EM staff to effectively oversee those contracts, 
        not the availability of qualified small businesses to perform 
        the work. The Assistant Secretary said that EM is proceeding 
        carefully to ensure that effective management and oversight 
        will occur; that cost, schedule, and technical standards are 
        met; and that safety and security issues are adequately 
        addressed.

    POTENTIAL BENEFITS AND RISKS OF INCREASED SMALL BUSINESS PRIME 
        CONTRACTING DEPEND ON THE GOAL THAT DOE TRIES TO ACHIEVE

    Since DOE is in the early stages of implementing a long-term 
strategy to redirect facility management contracting dollars to small 
businesses, the implications of increased small business prime 
contracting are still relatively uncertain. However, the implications 
depend heavily on the extent to which DOE agrees, in its negotiations 
with SBA, to meet. the 23 percent small business prime contracting 
goal. Given the differences we heard in the approaches of the three 
largest, offices, it is not, clear if DOE will commit to the 
incremental increases that would eventually lead to a 2 percent rate of 
prime contracting to small businesses, as detailed in the 20-year 
schedule prepared by DOE's Small Business Office. Absent more specific 
direction from Congress or the executive branch, DOE's eventual 
commitment to a particular small business prime contracting goal 
appears to rest heavily on whether the department will be willing to 
change its approach to contracting for activities at the science and 
weapons laboratories, its environmental cleanup work, or both. 
Regardless of the extent to which DOE directs more prime contracting 
dollars to small businesses, efforts to increase small business prime 
contracting involve potential benefits as well as potential risks.
Potential Benefits of Increasing Small Business Prime Contracting
    An overarching benefit of increasing small business prime 
contracting is that DOE would be helping to carry out the President's 
small business agenda and would be contributing to the federal 
government's overall goal of directing 23 percent of prime contracting 
dollars to small businesses. Beyond contributing to this overall 
effort, DOE's Small Business Office and procurement officials explained 
that the benefits included increased competition, greater innovation, 
and enhanced small business capacity.
    One example of increased competition can be seen in EM's program. 
DOE's efforts to increase small business contracting have resulted in 
new procurements with narrower scope. In the past, EM has been 
concerned about the limited pool of potential contractors for large 
cleanup projects, sometimes receiving only two proposals on 
multibillion dollar procurements. By structuring the cleanup work into 
smaller contracts and opening them to individual small businesses or 
small business teams, EM expects to attract more potential bidders. One 
of EM's current procurements is for cleanup work at the Fast Flux Test 
Facility at the Hanford site in Washington state. Currently included in 
a facility management contract, EM is in the process of redirecting 
this work as a small business set-aside. EM officials said that in the 
response to the request for proposals for this project, with an 
estimated contract amount of $46 million per year for up to 8 years, 
DOE received proposals from several small business teams. According to 
EM officials, increased competition from a larger pool of potential 
contractors could result in better prices for the government. However, 
since the contracts for the current small business procurements have 
not yet been awarded, it is too soon to tell whether better prices will 
be realized.
    In addition to increased competition, DOE procurement and program 
office officials believe that small businesses may bring new ideas and 
innovative approaches to the work. For example, as part of its 
accelerated cleanup strategy, EM has been looking for better and faster 
ways to accomplish cleanup at its sites and facilities. According to EM 
officials, expanding the pool of potential contractors, for cleanup 
projects may increase the potential for new technology and ideas.\11\
---------------------------------------------------------------------------
    \11\ To assist in the development of new technologies, EM as well 
as other program offices with research and development programs provide 
funding for two small business grant programs managed by the Office of 
Science. The Small Business Innovation Research Program and the Small 
Business Technology Transfer Program, with combined funding of more 
than $100 million in fiscal year 2003, encourage the development of new 
technologies, including those dealing with environmental cleanup.
---------------------------------------------------------------------------
    Increasing small business prime contracting can also provide small 
businesses with the experience necessary to compete for other federal 
prime contracts. According to small business associations and advocacy 
groups that we contacted, a direct contracting relationship with DOE 
provides small businesses with more challenging work and better 
opportunities to grow and expand their businesses. The use of mentor-
protege arrangements or teaming with other small or large businesses 
also provides opportunities for growth and economic development. For 
example, an owner of a small construction company in New Mexico told us 
that his business had successfully teamed with a large construction 
company for several projects and that his small company was now the 
senior member of that team and was competing for DOE prime contracts.
Potential Risks of Increasing Small Business Prime Contracting
    DOE's long-term strategy for achieving a 23-percent, small business 
prime contracting goal includes redirecting a substantial amount of 
facility management contract dollars to small business prime contracts. 
DOE procurement and program officials acknowledge that doing so would 
significantly increase the number of prime contracts DOE would have to 
manage. Increasing DOE's number of prime contracts, whether these are 
with small or large businesses, could create problems with integrating 
and coordinating the efforts of more contractors at a site, as well as 
create problems with contract management and oversight. In addition, 
DOE's efforts to increase small business prime contracting could 
inadvertently reduce the amount of small business subcontracting 
directed to local and regional small businesses.
    Increasing the number of prime contracts at a site raises concerns 
about integration, coordination, and accountability. If a facility 
management contractor has primary responsibility for accomplishing work 
at the site, that contractor is also accountable for integrating the 
efforts of multiple subcontractors to ensure that the mission work is 
accomplished. In addition, the facility management contractor has the 
responsibility for ensuring that all contractor and subcontractor 
employees at the site comply with DOE safety and security standards. If 
the work done by the facility management contractor becomes fragmented 
and spread among multiple prime contracts, DOE may need to carry out 
these integration functions, which places more oversight 
responsibilities on federal program and project management personnel. 
If the number of prime contractors at a site increases significantly, 
the challenges associated with integrating and coordinating the 
activities also increase. Both DOE and facility management contractor 
officials have expressed concerns about successfully integrating and 
coordinating the efforts of an increased number of prime contractors at 
a site. Ensuring that all work is performed in accordance with DOE 
safety and security standards is a significant concern, especially 
given the continuing challenges that the department faces in these two 
areas.\12\
---------------------------------------------------------------------------
    \12\ For information on safety and security challenges, see U.S. 
General Accounting Office, Major Management Challenges and Program 
Risks: Department of Energy, GAO-03-100 (Washington, D.C.: Jan. 2003); 
Department of Energy, Management Challenges at the Department of 
Energy, DOE/IG-0626 (Washington, D.C.: Nov. 12, 2003); U.S. General 
Accounting Office, Department of Energy: Mission Support Challenges 
Remain at Los Alamos and Lawrence Livermore National Laboratories, GAO-
04-370 (Washington, D.C.: Feb. 27, 2004); and U.S. General Accounting 
Office, Nuclear Security: DOE Must Address Significant Issues to Meet 
the Requirements of the New Design Basis Threat, GAO-04-701T 
(Washington, D.C.: Apr. 27, 2004).
---------------------------------------------------------------------------
    To begin to address the constraint of having a limited number of 
federal employees to perform coordination and integration functions, 
DOE is considering awarding small business prime contracts but then 
having the facility management contractors at the sites manage and 
oversee the work. As some facility management contracts are extended or 
awarded, DOE includes a provision that specifically allows the 
department to identify and redirect work within the facility management 
contract to a small business prime contract. The provision also allows 
DOE to request the facility management contractor to manage and oversee 
the work. Since the work that DOE would redirect is generally already 
being done by a facility management subcontractor, the only actual 
change is the contractual relationship. In fiscal year 2003, NNSA 
started using this arrangement for facilities and infrastructure 
restoration projects at the Sandia National Laboratory in New Mexico. 
NNSA awarded prime contracts--$100,000 in fiscal year 2003 and an 
estimated $3 million in fiscal year 2004)--to small businesses for some 
of these projects. Although it is too soon to fully assess the 
implications of thus arrangement, facility management contractor 
officials at the Sandia laboratory, have expressed concern that it 
could confuse the lines of authority and accountability at the site, 
because the contractual relationship is not consistent with the daily 
management and oversight of the activities being performed. In prior 
work, we have also expressed concerns about confusing the lines of 
authority, which can make it difficult to hold contractors accountable 
for performance.\13\
---------------------------------------------------------------------------
    \13\ U.S. General Accounting Office, Department of Energy: 
Fundamental Reassessment Needed to Address Major Mission, Structure, 
and Accountability Problems, GAO-02-51 (Washington, D.C.: Dec. 21, 
2001).
---------------------------------------------------------------------------
    Regarding contract management, and oversight, increasing the number 
of prime contracts with DOE could place further strain on DOE's 
procurement and program oversight personnel. DOE's reliance on 
contractors to operate its facilities and early out its missions, 
coupled with the department's history of inadequate contractor 
management and oversight, led us in 1990 to designate DOE contract 
management, as a high-risk area vulnerable to fraud, waste, abuse, and 
mismanagement. This high-risk designation is still in effect. GAO and 
others have stated that one of the contributing factors to DOE's 
inadequate oversight of its contractors has been a shortage of 
personnel with the right skills to perform these functions.
    Although DOE has over the past several years made progress in 
training and certifying its procurement and project management 
personnel, DOE procurement and program officials said that the overall 
number of available personnel has not grown, and has significantly 
decreased in NNSA. More prime contracts would create additional work 
for federal employees in two phases: managing the procurement process 
by requesting and evaluating proposals to award a contract, and 
overseeing the work of the contractor to ensure that performance is 
acceptable. DOE officials at headquarters and at the sites we visited 
expressed concerns that significantly increasing the number of prime 
contracts could reduce the ability to adequately oversee and evaluate 
contractor performance.
    While headquarters and site office officials in the EM program 
acknowledge the potential risks that additional prime contracts can 
create in both integrating work activities at a site and contract 
management and oversight, they are pursuing ways to mitigate those 
risks. To address concerns about site-wide integration of safety and 
security, DOE officials at Hanford plan to use contract language and 
incentives to encourage the site's new small business prime contractors 
and the facility management contractors to work together. To earn 
potential incentive fees under this proposed arrangement, for example, 
all prime contractors will have to cooperate in such areas as safety 
and security. But, since these are new approaches and the small 
business prime contracts have yet to be awarded, the extent to which 
these steps will mitigate the potential risks is unknown. To lessen the 
impact of additional prime contracts on procurement and program 
personnel, EM officials said they intend to use a contract for small 
business procurements that has a well-defined statement of work and 
that ties incentive fees to accomplishing the contract's stated final' 
goal rather than to interim steps. According to EM's Director of 
Acquisition Management, administering such contracts generally may 
require less federal involvement, although EM will also have to train 
its staff on the most effective way to manage these contracts.
    In addition to the potential risks discussed above, DOE and 
contractor officials, as well as representatives of small business 
advocacy groups, raised concerns about DOE's efforts to increase small 
business prime contracting. One concern expressed was that such efforts 
could inadvertently result in less total contracting dollars directed 
to the small business community. Procurement regulations require that 
all facility management contractors have a small business 
subcontracting plan and facility management contractors must generally 
negotiate annual small business subcontracting goals with the 
department. However, if work is removed from a facility management 
contract, the facility management contractor may negotiate lower 
subcontracting goals with the department and then subcontract less of 
the remaining work to small businesses. Since the efforts to redirect 
facility management contract dollars to small businesses is in its 
early stages, no data are yet available to validate this concern.
    A related concern is that if DOE removes work from a facility 
management contract and sets that work aside for a small business 
procurement, there may be fewer contracting dollars available to local 
and regional small businesses. This could occur because DOE's facility 
management contractors generally are not required to follow federal 
regulations in their procurements, but instead comply with ``best 
business practices.'' In doing so, a facility management contractor can 
restrict a competition for its subcontracts to the local small business 
community. In contrast, DOE must generally open up its procurements to 
nationwide competition, which may result in fewer contracts going to 
local and regional small businesses. Again, no data are yet available 
to validate this concern.
    Finally, representatives of some small business advocacy groups 
told us that some small businesses would rather have a subcontract with 
a facility management contractor than a prime contract with DOE. This 
is because facility management contractors generally have fewer 
administrative requirements and a less burdensome and faster 
procurement process.
    It is not clear to what extent these potential risks will affect 
DOE's ability to carry out its missions in a safe, secure, and 
effective manner. The impact on DOE's missions of increasing small 
business prime contracts will depend both on the total number of new 
prime contracts awarded and on how well the department manages the 
contractors and the work. The stakes are high as DOE attempts to 
contribute to the federal. government's goal of increasing the prime 
contracting dollars directed to the small business community, while 
striving to accomplish its missions efficiently and effectively.
    This concludes my testimony. I would be pleased to respond to any 
questions that you may have.

                      CONTACTS AND ACKNOWLEDGMENTS

    For further information on this testimony, please contact Ms. Robin 
Nazzaro at (202) 512-3841. Individuals making key contributions to this 
testimony included Carole Blackwell, Ellen W. Chu, Matt Coco, Doreen 
Feldman, Jeff Rueckhaus, Stan Stenersen, and Bill Swick.
                                 ______
                                 

  Appendix I.--Department of Energy (DOE) Contract Dollars Directed to Small Businesses, Fiscal Years 1990-2003
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                 Contract type                       1990         1991         1992         1993         1994
----------------------------------------------------------------------------------------------------------------
Contracting base\1\............................   $17,095.8    $18,628.6    $18,852.2    $18,392.5    $18,826.3
  Facility management..........................    13,790.2     15,592.5     15,798.2     14,970.0     15,788.0
  All other prime contracts....................     3,305.5      3,036.1      3,054.0      3,422.5      3,038.3
Contracts to small businesses..................     3,047.2      3,211.8      3,162.3      3,578.8      3,616.2
  Small business prime contracts...............       500.9        529.8        578.8        512.7        508.1
  Small business subcontracts awarded by prime      2,546.3      2,682.0      2,583.5      3,066.1      3,108.2
   contractors.................................
    Small business subcontracts awarded by          2,402.4      2,464.0      2,374.8      2,772.3      2,795.6
     facility management contractors...........
    Small business subcontracts awarded by all        144.0        217.9        208.7        293.9        312.5
     other prime contractors...................
Small and large business subcontracts awarded       5,617.8      6,300.1      5,653.5      6,458.5      6,347.3
 by prime contracts............................
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Small business prime contracts\2\ \3\..........         2.93         2.84         3.07         2.79         2.70
Small business prime contracts and facility           N/A           16.07        15.67        17.86        17.55
 management subcontracts\2\ \4\................
Small business prime and subcontracts\2\ \5\...        17.82        17.24        16.77        19.46        19.21
Small business subcontracts\2\ \6\.............        45.33        42.57        45.70        47.47        48.97
----------------------------------------------------------------------------------------------------------------

                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                 Contract type                       1995         1996         1997         1998         1999
----------------------------------------------------------------------------------------------------------------
Contracting base\1\............................   $17,177.4    $16,213.2    $15,844.0    $15,117.5    $15,483.8
  Facility management..........................    14,240.1     13,127.7     13,844.4     13,266.6     13,487.8
  All other prime contracts....................     2,937.3      3,085.5      1,999.6      1,890.9      1,995.9
Contracts to small businesses..................     3,441.8      3,001.1      3,173.4      3,033.5      3,225.3
  Small business prime contracts...............       484.5        434.9        460.9        442.6        472.9
  Small business subcontracts awarded by prime      2,957.3      2,566.2      2,712.5      2,591.0      2,752.4
   contractors.................................
    Small business subcontracts awarded by          2,699.3      2,328.1      2,156.7      2,037.3      2,608.7
     facility management contractors...........
    Small business subcontracts awarded by all        258.0        238.1        555.8        553.6        143.7
     other prime contractors...................
Small and large business subcontracts awarded       5,870.3      5,055.1      5,223.4      5,684.5      5,547.1
 by prime contracts............................
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Small business prime contracts\2\ \3\..........         2.82         2.68         2.91         2.93         3.05
Small business prime contracts and facility            18.53        17.04        16.52        16.40        19.90
 management subcontracts\2\ \4\................
Small business prime and subcontracts\2\ \5\...        20.04        18.51        20.03        20.07        20.83
Small business subcontracts\2\ \6\.............        50.38        50.76        51.93        45.58        49.62
----------------------------------------------------------------------------------------------------------------

                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                        Contract type                             2000         2001         2002         2003
----------------------------------------------------------------------------------------------------------------
Contracting base\1\.........................................   $17,067.9    $18,551.2    $19,170.9    $21,210.0
  Facility management.......................................    14,079.1     14,756.4     15,671.7     18,189.1
  All other prime contracts.................................     2,988.8      3,794.7      3,499.2      3,020.9
Contracts to small businesses...............................     2,805.1      3,539.9      4,241.9      4,382.2
  Small business prime contracts............................       486.8        509.5        555.7        847.2
  Small business subcontracts awarded by prime contractors..     2,318.3      3,030.4      3,686.2      3,535.0
    Small business subcontracts awarded by facility            \7\ N/A      \7\ N/A      \7\ N/A      \7\ N/A
     management contractors.................................
    Small business subcontracts awarded by all other prime     \7\ N/A      \7\ N/A      \7\ N/A      \7\ N/A
     contractors............................................
Small and large business subcontracts awarded by prime           4,826.4      6,409.3      7,548.6      7,349.0
 contracts..................................................
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Small business prime contracts\2\ \3\.......................         2.85         2.75         2.90         3.99
Small business prime contracts and facility management             N/A          N/A          N/A          N/A
 subcontracts\2\ \4\........................................
Small business prime and subcontracts\2\ \5\................        16.44        19.08        22.13        20.66
Small business subcontracts\2\ \6\..........................        48.03        47.28        48.83        48.10
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of DOE data.
Note: Dollars in the table are expressed in current-year (unadjusted) dollars and include DOE prime contracts
  valued at $25,000 or more that are tracked in DOE data systems. Prime contracts awarded by another federal
  agency but funded by DOE are excluded from the table. Subcontract dollars are included only for contractors
  who are required to report on their small business subcontracting activities.
\1\ DOE's contracting base includes dollars that can potentially be directed to U.S. small businesses,
  excluding, under Small Business Administration (SBA) guidelines, dollars that cannot go to small business
  prime contracts, such as grants and purchases from mandatory or foreign sources.
\2\ As a percentage of all subcontracts.
\3\ We calculated the percentage of DOE's contract dollars going to small business prime contracts by dividing
  small business prime contract dollars (row 5) by the contracting base (row 1).
\4\ For fiscal years 1991 through 1999, DOE's annual small business prime contracting achievements, as reported
  to SBA; included DOE subcontracts awarded to small businesses by its facility management contractors, as well
  as prime contracts awarded directly to small businesses. To calculate small business prime contracting
  achievements for these 9 years, we therefore added rows 5 and 7 and divided the sum by row 1. We did not do
  this calculation for fiscal years 1990 and 2000 through 2003 because small business subcontracts from facility
  management contractors did not ``count'' in those years toward small business achievement percentages.
\5\ We calculated the overall percentage of DOE's contract dollars going to small businesses-via both prime
  contracts and subcontracts-by dividing DOE's contract dollars to small businesses (row 4) by the contracting
  base (row 1).
\6\ We calculated the percentage of total subcontracting dollars going to small business by dividing small
  business subcontract dollars from prime contractors (row 6) by total subcontract dollars going to small and
  large businesses (row 9).
\7\ For fiscal years 2000 through 2003, DOE did not account separately for subcontract dollars going to small
  businesses from facility management prime contractors versus those from all of its other prime contractors.

    The Chairman. Dr. Woodard, from Sandia, good to have you 
here. Will you make your testimony as brief as possible and 
we'll put it in the record.

STATEMENT OF DR. JOAN B. WOODARD, EXECUTIVE VICE PRESIDENT AND 
         DEPUTY DIRECTOR, SANDIA NATIONAL LABORATORIES

    Dr. Woodard. Thank you, Mr. Chairman.
    Sandia, as you know, is a multi-program national laboratory 
operated by Sandia Corporation, a wholly owned subsidiary of 
Lockheed-Martin for the Department of Energy.
    We at Sandia care very strongly about our small business 
relationships and small business suppliers. They are vital to 
our ability to achieve, and to deliver on our daily mission.
    Sandia has an excellent track record in the small business 
contracting area. We are pro-active with our small business 
suppliers, and our small business development programs offer 
mentoring, business training, and technical as well as business 
assistance to the small businesses.
    We usually meet, or exceed, the annual small business goals 
that the Department has set for us. In fact in fiscal year 2003 
we awarded $459 million dollars to small businesses, which was 
53 percent of our total procurement commitment.
    Every year Sandia places well over 50 percent of the 
procurement dollars with small business----
    The Chairman. What percent? Well over?
    Dr. Woodard. Well over 50 percent. The new policy guidance 
that prevents the Department from including subcontracts placed 
by management and operating contractors in the Department's 
small business performance totals presents many difficulties. 
The national leadership--I'm sorry, the National Laboratory 
Improvement Council, which represents all 16 DOE laboratories, 
communicated these difficulties and concerns in a letter to the 
Department in the year 2002, which is attached to my written 
statement.
    The Chairman. Dr. Woodard, excuse me for interrupting. The 
whole issue we're arguing about is brought right in focus when 
you testify about how much you're doing, because you are the 
contractor doing it rather than the DOE doing it. You can do a 
lot more because you're doing it.
    But I want to ask you when you get as high as you are, and 
I have no reason to know what the answer to this is except it 
seems prudent that you wouldn't do it if it hurt, but are you 
sure that--can you assure us that by offering such a large 
percentage of subcontracts that your major goals, objectives, 
and work load is in no way diminished or put upon by this large 
percentage of small business? Do you do your job as well in 
your opinion?
    Dr. Woodard. Absolutely.
    The Chairman. So this is not a detriment to go as high as 
you are?
    Dr. Woodard. No, it is not.
    The Chairman. The second point seems to me that what's 
wrong with the DOE's approach is not present in New Mexico or 
other laboratories like Sandia, and that is how can the 
subcontractor get in touch with entity its contracting with.
    I think one of the shortcomings of DOE's approach is that 
those subcontractors have to work with DOE when they have 
problems. I would guess that that's a lot more difficult, a lot 
less responsive, than if they work for you right in the same 
city, they're right there for the most part in the same state.
    Do you have an opinion on that?
    Dr. Woodard. Yes, Mr. Chairman, we have found that for 
small businesses that one tool that we offer, which is one-on-
one orientation to procurement process is very beneficial. And 
so, again imagining that if you're doing that as the Department 
of Energy nationwide it's very difficult to reach out and touch 
day to day, everyday, the small business suppliers with these 
one-on-one orientations and other assistance that we provide.
    The Chairman. Now in New Mexico, and I assume in other 
States, it's just that I'm not as familiar with it, it would 
seem to me that there are certain subcontractors that qualify 
that get very big. So, you know, we have subcontractors that 
are little, and we have subcontractors that are very big. I 
would assume that the subcontractors that are very big--I won't 
mention them, but you know one in Albuquerque, they have a 
building with their name on it, pretty successful--I would 
assume they would like the DOE policy instead of yours; is that 
correct? Big versus little?
    Dr. Woodard. Let's see, I can't predict how they would do 
that.
    The Chairman. I don't blame you for not doing it if you 
knew, I would think you shouldn't know.
    [Laughter.]
    The Chairman. But I think I know. If I were they I would--
the big ones--I would like to work with Washington; if I were 
the little small ones or minorities or women's I would like 
very much to work with you.
    Would you proceed? I think I've made my point, so if you 
would kind of hurry, it would be good.
    Dr. Woodard. I will do that.
    In my view there are three principle concerns. The new 
policy creates a misleading measure of the total DOE true small 
business performance.
    Second, it is not clear that the new policy truly serves 
the best interests of small business.
    And three, DOE's plan to place directly contracts and then 
to rotate or transfer those contracts back to the M&O is 
problematic and creates concerns with regards to 
accountability.
    In general we believe that the DOE cannot dramatically 
increase its small business contracts in its current 
established business model, that in fact in order to meet the 
total goal of 23 percent it will require breaking apart the M&O 
contracts into smaller contractual units.
    This is similar to if you were to build a house and assume 
subcontractors would be directly contracting to you rather than 
to a general contractor, and then asking that general 
contractor to manage and integrate it all. It is not something 
that many general contractors would step up to.
    What is the solution? A course that we would prefer is to 
in fact reinstate the earlier policy guidance that allows the 
Department to include M&O contractors, small business 
subcontract totals, in the Department's total. And if that is 
not possible an exception should be made to the federally 
funded research and development centers because the FFRDCs have 
a special relationship to the government that is recognized----
    The Chairman. What is FFRDCs?
    Dr. Woodard. Federally funded research and development 
centers.
    The Chairman. I just came from a breakfast with the 
military talking about Iraq, and we were trying to get the 
Judge Advocate and the Generals to talk so we could understand. 
And about every 5 minutes the Secretary of Defense would remind 
somebody what they just said and ask them if they could just 
please try very hard. And it's amazing, for about 5 minutes 
they could do it, and then during the 6th minute they'd go back 
to acronyms that we didn't understand.
    So I'm sorry I had to ask you, but frankly----
    Dr. Woodard. I apologize for my use of an acronym, an 
abbreviation.
    Because the FFRDC, the federally funded research and 
development centers, have a special relationship with 
government perhaps an exception could be made to include their 
contracting, their subcontracts in the totals for all agencies.
    Thank you, that concludes my remarks.
    The Chairman. Thank you, your suggestions and analysis are 
very good.
    [The prepared statement of Dr. Woodard follows:]

Prepared Statement of Dr. Joan B. Woodard, Executive Vice President and 
             Deputy Director, Sandia National Laboratories

                              INTRODUCTION

    Mr. Chairman and distinguished members of the committee, thank you 
for the opportunity to testify. I am Joan Woodard, Executive Vice 
President and Deputy Director of Sandia National Laboratories. Sandia 
is a multiprogram national security laboratory managed and operated for 
the National Nuclear Security Administration (NNSA) of the U.S. 
Department of Energy (DOE) by Sandia Corporation, a subsidiary of the 
Lockheed Martin Corporation.
    The purpose of this hearing is to evaluate the implications of the 
policy prohibiting DOE from including in the Department's small 
business performance totals subcontracts placed by its Management and 
Operating (M&O) contractors. This new policy reverses previous policy 
articulated by the Office of Federal Procurement Policy (OFPP) in 1991. 
In my view, the new policy results in a misleading representation of 
DOE's true small business performance. I am also concerned that it has 
the potential to negatively impact institutional management and mission 
performance at DOE's Federally Funded Research and Development Centers 
(FFRDCs).
    We at Sandia National Laboratories care very strongly about the 
small business community. They are vital partners in achieving our DOE 
missions. Many of our small business suppliers are locally based and 
contribute significantly to the economic well-being of our region. We 
have been very innovative with programs to optimize their contracting 
opportunities. And we do not believe the new policy truly serves the 
interests of small businesses.

                  SMALL BUSINESS CONTRACTING AT SANDIA

    Sandia National Laboratories has an excellent track record in small 
business contracting. We are proactive in cultivating small suppliers. 
We don't passively wait for small businesses to come to us. Our 
supplier development programs offer mentoring, business training, and 
technical as well as business assistance. Many of our executives and 
procurement professionals are active in the small business community. 
We seek out small, small disadvantaged, women-owned, HUB zone, veteran-
owned, and service-disabled veteran-owned suppliers to compete for our 
contracts. Consequently, our small business programs yield good 
results. (Sandia's small business programs and initiatives are 
described in detail in Appendix A.)*
---------------------------------------------------------------------------
    * Appendixes A and B have been retained in the committee files.
---------------------------------------------------------------------------
    As required by law, Sandia National Laboratories' management and 
operating contract includes a small business subcontracting plan. 
Socioeconomic subcontracting goals are negotiated annually with NNSA/
DOE and become part of our M&O contract. DOE evaluates our actual 
performance against those goals in its annual assessments of Sandia's 
performance.
    We usually meet or exceed the annual small business goals that DOE 
sets for us. In fiscal year 2003 we awarded $459 million to small 
businesses in 94,000 procurement actions--53 percent of our total 
commitments of $866 million. We awarded $89 million to small 
disadvantaged businesses, topping the goal at 10.2 percent of our 
procurement budget. Women-owned commitments were $69 million or 7.9 
percent, and in fiscal year 2004 we are on track to hit 10 percent. 
Bottom line: every year, Sandia National Laboratories places well over 
50 percent of its procurement dollars with small businesses.

                      IMPACT OF THE POLICY CHANGE

    By excluding Sandia's excellent small business results (and those 
of other M&O contractors), DOE's true small business performance is 
grossly understated. In 1999, prior to the policy change, DOE met its 
Small Business Administration (SBA) goal of 16.7 percent with 18 
percent small-business participation. In 2000, when the change was 
implemented, the figure dropped to around 3 percent. Although SBA 
adjusted DOE's goal downward to 5 percent, DOE is now well short of its 
target. And it is now in the unfair position of having to meet a goal 
that is based on a percentage of the total value of its prime contracts 
without being able to include the small business portion of all its 
prime contracts.
    Is this what the law intended? The language of 15 U.S.C. 644(g) 
states that the ``goal for participation by small business concerns 
shall be established at not less than 23 percent of the total value of 
all prime contract awards for each fiscal year.'' Subcontracts do 
indeed constitute ``participation by small business'' in the prime 
contracts with which they are associated. You don't have to be the 
prime contractor to participate in a prime contract. However, SBA's 
interpretation of the statute is that only contracts awarded directly 
by the agency may be counted toward the agency's assigned goal.
    In order to comply with this policy, DOE is compelled to take small 
business contracts that in the past would normally be placed by the M&O 
contractors and award them directly from the agency. The plan is that 
DOE will novate or assign the contracts back to the M&O contractors to 
administer after they are signed.
    The National Laboratories Improvement Council (NLIC)--a forum of 
the sixteen DOE FFRDCs created to promote ``laboratory management 
excellence for the U.S. Department of Energy''--raised objections to 
this plan in 2002 in a letter to DOE's chief financial officer 
[Appendix B]. NLIC identified several ``serious contract management and 
operational problems'' with the novation concept, which I will 
paraphrase:

   Will the vendor's performance (good or bad) be imputed to 
        the M&O contractor in DOE's assessment process?
   Will the M&O contractor be forced to bear the costs for 
        vendor claims and liabilities?
   Can the M&O contractor (a private entity) administer 
        contracts that use federal teens and conditions in novated 
        contracts as opposed to industrial standard terms and 
        conditions?
   Will the M&O contractor have the authority to execute 
        contract modifications and extensions, and if so, will the 
        socioeconomic credit accrue to DOE or to the M&O?
   Will the M&O contractor be exposed to liability, fines, 
        penalties, etc. for work done under permits, regulatory 
        notices, and orders (including Price-Anderson) by the vendor?

    In addition to these contract management issues identified by NLIC, 
we are also concerned that the new policy may negatively impact mission 
performance. One concern is timeliness: Federal agency procurements 
take much longer to place. Mission performance may be delayed by the 
longer procurement cycle. The M&Os' industrial/commercial terms and 
conditions (as augmented by required flow-down clauses) permit faster 
placement. Disputes and protests that can delay or stop a program are 
handled more expeditiously as well.
    Another concern is control over requirements: The M&O will have 
less say in the formulation of the contract's scope of work and less 
flexibility to adjust the scope of work to changing needs. 
Consequently, the negotiated contract may not be, fully responsive to 
mission requirements.
    My biggest concern with the new policy is that it destroys the 
chain of accountability for facility management performance. You can't 
fairly hold the prime contractor accountable for the overall management 
and operation of a facility--including security, safety, health, and 
environmental compliance--when it does not have the hire-and-fire 
authority over the subcontractors at the site. If we can't choose our 
vendors, we can't be confident that we can control them.
    Here's an analogy that illustrates the problem this situation 
presents: If you were having a house built, you would almost certainly 
work through a general contractor who would hire the subs, integrate 
the work, resolve any difficulties along the way, and achieve the 
result you envision. You would not presume to hire the subcontractors 
yourself and then turn them over to him to supervise: Most general 
contractors would not accept such an arrangement because it would 
saddle them with accountability without control.
    At Sandia, we have already seen problems emerge with implementation 
of the new policy. Two of our procurements were transferred to DOE so 
that they could get the benefit of the small business credit. This 
created confusion with the contractors over whom they were really 
working for and who was defining the deliverables.
    Another contract posing difficulties involves the design of a water 
system at Sandia National Laboratories' Tonopah Test Range in Nevada 
under DOE's initiative to place Facilities and Infrastructure 
Revitalization Project (FIRP) contracts. We provided the technical 
requirements to DOE, and DOE negotiated the procurement. It took longer 
to place than we would expect for a contract of that size and type. DOE 
has not novated the contract to us, and we are not sure that they 
intend to do so. Decisions are being made by DOE administrators rather 
than our own facility engineers, who would normally work closely with 
the Sandia procurement officer. DOE management of a construction 
contract on assets under the management of the M&O creates authority 
and accountability confusion with regard to environment, safety, 
health, and security issues as well as performance and acceptance.

               MEASURING TRUE SMALL BUSINESS PARTICIPATION

    There is a major flaw in the contract-and-novate plan that falls 
into the ``emperor's new clothes'' category: It is likely to be a zero-
sum game. When DOE awards a small-business contract that previously 
would have been awarded to a small business anyway (by the M&O 
contractor), there is no net gain for small businesses. Unless DOE is 
able to convert a good portion of the M&O's large-business subcontracts 
into small-business prime contracts, there will be little net gain for 
the small business community. I doubt that there is much potential for 
this, because the M&O contractors are already trying to maximize their 
small business awards. Indeed, local and regional small businesses may 
actually lose contracts because federal agencies are required to 
conduct competitions on a nationwide scale. An existing supplier based 
in New Mexico or a neighboring state could lose out to a small business 
based thousands of miles away.
    If the real goal is to increase small business's share of 
contracting in DOE programs, then approaches other than the contract-
and-novate stratagem must be developed. We strongly support the federal 
government's policy to optimize small business participation in federal 
contracts. Elements of Sandia's outreach programs described in Appendix 
A of this statement could be applied at other DOE locations, and even 
by the agency itself, to increase small business participation across 
the board. There is no reason the M&O contractors and the Department 
can't work together to make true net gains for the small business 
community, and in fact we are doing so.
    But how will DOE know that it is making progress? A fundamental 
management principle is that you must have valid metrics to know how 
well you are doing. Unfortunately, we know that the new metric is a 
misleading representation of small business participation. The small 
business rate reported to SBA can rise without a real increase in net 
small business contracting.
    One alternative measure would be the total value of contracts 
awarded to small businesses by DOE, the prime contractors, and 
subcontractors. This would be a much more meaningful indicator. It 
would show the volume of business actually received by small business 
elements, not just the prime contract component. The difficulty with 
this alternative is that the data get harder to collect the further 
down the chain you go. Consequently, DOE would have to develop a better 
data collection system and a reliable small business contract 
information system.
    Another alternative measure would be the use of econometric models 
that quantify the economic impact of prime contract dollars in a given 
geographical region. These models generally determine a multiplier that 
can be applied to the prime contract value to yield the total economic 
impact to the region. These models are somewhat complicated, due to the 
multiplier differences in payroll dollars and dollars spent on 
materials and other subcontracts, but they do provide a very direct 
measure of the economic value to the communities in which DOE 
operations reside. Several M&O contractors utilize these models 
currently and periodically publish official reports.
    An alternative measurement system for small business contracting 
performance could be offered in parallel with the SBA-reported figure 
as a means to offer a more accurate representation of small business 
contracting performance for those who may be interested in that 
information.

                    GOCO CONTRACT MODEL IN JEOPARDY

    The new policy has the potential to weaken or even destroy the 
Government-Owned, Contractor-Operated (GOCO) contracting model that has 
been used by DOE and its predecessors for more than 50 years. There is 
no mathematically possible way for DOE to meet the 23 percent target of 
15 U.S.C. 644(g) without breaking the facility M&O contracts into 
smaller pieces. Although the fiscal year 2004 goal for DOE is only 5.06 
percent, we believe the intent is to make progress toward the 23 
percent government-wide goal every year. DOE cannot approach the 23 
percent target with its established business model.
    If DOE ultimately breaks apart some or all of its facility M&O 
contracts, it will have to assume the integrating role now performed by 
the M&O contractors. It is hard to imagine that a reputable industrial 
corporation or academic institution would accept the risk and 
responsibility for managing and operating a facility as a whole when it 
does not have general procurement authority for the goods and services 
required for that mission. Returning to my analogy of building a house, 
it would be as if you had to act as your own general contractor. Most 
homeowners don't have the requisite knowledge of the building trades or 
the management skills to do this successfully. Similarly, DOE does not 
have the in-house technical and managerial expertise to run high-
technology multiprogram laboratories on its own. Realizing this, DOE's 
predecessors wisely chose to contract for those responsibilities from 
among the nation's leading industrial firms and research universities.
    I suppose it would be possible for DOE to take the existing M&O 
contracts for its FFRDCs and evolve them over time into suites of 
smaller contracts awarded to unrelated entities, many of which would be 
small businesses. But by doing so, it would destroy the existing 
accountability structure. What will happen if there is a security 
incident, or a safety problem, or misuse of government property, or an 
environmental violation? Will DOE be able to hold anyone accountable, 
or will the contractors trade accusations of blame? And more 
importantly, who is going to develop the corporate policies and apply 
the corporate discipline across the facility to prevent such incidents 
from happening in the first place? DOE nuclear facilities are being 
held to a much more rigorous Design Basis Threat (DBT) than they were 
in the past. You need a single responsible and accountable contractor 
with general authority if you want to address the DBT and other 
security, safety, and environmental issues effectively.
    The scenario I have outlined here is not so far-fetched as it might 
sound. In fact, DOE is actively encouraging its program offices to 
break out requirements from existing facility management contracts to 
provide small-business prime contracting opportunities for the 
Department. DOE has even created an annual ``Small Business Breakout 
Award'' which it presents to the program office that pursues this most 
aggressively.

                            RECOMMENDATIONS

    My statement has described several troubling implications and 
concerns regarding the new policy and its potential impact, many of 
which I share with the managements of other DOE facilities as 
represented through the National Laboratories Improvement Council 
(NLIC). How to resolve these concerns is primarily a question for 
Congress to decide; I offer the following recommendations for 
consideration.

   The National Laboratories Improvement Council (NLIC) urged 
        reinstatement of the earlier OFPP policy that allowed M&O 
        contractors' small business subcontracts to count toward the 
        Department's goal. We regard this recommendation as the 
        preferred solution.
   If reinstatement of the earlier policy is denied, the 
        Department of Energy should develop an alternative measure of 
        small business contracting participation, based on a full 
        accounting of small business contracts and subcontracts, or on 
        an economic analysis of regional economic impact, or some other 
        legitimate method, to be published as supplementary 
        information.
   DOE and its M&O contractors should continue to work together 
        to increase small business participation at all levels of 
        contracting through small business development and outreach 
        programs deployed throughout all Department elements.
   the Federal Acquisition Regulations (Part 35.017) recognize 
        that Federally Funded Research and Development Centers (FFRDCs) 
        have a ``special relationship to the Government'' and enjoy 
        ``access, beyond that which is common to the normal contractual 
        relationship, to Government and supplier data'' and to other 
        resources of the sponsoring agency. Consequently, ``the FFRDC 
        is required to conduct its business in a manner befitting its 
        special relationship with the Government.'' Because FFRDCs have 
        a unique, close, and long-term relationship with a federal 
        agency, it would seem appropriate to include their small 
        business contracting results with those of the sponsoring 
        agency. FFRDCs are a unique and very limited class; thus, any 
        exception to the new policy for them would not apply to M&O 
        contractors generally.
   Alternatively, excluding FFRDCs from federal agencies' 
        procurement baselines, as the Small Business Administration 
        allowed NASA to do with its Jet Propulsion Laboratory prior to 
        1998, would also solve the problem. This would have the effect 
        of removing FFRDC management contracts from the denominator 
        when calculating an agency's small business prime contracting 
        rate.

    Mr. Chairman, this concludes my statement.

    The Chairman. Ann Sullivan. Let me ask you, I note what 
your title is, but does that mean that you are and advocate for 
women's businesses and contracting?
    Ms. Sullivan. Yes, I represent Women Impacting Public 
Policy in Washington. I'm actually a small business owner, I 
have a little lobbying firm and I represent Women Impacting 
Public Policy.
    The Chairman. Yes, but you're here, but you represent the 
women----
    Ms. Sullivan. I represent them, yes.
    The Chairman. Represent the women in my State?
    Ms. Sullivan. Yes, I represent 500,000 nationwide.
    The Chairman. I see.

            STATEMENT OF ANN SULLIVAN, ON BEHALF OF 
                 WOMEN IMPACTING PUBLIC POLICY

    Ms. Sullivan. Mr. Chairman and members of the committee, 
thank you for giving me the opportunity to speak on this 
important issue.
    I'm testifying today on behalf of Women Impacting Public 
Policy, a bipartisan organization which represents 500,000 
women in business nationwide.
    In addition to its individual members it represents 30 
small business organizations under its umbrella.
    I represent WIPP on the Department of Energy Small Business 
Advisory Council. While on the face of this, this is a dry 
subject with interest only from a few bean counters, in reality 
it has enormous implications for small business.
    Government procurement policy and its commitment to meeting 
those goals directly affects the ability of small businesses to 
contract with the Federal Government.
    We commend you for holding this hearing and letting us 
speak.
    Women-owned businesses number 10.6 million, accounting for 
nearly half of all privately held firms. We generate $2.5 
trillion in sales and employ 19.1 million people nationwide. 
And yet government-wide we are awarded only 2.9 percent of all 
prime contracts. At the DOE women-owned businesses possess .5 
of the prime contracts.
    We know that DOE has done its business the same way for 60 
years with large primes holding the contracts and 
subcontracting much of it to smaller businesses. But we would 
argue that the Department will gain a better price and more 
efficient service by contracting directly with small 
businesses.
    We believe the Government would realize savings by 
eliminating the overhead built in to a large bundled contract.
    With the duration of five plus years, and 85 percent of the 
$19 billion in contracts awarded by DOE to is primes DOE's M&O 
contracts are the embodiment of bundled contracts.
    The Senate in its reauthorization last year of the Small 
Business Administration spoke very clearly on its views on 
bundled contracts. It requires the DOD to justify consolidation 
of contracts in excess of $5 million, and requires all other 
Federal agencies to justify bundled contracts that exceed $2 
million. President Bush, as you know, also spoke about 
mitigating the effects of contract bundling. And in October 
2002 the Office of Federal Procurement Policy issued a 
directive to Federal agencies to strengthen agency reviews on 
bundled contracts. It found that for every $100 awarded under a 
bundled contract there's a loss of $33 dollars to a small 
business.
    So why all the fuss? As you know, small business 
participation is not a mandate, it's a goal. Thanks to many 
members, like yourself and members of the Senate, the agencies 
feel the pressure to meet those goals.
    If Federal agencies are permitted to count subcontracts as 
prime contracts as far as WIPP is concerned any incentive to 
reach the goal of 23 percent for small business is removed. 
Every other agency will be knocking at your door to get the 
same exception, and in the end small businesses will lose.
    I deal with small businesses nationwide every day, Mr. 
Chairman. Small businesses prefer prime contracts over 
subcontracts for the following reasons:
    One, the profit margin on a prime versus a sub is higher. 
That stands to reason because the overhead and the mark-up of 
the prime is removed from the profit margin.
    Two, government agencies, and even the commercial market 
views the prime contract differently than a subcontract in 
terms of past performance and the stature of the small business 
itself.
    Three, with regard to R&D many prime contractors require 
the small business to give up its intellectual property in 
order to be a subcontractor, and for that reason many small 
businesses simply will not work as subs, only primes.
    Four, payment directly from the government is generally 
much more reliable and faster.
    And five, if the Government enters into a prime agreement 
the small business can be assured it will perform the work, and 
when it is expected to perform it.
    We would be remiss if we did not point out the efforts of 
the Office of Small Disadvantaged Business Utilization at the 
Department of Energy. Under the leadership of Theresa Speak DOE 
is aggressively reaching out to small businesses and 
encouraging them to consider doing business with DOE.
    We applaud their efforts to increase the small business 
contracting dollars, but outreach can only go so far, the 
Department must have contracts to award.
    In closing, our recommendation is really very simple: if a 
contract is a prime contract call it a prime, if it is a 
subcontract call it a subcontract.
    Thank you for the opportunity to address this issue.
    The Chairman. Well, I just want to say, Ma'am, and I'll go 
right to Mr. Thompson, your last comment, if it's a prime call 
it a prime, if it's a sub call it a sub, you know that's a 
wonderful answer, but we're talking about what should be a 
prime and what should be a sub, that's the issue. So we can 
call it that, but before we call it that we've got to decide 
which is which.
    Sandia, by definition, is not the DOE, they're a contractor 
of DOE. And so when they issue contracts they are, by 
definition, small business subcontracts, not prime.
    So I think your notion is right, but what we're arguing 
about is how do we get there, and how do we achieve the 
percentages.
    Ms. Sullivan. I guess what we're saying is we think the way 
they're currently counted is the proper way to count it, which 
is if it's a prime it's a prime and if it's a sub it's a sub.
    The Chairman. Okay, got you.
    [The prepared statement of Ms. Sullivan follows:]

           Prepared Statement of Ann Sullivan, on Behalf of 
                     Women Impacting Public Policy

    Mr. Chairman and Members of the Committee, thank you for giving me 
the opportunity to speak on the issue of reporting of small business 
contracts by the Department of Energy (DOE). I am testifying today on 
behalf of Women Impacting Public Policy (WIPP), a bipartisan 
organization which represents 500,000 women in business nationwide. In 
addition to its individual members, it represents 30 small business 
organizations under its umbrella. I represent WIPP on the Department of 
Energy's small business advisory council.
    While on the face of it, this is a dry subject with interest only 
from a few bean counters, in reality, it has enormous implications for 
small businesses. Government procurement policy and its commitment to 
meeting small business goals, directly affects the ability of small 
businesses to contract with the federal government. This is not just a 
philosophical discussion-this has direct consequences for every small 
business interested or already doing business with the federal 
government. We commend the Committee for holding this hearing and for 
considering its effect on small business.
    The 25 million small businesses in this country are credited with 
keeping this economy afloat in the recent economic downturn. Of those 
small businesses, women-owned businesses number 10.6 million, 
accounting for nearly half (48%) of all privately-held firms. These 
firms generate $2.5 trillion in sales and employ 19.1 million people 
nationwide. And yet, government-wide, we are awarded only 2.9% of prime 
contracts. At the DOE, women owned businesses possess 0.5% of the prime 
contracts. The government wide goal for women owned businesses is 5% of 
the total 23% goal for small business.
    We know that the Department of Energy (DOE) has done its 
contracting the same way for 60 years with large primes holding the 
contracts and subcontracting much of its work to smaller businesses. 
But we would argue that the Department will gain a better price and 
more efficient service by contracting directly with small businesses. 
By allowing small businesses to perform services such as maintenance of 
the facility, environmental remediation, event planning, administrative 
support, construction, food services, and a host of other services 
needed to run a large facility efficiently, we believe the government 
would realize savings by eliminating the overhead built into a large, 
bundled contract. With a duration of 5+ years and 85% of the $19 
billion in contracts awarded by DOE to its primes, DOE's Maintenance 
and Operation (M&O) contracts are the embodiment of ``bundled 
contracts.''
    The Senate, in its reauthorization of the Small Business 
Administration (SBA), S. 1375 last year, spoke very clearly on its 
views on bundled contracts. S. 1375 requires the Department of Defense 
to justify consolidation of contracts in excess of $5 million and 
requires all other federal agencies to justify bundled contracts that 
exceed $2 million. Additional justifications by the agencies are 
required for contracts that exceed $5 million or in the case of DOD, $7 
million. Under S. 1375, agencies are required to assess the impediments 
to small businesses as a result of the consolidation and provide action 
plans designed to help small businesses with regard to the 
consolidation.
    President Bush and his Administration have also taken actions to 
mitigate the effects of contract bundling on small businesses. On 
October 29, 2002, the Office of Federal Procurement Policy (OFPP) 
issued a directive to federal agencies to strengthen agency reviews on 
bundled contracts. It found that for every $100 dollars awarded under a 
bundled contract, there is a loss of $33 dollars to small business. The 
Small Business Administration (SBA) issued proposed regulations to 
implement these directives and proposed a review of a bundled contract 
at $5 million for the DOE.
    The issue before you today is not new. The DOE, in 1991, argued 
that subcontracts in its M&O contracts should be counted toward its 
small business goals and won. In 1999, the OFPPS reversed that decision 
and ruled that DOE could not count its subcontracts as contracts for 
goaling purposes. Both Senators Bond and Kerry worked diligently to 
bring about that change.
    So why all the fuss? As you know, small business participation is 
not a mandate, it is a goal. Thanks to Members of the Senate and the 
House who support the success of small businesses in the federal 
contracting arena, the agencies feel the pressure to meet their goals. 
If federal agencies are permitted to count subcontracts as prime 
contracts, as far as WIPP is concerned, any incentive to reach the goal 
of 23% for small business is removed. If DOE is permitted to count 
subcontracts as prime contracts, every other agency will be knocking at 
your door to get the same exemption and in the end, small business will 
lose.
    Mr. Chairman, I deal with small businesses nationwide everyday. 
Small businesses prefer prime contracts over subcontracts' for the 
following reasons: (1) the profit margin on a prime contract vs. 
subcontract is higher. That stands to reason because the overhead and 
markup of the prime is removed from the profit margin; (2) government 
agencies and even the commercial market views a prime contract 
differently than a subcontract in terms of past performance and stature 
of the small business; (3) with regard to R&D, many prime contractors 
require the small business to give up its intellectual property in 
order to be a subcontractor. For that reason, many small businesses 
will not work as subs, but only as primes; (4) payment directly from 
the government is generally much more reliable and faster; and (5) if 
the government enters into a prime agreement, the small business can be 
assured it will perform the work and when it is expected to perform it. 
Under a subcontracting plan, even though the subcontractor is listed, 
it does not necessarily mean the prime will ever use them and 
utilization of the subcontractor can be very unpredictable over the 
life of a contract.
    We would be remiss if we did not point out the efforts of the 
Office of Small Disadvantaged Business Utilization (OSDBU) at the DOE. 
Under the leadership of Theresa Speake, DOE is aggressively reaching 
out to small businesses and encouraging them to consider doing business 
with DOE. We applaud the OSDBU's efforts to increase the small business 
contracting dollars. But outreach can only go so far-the Department 
must have contracts to award.
    In closing, our recommendation is really very simple. If a contract 
is a prime contract, call it a prime. If it is a subcontract, call it a 
subcontract.
    Thank you for the opportunity to address this issue. I would be 
happy to answer any questions.

            STATEMENT OF ROBERT THOMPSON, CHAIRMAN, 
                  ENERGY COMMUNITIES ALLIANCE

    The Chairman. Would you like to proceed, councilman? It's 
nice to have you. I guess I would ask why is a councilman here?
    Mr. Thompson. Well, because I'm the chairman for the Energy 
Communities Alliance, and I was the mayor of the city of 
Richland up until the last term. So I was a 4-year mayor in the 
city.
    The Chairman. And you have a lot of DOE activities in and 
around Richland?
    Mr. Thompson. We think the Hanford site generates a lot of 
revenue for our community, and a lot of work for the Department 
of Energy for both the primes and the subcontractors.
    And for the record, Senator, we do represent Edie County, 
Espanola, Carlsbad, and Los Alamos in--I suppose it would be 
your district. So we actually have some----
    The Chairman. In my State?
    Mr. Thompson. Definitely in your State, Senator.
    The Chairman. I don't have a district.
    Mr. Thompson. I appreciate the correction.
    Senator, it's a--first off it's a pleasure to have an 
opportunity for local government to come here and have an 
opportunity to discuss what we look at policy that tremendously 
impacts our community.
    Traditionally when you're a small business man, and when 
you're a small government like Richland, you have a tendency to 
be on the receiving end, and we very seldom get the opportunity 
to give some input.
    And so I want to base my comments from a local community 
perspective. And a lot of the concerns and questions that have 
come forward are those--basically I would echo them.
    It seems to me that nobody here is going to say anything 
bad against small business. Certainly the Energy Community 
Alliance, because it is our local businesses and the life load 
of ourselves, support local businesses, small businesses.
    The concern, and we have concerns, is that what has really 
happened is there's kind of an counting shift, is what it seems 
to me that's going on. And there are some potential unintended 
consequences that have been echoed by some of the members, and 
by Mr. McSlarrow himself, in regards to what the impact can be.
    But one that has not been touched on that impacts us is the 
idea of safety and security. What happens that hasn't been 
addressed by anybody on the panel so far is the idea that we're 
in the business of protecting our citizens, our constituents, 
and anybody who's gone through a fire such as Los Alamos, or 
what we had at Hanford, understands that there are concerns 
being able to integrate that safety.
    And the concern that we have if you break these contracts 
up, take a prime and break it into several entities, the 
ability to communicate, if past examples of working with the 
Department of Energy with local government is of grave concerns 
to us. We have concerns whether or not the new contractors if 
they are broken apart would have the ability to communicate.
    What we don't need is five separate law enforcement 
agencies, five separate privately held fire departments trying 
to integrate them. At least I can speak from personal 
experience having the fire at Hanford, it is of tremendous 
difficulty when you don't even have the same communication wave 
length to communicate. And there is no guarantee, unless it's 
provided within the contracts, to ensure that that occurs.
    Some of the other concerns that we have is the idea of 
integration. Now we've heard that touched on briefly here, but 
the idea is that if you break a prime into several different 
contracts the concern the local government has is what happens 
if one of these subs is able to complete its duties, where the 
other one has to wait because these are so integrated? I mean 
it's like a circulatory system, if there's a part that goes 
wrong here it has impacts somewhere else in the system.
    The concern that we have is what is truly the mechanism to 
integrate these, and candidly the Department of Energy perhaps 
has not managed contracts in a way that we think was as 
successful as we might have liked. We can only imagine the 
opportunity for the Department of Energy to increase the number 
of its employees to try to manage several other contracts, let 
alone our integration with them from a local government 
perspective.
    It can be a struggle communicating with the Department of 
Energy on certain levels. It can be a struggle communicating 
with the prime contractor. If you break it apart integrating 
the whole and making it a unified force might be very, very 
difficult.
    Part of what we have concerns about, Senator, is the 
regionalism, and Mr. McSlarrow touched on that.
    The Chairman. Well, we'll see here. We're going to have 10 
minutes left for all of you, so let's assume it is, so talk 
fast.
    Mr. Thompson. I'll do that.
    The regional question. Mr. McSlarrow touched on that, and 
the issue from our perspective is simply this: we want local 
businesses to exceed because local businesses have a tendency 
to stay in your community and expand. If we open it up to a 
nationwide or an international playing field we have concerns 
whether some of the local businesses would be able to stay in 
operation. And that is a grave concern.
    Senator, you've already touched on the pension questions. 
We really would have serious concerns from an employee 
standpoint, which again I understand, that's the life blood of 
our communities are these individuals, and suddenly that their 
pension plan has become in jeopardy because you have a sub. 
Although I fear the language the ability of subs of a certain 
size to be able to take care of the pension, and the union 
concerns that are--can be as big as they can be at the Hanford 
site, give us grave, grave concerns, Senator. And I think that 
any potential change really needs to be evaluated.
    You know, ultimately we're in this together. At the Hanford 
site we're in it to clean up, and we don't want to take 
advantage of the taxpayers in doing so. That hasn't always been 
the framework that my community might have suggested to you. 
But I will tell the Senator, and the committee, that it is 
important to give every dollar, and that the taxpayers get a 
bang for that buck.
    And the concern that we have is that if you start 
overlaying all sorts of overhead on top of each other, and Ms. 
Sullivan talked about the idea of the profit margin ends, as 
you start to break these things up you start to end up getting 
layering on profit margins as well. And we have a very 
difficult time thinking that somehow is going to benefit the 
taxpayers of the United States. And that is a concern of us 
all.
    We want to have things have cleaned up. We think that the 
traditional method of bundling--I've heard that word for the 
first time, but the original M and I contracts make sense.
    If you want to make changes make it specific language to 
support small business in the contracts. Breaking it up and 
having additional DOE oversight has not worked in the past, we 
doubt whether it will happen in the future.
    [The prepared statement of Mr. Thompson follows:]

           Prepared Statement of Robert Thompson, Chairman, 
                      Energy Communities Alliance

    Mr. Chairman and Members of the Committee, I thank you for inviting 
me to testify on the subject of Small Business Contracting by the 
United States Department of Energy (``DOE'' or ``Department'').
    energy communities alliance supports small business contracting
    As a small business owner and a leader in my community, I fully 
support the general idea of increasing small business opportunities in 
DOE contracts. However, in practice, the change in the Department's 
reporting of small business contracting with the idea of breaking up 
the Department's Management and Operating contracts and Management and 
Integration contracts (``Prime Contracts'') into several small business 
contracts creates several unintended consequences that may adversely 
impact local communities and workers at DOE sites and impede the 
ability to complete the DOE mission in a safe and effective manner.
    DOE's system of awarding large Prime Contracts to contractors 
(``Prime Contractors'') at sites and including small business 
contracting goals within such contracts is the best method of ensuring 
small business involvement in DOE contracts. As the organization of 
local governments that are most affected by the Department's weapons 
complex activities, Energy Communities Alliance (``ECA'') has an 
interest in ensuring the effective and efficient implementation of DOE 
contracts. ECA is committed to making sure that the DOE contracting 
system works.
    ECA is the organization of local governments that are adjacent to 
or impacted by DOE activities. Our mission is to bring together local 
government officials in DOE impacted communities to share information, 
establish policy positions, and advocate community interests in order 
to effectively address an increasingly complex set of constituent, 
environmental, regulatory, and economic development needs.

      CHANGING THE METHOD OF COUNTING SMALL BUSINESS INVOLVEMENT 
                          DOES NOT MAKE SENSE

    ECA has seen an evolution in the way the Department contracts for 
services. Many of the changes have made sense because they have as 
their goal focusing on the missions at the sites and ensuring that the 
U.S. taxpayer benefits. The Department has for the past several years 
evaluated small business contracts by measuring the amount of small 
business contracts the Department's Prime Contractors utilize to meet 
its statutory small business contracting goals.\1\ A recent change by 
which the number of small business contracts issued directly by the 
Department increases while the number of Prime Contracts issued 
decreases is being met with skepticism among the local governments 
around the DOE facilities. The best explanation the Department has 
provided to local governments is that the change is required by the 
Office of Management and Budget (``OMB'') to ensure that more contracts 
go directly to small businesses--a change that alters the method by 
which small business involvement is counted.
---------------------------------------------------------------------------
    \1\ The Small Business Act, as amended by.the Small Business 
Reauthorization Act of 1997, set a federal government goal of 23 
percent of prime contracting with small businesses.
---------------------------------------------------------------------------
    In the past, the Department has informed local governments that 
changes in contracting have been made in order to make contractors more 
accountable, assist DOE in obtaining better pricing, improve contract 
effectiveness, and provide better incentives to ensure that contractors 
focus on DOE's mission. This latest explanation as to why the system 
should change--to meet OMB contracting goals--will have unintended 
negative consequences on a complex system and does not further DOE's 
mission.
    Is the Department gaining a more efficient contract? A more 
effective contractor? The reality is that the Department is meeting an 
OMB goal of small business contracting--a goal ECA believes the 
Department achieved by setting small business contracting goals and 
small business contract reporting requirements in its Prime Contracts. 
If the Department wants to ensure more small business contracting, add 
the incentive to new contracts. The Department should not change a 
system based upon an internal administrative technicality--DOE 
contracts impact jobs, safety and the ability to complete a difficult 
job at the DOE facilities.
    DOE's contracts that it is looking to directly offer to small 
businesses are not simple. In fact, they are complicated and require 
highly specialized work that is not necessarily within the area of 
expertise of most large or small contractors. Some of the Department's 
missions are as follows.

   Take environmentally contaminated sites that are not clearly 
        characterized and remove and remediate hazardous and 
        radioactive waste within a specific budget that relies upon 
        regulatory review and approval to accomplish the cleanup.
   Provide security for Nuclear Weapons Facilities.
   Disassemble nuclear reactors.
   Demolish and remove buildings that contain radioactive and 
        hazardous substance contamination.

                        UNINTENDED CONSEQUENCES

    Prior to my testifying before this Committee, I contacted several 
local government officials around the country to discuss the impact of 
small business contracting changes at DOE facilities. The following are 
some of the unintended consequences that local governments have 
highlighted:

    1. DOE Oversight. The Department plans to divide the functions of 
some of the Prime Contracts into several different contracts at 
specific sites. DOE would become the contract integrator for the site. 
DOE's record on overseeing one contractor at a site has rarely been 
identified as exemplary, as is clear from reading GAO reports and 
reviewing Congressional hearings. The Department must address how it 
expects to manage multiple contracts at a site utilizing a decreasing 
number of DOE employees to oversee the contracts.
    2. Putting Regional Small Businesses Out of Work. Another 
consequence of dividing up the Prime Contracts is to put regional small 
businesses that currently work for the Prime Contractors out of 
business. The current system allows the Prime Contractors to solicit 
small businesses from a regional area. DOE's new contracting scheme 
advertises small business contracting nationally. Hence, DOE's change 
in policy removes the focus on regional small business hiring. Further, 
several small businesses in my community are concerned that the new 
small businesses that are hired under these contracts will no longer 
have an incentive in the contract to hire regional small businesses 
that currently work for Prime Contractors in the communities. These 
small businesses have created numerous jobs and new opportunities in my 
community and similar communities like mine around the country. I have 
been told by ECA members in Paducah, Kentucky that several small 
businesses with good performance records are being forced to leave the 
area or shut down entirely because they cannot take on the risk of 
bidding on the new Prime Contracts that are being set aside for small 
businesses. These small businesses have worked hard to create new jobs 
and new opportunities that the new contracting scheme may not take into 
account.
    3. Integration. DOE believes that it will gain certain efficiencies 
by becoming the integrator of all of the contractors at a site. 
Currently, the Prime Contractor at the site undertakes this difficult 
job. Integrating building demolition and environmental cleanup sounds 
simple but it is a technically difficult process. The process involves 
radioactive contamination and hazardous waste storage, removal, 
transportation, and disposal of the contamination within a site and 
preparation of some of the material for shipment to receiver sites. 
DOE, once again with the same number of employees, is responsible for 
dealing with additional contractors, workers, unions, additional 
paperwork and oversight, and additional resolution of issues. In 
addition, DOE will create duplication of functions; for example, each 
contractor will need safety officers, emergency response personnel, and 
security officers. At the Paducah, Kentucky site the local DOE office 
has been abolished except for a few employees, and DOE is preparing to 
award at least two small business set-aside contracts that were managed 
under a Primary Contract. This small business contractor will now need 
to figure out how to coordinate among at least four different 
contractors at the site, and no DOE office will be on site to referee 
the daily interface between the contractors. DOE will now need to 
schedule each contractor's activities since each contractor is 
dependent upon the other to complete its job. If one contractor does 
not complete its job on schedule, the other may not be able to 
undertake its job. With one Primary Contract, DOE can hold one 
contractor accountable and responsible for all of the work at the site.
    4. Safety and Security. Safety and security are among the most 
important issues on which the Department and local governments. around 
the sites have focused. Currently, the Department uses overhead 
expenses from the large contractors to pay for certain activities, 
including emergency response capabilities. The Department also 
considered subcontracting site security force activities directly to 
small businesses, which we now understand has been revoked. However, 
the idea that a small contractor with little experience needs to hire a 
large Prime Contractor in order to implement a small business set-aside 
contract does not make sense. If the Department hires multiple small 
businesses at a site, and the Department integrates the activities, who 
will pay for and conduct the emergency response actions? In addition, 
which one of the contractors will be responsible for implementing the 
emergency response activities, and if there are multiple contractors 
that are responsible for the same activity such as emergency response, 
how will they coordinate with responders that are outside the fence in 
the case of an emergency? All of these issues greatly impact not only 
the safety and security of the DOE site, but also the communities 
directly adjacent to the DOE site. At Hanford and Oak Ridge, DOE 
manages several Prime Contracts on the sites, and at both sites there 
have been challenges to DOE integration. In emergency response 
exercises there are multiple emergency response personnel with 
different ways of performing their jobs--how they communicate, react 
and work together impacts lives and the safety of my community. The 
same issues cut across environmental remediation, security, and 
performance of other jobs on-site.
    5. Support for Local Communities. DOE's good Prime Contractors work 
closely with the local governments around the DOE facilities. These 
contractors provide an important interface between the Department and 
the local governments. In addition, many of these contractors support 
economic development activities and local organizations, such as 
schools and charities. In a May 6, 2004 letter the Department's 
Environmental Management program clearly stated to local governments 
that it will not assist the local governments with any of these 
activities in its contracting process and DOE does not believe that it 
should be assisting our communities through the contracting process, 
even though in most cases the local government has been instrumental in 
mediating disagreements between state regulators and DOE that would 
otherwise have prevented DOE from progressing with its cleanup. The 
good local Prime Contractors have filled this void and work with local 
governments by using their corporate resources to assist local 
communities and have ensured that close partnerships exist that support 
the local economy and fabric of our communities. Because of DOE's 
recent deletion of the requirement for contractors to work with local 
communities on economic issues, only one small business has indicated 
support for local government programs during its bid process. By 
switching to multiple small business contractors, we are concerned that 
this assistance will be lost which will impact the quality of life for 
DOE workers and other citizens living in our communities and may lead 
to a decrease in support for DOE's missions.
    6. Additional Costs. The minimal number of small business contracts 
that the Department has put out for bid clearly indicates that although 
the Department believes it is hiring a small business contractor, the 
reality is that in order to perform this complicated work, small 
business contractors must retain large contractors in order to 
implement these activities. As a result, we are creating a small 
business contract face that subcontracts to the larger contractors who 
may have worked on the site and possess the experience and expertise to 
conduct the work which can increase administrative and other costs. 
Additionally, control and ultimate responsibility rest with the small 
contractor that may not have the experience, financial wherewithal or 
the ability to access corporate resources needed to address complicated 
issues that arise. Contracting with DOE is not simple, especially when 
a contractor needs to purchase surety bonds or environmental and other 
insurance products.
    7. Pension Plans. The Prime Contractors provide pension plans, 
which are critical in ensuring that current workers are incentivized to 
remain working at the sites and that retired employees retain health 
and other benefits. Maintaining a pension plan is difficult and 
complicated and not likely something that a small business can take on 
at a site--either the small business contractor would need to hire a 
larger Primary Contractor to run the pension plan or DOE would need to 
hire a new outside contractor to run the pension plan.
    8. Change for the Sake of Change. A significant concern for local 
governments is that at several sites, a contractor may be performing 
well but, since the Department has decided that it intends to break up 
several of the large contracts into smaller contracts, it does not 
consider past performance when deciding how to re-bid a contract. For 
example, at one site you may have a contractor who has performed well, 
hired an exemplary amount of small business contractors, and earned all 
of its incentives but then not be eligible to bid on a contract for an 
additional period. The message that it sends to contractors is to only 
look at the short-term and that regardless of performance the 
contractor may not be eligible to continue its work.

                               CONCLUSION

    DOE's past small business contracting system worked. The system 
included incentives for Prime Contractors to hire small businesses and 
to work with local governments. DOE has told ECA that OMB wanted direct 
contracting with small businesses, so it is changing the way it does 
business. The concept of contracting highly technical, complicated 
large projects to small businesses that may not have the workforce or 
expertise unless they partner with large contractors is not sensible or 
efficient.
    DOE should focus on using the best contracting methods to implement 
its mission. Use incentives at the sites for Prime Contractors to hire 
small qualified businesses where it makes sense. Breaking up large 
Prime Contracts has unintended consequences that negatively impact 
local communities (especially where the Department deletes any 
requirements to work with a local community), decreases management 
accountability, increases costs and potentially impacts safety and 
security at DOE sites. If DOE wants to promote small business 
contracting, additional incentives and requirements for the Prime 
Contractors in the contracts must be created.
    That concludes my prepared remarks. I applaud your efforts to 
ensure that the Department of Energy utilizes the best tools available 
to implement its mission. It is an issue that is vital to the success 
of the DOE activities in my community and communities throughout the 
country. I will be happy to provide you with any additional information 
that you desire and I would be pleased to answer any questions that you 
may have.

    The Chairman. Well, we don't start our vote until 11:15 so 
we have a little bit of time.
    Let me say, sir, your discussion here about your community 
and the area surrounding it, and how devoted and dedicated you 
are to using the taxpayers' dollars prudently, let me suggest 
that through no fault of yours the taxpayers' dollars have been 
thrown at your problems like we had all the money in the world, 
and then some more.
    We've had years and contracts where we have paid out our 
money and the achievement at the end of the time is nothing. 
Whatever millions we paid out you go in and say what happened? 
And the answer is: nothing, because we have had no agreement 
from the local communities as to goals that are going to be 
achieved, and when. And you know that.
    In fact we are a money machine to about three areas in the 
country. And it is not to be fathomed by some of them that this 
is a job that's supposed to run out. You know that. That's not 
it, it is a job where we're going to be here forever, and the 
checks are going to paint these walls forever.
    So anything that legitimately says we're going to spend 
less money I take very, very seriously. But I think the most 
serious one to save money is the current requirement by the 
Department of Energy that all clean-up sites sign an agreement 
as to the time table and achievable goals before they get the 
new allocation of substantial clean-up money.
    Now I assume you know that you all have done that; isn't 
that right?
    Mr. Thompson. The State of Washington certainly has in the 
tri-party agreement.
    The Chairman. Is that current?
    Mr. Thompson. It is. We are--you know, there may be a few 
lawsuits that are involved over that.
    The Chairman. I mean, is that a very recent agreement?
    Mr. Thompson. Oh, I think we've had that agreement in place 
for about the last 3 or 4 years, Senator. There is a question 
of interpretation in all contracts, and I think that you'll 
find that the State of Washington is advocating rather strongly 
through its Attorney General, Ms. Gregour (phonetic), their 
position in regards to clean up and milestones.
    The Chairman. Well I can tell you in the State of New 
Mexico, and Dr. Woodard knows about it, it didn't happen to her 
lab but it happened to Los Alamos, they had a very large $42 
million dollar addition that was going to be paid to them for 
environmental clean up, and the State of New Mexico decided 
that they wouldn't sign an agreement as to goals and achievable 
time table. And as a matter of fact they didn't get the money 
until they did.
    Now of course they claimed victory, but we got an 
agreement, where they wanted the money without it.
    So I accept your concerns and your recommendations, but I 
just want you to know that we're fully aware that we've got to 
get on with the business of cleaning up, not with the business 
of having good agreements with subcontractors or general 
contractors, or whatever it is.
    Let me move now to both Robin Nazzaro and Dr. Woodard, and 
any other of you that have an idea.
    The DOE is asking a facility manager to manage small 
business doing the work they used to do. Testimony from both 
GAO and Sandia states that one action DOE is considering is to 
expand its small business prime contracting to identify an 
activity already subcontracted by a facility manager to a small 
business.
    Two, to remove that activity from the facilities manager's 
contract.
    Three, to enter into a prime contract with small business 
for the same service, and Four, then require that the facility 
management contractor to administer the activity that they just 
lost control of.
    This strikes me as encouraging the same lack of 
accountability that led me and my colleagues to create a 
separate National Security Administration because we were 
disgusted with the lack of accountability that was rampant in 
the Department of Energy.
    I don't know if you have a view, if my question was 
intelligible, or too long, but let's ask you first, Ms. 
Nazzaro.
    Ms. Nazzaro. Mr. Chairman, this appears to us to be an 
example of where a good policy leads to a bad practice. The 
intent was to reduce the effects of more prime contracts, you 
know, as far as the limited resources that DOE has for 
oversight and management. We certainly share your concern about 
the potential lack of accountability, it will blur those lines 
of accountability and authority, definitely a step in the wrong 
direction for NNSA.
    Both NNSA and the contractor at Sandia have used this on a 
limited basis and have raised concerns.
    The Chairman. Dr. Woodard.
    Dr. Woodard. I share your concern too, Mr. Chairman.
    In this particular case by transferring the contracts back 
to the facility manager you create significant problems with 
the accountability chain, and you separate the accountability 
and authority, or at least create confusion about 
accountability and authority in order to achieve the work in 
the contract successfully.
    The Chairman. Councilman, have you got a comment?
    Mr. Thompson. No, I agree.
    The Chairman. Thank you very much, you're helping me along 
nicely.
    How about Small Business Advocate, do you have something?
    Ms. Sullivan. I guess I would just say that if I, you know, 
if I had 85 percent of the business I wouldn't want any changes 
either, and I would talk about how mine was the best way to 
achieve the way it's run.
    I'm interested to hear that the reason given for not 
wanting to do things a little bit differently is the 
incompetence of the Department. I don't now that the small 
business law allows for that to be a criteria not to award 
contracts to small businesses.
    The Chairman. That the DOE is incompetent?
    Ms. Sullivan. Well, I mean that's what I'm hearing is don't 
give it to small businesses because DOE can't manage itself, it 
can't even manage the big guys so how can it manage small guys. 
And I'm just saying well, that's kind of an interesting--to me 
I don't believe the law allows that that's a reason not to 
subcontract or to contract.
    The Chairman. Well it may be interesting for you, but it 
may also be true. Some of us believe it. I would have told that 
to the Deputy Secretary but he escaped already.
    Let me talk to you, Dr. Woodard. I'm concerned about your 
point that the DOE could not possibly approach the 23 percent 
government-wide goal with its current business model, a 
government owned, government operated GOGO model. You and GAO 
noted that the DOE will have to break some of their facility 
M&O contracts into collections of smaller contracts.
    Let me ask you, if DOE were to progressively break off 
pieces at Sandia under their M&O contract, and award them to 
different companies, presumably identified as small business, 
would there come a point when Lockheed Martin could reasonably 
say we can't manage this way, this isn't worth it? The risk is 
too high, we're no longer interested in being an M&O 
contractor?
    Dr. Woodard. Mr. Chairman, I think the likelihood of them 
walking away is small, but real. More likely in future 
competitions for the M&O contracts at these facilities the 
caliber of corporations like Lockheed Martin, and our top 
research universities, would think again about the risks and 
the liabilities they make be taking on.
    The Chairman. I think that's a good observation. And we're 
coming up with one soon.
    You suggest in your statement that federally funded 
research and development centers, as you remember you called 
those FFRDCs, like Sandia National Laboratories, have unique 
relationship with the Government, and an exception to the small 
business policy should be made for them because of this close 
relationship.
    In my own experience I know that labs like Sandia are 
performing functions that are sometimes described as inherently 
governmental. In your view what makes an FFRDC closer or more 
special to a Federal agency than Federal contractors?
    Dr. Woodard. In the Federal acquisition regulation that 
describes these federally funded research and development 
centers it talks about the special relationship and the 
establishment of these centers to address a special research 
and development need of that agency. The FFRDC, if I might use 
that acronym, acts as if it owns in fact the mission of that 
agency, the agency entrusts to the FFRDC special access to data 
and information to government facilities, and to employees. So 
there is very much of a special relationship and a sense of 
ownership of the mission by the FFRDC.
    The Chairman. This is my last question and I'll submit some 
for you in writing. This can be either--I guess it would be Ms. 
Nazzaro; can DOE reach the 23 percent? Your testimony makes it 
clear that having a long term goal directing 23 percent of 
DOE's contracting base the small business prime contracts would 
be a very challenging thing for DOE to do.
    That might be putting it mildly.
    Why is it so difficult for DOE to expand its prime 
contracting with small business?
    Ms. Nazzaro. To reach this goal would require a significant 
redirection of the dollars to the small businesses. DOE is 
limited to a degree to the extent to which it can tap into 
these dollars as they come up for award, or renewal.
    DOE's programs also, as we mentioned, disagree on whether 
they can ever really reach a goal, particularly of 23 percent, 
and how much of those dollars can be redirected.
    Neither NNSA nor the program offices that we talk to could 
provide us an estimate of what was reasonable, or what they 
could attain. While we said EM is a little more optimistic they 
do plan to proceed cautiously toward this goal. And NNSA and 
Science said they will never be able to reach the 23 percent 
goal, and while performing their mission safely and securely 
this would not be an option.
    The Chairman. Do you agree with that? Do either of you have 
an opinion on that?
    Ms. Sullivan. Well the DOE negotiated that 20-year plan 
with the SBA, so clearly there are people on both sides who 
think they can reach it.
    The Chairman. Okay. I want to thank all of you, I will 
submit some questions to each of you, and we had a very full 
day, but we didn't know we were going to. So we set you up when 
I'm in the middle of five other things, and most Senators are. 
But I think we made our point, and I think the DOE understands 
that we are concerned, and they certainly should know that 
we're not trying to force upon them a policy that we dream up, 
but we think some of the things they're recommending are not 
very practical and will probably have a negative impact on 
small business and the laboratories, which I don't think any of 
us here want to see, and certainly most Senators don't want.
    We stand in recess.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]

                               APPENDIXES

                              ----------                              

                               Appendix I

                   Responses to Additional Questions

                              ----------                              

                              Department of Energy,
               Congressional and Intergovernmental Affairs,
                                   Washington, DC, August 23, 2004.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.On May 18, 2004, Kyle McSlarrow, Deputy 
        Secretary, testified regarding the implications of a recent 
        change in reporting of small business contracts by the 
        Department of Energy.
    Enclosed are the answers to 14 questions that were submitted by 
Senators Bingaman, Thomas, and Bunning for the hearing record. The one 
remaining answer is being prepared and will be forwarded to you as soon 
as possible.
    If we can be of further assistance, please have your staff contact 
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
            Sincerely,
                                          Rick A. Dearborn,
                                               Assistant Secretary.
[Enclosures.]

                    Questions From Senator Bingaman

    Question 1. In order to meet the 23 percent small business prime 
contracting goal, DOE would need to separate out some of the small 
business subcontracts awarded by M&O contractors and award them as 
prime contracts. However, your testimony states that the ``Department 
is evaluating whether and to what extent doing so would entail certain 
risks and concerns, especially with regard to program coherence and 
integrity . . .'' It seems to me that the outcome of this evaluation is 
essential to determining what DOE can actually achieve. Can you tell us 
when this evaluation will be complete?
    Answer. The evaluations are being completed on a case-by-case basis 
as the M&O contracts come up for bid. The Department has commissioned 
studies that will assist in identifying the work that would potentially 
be broken out given the nature of the work. These studies are to 
identify ``critical services'' that are integrated and cannot be broken 
out from those ``supportive services'' that can be broken out. The 
individual program office responsible for the M&O contract is the 
office that will determine which portion of the work could be 
redirected without jeopardizing ``program coherence and integrity.'' 
There is not a department-wide determination for what could/will be 
broken out of the individual M&O contracts.
    Question 2. GAO's report states that DOE has ``no strategy in place 
that defines how DOE will achieve (the 23 percent) goal, identifies 
what the contributions of the various DOE organizational components 
will be, or reconciles the differing views within DOE as to what would 
be an appropriate level . . .'' Would you agree that more work needs to 
be done at DOE to determine whether the 23 percent goal is achievable-
the evaluation of M&O contracts needs to be completed, the 
determination of an achievable goal, and further detailing of a Plan of 
Action that would have proper support within the Department?
    Answer. DOE agrees that, should there be a requirement that DOE 
achieve a 23 percent goal, more work will need to be done to determine 
whether the 23 percent goal is achievable. In FY 2003, based on a 
request from SBA (during the negotiations for the FY 2003 goal) as to 
when DOE might possibly achieve a 23 percent goal, DOE submitted a 20-
year plan to SBA.
    Currently DOE has a 5.06 percent goal for FY 2004 and FY 2005. That 
goal was negotiated with SBA pursuant to Section 15(g) of the Small 
Business Act that allows each Agency to ``establish realistic goals for 
the award of the contracts to small business.'' DOE does not currently 
have a 23 percent goal and may never have a 23 percent goal. DOE 
establishes its annual small business goals based on the identification 
of new contracting opportunities, extensive small business outreach, 
development of a customized small business database, and past 
performance by each of the offices within DOE. Under this approach, we 
have been taking realistic steps in increasing our small business prime 
contract goals from 3.7 percent in FY 2002 and 4.6 percent in FY 2003, 
to 5.06 percent for FY 2004 and FY 2005 and will continue to do so.
    One of the ways in which we are identifying new contracting 
opportunities is through the conduct of studies of all the M&O 
contracts for the ability to break out work for small business. Such 
studies are conducted prior to the award of any new contract and are 
provided to the office in charge of that M&O contract for their 
determination as to what portion of the work (if any) they will pull 
out for direct contracting with small business.
    Question 3. If it becomes clear that DOE cannot achieve the 23 
percent goal without unacceptable risks and unintended consequences, do 
you think the applicability of this goal to DOE should be changed, or 
should it just be accepted that it is a performance ``goal'' and not a 
mandate?
    Answer. The 23 percent goal is a government-wide goal. Agency goals 
and government-wide goals are not necessarily identical. The Small 
Business Act states ``Notwithstanding the government-wide goal, each 
agency shall have an annual goal that presents, for that agency, the 
maximum practical opportunity for small business concerns . . .'' (15 
U.S.C. 644 Section 15(g)(1)). The DOE goal for FY 2004 and FY 2005 is 
5.06%. DOE should never find itself in the position of having a mandate 
that has ``unacceptable risks and unintended consequences''--but, 
rather a goal established in consultation with SBA given the 
Department's procurement needs.
    Question 4. GAO has said that DOE would need to increase its small 
business contracting by about six fold (4 percent to 23 percent) in 
order to meet the goal. Do you have an estimate of how much DOE's staff 
and budget would need to be increased in order to handle the additional 
contract processing and management, and whether the savings from the 
avoided M&O contractor profit and overhead costs would yield a net 
savings to DOE?
    Answer. The Department has not performed the analysis needed to 
estimate potential savings.

                     Questions From Senator Thomas

    Question 1. How does DOE ensure that Maintenance & Operations (M&O) 
contractors comply with their subcontract plans?
    Answer. Every M&O contract contains a clause based on the Federal 
Acquisition Regulation (FAR) 52.219.9, for ``Small, Small Disadvantaged 
and Women Owned Small Business Subcontracting Plans''. All subcontract 
plans are made a material part of each contract.
    Additionally, Contracting Officers, in consultation with Small 
Business Program Managers, are required to meet periodically with 
directors of contractor purchasing to review the status of the 
contractor's performance against its small business subcontracting 
plan. (DOE Acquisition Letter 2004-03)
    This year the U.S. Small Business Administration (SBA) advised DOE 
that it would Conduct ``surveillance reviews'' on two of its 
facilities: the Los Alamos National Laboratory and the Richland 
Operations Office. DOE is cooperating with SBA in these reviews which 
are scheduled to determine if the buying activity made every reasonable 
effort to maximize contract opportunities for small business concerns. 
Since these facilities are operated by prime contractors, the review 
will basically address their subcontracting efforts.
    Finally, the DOE Office of Small and Disadvantaged Business 
Utilization (OSDBU) this year initiated a pilot subcontract review 
process of several M&O contractors. Notice of the study and the 
application of the SBA negotiated small business subcontract goals was 
provided to all departmental elements and contracting activities 
(Exhibit A--2 memos dated 12/17/03 and 1 memo dated 12/19/03).
    The subcontracting review process itself will consist of (1) 
determining whether the subcontracting plan meets the requirements of 
the FAR, (2) whether the subcontracting reports submitted by the M&O 
contractors are in compliance with their subcontracting plans and (3) 
whether the M&O contractors have the required files to back up reported 
small business awards. (Exhibit B--Evaluation Review Form and Exhibit 
C--Subcontracting Plan Checklist). Compliance with subcontracting 
plans/goals will be used as an evaluation factor in future RFPs for 
work at DOE.
    Question 2. Have liquidated damages ever been imposed on non-
compliant M&O contractors? If not, why not?
    A2. The Department has never found any of its M&O contractors to 
have willfully or intentionally failed to carry out the provisions of 
their subcontract plans, nor has the Department found any such 
contractor to be taking any action to willfully or intentionally 
frustrate its subcontracting plan. Therefore, no liquidated damages 
have been imposed on an M&O contractor under FAR 52.219.16--Liquidated 
Damages--Subcontractor Plan.
    Question 3. Does DOE participate in the Small Business 
Competitiveness Demonstration Program?
    Answer. Yes. The Department has participated in this small business 
set aside program since its inception in 1999. Every year the 
Department reviews the list of Designated Industry Groups (DIGS) 
identified by the Small Business Administration for participation in 
the program and if/when 40% of the obligations in a specific DIG is 
awarded to Small Business, we remove the set aside requirement.
    Question 4. If DOE is allowed to count prime and subcontracts 
toward a single overall goal, how would DOE ensure that small 
businesses obtain prime contracts where appropriate?
    Answer. The DOE has an aggressive outreach program to ensure that 
small business become aware of contracting opportunities available at 
DOE. This process includes one-on-one counseling sessions, meetings 
between small business and program/procurement representatives, 
establishment of a small business database available to all program/
procurement staff to help identify small business in whatever field of 
work they are seeking goods and/or services, establishment of a 
Forecast of Contracting Opportunities updated semi-annually, 
participation in workshops and conferences targeted to small business 
such as the SBA Matchmaker Missions and conduct of an Annual DOE Small 
Business conference that attracts between one and two thousand 
attendees every year. DOE will continue with this outreach effort.
    Question 5. Why is DOE different than DOD with its large 
sophisticated contracts, yet it is able to meet (or come close) to its 
23% prime contract goal?
    Answer. DOE has a unique structure whereby its facilities and 
laboratories have been, for over fifty years, operated through 
management and operations (M&O) contracts with the private sector, 
rather than federal employees. These contracts have traditionally been 
executed with large corporate entities or universities. This process 
has resulted in very large, complex and long term contracts that have 
not been accessible by small business. These M&O contractors currently 
receive between 85 percent and 90 percent of DOE's procurement dollars 
leaving approximately 10 percent potentially available to all other 
firms (large and small). DOE would need to change or modify its 
approach to contracting in order to meet (or come close to meeting) the 
23 percent goal established by Congress as a small business goal for 
all procurement dollars awarded government-wide.
    The 23 percent goal does not (necessarily) apply to each department 
but is required in statute as a government-wide goal. The SBA has been 
given authority to establish individual goals with each agency/
department of the Government based on Section 15(g) of the Small 
Business Act that requires that each agency ``establish realistic goals 
for the award of contracts to small business'' and that the head of 
each Federal agency make consistent efforts to annually expand 
participation by small business concerns.
    The Department of Energy has negotiated a 5.06 percent goal with 
the SBA for FY 2004 and FY 2005.

                     Questions From Senator Bunning

    Question 1. The Department of Energy introduced the ``Rocky Flats'' 
model as the way to achieve successful accelerated site cleanup. This 
model seems to be working. However, after concurrence by many states, 
including Kentucky, to support this approach, DOE has now decided to 
use small business contracts at DOE sites to achieve this accelerated 
cleanup.
    Why has the DOE chosen to do this and move away from large business 
contacts? Will this affect any of the accelerated cleanup plans at 
Paducah? What effects will adding a small business prime contract to 
Paducah have on the pace of the cleanup work already underway?
    Answer. The ``Rocky Flats'' model is a cost-plus-incentive-fee 
(CPIF) contract with a clearly defined scope of work and end states for 
the project. The contractor can earn fee by safely completing the full 
scope of work, with additional cost and schedule incentives, and 
penalties, based on performance. At more and more of our Environmental 
Management sites, where we can clearly define the scope of work and 
articulate the end state condition of the site, or a project, we 
believe the CPIF model can be applied. However, this model is not 
limited strictly to large businesses or large contracts. Recent 
responses to competitive small business set-aside solicitations 
indicate that small businesses, as well as large businesses, can 
provide more cost-effective and efficient cleanup by using the CPIF 
model. It is not our intention to slow the pace of cleanup underway at 
Paducah, or any other EM site. We believe the CPIF contract model, when 
applied correctly, can impart significant cost and schedule benefits 
for the EM cleanup program.
    Question 2. Why does the DOE believe that Paducah is a good site to 
test using a small business contract for a large cleanup project?
    Answer. We successfully awarded small business contracts for the 
Columbus Cleanup Project and for the construction of a Glass Waste 
Storage Building at Savannah River. Additionally, we are completing 
evaluations of a small business contract for the Fast Flux Test 
Facility cleanup work at Hanford, the environmental remediation of the 
Portsmouth site, and laboratory services at Hanford. We believe Paducah 
has similar attributes to these work sites for a small business 
contract.
    As you probably are aware, the Paducah site has two small business 
set-side competitive procurements under evaluation by the Department. 
The Site Services and Infrastructure contract is a cost-plus-award fee 
contract that provides the necessary infrastructure to support the 
ongoing cleanup mission. The Environmental Remediation contract will be 
a cost-plus-incentive-fee contract with cost and schedule incentives to 
complete the cleanup work at Paducah safely.
    Question 3. In order to meet SBA requirements, DOE is allowing for 
small businesses to bid on large contracts. In many cases, these small 
businesses in turn need to partner with a large business in order to do 
the necessary work. Do you think this translates into meaningful small 
business participation compared to the same number of small businesses 
working as a subcontractor of the larger project?
    Answer. We believe this approach does translate to meaningful small 
business participation. The small business is accountable as the prime 
contractor and is provided the stimulus to expand its capabilities and 
experience in DOE cleanup activities. Under previous DOE contracts, 
goals had been set for small business participation, which may or may 
not be accomplished through the execution period of the contract. We 
believe having the set-asides will ensure meaningful small business 
participation.
    Question 4. It is my understanding that Bechtel Jacobs has been 
asked to continue to handle the pensions for the Paducah plant because 
there is concern that a small business would not be able to handle 
them. Do you foresee the small business that wins the Paducah cleanup 
to eventually takeover the pensions at the plant?
    Answer. At this point, we do not anticipate that the successful 
small business contractor would take over the pension plan. The 
successful small business contractor will become a co-sponsor and 
participant in the plan administered by Bechtel Jacobs. Bechtel Jacobs 
will remain the prime sponsor of the plan.
    Question 5. What mechanisms will DOE put in place in either the 
Lexington office or assign to particular contractors to assure there is 
an ``integrator'' to manage workforce transition between the various 
prime contractors and subcontractors at Paducah and Portsmouth in order 
to minimize employment disruptions and assure seamless benefits 
arrangement?
    Answer. The Lexington Office will be responsible for contract 
administration and oversight of all four infrastructure and 
environmental remediation contracts at Portsmouth and Paducah. The 
Lexington office will closely coordinate the transition of the current 
Bechtel Jacobs Company (BJC) contract to the new contractors as well as 
the Oak Ridge Operations Office with DOE Headquarters providing 
whatever assistance is needed to facilitate the transition. The 
Department understands the unique nature of this transition and is 
already working with the incumbent contractor (BJC) to plan the 
transition. Although many issues will be dealt with as part of the 
transition, our goal is to make it as seamless as possible for the 
workforce and project performance.
                                 ______
                                 
                              Department of Energy,
               Congressional and Intergovernmental Affairs,
                                Washington, DC, September 16, 2004.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: On May 18, 2004, Kyle McSlarrow, Deputy 
Secretary, testified regarding the implications of a recent change in 
reporting of small business contracts by the Department of Energy. On 
August 23, 2004, we sent you the answers to 14 questions for this 
hearing.
    Enclosed is the answer to the one remaining question that was 
submitted by Senator Bingaman for the hearing record.
    If we can be of further assistance, please have your staff contact 
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
            Sincerely,
                                          Rick A. Dearborn,
                                               Assistant Secretary.
[Enclosure.]

                  QUESTION FROM SENATOR JEFF BINGAMAN

    Question 5. Dr. Woodward has suggested that the pre-2000 policy of 
counting subcontracts as prime contracts should be allowed in the case 
of Federally Funded Research and Development Centers (FFRDCs). What is 
your reaction to this suggestion? How much of DOE's funding currently 
goes to FFRDCs, and what total value of subcontracts would be allowed 
to be counted as prime contracts if this policy were adopted?
    Answer. The Department is currently counting its subcontracts based 
on the direction given it by SBA and the Office of the Federal 
Procurement Policy in FY 99. That directive requires that all 
subcontracting achievements be reported as subcontracts, not as prime 
contracts. On several occasions, the Department has taken the position 
that it will continue its compliance with such directives. On two 
separate occasions, Secretary Abraham has informed Senator Christopher 
Bond that he remains committed to ``directed changes in the methodology 
used for reporting our small business goals and achievements'' and that 
he has directed that, as the M&O contracts came up for renewal or 
recompete, ``they receive a focused review for any potential small 
business prime contracting opportunities.'' Unless the OFPP and SBA 
make changes in the methodology for goaling and counting small business 
achievements, DOE will continue to count its subcontracts as 
subcontracts and its prime contracts as prime contracts ``like all 
other federal agencies''.
    In FY 2003, DOE obligated $10.1 billion to the 15 FFRDCs sponsored 
by DOE. In that same fiscal year, these FFRDC's subcontracted $2.9 
billion, of which $1.4 billion was awarded to small business.
                                 ______
                                 
                             Women Impacting Public Policy,
                                     Washington, DC, July 15, 2004.
Hon. Pete Domenici,
Chairman, Senate Energy and Natural resources Committee, U.S. Senate, 
        Washington, DC.
    Dear Senator Domenici: Thank you for giving us the opportunity to 
testify before your Committee on reporting of small business contracts.
    Attached are responses to questions submitted for the record.
            Sincerely,
                                              Ann Sullivan,
                                    Federal Legislative Consultant.
[Enclosures.]

                    Questions From Senator Bingaman

    Question 1. Do you believe that DOE can achieve the 23 percent goal 
as set forth in their Plan of Action?
    Answer. WIPP has to believe that the DOE will do what it says it 
can do. They laid out a 20 year plan to achieve their small business 
goals and small businesses and the Congress should hold them to their 
commitment to reach small business goals.
    Question 2. If it becomes clear that DOE can't meet this goal, do 
you think it's applicability to DOE should be changed, or should it 
just be accepted that this is a goal, not a mandate?
    Answer. As this Committee knows, Congress sets the small business 
goals. We do not believe that agencies should receive different goals 
based on their past performance. For example, HUD will far exceed its 
goal of 23% this year. If DOE or any other agency is exempted from its 
goal of 23% due to failure to meet it, HUD would have no incentive to 
continue its good work in exceeding its small business goals. The 
contracting system DOE has used for many years is heavily weighted 
against working directly with small businesses. We believe what needs 
to be changed is the way DOE does business with small businesses, 
rather than a change in how it counts its small business numbers.
    Question 3. Do you agree with the statement by GAO that shifting 
M&O small business subcontracts to DOE prime small business contracts 
will have the effect of shifting contracts away from local and regional 
small businesses?
    Answer. Based on the feedback from our membership, shifting to 
prime contracts rather than as subs, will have the opposite effect. 
Larger contracts mean more local presence, since a rule of doing 
business with the government is having a presence close to its 
facility. Certainly that is the case with large businesses-if they have 
a sizable contract, key personnel servicing the contract will be 
located close to the facility. Small businesses of any size follow the 
same principle of business. Although we do not claim to be familiar 
with the terms of the subcontracting plans by the labs, we are not 
aware of any current subcontracting plan that requires all small 
businesses who subcontract to the labs are limited to local and 
regional businesses.

                                 ______
                                 
  Responses of Dr. Joan B. Woodard to Questions From Senator Bingaman

    Question 1. You state that DOE's practice of breaking out elements 
of existing M&O contracts in order to provide prime small business 
contracts ``may ultimately destroy the existing accountability 
structure that holds a single integrating M&O contractor responsible.'' 
Do you think that DOE, with a 5 percent target for prime small business 
contracting next year, is already near the point of destroying the 
accountability structure, or do you believe that significant 
opportunities still exist to expand prime small business contracting?
    Answer. My statement cautioned that the practice of breaking out 
requirements from existing facility management contracts in order to 
provide small-business prime contracting opportunities for DOE could 
ultimately destroy the existing accountability structure that holds a 
single integrating M&O contractor responsible. We are not at that point 
yet. However, it is my opinion that an erosion of accountability has 
already begun and will accelerate if DOE progressively breaks out more 
requirements from M&O contracts and awards pieces of operational 
responsibility to multiple small-business contractors.
    DOE's target for small business prime contracts of 5 percent next 
year may seem insignificant. However, the GAO testimony points out that 
DOE has a plan for ramping up to 23 percent over 20 years. Even today, 
DOE is scrambling to achieve its 5 percent goal by removing 
procurements from the M&O contractors and letting the contracts 
themselves in order to get credit for the 5 percent goal. The result is 
that the Department is merely awarding small business contracts that 
the M&O contractor was already planning to award to small business. 
Small businesses are not benefiting from this approach.
    The M&O contractors are already doing their best to maximize small 
business opportunities, so it is doubtful that DOE would be successful 
in increasing small business contract awards above what the M&O 
managers are already achieving (in excess of 50 percent). I do not 
believe that significant opportunities exist for breaking out 
requirements from the M&O contracts without eroding, damaging, and 
ultimately destroying the accountability structure.
    Question 2. Do you agree with the statement by GAO that shifting 
M&O small business subcontracts to DOE prime small business contracts 
will have the effect of shifting contracts away from local and regional 
small businesses and, if so, can you estimate this impact for Sandia?
    Answer. We agree with GAO's statement that ``DOE's efforts to 
increase small business prime contracting may cause its facility 
management contractors to reduce the amount of subcontracting that they 
direct to local and regional small businesses.'' Whereas M&O 
contractors can restrict competition to the local small business 
community, DOE is required to competitively bid requirements on a 
nationwide basis.
    There is evidence that the rate of participation in government 
contracts by local small businesses would decline. For example, in 
fiscal year 2003, 32 percent of Sandia's total contract payments were 
paid to New Mexico businesses. However, contract payments made by 
procurement card purchases (which allow an employee to buy small items 
directly) resulted in only 22 percent New Mexico participation. Based 
on our experience with procurement card purchases, approximately one-
half of the purchases that would normally be placed in the local or 
regional area have been placed nationally. If this factor were to hold 
true for small business contracts placed directly by DOE, then the loss 
experienced by the local small business community would be 
approximately one-half of the value of DOE-awarded contracts. In fiscal 
year 2003, Sandia's contract commitments with local small businesses 
totaled almost $300 million. If DOE took over contracting 
responsibility for half of that, the local small business community 
could perhaps lose about $75 million per year, assuming the small-
business loss rate experienced with procurement cards holds true for 
DOE contract awards.

                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

             Small Environmental Business Action Coalition,
                                      Washington, DC, June 1, 2004.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.

Re: SEBAC Response to Verbal Testimony at the Senate Energy and Natural 
Resources Committee Hearing on DOE Small Business Contracting, May 18, 
2004

    Dear Senator Domenici: The Small Environmental Business Action 
Coalition (SEBAC) is the premier industry representative for small 
businesses performing environmental remediation and waste management 
services for the DOE and other federal agencies. SEBAC membership 
includes Small, Small Disadvantaged, 8(a), Women-Owned, Veteran-Owned, 
HubZone and Native American-Owned businesses that perform environmental 
investigations, design, engineering, remediation, operations and 
maintenance, and ordnance and explosives work with federal agencies. We 
truly represent the interests of all types and sizes of small 
businesses in the environmental industry. SEBAC is concerned with the 
potential ramifications of the testimony given at the Senate Energy and 
Natural Resources Committee May 18, 2004 hearing concerning the 
Department of Energy's (DOE) small business contracting practices.
    SEBAC believes that the Committee seeks to support small business 
while ensuring safe and successful execution of the DOE mission. 
However, SEBAC is very concerned that small business views were 
inadequately represented during the hearing. The testimony had a bias 
in favor of large business, and the Committee appeared to conclude that 
DOE contracts with small business endangered national safety and 
security and that only large business could perform virtually all of 
DOE contracts. The Committee appeared to plan on recommending that 
subcontracts to small business from DOE's large business contractors be 
counted toward DOE's small business subcontracting goal.
    This apparent recommendation has the potential to be extremely 
detrimental to small business. DOE has only started a meaningful small 
business program in the past year after years of contracting only two 
or three percent to small business as opposed to the government's 23 
percent goal. The Committee and any other parties having influence over 
the Committee's recommendation must hear balanced views on the issues 
affecting DOE subcontracting to small business.
    SEBAC has attempted to provide such a balanced view. SEBAC prepared 
written testimony (attached) which was requested by the Committee, but 
was denied the opportunity to testify verbally. SEBAC requests an 
opportunity to discuss its views and provide the Committee with a 
clearer understanding of the situation.
    Both the DOE and DOE's large business contractors are major 
customers for our members. SEBAC's membership is comprised of many 
companies that participated in DOE's small business set-aside 
contracts, including the awardee on the most recent small business 
environmental management contract award, the Columbus Closure Project. 
Therefore, SEBAC members have an in depth of knowledge of both the DOE 
and its large business contractors' small business contracting 
practices. There are very substantial differences in small business 
contracting directly to DOE rather than to DOE's large business prime 
contractors.
    SEBAC believes that the testimony of all parties missed the point 
of what DOE is doing with small business contracting and 
subcontracting. DOE, SBA and the small business community have never 
recommended any actions that would compromise the safety, security or 
mission of DOE facilities. DOE has taken a common sense approach to 
small business contracting with input-and support of both small and 
large businesses. DOE is implementing a plan to achieve a modest goal 
of five percent of all prime contract dollars awarded to small 
businesses, combined with a more robust small business subcontracting 
requirement for its large prime contractors. The 2004 and 2205 goal of 
5 percent is eminently achievable, and increasing that goal in future 
years is not only possible, but beneficial to DOE and taxpayers. For 
virtually all small business prime contracts, DOE has identified 
appropriate opportunities and has conducted sources sought evaluations. 
Technical and management experts in DOE reviewed small businesses' 
responses to the sources sought to insure that small businesses could 
perform. The evaluation was conducted prior to any determination that 
small business set-asides were appropriate. Some of DOE's largest 
contractors supported small businesses in these sources sought and 
resulting proposal efforts. The Paducah Environmental Restoration 
Project is among the contracts for which sources sought were completed 
and large businesses aggressively sought to team with small businesses. 
DOE reportedly is very pleased with the proposals and performance 
results to date.
    DOE has correctly judged that small business has strong 
capabilities in environmental management as a result of small business 
having had substantial prime contracting experience with DOD agencies. 
If DOD had limited small business to a subcontractor role, this 
capability never would have developed. DOE Office of Environmental 
Management (DOE EM) sees that small business can be a valuable tool in 
continuing its push for performance improvement and positive cultural 
change within DOE. Congress should support DOE EM's efforts as a part 
of a common sense approach to small business prime contracting that 
maximizes appropriately selected small business prime contracts 
complimented by a larger role for small business subcontracts.
    We address below, some of the specific misconceptions discussed at 
the hearing:

    1. DOE cannot reach the federal government's 23 percent goal--DOE's 
goal for 2004 and 2005 is approximately five percent. The goal is 
reviewed and negotiated annually between DOE and the SBA. The goal is 
not 23 percent. The 23 percent goal is government wide and is not the 
issue. The issue is five percent and whatever increases can be achieved 
in the future. DOE is doing what makes sense: identifying areas in 
which small businesses are strong and can perform as prime contractors 
without compromising DOE's mission. DOE may not be able to reach 23 
percent, but it must continue to appropriately increase small business 
prime contracting for the reasons outlined in SEBAC's original 
testimony. These include the increase in competition with resulting 
benefit to DOE and the taxpayer, and the government's mandate to 
support the development of small business. It is evident that five 
percent is an extremely modest goal, and it is hard to believe that 
there is opposition to a five percent goal.
    2. Small business prime contracts threaten safety, security, 
mission performance and cost control--DOE has appropriately identified 
small business opportunities which do not compromise these areas. DOE 
has not broken up any M&O contracts in a way that degrades the ability 
of the M&Os to perform critical functions. DOE has sought contracts 
that can be separated from the M&O contracts in accordance with 
government policy on--bundling and has identified environmental 
restoration at closing facilities (or at closing parts of operating 
facilities) as a primary target for small business contracting.
    3. Small businesses prefer to work for the DOE large business prime 
contractors as opposed to working for DOE--Nothing could be further 
from the truth. Perhaps Sandia does a fine job, but many others operate 
in a way that appears oriented to causing small businesses to go out of 
business. DOE's large business contractors take advantage of small 
business to mitigate risk and enhance their own profits. Large 
businesses use many forms of coercion to injure small business 
subcontractors as outlined in SEBAC's original testimony. DOE follows 
the Federal Acquisition Regulations and could not and would not behave 
in the manner of many of its large business contractors.
    4. Small business subcontracts will be reduced as a result of the 
increase in prime contracts--This is not DOE's plan. SEBAC's 
understanding is that DOE intends to increase the small business 
subcontracting requirements for its large business contractors. SEBAC 
has recommended further improvements such as giving preference to teams 
comprised of all small businesses and setting dollar rather than 
percentage subcontract goals.
    5. DOE's small business contracting plans will dilute the market 
for local companies at DOE sites--The DOE market is inherently a local 
market for both large and small businesses. DOE's sites are remote and 
require local offices, local hires and local expenditure of salaries to 
support the local economy. Large business has the same issues as small 
business in this regard, except for the fact that small businesses are 
more likely to use their local offices supporting DOE to grow their 
companies. For large businesses, these DOE site offices are stand-alone 
offices performing only the DOE contract. For small business, the DOE 
site offices represent a substantial percentage of their business and 
capability. Small businesses have to work to grow and diversify these 
offices on other projects to support the company's growth.
    6. DOE cannot manage the increased number of small business 
contracts--SEBAC recognizes that this is a concern; however, DOE EM has 
taken very impressive steps to solve this by creating an EM-focused 
acquisition management group. This can be funded by the money DOE will 
save by eliminating the exorbitant G&A markup that its M&Os charge on 
top of their subcontracts. Also, the example of Pit 9 was raised by 
Senator Domenici as an example of a DOE management problem. When the 
approach to Pit 9 was proposed, a small business which reviewed the 
plans for DOE-ID found significant flaws in the approach, design, and 
cost estimate. DOE chose to push the project forward with its large 
business contractor against the advice of the small business. Perhaps 
if DOE had listened to the small business, the Pit 9 fiasco could have 
been avoided.
    7. Small business may increase competitiveness--This issue was 
glossed over in the hearing, but it is very significant. DOE typically 
gets three or fewer proposals in response to its unrestricted 
contracts. Tens of billions of dollars are awarded on limited 
competition. The market is controlled to a large extent by three 
companies. (And the management focus of these companies has shifted 
from DOE to Iraq.) On small business procurements, DOE has seen 
increased competition. All small business RFPs have had at least five 
responses, with the Nationwide EM contract reportedly receiving 
approximately 90 proposals.
    8. DOE plans to novate contracts to M&O contractors--This had been 
discussed as a possibility, but SEBAC is unaware that it has become DOE 
policy. If it is DOE policy, SEBAC agrees with testimony that it could 
impair accountability for M&O contractors. However, if DOE continues to 
choose non-mission critical work for small business primes, this will 
not be an issue.
    9. Small business cannot handle the retirement and benefits 
issues--Again, the important issue is for DOE to select appropriate 
small business contracts. Even with large business on closure contracts 
such as the Mound Closure Contract, DOE has taken the responsibility 
for workers not retained by the winning bidder.
    10. DOE's plan benefits only the larger small businesses--Since DOE 
plans to award prime contracts and increase subcontracts, the 
opportunities will grow for all small businesses. The smaller 
businesses can also find competitive teaming arrangements with other 
small business. SEBAC members frequently team for proposals and 
contracts. Again, SEBAC recommends that preference be given to teams 
comprised of all small business, thereby increasing opportunities for 
all types of small business.
    11. DOE prime contracts with small businesses will increase costs 
to the taxpayer--DOE has already seen substantial savings by small 
business contracting. The Columbus Closure Project was awarded for 
approximately 60 percent of the government estimate after nine 
proposals were received from small business. Other EM small business 
contracts have allowed DOE to avoid as much as 40 percent in G&A 
charges that would have been added to the work by an M&O. Also, the 
small business subcontractors do not recreate and duplicate the federal 
bureaucracy on a cost-plus basis on their contracts.

    In summary, SEBAC believes that DOE has embarked on a very 
productive and sensible approach to small business contracting. DOE has 
done a fine job of increasing small business contracting while saving 
money and improving performance. SEBAC believes that we can help 
explain this situation to the Committee and to Congress in a balanced 
way that has not been previously presented. We request the opportunity 
to meet with you to discuss this matter.
            Very truly yours,
                                           Pamela J. Mazza,
                                                   General Counsel.
[Enclosure.]

                                 ______
                                 
     Statement of the Small Environmental Business Action Coalition

    This statement is being submitted for the Committee hearing record 
on behalf of the members of the Small Environmental Business Action 
Coalition (``SEBAC'').
    SEBAC is the premier industry representative for small businesses 
performing environmental remediation and waste management services for 
the Department of Energy (DOE or ``the Department'') and other federal 
agencies.
    SEBAC membership includes Small, Small Disadvantaged, 8(a), Women-
Owned, Veteran-Owned, HubZone and Native American-Owned businesses that 
perform environmental investigations, design, engineering, remediation, 
operations and maintenance, and ordnance and explosives work with 
federal agencies. We truly represent the interests of all types and 
sizes of small businesses in the environmental industry. Both the DOE 
and the Department's large business contractors are major customers for 
our members. SEBAC members have an intimate knowledge of both the DOE 
and its large business contractors' small business contracting 
practices. We also understand that there are very substantial 
differences in small business contracting for the Department as opposed 
to its contractors. SEBAC's membership is comprised of many companies 
that participated in the Department's small business set-aside 
contracts, including the awardee on the most recent small business 
environmental management contract award, the Columbus Closure Project.

                            I. INTRODUCTION

    SEBAC's position on DOE small business subcontracting is that the 
DOE market currently has an appropriate mix of direct small business 
contracts with DOE and small business subcontracts with DOE's large 
business contractors. SEBAC supports DOE's plans to increase small 
business opportunities under both direct contracts and subcontracts. 
DOE's expansion of small business contracting has had, and will 
continue to have, a beneficial effect on DOE and taxpayers. Any 
recommendations to limit DOE direct contracting will have a detrimental 
effect on DOE, taxpayers and small business, while potentially limiting 
competition for billions of dollars in DOE contracts to only a few very 
large companies. For these reasons and the reasons set forth below, 
SEBAC strongly disagrees with proposals to limit DOE direct contracting 
to small businesses.
    The federal government's goal is to issue small business prime 
contract awards equal to 23% of federal contracting dollars. However, 
the DOE has continuously fallen well below that goal with direct 
contracts only reaching approximately:

   3% in FY 2001
   3.7% in FY 2002
   3.7% in FY 2003
   5% in FY 2004 (goal)
   5% in FY 2005 (goal)

    Despite this disappointing track record, DOE has shown some 
improvement in its direct contracting to small businesses. In FY 2003 
and FY 2004 DOE has made significant strides in small business 
contracting, as discussed more fully below.
    The federal government's mission is to encourage, promote, and 
foster the U.S. marketplace and remove barriers that impede capitalism. 
This is the reason for the government's emphasis on small business 
contracting. Our country's history demonstrates that, in many 
instances, in order to ensure our marketplace does not convert into a 
monopoly or oligopoly, regulations and rules are required to keep 
capitalism and competition alive. Consequently, the bundling of federal 
contracts and the past preference for large business contractors by DOE 
has had a consolidation effect. Therefore, it is the obligation of the 
government to maximize capitalism, stimulate competition, and allow 
small businesses to flourish in order to ensure pricing of services, 
quality, and execution are provided to the federal government by all 
contractors, regardless of size. DOE should continue to make progress 
in its small business contracting practices.
    Some large businesses and small businesses contend that DOE's 
approach to small business subcontracting benefits a few small business 
contractors while excluding others and limiting the market for most 
small businesses. They believe that DOE's direct small business 
contracting plans will detract from the small business subcontracting 
available from large businesses. In fact, SEBAC understands that the 
opposite is the case. We understand that DOE seeks not only to increase 
direct small business contracting, but also to require more and higher 
quality subcontract opportunities. SEBAC, as a representative of all 
sizes of small business, believes that the DOE market has been moving 
in a healthy direction in which significant prime contracting 
opportunities exist along with the potential to increase subcontracting 
opportunities to DOE's large business contractors.
    SEBAC provides below a more detailed discussion of its position and 
makes recommendations to improve the system for DOE, the taxpayers, and 
small businesses working as prime or subcontractors. The large 
businesses that work productively with small business will be 
unaffected by the adoption of SEBAC's recommendations.

                             II. DISCUSSION

DOE Improvement in Small Business Contracting
    In FY 2003 and 2004 DOE has made great strides in increasing its 
small business participation, specifically through 2003-2004 small 
business set asides competed within the past year under NAICS 562910, 
Environmental Remediation. Congratulations are in order for those who 
have sought to break with old habits.
    Specifically, DOE Environmental Management (``EM'') has improved 
the numbers of competitive small business contracts in the past year 
with several very large small business contracts. The first step was to 
request a Sources Sought from interested small businesses to ascertain 
if they have the technical capability to perform the work. Under the 
Rule of Two, after reviewing the results of the Sources Sought, if DOE 
determines there are at least two credible small businesses, then the 
procurement is set-aside for small business. On each of the following, 
DOE should be proud of its accomplishment in following the Small 
Business Administration (``SBA'') guidelines and the Rule of Two:

   Columbus Closure Project, Reactor D&D;
   Fast Flux Test Facility (FFTF);
   Portsmouth Environmental Remediation;
   Paducah Environmental Remediation;
   National Environmental Remediation and D&D Contracts.

    DOE has correctly identified EM as an area in which there is 
substantial small business capability that can improve EM performance 
as well as help to expand DOE small business subcontracting. DOE has 
performed sources sought announcements on several large procurements 
and potential procurements that have demonstrated to DOE that small 
businesses have the capability to perform the contracts to be set-
aside. SEBAC and the media have learned that DOE is extremely satisfied 
with the level of competition and the quality of proposals received 
from small businesses.
    In addition, EM and Office of Small and Disadvantaged Business 
Utilization (``OSDBU'') have worked to understand the issues that small 
businesses face and have offered substantial outreach and education to 
small businesses seeking to contract with DOE. EM and OSDBU have 
conducted seminars and established websites to help small businesses 
pursue work with DOE. By seeking input from small businesses on the 
issues confronting them when working with DOE, DOE has been able to 
better address these issues in its RFPs and business practices. The 
OSDBU has also established a small business advisory board that serves 
as a sounding board and reviewer of DOE plans. The board is comprised 
of representatives of industry associations representing all types of 
small business from virtually every industry supporting DOE. The 
advisory board also provides DOE with an excellent tool for outreach 
and communication to the members of the associations that comprise the 
board.
    Despite these commendable efforts, DOE has maintained a culture of 
comfort with large businesses, and a number of issues remain on which 
performance could improve. While the small business contracting 
percentages have improved in recent years, there is still an obligation 
to reach a goal closer to the government goal of 23%. Other large 
federal agencies have similar missions and have had a commendable track 
record in incorporating meaningful and substantial small business 
opportunities into their yearly acquisitions. Clearly, DOE can continue 
to identify appropriate small business opportunities as their other 
sister agencies have done, while continuing to build on the progress 
DOE has made.
    For example, EM can increase the amount of subcontracting 
opportunities well beyond the 5% targets that have been established. EM 
can continue to break small business contracts out of large 
procurements currently under consideration. There are significant DOE 
requirements that have been rolled (bundled) into M&O's and M&I 
contracts as a matter of convenience that do not affect the primary 
mission of DOE. These areas include those already identified by DOE, 
such as EM and information technology. This approach can also have the 
advantage of breaking out discrete scopes of work for performance based 
contracts, instead of having this work bundled into larger contracts 
where projects do not get appropriate management attention and suffer 
delays in implementation and associated cost increases.
Additional Benefits of Direct Small Business Contracts to DOE
    A decision to allow DOE to count dollars subcontracted to small 
business by large businesses under contract to DOE as contributing to 
DOE's small business subcontracting goal would be extremely detrimental 
to small business. A subcontract to a DOE large business contractor 
does not provide the same growth and development opportunity to small 
businesses as a prime contract with DOE. For example, the prime 
contractors determine what scope of work is provided, which may be a 
``rent a person.'' In contrast, when a small business serves as the 
prime contractor, the small business is in a position to make that 
choice, thus truly developing skills and experience. Part of the 
government's mission is to foster the growth and development of small 
business. This can only be realized through prime contracts for small 
business with government agencies such as DOE.
    Further, the marketplace for large contractors within DOE has very 
limited competition. Major unrestricted procurements attract three or 
fewer bidders. Small business prime contracts provide DOE with greater 
competition, as evidenced by the small business set-aside Columbus 
Closure Project, which attracted 9 bidders. In addition, the largest 
DOE contractors tend to team together to further restrict competition. 
Finally, when small businesses subcontract to DOE large business 
contractors, the small business invoices are marked up by as much as 
40% to cover large business overhead cost, thereby significantly 
increasing costs to taxpayers. In sum, the expansion of small business 
contracting by DOE reduces costs and enhances competition.
    The federal government's mission is to encourage, promote and 
foster the US market place and remove barriers that impede capitalism. 
This is the reason for the government's emphasis on small business 
contracting. Our history shows that in many instances, to ensure that 
our market place does not convert into a monopoly or oligopoly, 
regulations and rules are required to keep capitalism and competition 
alive. The bundling of Federal contracts and the past preference for 
large business contractors by DOE has had a consolidation effect. It is 
the obligation of the government to maximize capitalism, stimulate 
competition, and allow small businesses to flourish to ensure best 
value, quality and execution are provided to the Federal government by 
all contractors, regardless of whether it is small business or large 
business. Indeed, DOE has already seen the competitive benefits of 
small business contracting on the small business set-asides competed 
within the past year, specifically the 2003-2004 small business set 
asides discussed above.
    For the Columbus Closure Project, DOE received 9 proposals. For the 
Portsmouth and Paducah Environmental Remediation contracts, we 
understand that DOE received more than 5 proposals for each. For the 
FFTF project, DOE received 5 proposals. For a recent unrestricted 
procurement of similar scope at the Mound, OH facility, DOE received 
only three proposals. The award was made to a team comprised of three 
of DOE's largest contractors who chose to team with each other as 
opposed to competing with each other. For an upcoming $4 billion 
procurement at River Corridor, SEBAC understands that DOE may see only 
one or two proposals, based on the contacts made by large business with 
SEBAC members relative to potential subcontracting. That is a huge 
amount of taxpayer dollars to award on such limited competition.
    DOE is well aware of the economic advantage of direct 
subcontracting with small business, simply by eliminating the G&A 
markup applied by large business. By using the nationwide 8(a) 
Indefinite Delivery/Indefinite Quantity Environmental Restoration 
contracts recently awarded, DOE believes it has realized significant 
savings. At one site, two 8(a) contractors have performed projects, 
which would have been otherwise subject to a 40% G&A markup. DOE (and 
NNSA) have said that the companies have performed well and are clearly 
dedicated and focused on the work.
    DOE reaps additional benefits when contracting with small business:

   Company management is focused on project performance; each 
        project is of significant importance to the company;
   Decision-making is rapid and focused on the needs of the 
        project as opposed to satisfying internal and public 
        shareholder demands;
   Small business embodies the entrepreneurial mindset to 
        support EM's drive to improve performance and make cultural 
        changes to a performance-based organization;

    The contract planning, teaming, staffing and execution approaches 
are not significantly different for a small business than a large 
business. However, the client focus and decision-making of a small 
business can be advantageous to DOE.

Detriments to Small Business From Proposal to Allow DOE to Obtain 
        Credit Toward Its Small Business Goals From Large Business' 
        Subcontracting to Small Business
    A subcontract to a large business does not provide the same 
benefits to small businesses that are provided by a direct contract 
with DOE. Much of this has to do with the subcontracting procedures of 
the DOE large business contractors.
    A. FAR Disputes Clause does not apply to subcontracts--The small 
business must often go to civil court to seek relief. The large 
business prime contractors are therefore not motivated to be as fair 
and reasonable in their treatment of small business contractors as is 
the federal government. The small business contractors also have a fear 
of reprisal by the large business if they seek to resolve a dispute. 
For example, a small business may have a significant portion of its 
revenue under one contract with a large business at a DOE facility. If 
the small business disputes unfair treatment, then the large business 
can withhold work, thus threatening the existence of the company.
    B. Large Businesses Use Small Business to Mitigate Risk--Large 
businesses require contract terms from small businesses that are not 
required of large businesses by the government. For example, firm fixed 
price subcontracts are used (under a large business cost plus contract) 
for work that should be performed on a cost plus basis. Work 
subcontracted to small business often constitutes the riskier portions 
of the prime contractor's scope of work.
    C. Subcontracts Often Provide Little Opportunity for Development of 
Management and Technical Capability--The scope of subcontracts is often 
focused on lower-level tasks and does not allow for small businesses to 
play a role in contract management. Large businesses often meet their 
subcontracting goals with non-technical support services. Large 
businesses also achieve small business goals by ``leasing'' employees 
from small business in a way that provides no experiential benefit to 
the small business. In contrast, when the small business is the prime 
contractor, the small business has the opportunity to develop 
meaningful experience and skills that can be translated to other 
contracts, consistent with the government's goal of promoting the 
growth and development of small businesses.
    D. Large Businesses Prefer to Self-Perform Work Under DOE 
Contracts--Existing DOE contracts to large businesses do not provide 
incentives for the use of small business, but often do provide 
incentives for large businesses to retain work in-house. This is a 
stated policy of many large DOE contractors. RFPs may require 
percentage goals for small business subcontracts, but they do not 
define the type of work or total dollars to be subcontracted.
    E. DOE's Large Business Subcontractors Use Small Businesses for 
Labor Load Leveling--Large businesses hire small businesses to address 
surges in workload and eliminate or reduce subcontracts when budgets 
decrease (or when the large business overuses its budget). Small 
businesses cannot absorb these changes in workload as easily as large 
businesses.
    F. Large businesses establish staffing and performance requirements 
from small businesses, and then fail to provide adequate workflow to 
support demands--For example, one DOE large business contractor 
required the establishment and staffing of a site office based on a 
forecast of approximately $1.2 million/year in funding for the small 
business contract. After the office was established, the large business 
contractor elected to keep work in-house and contracted only $365,000, 
causing significant losses for the small business.
    G. Large Business Contractors Hire Key Staff from Small Business--
Large businesses have a common) practice of hiring key personnel away 
from subcontractors; along with the reduction of the small business 
scope of work that person was performing. As a result, the small 
business suffers twice--first by losing a valued employee, second by 
seeing a reduction in work. As an example, a small woman-owned business 
performing health physics and nuclear safety work lost four of its 
seven employees to its large business client within a period of one 
month. How would a large business react if its client took 57% of its 
workload away?
    H. Reporting of Subcontract Dollars is Often Inaccurate--DOD audits 
have shown that large business contractors often report subcontract 
percentages in excess of actuals. Reporting also involves tiered 
subcontractors, causing double or triple counting of the same dollar.
No Negative Impact on National Security
    Providing prime contracting opportunities to small businesses does 
not constitute a threat to national security. DOE has done an excellent 
job of identifying the areas in which small businesses have strength 
and which are considered to be outside of the critical mission areas of 
the DOE sites. For example, the environmental closure of an excess 
facility cannot, by definition, endanger national security: it is a 
facility that the government decided is no longer needed.
    As evidence that this concern is baseless, the Department of 
Defense (``DOD''), which has the nation's primary role for national 
security, has contracted an average of 21% of its direct contracts to 
small business for FYs 2000, 2001, and 2002. This performance was 
achieved during wartime, both in Afghanistan and Iraq. Much of this 
work was accomplished at active military installations in the U.S. and 
overseas, which were participating in the war effort. One SEBAC 
contractor was performing construction work on an active flight line 
and had to manage its work in coordination with the war effort. Other 
small businesses support the high tech end of critical mission items 
for DOD, including, among other things, information systems, combat 
planning and management software. SEBAC's view is that the work of 
small business contributed positively to national security for DOD.
    Within the DOE market, the Department has accurately identified 
areas in which DOD experience strengthened small businesses so that 
they could take on the challenges of DOE work. These companies are not 
learning on the job. They have done the job for DOD and now seek the 
opportunity to do so for DOE. Indeed, many employees of small 
businesses have come from large businesses, and were relied on for 
critical mission support while they were employees of a large business. 
These employees did not lose their capabilities or competence when they 
joined a small business.
    SEBAC further notes that procedural mechanisms exist to ensure that 
businesses with access to sensitive information obtain the appropriate 
security clearances. For example, small businesses have DOE ``L'' and 
``Q'' clearances. Small businesses also have secret and top secret 
clearances for DOD, as well as secure facilities for handling 
classified documents.
    At the same time, we understand that not all of DOE's large 
business contractors have performed as well as they might in relation 
to security issues. For these reasons, the argument that small 
businesses somehow pose a threat to national security is without merit.
Recommendations for DOE Small Business Contracting
    DOE has been working hard to improve its small business performance 
and should be congratulated on the notable improvements it has made. 
DOE should continue the trend of increasing non-mission critical small 
business contracting and should continue to evaluate all large 
contracts to determine whether there are components that can be set 
aside for small business. If it does so, DOE will increasingly 
recognize the competitive and performance benefits discussed above.
    In addition, DOE small business prime contract solicitations should 
be structured to significantly favor teams comprised entirely of small 
businesses. This will, in effect, increase the amount of small business 
participation and experience in DOE procurements. It also raises the 
level of competition on future procurements and lowers the barriers for 
small businesses to enter into the DOE market.

Recommendations for DOE-Driven Changes in Small Business Subcontracting 
        by DOE's Large Business Contractors
    Whether or not the Committee makes recommendations to change DOE's 
small business contracting program, SEBAC believes it is necessary to 
make changes in the subcontracting approaches by DOE concerning large 
business contractors. As such, SEBAC submits the following additional 
recommendations for DOE-directed changes in small business 
subcontracting by DOE's large business contractors.
    A. Large businesses should increase small business contracting--In 
order to compensate for the lack of small business prime and 
subcontracting utilization, DOE should modify its subcontracting 
program until such time as its small business prime contracting 
statistics meet the President's goal of 23%. Large contracts, such as 
M&O's, should be required to subcontract at least 30% of the total 
contract to small businesses, when it is determined to be in the 
government's best interest.
    B. Large business goals should be dollar goals--Large business 
goals should be translated from the percentage goal to a committed 
dollar goal. DOE should establish disincentives for large businesses 
that retain an excessive amount of work in-house.
    C. DOE should allow small businesses to receive their fee separate 
from the large business fee pool--One significant disincentive to large 
businesses subcontracting to small businesses is when DOE's contract 
terms allow only one fee pool for all companies working under the 
contract. Large businesses believe that small business should be able 
to receive a fee for their work that does not detract from the large 
business' potential earnings if the large business prime contractor 
performs well. SEBAC understands that this is appropriately addressed 
in the upcoming River Corridor procurement and applauds DOE for 
listening to both large and small businesses on this issue. SEBAC 
encourages DOE to continue this practice for all future procurements.
    D. Only SBA rules on small business programs should be allowed for 
subcontracting--This will, effectively eliminate the loopholes and 
place the SBA in an honest broker position.
    E. Contracts should prohibit hiring of subcontractor personnel--
This is common in many circumstances, but DOE's large business primes 
will not currently accept this language in a contract.
    F. The FAR disputes clause should be included in subcontracts.
    G. DOE should audit large business subcontracting and establish fee 
incentives--DOE should more carefully monitor large business 
subcontracting to ensure that small businesses have meaningful roles on 
the contract, have an opportunity to participate in management, and 
subcontract according to a committed plan.

                               CONCLUSION

    We thank the Committee for its consideration of this statement.

                                 ______
                                 
Statement of Henry T. Wilfong, Jr., President, National Association of 
                     Small Disadvantaged Businesses

    Mr. Chairman and Members of the Committee, we were not invited to 
appear in person, so we take this vehicle to address this issue which 
is most crucial to the small and disadvantaged business community. It 
is even more crucial due to evidence that portends the virtual dropping 
of ``disadvantaged businesses'' from the prominent position of 
Congressional assistance intent that it once held.
    The National Association of Small Disadvantaged Businesses was 
formed back in 1987 as a result of P.L. 99-661. We started with a group 
of 10 SDBs, intending to facilitate the implementation of the law and 
to monitor that implementation. NASDB has grown from that 10 to nearly 
300 firms, now. Our constituency is made up of all segments of the SDB 
Community. However, the overwhelming bulk of our firms are Aerospace/
Defense/Energy related firms.
    We hear that there's a move floating around to combine Prime 
Contract numbers and Subcontracting numbers. Bad idea, bad idea. Oh, 
the combining of numbers is not, in and of itself, bad. It's neutral. 
But what is the purpose for doing it? Now, that's where the problem 
comes in.
    We don't really know the reason folk want to combine the numbers. 
So, why, you ask, do we conclude, without knowing, that it's a bad 
idea? Human nature, that's why. We've gotten used to seeing them 
separate. We trust that separateness. It makes it easier for us to 
assess responsibility. So, any change in that is gonna cause us some 
reason to ``notice'', if not to be ``concerned''. Knowing the nature of 
other human beings, we then become concerned about a number of things. 
We wonder about a number of things. And, we suspect . . .
    We suspect that some are desirous of making these ``numbers'' look 
good. The mere combining of the figures will, of course, make the 
``numbers'' look better. But, will the mere combining of the numbers 
cause an additional benefit to the SDBs involved? Not one bit.
    Measuring the betterment of the SDBs involved is the purpose of 
keeping these numbers. Tracking contracting with firms owned by 
socially and economically disadvantaged persons, enables a better 
assessing of accountability of Government agencies in complying with 
the Laws, as regards to maximum practicable inclusion of small and 
disadvantaged businesses in the business of America? Of course that's 
the purpose.
    So, why the desire to change the way the agencies keep these 
``numbers''? We suspect the answer is, rather than increase the 
numbers, and thus better the involvement, they want to simply change 
the way of accounting and thus camouflage the failure to improve the 
involvement.
    We suspect that many are now discovering the futility of trying to 
increase prime contracts, without ``goring somebody's ox''. Facing the 
fact that the United States Government has dramatically changed the way 
it procures goods and services, there's simply no other reasonable 
alternative. The ``Bigs'' are gonna have to give up some of the pie 
they consider their proprietary realm.
    Why not face the fact that there simply are not as many prime 
contracts going out in the first place? Why not face the fact, then, 
that these contracts are going more and more to a smaller group of 
Behemoth firms? There simply is not that much left to be primed out to 
the little folk.
    We, in the small and disadvantaged business community, don't like 
that situation. We sincerely wish you'd change the way things are being 
done. Don't try to deceive us by some sleight of hand, or innovative, 
creative accounting. Tell us what's doable, and what's not. If 
subcontracting is what we're gonna be stuck with, tell us that. Teach 
us how to make a fair and equitable profit, and how to make our 
disadvantaged firms economically viable.
    And, while we're talking about teaching, someone needs to do some 
heavy teaching on what ``maximum practicable utilization'' really means 
. . .
    Combining prime contracts and subcontracting numbers--that dog 
won't hunt.

                                 ______
                                 
  Statement of Jacqueline W. Sales, President and Owner, HAZMED, Inc.

    Thank you for inviting me and giving me the opportunity to share my 
views and present my written testimony today before the Senate Energy 
Full Committee hearing on the Department of Energy's Small Business 
Contracting. I want to commend the Committee for pushing forward on 
this very critical issue for small businesses. I believe we are at a 
point where it is imperative for the U.S. Congress to set the tone and 
the framework for moving forward on this issue.
    On May 7, 2003, Ms. Angela B. Styles, the Office of Management & 
Budget, (OMB), the Administrator for Federal Procurement Policy, 
presented testimony before the U.S. House of Representatives Committee 
on Small Business, to discuss the critical issue of ``whether larger 
businesses are improperly receiving contracting opportunities intended 
for small businesses.''
    The OMB Administrator stressed the Administration's efforts and 
hard work ``to create an environment where small businesses can 
flourish and apply their talents to the many pressing needs facing our 
governments.''
    Moreover, the OMB's study to the President revealed that ``not only 
is substantially fewer small businesses receiving federal contracts . . 
. but that the pool of small business contractors receiving new 
contract awards declined considerably.''
    Mr. Chairman and Committee Members, my company, HAZMED, Inc. has a 
16-year record of excellent service provided to the Federal government, 
and has been awarded contracts from the U.S. Department of Energy. We 
have also been consistently ranked as an excellent contractor and 
provider of services from DOE and the U.S. Small Business 
Administration. Our experience has been that there are a finite number 
of contracts that DOE rotates to small businesses, this is evidenced by 
the fact that most of our contract awards from the DOE were in the 
early stages of our small business development. Our experience has 
shown that after we have per formed excellently and received 
recognition, the opportunity is rotated to the next emerging small 
business. What we are asking DOE is to provide larger opportunities for 
small businesses, like ours, who have demonstrated a capability to 
perform.
    DOE's past practices rely on large contractors to disseminate work 
to small businesses after award. The fact is that large businesses 
often report their small business participation against their entire 
company, not against the specific DOE contract. Therefore, there is no 
measure of small business participation attributable to the specific 
DOE award. Often large businesses will offer small business less 
desirable work. We want credible work that adds to our capabilities and 
fosters continued growth.
    We believe that large businesses view increased small business 
capabilities as yet another competitive threat. It is our experience 
that some do not see it their advantage to support DOE Small Business 
Initiatives.
    Mr. Chairman, I appreciate having the opportunity to share my views 
with the Committee members this morning, and we hope that DOE and the 
large contractors will understand that as small businesses get larger 
contracts, more and more jobs can be created for the American people; 
and that many large businesses started out themselves as small 
businesses.
    Thank you Mr. Chairman.

                                 ______
                                 
       Statement of the American Council of Engineering Companies

    ACEC represents over 6,000 engineering firms across the country, 
most of which have fewer than 35 employees. ACEC promotes the business 
interests of the engineering industry to Congress, federal agencies, 
and international organizations. Our members provide engineering 
expertise to the Federal Government, state, local, and municipal 
entities, and the private sector for engineering projects of all types. 
Many of our firms are engaged in work for the Department of Energy 
(DOE), particularly in the area of Environmental Management.
    ACEC supports DOE's initiatives to increase the amount of small 
business participation in DOE work. We recommend, in carrying out this 
initiative, that DOE:

   Create small business prime contracting opportunities that 
        are designed more appropriately for the size of the company 
        that is expected to perform the work, taking into account the 
        potential risks to the small business, to the project schedule 
        and budget, and to the general health and safety.
   Require that prime contractors include in their small 
        business reports the actual amount of work given to small 
        business subcontractors, as opposed to the value of 
        subcontracts, which may or may not be fulfilled.

    DOE legacy site cleanup projects are unique in their size, scope, 
degree of complexity, and risk. These sites include unprecedented 
amounts of contaminated waste, water, and soil, and a vast number of 
contaminated structures that will remain radioactive for thousands of 
years. The environmental remediation of the nuclear weapons complex 
encompasses radiological and non-radiological hazards, vast volumes of 
contaminated water and soil, and over 7,000 contaminated structures. 
DOE must characterize, treat, and dispose of hazardous and radioactive 
wastes that have been accumulating for more than 60 years at 120 sites 
in 36 states and territories.
    Management of DOE legacy sites also differs from management of 
Department of Defense (DoD) environmental clean up projects, in another 
very important aspect: overall management of DoD projects is performed 
by DoD, while DOE sites are managed by contractors, who are responsible 
for the contract management and coordination of hundreds of complex 
interrelated tasks.
    Due to the unprecedented complexity and risk associated with DOE's 
Environmental Management projects, it is very difficult to effectively 
divide large contracts into smaller contracts for small businesses 
without undermining the interests of the project. Separating such 
contracts could increase the potential of not meeting critical 
regulatory and milestone drivers, and thus incurring fines and 
penalties and risking public and worker health and safety.
    However, using large contracts for small business set-asides can 
also be problematic. The Small Business Administration small business 
size standard for environmental remediation services is 500 employees, 
which generally translates to roughly $50 million in annual revenue 
(which includes all of the firms projects). A DOE small business 
opportunity could be equal to this amount or more (a small business 
setaside of $500 million over several years was recently awarded), 
potentially putting undue stress on the company and its resources, and 
potentially increasing the risk of inefficient and/or ineffective 
performance. These firms typically do not have the depth of staff or 
the breadth of staff to accomplish the vast managerial effort required 
to carry out this work effectively.
    Compounding this are the affiliation rules, which require the small 
business prime to not only perform at least 51% of the contract work, 
but also be responsible for at least 51% of the proposal preparation 
and costs. Large businesses could offer this support, eliminating some 
of the burden, while providing learning, mentoring and growth 
opportunities.
    Opportunities for prime set-asides for small businesses should be 
sized appropriately for the scope of work and the size of the company 
or companies that are expected to perform the work. However, in so 
doing, DOE should avoid dividing up large, complex managerial functions 
best suited for larger businesses given their internal infrastructure, 
project management, monetary strength and manpower. Additionally, 
procurements targeted for small business set asides should have clearly 
defined scopes of work and contract values that fit within the 
parameters of the NAICS codes for those opportunities.
    Prime contractors are contractually required by DOE to make a good 
faith effort to provide opportunities for small businesses to compete 
for subcontracts and purchases. The reason that the requirement is for 
a good faith effort towards meeting the goals, as opposed to the actual 
realization of the goals, is that the prime contractor does not control 
many of the circumstances that enter into how much small business 
contracting can be accomplished. These factors include: (1) the prime 
contractor may not receive enough work under an ID/IQ contract to 
create a need for subcontracts; (2) there may not be enough firms 
qualified under the particular goal (e.g., veteran disabled owned small 
businesses) available to bid on the type of work or services needed; or 
(3) there may not be enough qualified firms located in a close 
geographical proximity to the site location to compete from a price 
standpoint (applies most often when mobilization of equipment and field 
crews are required).
    The prime contractor's good faith efforts are best judged by 
examining how the subcontracting is managed, including: (1) the number 
of companies meeting the small business qualifications that are 
included on the source list; (2) the time given to bidders to submit 
their bids (small businesses often need more time); (3) whether small 
business set-asides were used, limiting the competition to small 
businesses; (4) whether small businesses are included on teams; and (5) 
whether real work is given to those small business team members.
    Of these factors, we believe the last has the greatest potential 
for increasing the amount of work that small businesses perform on DOE 
Environmental Management projects. Currently, prime contractors report 
the total value of contracts that they enter into with subcontractors, 
which may or may not be realized. Small business subcontractors have 
little control over the amount of work that they actually perform under 
these contracts, and in some cases, may actually not perform any work. 
ACEC believes that if the prime contractor were required, as part of 
its demonstration of a good faith effort towards meeting small business 
goals, to report actual real work performed by its small business 
subcontractors, more actual work would go to the small business firms.
    It should be noted that the number of different small businesses 
that perform work on DOE Environmental Management projects is greater 
when a large business prime contractor subcontracts work to small 
businesses, as compared to when small business prime contract set 
asides are utilized. An example is the Portsmouth/Paducah environmental 
procurements, for which 2 to 3 small businesses joined to perform the 
work as prime, and these are the only small businesses involved. 
Contrast Portsmouth/Paducah to a typical large business prime, who 
would typically subcontract with several times as many small 
businesses.
    Finally, we believe that DOE could obtain a more accurate 
accounting of actual small business participation, and at the same time 
benefit small firms, by accounting for small business subcontracts and 
joint ventures towards an overall small business goal. We would 
recommend, however, that if such an approach were taken, that it be 
limited to DOE contracts because of the unparalleled size and 
complexity of DOE's program as discussed above. A corresponding 
increase to DOE's small business contracting goal, which reflects the 
total amount of DOE work to small business, including subcontractors 
and joint ventures, and includes an aggressive small business 
objective, would be appropriate.
    ACEC thanks the Committee for the opportunity to submit comments.

                                 ______
                                 
    Statement of Jenny Freeman, Executive Director, East Tennessee 
                   Environmental Business Association

    On behalf of the 125 companies that are members of the East 
Tennessee Environmental Business Association (ETEBA), I thank you for 
the opportunity to submit comments to the Senate Committee on Energy 
and Natural Resources regarding the U.S. Department of Energy (DOE) and 
direct contracting to small businesses. ETEBA's member companies 
include large and small businesses based in East Tennessee that provide 
technical services to DOE and its prime contractors. ETEBA companies 
employ approximately 6,000 people and provide an annual income to the 
region of about $500 million.
    ETEBA applauds the hard work DOE has done over the last year to 
develop procurements directly bid to small businesses. In four months, 
beginning last October, DOE has held at least six major small business 
procurements, each worth hundreds of millions of dollars. ETEBA is in 
the process of evaluating the impacts of this intense bidding on the 
subcontracting community and will share our results with DOE soon in an 
ongoing effort to improve the opportunities for our companies, and in 
light of DOE's interest in doing the same for small businesses. DOE, we 
are sure, will be interested in the impacts on the subcontracting 
community of the release of so many large procurements in a very short 
timeframe.
    The direct small business bidding has created new opportunities for 
small businesses after years of mainly large business participation at 
the first tier of DOE's work. It has created new mentoring 
relationships between large and small businesses; it has given small 
businesses the opportunity to obtain contracts at values far beyond 
what is available to them in the second-tier market; and it has given 
them the chance to perform ``meaningful'' work that will allow them to 
grow. We believe this was the hope of DOE Secretary Abraham when he 
stated in June 2003, ``Making contract opportunities available to the 
small business community is one of the department's top priorities.''
    So, the issue is not the small business direct contracting goal, 
today set at 23 percent of DOE's budget; rather, the issue is 
implementation of that goal. There are four major impediments to 
realistic participation by small businesses in DOE work at the scale 
reflected in these recent procurements. They are:

    1. Small Business Administration (SBA) rules governing size 
standards are flawed. The way the North American Industry 
Classification System (NAICS) codes are set up now, particularly the. 
size standard for NAICS Code 562910 (Environmental Remediation), true 
small businesses cannot compete successfully on DOE remediation 
projects. A small company goes from competing against $6 million and 
under companies to competing against the large companies with a 500-
employee size standard that are still ``small'' under SBA rules. This 
gives an unfair advantage to those large small businesses and 
effectively keeps the smaller small businesses from winning work and 
growing.
    Recommendation: Create a size standard for small businesses for the 
Environmental Remediation category that allows the true small 
businesses to enter into the market on a competitive standing.
    2. Scopes of work in procurements targeted for small businesses are 
not clearly defined and contract values do not fit within the 
parameters of the NAICS codes for those opportunities. Larger small 
businesses often must either forego small business opportunities or 
transition to a large business classification where they find 
themselves competing against companies with 10,000 or more employees. 
This essentially means that the government will be selecting a 
different small business each time they have a procurement of this 
magnitude, negating the opportunity for companies to apply lessons 
learned from one project to the next. Current SBA rules are pushing 
competent and qualified small businesses into the large business arena 
with one win when they are forced to inherit an incumbent workforce. 
Forming a Limited Liability Corporation (LLC) does not alleviate the 
allocation of employees because each member of the LLC is required to 
count all employees, regardless of their level of participation in the 
LLC. Additionally, SBA rules force the small business prime to not only 
perform at least 51 percent of the contract work, but also be 
responsible for at least 51 percent of the proposal preparation and 
costs. This puts tremendous cost burdens on small business primes and 
prevents their large business subcontractors from providing essential 
support.
    Recommendation: Congress and DOE must encourage the SBA to review 
the small business size standards, which have been in effect since the 
early 1980s. The SBA is currently reviewing the standards, but they are 
only replacing revenue standards with employee standards, not modifying 
the size of classifications. The current standards no longer apply to 
today's marketplace when procurements are being conducted as small 
business set asides even with annual funding levels significantly 
greater than the standard itself. The current standards are actually 
working against the SBA's small business constituency. Size standards 
should be developed for phased growth, and then DOE should carefully 
and systematically review its small business procurements to ensure the 
correct size standard is applied.
    3. DOE large business procurements have no teeth for enforcing 
small business subcontracting, leading to ``business as usual.'' 
Although Requests for Proposals (RFPs) require certain percentages of 
small business participation, consistent, across-the-board enforcement 
of small business subcontracting does not exist. Requiring 50 percent 
small business participation has little value if the prime chooses to 
self-perform the majority of the work. Existing requirements also do 
little to ensure that small business goals are met by making 
``meaningful'' work available, meaning that small businesses are often 
given opportunities only to perform work which the large businesses do 
not want to perform themselves. Additionally, the shared fee pool 
concept leads large businesses to self-performance. Large businesses 
are able to claim that since DOE is requiring that the small business 
subcontractors are part of the fee pool, they will not be included as 
real teaming partners in the bid. Many large businesses legitimately 
would like to include small business teaming partners, but do not, 
believing that it is unfair that they share in the fee pool when they 
are unlikely to share proportionately in the risk of performance. In 
other words, it is basically the prime's name that is ``on the line'' 
for performance.
    Recommendation: DOE should require small business plans in its 
large business procurements and then hold the large business prime 
accountable for implementing the plans. DOE needs to include hefty 
subcontracting requirements for small business subcontracting in these 
procurements, with required definition of meaningful subcontract roles 
for the small business, and with incentives and penalties for meeting 
or not meeting those goals built into the procurements. The plans 
should be included in the evaluation criteria.
    4. It is not the goal that matters. The issue lies in how DOE 
achieves the set goal. The inflexibility in the current interpretation 
of how DOE can only count direct contracting toward accomplishment of 
its 23 percent goal instead of being able to count its prime 
contractors' actual small business subcontracts as part of its own is 
unrealistic. The goal of 23 percent direct contracting for DOE, 
particularly in Environmental Management, is unlikely given that DOE's 
annual budget is around $20 billion, translating into what would be 
around $4.5 billion in small business awards per year. In addition, 
most DOE work is not amenable to unbundling. One reason is because its 
high-risk cleanup projects have critical regulatory drivers and 
milestones, and unbundling such projects could increase the potential 
of missing these drivers and incurring fines and penalties. 
Additionally, without significant DOE oversight, the unbundling of 
complex cleanup activities creates a substantial health and safety 
risk. However, DOE should never be allowed to go back to achieving its 
small business goals primarily through its prime contractors. Most 
importantly, DOE has spent years reducing its cost to the taxpayers by 
changing the way it does procurements, by creating larger contracts and 
by contracting management of DOE installations. To successfully meet 
the 23 percent goal, DOE will have to significantly increase its staff 
in order to generate enough procurement activity to directly spend the 
$4.5 billion.
    Recommendation: Allow DOE and large businesses to be able take dual 
credit for a large business prime contractor's small business 
subcontracting. Without this ability, DOE and its large business primes 
are essentially competing for the same limited pool of small business 
resources. If a single award has the risk of putting a small business 
out of the small business size category, they will choose their 
opportunities very carefully.
    While DOE direct work potentially offers good opportunities for 
small businesses, DOE's traditional delays in procurements and the 
complexity of RFPs result in bid costs that are an order of magnitude 
higher than for comparable opportunities with first-tier prime 
contractors. Many small businesses simply cannot afford to play in that 
game and will forego DOE opportunities for lower cost procurements in 
the private sector. Those that do respond to these large procurements 
take on excessive financial risk that may be difficult to recover from, 
particularly if they do not win the contract. This is counterproductive 
to DOE's goal of making small businesses successful.
    To ensure that the first tier large businesses make meaningful 
opportunities available to small business, require DOE to impose an 
especially high small business subcontracting threshold, similar to the 
conditions of the Hanford River Corridor Draft RFP that incentivizes 
large businesses to meet their goals.

    ETEBA represents those companies, large and small, that actually 
perform DOE's work on the ground and in the field. These companies are 
innovative, creative, and have great ideas about ways to perform work 
that safely result in savings to the government and ultimately the 
taxpayers. We have many more recommendations that come out of our 
experience with DOE projects, and we look forward to sharing them with 
DOE and this Committee in the future. Until then, we appreciate the 
opportunity to enter these comments into the public record.

                                 ______
                                 
   Statement of the Coalition of Minority Business trade Associations

    This statement is being submitted for the Committee hearing record 
on behalf the Coalition of Minority Business Trade Associations 
(Coalition) which includes the New Mexico 8(a) and Minority Business 
Association (NM 8(a)), the U.S. Hispanic Chamber of Commerce (USHCC), 
The National 8(a) Council (National 8(a)), and the Latin American 
Management Association (LAMA).
    The Coalition represents thousands of small, minority businesses 
throughout the United States. Our membership includes minority 8(a), 
SDB, HUBZone, and Veteran Owned companies that are contractors with the 
Federal Government, the Department of Energy (DOE), DOE's large prime 
contractors, M&O Contractors (National Laboratories) and other large 
institutional buyers. Our members have an intimate knowledge of doing 
business with DOE and its large prime contractors. Our membership also 
participates in DOE's small and minority business set-aside contracts, 
both as prime contractors as well as subcontractors. Many of the 
individual business owners, the officers of our constituent trade 
organizations, and the business advocates that constitute our Coalition 
have been recognized nationally in the fields of government 
contracting, small business advocacy, and federal small business 
legislation. Our constituents have also previously served on various 
task forces and committees that have undertaken rigorous examination of 
the procurement practices of Federal Agencies, M&O contractors, and 
other large other Prime Contractors to the federal government.

                            I. INTRODUCTION

    Our portfolio of 8(a) and Socially Disadvantaged Businesses (SDBs) 
have been the benefactors of DOE's aggressive initiative to increase 
direct contracting and subcontracting opportunities for fiscal year 
2003 and 2004. Our membership congratulates DOE for the improvements in 
its direct contracting to small and 8(a) businesses. We support DOE 
increasing non-mission critical small business contracting by 
determining the viability of breaking the contract out for small and 
8(a) set asides.
    The Coalition is making recommendations that meet both the needs of 
DOE as well as the needs of the small and 8(a) minority contracting 
community. These recommendations will be based on re-emphasizing the 
``development'' portion of the business development process for 8(a) 
firms. We strongly suggest to this committee and to the Department of 
Energy that the success of the business development process needs to be 
measured not only in the total dollars contracted to small business, 
but also in the number of 8(a) businesses that survive, and are strong 
enough to graduate from small business to large business.

                          II. RECOMMENDATIONS

    The recommendations respectfully presented to this committee 
include the following--

    1. DOE must not count the dollars spent by large prime contractors 
towards DOE's small business contracting goals.
    2. DOE must increase the number of prime contracts awarded to small 
and 8(a) businesses.
    3. DOE must continue to define its mission-critical and 
supplemental activities in order to develop more prime contracting 
opportunities available to small and 8(a) businesses.
    4. DOE must encourage the development of 8(a) business by using the 
SBA's Mentor-Protege Program.
    5. DOE must increase small business opportunities by strengthening 
the subcontracting process between large prime contractors and small 
minority subcontractors.

                            III. DISCUSSION

DOE must not count the dollars spent by large prime contractors towards 
        DOE's small business contracting goals.
    If DOE is allowed to re-define what gets included in its small 
business numbers then in effect nothing has changed except the way 
small business contracts are counted. This is a nonproductive 
accounting exercise that does not increase the pool of capable small 
and minority businesses. The Coalition is focused on initiatives 
devoted to capacity building of small and minority businesses.
    Our Coalition has discussed this issue with members of the Small 
Environmental Business Action Coalition (SEBAC) and other small and 
minority trade associations and we concur that small business will be 
negatively impacted if DOE is allowed to count its large prime 
contractors' small business subcontracts as part of DOE's small 
business goals.
    A subcontract to a large business does not provide the same 
benefits to small businesses that are provided by a direct contract 
with DOE. Much of this has to do with the subcontracting procedures of 
the DOE large business contractors.

    1. FAR Disputes Clause does not apply to subcontracts.
    2. Large Businesses Use Small Business to Mitigate Risk.
    3. Subcontracts Often Provide Little Opportunity for Development of 
Management and Technical Capability.
    4. Large Businesses Prefer to Self-Perform Work Under DOE 
Contracts.
    5. DOE's Large Business Subcontractors Use Small Businesses for 
Labor Load Leveling.
    6. Large businesses establish staffing and performance requirements 
from small businesses, and then fail to provide adequate workflow to 
support demands.
    7. Large Business Contractors Hire Key Staff from Small Business.
    8. Reporting of Subcontract Dollars is Often Inaccurate.

    For a thorough examination of the issues above, please refer to 
SEBAC's written testimony also submitted to this committee.

DOE must increase the number of prime contracts awarded to small and 
        8(a) businesses.
    Because subcontracts do not provide the same growth and development 
opportunities to small and minority businesses as do prime contracts 
with DOE, it is imperative that DOE make every effort to increase the 
total amount of its contracts with small businesses. In addition to 
increasing the total amount of contracts, DOE must raise the individual 
contract amount for each project awarded to small and minority owned 
companies. DOE must also increase the complexity of scope for these 
small business projects. By increasing the dollar amount and the scope 
of contracts to small and minority businesses, DOE will increase small 
and minority business' technical, administrative, and financial 
capacity. This in turn will increase a small firm's prospects of 
survival after graduating from the SBA's 8(a) program as well as its 
ability to become a large prime contractor to DOE.
    Some critics of this approach may mistakenly argue that small 
businesses do not in general have the capacity or ability to perform on 
larger and more complex projects and to provide the same value to the 
Federal Government. However, this common misconception is proved 
erroneous by the fact the (1) Large prime contractors typically 
subcontract to small and minority businesses and add significant 
overhead mark-ups to their charge to DOE and (2) the success of DOE's 
recent efforts to award projects of significant size and scope to teams 
of small environmental firms (refer to SEBAC testimony).

DOE must continue to define its mission-critical and supplemental 
        activities in order to develop more prime contracting 
        opportunities available to small and minority owned businesses.
    In order to award more contracts with higher dollar value and more 
complex scopes of work to small and 8(a) businesses and teams of small 
and 8(a) businesses, DOE must continue to redefine its procurement 
process into critical and non-critical (supplemental) activities to 
determine breakout opportunities for small and 8(a) companies.
    Another related issue concerns the recent trend towards bundling of 
small contracts at site offices into large national contracts. These 
bundled national contracts keep business out of the hands of small 
contractors and limit competition to a handful of large national firms. 
The large firms typically subcontract to small firms and then markup 
their costs to the government. Furthermore, many large firms who choose 
to self-perform on these contracts will hire employees away from the 
small incumbent firms that initially performed the work, and therefore 
further tend to erode the strength of this country's small business 
community.

DOE must encourage the development of small business by using the SBA's 
        Mentor--Protege process between large companies and small 
        companies.
    The SBA developed the Mentor-Protege Program to accelerate capacity 
building of 8(a) firms by allowing a large prime contractor to mentor a 
small 8(a) protege company.
    The mentor-protege process allows the DOE to award large and 
complex projects to an 8(a) joint venture. Furthermore, the risk of 
technical or financial failure of the small company is mitigated by the 
experience and resources of the large mentoring firm. The problems that 
a small firm faces when subcontracting with a large prime contractor 
are eliminated because the small firm is no longer relegated to a 
subcontractor status, but is instead given the role of ``managing 
partner'' in the joint venture. Because the Mentor-Protege program 
requires that the larger firm share technical know-how, quality 
systems, safety processes, accounting systems, and financial resources 
with the smaller company, the mentor-protege process is truly an 8(a) 
small business development process. A mutually beneficial relationship 
is established between the protege and the mentor, the former receives 
the transfer of technical, financial and managerial expertise, and the 
latter shares in a market that would otherwise be unavailable.

DOE must increase small business opportunities by strengthening the 
        subcontracting process between large prime contractors and 
        small minority subcontractors.
    For the sake of brevity we respectfully refer this Committee to the 
testimony of our colleagues from SEBAC concerning the recommendations 
for expanding and strengthening the subcontracting process at DOE.
    Previously, in our first recommendation that DOE not be allowed to 
count the small business dollars of their prime contractors in DOE's 
small business goals, we showed that small businesses are at a great 
disadvantage when in the role of subcontractor. We listed eight 
negative consequences of being a subcontractor as opposed to a prime 
contractor to DOE. Below we list several the actions that we recommend 
the DOE take to strengthen their subcontracting plan.

    1. Large businesses should increase small business contracting
    2. DOE must revise prime contracts small business subcontracting 
plans.
    3. Only SBA rules on small business programs should be allowed for 
subcontracting--This will, effectively eliminate the loopholes and 
place the SBA in an honest broker position.
    4. Contracts should prohibit hiring of subcontractor personnel
    5. The FAR disputes clause should be included in subcontracts.
    6. DOE should audit large business subcontracting and establish fee 
incentives for success and liquidated damages for failure to meet 
stated goals.

                             IV. CONCLUSION

    We thank the Committee for its consideration of this statement.

                                 ______
                                 
 Statement of Robert Kingsbury, President and Chief Operating Officer, 
                 Los Alamos Technical Associates, Inc.

    Mr. Chairman and distinguished Members, I am Bob Kingsbury, 
President of Los Alamos Technical Associates, Inc. (LATA), a Service 
Disabled Veteran Owned Small Business, headquartered in Los Alamos, New 
Mexico. LATA has provided engineering, environmental, and information 
technology services to the Department of Energy (DOE) complex for the 
past 28 years.
    The recent change in DOE's reporting of small business contract 
volume, and the actions that DOE has taken to ``unbundle'' significant 
work scopes and to set aside large scopes of work for small business in 
response to this change, will benefit both DOE and the business 
community. The benefits to DOE include an increased industrial base, 
higher quality competition, direct access to small business' top 
executive talent, and direct access to companies that have demonstrated 
a high degree of technical innovation coupled with a highly developed 
safety culture. The benefits to a broader business community that-
includes small business comprise opportunities to demonstrate 
management skills, develop track records as prime contractors, grow, 
and compete successfully as large businesses as well as the opportunity 
to retain and attract key technical and management talent.
    I have been associated with the DOE and its predecessor agencies 
since 1967. During this period, I have seen a number of premier 
companies, such as General Electric, DuPont, and AT&T, leave the DOE 
market. DOE must be able to call upon the broadest possible industrial 
base of qualified companies available to perform its operations. By 
setting aside large scopes of work for small business, as DOE has been 
doing for the past year, DOE is increasing this industrial base. The 
small businesses that perform the setaside contracts will be a part of 
the next generation of large businesses in DOE's industrial base, and 
DOE will realize broader and higher quality competition for its future 
procurements.
    Our experience on DOE's significant small business set-aside 
procurements to date has shown that small business is proposing company 
elders to lead these projects. Company founders, CEOs, members of 
Boards of Directors, and senior executives with both large and small 
business backgrounds are being proposed as key personnel for these 
projects. DOE is clearly getting the ``captains of industry,'' as 
characterized by one DOE official, on these small business set-aside 
procurements. As contracts for these set-aside projects are awarded, 
DOE will find that top management in the successful companies will be 
focussed on performance and customer objectives as never before, 
because the success of these contracts is vital to the future of these 
small businesses.
    By setting aside large scopes of work for small businesses, DOE is 
gaining direct access to a greatly increased number of companies that 
have significant experience in DOE operations and commercial nuclear 
power operations. These companies have gained experience as 
subcontractors to DOE's Management and Operations contractors and DOE's 
Closure contractors. They are responsible for many of the successes 
achieved by large business prime contractors at DOE sites, and they 
have demonstrated technical innovation while maintaining outstanding 
safety records.
    DOE's recent practice of setting aside large scopes of work for 
performance by small business benefits small business in ways that are 
totally aligned with the benefits of this practice to DOE. It is a win-
win situation. LATA's experience with DOE's small business contracting, 
which I believe is typical of the small business community's 
experience, illustrates these benefits.
    Prior to OMB's decision that DOE could credit only contracts that 
it awards directly to small business, nearly all of LATA's DOE program 
business was performed as a subcontractor to large business prime 
contractors. Over the past year LATA has participated as prime 
contractor or as a member of a small business joint venture prime 
contractor in procurements for the Columbus Closure Project, the FFTF 
Closure Project, the Nationwide ER/WM and DD&R (FOCUS) contract, and 
the Portsmouth Remediation contract. Experience in performing projects 
such as these as a prime contractor is significantly more valuable to a 
small business than experience gained in a subcontract role to a large 
business.
    As a prime contractor, we will have the total responsibility for 
all aspects of project performance, including technical, budget, and 
schedule performance. This responsibility allows us to demonstrate the 
value of our business systems and our management personnel. Successful 
performance as a prime contractor builds our corporate track record and 
puts us in the position to successfully compete for future projects. In 
contrast, performance as a subcontractor to a large business leaves us 
in a supporting role, often limited to supplying technical resources 
that are directed by the prime contractor, or performing work that is 
not central to the scope of the contract. The track record that we can 
establish as subcontractors to large businesses supports only our 
credentials to operate in the same subordinate role in future 
procurements. Small businesses thus tend to remain small and cannot 
easily emerge to contribute to the diversity, robustness, and growth of 
the economy as a whole.
    The opportunity to compete for projects that are set,aside for 
small business helps us to retain our most talented key personnel and 
to attract new personnel who aspire to manage significant projects. 
LATA has served as a subcontractor on many large business-led 
contractor teams that were awarded Management and Operations and 
Closure contracts by DOE. Many of these teams' proposals included LATA 
employees as key personnel. Typically LATA's key personnel have served 
as functional unit managers reporting to the General Manager's office 
on these contracts, while employees of the large business prime 
contractor served in the General Manager and Deputy General Manager 
positions. A number of our employees, while serving in functional unit 
manager positions on these teams, have been offered employment as 
Deputy General Manager or General Manager by the large business prime 
contractors. In some cases they have accepted these offers because they 
believed that they could only achieve their professional objectives by 
joining a large business. Since DOE began setting aside significant 
projects for small business, we have seen a reversal of this trend. A 
number of key personnel with site management experience and credentials 
have left large companies to join small businesses.
    In summary, DOE's recent practice of contracting directly with 
small business for large scopes of work, driven by the change in 
reporting of small business contract volume, yields significant 
benefits to DOE, to the small business community, and to the healthy 
diversification of the economy overall. These benefits are not realized 
through small business subcontracting by DOE's large prime contractors. 
The recent change in reporting of small business contracts by DOE 
should be sustained in order to encourage DOE's continued contracting 
of large scopes of work directly to small business.
    Thank you for allowing me to present this testimony.

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