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76–461 2012

BARRIERS TO SMALL BUSINESS PARTICIPATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CONTRACTING AND 

WORKFORCE 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD 

FEBRUARY 9, 2012 

Small Business Committee Document Number 112–053 

Available via the GPO Website: www.fdsys.gov 


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HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

CHUCK FLEISCHMANN, Tennessee 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


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C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Mick Mulvaney ............................................................................................... 1 

Hon. Judy Chu ......................................................................................................... 2 

WITNESSES 

Mr. Dirk D. Haire, Partner, Fox Rothschild, Washington, DC ............................ 4 

Ms. Rosie Privitera Biondo, President of Women Construction Owners and 

Executives (WCOE), Mark One Electric Co., Inc., Kansas City, MO .............. 6 

Mr. Mark McCallum, Chief Executive Officer, National Association of Surety 

Bond Producers, Washington, DC ....................................................................... 8 

Mr. Miguel Galarza, President, Yerba Buena Engineering & Construction, 

San Francisco, CA ................................................................................................ 10 

Mr. James C. Dalton, P.E., Chief, Engineering and Construction, U.S. Army 

Corps of Engineers, Washington, DC ................................................................. 27 

Ms. Jeanne Hulit, Acting Associate Administrator for Capital Access, Small 

Business Administration, Office of Surety Guarantees, Washington, DC ...... 28 

Mr. William Guerin, Assistant Commissioner of the Office of Construction 

Programs, General Service Administration, Public Buildings Service, Washington, DC ............................................................................................................. 30 

APPENDIX 

Prepared Statements: 

Mr. Mark McCallum, Chief Executive Officer, National Association of 

Surety Bond Producers, Washington, DC ................................................... 38 

Ms. Rosie Privitera Biondo, President of Women Construction Owners 

and Executives (WCOE), Mark One Electric Co., Inc., Kansas City, 

MO .................................................................................................................. 49 

Mr. Dirk D. Haire, Partner, Fox Rothschild, Washington, DC ..................... 55 

Mr. Miguel Galarza, President, Yerba Buena Engineering & Construction, San Francisco, CA ................................................................................ 65 

Ms. Jeanne Hulit, Acting Associate Administrator for Capital Access, 

Small Business Administration, Office of Surety Guarantees, Washington, DC ..................................................................................................... 71 

Mr. James C. Dalton, P.E., Chief, Engineering and Construction, U.S. 

Army Corps of Engineers, Washington, DC ............................................... 73 

Mr. William Guerin, Assistant Commissioner of the Office of Construction 

Programs, General Service Administration, Public Buildings Service, 

Washington, DC ............................................................................................ 87 

Questions for the Record: 

Questions for James Dalton ............................................................................. 143 

Questions for William Guerin .......................................................................... 146 

Questions for Jeanne Hulit .............................................................................. 149 

Answers for the Record: 

Response from William Guerin ....................................................................... 151 

Response from Jeanne Hulit ............................................................................ 159 

Additional Materials for the Record: 

San Francisco Human Rights Commission Summary of Findings ............... 93 

Presentation on Bonding Assistance Programs by Merriwether & Williams Insurance Services .............................................................................. 108 

Special Informational Notice to All Bond-Approving (Contracting) Officers ................................................................................................................. 124 

Sheet Metal and Air Conditioning Contractors’ National Association Letter for the Record .......................................................................................... 126 


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IV 

Additional Materials for the Record—Continued 

National Association of Surety Bond Producers and The Surety & Fidelity 

Association of America Letter for the Record ............................................. 128 

The Barbour Group Testimony of Karen Pecora-Barbour ............................ 130 

U.S. Department of the Interior Policy Release from Debra Sonderman .... 141 


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CONSTRUCTION CONTRACTING: BARRIERS TO 

SMALL BUSINESS PARTICIPATION 

THURSDAY, FEBRUARY 9, 2012 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON CONTRACTING AND WORKFORCE, Washington, DC. 

The Committee met, pursuant to call, at 10:45 a.m., in room 

2360, Rayburn House Office Building. Hon. Mick Mulvaney (chairman of the subcommittee) presiding. 

Present: Representatives Mulvaney, West, Hanna, Chu, Schrader. 

Chairman MULVANEY. I apologize in advance on behalf of myself 

and Ranking Member Chu for being 44 minutes late. But at least 

this way we will not be interrupted by votes. And we do hope that 

we will have other members of the Committee, Subcommittee, coming and going. But we are going to go ahead and get started now. 

We are here today to discuss the impediments that small businesses face when competing for federal government construction 

contracts. The federal sector is an extremely important portion of 

the construction market, accounting for 40 percent of the value of 

ongoing overall private and public sector construction activity in 

2010, compared to an average of about 20 percent in the prior decade. However, in our current economic climate, the construction industry faces extremely low profit margins and an incredibly high 

rate of unemployment. It was over 18 percent just last month, 

which is, as high as that is, the lowest the unemployment rate has 

been for the last two years. Against that backdrop, we have regulatory requirements of the federal contracting process that are costly, burdensome, and often prohibit small businesses from successfully competing on contracts, especially construction contracts. This 

is not satisfactory. 

You will hear testimony today that brings to the forefront issues 

that small businesses cope with on a daily basis: as prime construction contractors and subcontractors on construction projects, from 

numerous statutory and regulatory changes, to obstacles dictating 

how construction work will be solicited and awarded. For example, 

the bundling of construction requirements often prevents small entities from competing for contracts that only large entities have the 

resources to perform. However, as a former small home builder myself, I know that small construction companies have the resources 

and expertise to build in their communities at competitive prices. 

We will also examine challenges involved with the sealed bidding 

methods of contract awards, the manner in which SBA calculates 


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the prime contractor’s credit for subcontracting goals, the prompt 

payment of prime contractors and subcontractors on construction 

contracts, the government’s retention of contract payment on some 

construction contracts, and the desirability of having a local preference in some circumstances for construction contracts. Finally, 

we will address the effectiveness of the SBA’s Surety Bond Program and take a look at the individual surety bond market’s role 

in securing bonds for government contracts. 

The testimonies today should help the Committee determine if 

legislative changes or policy clarifications are needed to further 

maximize small business participation in construction contracting. 

I would like to thank everybody for being here today. We look forward to your testimony on construction. 

At some point during the day we hope to have two nonmembers 

of the Committee participate, the gentleman from New York, Mr. 

Hanna, and the lady from Washington, Ms. Herrera Beutler. And 

if there is no objection we will allow them to sit today. 

With no objection being heard, we will do that assuming they 

show. 

So for that, before we begin, I will turn to the Ranking Member 

for her opening comments. Ms. Chu. 

Ms. CHU. Thank you, Mr. Chairman. 

In recent months, the nation has finally seen some enduring 

glimmers of economic hope. The unemployment rate has fallen for 

five straight months and the 3.7 million new jobs have been created over the last two years. In my home state of California, optimism is picking up as a measure of a state’s economic activity is 

now 12 percent above its cyclical low. And while there is much 

progress that still must be made, these are promising developments. 

Part and parcel to this recovery is the revival of the construction 

industry. According to the Associated General Contractors of America, year-over-year construction employment improved in 28 states 

last month, including California, which led the way to creating 

more than 21,000 new jobs. This is the largest such increase since 

November 2007. 

While this is positive news, the truth is that the unemployment 

rate in the construction industry is more than 17 percent, double 

that of the total population. In fact, according to AGC, employment 

remains at 1996 levels. The reason is simple. Private sector spending, as well as that of state and local governments, has declined 

substantially over the last few years. Compounding this are several 

challenges that small businesses face in winning federal construction work. 

Among these problems is the continued bundling of contracts. 

Last year more than 150 contracts worth over $50 billion were consolidated. As a result, nearly 200 small businesses missed out on 

contracting opportunities worth more than $15 billion. By bundling 

large contracts such as these, the government effectively shuts out 

smaller companies from competing for work that they have the 

skills and expertise to perform. Splitting these mega contracts into 

smaller pieces would enable more construction firms to participate 

in these projects. By doing so, the government would avail itself of 


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more qualified companies and the high quality craftsmanship that 

they bring to the table. 

Another challenge that small construction firms face is receiving 

a surety bond which is required by the government and guarantees 

contractor performance. While the SBA operates a program to fill 

this gap, the agency found that only 1,000 of the 72,000 small construction businesses that are less than two years old used it last 

year. 

Why is this? Small businesses cite too much paperwork and a 

guarantee rate that is not high enough as problems plague this initiative. These concerns, as well as those requiring the adequacy of 

bond sizes themselves are preventing small firms from competing 

for federal construction contracts. 

While bundling and bonding are the most notable obstacles to 

small firms’ participation in federal construction projects, other 

issues impede their involvement. Subcontractor protections are important in the bidding process as are requirements that all contractors, both primes and subs, receive prompt payment for their services. After all, many small businesses do not have the deep financial pockets of larger firms and need to receive payment to make 

payroll and pay their own vendors. 

During today’s hearing I am looking forward to hearing from 

both industry experts and agency officials on these matters. Ensuring that small construction firms can fully compete for federal contracts is critical, not just for them but for the country as this sector 

underpins much of our nation’s economy. In light of declining private sector and state and local infrastructure investments, federal 

contracts have become increasingly an important source of revenue 

for small businesses. With such spending more than doubling over 

the last decade, the reality is that doing business with the federal 

government is no longer simply an option but rather a critical requirement for small firms’ long term success. 

Thank you, and I yield back. 

Chairman MULVANEY. Thank you, Ms. Chu. 

Just a couple of housekeeping matters. The way we work it in 

here is that when we ask you to begin speaking you will see a 

timer in front of you and the basic time allotment is five minutes. 

You will see a green light for four minutes and then the yellow 

light for the last minute. However, our practice, since we have been 

doing this this year, is to try and give you as much leniency as possible. Please do not feel the need to rush through your presentation. We are very interested. Many of you have come long distances. So we will give you as much time as you need. If for some 

reason you do start to get a little longwinded, which is not unusual 

in this room, mostly from us more than it is from you, you will 

hear me lightly tap the gavel and that is just an invitation to 

please start to wrap things up. And then what we will do is we will 

have everybody’s testimony at one time and then we will turn to 

the members for questions. 


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STATEMENTS OF DIRK D. HAIRE, PARTNER, FOX ROTHSCHILD, 

TESTIFYING ON BEHALF OF THE ASSOCIATED GENERAL 

CONTRACTORS OF AMERICA; ROSANA PRIVITERA BIONDO, 

PRESIDENT, MARK ONE ELECTRIC CO., INC., TESTIFYING ON 

BEHALF OF WOMEN CONSTRUCTION OWNERS AND EXECUTIVES; MARK MCCALLUM, CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS; 

MIGUEL GALARZA, PRESIDENT, YERBA BUENA ENGINEERING AND CONSTRUCTION 

Chairman MULVANEY. So with that I will introduce some of the 

members of the first panel. We will start with Mr. Dirk Haire. He 

is the managing partner with Fox Rothschild and he practices in 

the area of construction law and government contracts. Mr. Haire 

is testifying on behalf of the Associated General Contractors of 

America, for whom he is the federal—excuse me, serves on the Federal Acquisition Regulation Committee. 

Sitting next to him is Mrs. Rosana Privitera Biondo. She is the 

founding employee, now the president, of Mark One Electric Company. She is testifying as the President of Women Construction 

Owners and Executives. Welcome, Ms. Biondo. 

Following her is Mr. McCallum. Mark McCallum is the chief executive officer of the National Association of Surety Bond Producers, an international association of companies employing professional surety bond producers and brokers. 

And I will yield now to Ms. Chu for the introduction of our final 

panel member. 

Ms. CHU. Thank you, Mr. Chairman, for allowing me to introduce 

Miguel Galarza, who is president of Yerba Buena Engineering and 

Construction, which is a multimillion dollar civil and environmental engineering firm. He successfully managed contracts for the 

U.S. Navy, the U.S. Army Corps of Engineers, the U.S. Air Force, 

National Park Service, as well as for the California Department of 

Transportation [CALTRANS]. Mr. Galarza has been honored by the 

Small Business Administration, the California Hispanic Chamber 

of Commerce, Ernst and Young, Inc. Magazine, and the Minority 

Business Development Agency. He received a B.S. in construction 

management and attended UCLA’s Anderson School of Business 

and Dartmouth’s Tuck School of Business. 

Mr. GALARZA, I thank you for being here and I welcome you to 

the hearing. 

Chairman MULVANEY. You should have him sit up here. Goodness gracious. 

Mr. Haire, fire away. We will just go right down the aisle. 

STATEMENT OF DIRK D. HAIRE 

Mr. HAIRE. Thank you. Good morning. 

Although I am in a private law firm, private practice representing contractors involved in federal small business issues, my 

testimony here today involves or is on behalf of the Associated General Contractors of America and their 33,000 member companies, 

many of which are small or closely held businesses. As you mentioned, Mr. Chairman, I am on a number of leadership roles in the 

AGC and an active member. 


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The federal government has many different programs and services to support small business contracting. Agency applauds this 

Subcommittee for holding today’s hearing to examine ways to improve the delivery of federal construction services involving small 

businesses. AGC’s members recognize the potential benefits that 

federal small business programs provide to contractors who qualify 

for these programs. 

However, the programs as currently regulated sometimes do not 

achieve the important goal of developing successful small businesses that can compete and succeed on their own. 

SBA’s affiliation role provides a good example of the challenge. 

In recent years, many federal agencies have increased their goals 

for small business participation in construction to the point where 

small businesses are regularly given the opportunity to compete for 

projects that stretch their resources and capabilities. While this 

can be very positive for growing a small business, these small businesses often need to subcontract some of the work to a larger business which may have more expertise or resources. One would think 

that SBA publishes a clear set of rules for affiliation so that contractors would know what they can and cannot do with respect to 

business relationships between small prime contractors and their 

large business subcontractors. That is not the case. 

SBA polices the affiliation rule on a case-by-case basis with no 

set of safe harbors that contractors can rely on to know if they are 

in compliance or not in compliance. This ad hoc approach has 

thrown the construction industry into disarray when it comes to 

small business contracting issues. I have clients who routinely receive inconsistent advice on small business issues by different 

agencies, and even by different geographic offices within the same 

agencies. Agency believes that one way to solve this problem is to 

adopt a consistent set of safe harbor activities with respect to affiliation so that all contractors, large and small, know what they can 

and cannot do with respect to small business contracting issues. 

The construction industry has historically supported and provided opportunities for small businesses and is proud of its efforts 

to include small businesses and allow small businesses to develop. 

Consequently, agencies often over-rely on the construction industry to shoulder the burden for other industries that have not encouraged small business involvement. Agencies try to meet their 

entire goal by limiting competition almost only to small businesses 

in construction. In effect, the construction industry has been penalized for their success encouraging the utilization of small businesses. 

The same concern holds true for small business subcontracting. 

I routinely see solicitations for $100 million and even billion dollar 

construction projects with small business subcontracting goals of 70 

percent or more. Rather than force unrealistic subcontracting goals 

on very large projects where an extremely high level of small business subcontracting is simply not feasible. The government should 

adopt its agency-wide goals and subcontracting goals to be more 

consistent with what the market typically provides. 

We thank the Committee for recognizing the need to begin to address the issue of allowing prime contractors to fully report and receive credit for small business subcontracting activities at all tiers. 


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This will increase transparency and demonstrate whether an agency has actually met its utilization goals. 

Another major challenge for contractors over the past several 

years is how federal agencies have addressed the consolidation of 

multiple construction contracts into a single contract, the bundling 

issue. One of the major reasons bundling on construction contracts 

has proliferated is that there is currently no provision in federal 

law that requires construction contracts to be reviewed for a bundling determination. Incidentally, from our members’ perspective, 

the utilization of multiple award task order contracts [MATOC] or 

multiple award construction contracts, also known as MACs as 

they have been called, fit within the parameters—from our view fit 

within the parameters of contract bundling. 

AGC thanks this Committee for its consideration of revising the 

bundling definition to clarify the contracting building rules apply 

to construction procurements and that these procurements must be 

reviewed for any negative impacts on small companies. 

Another trend that we have seen at the state and local level is 

the proliferation of local geographic preferences. AGC believes that 

these preferences can, in fact, be very detrimental because they encourage retaliatory measures from other local surrounding jurisdictions and can have the effect of hurting small and local construction companies that typically are limited by geography. 

Thank you for the opportunity to provide our views on working 

with the federal market. AGC strongly recommends Congress reform the federal procurement process to: (1) create safe harbor 

standards that do not penalize contractors for making good faith efforts to abide by the SBA rules and regulations, and specifically the 

affiliation rule; (2) limit overreliance on construction to achieve 

overall agency small business subcontracting goals; (3) ensure that 

small business goals take into consideration small business capacity in the relevant markets; (4) count all small business participation at all contracting tiers; and (5) revise the bundling definition 

to clarify that contract bundling rules apply to construction procurements. 

Thank you. I appreciate the time. 

Chairman MULVANEY. Thank you, Mr. Haire. And we are going 

to have several questions but we will go through all the testimony 

first and then come back one at a time. 

Ms. Biondo. 

STATEMENT OF ROSANA PRIVITERA BIONDO 

Ms. BIONDO. Mr. Chair, Ranking Member Chu, and members of 

the Subcommittee. Good morning. 

I am Rosana Privitera Biondo, president of Mark One Electric 

Company, headquartered in Kansas City, Missouri. Our company 

does both prime and subcontracting work. I can see the issues from 

both sides. 

Today I am testifying in the capacity as president of Women 

Construction Owners and Executives (WCOE). Our mission is to 

create contracting opportunities for our members. Our members 

are women. We have just completed our 28th annual leadership 

conference here in DC, and we had women business owners from 

across the country discuss these important issues. 


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Let me begin with size standards. The SBA’s size standards in 

construction are based on either revenue or number of employees. 

We at WCOE would like the SBA’s office to change the process 

from revenue to number of employees. Here is why: A small specialty contractor is capped at $14 million revenue. 

Then once they exceed those numbers they are now a large company. Yet, a company that you may buy material supplies from 

may have revenue that exceeds that same $14 million number, yet 

their company is not considered small—they are still considered 

small. And the reason they are still considered small is that they 

are done by the number of employees. So in this very avenue you 

have companies who have all types of dollar ranges that differ, yet 

number of employees seems to be a better way to calculate whether 

a company is large or small. So we urge them to look at calculating 

the size of a company based on number of employees. 

Bid shopping—We need this to shop. This hurts women in all 

small businesses. We would like the agency to implement a process 

that on all sealed bids that the prime contractor would submit, that 

they would be required to list their major subcontractors by name, 

scope, and dollar value at the time of bid. This would eliminate the 

after-the-fact low bid substitution. This happens both in the private 

and public sector. 

Example: I bid a job and on that day the general contractor 

comes back to me and says we used you on this project; you are 

the low bidder. Weeks go by; You never hear any more from them 

and then you are asked what happened? You are told, after-thefact, that a lower bid came in and so they used that bid. So the 

question is at the time of bid, if this was the federal government, 

and I was low at the time of bid, did they use—they used my number. Where did that money go? Did the federal government get that 

savings? And it is just not a fair process. 

So we would like to see, again, I will say it again, we would like 

to see on sealed bids that the majority subcontractors be listed by 

name, value, and scope of work. This would give the contracting officers the ability to police this through their contract process and 

this would help small businesses of all kinds. 

WOSB, Women-Owned Small Business Program. They refer to 

this as 8M. This was implemented last year. This program is intended for restricted competition for women-owned businesses 

seeking prime contracts, very much like the 8A program and the 

service-disabled veterans program. This is not what we got. It is restricting our women to a $4 million cap on the size of projects. That 

statistic shows that the $4 million dollar value created by 165,000 

projects, that the size of the contracts end up being $118,000 for 

165,000 procurements. 

Well, companies that do $118,000, may or may not make a few 

thousand dollars at the end of the day. That is not a way to grow 

new businesses, especially for women. The women have waited 11 

years for this program to be enacted and then we are being capped 

right out of the chute. But the other two, 8A and service-disabled 

vets are not. 

And just to give you some further statistics, contracts that are 

over the $4 million value created about 2,125 projects with a base 

contract of $16.6. This is what women need to grow their compaVerDate Mar 15 2010 02:15 Dec 01, 2012 Jkt 076461 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A461.XXX A461

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nies in order for them to become more successful; not this $4 million cap. Now, we understand that this has already started to be 

addressed but we urge you to remove these caps. 

Retention and bonding. In the federal government contracting, it 

says that retention is at the discretion of the contracting officer. 

We think that retention should only be held on work in question 

and nothing else. We feel that if a bond is in place, for sure no retention should be held as that is double dipping. The bond should 

protect the owner. 

Bundling. Bundling or the grouping together of different requirements into one enormous contract. They may or may not—let me 

start over. 

Bundling or grouping together of different requirements into one 

enormous contract means small businesses cannot compete as 

primes. They may or may not be getting subcontracting work but 

do not get prime work. However, the current unbundling rules do 

not apply to new construction contracts, so many small construction firms do not get the protection given to the small business in 

other industries . . . we need these protections. Bundling hurts the 

women-owned business. 

In conclusion, given the importance of contracting, WCOE, we 

applaud Chairman Graves for introducing the Government Efficiency through Small Business Act of 2012. We also express our 

support and thanks to you, Chairman, for introducing H.R. 3893 on 

Subcontracting, and you, Ranking Member Chu, for your work on 

Mentor Prote ́ge ́ Programs. We also want to thank Congressman 

Hanna for his Bonding Bill and the other Committee members who 

have been, or are, in the process of introducing small business contracting legislation. Thank you. 

Chairman MULVANEY. Thank you, Mr. McCallum. 

STATEMENT OF MARK MCCALLUM 

Mr. MCCALLUM. Chairman Mulvaney, Ranking Member Chu, 

members of the Subcommittee on Contracting and Workforce. 

Thank you for the opportunity to speak with you this morning. 

NASBP members are companies employing licensed surety bond 

producers who assist businesses of all sizes to obtain surety credit 

and to grow as competitive businesses. Surety bonds assure that 

businesses seeking award of federal contracts are qualified to undertake the contract obligations sought and they provide guarantees of payment and performance if the business awarded the contract defaults on its contract obligation. Bonds are statutorily required and they preserve vital taxpayer funds and provide payment 

remedies to downstream parties, the subcontractors and the suppliers, in the event the prime contractor fails to pay them. Without 

recourse to a payment bond remedy, unpaid subcontractors and 

suppliers, particularly small construction firms, may not be able to 

continue as viable businesses, threatening the jobs that they create. Sureties underwrite to assure qualifications and to prevent 

losses. They assess the character, the capacity, and the capital of 

the firm, to determine if the business is capable of performing each 

contract. 

An important SBA program exists to assist small businesses having difficulty qualifying in the standard market. Started in 1971, 


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the SBA Bond Guarantee Program provides guarantees ranging 

from 70 to 90 percent to surety companies as an inducement to extend surety credit, the firms that otherwise do not qualify in the 

standard surety market. This program has helped thousands of 

small construction firms over the years, but it could be helping 

even more. 

The SBA recently has undertaken efforts to improve the program, such as streamlining its bond application process and improving its response time to claims and expanding its outreach to 

design build contracts. It is a good federal program that deserves 

to get better to continue to achieve its mission. Among the enhancements that we propose are increasing the guaranteed percentage to a uniform 95 percent, reducing the fees charged businesses and sureties to access the program, increasing the contract 

maximum from $2 million to $5 million, vesting discretion in the 

program administrator to assume program liabilities, and eliminating regulations out of keeping with prevailing practices of the 

construction and surety industries. Further recommendations are 

detailed in our written testimony. 

Revitalizing this program with statutory and regulatory enhancements will increase its effectiveness, directly benefitting small businesses seeking access to the public contract market. 

I now turn your attention to a bill, the Security in Bonding Act 

of 2011, H.R. 3534, which was introduced on December 1, by Representative Hanna and co-sponsored by Chairman Mulvaney. 

NASBP, along with 10 other national organizations, many of which 

are represented in this room, support H.R. 3534 as a critical and 

commonsense measure to protect small businesses and to ensure 

the integrity of surety bonds on federal construction projects when 

issued by individuals using a pledge of assets. 

Currently, construction firms may use one of three methods to 

furnish security on a federal construction project. They may secure 

a bond written by a corporate surety listed in Treasury Circular 

570. They may use their own assets to purchase and to post an eligible obligation, which is a public debt obligation of the U.S. government in lieu of a surety bond, or they may obtain a bond from 

an individual if the bond is secured by an acceptable asset which 

includes stocks, bonds, and real property. 

The role of the surety is predicated on its financial standing. Corporate sureties writing on federal projects must possess a certificate of authority from the Department of the Treasury, which conducts a financial review of the surety and sets a single bond size 

limit for that surety. Corporate sureties are licensed in the states 

in which they conduct business and are required to obtain certificates of insurance in those states from state insurance departments. They are rated by private rating organizations, such as A. 

M. Best, which publicize their financial strength and size. 

Individual sureties are not subject to the same level of scrutiny 

and oversight as corporate sureties and are vetted solely by contracting officers. No third-party rating information is available on 

individual sureties. If the assets backing an individual surety bond 

prove insufficient or nonexistent, unpaid subs and suppliers are denied their statutory payment remedy. 


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H.R. 3534 solves this problem. It requires individual sureties to 

pledge solely those assets defined as eligible obligations by the Secretary of the Treasury and provide those assets to the federal contracting authority, who in turn will deposit them in a federal depository, ensuring that pledged assets are sufficient, readily convertible to cash, and in the physical custody and control of the federal government. This is nothing more than what now is statutorily 

required of construction firms that wish to pledge assets as security 

on a federal contract in lieu of a surety bond. 

Small firms working on federal construction projects, either as 

subs or suppliers, have no control over the prime contractor’s choice 

of security provided to the federal government, but they suffer the 

most harm financially if that provided security proves illusory. 

H.R. 3534 will give them the confidence that on all federal projects 

adequate and reliable security is in place to guarantee that they 

will be paid. 

Thank you very much for your time and attention this morning. 

I look forward to answering any questions you may have. 

Chairman MULVANEY. Thank you, Mr. McCallum. Finally, Mr. 

Galarza. 

STATEMENT OF MIGUEL GALARZA 

Mr. GALARZA. Thank you, Chairman Mulvaney and Ranking 

Member Chu and other members of the Subcommittee for the opportunity to speak to you today. 

My name is Miguel Galarza. I am from San Francisco, California. 

And I am the owner and founder of Yerba Buena Engineering and 

Construction. We have branch offices in Salt Lake City also. And 

in addition to all the accolades that Ranking Member Chu gave me, 

in addition to my family and daughter, some of the most proud 

things are being a state director for AGC and also a board of directors for ICA or the Inner City Advisors, which is a nonprofit providing assistance to smaller inner city companies. 

As the founder of Yerba Buena Engineering, I have had a long 

road starting from in the field as a laborer to working my way up 

through a mid-management level and then becoming an owner of 

a company. And so I think I provide a unique perspective to what 

it means to be a small business from the eyes of an employee, from 

the eyes of a manager, and in the eyes of an owner. And having 

learned the ropes the hard way and understanding what it means 

to be a small business and understand the rules that are involved 

in playing in the game of surety and bonding and lines of credit. 

So I am hoping that today through this discussion, obviously 

small business is a nonpartisan issue. Having this open discussion 

to be able to discuss how we can improve some of the subcontracting issues that are prevalent in federal contracting, the small 

business bonding issues that prevail and other bundling issues are 

prominent and how we can come to some resolution and some at 

least meaningful exchanges. 

One of the things that being in eight states throughout the 

United States and having done well in excess of over $100 million 

worth of work, we have had this unique perspective of having had 

Aerofunded projects. And these Aerofunded projects, Yerba Buena 

was the recipient of 21 of them. And we were able to create a lot 


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of projects and a lot of jobs to keep people busy and keep people 

employed. And that is one of the main reasons why I can see why 

bundling is important because when that funding came in place it 

was important that there was an avenue that silver-rated projects 

can be implemented quickly and efficiently and expediently to get 

people to work. 

And so while there is a need for bundling in the form of an IDIQ 

or MATOC or as-needed contracts through IDIQ, there are other 

opportunities that are not being used now to create opportunities 

not only for those prime contractors but for those subcontractors 

that do not get that main prime contract. And that is where I see 

there is a big lack in opportunity. 

Currently today, through FAR Subpart 19, there are requirements for subcontracting. Unfortunately, those numbers do not 

really become numbers. The reporting mechanism for subcontracting is done under, I believe, Note Form 244 or 294. That number or that form basically talks about percentages. It does not talk 

about dollars. So when you have a $100 million contract, you do 

not talk about—you talk about 60 percent. Sixty percent of subcontracting. But what really makes up that 60 percent? It is the portion of which the prime contractor designates he is going to subcontract. 

So in that $100 million contract, if he decides he is only going to subcontract $2 million and he says he met his goal of 60 percent, 

what is 60 percent of $2 million? In the big scheme of things he 

can say he did 60 percent and he met his goal, but he really did 

not do much other than meet his minimum standard that was required contractually. 

I think the City of San Francisco, the State of California, and 

other state agencies provide a true roadmap of how subcontracting 

should be done. It should be done based on dollars and on total contract value. That way you have an obligation to meet a certain requirement. If it is a $100 million contract, we want 20 percent subcontract; that is $20 million worth of opportunity. And developing 

a real statutory penalty for not enforcing and meeting those obligations that you set forth as we need the contract. 

There is nothing worse than to win a contract and then say you 

are nonresponsive because you failed to meet your statutory requirement. That is the penalty that needs to be imposed. Only then 

when there are real teeth in enforcement will contractors begin to 

understand that that is the real price of doing business for the federal government. And they will start to reach out and look for opportunities for subcontractors. 

There are other issues regarding bundling, subcontracting, but 

my time is short so let the Committee talk to me in questions if 

you feel free. Thank you again for the opportunity. 

Chairman MULVANEY. Thank you, Mr. Galarza. And thank you 

to all the panelists. As is my custom, I will defer my questions to 

the end and ask Ms. Chu now to take her opportunity to ask the 

panelists questions. 

Ms. CHU. Thank you. I will start with Mr. Galarza. You highlight 

the City of San Francisco and many of its practices, and one of 

those things that you highlight, certainly in your written testimony, is the Surety Bond Program that they have, which is a 


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model of their strong commitment to including the small business 

community in a major procurement program. How does this program differ from SBA’s Surety Bond Program? 

Mr. GALARZA. I think fundamentally the main difference is the 

mechanism, to be quite candid, reimbursement. Under the SBA 

funding you are still dealing with a broker who still needs to commit to a certain level of effort to get this contractor bondable and 

to make sure that he has all the steps in place, his financials and 

so forth. There is no guarantee that he is going to be successful 

and/or in other words earn a commission or increase some income 

for the level of effort that he has put into it. 

So what ends up happening, unfortunately, is those thousand 

contractors that you mention utilizing are those that have been 

somewhat the low hanging fruit, the easy ones that have been 

cherry picked that are easy to access. They have financials. They 

have the tools in place already to be an easy target to be used. 

The City of San Francisco does not use that methodology. They 

use the contract. The agency that is used to initiate the bonding 

program is paid a flat fee. And their job is to get the contractor 

ready to do business the right way. In other words, build their 

foundation so that at some point in time they no longer need the 

Surety Bond Program. They are in the game with the rest of contractors. Ultimately, this is supposed to be a developmental stage 

to get them to the next level. Not that they should depend on this 

5, 6, 7, 8, 10 years down the road. They should be able to build 

their capacity, learn how it means to be in business, to report, to 

pay their taxes, to do what it needs to be part of the taxpaying 

community. And then you will be able to get bonding a lot easier. 

Those are all simple—bonding has not changed in 50 years. It is 

the same rules that have always applied. Ultimately, you choose as 

a contractor whether you want to play by the rules or not play by 

the rules. Unfortunately, so many small businesses do not understand what the rules are and so they are lacking that understanding so that they can play by the rules. 

Ms. CHU. Well, for Mr. Galarza and also our expert on surety 

bonds, Mr. McCallum, should Congress consider scaling up or piloting this type of bonding program? If so, which agency would be the 

best to run this program? 

Mr. MCCALLUM. I would think it would be through the Small 

Business Administration. I think there could be additional enhancements made. The industry itself has done a lot of outreach, 

particularly in the last three years, given the economic climate. 

And as Mr. Galarza points out, oftentimes one of the initial difficulties is that businesses just do not know where to go. They are not 

aware of what a surety bond is, how to go about it, and so forth. 

And so the industry has done a number of what they call contractor development programs which were programmed by the Surety and Fidelity Association of America and have been partnering 

with the USDOT, for example. They did 11 different programs last 

year. I think they are on track to do 11 or 12 this year, and it is 

designed to go out there into the small business community and 

give them initial awareness and education about bonding and other 

things, such as risk management, that they need to know in order 

to qualify not just for bonding credit but for financial credit as well. 


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And there needs to be more investment, I think, by any contracting 

agency of the federal government in trying to put on these types 

of awareness and education programs. 

Mr. GALARZA. If I might add, in the 15 years that the city program has been in place, the millions of dollars of contracts that 

they have had, they have been able to collateralize these bonds 

with as little as 40 percent. And one of the key reasons that it 

works in San Francisco is because the city itself has put $5 million 

in escrow. And that $5 million means that the city has a vested interest in making sure the contractor is successful. After all, it is 

their money that is backing their own bond. 

And so to make sure that we are all in together, so to say, rather 

than having an adversarial role, the city comes to the table and 

says how can we make sure you as a contractor are successful? 

What is it that is going on in this project that is preventing you 

and the project itself from meeting success. So given that it is their 

money they have a vested interest in making sure that it succeeds. 

Mr. MCCALLUM. If I may add an additional point, one of the 

things that our members seem to find out that a lot of times with 

an emerging business there is a reticent to take their hard-earned 

capital and apply it for the services of a construction attorney or 

a construction accountant. That can be a significant fee for them 

when they are just getting started. At the same time that is exactly 

what they need to be doing to make sure that they are building 

their business infrastructure so they can succeed and go to the next 

level. And there are sometimes local programs that will, through 

a grant of funds, help them with securing those kinds of professional services. Or alternatively there may be opportunities 

through, for example, the SCORE program where you have retirees 

who are construction lawyers or accountants come and provide 

those kinds of services for businesses. 

Ms. CHU. Thank you. Those are great suggestions. 

Now I would like to direct a question to Ms. Privitera Biondo. I 

was very interested in your recommendations because, of course, in 

federal government we have this 5 percent goal for women-owned 

businesses but we are only at 4.04 percent, which is a huge amount 

if you think about the fact that we have over $500 billion worth 

of federal contracts. So we really need to improve this situation. 

And in your testimony you bring up the practice of prime contractors bid shopping subcontractors and they will submit their proposal with the women-owned business or other small firms. But 

once they get the contract then they make this last minute substitution with a business that offers a lower bid and then they will 

pocket the difference. It is a terrible practice and has a negative 

effect on women-owned small businesses. How could we stop prime 

contractors from this ‘‘bait and switch’’? I know you talked about 

requiring a listing of subcontractors but if you could expand upon 

that. 

Ms. BIONDO. Sure. In Kansas City, at the city level, they have 

implemented a program so when you even bid on a traffic signal 

project and if they ask for small business, minority participation, 

other venues inside that, you actually list that information at the 

time of bid. And then it goes back to a Human Relations Department. So in this case it would be a contracting officer. They review 


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that information. At the time of bid those subcontractors actually 

sign an affidavit saying this is my number, this is how much my 

bid is; I am good for it. And so when it is submitted to the city, 

the city sees these are the major subcontractors listed so that way 

they know unless something happens after the fact, at least the 

city can vet out what happened. If the company needs to remove 

themselves from the project or whatever that may be, but we have 

found that that has eliminated a lot of the after-the-fact shopping. 

Ms. CHU. Now I would like to ask about the bond limit, the maximum bond limit. The American Recovery and Reinvestment Act 

temporarily increased the maximum bond limit from $2 million to 

$5 million. And bonds of up to $10 million could be authorized if 

a contracting officer certified that a bond over $5 million was necessary. Unfortunately, this provision has expired and I know, Mr. 

McCallum, you talked about how increasing it would certainly help 

small businesses compete for bigger contracts. Should Congress 

permanently extend the bond limit? And what maximum bond limit 

should be available? Anybody on this panel. 

Ms. BIONDO. The women believe that it should be extended at 

the R rate that was in existence prior to this. It has expired. So 

at a minimum where it was before. 

Mr. MCCALLUM. You know, as you recounted, it was $5 million increase during the economic stimulus and then up to $10 million 

should a contracting officer certify that there were appropriate circumstances. We think a $5 million limit would be a good limit. I 

think it is recognizing that even for smaller procurements they are 

getting larger. And it would give the small businesses who are participating in that program the opportunity to seek more federal 

work. But you have to remember the program itself is helpful in 

other contexts, not just federal work but other public work contexts 

as well where they may need that credit line. 

Ms. CHU. My final question is for Mr. Galarza and Ms. Privitera 

Biondo. Agencies are required to review contracts and bundle requirements of two or more goods or services where it is previously 

provided or performed under separate contracts. However, since 

construction contracts are new requirements there are those that 

argue that these contracts do not need to undergo the same bundling scrutiny. Courts have yet to rule definitively on this issue but 

I think we should focus our attention on contracts that are more 

likely to be bundled. What types of contracts do you see bundled 

that could clearly be broken up and bid on by small businesses? 

Mr. GALARZA. Obviously there are reasons for bundling, either 

capacity, the nature of the work. For example, in our home state 

of California there are often large environmental contracts that require extreme expertise that are not available to small business. 

And so I can see that. The reason for having a bundled contract, 

those are typically $500 million to a billion dollar programs involving environmental clean-up in BRAC facilities. However, on the 

other side, the opportunity to create a smaller, say baby RAC (Remediation Action Contract) so that you, although you have a bundled contract for the large prime contractors, you enable smaller 

prime contractors to gain traction and to learn how to do that similar work and so that they can build their capacity at that same 

level. 


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Ultimately, these large businesses were small at one time and 

they obviously built their bonding capacity to get to that level. And 

obviously, that would be an excellent opportunity. Agencies, like 

the Corps of Engineers, the Navy, they have BOAs, they have 

MATOCs, they have smaller procurements that give expertise to 

smaller contractors. All I would say is it is create an opportunity. 

If the contract needs to be bundled, create an opportunity where 

there is a similar myriad opportunity for small business so that 

they can indeed do the same thing. 

Ms. BIONDO. And I would say that I believe that the women have an opportunity to get more prime contracts. If you have a $5 million contract I guarantee you they can easily take $20 million out 

of that and scope it out so a woman or a minority can go and be 

a prime contractor and achieve that. The problem is once you bundle it they do not reach down that far to you. But those large 

projects, they can break scopes down. The larger the project, the 

easier to break the scope down. The smaller the project, the harder 

to break the scope down because there is so much more to work 

with. So I just think it is a choice and I think they need to break 

them down further. 

Ms. CHU. Thank you. And I yield back. 

Chairman MULVANEY. Thank you, Ranking Member. I turn now 

to the gentleman from Florida, Mr. West. 

Mr. WEST. Thank you, Mr. Chairman and Ranking Member. And 

thanks for the panel for being here. 

I just have one basic question. I think it is great today that we 

have the private sector representatives here and then also we have 

public sector representatives here. We have folks that are here 

from the SBA, from the Office of Surety Guarantees. We have the 

chief of Engineering Construction from the Corps of Engineers. And 

we also have from the GSA their representative as far as construction. So what I would ask is this. What would be the one or two 

recommendations, concerns that you would like to say to them from 

the SBA, from the GSA, and from the Corps of Engineers as far 

as policies, regulations, processes, best practices, procedures since 

we have all of these players in the same room at the same time? 

Mr. GALARZA. If I may, thank you. 

As we all know, construction is about building a good foundation. 

And that foundation starts with training and starts with a teaching 

program. And as we move forward, the issues involving defunding 

organizations like Department of Commerce and NBDA, either succumbing them into other organizations, let us not make sure that 

those training opportunities do not disappear. And that SBA and 

their budget does not get shrunken any further. They are in a tenuous position trying to do too many things with too far few people. 

And without, as we all know the old proverb, I can give you all the 

fish you want but until I teach you how to fish you will not sustain 

yourself. And ultimately, the responsibility is to give an opportunity to a contractor, not give him a contract, not give him the opportunity but teach him how he could sustain himself and then 

continue to grow to the next level once he moves out of an 8A program, out of a HubZone program. So he can bring opportunities to 

his own community. Without that training and without that effort 

then they will always be looking for the opportunities that are 


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given to them rather than those that they can reach out for themselves. 

Ms. BIONDO. I would like to go back to the size standard issue. 

This has been an antiquated program in place for many years that 

there has been a lot of discussion on. And you know, to ask for 

something as simple as move from a number of employees to revenue and to not get much movement is very difficult. But if we 

could have some consideration in that area because it is done so 

many different ways it is not consistent. 

Mr. HAIRE. From AGC’s view, we would like to see some clear 

rules, safe harbors, if you will, on how SBA evaluates the affiliation 

rule, particularly with respect to subcontracting between small 

business prime contractors and large business subcontractors. 

There is a lot of confusion in the marketplace. There is a huge 

amount of bid protest activity going on right now. And we would 

like to see some clarity. We think if SBA could clarify for everyone 

what small and large businesses can do in a subcontract relationship it would benefit the industry and the agency’s and the SBA’s 

programs and goals. 

Mr. MCCALLUM. And I would add in terms of training just internally, that they make a commitment to train their procurement officers. There is a lot of concern in the private sector that there are 

a lot of retirements that will happen for very skilled procurement 

officers. They have a tough job. They do a wonderful job out there. 

But as new folks come in they need to have the training to carry 

on with their complex tasks that they have. So I would urge them 

to do that. And from my own perspective, as well, an adherence to 

the Miller Act requirements. We sometimes see that they are not 

adhered to. They are there for very good public policy reasons and 

that needs to happen. 

Mr. WEST. Last quick thing each one of you. If there was one onerous federal regulation that you would want to see repealed what 

would it be? 

Mr. HAIRE. I will take that one. AGC for several years has asked 

to have a line from FAR 52.219–9L removed. It is FAR clause 

52.219–9L as in Larry. There is a sentence in that particular FAR 

clause that places a restriction against counting lower tier subcontracting in the small business subcontracting goals. Obviously, 

Congress could choose on its own to take care of that issue but also 

the FAR Council if it so chose could simply go in and delete that 

reference. 

And I would also point out the government’s Electronic Subcontractor Reporting System now has the capability to easily allow 

tracking at all levels. It is not the paperwork complication it was 

before it was all computerized. So AGC would like to see that. 

Ms. BIONDO. There is—I am trying to think how to say this— 

there is a bid process in place where you submit your bid on-line 

and then they come back and they ask you to counter your bid and 

counter your bid and counter bid. It is sort of, in my mind, similar 

to this bid shopping. So I am concerned how that works because 

basically you are giving your price and you are asked to continually 

think about lowering your price. And you are bidding against a 

blind computer that you do not know why you are doing it. What 


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is the logic behind it? If you are taking out scope. So I would like 

to see that changed. 

Mr. MCCALLUM. Since you have rattled my memory on that, and 

I think you are referring to a reverse action process, we feel that 

it is very problematic anytime you commoditize construction, because construction is unique in every instance. You have unique 

site requirements. You have unique owner requirements, and all 

the rest. And so a process or a procurement process that does not 

recognize that is I think very problematic. And particularly so for 

a small business who cannot finance the risk. So if you 

commoditize it, you are cutting the margin. You are putting difficulty on letting them compete, and that should not happen. 

Mr. GALARZA. In regards to legislation, but more of a practice, 

the Committee has talked about bid shopping. And unfortunately 

we had the example of the government bid shopping in the form 

of BAFOs (Best and Final Offers). I have been involved in rounds 

of BAFOs for the same contract five and six times over and over 

and over again. It seems that some agencies are not quite happy 

with what the competition has felt is a fair and reasonable price 

and they want a lower price. And they continue to ask for a lower 

price. And so if there was going to be a meaningful change, maybe 

a reason for one BAFO, but multiple BAFOs on the some solicitation seems unfair and unrealistic and unreasonable. 

Mr. WEST. Thank you very much. Thank you, Mr. Chairman. I 

yield back. 

Chairman MULVANEY. Thank you, Mr. West. 

I turn now to the gentleman from New York, Mr. Hanna, the primary sponsor of a bill that I am associated with. So Mr. Hanna. 

Mr. HANNA. Boy. It sounds like nobody here likes to compete. Let 

me just play devil’s advocate for a moment. 

What is wrong? I mean, if you do not want to sit at your computer and have a reverse action all you have to do is shut the darn 

thing off and not bid it. Those are your options. Or stop—put your 

price out there and leave it there. 

I do not—I have never—I mean, I have never been offended by 

anybody who sought the best price for anything. It is a brutal 

world out there. We know that. And I do not know that the government should necessarily be in the business of taking that marketplace away, but I absolutely sympathize with that because I understand what you mean. 

The other thing I would like to say is that in terms of having an 

auction or you putting a price in on bid day and somebody changes 

it later, Ms. Biondo, you may have answered this but what do you 

think is wrong with that? 

Ms. BIONDO. To change the bid later? 

Mr. HANNA. No, for somebody to come back to you and say—or 

not come back to you a week later and say, you know what? We 

had someone call and their price was lower. Or let us say, for example, they say to you, you know what? Your price was the lowest 

price but we want to pay more because we know someone who we 

feel is more qualified. I mean, that also could happen. 

Ms. BIONDO. Okay. Well, I will try to be pretty clear here. First, 

when you said I could stop bidding. Well, you already took three 

bids or more so you already had multiple choices of multiple numVerDate Mar 15 2010 02:15 Dec 01, 2012 Jkt 076461 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\A461.XXX A461

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bers from right out of the box. You always have a minimum of 

three bids if I recall. So you had three multiple choices so you had 

three different people who bid. I think that should be enough. 

Mr. HANNA. I do not, well, I am not here to argue against you. 

Ms. BIONDO. Okay. So then—— 

Mr. HANNA. Let me just say this though. First of all, why is it 

enough? Why is one not enough? 

Ms. BIONDO. So now I am going to go to your next thing that you 

said about—I do not know how you said it, but why do I think that 

is not fair? I think that is what you said. 

Mr. HANNA. Yes, ma’am. 

Ms. BIONDO. This is government money. So this is our money. It 

is not private money. If it is private money and the owner chooses 

to go with a lower bid, I can understand that. But this is the government’s money so every person in this room has the ability to go 

after that. And I do not think that the process that they have 

makes that fair. 

Mr. HANNA. Should not the government be in a position to get 

the best price it can? Is that not the ultimate responsibility for the 

government to find the same goods or service or both at the lowest 

possible price? 

Ms. BIONDO. Yes. And that is why you go for multiple bids. You 

had multiple choices. But when people put those numbers together 

and companies spend thousands of dollars putting bids together 

and are unsuccessful in that way, I mean, there is a lot—it is not 

like you just put your number out there and it did not cost your 

company any money to put the job together. I mean, how about 

when your company spends $100,000 putting the bid together and 

you did not get it? 

Mr. HANNA. That is life. Some other company did. And somebody 

got a better deal. And I assume that the ultimate goal of all your 

companies is to be competitive. Or no matter what we do from this 

seat or in this House, we cannot control how competitive you are. 

Only you can. And the work is getting done and somebody is doing 

it. And that person presumably is the most qualified at the lowest 

price. 

So I appreciate that you like not to have to compete as much. I 

appreciate that you like not to have a prime contractor to be able 

to go to someone after the fact and shop your price which I would 

agree with anybody here there is something unethical about that. 

I do not disagree. But it does not make it illegal, and certainly it 

may be the case that somebody actually found a great deal better 

price. And we have to remember this is the beginning of the job 

and a prime contractor, if it is a big job that is bundled, there is 

no guarantee that the profit he took by getting a lower contractor 

will actually help him finish that job. He may need that money to 

be successful. 

Ms. BIONDO. Well, let me say that speaking on behalf of my own 

personal company, we bid thousands of jobs every year and we 

compete on a day in, day out basis. So for you to insinuate that 

I do not like to compete, I take offense to that because we compete 

constantly and we understand what competition means. And I welcome it. 


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Mr. HANNA. You must be doing well. I mean, obviously you are 

competitive or you would not be here. So I give you credit. It was 

not meant to offend you. It is a simple question. I have lived in 

your world for 30 years and dealt with the same circumstances. 

Mr. Galarza. 

Mr. GALARZA. Yes, sir. 

Mr. HANNA. If I may? I am out of time. 

Chairman MULVANEY. No objection. 

Mr. HANNA. Thank you. Thank you very much, Mr. Chairman. 

What do you build? 

Mr. GALARZA. We are a heavy civil contractor. Roads, bridges, 

pipelines, things of that nature. 

Mr. HANNA. And so I have to ask you. If you can do all of that, 

and this is meant in the kindest way because I understand the nature of accounting and bonding. Everything you go through is 

awful. But if you can do all that and you are an engineer, why can 

you not figure out your own bonding needs? 

Mr. GALARZA. I certainly can. This issue is not about me. This 

is about the tens of thousands of contractors that do not know what 

to do. Just because you are a contractor does not make you a builder. It just means you passed the test. And just because you are in 

business does not make you a business owner. It just means that 

you signed up for a business license. And so unfortunately, when 

you get into environments like a reverse auction you have that contractor who has no clue what that means. So he gets sucked into 

the competition just like playing poker. And unfortunately, he has 

found the quickest way down to bankruptcy and not understanding 

what he has gotten himself into. And yes, I got the job but I cannot 

pay my bills. I cannot pay my vendors. I cannot pay my taxes. I 

cannot pay my FICA, my FUTA, my SUI. But I got the job. And 

unfortunately, that is what happens when you open up a competition where you have people that are not knowledgeable enough to 

understand the ramifications. 

Mr. HANNA. But is that not exactly the point, that the bonding 

is that firewall between those people and more qualified people? 

And by removing some portion of that firewall that has existed for 

so many years, 50 years, and I would argue bonding has changed 

in the last 10, 20 years to its detriment because it does let marginal people in. Not that I am not supportive of minority bidding, 

et cetera, but do you see in your mind a point at which there is 

too much of that where severely marginal people get into a business that frankly they are not qualified for? That there is so much 

assistance it actually encourages their own demise? There has to 

be some kind of bottom-line limit where a person has to have more 

than a pickup truck and a hammer. 

Mr. GALARZA. No question. And I would agree with you. I think 

the point that you have made earlier about competitiveness is tailored to the large business. He gets a preferential bonding credit. 

He gets a preferential line of credit. So his cost of money is cheaper 

than the small business. His cost of bonding is cheaper than a 

small business. His tax rates may be sweeter. He has a better tax 

accountant. All those things play in favor of the large business who 

is able to bring his bottom-line so that he can be competitive at 2 

percent. Whereas, the companies that are trying to get to that next 


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level have a higher cost of money. Have a higher cost of bonding. 

Have a not so good CPA. Not so good banking alliance. And so 

their cost of doing business, while they have made as little profit 

as the other company, it cost them—— 

Mr. HANNA. You know, let me just agree with you 100 percent. 

The process is this. That a guy starts small. A woman starts small. 

They learn. They build up resources. They build up knowledge, 

skill. Employees with the same. They get a better lawyer. They get 

a better accountant. They start to make a few bucks. They get cash 

reserves. They get a bigger bond. They do it all over again the next 

year and they get a bigger bond and a bigger bond. And ultimately, 

you can do exactly what anyone else can do and that is to grow a 

large $10, $20, $50 million business and bid work appropriately. 

But personally I like the fact that you learn as you go and you require and attain bonding and credit as your binding and credit capacity grows based on your knowledge, your skill, your income, and 

your financial statement. 

That is why bonding has worked so many years. And the problem 

with bonding today is that it is supposed to be a zero loss ratio. 

Is that correct, Mr. McCallum? 

Mr. MCCALLUM. Yes. That it is written under a theory that there 

will not be loss. 

Mr. HANNA. Right. So it is not a zero loss ratio anymore. And because marginal people get in it adds difficulty. I am way over my 

time so I will end there but thank you for your tolerance. 

Chairman MULVANEY. No, that is fine, Mr. Hanna. I am glad you 

had a chance—I want to begin my questioning on something you 

raised which I think bears further discussion because no one here 

I think is against competition. You make an excellent point. But I 

would think having been through this process myself, both as an 

owner and as a bidder, one of the difficulties that I always faced 

was knowing what the rules were in advance. That if I was going 

to bid on anything, whether it be a contract, a piece of land, a 

building, I wanted to know if I was in a reverse action, I wanted 

to know how many rounds of bidding there would be. I would want 

to know if there would be multiple best and last offers because if 

I ended up with the rules changing as I got into the process, over 

the long term it has a chilling effect. And the next time a bid comes 

up from that particular or that same organization or a similar organization, I might be much less likely to bid. And I think in the 

long run, if we allow that environment to prevail when it comes to 

government contracting, what you will see is folks like Ms. Biondo 

or other organizations simply drop out of the process and decide if 

I do not know what the rules are in advance, if I am going to waste 

all my time and my money to go through these multiple rounds of 

bidding, then I am not going to do it. And I think in the long term 

that may have a detrimental effect on the price the taxpayer ultimately pays. 

Everybody up here, and you and I know each other very well, are 

interested in seeing the best deal for the taxpayer. But I also think 

there is a long-term consideration over the system that we create 

as opposed to looking at everything as a one off kind of deal. 

I will start with my questions and then maybe we can come back 

and throw it up under further discussion. I want to start with— 


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we will just go in order, Mr. Haire. You had mentioned that there 

were no rules on subcontracting by small business to large businesses. There are no safe harbors. It was done on a case-by-case 

basis. As someone who used to practice law I can tell you that the 

world of case-by-case basis is the world in which the lawyers 

thrive. We love that kind of thing because it simply drives litigation. 

Give me some suggestions. When we talk about that world of 

small businesses subcontracting to larger businesses, which we 

know not only happens but has to happen in certain circumstances. 

Give us some suggestions for safe harbor rules that you would like 

to see. 

Mr. HAIRE. The two biggest challenges, and you probably are all 

aware, but how this typically comes up is through the bid protest 

process. So a competitor will protest a bid of another contractor 

who is the apparent awardee on the basis that the business relationship between a small prime contractor and one of its subcontractors who happens to be a large business is in violation of 

SBA’s affiliation rules. So a lot of the reason why there is a basis 

for the protest is because of allegations related to the bonding relationships that are utilized in the project. The prime contractor is 

required on nearly every federal project—I think Mark would say 

every federal project to his Miller Act point—about making sure 

that you post a bond. And oftentimes the size of the small business 

set-aside project is so large that the subcontractor may be looked 

for to provide some assistance in the form of maybe an indemnification or things like that to help the small business subcontractor 

provide the bond. 

AGC’s view and our view, my view is, you know, that is not 

something that in and of itself should be improper. You have to 

look at other things. And I think you could develop a set of rules 

where, you know, that is something that is specifically remitted. 

For example, in the Mentor Prote ́ge ́ Program, allowing the mentor 

to help support the bonding program of the prote ́ge ́ is specifically 

allowed and often included. And I think it helps build, you know, 

a level of relationship for the small business that it can develop 

with its surety that in some cases is very helpful. But that is a 

very heavily litigated area right now in this type of work. 

Another example of a safe harbor that I think would be useful 

is some kind of, you know, clear rule on whether or not different 

parties can utilize employees of different companies. Just some 

clarity. You know, so that everybody is playing by the same set of 

rules because different competitors will choose to do different 

things related to how they get labor and executives onto a contractor’s staff. And if one contractor is, you know, because of the absence of rules is doing something and another contractor is not, 

that often can make the difference as to who gets the job based on 

competitiveness and a whole range of factors. 

And I guess my last point, the reason why this has become such 

an issue is because the Small Business Act has a provision in it 

that says if you misuse the goals of the Small Business Program 

you potentially are subject to False Claims Act liability. And there 

is no clear guidance on what is and is not an improper practice relative to the small business rules. And we are starting to see both 


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offices of inspector generals and in some cases U.S. attorneys who 

are taking a look at what we think are legitimate business practices and taking a different view of that and saying that is improper. And now all of a sudden you have got, you know, investigations ongoing with a lack of clarity as to what is permitted. 

Chairman MULVANEY. And by the way, to the next panelists, Mr. 

West hit on this, a lot of times what we would rather see is a back 

and forth between folks in the private sector and the folks in the 

SBA and the GSA. So to the extent the next panel is in place, I 

encourage you to listen as we go through all of these questions but 

specifically these because what we would like you to do is respond 

specifically to things such as the recommendations, the request 

that Mr. Haire just made. 

Let us talk about bundling for a second because I was surprised 

when you get down to the weeds of bundling, one of the—it is not 

a loophole but it is a gray area in the law that essentially removes 

or could be determined to remove new construction from the prohibition zone bundling. Tell us a little bit why that is and how you 

think we can fix that. 

Mr. HAIRE. Well, I am not exactly sure why that is. 

Chairman MULVANEY. No, the definitional issues. 

Mr. HAIRE. Well, AGC, and I am not even sure I am going to be 

able to answer your question the way you want it for lack of understanding on my part. But I think AGC’s view is that there are a 

variety of contracting vehicles that are used by the federal government and several of the panelists here have touched on the bundling issue. We think that bundling in general, as long as you— 

I think what I heard Mr. Galarza say is that perhaps you could 

take a series of smaller projects which could be placed in an IDIQ 

or a multiple award vehicle, and as long as you, you know, set 

those aside for small businesses, even though that is technically 

bundling it, it would not hurt small businesses is perhaps the way 

to say it. 

And the flipside of that is, you know, what AGC looks at are 

these larger, multiple award contract vehicles where maybe you are 

taking, you know, $500 million down in New Orleans and you are 

sticking it into a multiple award vehicle. And only large businesses 

are going to qualify for that even though you may have 50 projects 

that could come out of that and a per project average size of, you 

know, $5 to $10 million. And I think the concern is if you are taking that type of bundling and sticking it into a vehicle it does hurt 

small businesses. 

Chairman MULVANEY. Bundling is a many splintered thing it 

seems sometimes. One of the issues that we came across in one of 

our field hearings was that new construction, there is a prohibition 

on bundling in many circumstances. But because of the way the 

language is written, new construction is often excluded from that 

prohibition so that you are allowed to bundle contracts on new construction that oftentimes effectively remove small businesses from 

allowing to bid. 

Which leads me to my next question because one of the things 

we heard, both in California and in South Carolina when Ms. Chu 

and I conducted our field hearings, was frustration over the 

amount of contract work that stayed local. The example I rememVerDate Mar 15 2010 02:15 Dec 01, 2012 Jkt 076461 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 E:\HR\OC\A461.XXX A461

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ber from my district, was $103 million project of which less than 

$200,000 actually went to local businesses. Now, you mentioned 

during your testimony that generally you are concerned about a 

local preference, that you think it might have a negative impact. 

Tell me why that is and tell me your thoughts generally on local 

preferences. 

Mr. HAIRE. The concern with local preferences and many other 

preferences often is the reduction in competition and the price pressures that naturally occur as a result of that. I mean, taking the 

flipside, I was in Puerto Rico at an agency meeting last month and 

the Puerto Rico AGC constantly is concerned about the fact that 

the larger mainland United States contractors come down there 

and compete in Puerto Rico for GSA projects, Corps of Engineers 

projects, things like that. You know, it is a—sometimes a challenging set of circumstances to balance, you know, cost with the desire to provide more opportunity for local businesses. And I think 

sometimes there is a tension there. 

Chairman MULVANEY. There is tension. Certainly, again, as Mr. 

Hanna said and I think as everybody on this panel agrees, we are 

interested in getting the best deal for the taxpayers in both the 

short run and the long run to the extent that is possible. But I cannot remember if it was your testimony or Mr. McCallum’s, that one 

of the things we struggle with in the construction business generally is the attempts to commoditize the product, recognizing that 

it is not a commodity product. The construction in California is different from construction in South Carolina. And that sometimes, 

maybe under limited circumstances that could still protect the taxpayer, I do want to continue to explore the possibility of looking at 

local preferences. But we will deal with that as it comes. 

Mr. McCallum, you talked about the size standard, which, listen, 

we ran a small business that had very high revenues with very few 

number of people because we were able to subcontract out of a lot 

of our business. If you build houses you could do that. Plus, if you 

are selling something that sells for a relatively large amount of 

money, regardless of the size of the profit margins, and if you 

measure by revenue you might be large; if you measure by number 

of employees you might be small. 

So while I share your concern, and I sympathize with you to a 

certain extent, tell me how to deal with the other circumstance 

where I might be a business that sells something that does not cost 

very much but employs a large number of people. And that is why 

we run into this because we want to treat them as a small business 

as well. So help us walk that fine line between counting something 

that is a small business, is a large business, and vice versa. 

Ms. BIONDO. Well, in construction, what we find is a great number—a great deal of our money is spent on material. Subcontractors, equipment. So if you actually look at the size of a company, 

is it valued by their gross revenues, their net income? How are you 

really looking at that? There is not a clear definition as why they 

are looking at the top revenue. 

So if you were to look at what I actually expend in labor, that 

might be a better indicator. If you were allowed to maybe exclude 

out your material and subcontractors, because this is work that 

was actually performed by your own forces. So it would perform a 


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commercial useful function in the construction industry. That 

would make sense to me. But to just say that because you do $7 

million a year you are a big business, I do not understand that. I 

do not think it makes sense when other companies can do $100 

million and still be considered small because they had an employee 

count of less than 1,500 people. So how can someone who has 1,500 

people still be considered small but—I am just going to use my own 

company’s example—if I do more than $14 million, I am not considered small. And I have less than 500 people. I cannot understand 

that. 

Chairman MULVANEY. We struggle with it as well. As somebody 

who used to be in the private sector and then ended up on this 

Committee, I was stunned to find out that not only do we do that 

but we change the definition from industry to industry. So while 

we are here today talking about general construction industry, 

there is a different measure for what is small within pharmaceuticals versus construction versus transportation. So we sympathize with you and I can assure you we are trying to figure out 

a way to bring some reason to that system as well. 

Talk to me about retainage. Again, a circumstance where I am 

sympathetic to the plight that you brought to us today because I 

have been on your side of contracts. I have also been on the other 

side of the contracts and I found retainage to be a really, really 

good way to make sure the job gets finished. And while your claim 

is correct that I, as the owner or as the prime contractor, I could 

always turn to the bond. I could assure it was much easier to make 

sure you finish the job by keeping at least a little bit of retainer. 

So how do we balance that? 

Ms. BIONDO. Well, as you know, it will be difficult to give you 

all the different scenarios in our testimony because there was a lot 

of controversy in regard to the retainage. But the retainage we understand when you are a general—— 

Chairman MULVANEY. By the way, am I using—because we call 

it retainage. It is called retention. Are we talking about the same 

thing? 

Ms. BIONDO. Yes. 

Chairman MULVANEY. Good. Thank you very much. 

Ms. BIONDO. Yes. You know, in a lot of instances when you work 

in the private sector, if you are performing a large contract and you 

go back to your general contractor and say, hey, you know, I am 

just about done with this job. Can you reduce my retention by 5 

percent or at the 50 percent mark, you know, is it necessary for 

you to continue to hold 10 percent? Most of the time in the private 

sector our own will come back and say, ‘‘Hey, yes. You are doing 

a great job. I will reduce your retention.’’ If you are not doing a 

good job, obviously they are going to hold your retention. So the 

problem is how do you do this with the federal government so it 

is clear? And the way the rules currently read, it says they do not 

have to charge that. 

Well, look at it from another perspective. Business is not all that 

great for most contractors these days. At the end of the day on 

their financial statement, maybe they might make 1 percent. 

Okay? If you are holding 10 percent of that project until six, seven 

months after a job is completed, you have officially become that 


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company’s bank for them because they have had to go and borrow 

the money before they get that last 10 percent of their job. 

Chairman MULVANEY. Yeah, but when I dealt with retention it 

was simply until the work was completed on the contract, not the 

overall job was completed. 

Ms. BIONDO. Well—— 

Chairman MULVANEY. That circumstance I could see it would be 

a problem but how could—if I am the owner and you are the contractor, how could you object to me withholding 10 percent until 

the final piece of work on your contract is finished? 

Ms. BIONDO. Okay. So say you finished your job in September 

and the entire project was finished in September, all scopes. 

Chairman MULVANEY. Okay. 

Ms. BIONDO. And you do not get paid for a whole year because 

the owner does not choose to pay you for a whole year. 

Chairman MULVANEY. Okay. Maybe we are talking about something else. To me that would be a breach of the contract. But I see 

what you are saying. 

Ms. BIONDO. But again—— 

Chairman MULVANEY. Let me ask you one more question and 

then we will move on, which is bid shopping, because it is something I struggle with as well. I do not care for it. My state has 

banned—several states have banned. What is the experience within 

the industry? Have the states banned? I think it is 10 or 12 states 

that have done it. Has that proved successful? Have we managed 

to solve this problem in the states that have banned bid shopping? 

Ms. BIONDO. I do not know the answer to that. I am sorry. 

Chairman MULVANEY. And neither do I. Very quickly, I have— 

early on in the process Mr. McCallum, or earlier on this year I became aware of some of the issues that deal with surety bonds 

through something that happened back in my district. An spent a 

little bit of time getting up to speed on the issue, only to find that 

Mr. Hanna had already done a considerable amount of work on it. 

So I would like at this point to yield four minutes to Mr. Hanna 

to ask questions of Mr. McCallum specifically on H.R. 3534. 

Mr. HANNA. Is there anything you want to say about it? 

Mr. MCCALLUM. We touched on it I think earlier in my testimony. Right now, particularly in the difficult environment, it is 

very difficult for construction firms. They have been very much impacted in this environment. And so sometimes their balance sheets 

are not what they used to be. And there are times, whether they 

are tempted to seek a market that they should not seek, or what 

have you, they can be preyed upon by individuals who are not licensed at the state level. They are not vetted by the Department 

of Treasury. They just exist and will sometimes proffer their assets 

to act as an individual surety. 

It is a caveat emptor situation. And I think small businesses cannot and should not be victimized. There is a simple solution, and 

the solution is just make sure that the assets are real; that they 

are convertible into cash so if a claim happens, that it can be readily rectified. And that it is in the care and custody of the federal 

contracting agency and the federal government. 

Currently, under the FAR, which I believe is fundamentally 

flawed, the contracting officer shoulders the entire burden. They 


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are very busy folks who have a lot thrown at them. This is a burden that they should not necessarily have to bear or at least it 

should be lightened. 

Individual surety. The program has actually been problematic 

over a number of decades and they tried to fix it—in the fall of 

1989 and in 1990. But we are still having problems currently in 

that regard. And there is plenty of documented cases about that. 

Again, H.R. 3534 is a simple solution that would basically make 

sure that parties, if they are subcontractors or suppliers that they 

have a valid payment bond in the event they are unpaid. 

And on top of that, individual sureties, if they use eligible obligations, meaning a public debt obligation of the U.S. government, 

could actually use the interest off that once the obligation is completed. 

Mr. HANNA. I hated retentions but I always, I mean, whatever 

the contract was when I started the job. I never assumed that it 

would change after I finished the job. So it was about 10 percent. 

You would always ask for less but you never got it and moved on. 

The fundamental problem is that it is the one thing that protects 

all of us against bad actors. And when you let someone in that 

business in the bonding business, as an insurance company you are 

actually saying we accept you over them. And if they are no good, 

you have got nothing. And the problem with bonding is it is the one 

of the few areas of law where we rely almost completely on history 

on the bonding companies’ desire not to lose money. Hence, the 

zero laws ratio. 

What has happened is people have gotten in the business and 

they forced other insurance companies to raise the cost of bonding, 

even though there is implicit there will be no losses because there 

actually are losses. The goal is not to limit people’s access to bonding; it is to try to keep it so that good actors are in that business. 

And what ultimately does is it lets good people who are good intentioned and talented go to work. And it secures those people who 

have been in this business for years who if you earn your way up 

to the ladder, who have that million dollars in the bank to do a $20 

million job, who have those three or four hundred employees that 

know exactly what you are going to do the say they get there. And 

when you do not project bonding, you are not protecting the contractor, you are not protecting the government or the taxpayer? 

And most of all—you are hurting the individual’s ability, who is a 

good contractor, to stay in that business. And that is why I am, you 

know, involved in this. 

Chairman MULVANEY. Thank you, Mr. Hanna. Folks, thank you 

very much. I appreciate your patience and thank you for your testimony today. 

If we could have the second panel, please, step up. That would 

be great. 

[Recess.] 

Chairman MULVANEY. All right. We will go ahead and get started 

with the second panel. 


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STATEMENTS OF JAMES C. DALTON, P.E., CHIEF, ENGINEERING AND CONSTRUCTION, U.S. ARMY CORPS OF ENGINEERS; 

JEANNE HULIT, ACTING ASSOCIATE ADMINISTRATOR FOR 

CAPITAL ACCESS, SMALL BUSINESS ADMINISTRATION, OFFICE OF SURETY GUARANTEES; WILLIAM GUERIN, ASSISTANT COMMISSIONER OF THE OFFICE OF CONSTRUCTION 

PROGRAMS, GENERAL SERVICE ADMINISTRATION 

Chairman MULVANEY. The first witness here is Mr. Dalton. He 

currently serves as the chief, Engineering and Construction, for the 

U.S. Army Corps of Engineers. He is responsible for the execution 

of $10 billion of design and construction programs for the Army, 

Air Force, Department of Defense, and other federal agencies, and 

over 64 nations. Welcome, Mr. Dalton. Thank you for your service, 

sir. 

Sitting next to him is Mr. William Guerin, the assistant commissioner of the Office of Construction Programs at the GSA’s Public 

Buildings Service. Mr. Guerin is responsible for the construction of 

the GSA’s more than $1 billion per year of capital construction programs, including the design and construction of federal buildings, 

land, ports of entry, courthouses, and other projects for the nation’s 

landlord. He is also the recovery program manager and recovery 

executive, overseeing the timely delivery of high performance green 

building projects worth more than $5.5 billion, which I think together we have about $20 billion worth of management on this 

panel. So thank you gentlemen for being here. 

And the final witness is Mrs. Jeanne Hulit, the acting associate 

administrator for the Capital Access Office of Surety Guarantees at 

the SBA. She manages and oversees the SBA loan programs and 

is here today to talk about the Bond Surety Program and specifically H.R. 3534. 

So with that we will begin because it says so on the paper with 

Mr. Dalton, even though he is sitting in the middle. Mr. Dalton, 

fire away. 

STATEMENT OF JAMES C. DALTON 

Mr. DALTON. Thank you, Mr. Chairman and Ranking Member 

Chu. I really appreciate the opportunity to be here today to testify 

before this Committee. I especially appreciate the opportunity to 

listen to the previous panel. It is always interesting to hear what 

our industry partners think and offer as suggestions. 

Certainly, small businesses are a great value to this nation and 

we in the Corps will continue to do all we can to promote those 

small businesses and to help them to grow. During the FY11, the 

Corps exceeded its small business goal of 35 percent and we actually awarded 42 percent of our contracts to small businesses. This 

really equates to about $8 billion to small businesses, and of those 

$8 billion, 3.3 billion of that was to small businesses as prime contractors. 

In addition to that, the Corps prime contractors awarded a high 

degree of their subcontracts to small businesses. About 63 percent 

of the subcontracts went to small business subcontractors. But having said that, the Corps continues to look for ways to improve its 

relationship, as well as help to grow those small businesses into 

large businesses. 


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Today I would like to just talk about a couple of those, what I 

would classify as sort of internal hindrances or obstacles for small 

businesses. One would be that in a lot of cases, certainly not all 

cases, small businesses may lose out on opportunities to actually 

influence the acquisition process, because they do not respond to 

sources sought in synopsis. If we get two or more small business 

contractors then we will set aside that acquisition for small businesses. We certainly would encourage small businesses to pay attention to that. 

The second is, in some cases, we have companies that will focus 

more on the small business certification or the 8A certification 

when they submit proposals rather than focus more on the qualities they bring to the project. Their past performance, their current 

experience, et cetera. These are the kind of things that we talk to 

small businesses about to try and encourage them to put together 

better proposals. 

But, in addition, there is the bundling aspect of it that you 

talked about. The Corps of Engineers does not bundle contracts, 

but I think what you are referring to is the consolidation of contracts. We do consolidate contracts, but the rules we follow are very 

close to the rules one would follow if, in fact, you were bundling 

contracts. I’ll probably get a chance later to discuss that a little bit 

more. 

We require performance and payment bonds or surety bonds, for 

acquisitions over $150,000. We have discussions with our small 

business community but we are sensitive to this and we try and 

adjust our acquisition sizes to ensure that we do not do something 

that detracts or takes away from small business opportunities. 

The last thing I will mention here is that with regard to prompt 

payments, we actually have paid 98.5 percent of our contacts in 

timely payments. We pay prime contractors within 14 days. Construction contracts as required. And for subcontractors, a certificate 

is required from prime contractors to say they have paid their subcontractors before they submit a request for payment to us. 

I would like just to close and say thanks again, Mr. Chairman, 

and the Committee, for allowing us an opportunity to come here 

and try to help you address the problems that you have discussed. 

Chairman MULVANEY. Thank you, Mr. Dalton. We will come back 

and ask questions in a second. 

I understand that Ms. Hulit has to leave, and I apologize again 

for running over because of votes. Ms. Hulit, we ask you now to 

give your testimony. And to the extent you could give your opinion 

on H.R. 3534, that may preclude any questions on that topic. 

STATEMENT OF JEANNE HULIT 

Ms. HULIT. Sure. Thank you very much, Chairman Mulvaney 

and Ranking Member Chu and members of the Subcommittee. I 

am pleased to be testifying before you today on the topic of surety 

bonds. And I do want to apologize in advance that I have a flight. 

I have listened to the other panelists and their concerns and can 

follow up with them directly, as well as members of your staff, as 

well as refer things to our Office of Government Contracting and 

Business Development. 


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The U.S. Small Business Administration Surety Bond Guarantee 

Program was established in 1971 to help small businesses obtain 

surety bonds that are often required as a condition for an award 

of a construction contract or subcontract. As you know, the federal 

government requires surety bonds on any construction contract valued at $150,000 or more. Surety bonds are also required for many 

state and local government and commercial contracts and subcontracts. In our Surety Bond Program, the SBA guarantees bid, 

performance, and payment bonds for eligible small businesses that 

cannot obtain surety bonds through the conventional surety market. SBA’s guarantee gives surety companies an incentive to provide bonding for small business contractors whom might otherwise 

be perceived as too risky to bond without an SBA guarantee. These 

bonds help small, emerging firms gain access to contracting opportunities in the commercial and government markets. 

As many of you know, when the economic downturn occurred a 

few years ago, construction was one of the hardest hit sectors. In 

spite of the downturn, however, the SBA Bond Guarantee Program 

volume grew every year over the past five years. We saw an increase in the number of participating surety companies and agents. 

When Congress passed the American Recovery and Reinvestment 

Act in February of 2009, the SBA was given the authority to temporarily increase the Surety Bond Contracting Program to $5 million as you have heard from some of the other panelists. This 

change was well received by the surety industry and small business community, and we noticed a significant uptick in bond volume 

The Recovery Act infused new life into the Surety Bond Program 

as seen by the increase in program activity in fiscal year 2010. The 

total number of bonds guaranteed that year represented a 36 percent increase over the previous fiscal year. In fiscal year 2010, SBA 

guaranteed a total of 8,348 bonds representing a contract value of 

$4 billion. 

Building on that success, the SBA has continued to make outreach and awareness of the Surety Bond Program a priority. We 

have been working closely with our local district offices and industry partners to let small businesses know that they can take advantage of our program. 

We have also been listening closely to our industry partners and 

small businesses on how we can make the program better and 

more accessible to a greater number of firms. Recently, we developed an automated tool to complement the Electronic Bond Guarantee Application, which we implemented a few years ago. Surety 

companies, agents, and small businesses can now upload a variety 

of underwriting documents and transmit them electronically to our 

field offices. This makes the processing time faster and reduces 

compliance costs. 

This week we published in the Federal Register a proposed rule 

that would adopt the streamline application process for any bond 

guarantee on a contract valued up to $250,000. This new ‘‘Quick 

Application’’ process will reduce paperwork requirements for smaller contracts. As a result, small businesses and surety agents will 

navigate the bond application process more easily and cycle time 

between application approval will be compressed. 


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We are not stopping there, however. In addition to other agencies 

in the Administration, the SBA has been tasked with undertaking 

a full review of our current regulations. In response to industry 

concerns that certain requirements imposed on surety companies 

are no longer consistent with industry best practices, our office is 

trying to update, streamline, and simplify the surety bond regulations. 

We look forward to working closely with you and your staff on 

each of those initiatives. I appreciate the opportunity to testify before you today, and I welcome your questions. 

Chairman MULVANEY. Ms. Hulit, in light of your time I am going 

to speak out of order and ask you a very simple question. Has the 

SBA taken a formal opinion yet on H.R. 3534? Do they have any 

thoughts on it in general? 

Ms. HULIT. We have not taken a formal opinion. Our program, 

as you know, is only for corporate sureties. We do, however, hear 

a lot from small businesses and the surety industry. And we are 

happy to talk about what we have learned from those parties with 

your staff. 

Chairman MULVANEY. Thank you very much. 

Ms. HULIT. You are welcome. 

Chairman MULVANEY. If you need to be excused, unless anybody 

else has any questions, she has a flight, Mr. West. 

Ms. HULIT. Well, I can stick around for 10 or so minutes if you 

would like. 

Chairman MULVANEY. Okay. Mr. Guerin. 

I am sorry. 

Ms. CHU. We have questions for the record so we do not have to 

do them right now but we will direct them to you. 

Ms. HULIT. Thank you very much. 

STATEMENT OF WILLIAM GUERIN 

Mr. GUERIN. Good afternoon, Mr. Chairman, Ranking Member 

Chu. Thank you for the opportunity to be here today. 

I, too, got a lot out of the private sector panel and I appreciate 

the opportunity to listen to their comments before we had a chance 

to speak. 

GSA recognizes the important role small businesses play in driving our national economy. We value the new and innovative solutions that small businesses offer to us as we try to meet today’s 

challenges. GSA has aggressive goals for the participation of small 

businesses, including small, disadvantaged, women-owned, 

HubZone, and service-disabled veteran-owned small businesses. In 

fact, in 2011, GSA awarded 41 percent of all contract dollars to 

small business. This is well above our goal of 27 percent, and PBS 

itself obligated more than $1.05 billion or approximately 39 percent 

of our dollars to small businesses. 

In addition, despite the huge Building Modernization Program 

that came through the American Recovery and Reinvestment Act, 

we awarded fully 26 percent of our construction dollars to small 

businesses in 2011. 

Today I would like to focus on the role of small businesses in 

these new construction major modernization and repair and alterations projects. As a major public real estate organization, our goal 


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is to maintain a robust inventory that meets the long-term needs 

of federal agencies. We make investments in this inventory by constructing new buildings and modernizing or repairing existing ones. 

For each of the last five years, our average request for investments 

in our inventory was nearly $1.4 billion. Unfortunately, in 2011 

and 2012, those numbers are a lot lower than the average. 

There are two ways that PBS seeks to provide small business opportunities in our construction projects. As prime contractors on 

minor repair and alteration projects and smaller capital program 

projects, and as subcontractors on our major modernization and 

new construction projects. Our minor repair and alterations program provides the perfect venue for small businesses. In 2011, the 

majority of small business construction opportunities were found in 

our Minor Repair and Alteration Program. 

Whenever possible, GSA provides small businesses with prime 

contracting opportunities. For example, we recently structured a 

$46 million recovery act modernization project in the Robert Young 

Federal Building to allow small businesses to participate. We had 

a small business designer break the contract into three pieces and 

we were able to award the three different parts of that contract to 

small businesses and they would not have been able to compete for 

the project had it been a single project at a much larger dollar 

amount. 

As subcontractors, small businesses also have the opportunity to 

work on large new construction and major modernization projects 

for GSA. For example, we have a number of small businesses who 

are assisting us with the construction of the new Department of 

Homeland Security Campus at St. Elizabeth’s. About 42 percent of 

the total dollar value of contracts for that project is going to small 

businesses, and about 10 percent of those businesses are 8A firms. 

All of the large prime contractors on projects exceeding $1.5 million must have small business plans. These plans and goals are 

evaluated during the contract selection process and then they are 

confirmed after the award. In addition, GSA participates in a Mentor Prote ́ge ́ Program to assist willing prime contractors to mentor 

small businesses. This program allows smaller firms to team with 

larger construction contractors. Through this relationship, small 

businesses can gain more direct experience and better transition 

into larger projects and contracts. 

There are a number of opportunities and challenges going forward. We track our prime contractors for progress towards meeting 

the goals of their small business subcontracting plans. Commonly 

in large construction contracts there are many layers of subcontractors. GSA’s projects are no different. Progress towards small business goals only count first tier, small business subcontractor. As a 

result, this creates a challenge in ensuring that the actual dollars 

awarded to small businesses are accurately reflected. 

It is generally more cost-effective for us to pursue major modernization and then to maintain our inventory with numerous 

small scale repair and alterations projects. But given the current 

budget environment, we think that the large projects are probably 

not going to receive much funding and so there will be a lot of opportunity for small businesses there. 


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Thank you for inviting me to speak with you today. I appreciate 

the opportunity to discuss GSA’s encouraging small business participation on our construction contracts, as both prime and subcontractors. And I welcome any questions you have. 

Chairman MULVANEY. Thank you, Mr. Guerin. 

Ms. Chu. 

Ms. CHU. Ms. Hulit, do we still have you? 

Ms. HULIT. Five minutes. 

Ms. CHU. Five minutes. Okay. I will make this quick then. 

You talked about the increase of the Bond Guarantee Program from $2 million to $5 million as a result of the American Recovery 

and Reinvestment Act. And, of course, it was a temporary increase 

and expired in September 2010. 

Now, you talked about an overall increase of 3 percent for businesses that applied during that period of time. But I wanted to 

know how many small businesses took advantage of that higher 

ceiling, the amount that was above $2 million? 

Ms. HULIT. My apologies. We had about 100 businesses take ad- vantage of it at that time. And there were over 663 bids—$663 million in bids, 51 contracts for about $145 million. 

Ms. CHU. So the 100 businesses represented, that is what percentage of the total amount of businesses that were there? 

Ms. HULIT. We had about 1,000 businesses annually participating in the program, so you had 100, so about 10 percent. 

Ms. CHU. Okay. And did the SBA see any higher or lower default 

rates of those contracts or did the rates stay level? 

Ms. HULIT. We only had one default of those higher contracts so 

it was actually a little bit less than our regular rate. 

Ms. CHU. That is very good news. 

Currently, there are 12 approved surety companies that can 

issue bonds in the Prior Approval Program, while there are only 

five companies that issue bonds in the Preferred Program. 

Ms. HULIT. Yes. 

Ms. CHU. Why are there so few surety companies that participate 

in the SBA surety bond program? 

Ms. HULIT. On the preferred side or on both? On the preferred 

side our guarantee level is 70 percent. On the prior it is 80 to 90 

percent depending on the company. And we hear from industry 

that the 70 percent guarantee, as you heard from, Mr. McCallum, 

is also a detriment, particularly in troubled economic times. So 70 

percent guarantee has decreased the participation rate on the preferred side. On the prior approval side we had seen a decline over 

the last 10 to 15 years in participation in our program. And that 

was largely due over an historical period that we closed some offices. Our cycle times in terms of application and honoring guarantees were very delayed and it caused cash flow problems in the industry. As you see, in the last five years we have turned that corner and our bond volume is growing again and our surety participation is growing. So we have addressed those concerns. Our cycle 

times are much, much more reasonable. And, you know, we are 

hoping to get more surety companies participating. 

Ms. CHU. Very good. Thank you. 

Mr. Dalton. 

Chairman MULVANEY. Ms. Hulit, if you would like to be excused. 


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Ms. HULIT. Thank you. I appreciate very much your understanding. 

Ms. CHU. Mr. Dalton, I was surprised to see that you do not bundle contracts and have not done so in the last two years. Did you 

bundle before that time? 

Mr. DALTON. I am not aware of us bundling contracts even before 

those last two years. I had a chance to go back and verify and 

check for the last two years and that was something I could definitely state in my written testimony. Bundling contracts within the 

Corps is something that is certainly frowned upon. And if we wanted to bundle contracts, the Corps of Engineers would have to seek 

and receive approval to do so. The Corps has a program and a process very similar that we would follow for consolidation of contracts 

just as we would follow if we were bundling contracts. But the specific reason for mentioning two years is that is as far back as I had 

a chance to go back and verify. 

Ms. CHU. So it was not necessarily a change in policy? 

Mr. DALTON. No. Absolutely not. In fact, I feel pretty safe in saying that our policy has always been that we do not bundle contracts. 

Ms. CHU. I see. And Mr. Guerin, you do bundle contracts then 

in GSA? 

Mr. GUERIN. No, we do not, ma’am. 

Ms. CHU. Oh, you do not either? 

Mr. GUERIN. No. 

Ms. CHU. Okay. And is this a change in policy or you have never 

done that? 

Mr. GUERIN. There are instances in the past where bundling occurred but it is not a common practice of GSA and it does require 

additional levels of approval for us to do that. So we do not do bundling. 

Ms. CHU. Is the disincentive this additional scrutiny? 

Mr. GUERIN. No. It is the nature of what we build. We have large 

projects, typical single building projects where bundling really is 

not necessary to accomplish what we need to accomplish. 

Ms. CHU. Okay, very good. Construction contracts can oftentimes 

be out of the reach of small businesses because of the large capacity needed to complete the project, and Mr. Guerin, in your testimony you gave an example of PBS breaking up a construction 

project into three smaller projects that could be performed by small 

businesses. Why are not agencies using this type of acquisition 

strategy more often so that small businesses can compete on more 

solicitations? 

Mr. GUERIN. I do not know, ma’am. I do not know that they are 

not doing that. It is just an example that we had that is very timely in terms of the discussion today. But we do that fairly frequently 

where we have opportunities to break a project up. There are needs 

to go for a larger, single contract where we are doing a large building that is very disruptive to the building, it is disruptive potentially to the tenants in the building, so we want to get in and out 

of that building as quickly as possible. So we try to go with a general contractor who marshals the forces, makes sure that all the 

issues and, you know, possible challenges that come up are addressed. But where we have an opportunity we do break the 


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projects down, so we have opportunities to get small businesses 

into our contracts. 

Ms. CHU. And Mr. Dalton, do you have any similar experience 

with breaking up such kind of contracts? 

Mr. DALTON. Absolutely, we do. As a matter of fact, as was mentioned by or recommended by the previous panel, if you have a 

MATOC contract, that we should look for similar opportunities for 

small business opportunities the same way we would create an unrestricted MATOC. We absolutely do the same thing we just talked 

about. We work with the small business community, the SBA as 

well as with the surety companies and contractors to determine 

what is doable by the small business community. And so, over the 

past several years what we have done is when we created those unrestricted MATOCs, we also created small business MATOCs. For 

instance, I can remember down at our southwestern division starting in the Fort Worth area, is that we worked with the surety companies to determine what amount we could put out for small business MATOCs. For set-asides I think we had a limit of $20 million 

and then we looked for 8A set-asides of $15 million. And also down 

to the service-disabled vets I think that was about $8 million. 

When we set up these MATOCs, we include in those MATOCs 

those projects on which small business can actually compete. We 

also look at the different subcategories within small business so 

that we are not just creating one size fits all. And when we put together our acquisition plans for those large procurements over the 

last several years, it is always keeping in mind what small business can actually execute so that we do not go too far on one side 

or the other. 

And finally, the last thing I would mention, because we keep discussing bundling versus consolidation, one of the things that we 

look at under consolidation is to make sure that we do not consolidate projects that used to be available to small business and consolidate those to where they are no longer available, executable by 

small business. So we certainly try to keep small business in mind. 

Ms. CHU. Thank you. I yield back. 

Chairman MULVANEY. Thank you, Ms. Chu. 

Mr. West. 

Mr. WEST. Thank you, Mr. Chairman and Ranking Member. 

Mr. Dalton, we heard a lot of people previously talk about this 

reverse auction process or policy. Do you have any policy on that 

whatsoever? 

Mr. DALTON. We do not believe that, for the type of projects that 

we execute within the Corps, that it is applicable or useful to use 

reverse auctioning. There are a couple of cases where we actually 

tried to use reverse auctioning when it was mostly based on looking at materials such as borrow materials in the New Orleans area 

and we found we had problems with it. We think reverse auctioning works best in categories where you are buying products or 

supplies more so than construction. Construction is a little hard to 

do with reverse auctioning. 

Mr. WEST. The other question is a pretty good payment schedule, 

payment rate as far as the prime contracts. Do we still also have 

a pretty good, as far as the small business contractors, an on-time 

payment plan with those or schedule? 


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Mr. GUERIN. In fact, the numbers that I quoted before the percentage, the 98.5 percent payments on-time, that includes both 

small business as well as large businesses. 

Mr. WEST. All right. And Mr. Guerin, can you give us an idea 

as far as percentage that you are trying to include small businesses 

in the GSA modernization construction products? 

Mr. GUERIN. What our goals are? 

Mr. WEST. Yes. 

Mr. GUERIN. Our goals are 39 percent in PBS for small business. 

Mr. WEST. How close are we? 

Mr. GUERIN. We are over that. 

Mr. WEST. Good. 

Mr. GUERIN. I am sorry. We are at 39 percent. I think our goal 

is 27 percent. 

Mr. WEST. Okay. I yield back. 

Chairman MULVANEY. Very quickly in the interest of everybody’s 

time. Gentlemen, you heard first off, actually, Mr. Dalton, because 

you are using a term that I am not familiar with, which is consolidation versus bundling. Can you help me understand the difference 

between those two things? 

Mr. GUERIN. Bundling, the way we look at bundling is that if 

we—if opportunities that were previously available to small business, we take those and add projects together and they are no 

longer available to small business, meaning that if before small 

business could bid on two barracks at $25 million, we add those together and now it is a $50 million project beyond a small business 

cap there, then that would be—I would consider that bundling. The 

consolidation would say combine projects together but they still do 

not exceed the amount that was previously available for small business to bid on. 

Chairman MULVANEY. So it is a similar thing; it is just in a different scope then? Consolidation would be smaller than bundling? 

Mr. GUERIN. I do not know that I would say consolidation is 

smaller. It is just that when we add those projects together we do 

it in such a manner to make sure we do not exclude or eliminate 

small business from opportunities that they previously had. 

Chairman MULVANEY. And since it does not violate the definition 

of bundling it would be something—okay, that I understand. Thank 

you for that clarification. 

Gentlemen, both of you heard some testimony earlier today that 

was extraordinarily enlightening to me. And one of the specific reforms that you heard suggested or offered was to allow you to credit against your small business requirement; small businesses that 

participate at lower than first tier subcontractors. Is there any objection to that? Is there any reason that that should not have been 

done already? Is there something that I am missing because that 

seems like a fairly commonsensical reform. But I will throw it open 

to you as to whether or not you think that might have any potential pitfalls that are not readily apparent. 

Mr. GUERIN. We think it gives a more accurate reflection of how 

many dollars are going to small businesses. 

Chairman MULVANEY. The way it is now? 

Mr. GUERIN. No, with the changes that were discussed earlier. 

And I do not think GSA would have any objection to that. 


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Chairman MULVANEY. Mr. Dalton. 

Mr. DALTON. I would say that we would want to move carefully 

with making that change. While I certainly would agree that it 

gives more visibility to small business awards, what we would 

want to be careful I think with is that we do not want the prime 

contractor to handoff without any responsibility for small business 

or to help mature and train small businesses’ subcontractors on 

how to do business. And one concern would be that if I had let us 

just say a 50 percent subcontractor to small business responsibility 

that I as a prime may hand off all of that to a large business subcontractor and place the responsibility on that subcontractor. What 

we would probably prefer, I think as one way to look at that is a 

certain percentage would still and probably should be required 

from the prime to that sub, the first-tier sub. Certainly collecting 

and adding all of it up would add more visibility to it but I would 

just suggest we be real careful. 

Chairman MULVANEY. That is an excellent point. I never thought 

about that, effectively delegating your small business responsibilities through somebody else. Thank you for that. I appreciate that. 

Finally, Mr. West asked about reverse actions. Ms. Biondo, who 

was here previously, I do not know if she is still here or not, had 

mentioned the multiple best and final offer projects. And again, all 

I am really concerned about from the taxpayers’ long-term interest 

is whether or not those rules are published in advance. So when 

you say you do not use reverse auctions, do you tell people about 

that before they bid on a service contract, on a construction contract? 

Mr. DALTON. I cannot speak accurately on the service contracts. 

I am just not as familiar with those and I am not sure we use that 

within the Corps but I can certainly check and verify. 

Chairman MULVANEY. On construction contracts. 

Mr. DALTON. On the construction contracts, they are notified in 

advance. I can only think of one case that we tried reverse auctioning and really it is not our policy. In fact, our policy is to not 

use reverse auctioning. 

Chairman MULVANEY. Is that policy made public? 

Mr. DALTON. I do not know that is. Maybe it is more of a practice 

than a policy. I would have to verify that. But the reason why we 

do not, is because construction is not one of those type of commodities. In fact, it is not a commodity, but it certainly makes it difficult to use reverse auctioning for something where you do not 

know the qualifications of companies, et cetera. 

With regard to best and final offers, that is something that companies would know in advance before we would do that. 

Chairman MULVANEY. Mr. Guerin. 

Mr. GUERIN. GSA uses best value. We do not go for reverse auctioning. I agree with everything my Corps colleague said. The construction really does not lend itself to that. We go after technically 

qualified firms and then we evaluate price typically. 

Chairman MULVANEY. But if I am bidding on a project, do I know 

what those rules are in advance? 

Mr. GUERIN. Yes. In advance you would know how we are intending to award the contract. 


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Chairman MULVANEY. Gentlemen, I will just close by saying this. 

One of the things that has become apparent to me since I have 

been involved in this Subcommittee is that I have been overwhelmed with the response that many government agencies have 

to small business, and both your organizations stand at the top. I 

am not surprised to hear the numbers. I was not familiar with 

them, but both the GSA and the Army Corps have done a tremendous job. And I really do appreciate your commitment to small 

business. And thank you for allowing us to help small business succeed. 

So with that, unless there is anything else, we will adjourn. Everyone have a nice weekend. Thanks again. I apologize for running 

over. 

[Whereupon, at 12:45 p.m., the Subcommittee hearing was adjourned.] 


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NATIONAL ASSOCATION OF SURETY BOND 

PRODUCERS 

Testimony of Mark H. McCallum 

Chief Executive Officer 

Before the U.S. House of Representatives 

Committee on Small Business 

Subcommittee on Contracting and Workforce 

On 

Construction Contracting: Barriers to Small Business Participation 

February 9, 2012 

1140 19th Street, NW, Suite 800 

Washington, DC 20036 

Phone: 202-686-3700; Fax: 202-686-3656 

Website: www.nasbp.org 
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The National Association of Surety Bond Producers (NASBP) is a national trade 

organization of professional surety bond producers, whose membership includes 

firms employing licensed surety bond producers placing bid, performance, and 

payment bonds throughout the United States and its territories. NASBP wishes 

to extend its appreciation to Chairman Mulvaney, Ranking Member Chu, and to 

the members of the Subcommittee on Contracting and Workforce of the U.S. 

House of Representatives' Committee on Small Business for the opportunity to 

provide written and oral testimony on issues of importance to federal contracting 

opportunities for small businesses. Our testimony will center on policy issues 

which, in our opinion, will provide greater protection to and resources and 

opportunities for small construction firms. 

By way of background, our testimony will begin with a brief description of the 

important role surety bonds play in the federal procurement arena. 

The Importance of Surety Bonds: Sound Public Policy 

Corporate surety bonds are three-party contract agreements by which one party 

(a surety company) guarantees or promises a second party (the obligee/federal 

government) the successful performance of an obligation by a third party (the 

. principal/contractor). In deciding to grant surety credit, the surety underwriter 

conducts in-depth analysis, also known as prequalification, of the capital, 

capacity and character of the construction firm during the underwriting process to 

determine the contractor's ability to fulfill contractual commitments. Surety bonds 

are an essential means to discern qualified construction companies and to 

guarantee contracts and payments, ensuring that vital public projects are 

completed, subcontracting entities are paid, and jobs are preserved. 

The federal government has relied on surety bonds for prequalification of 

construction contractors and for performance and payment assurances since the 

late nineteenth century. In 1894, the U.S. Congress passed the Heard Act which 

codified the requirement for surety on U.S. government contracts and 

institutionalized the business of surety. In 1935, the Heard Act was superseded 

by the Miller Act, which required the continuation of these vital assurances so 

that U.S. taxpayer funds were protected and subcontractors and suppliers would 

receive payment for their labor and materials. Today, the Miller Act and 

applicable regulations require that, before any contract exceeding $150,000 is 

awarded for a federal construction contract, the prime contractor must furnish a 

performance bond and a payment bond to the contracting agency. 

Types of Surety Bonds 

The bid bond assures that the bid has been submitted in good faith and the 

contractor will enter into the contract at the bid price and provide the required 

performance and payment bonds. A performance bond protects the project 

owner from financial loss should the contractor fail to perform the contract in 

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accordance with its terms and conditions. The payment bond protects 

subcontractors and suppliers, which do not have direct contractual agreements 

with the public owner and which would be unable to recover lost wages or 

expenses should the contractor be unable to pay its financial obligations. Often, 

small construction businesses must access the federal procurement marketplace 

at subcontractor and supplier levels, and the payment bond is their primary 

recourse and protection in the event of prime contractor nonpayment or 

insolvency. 

Role of the Bond Producer 

The bond producer plays a vital role in the federal construction process. The 

bond producer stands as the "bridge" between the construction contractor and 

the surety company. The bond producer works closely with the construction 

bUSiness as an advisor, educator, and match maker to pOSition the business to 

meet underwriting requirements in order to obtain surety credit. 

The objective of the producer is not only to assist the contractor with obtaining 

surety credit for each contract requiring surety credit but to ensure that the 

contractor's business remains viable and thrives for years to come. To that end, 

bond producers assist construction firms of all sizes with creating networks of 

knowledgeable' professional services providers, such as construction attorneys, 

certified public accountants familiar with construction bUSiness practices, and 

construction lenders, and may assist construction firms with market intelligence 

and even strategic and succession planning. 

Assist Small Businesses: Enhance the U.S. Small Business 

Administration's (SBA) Bond Guarantee Program 

The SBA Bond Guarantee Program (Program) was created to ensure that small 

and emerging contractors, which, for various reasons, do not qualify in the 

standard surety market, have a means by which to gain access to surety credit. 

The Program provides guarantees, ranging from 70 to 90 percent, to partiCipating 

surety companies as an inducement to extend surety credit to these construction 

firms. The construction firm and the surety company pay fees to access the 

Program .. 

The Program has been serving small businesses for decades and continues to 

be a necessary and needed federal program. In recent years, the SBA has 

undertaken incremental efforts to improve the functioning and the appeal of the 

Program, making strides, for example, in improving its application processes and 

procedures, its response time to claims, and expanding the Program's reach to 

include design-build contracts. NASBP applauds the SBA for taking these 

important steps. In the opinion of NASBP, however, much more can and needs 

to be done so the Program can fully realize its potential to assist small 

businesses. The SBA Bond Guarantee Program is an example of a good federal 

program that deserves to get better to continue to achieve its mission. 

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Legislative and Regulatory Enhancements 

NASBP offers recommendations for enhancements to the Program below. 

• Increase the SBA guarantees to sureties across the board to 95% of the 

bond amount for 18 months, then reduce the guarantee across the board 

to 90% thereafter. 

• Increase the size of contracts that can be guaranteed through the 

Program to $5 million; the contract threshold currently is $2 million. 

• Provide statutory discretion to the Administrator to determine liabilities 

assumed by the Program, so that a denial of a guarantee can be partial, 

reflecting the amount of the prejudice suffered by the SBA, and not a 

complete denial of the entire guarantee in every instance. 

• Require the Administrator to reduce or waive fees paid by contractors and 

sureties in the Bond Guarantee Program for 18 months, with authority to 

extend the time period for such actions. 

• Provide assistance to small construction firms, particularly to women-, 

minority- and veteran-owned construction firms, for the purpose of 

providing them financial means/incentives to access professional services 

providers such as construction lawyers and construction accountants. 

• Create a system of due process in connection with the SBA Bond 

Guarantee Program so that sureties receive notice, a hearing, and right to 

appeal if: 1} the SBA denies a surety's request to participate in the 

Program or eliminates a surety from the Program, or 2} denies a claim 

under a bond that the SBA has guaranteed. 

• Require the SBA to track the contractors that participate in the program. 

• Ensure that the SBA Bond Guarantee Program regulations keep pace with 

changes in law and practice in the construction and surety industries. 

• Ensure that the Program has adequate resources to market itself to small 

construction businesses and to state and local agencies assisting such 

businesses. 

NASBP supported the enhancements to the Program adopted under the 

American Recovery and Reinvestment Act (ARRA), which included increasing 

the contract size that can be guaranteed through the Program from $2 million to 

$5 million, and up to $10 million if a federal agency's contracting officer certifies 

that the guarantee is necessary, and vesting discretion in the Administrator to 

determine the Program's liabilities. These enhancements expired on September 

30,2010. NASBP believes that they should be made permanent. 

Construction firms, particularly those that are small and emerging, still face an 

exceedingly difficult construction market for the foreseeable future. Reducing the 

fees paid by contractors to access the Program and providing assistance with 

retaining professional services providers would be Significant steps to position 

these businesses to qualify for surety and financial credit. Such enhancements 

could be taken on a limited time basis to help small construction firms weather 

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the current, difficult economic environment, boosting this particularly hard-hit 

industry. 

Other proposed enhancements are for the purpose of removing barriers to surety 

company participation in the Program. The Program should offer a uniformly high 

guarantee percentage that makes business sense to surety companies. Without 

such a high guarantee, such as 90%, surety companies will be hard pressed to 

make the internal business case for underwriting firms that otherwise do not 

qualify for surety credit. Further, the Program's existing regulations are out of 

step with prevailing practices of the construction and surety industries. Current 

SSA regulations, for example, require notice to the SSA from the surety company 

of change orders exceeding a certain dollar amount or percentage of the contract 

amount, but most construction contracts, including commonly used standardized 

forms, such as those published by the American Institute of Architects and by 

ConsensusDOCS, include boilerplate language requiring the surety to waive 

notice of increases in contract amount. As a result, sureties routinely are not 

informed of all contract increases and are not in position to provide the SSA with 

notice of all changes in the contract amount. The failure to inform the SSA of 

such changes constitutes grounds for the complete denial of the surety's 

guarantee. Moreover, the Program does not include a structured process for 

surety companies to contest the denial of a previously-approved guarantee. At 

the very least, surety company participants should have a delineated means by 

which to have their concerns or positions heard by the Program. 

NASSP believes that the proposed enhancements to the Program would create 

additional opportunities for small and emerging contractors and additional 

incentives for more sureties and agents to assist small contractors in obtaining 

their first bonds and graduate them from the SSA Surety Sond Guarantee 

Program into the traditional surety market. 

Educate Small Businesses: Encourage Industry & Government 

Partnership on Bonding Awareness & Education 

Industry and government can work together to provide small and, particularly, 

emerging construction firms with bonding awareness and education. Many such 

firms simply do not understand the resources that presently exist for them at the 

federal level. Also, state and local governments often are unaware of federal 

programs for emerging construction businesses, such as the SSA Sond 

Guarantee Program, and may seek to create duplicative and unnecessary 

programs. NASSP urges that Congress make building such awareness a policy 

goal of the federal government. 

In recent years, NASSP together with the Surety & Fidelity Association of 

America (SFAA) and in partnership with federal agencies, such as the U.S. 

Department of Transportation, and with various state and local agencies have 

been engaged in bonding education programming for small and emerging 

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construction businesses throughout the United States. This past year, NASBP 

producers worked with SFAA and the U.S. Department of Transportation at 

eleven bonding education programs throughout the country. An equal number of 

programs are planned for 2012. These programs, first developed by SFAA, can 

vary in duration, but typically are offered over the course of eight to ten weeks, 

acquainting small and emerging construction firms with the business and risk 

management processes needed for their success and growth and acquainting 

them with the prerequisites for obtaining surety credit. Subject matter experts 

drawn from the local construction and surety communities serve as volunteer 

instructors, providing attendees often with first contacts to important resources 

for their businesses. Programs like these need to be a component of the 

outreach efforts of other federal contracting agencies. NASBP would like to assist 

federal contracting agencies interested in pursuing these awareness and 

education programs. 

Protect Small Businesses: Support H.R. 3534. 

the Security in Bonding Act of 2011 

NASBP strongly supports H.R. 3534, the "Security in Bonding Act of 2011" as a 

critical means to protect small businesses and to assure the integrity of surety 

bonds on federal contracts when issued by individuals using a pledge of assets. 

As noted earlier, the Federal Miller Act requires contractors to furnish surety 

bonds on federal construction projects to ensure that bonded contracts will be 

completed in the event of a contractor default, thereby protecting precious U.S. 

taxpayer dollars and subcontractors and suppliers, many of which are small 

businesses. The financial stability of the surety is the key to the success of the 

surety bonding system. 

Presently, there are three methods construction firms may use to furnish security 

on a federal construction project: 

1. By securing a bond written by a corporate surety, that is vetted, approved, 

and audited by the U.S. Department of Treasury and listed in its Circular 

570; 

2. By using their own assets to post an "eligible obligation," i.e. a U.S.-

backed security, in lieu of a surety bond. The security is pledged directly 

and deposited with the federal government until the contract is complete; 

or 

3. By securing a bond from an individual, if the bond is secured by an 

"acceptable asset," which includes stocks, bonds, and real property. 

It is this third alternative that has proven consistently problematic, to the financial 

detriment of contracting authorities and of subcontractors and suppliers. NASBP 

believes that the current regulations pertaining to use of individual sureties on 

federal construction projects are flawed and allow gamesmanship by 

unscrupulous persons acting as sureties and, therefore, need to be superseded 

by the statutory approach delineated in H.R. 3534. 

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Federal Acquisition Regulation (FAR) 28.203-2(b)(3) permits federal contracting 

officers to accept bonds from natural persons, not companies, if the bond is 

secured by an "acceptable asset," which includes stocks, bonds, and real 

property. These individuals neither are subject to the same scrutiny and vetting 

given to corporate sureties nor are they required to provide physical custody of 

the asset to the government that they pledge to secure their bonds to the 

contracting authority. 

This lack of thorough scrutiny of individual sureties and control over their pledged 

assets has resulted in a number of documented situations where assets pledged 

by individual sureties have proven to be illusory or insuffiCient, causing significant 

financial harm to the federal government, to taxpayers, and to subcontractors 

and suppliers, many of whom are small businesses wholly reliant on the 

protections of payment bonds to safeguard their businesses. 

Federal requirements do mandate a level of documentation and information from 

individual sureties. Individual sureties are required to complete, sign, and have 

notarized an affidavit of individual surety (SF 28), which is a standardized form 

for the purpose of eliciting a description of the assets pledged and the contracts 

on which they are pledged. SF 28, however, does not elicit other pertinent 

information, such as that about the character or fitness of the individual acting as 

surety, like criminal convictions, state insurance commissioner cease and desist 

orders, or personal bankruptcies. 

Under FAR requirements, the pledged assets also are supposed to be placed in 

an escrow arrangement by the individual surety, subject to the approval of the 

contracting officer. The individual surety, however, is not required to turn the 

assets over to the physical custody of the contracting authority. Each contracting 

officer, not the Department of Treasury, shoulders the entire burden of 

determining the acceptability of the individual surety, its documentation, the 

escrow or security arrangement, and the value and adequacy of pledged assets, 

and must do so in relatively short order to progress the contract procurement. A 

missed, incorrect, or forsaken step may mean the acceptance of a fraudulent or 

insufficient bond, rendering its apparent and much needed protection worthless. 

This burden of assessing individual sureties is added to the already considerable 

responsibilities of contracting officers. They are required to determine the 

authenticity of the documentation of the assets pledged to support the individual 

surety's bond obligations and to verify that the pledged assets actually exist, are 

sufficient, and are available to the federal government. They have to know that a 

particular financial document is what it purports to be and to understand and to 

assess the different types of collateral, such as stocks and real estate located 

anywhere in the United States. 

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It is not clear if and how often federal contracting officers receive specific training 

to understand and to perform the needed tasks of examination concerning 

individual sureties. Documents of federal agencies suggest that there are 

occasions when federal contracting officers may not have a complete 

understanding of what is required of them to safeguard taxpayers and small 

businesses from individual surety fraud. The Financial Management Service of 

the U.S. Department of Treasury issued a "Special Informational Notice to All 

Bond-Approving (Contracting) Officers" on February 3, 2006, still posted on the 

web site for the Financial Management Service at 

http://www.fms.treas.gov/c570/specialnotice.pdf.This informational notice was 

directed to federal contracting officers to remind them of the applicable FAR 

requirements governing individual sureties. Specifically, the notice, a copy of 

which is attached to this testimony, states in part: 

"Although FMS is not substantively responsible for approving individual sureties, 

we believe it prudent to issue this Special Informational Notice on a FYI basis to 

Agency Bond-Approving (Contracting) Officers who do have that responsibility 

under the FAR. 

Recently, FMS has been made aware of instances where individual sureties are 

listing corporate debenture notes and other questionable assets on their 'Affidavit 

of Individual Surety', Standard Form 28. In some instances, the individual 

sureties used a form other than the Standard Form 28 as their affidavit." 

Likewise, the U.S. Department of the Interior issued a notice to its contracting 

officers in 2009 to remind them of FAR requirements associated with acceptance 

of individual surety bonds. This notice, titled "Department of the Interior 

Acquisition Policy Release (DIAPR) 2009-15," states that the Department of the 

Interior Office of Inspector General conducted an investigation of contracting 

personnel practices concerning individual sureties and found concerns. 

Specifically, the release, a copy of which is attached to this testimony, states in 

part: 

"The investigation identified several areas of concem that require our attention. 

There is concem that Contracting Officers (COs) are: (1) unfamiliar with the FAR 

requirements for individual surety; (2) accepting individual surety bonds without 

knowing or verifying the assets backing the bonds; (3) not vetting questions 

about individual surety bonds through the 001 Office of the SOlicitor; and (4) not 

verifying individual sureties against the General Services Administration's 

Excluded Parties List System. " 

If a contracting officer fails to perform adequately the necessary investigation of 

an individual surety, and the individual surety pledges assets that do not exist, 

are insufficient, or are not readily convertible into cash to pay the obligations of 

the defaulted general contractor, everyone on the project from the contracting 

agency on down is left unprotected and at risk for financial loss. If the assets 

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pledged to support the bonds are uncollectible, unpaid subcontractors and 

suppliers protected by the bond will suffer financial hardship and could, in turn, 

default and go into bankruptcy. 

Improper Individual Surety Activity 

Recent situations illustrate where individual surety bond assets have turned out 

to be inadequate, illusory, or unacceptable. One illustration is United States ex 

reI. JBlanco Enterprises Inc. v. ABBA Bonding, Inc, where, in spite of a March 11, 

2005 cease-and-desist order from the Alabama Insurance Department, Mr. 

Morris Sears was able to submit bonds on a federal contract in Colorado 

supported by an affidavit (Standard Form 28) stating that ABBA Bonding had 

assets with a net worth of over $126 million. Although no assets were placed in 

escrow for the benefit of the government, the U.S. General Services 

Administration accepted the bonds anyway. Mr. Sears eventually filed for 

Chapter 11 bankruptcy in the Southern District of Alabama, and it was made 

clear from the bankruptcy proceeding and legal depositions that most of the $126 

million never existed. JBlanco Enterprises, a small business subcontractor 

performing work on federal contracts, nearly was forced to declare bankruptcy as 

a result of a deficient individual surety bond placed on a federal project that later 

proved to have no assets behind it. 

Another notable instance surfaced in March 2010, when George Douglas Black, 

Sr., an individual surety doing business as Infinity Surety, was arrested and 

charged by the U.S. Department of Justice with mail fraud for allegedly selling 

more than $25 million of worthless construction bonds to 150 different 

construction companies on local, state, and federal public works projects, while 

receiving $2.9 million in fees. Among Black's alleged victims were the U.S. 

Department of Navy, the Beaumont Independent School District of Texas, and 

the Monroe Airport in Monroe, Louisiana. It is alleged that Black repeatedly 

pledged the same small piece of real property to insure multi-million dollar state 

and federal construction contracts. 

These, unfortunately, are not isolated instances. Other examples exist, both past 

and present, showing where individual surety bond assets proved illusory, 

uncollectible, or deficient. 

Legislative Solution 

H.R. 3534, the "Security in Bonding Act of 2011," is a common-sense solution to 

this problem. The bill requires individual sureties to pledge solely those assets 

defined as "eligible obligations" by the Secretary of the Treasury and to provide 

those assets to the federal contracting authority, which will deposit them in a 

federal depository designated by the Secretary of the Treasury, ensuring that 

pledged assets are suffiCient, convertible, and in the physical custody and control 

of the federal government. This is nothing more than what now is statutorily 

required of contractors who wish to pledge collateral as security on a federal 

contract in lieu of a surety bond. 

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If enacted, H.R. 3534 will eliminate the gamesmanship inherent in the current 

regulatory system governing individual surety bonds and will remove a 

considerable administrative burden from federal contracting officers. Small 

businesses working on a construction project-either as subcontractors, 

suppliers, or workers on the job-have no control over the prime contractor's 

choice of security provided to the federal government, but they suffer the most 

harm financially if the provided security proves illusory. The result of this bill is 

that small contractors, subcontractors, and suppliers on federal construction 

projects will know that adequate and reliable security is in place to guarantee that 

they will be paid. 

Position Small Businesses: Include New 

Construction in Contract Bundling Scrutiny 

The Small Business Reauthorization Act of 1997 defines contract bundling as 

"consolidating two or more procurement requirements for goods or services 

previously provided or performed under separate, smaller contracts into a 

solicitation of offers for a single contract that is unlikely to be suitable for award to 

a small business." In order to justify contract bundling, according to 15 U.S.C. 

§644(e), federal agencies must demonstrate "measurably substantial benefits," 

such as cost savings, quality improvements, reduction in acquisition cycle times, 

or better terms and conditions. 

In Tyler Construction Group v. U.S., 83 Fed. Ct. 94, a federal contracting agency 

called into question whether anti-bundling rules apply to procurements for new 

construction. In deciding the case, the U.S. Court of Federal Claims stated, 

"whether the bundling provisions of 15 U.S.C. §631 0) should or do apply to 

acquisitions for new construction is a question we leave to Congress." Clearly, 

the U.S. Court of Federal Claims opinion sends a message that, without 

legislative intervention, contracting agencies need not place procurement of new 

construction on the same footing for scrutiny of improper contract bundling as 

other procurements. In "Bundling and Consolidation: Making Sense of It All," an 

article published in the October 2010 issue of the Army Lawyer, the author 

writes: "[iln some cases, agencies may find it less problematic to simply state that 

the requirements being considered for consolidation are new and, therefore, fall 

outside the scope of either the SBRA Bundling or Section 801 Consolidation 

provisions." Thus, in the current procurement environment, contracting agencies 

may seek to lessen contract bundling scrutiny simply by casting a procurement 

bundling small contracts as one for new construction. Use of such tactics would 

impede or foreclose small business participation at the prime contract level and, 

ultimately, lessen competition on federal projects. 

Legislative Solution 

NASBP urges that Congress address this question of the applicability of antibundling rules to new construction by introducing legislation that would amend 

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the statutory definition of contract bundling to specifically include procurements 

for new construction, so that small construction businesses can more fully 

participate as prime contactors on federal construction projects. By undertaking 

this action, Congress would facilitate greater participation of small construction 

contractors at the prime level in the federal procurement arena; increase the 

likelihood that contracting agencies will meet or exceed their small business 

participation goals; and increase competition for federal procurements, thereby 

providing pricing benefits to the federal government. In short, small construction 

firms would be given more opportunities to compete for award of contracts which 

will be within their reach and resources and within their financial capabilities and 

surety credit. 

NASBP appreciates the opportunity to address the Subcommittee on Contracting 

and Workforce to raise awareness about important issues confronting small 

construction businesses wishing to perform or performing federal contracts or 

supplying labor and materials on such projects. NASBP hopes its testimony 

proves beneficial to the deliberations of the Subcommittee and welcomes any 

inquiries from the Subcommittee on the matters raised in this testimony or on 

other matters pertinent to small businesses and surety bonding. 

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~ Women Construction 

~ Owners & Executives USA 

Testimony of Rosana Privitera Biondo 

President 

Mark One Electric 

On Behalf of Women Construction Owners and Executives 

Before the 

Committee on Small Business 

Subcommittee on Contracting and Workforce 

United States House of Representatives 

On 

"Construction Contracting: Barriers to Small Business Participation" 

February 9, 2012 

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Mr. Chairman and Members of the Subcommittee, good morning. My name is 

Rosana Privitera Biondo. I am the President of Mark One Electric, headquartered in Kansas 

City, Missouri. I am testifying today in my capacity as President of the Board of Directors of 

Women Construction Owners & Executives (WCOE), a 28 year old organization whose 

mission is to create contracting opportunities for our members - women who have chosen 

to build a business in the non-traditional industry of construction. 

Thank you for giving me the opportunity to testify before you today in this very 

important hearing. WCOE has just completed our Annual Leadership Meeting here in 

Washington, DC where we gathered our organization's leaders from across the country to 

discuss issues of importance to them and their businesses. As you know, the lingering 

economic recession has hit the construction industry particularly hard, and many small 

businesses in our industry seem to have been hit disproportionately hard. Yet, our 

members are energized about the future and particularly about new efforts in Congress to 

intelligently address the problems with federal construction contracting and the various 

programs intended to promote utilization of small, disadvantaged or woman-owned 

businesses. As you know, the construction industry is unique and many of our challenges 

differ from other small businesses. Our testimony will concentrate on construction 

projects at t~e federal level, although it is impossible to address federal projects without 

mentioning the state and local components of the process. 

The first important principle is the structure of our contracting work. Both public 

and private construction projects are awarded to a prime contractor who is then 

responsible for subcontracting out the majority of the work to specialty contractors. 

Federal construction projects are usually much larger than privately funded projects. 

According to a search on USASpending.gov, the top five prime contractors performing 

construction related work received between $712 million and $1.2 billion in FY2010. 

WCOE is intent on ensuring that our women-owned construction companies receive 

their fair share of subcontracts on these major federal construction projects. While the 

prime contractors will solicit bids from us and will include us as subcontractors in the final 

bid submittal, once the government has issued the contract the prime contractor will often 

"bid-shop" the subcontractor bids. It is not uncommon for the prime contractor to make a 

last minute substitution of a lower bid subcontractor and keeping the difference. WCOE 

would prefer that the agency's contracting officer be informed of and responsible for 

subcontracting substitutions, which often eliminate women-owned small businesses that 

were included in the initial bid submittal. 

Many federal construction projects are awarded through grants to states, 

particularly for Department of Transportation projects. The Department of Transportation 

issues guidelines to states, which include recommendations for utilization of small or 

minority owned businesses. However states are not compelled to comply, even though 

they are using federal dollars for the project. We understand the complexities presented by 

the Adarand Constructors. Inc. v. Pena. 515 US 200 (1995) but we believe a uniform 

standard could be implemented and no state should be permitted to have goals below the 

federal standard. 

We realize this is a complicated area and affects other Congressional Committees, 

but we felt it was important to bring this issue to this Committee's attention because it has 

a direct effect on the health of small construction businesses and their ability to create jobs. 

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The $46 billion in transportation project funding included within the stimulus package 

could have been a much-needed stimulus to women-owned small construction businesses 

- and indeed we thought it would be. However, many states that received the funding have 

refused to incorporate provisions for small or woman-owned business participation. We 

know the Congressional intent was there, but the implementation on the state level did not 

~~~ . 

Let me just take a few minutes to highlight two issues where the well-intentioned 

federal small business programs do not apply to small construction companies. 

First, the women owned small business (WOSB) procurement program. It took the 

efforts of thousands of women owned businesses and dozens of organizations that 

represented them to persuade the SBA to implement the program enacted by Congress 11 

years ago. This program allows for restricted competition for women owned companies 

that seek prime contracts. While this program will benefit many women owned businesses, 

WOSBs in the construction industry fear it will be oflimited benefit, even though 61 sixdigit NAICS codes connected with WCOE members are included in the program 

The WOSB program has a contract award limit of $4 million for construction NAICS 

codes. This contract limit confines women-owned small businesses to compete for very 

small federal construction contracts. Let me explain. In FY2010, the federal government 

awarded 165,269 construction-related contracts with a dollar value less than $4 million for 

a total of $19.5 billion. The average contract award was $118,085. When you look at the 

complexity of the paperwork required on bid submittals and progress payments compared 

to the small profit percentage allowed on federal projects, it is extremely difficult to net out 

at anything other than a break-even on these small projects. Yes, the quantity of projects 

were there - but the quality of the projects is seriously lacking. 

On the other hand, construction related contracts worth more than $4 million are a 

different story. In FY2010, 2,125 contracts were awarded with a total value of $35.2 

billion. The average contract value was $16.6 million. This demonstrates the vast 

difference between the size of the awards at the $4 million threshold that the WOSB 

program stipulates and the size of awards above that total. Women-owned small 

businesses - especially women in the construction industry - will continue to be at a 

disadvantage, so long as the size limits for awards remain in place. The WOSB program 

simply will not work unless the dollar limits for awards are removed. This really will take 

an Act of Congress, since Congress put the limits in place. Thankfully, we understand that 

legislation will be introduced shortly in this Committee to remove those caps. We will 

work diligently to gather support from the community and Congress to pass this legislation 

because it is the only way this program can assist the women that we represent in securing 

federal work. Other small business programs which restrict competition, such as the 8(a), 

Veterans, HUBZone, etc. do not have award caps. We believe it is only equitable that the 

women construction owners in this country are afforded the same opportunity to contract 

with the federal government. 

The second example is also about size and related to the WOSB program. The 

program, as well as all of the good work that this Committee has done and will continue to 

do, is only applicable to businesses that are defined as small. That determination is made 

by SBA's Office of Size Standards. SBA size standards are based on either revenue or 

number of employees. Currently, the SBA size standard for construction is based on a 

revenue standard of $7.0 to $14.0 million for specialty subcontractors to $33.5 million for 

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prime contractors. That severely limits the amount of available construction projects in 

the Federal sector that will be eligible for the "small" designation. WCOE believes that 

gross annual revenue is no longer a relevant determinant of whether a business is small or 

not in the construction industry. In today's construction industry, over 50% of a project 

cost is in materials and every business publication provides monthly reports about the 

steadily increasing costs of building materials. 

WCOE believes a more accurate determinant for size standards in the construction 

industry (NAICS section 23) would be employee based (FTE) as it is for the majority of 

other NAICS sections. The SBA has a complicated economic formula for calculating its 

revenue based size standards and WCOE has neither the resources nor the Masters in 

Economics to defeat SBA's arcane mathematical formula. However, we do have on-theground experience and we can tell you that the revenue-based size standard severely 

restricts our ability to take advantage of programs Congress has put into place to assist us 

growing our businesses and creating jobs. 

We would like to offer a suggestion that an alternative way of calculating the 

employee standard by a relatively simple formula that OSHA uses. All of our members have 

to file an OSHA 300 form which contains a formula to calculate full time employees (FTE). 

The formula takes the number of employees paid and divides it by the number of pay 

periods to arrive at the FTE number. 

Given the importance of subcontracting to members of our organization, we applaud 

Chairman Graves for introducing the Government Efficiency through Small Business 

Contracting Act of2012 (GET Act). While we certainly support raising the overall small 

business goal from 23 to 25 percent, raising the subcontracting goal from 35.9 percent to 

40 percent of the total value of all subcontracting awards is one of the keys to our 

members'success. We also believe that senior officials of agencies should be held 

accountable for meeting Congressionally mandated goals, so we support the provision that 

prohibits them from receiving bonuses if the agency has not met its small business 

contracting goals. 

We also support the legislation introduced by Representative Mulvaney. H.R. 3893. 

which further strengthens the subcontracting law by imposing substantial penalties to 

primes that do not file their subcontracting plans. Although the Small Business lobs Act 

prohibits the practice of switching subcontractors upon an award. this bill puts additional 

teeth into the law. 

WCOE also believes there is room for a mid-tier contracting program. In order to be 

a successful federal construction contractor. it is necessary to have considerable financial 

assets available because of bonding requirements. Although our members are small 

compared to our competition that secure the bulk of federal construction dollars. many 

WCOE members do not fit within the small business size standards. So, we are in limbo. 

Not big and not small. Anyone who is knowledgeable about federal contracting knows that 

this not an enviable position to be in. Mid-size companies would be in a much better 

position to identifY small businesses with whom to subcontract, thereby assisting them in 

growing their businesses and creating jobs. Legislation pending in Congress calls for a midtier pilot program and we urge the Committee to take a close look at structuring a program 

for the construction industry. Lastly, there are two access to capital issues that we would 

like to address-retention and bonding. We refer to these issues as access to capital issues 

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rather than contracting issues for a reason. The policy surrounding retention and bonding 

have a direct effect on the success of our businesses to compete on federal projects. 

Retention is the process of holding back a portion of the contract until the work is 

completed. While that is an accepted practice in construction, it can tie up capital for 

smaller firms unnecessarily. We would ask that on federal projects, the amount a prime 

can hold back from a sub should not be a percentage, but rather the amount necessary to 

cover the work in question. Here's what the FAR 32.103 says about retainage: 

32.103 Progress payments under construction contracts. 

When satisfactory progress has not been achieved by a contractor during any 

period for which a progress payment is to be made, a percentage of the 

progress payment may be retained. Retainage should not be used as a 

substitute for good contract management, and the contracting officer should not 

withhold funds without cause. Determinations to retain and the specific amount 

to be withheld shall be made by the contracting officers on a case-by-case basis. 

Such decisions will be based on the contracting officer's assessment of past 

performance and the likelihood that such performance will continue. The 

amount of retainage withheld shall not exceed 10 percent of the approved 

estimated amount in accordance with the terms of the contract and may be 

adjusted as the contract approaches completion to recognize better than 

expected performance, the ability to rely on alternative safeguards, and other 

factors. Upon completion of all contract requirements, retained amounts shall 

be paid promptly. 

In other words, federal contracts do not require a set percentage of retention and 

contracting officers should only withhold funds for cause. Subcontractors should not have 

funds withheld as retention unless the work for which they are responsible is not accepted 

as complete. WCOE recommends that the amount withheld in such an instance should not 

exceed the value of the work remaining to be done and should not be set at an arbitrary 

percentage of the contract. It is important to note that surety bonds cannot be released 

unless the retention is released, so a contractor's ability to begin a new project is restricted 

until her assets are released when the bonded work is accepted as complete and she can 

bond a new project. 

Bonding requirements for subcontractors, or dare we say, over-bonding, ties up 

capital for our members as well. Bonding, unique to the construction industry, is a 

guarantee of performance on a project which the owner of the construction company must 

collateralize with business and personal assets-thus tying up precious capital. We urge 

federal agencies to eliminate the requirement for subcontractors to provide a bond unless 

it is required of the prime contractor. 

In summary, these last few years have been difficult for our industry. Federally 

funded projects and contracts have been instrumental in keeping our firms viable. We are 

encouraged by this Subcommittee's commitment to the women owned firms who seek to 

rebuild their communities by growing their businesses and creating jobs. We look forward 

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to working with you to address some of the barriers we have identified today. I would be 

happy to answer any questions. 

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Statement of 

Mr. Dirk D. Haire of Fox Rothschild, LLP 

on behalf of 

The Associated General Contractors of America 

to the 

Subcommittee on Contracting and Workforce 

Committee on Small Business 

U.S. House of Representatives 

For a hearing on 

"Construction Contracting: Barriers to Small Business Participation" 

February 9, 2012 

~~£GgL6mo~!L~~ I)) 

Quality People. Quality Projects. ',..~. 

The Associated General Contractors of America (AGC) is the largest and oldest national construction trade 

association in the United States. AGC represents more than 33,000 firms, Including 7,000 of America's leading 

general contractors, and over 12,000 specialty·contracting firms. Over 13,000 service providers and suppliers are 

associated with AGC through a nationwide network of chapters. AGC contractors are engaged in the 

construction of the nation's commercial buildings, shopping centers) factories, warehouses, highways, bridges, 

tunnels, airports, waterworks faCilities, waste treatment facilities, dams, water conservation projects, defense 

facilities, multi-family housing projects, site preparation/utilities installation for housing development, and more. 

THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA 

2300 Wilson Boulevard, Suite 400' Arlington, VA 22201 • Phone: (703) 548-3118' FAX: (703) 548-3119 
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Statement of Mr. Dirk D. Haire 

Fox Rothschild, LLP; Washington, DC 

Subcommittee on Contracting and Workforce 

Committee on Small Business 

United States House of Representatives 

February 9, 2012 

My name is Dirk Haire. I am the Managing Partner of Fox Rothschild, LLP's District of 

Columbia Office, where as I lead our national construction law practice, which is focused on 

federal construction. I regularly counsel federal contractors on small business teaming 

arrangements, including advice on affiliation and SBA's Ostensible Subcontractor Rule; mentorprotege programs; small business and set-aside strategy and compliance (8(a) contracting, ANC, 

NAC, HUBZone, SDVOSB); small business subcontracting plan compliance; and small business 

size protests. I also current serve on the Executive Board of the Associated General Contractors 

of America (AGC), and currently Chair the AGC Federal Acquisition Regulation (FAR) 

Committee. I testifY before the Committee on behalf of AGC and its members on the topic of 

small business utilization in federal contracting and potential reforms that may improve the 

government's efforts to utilize and develop small businesses. 

AGC strongly supports full and open competition for the many contracts necessary to construct 

improvements to real property. AGC works to foster a business climate that provides 

opportunities for all small businesses. To succeed, construction firms must focus on price, 

quality and reliability. Construction is an intensely competitive industry, and we believe that full 

and open competition properly penalizes any firm that discriminates based upon impermissible 

factors. Competition energizes and improves the construction industry, which benefits the 

economy as a whole. Full and open competition is especially important during these trying 

economic times. 

Despite a recent modest upturn in construction employment, payroll employment in January 

2012 was nearly 2.2 million, or 28 percent, below the peak in 2006, and unemployment in the 

sector remains deplorably high. The industry's unemployment rate in January 2012 was 17.7 

percent, not seasonally adjusted-the highest of any industry and double the overall 

unemployment rate, according to data the Bureau of Labor Statistics released on February 3, 

2012. Although demand for private nonresidential and multifamily construction has revived 

modestly, the outlook for public construction is grim as agencies at all levels of government 

continue to cut construction spending. 

AGC supports procurement reform to improve delivery offederal construction services. Reform 

of the federal procurement process should recognize construction's unique blending of diverse 

industry sectors. It should also recognize the limitations of what the market can provide, as well 

as consider the cost versus benefit to the public sector and to taxpayers of any proposed reform. 

Our members recognize the potential benefits that federal small business programs - including 

the 8(a) Business Development Program, HUBZone Program, Small Disadvantaged Veteran 

Owned Small Business (SDYOSB) Program, tribally-owned contracting programs, and Woman 

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Owned Small Business Program - provide to contractors who qualif'y for these programs. 

However, the programs as currently regulated, do not achieve the important goal of developing 

successful companies that can compete and succeed on their own. In AGC's view, the rules need 

to be reformed so that: (1) contractors may both comply with the rules and meet the requirements 

of the customer more efficiently, and (2) contractors may reasonably predict what actions are 

compliant with the rules. AGC believes that the current rules encourage firms to structure their 

performance in a way that technically meets legal requirements yet fails to capture the sprit of 

the smaIl business programs. Additionally, many of AGC's members, and many of my clients, 

find the rules difficult to understand as they are currently written. For these reasons, AGC 

proposes: (1) that agency small business utilization goals be revised, and not increased, so as to 

secure more meaningful, achievable utilization of small businesses, (2) SBA work with federal 

agencies and industry groups to devise safe harbor standards for contractors who attempt to meet 

SBA requirements in good faith, yet fail to achieve perfect compliance, and (3) the burden of 

meeting agency small business utilization goals be spread more evenly across all industries. 

Contracting Reform 

As the Committee considers the changing federal procurement landscape, AGC offers the 

following points for consideration before the Subcommittee today: 

The SBA and contracting agencies need to work together and consult with industry 

leaders to develop safe harbor standards. Having easy to understand safe harbor 

standards will encourage: (1) small business participation in the federal market, and (2) 

large businesses working with small businesses without the fear of inadvertently violating 

some unknown portion of the Small Business Act or SBA's rules of affiliation. 

o As an example of a proposed safe harbor standard: AGC requests clear guidance 

for when the hiring of employees will make one business affiliated with another. 

Specifically, AGC requests clear guidance stating that the following scenario does 

not constitute affiliation: an employee, who used to work for a subcontractor, 

leaves his employment and becomes an employee of a prime contractor. 

AGC additionaIly proposes that SBA consult with federal agencies and industry leaders 

to develop more consistent and easier to understand affiliation rules. AGC has found that 

the current rules of affiliation are not easy to understand. They do not understand which 

factors contribute to a finding of affiliation. They also do not understand the "tipping 

point" where too many factors will make a large business and small business affiliated. 

Confusion over the affiliation rules cause businesses to file protests, which cost the 

government both time and money. Some of these protests may be avoided if all parties -

the agencies, the SBA, and industry leaders - contribute to revising the SBA rules of 

affiliation to clearly state was is and is not prohibited. 

o AGC additionaIly proposes that a safe harbor standards be created to protect 

contractors who assist small businesses, believing they are complying with the 

rules, but may inadvertently violate the rules of affiliation. 

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AGC also proposes that agency small business utilization goals be reduced, or at the very 

least, stay at their current levels. Although AGC applauds the govermnent's efforts to 

increase opportunities for small businesses, AGC believes that higher goals come at the 

expense of more meaningful small business participation. A higher percentage of small 

business contracting does not mean that small businesses are performing more work on 

average. Instead, it provides more opportunities for businesses to abuse the small 

business programs. Agencies lose the ability to successfully monitor the current set-sides 

and related efforts to involve small businesses when they are required to solicit more. 

Without vigilant monitoring, the government has no way of knowing that small 

businesses will actually perform primary and vital work. This is especially disconcerting 

given that many companies making a good faith effort to comply cannot do so because of 

the complexity of the current regulations. Contractors need more, not less guidance to 

comply with program requirements. Contractors will not receive this guidance if 

agencies are required to focus on a higher volume of small business utilization. 

o AGC strongly suggests that the government utilize its current technology and 

allow contractors and contracting agencies to count lower tier subcontracts as 

contracts to small businesses. This will provide a more accurate picture of how 

small businesses are used to complete federal projects. This will also allow 

contractors to structure their subcontracts in a way that is closer to general 

industry practice, and is therefore, more economically efficient and less costly to 

the goverurnent, without sacrificing any small business participation. 

• AGC also proposes that federal agencies only consider setting aside a contract to a small 

firm if the contract is less than 50 percent of the size standard in that industry NAC]S 

Code. This will ensure small firms are awarded contracts that are executable by the firms 

themselves. It will also ensure smaller firms will succeed by not being burdened with 

contracts that are so large they would be at risk for defaulting on the contract or being 

forced to simply "pass through" the work to a larger firm at a lower tier. 

Current Rules Do Not Optimally Encourage Small Business Participation 

AGC believes that current rules governing small business programs allow firms to structure their 

performance in a way that minimizes true small business involvement and development yet 

technically operates within the bounds of the law. AGC does not believe this achieves the true 

intent of these programs, which is to maximize small business development. Additionally, the 

current regulations requiring agencies to meet certain, set percentages of small business 

utilization, unfairly requires agencies to choose between coming short of meeting their goals or 

risking SBA rule violations. 

My construction clients attempt to follow SBA rules and regulations in good faith. However, 

they sometimes fall short of perfect compliance because the rules are not clear or they conflict 

with the rules yet meet the requirements of their customer. 

For example, I represent one client that could not meet the requirements of the ,"ustomer yet 

comply with the HUBZone set-aside requirements of the contract. My client was a non4 
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HUBZone subcontractor on a HUBZone set-aside contract. The HUBZone prime contractor had 

little experience performing the type of work required by the contract. Therefore, the HUBZone 

prime contractor subcontracted a significant portion of the work (more than 85 percent) to my 

client. The HUBZone prime contractor represented to my client that both the 50 percent and 15 

percent self-performance requirements for the contract, codified in two separate sections of the 

Code of Federal Regulations, were waived by the contracting agency. The HUBZone concem 

interpreted this to be the instruction of the contracting agency. After reviewing the contract and 

solicitation information, I could not find that the IS percent requirement had been waived for the 

contract. Fortunately, the contracting team had not performed the majority of the work, and the 

HUBZone concern had the opportunity to devote more of its own labor to the project to meet the 

15 percent requirements of the contract. However, had my client not brought this matter to my 

attention, both the HUBZone concern and my client may have violated an SBA regulation that 

required at least IS percent HUBZone performance on the contract. As a result of the direction 

from the agency and the confusing language of the regulations, both the HUBZone concern and 

my client expended additional amounts reforming their subcontract agreement and the 

agreements for lower-tier subcontractors. We anticipate that these costs will be submitted in a 

claim to the contracting officer. 

The additional costs and efforts would not had been required had the parties understood the SBA 

HUBZone Program requirements. The contracting agency provided a good-faith interpretation 

of the rules. The agency's interpretation was provided so that the HUBZone concern could 

perform the work as a prime contractor; yet ensure that the agency's needs for a timely, quality 

end product were satisfied by an experienced party. However, despite all parties' good faith 

efforts to meet the contract requirements using a small business, the agency's interpretation did 

not comport with the Code of Federal Regulations requirements for the set-aside. Had the 

regulation been more straightforward, any confusion may have been avoided. Alternatively, had 

this project been bid as an unrestricted procurement, the agency's needs may have been better 

satisfied for less money. 

Additionally, agencies concerned with fraud in small business programs may over-correct, so as 

to deny opportunities to legitimate small businesses. The u.s. Government Accountability 

Office (GAO) has repeatedly reported the problems of agency monitoring their set-aside 

programs, including the HUBZone program, the super-preferences afforded to Alaskan Native 

Corporations, and the newest preferences created for Service Disabled Veterans and Women 

Owned Small Businesses. Agencies looking to avoid criticism, but required to keep utilizing 

these programs at high levels, may unfairly exclude some businesses that do qualifY for the 

program for minor technicalities in the contractor's paperwork or the government's processing of 

that paperwork. For example, on November 30, 2011, the U.S. Government Accountability 

Office (GAO) issued a report stating that the Department of Veterans Affairs (VA) could do 

more to reduce the SDVOSB Program's vulnerability for fraudulent certifications. See 

Additional Improvements to Fraud Prevention Controls Are Needed, GAO-12-205-T (Nov. 30, 

2011). After GAO issued the report, I represented several clients in VetBiz delisting matters. 

My clients are service-disabled veterans who own businesses that qualifY for inclusion in VetBiz. 

Yet the VA delisted them from VetBiz and therefore prevented them from receiving contract 

awards for a period of time. Although the V A should take actions to avoid fraudulent 

certifications, the VA should not respond to criticism by overcorrecting and delisting concerns 

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that are clearly eligible SDVOSBs. Doing so hurts small businesses and prevents federal 

agencies from meeting their goals. 

Reform Small Business Utilization Goals 

As I previously noted, there is an incredible amount of pressure on contracting officers to meet 

agency-wide goals. This pressure is increasing. It is proposed in a pending bill that senior 

executives within a contracting agency shaH not receive any incentive awards, or bonuses, if that 

agency fails to achieve its yearly small business utilization goal (See H.R. 3850). This proposed 

legislation unfairly penalizes agency officials for matters beyond their control. Not every small 

business is well-suited for every contracting opportunity. Requiring agency officials to meet 

goals regardless of whether the offering small businesses are capable of performing the work is 

unfair to the agency officials, the awardee, other contractors, and the public. It is unfair to the 

public because the public receives inferior work at a higher price when the agency is forced to 

award a contract to an unqualified firm. Additionally, the small business awardee does not 

benefit from being placed in a position where it cannot satisfy the contract requirements. Taking 

on a large contract, too fast, may have the unintended effect of bankrupting a small business. 

Additionally, when a small firm finds itself unable to complete the work on a contract it was 

never qualified for, the firm must subcontract the work to a large ftrm to perform the vast 

majority of the work. This does not serve the intended purpose of the Small Business Program -

"to maintain and strengthen the nation's economy by enabling the establishment and viability of 

small businesses and by assisting in the economic recovery of communities after disasters" - at 

all. The federal government must ask itself a simply question: What is more important - Help 

small firms thrive in all industries or meet the goals by any means necessary? 

Furthermore, the small business utilization goals overburden some industries. The construction 

industry has historically supported and provided opportunities for small businesses. The industry 

is proud of its efforts to include small businesses and allow small businesses to develop. Instead 

of being rewarded for its efforts, agencies over rely on the construction industry to shoulder the 

burden for other industries that have not encouraged small business involvement. Agencies try 

to meet their entire goal by limiting competition almost only to small businesses in construction. 

In effect, this industry is penalized for their successes encouraging diversity. 

A consequence of this practice is causing another disturbing trend: Massive growth in the 

percentage of small business subcontracting goals. In some cases, we have seen the small 

business subcontracting goal requirements exceed 70 percent and have gone as high as 90 

percent even on projects well in excess of the small business size standard. Large prime 

contractors are usually able to meet the strict legal requirements to achieve these goals, but only 

through a combination of complicated project administration maneuvers and substantial use of 

lower-tier subcontracting to larger businesses. These techniques, while legal, do not help most 

small business and serve primarily to increase the cost of construction to the taxpayers. Rather 

than force unrealistic goals on very large projects where an extremely high level of small 

business subcontracting is simply not feasible, the government should adapt its agency-wide 

goals and subcontracting goals to be more consistent with what the market can provide. This 

might be an opportunity for the government to break up such contracts into smaller ones so that 

small businesses will be better positioned to compete and execute contracts with greater success. 

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Count Subcontracting At All Tiers 

We thank the Committee for recognizing the need to begin to address the issue of allowing prime 

contractors to receive credit for fully reporting subcontracting activities at all tiers. Current SBA 

rules require that large business contractors keep track and measure the actual flow of dollars to 

small business subcontractors on federal construction projects. However, the Current rules do not 

take into account the actual amounts that flow down below the first tier level of subcontracting. 

Within the construction industry, the bulk of the work is performed by subcontractors who in 

turn hire second tier and third tier firms to perform elements of the project. Under the current 

system, if an "other-than-small" business serves as a first-tier subcontractor, the prime contractor 

is not asked to report further dollars that are going to small businesses below the first tier 

subcontractor. This is because the contracting agency is not allowed to take credit for those 

dollars towards its goals. Unfortunately, this gives an incomplete picture of true small business 

participation. 

Allowing prime contractors to report small business subcontracting at all tiers would more 

accurately measure small business participation. Allowing for reporting at all tiers would also 

allow agencies to more easily meet their small business utilization goals. Allowing for reporting 

at all tiers would fmally allow prime contractors to structure their subcontract arrangements in 

the way that is most sensible and cost-effective, instead of having to structure their subcontractor 

choices around the reporting requirements. 

One example why this is a problem for prime contractors and the government and how our 

recommendation can help bring greater transparency to subcontracting goals is the following: 

• An agency procures a $100 million building to be constructed. One of the first tier 

subcontracts is for all the mechanical work to be performed in the structure. The 

subcontract is valued at approximately $12 million and the electrical subcontract is 

approximately $15 million. This is simply due to the size and scope of the facility to be 

built. Unfortunately, both subcontracts are simply too large for a small business. 

The total dollars available for subcontracting opportunities is approximately $75 million. 

With a small business subcontracting goal of 77 percent, this translates to $57,750,000 

awarded to small business concerns, just short of $7,750,000 short of attaining the goa\. 

The current law prevents the prime contractor with the ability to count any of the work 

beyond the first tier because if the first tier subcontractors are large, the counting and 

reporting stops right there. That is true even though both the mechanical and electrical 

subcontractors will purchase materials and subcontract to 2nd and 3

rd tier levels, and that 

work will never get counted. The problem is compounded further among subcontracts for 

specialty trades for which there are no qualified small businesses are included, such as 

skylights ($1 million), precast ($2 million) and structural steel fabrication ($4 million). 

The technology for reporting subcontracting data at all tiers is already available and used by the 

federal government. The system already used to report subcontracting data, the Electronic 

Subcontractor Reporting System (eSRS), is capable of tracking and reporting small business 

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subcontractor data on multiple tiers. Unfortunately, current rules do not encourage prime 

contractors and their subcontractors to account for total small business participation at all tiers. 

AGe recommends that Congress legislate to allow contractors to count small business 

involvement at all tiers for purposes of meeting subcontracting goals and agency small business 

utilization goals. 

Contract Bundling 

Another major challenge for contractors over the past several years is how federal agencies have 

addressed the consolidation of multiple construction contracts into a single contract. From our 

members' perspective, the utilization of Multiple Task Order Contracts (MATOCs) or Multiple 

Award Constructiori Contracts (MACCs), as they have been called, fit within the parameters of 

contract bundling. These types of contracts may not meet the legal definition of "bundling" per 

se, but they have the practical effect of serving as de facto bundled contracts because these 

contracting vehicles include more than one "task" that can easily be contracted out under a 

separately procured solicitation. Increasingly, the federal government is awarding ever-larger 

contracts for public works and infrastructure projects. These mega-projects reduce bidder 

competition and aggregate project risk, and may challenge surety capacity, sometimes 

necessitating percentage or partial bonds instead of bonds covering 100 percent of the contract 

price. 

One of the major reasons bundling on construction contracts has proliferated is that there is 

currently no provision in federal law that requires construction contracts be reviewed for a 

bundling determination. Consequently, agencies are able to avoid having to do any sort of 

economic impact analysis for a contract that would otherwise meet the definition for "bundling" 

simply by adding a component that small businesses are not performing to the contract. A 

revision to the definition would clarifY that contract bundling rules apply to construction 

procurements and that these procurements must be reviewed for any impacts on small 

companies. We are pleased to see that the legislation recently introduced will address this 

shortfall. The federal government needs to find ways to unbundle extraordinarily large 

construction projects, so more contractors can compete for these projects and so these projects 

are fully covered by the performance and payment bonds. Reducing government contract 

bundling would increase competition on federal procurements and would enhance benefits to the 

government and provide added opportunities for small businesses to obtain government 

construction contracts. 

Local Geographic Preferences for Construction 

AGC believes that local geographic preferences can in fact be more detrimental than beneficial, 

by encouraging retaliatory measures from other local surrounding jurisdictions. Many of our 

members have growing concerns that local preferences has have the effect of limiting small and 

local business participation; which is especially detrimental to the construction industry, which is 

comprised of many small businesses that typically are limited by geography. 

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Federal Acquisition Workforce 

Recruitment, retention and training of the federal acqUISItion workforce is critical to the 

successful execution and completion of construction contracts. As you can already see from our 

concerns about contract bundling, an understaffed federal acquisition workforce is suffering from 

the pressures of an already challenging procurement environment. The shrinking acquisition 

workforce is an ongoing problem and will exacerbate as the number of procurements continues 

to grow. 

There are two simple facts that raise our concerns in this area: I) In fIscal year 2011 alone, the 

government purchased approximately $720 billion in goods and services, and 2) one federal 

acquisition professional in eight already is eligible to retire, and that will rise to more than half 

the workforce by 2016. The average retirement eligibility for contracting professionals will 

increase from 29 percent in FY 2011 to 50 percent in FY 2016. 

We fear that the federal government workforce challenges may only get worse in the coming 

years. In order for the government to meet its many missions, it will have to do a better job of 

recruiting, hiring and training new employees. Given that the government's purchase of goods 

and services is at an all time high, it is essential that the government acquisition positions be 

fully staffed. This problem needs to be addressed in the near-term to avoid the negative ripple 

effects that a strained workforce can have on all facets of contracting. 

Agency Consistency 

As a matter of policy, AGC recommends that agencies with large regional offices continue to 

work to promote the implementation of uniform agency policies that will provide greater 

consistency in the construction process. Many of our members have repeatedly found wide 

variances in regional operations, contract administration and administrative practices. Such 

inconsistencies can produce serious administrative and communication problems and can 

discourage contractors from continuing to work in the federal market. We recognize that the 

federal agencies have worked very hard to ensure consistent communication and consistency 

between regional offices over the past several years and hope that trend continues into the future. 

Conclusion 

Thank you for the opportunity to provide our views on working with the federal market. AGC 

strongly recommends Congress reform the federal procurement process to: (I) create safe harbor 

standards that do not penalize contractors for making good faith efforts to abide by SBA rules 

and regulations, (2) limit overreliance on construction to achieve overall agency small business 

contracting goals, and (3) ensure that small business goals take into consideration actual small 

business capacity in relevant specialties. Requiring higher-and-higher agency small business 

utilization goals will not result in stronger small businesses. Instead, agencies should focus on 

monitoring current small business work to discourage fraud yet ensure that legitimate small 

businesses are not excluded from competition. Counting all small business participation, at all 

contracting tiers, will provide a more accurate picture of small business usage and not force 

small businesses to bid on contracts that far exceed the relevant small business size standard. 

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AGC believes these reforms will encourage the development of successful and enduring small 

construction businesses. AGe believes that this should be the goal of all small business 

programs. In addition, we strongly believe that agencies need knowledgeable procurement 

officers to navigate the complexity of the construction process and to ensure success in aU 

aspects of procurement and project delivery. In the end, supporting small businesses is the 

responsibility of all industries, and the government should not rely on meeting arbitrary goals at 

the expense of a few industries that already do a good job of supporting small businesses. 

We believe this market offers tremendous opportunities for both construction contractors and the 

federal government. AGC looks forward to continue working with the Subcommittee and the full 

Committee on these critically important issues. 

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Testimony of 

Miguel Galarza 

President of Verba Buena Engineering & Construction, Inc. 

Before the 

United States House of Representatives 

House Committee on Small Business 

Hearing on 

Construction Contracting and the Barriers 

Preventing Effective Small Business Participation. 

February 9,2012 
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Testimony of Miguel Galarza, President ofYerba Buena Engineering & Construction, Inc. 

Before the United States House of Representatives House Committee on Small Business 

Construction Contracting and the Barriers, Preventing Effective Small Business Participation. 

February 9, 2012 

Good morning Chairman Mulvaney, Ranking Member Chu and member of the subcommittee. 

My name is Miguel Antonio Galarza and I am the President and Founder ofYerba Buena 

Engineering & Construction, Inc., headquartered in San Francisco, CA, with offices in Salt Lake 

City, UT. I have served as a State Director tor the Association of General Contractors in 

California and currently serve on the Board of Directors of ICA, also known as the Inner City 

Advisors. 

As a business owner who has risen over the past 30 years from working in the field as a 

tradesman to filling mid- and senior-level management roles as an employee to currently 

performing federal, state, and local construction contracts in (8) eight Western states as a prime 

contractor, I am honored to share my unique perspective on the barriers and challenges that face 

small and emerging businesses in the construction industry as they relate to bonding, 

subcontracting goals, and contract bundling. 

It is my hope to provide the insight your subcommittee needs to continue the dialog and develop 

a plan to enact meaningful change to subcontracting goals, contracts that are bundled, and the 

broadening and strengthening of current bonding availability and bond guaranty programs. 

Verba Buena Engineering was incorporated in Jan 2002 and shortly thereafter, in May of 2003, 

became 8(a) certified though the U.S. Small Business Administration. Additional certifications 

that were instrumental to our growth were our local City & County of San Francisco small 

business certification under the Human Rights Commission and our U.S. Small Business 

Administration HUBZone certification. Verba Buena Engineering & Construction, Inc., has been 

a recipient of21 ARRA-funded contracts over the past 3 years, contributing to our 30% growth 

over that time period. 
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Key to our success, besides the obligatory high standards of quality, safety, and pricing, was the 

experience I gained from working in the field and for other smaIl8(a) firms as an estimator and 

project manager. 

My 10-year "apprenticeship" of working for other small, disadvantaged businesses served as a 

proving ground, honing my negotiation skills, engineering knowledge, and, most of all, my 

operational knowledge of bonding and banking that would be required to play in the game of 

federal prime contractor. Unfortunately, far too many tradespeople believe that simply being a 

good craftsperson and providing value to your clients is all you need to be successful. Sadly, this 

idealistic approach to the federal procurement arena leaves a business owner confused, 

overwhelmed, and intimidated. 

Since our inception in 2002, Verba Buena Engineering & Construction, Inc., has completed 

hundreds of projects from Hawaii to North Dakota, with contract revenue in excess of$112 

million in the past 10 years. Ninety-five percent ofthose projects required us to provide bonding. 

This growth was accomplished by having the opportunity to find and compete for small projects, 

growing to larger projects, slowly building our bonding capacity, our cash flow reserves, and our 

capable personnel to construct the work. This cannot not be accomplished if contract 

opportunities are bundled for the ease and time saving gained by the contracting community. 

While all contract bundling cannot be avoided, what can be done is to put teeth into the 

subcontracting plans required by large businesses. Under FAR Subpart 19.7-The Small 

Business Subcontracting Programl

; the statute requires a "good faith" effort to maximize 

opportunities for small business. But to the small business community, "good faith" really means 

"no faith at all." Only by setting mandatory goals for small business inclusion, coupled with 

serious and real penalties for failing to achieve these goals, can Congress guarantee small firms 

an opportunity to build capacity and grow their companies, in spite of bundled contract 

procurement. 

This concept is not new and unproven. The State of California, for example, has a mandatory 

Disadvantaged Veteran Business Enterprise (DVBE) goal of 5 percent on all State-funded 

construction contracts and a Disadvantaged Business Enterprise (DBE) goal of 13.5 percent on 
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its federally funded projects2

. These goals are the minimum standards; contractors who choose to 

do business in California understand that not meeting these goals is not an option. The same can 

be said for the City and County of San Francisco. Under the direction of the Human Rights 

Commission, all construction contracts are subject to mandatory minimum goals, established by 

market research. A copy of the report for the last quarter (provided with my written testimony) 

clearly shows that citywide through all its various agencies, San Francisco is on the leading edge 

of creating and maximizing the opportunities for local business enterprises. This highlights that 

with a combination of commitment and strong enforcement, the small business community can 

be included in major procurement programs. Again, the goal here is to provide the contractors 

that have limited and growing bonding capacity an opportunity to grow their firms to the next 

level. HRC quarterly report 20101201 P 

This growth in bonding capacity is uniquely supported by the City of San Francisco Surety Bond 

program. The following are the highlights of this program locally in San Francisco and 

statewide. The City & County of San Francisco bonding assistance programs are demonstration 

models that have proven that providing direct and locally delivered bonding support can reduce 

the bonding barrier and enable contractors to participate and perform with exceptionally low risk. 

Since their implementation, these programs have enabled minority and small contractors to 

secure bonds to bid on $564 million in public contracts and $176 million in final contract 

awards. They have garnered $11.4 million in owner cost savings from low-bid program 

contractors. There has been only one default in 15 years with a program loss ratio of .02% (two 

tenths of one percent) of program-pledged collateral of $31.3 million. 

These results have been achieved with low levels of collateral (average 30%, never exceeding 

40%) and use of effective risk management strategies applied through completion of the contract 

by maintaining an engagement [unclear] of the program contractor, project manager, and project 

owner throughout. 

These programs prove that the removal of impediments and barriers, enabling more contractors 

to compete, save contracting dollars while achieving the goals of inclusion and stimulating local 

economic growth by retaining more local public contracting dollars and employing local 

workers. Meriwether & Williams Presentation4

• 
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I would like to share my personal beliefs and opinion on the current status of the U.S. Small 

Business Administration and its current and future funding requirements, as well as current 

developments happening at the Department of Commerce and MBDA. 

Only by investing in the future of small business can we as a nation continue to grow. 

Construction as an industry is uniquely positioned to lead in this resurgence. Why? 

• Construction cannot be exported. 

• The products used in construction are manufactured in the United States, creating jobs on 

the supply chain locally and nationwide. 

• Construction projects create provide solid living wages for tradespeople. 

Hence, when funding to SBA is reduced, the opportunity for small business to learn the ins and 

outs of federal procurement 101 is greatly reduced. SBA is current understaffed and overworked. 

Great care must be exercised if and when the Department of Commence mission is changed and 

the small business technical training ofMBDA is moved or considered for elimination. The 

importance of trained and qualified personnel who are in the business of ensuring small business 

program participation is highlighted by the recently passed FAA reauthorization. It contains a 

provision for mandatory training of FAA procurement personnel in the procedures of having and 

achieving a successful small business project. 

On the one hand, I'm pleased to see that an agency the size of FAA recognizes that it lacks the 

expertise to develop and run a small business project. Still, I'm disappointed that the U.S. Small 

Business Administration has existed since 1953, and more than 50 years later, we are still trying 

to figure out how to train personnel to develop a program that works. 

Thank you for the opportunity to share with you my experiences. I am proof that small business 

can succeed and prosper. I would like to thank the committee for the excellent work to date and 

encourage the committee to continue to fight for small business. We need you support. 
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References 

1 Subpart 19. 7 -The Small Business Subcontracting Program. (n.d.). www.acquisition.gov. 

Retrieved February 7, 2012, from IcurrentihtmllSubpart%20 19_7 .htrnl 

2 Offices of Business and Economic Opportunity. (n.d.). California Department of 

Transportation ... Retrieved February 8,2012, from http://www.dot.ca.govlhqlbep/ 

~uman Rights Commission: Policy Division. (n.d.). Human Rights Commission: Home. 

Retrieved February 7, 2012, from http://www.sf-hrc.org/index.aspx?page=6 

4Meriwether & Williams Presentation on; Bonding assistance programs. PPT 2012 
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u.s SMALL BUSINESS ADMINISTRATION 

VVASfITNGTON,D.C.20416 

TESTIMONY OF 

JEANNE A. HULIT 

ACTING ASSOCIATE ADMINISTRATOR 

OFFICE OF CAPITAL ACCESS 

U.S. SMALL BUSINESS ADMINISTRATION 

BEFORETBE 

SUBCOMMITTEE ON CONTRACTING AND WORKFORCE 

HOUSE COMMITTEE ON SMALL BUSINESS 

U.S. HOUSE OF REPRESENTATIVES 

"CONSTRUCTION CONTRACTlNG: BARRIERS FOR SMALL BUSINESS CONTRACTORS" 

FEBRUARY 9, 2012 

Thank you Chainuan Mulvaney, Ranking Member Chu and members of the 

Subcommittee. I am pleased to be testifying before you today on the topic of surety 

bonds. 

The U.S. Small Business Administration (SBA) Surety Bond Guarantee program was 

established in 1971 to help small businesses obtain the surety bonds that are often 

required as a condition for award of a construction contract or subcontract. As you know, 

the Federal government requires a surety bond on any construction contract valued at 

$150,000 dollars or more. Surety bonds are also required on many State, local 

government and commercial contracts and subcontracts. 

In our surety bond program, SBA guarantees bid, perfonuance and payment bonds for 

eligible small businesses that cannot obtain surety bonds through the conventional surety 

market. SBA's guarantee gives surety companies an incentive to provide bonding for 

small business contractors who they might otherwise perceive as too risky to bond 

without an SBA-guarantee. These bonds help small and emerging finus gain access to 

contracting opportunities in the commercial and government markets. 

As many of you know, when the economic downturn occurred a few years ago, 

construction was one of the hardest hit sectors. In spite of the downturn, however, the 

SBA bond guarantee volume grew every year over the past five years. We also saw an 

increase in the number of participating surety companies and agents. When Congress 

passed the American Recovery and Reinvestment Act in February of 2009, SBA was 

given the authority to temporarily increase the surety bond contract ceiling to $5 million 

dollars. 
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This change was well received by the surety industry and the small business community, 

and we noticed a significant uptick in bond volume. The Recovery Act infused new life 

into the surety bond program as seen by the increase in program activity in fiscal year 

2010. The total number of bonds guaranteed in that year represented a 36% increase over 

the previous fiscal year. In fiscal year 2010, SBA guaranteed a total of 8,348 bonds 

representing a contract value contract value of$4 billion dollars. 

Building on that success, SBA has continued to make outreach and awareness of the 

surety bond program a priority. We have been working closely with our local district 

offices and industry partners to let small businesses know how they can take advantage of 

our program. 

We have also been listening closely to our industry partners and small businesses on how 

we can make the program better and more accessible to a greater number of firms. 

Recently, we developed an automated tool to complement the electronic bond guarantee 

application, which we implemented a few years ago. Surety companies, agents, and 

small businesses, can now upload a variety of underwriting documents and transmit them 

electronically to our field offices. This helps make the processing time faster and reduces 

compliance costs. 

This week, we will be publishing a proposed rule that will adopt a streamlined 

application process for any bond guarantee on a contract valued up to $250,000. This 

new "Quick Application" process will reduce paperwork requirements for smaller 

contracts. As a result, small businesses and surety agents will navigate the bond 

application process more easily and the cycle time between application and approval will 

be compressed. 

But we are not stopping there. In addition, like every other agency in the Administration, 

SBA has been tasked with undertaking a full review of our current regulations. In 

response to industry concerns that certain requirements imposed on surety companies are 

no longer consistent with industry best practices, our office is trying to update, 

streamline, and simplify the surety bond regulations. 

We look forward to working closely with you and your staff on each of those initiatives. 

I appreciate the opportunity to testify before you today and I welcome any questions. 

Thank you. 

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U.S. ARMY CORPS OF ENGINEERS 

DEPARTMENT OF THE ARMY 

TESTIMONY OF 

JAMES C. DALTON, P.E. 

CHIEF, ENGINEERING AND CONSTRUCTION 

U.S. ARMY CORPS OF ENGINEERS 

BEFORE THE 

COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON CONTRACTING AND WORKFORCE 

UNITED STATES HOUSE OF REPRESENTATIVES 

ON 

CONSTRUCTION CONTRACTING AND THE BARRIERS THAT OFTEN 

PREVENT SMALL BUSINESSES FROM EFFECTIVELY 

PARTICIPATING ON CONSTRUCTION PROJECTS 

February 9,2012 

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Mr. Chairman and Members of the Subcommittee, I am James Dalton, Chief of 

Engineering and Construction for the U.S. Army Corps of Engineers (Corps). I provide 

engineering and construction leadership to nine divisions, 45 districts, and guide the 

development of engineering and construction policy for our world-wide Civil Works and 

Military Programs missions. Thank you for the opportunity to testify today to discuss 

construction contracting and barriers to small business participation. 

The Corps fully recognizes the value that small businesses bring to our national 

economy, and is committed to using small businesses in performing our work. We use 

Small, Small-Disadvantaged, Women-Owned, HUBZone, Veteran-Owned, and ServiceDisabled Veteran Owned firms to the maximum extent possible, and typically, each year 

the Corps of Engineers awards 40 percent or more of its prime contract dollars to small 

businesses. 

My testimony will address the Corps successes and challenges with helping small 

businesses obtain construction contract awards. I will also discuss local job creation, 

Miller Act surety bonding, contract payments, subcontracting credit, contract bundling, 

and the use of sealed bid versus negotiated procedures. 

Small Business Construction Contract Awards 

The Corps relies on small businesses to help us meet our military and civil works 

missions around the world. However, the Corps sees small businesses impacted by 

their internal challenges and barriers to being awarded construction contracts. I will 

discuss some of these barriers today. The Corps is committed to the continued success 

of its small business program. 

During Fiscal Year (FY) 2011, the Corps had an overall prime contract small business 

goal of 35 percent. The Corps exceeded its small business contracting goal by 

awarding over 42 percent of all prime contract dollars to small businesses for a total of 

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over $8 billion. Of this $8 billion, we awarded approximately $3.3 billion directly to small 

businesses for construction projects. 

The Corps consistently looks for ways to improve processes and minimize barriers to 

help small businesses compete for contracts. One simple yet significant improvement is 

increasing the visibility of our pending procurements through early acquisition 

forecasting. Small businesses need time to prepare proposals and develop teams for 

major procurement opportunities. Procurement forecasts are critical tools that small 

businesses use to plan early and position themselves for success. We are providing 

early forecasts on our websites, at industry events, and via email for inquiring small 

businesses. Our small business advocates, contracting chiefs, and small business 

leaders meet no less than quarterly to discuss forecasts and opportunities for setting 

aside projects for small businesses. 

The Corps is actively evaluating small business participation in construction source 

selections exceeding $1.5 million, in accordance with FAR Subpart 15.304 and the 000 

Source Selection Procedures. These procedures allow for proposals to be evaluated 

more favorably if prime offerors have binding agreements with small business 

subcontractors, and that meet or exceed the stated subcontracting goals of a particular 

procurement. The Small Business Jobs Act also assists in better enforcement of and 

actual use of the subcontractors stated and evaluated in the proposal. 

I would like to discuss some of the barriers internal to small businesses that the Corps 

has witnessed: 

Failure to Influence the Acquisition 

Small businesses often miss the opportunity to influence acquisitions when they fail to 

respond to "sources sought" synopses. These synopses are used by the Government 

to determine whether or not procurements should be solicited full and open, or on a 

restricted basis for small businesses only. 

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The Federal Acquisition Regulation (FAR) requires contracting officers to set-aside each 

procurement that is valued under $150,000 automatically and exclusively for small 

businesses unless the contracting officer determines there is not a reasonable 

expectation of obtaining offers from two or more responsible small business concerns 

that are competitive in terms of market prices, quality, and delivery. In addition, any 

procurement not set aside for small business is also coordinated with the Small 

Business Administration (SBA) Procurement Center Representative (PCR) that is 

assigned to that facility. In those instances where procurements cannot be set aside, 

our small business advocate works with the SBA PCRs to maximize subcontracting 

opportunities for small businesses. 

For procurements over $150,000, Corps small business advocates sit side-by-side with 

Contracting Officers and Program Managers to determine if there is a reasonable 

expectation that two or more responsible small businesses will submit an offer at a fair 

market price. This is referred to as the "Rule of Two." When market research validates 

small business capability, contracting officers are required to set-aside acquisitions over 

$150,000 for small businesses. 

Market research to validate the "Rule of Two" is done through a variety of methods, but 

the most effective method is a sources sought synopsis on the Federal Business 

Opportunities web page. The purpose of the "sources sought" synopsis is to request 

information about the capability of small business firms. Typically, the synopsis requires 

small businesses to respond to a handful of questions and provide information about 

their technical capabilities and experience. Small businesses have a set number of 

days to respond. When two or more capable firms are identified, the FAR requires the 

solicitation to be set-aside exclusively for small businesses. However, small business 

advocates cannot recommend setting solicitations aSide exclusively for small 

businesses if market research does not validate small business capability and interest. 

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Many small businesses focus their efforts on marketing face-to-face at outreach events 

and meetings with contracting officials and program managers without targeting a 

specific acquisition. There is significant value in face-to-face relationship building 

techniques. However, this is ineffective in actually winning contract awards. The most 

important and effective marketing technique is responding to the "sources sought" 

synopsis for upcoming solicitations. 

Many small businesses are simply unaware of the significance of a "sources sought" 

synopsis, and this creates a barrier for getting the work set-aside exclusively for small 

business competition. Some small businesses consider the nature of sources sought 

synopsis to mean that it is too late to market for and participate in a particular 

procurement. Some are hesitant to respond, concerned that their technology or solution 

would be included in the final version of the solicitation and made available for other 

competitors to learn of a perceived competitive advantage. These concerns are 

unfounded. A sources sought synopsis does not seek an offer or bid and does not 

solicit proprietary information. Rather, it is a way for contracting officers to perform 

market research, verify requirements, validate an approach to a solution (e.g. 

subcontracting goals), ensure industry interest and capability, and ensure competition. 

Small businesses miss the opportunity to influence the acquisition strategy when they 

fail to respond to sources sought synopsis. Of course small businesses may bid or 

propose on acquisitions that are not set-side exclusively for small businesses, but the 

potential for success is maximized when the procurements are set-aside for small 

business competition only. Small businesses must look for these opportunities on the 

Federal Business Opportunities website, determine if they have the experience and 

financial capability to handle the work, and then target their marketing efforts directly for 

specific procurements. 

Failure to Focus on Technical Capability 

Small businesses experience barriers to competing when their marketing is focused on 

their small business certification instead of their capability. Effectively marketing their 

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capabilities is key to influencing the acquisition. Small businesses must be diligent 

about pursuing work that aligns with their experience, past performance, and financial 

capability, and market those capabilities. Our customers expect us to minimize risks to 

their projects by making contract awards to the most experienced, capable, and 

financially sound firms. For negotiated procurements, evaluation teams weigh 

proposals for the optimum mix of experience, capability and financial soundness that 

result in contract award to the offeror deemed most capable of delivering a project on 

schedule and on budget for either best value or lowest price technically acceptable 

requirements. Having 8(a) and other small business designations is definitely an 

advantage, but it never takes precedence over demonstrated capability to perform. 

Inexperience with Responding to Solicitations 

Small businesses experience barriers when they do not take advantage of the many 

organizations dedicated to teaching small businesses how to navigate the federal 

procurement process. Firms must clearly understand what is required in the solicitation 

in order to respond in the correct format and with a winning solution. Organizations like 

Service Corps of Retired Executives (SCORE), Procurement Technical Assistance 

Centers (PTAC), and Minority Business Development Centers (MBDC) walk small 

businesses through the procurement process through training and mentoring. It is 

imperative that small firms that have yet to receive their first federal contract connect 

with these agencies to help focus their efforts in a way that would more likely result in 

contract awards. Many of these services are provided at no-cost to small businesses. 

For negotiated procurements, small businesses must look for ways to make their 

proposal stand out by applying creative ideas to express capability and technical 

strength. One possible technique used by proposal teams is to have a separate team 

review the proposal against the solicitation requirements prior to submission, or for 

teams from very small companies to have individuals review elements of proposals 

written by others on the team. Review teams can increase the potential for success, 

because they objectively review whether or not the proposal effectively responds to the 

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Government's needs. Small businesses must keep in mind the Government's right to 

award without negotiations and discussions, even in negotiated procurements, so it is 

very important that the initial proposal represents the best possible technical proposal at 

the best possible price - there may not be an opportunity to submit a revision. 

Small businesses can also learn to minimize the barriers related to mistakes and 

incomplete proposal submission through debriefings. Unsuccessful offerors should 

consistently request proposal debriefings. Offerors may request a debriefing to discuss 

the evaluation of their proposal in comparison with the requirements of the solicitation. 

The debriefing can provide critical information necessary to improve future proposal 

submissions. 

The Corps Commitment to Minimizing Barriers for Small Businesses 

Across the Corps, we are successful in helping to minimize barriers for small 

businesses, and our success is reflected in our small business program achievements. 

We will continue to commit to educating small businesses on how to influence 

acquisition strategies by responding to sources sought synopsis; the importance of 

focusing on technical capability, past performance, and experience; and the value of 

taking advantage of organizations that provide more in-depth counseling and training on 

how to navigate the federal procurement process and how to effectively respond to 

requests for proposals. 

In FY2010, there were 42 protests lodged with the Government Accountability Office 

(GAO) against Corps construction project solicitations. In FY2011, protests to GAO for 

construction projects totaled 36. The Corps Small Business Office initiatives for FY2012 

include analyzing the various small business related protests to determine if there are 

systemic issues relative to how we do business with small firms. Procedures will be 

reconsidered as we analyze the protests and the impacts on our procurements and the 

small business industry. 

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Local Job Creation 

The nature of construction contracting fosters the participation of local subcontractors to 

execute the majority of the construction in most projects. The added expense to bring 

in non-local subcontracting teams, when local capability exists, adds unnecessary 

expense and significantly reduces overall profit to the prime contractor. Prime 

contractors generally must self perform 15 percent of the work, with up to 85 percent 

allowed to be subcontracted to local, regional. or national firms, who in turn rely 

predominately on the local labor market to provide both skilled and unskilled labor. It is 

common practice for prime contractors to hire local labor obtained through union hiring 

halls or local employment agencies. 

Miller Act Surety Bonding 

Pursuant. to the Miller Act as implemented by Regulation, before a construction 

contractor is allowed to start work on a contract of more than $150,000, it generally 

must furnish performance and payment bonds. A performance bond with a surety 

satisfactory to the contracting officer is required in an amount the contracting officer 

considers adequate for the protection of the Government. Generally the penal amount 

of the bond is 100 percent of the contract price. A payment bond is also required for the 

protection of all persons supplying labor and material. The amount of the payment bond 

is the same as the amount of the performance bond. 

For contracts exceeding $30,000 but not exceeding $150,000, alternative payment 

protection (e.g. irrevocable letter of credit) may be provided in the amount of the 

contract price. 

The Corps complies with the Miller Act as implemented by the Federal Acquisition 

Regulation (FAR). Performance and Payment Bonds are required on the vast majority 

of all construction requirements in excess of $150,000 prior to the issuance of a Notice 

to Proceed. 

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Sureties make money through volume, not by taking risks. Solid relationships with 

sureties and brokers remain the key to any construction companies attempting to obtain 

bonds. It is important for contractors to sell the job, sell the risk, sell the rational for the 

pursuit, and the credibility of ~e construction company. 

A limited amount of financial firms in the surety market could present barriers for small 

businesses. The surety market is effectively controlled by fewer than a dozen 

companies (fewer for environmental contracting). This limited presence of market 

providers present small companies with financial challenges, such as bonding 

availability, pricing and risk evaluation. 

Contract Payments 

The Corps is proud of its payment record, with 98.5 percent of all payments made timely 

in FY2010 and FY2011. 

Corps construction contracts require certification from the prime contractor that it has 

paid its subcontractors from prior invoices and will pay its subcontractors from current 

invoices upon submission of a "proper invoice". Construction contractors generally 

invoice monthly and the Corps is required to make progress payment within 14 days of 

receipt of a proper invoice. Prime contractors are required to include prompt payment 

flow down provisions in subcontract agreements with subcontractors and suppliers at all 

tiers. Each subcontractor and material supplier at the first tier is required to be paid 

within seven days of receipt of payment from the Government or 21 days after receipt of 

a proper invoice by the Government. Second and third tier subcontractors are required 

to receive payment within seven days of receipt of payment from the next higher tier 

contractor. 

The Government's privity of contract is with the prime contractor. In general, any 

payment dispute between a prime contractor and its subcontractors is handled privately 

and in accordance with the terms and conditions of that subcontract. However, there 

are some measures and provisions provided within the FAR to assist subcontractors' 

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timely receipt of payment. These include interest penalties for late payment, 

requirements to provide subcontractors the prime contractor's bonding company contact 

information, and the prospect of less than satisfactory performance evaluations of the 

prime contractor by the Contracting Officer. 

Late progress payments could present a barrier for any business in terms of cash flow. 

However, the most common reason for delayed progress payments to the prime 

contractor and therefore its subcontractors is the failure by the prime contractor or its 

subcontractors to submit a proper invoice. Generally, defective invoices are the result 

of the lack of a valid prompt payment certification, failure to submit an approved 

schedule and failure to submit certified payrolls. The most common reasons the Corps 

makes payment but retains up to 10 percent of the earnings from the prime contractor 

are deficient construction or failing to make sufficient progress in accordance with Ihe 

approved schedule. 

Subcontracting Credit 

The Corps' prime contractors have a high performance level in the award of 

subcontracts 10 small businesses. Our FY2011 dala from the Electronic Subcontracting 

Reporting System (eSRS) reflects that Corps prime contractors awarded over 63 

percent of all subcontracted dollars to small businesses. Our subcontracting goal for 

FY2011 was 50 percent, and our prime contractors exceeded this goal by an impressive 

13 percent. Based on current regulations, prime contractors report subcontracting 

achievement on first tier subcontractors. 

Contract Bundling 

Small businesses have not encountered barriers due to bundling of Corps contracts. 

The Corps did not bundle any contracts for FY201 0 and FY2011. Within the federal 

government, there is a clear distinction between the terms bundling and consolidation 

when applied to contracting. For construction projects, we secure approval from the 

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Head of Contracting Activity to consolidate construction projects on a limited basis only 

when determined and found to be in the overall best interests of the Government. 

Army construction acquisition strategies may sometimes necessitate the need to 

consolidate projects into one solicitation. The Corps conducts market research to 

determine the best acquisition approach examining labor markets, the availability of 

supplier pools, economic forecasts, project complexity, and bonding requirements. 

After our market research indicates that consolidation is warranted, the Corps links 

suppliers to requirements with maximum consideration given to opportunities for small 

businesses. This includes consideration of fiduciary responsibilities to ensure proper 

stewardship of tax payer dollars and compliance with statutory and regulatory 

requirements to minimize the impact on small businesses. 

Use of Sealed Bid versus Negotiated Procedures 

When contracting by negotiation, the Corps has the flexibility to establish source 

selection criteria other than price. This gives the Corps the opportunity to select the 

contractor that is best qualified to meet a project's unique technical, schedule and 

budget performance requirements considering factors in addition to price. With sealed 

bids, we must select the lowest priced responsive bid from a responsible bidder. 

Sealed bid is the least used method for construction contracting, because it does not 

provide an opportunity to negotiate with the offeror. 

Overall sealed bid procedures were used by the Corps to award 2,649 contracts valued 

at $1.8 billion during FY2010 with preponderance of awards for FY2010 conducted 

using negotiated procurement procedures with 19,240 contracts awarded that totaled 

$15.6 billion. 

This trend of a higher volume awards using negotiated procurement procedures 

continued during FY2011 with 20,939 negotiated contracts awarded valued at $11.4 

billion in comparison with 2,821 sealed bid procurements valued at $1.5 billion. 

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The same conclusions can be drawn from awards made to small business during FY 

2010 and FY2011. During FY2010, the Corps awarded 1,776 sealed bid construction 

contracts to small businesses totaling $767 million and 8,000 negotiated construction 

contracts valued at $3.8 billion. In FY2011, the Corps awarded 1,854 sealed bid 

construction contracts to small businesses valued at $363 million and 8,684 negotiated 

contracts valued at $2.9 billion. 

Table illustrating sealed bid versus negotiated contract data stated above is as follows: 

During negotiated procurements, the Corps encourages offerors to submit their best 

offer at the outset. The Corps source selection criteria require offerors to describe past 

experience and past performance in constructing similar projects. Once award is made, 

The Corps expects the key subcontractors identified in the proposal to be awarded 

subcontracts. Subcontracting plans are required when awards are made to other than 

small businesses demonstrating how subcontracting goals will be achieved. 

Contractors who request a change in proposed subcontractors after award must receive 

approval to do so from the contracting officer. 

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The Corps has experienced improved technical and schedule performance with 

negotiated procurements compared to sealed bidding because the contracting officer's 

award determination is based on best value through the consideration of factors such as 

technical, performance and small business participation, rather than solely on price. 

Negotiated procurements are more frequently used when the Corps defines projects in 

terms of performance expectations. In these cases industry is responsible for design 

and construction. 

The Corps employs sealed bidding to a greater extent on Civil Works projects because 

of the nature of this work, which generally have no characteristics that can be used as 

discriminators. On prescriptive projects such as dredging, earthwork and mass 

concrete there is no benefit to the Government to attempt to establish source selection 

discriminators other than price. Many of our heavy/highway industry partners prefer 

sealed bidding over negotiated procurements for these type projects due to the 

transparency of the process and ease and simplicity of submitting a bid and making an 

award. 

Sealed bidding is a common procurement method when our requirements are 

prescriptive and we issue fully detailed plans and speCifications which the industry can 

easily price. This Design-Bid-Build strategy tends to result in more claims and changes 

and can be more adversarial than the Design-Build delivery system. In a Design-BidBuild procurement, the Government effectively warrants its prescriptive design to be 

free of defects. Therefore any errors and omissions in the plans and specifications give 

rise to requests for equitable adjustment from the contractor. Because the prime 

contractor generally self-performs a small percentage of the overall work, the 

preponderance of change requests come from subcontractors at all tiers to the prime. 

This can result in acrimonious relationships between the prime and its subcontractors 

particularly when the prime must pass-through the request to the Corps. Furthermore, 

since we have no privity of contract with subcontractors, we have no way of knowing 

what the exact scope and terms and conditions of the subcontracts are, what scopes of 

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work are missing from the subcontractors' contracts, and what the exact nature of any 

disputes are between the prime contractor and its subcontractors. 

The quality of the end product is affected by many factors, not just the use of negotiated 

or seal bid procedures. A sealed bid, based on fully developed prescriptive plans and 

specifications, can result in a very high quality end product and generally is the result of 

the project being well defined. 

A negotiated procurement for a project articulated in terms of performance with a 

prescribed cost ceiling and prescribed (short) performance period may result in an end 

product that appears to be of "lower" quality. For example, the structural systems and 

finishes selected by the Design-Build contractor may be more consistent with 

commercial practices. However, the end product may exactly comply with the 

contractual technical and quality performance criteria articulated in the solicitation and 

as desired by the customer. 

Mr. Chairman, this concludes my statement. Thank you again for allowing me to be 

here today to discuss the Corps small business construction contracting. I would be 

happy to answer any questions you or other Members may have. 

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u.s. General Services 

Administration 

William Guerin 

Public Buildings Service 

Assistant Commissioner 

Office of Construction Programs 

Committee on Small Business 

Subcommittee on Contracting and Workforce 

February 9, 2012 
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Good morning Chairman Mulvaney, Ranking Member Chu, and members of the 

Subcommittee. My name is Bill Guerin, and I am the Assistant Commissioner for the Office 

of Construction Programs at the U.S. General Services Administration's (GSA) Public 

Buildings Service (PBS). Thank you for this opportunity to appear before you today to 

discuss how we pursue construction projects, the challenges and opportunities that exist 

within this process for small businesses, and our successes in meeting our small business 

goals. 

GSA recognizes and values the importance small businesses play in our ability to help 

agencies meet their needs. We know that small businesses help drive our national 

economy and bring new and innovative solutions to Government challenges, which is why 

we strive to include small businesses in our acquisitions. In FY 2011, GSA awarded 41 

percent of all contract dollars to small businesses. 

Within GSA, PBS is primarily responsible for the Federal Government's civilian real 

property inventory. While we provide a variety of services for other Federal agencies, I 

want to focus today on PBS's new construction and repair and alterations projects within 

our owned inventory. Last year alone, PBS obligated more than one billion dollars to small 

businesses. We understand that a strong and successful small business community is 

integral to job creation, community empowerment, and economic revitalization for our 

nation. 

How PBS Pursues Federal Construction 

As with any major real estate organization, public or private, PBS pursues a robust asset 

management program that strives to make the proper investments in our inventory to 

maintain a portfolio of sustainable and well-performing assets to meet the long-term needs 

of Federal agencies. 

The investments we make in our public buildings help to stimulate and retain job growth in 

the construction and real estate sectors, reduce energy consumption, improve the 

environmental performance of our inventory, reduce our backlog of repairs and alterations, 

and increase the value of our assets. 

With appropriations, PBS has requested, on average, $682 million in constructing new 

facilities over the last five years. Over this same time period, PBS has requested on 

average $713 million for reinvestment to maintain our inventory of over 1,500 owned 

buildings, which have an average age of 47 years. Approximately 52 percent of these 

reinvestment dollars fund major modernization projects, while the remaining 48 percent 

fund the necessary minor repair and alterations needed to perform interior fit-outs to keep 

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our vacancy rates at an enviable low level, maintain the health and safety of building 

occupants, and provide the funds necessary to deal with minor emergencies and other 

needs that arise in the day-to-day operations of GSA's building inventory. 

Procuring Construction Services 

As real estate experts, PBS procures construction goods and services at the best value for 

the Government on behalf of the American taxpayer. PBS uses proven selection 

procedures that enable us to award contracts to deserving competitors who can offer the 

Government the best overall value. 

GSA separately evaluates both the technical qualifications and the price of each proposal 

we receive. The merit of a technical proposal is reviewed on a variety of factors, including 

past performance and price, technical excellence, personnel qualifications, and experience 

with similar projects. On large construction projects that exceed $1.5 million, GSA must 

evaluate a small business subcontracting plan in relation to the small business goals set 

for the project in the solicitation. These goals usually reflect GSA's small business goals 

for the fiscal year. This project plan represents a good faith commitment on the part of the 

contractor to ensure that small and disadvantaged subcontractors participate in the 

construction of every GSA project. 

Small Business Opportunities within GSA 

GSA understands the value of small businesses to our economy, and advocates for the 

participation of small businesses 1

, including small disadvantaged, women-owned, 

HUBZone, veteran, and service-disabled veteran-owned small businesses, in its 

procurement process at both the prime and subcontracting levels. 

GSA has aggressive goals for small business participation in our acquisitions. These goals 

are based on our forecast of requirements and associated contracting actions for the next 

fiscal year. GSA's small business contracting goal for FY 2011 was 27 percent of all 

contract dollars obligated. In FY 2011, GSA awarded 41 percent of all contract dollars to 

small businesses. PBS obligated more than $1.05 billion, or approximately 39 percent of 

eligible dollars, to small businesses. 

1 The small business size standard for General Construction is $33.5 million average annual gross receipts over the last 

three years, For Specialty Trade Contractors the size standard is $14 million average annual gross receipts, If a procurement is set-aside for small business then the prime contractor must perfonn at least 15 percent of the cost of the 

contract, not including the cost of materials, with its own employees for general construction and at least 25 percent of 

the cost of the contract, not including the cost of materials, with its own employees for specialty trade contracts, 

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PBS's prime contractors continue this high level of small business participation in their 

subcontracting awards. In FY 2011, PBS contractors awarded more than 46 percent of all 

subcontracted dollars to small businesses. 2 

There are two main ways in which GSA provides small business opportunities in our 

construction projects: small business set-asides for prime contractors on our minor repair 

and alteration projects and smaller capital program projects, and as subcontractors on our 

major modernization and new construction projects. 

Minor Repair and Construction Projects - In FY 2011, the majority of PBS's construction 

contracting opportunities were awarded from our minor repair and alteration funding. GSA 

historically requests, on average, $340 million for minor repairs to maintain our buildings 

and take care of emergency work that arises during day-to-day operations. These minor 

repair projects total less than $2.79 million and, for that reason, provide a perfect venue fOI 

small businesses. 

For example, W.P. Mahon, a woman-owned, section 8(a) general contracting and roofing 

firm based out of Delaware, helped PBS replace and make significant roof repairs on the 

historic Mitchell H. Cohen U.S. Courthouse and Post Office in Camden, New Jersey. This 

project was a success due to Mahon's dedication and ability to work through inclement 

weather, without disrupting the tenants occupying the building. Mahon showed trernendoui 

flexibility in expertly installing vacuum-insulated panels even though they had no prior 

experience with these products. This is a prime example of the types.of projects we are 

privileged to award to small businesses. 

Another one of PBS's small business success stories involves a small firm from Erlanger, 

Kentucky. This firm, Century Construction, installed 300 security bollards at the historic 

Gene Snyder Federal U.S. Courthouse in Louisville. The project completed by Century 

helped resolve a four-year old building security deficiency on this complex project. Centul) 

Construction finished on-schedule and on-budget without any disruptions to building 

operations. 

Major Construction and Modernization Projects - Small businesses also have many 

opportunities to work on large GSA modernization and new construction projects, primaril~ 

as subcontractors. 

Typically, small businesses may have difficulty obtaining prime contract awards in major 

construction as a result of bonding limitations. The Small Business Administration, 

however, assists by providing bonding assistance through their Surety Bond Guarantee 

2 Based on preliminary reporting through the Electronic Subcontracting Reporting System (eSRS): percentages are 

subject to change with final reporting. 

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Program for individual contracts of $2 million or less for small and emerging contractors 

who cannot obtain surety bonds through regular commercial channels. 

GSA strives to provide small businesses with prime contracting opportunities when 

possible. For example, PBS structured a $46 million Recovery Act project in St. Louis, 

Missouri at the Robert A. Young Federal Building for small business. GSA established 

three separate constructions projects and awarded the design to a small business 

architect-engineering firm who designed each project to ensure coordination and 

consistency. PBS awarded each of the three smaller projects to small businesses, which 

could not have competed for a single, larger project due to its size. 

PBS's prime contractors on our large projects exceeding $1.5 million must have small 

business plans and goals for these projects that are evaluated during the contract 

selection process. On these construction projects, we must evaluate a small business 

subcontracting plan in relation to the small business goals set for the project in the 

solicitation. 

The relationships between our prime contractors and small business subcontractors are 

working successfully at GSA. For example, a number of small businesses are assisting us 

at the Department of Homeland Security campus at St. Elizabeths in Washington, DC, the 

largest construction project since the Pentagon. Small businesses consist of approximately 

42 percent of the dollar value of all contracts at St. Elizabeths. Approximately 10 percent of 

those small businesses are 8(a) firms. These small businesses provide their expertise in 

more than 16 different types of work and field expertise. 

To further our achievements in subcontracting, GSA has a Mentor-Protege Program to 

assist our prime contractors in selecting small businesses in various fields, as well as 

helping to enhance small businesses' performance capabilities. This program allows 

smaller firms to team with our larger construction contractors to gain more direct 

experience in the construction field and make the tranSition to larger projects and 

contracts. We have more than 100 active agreements in place and expect even more in 

coming months. Protege participants have reported 41 new contracts won as a result of 

assistance received from Mentor firms, with a total value amounting to nearly $260 million. 

Additionally, we have seen an increase in subcontract awards to Proteges, which have 

reported 54 new subcontracts from Mentor firms. 

To increase the availability of information, GSA publicizes prime contractor contact 

information online and hosts partnering events that enable small businesses to present 

qualifications and develop relationships with our prime contractors. 

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Small Business Challenges 

We realize the importance and value small businesses bring to our agency and economy, 

and we track our large contracts to ensure our partners are meeting the commitments they 

made to GSA in their small business subcontracting plans, On major modernizations and 

new construction projects, our prime construction contractors directly issue subcontracts to 

other firms, As is common in construction, GSA's projects often involve many layers of 

subcontracting, These first-tier subcontractors issue further subcontracts to small 

businesses. The subcontracting plan clause requires that large business subcontracts that 

exceed $1.5 million include the same subcontracting requirements as the prime contractor. 

But we do not have the opportunity to similarly track compliance with second- and third-tier 

contracts, creating a challenge in ensuring the actual dollars awarded to small businesses 

are accurately reflected. 

Additionally, in the current budgetary environment, GSA has received very limited funds for 

large new construction and modernization projects. Indeed, in FY 2012, all of our repair 

and alteration funding will be used for minor projects, rather than major modernizations. 

Most of the contract opportunities, as mentioned previously, will be ideal for small 

businesses, 

Conclusion 

I am happy to be here today to discuss the success GSA has had in encouraging small 

business participation on our construction projects, both on the prime contract level and in 

subcontracting. While there are challenges in the current system, GSA has developed and 

will continue to develop new and innovative ways to promote small business participation 

in our construction projects, helping strengthen small business communities and foster 

partnerships both with GSA and with the broader construction community. 

Thank you for the opportunity to appear before you today and I welcome any questions 

you or other members of this Subcommittee have for me. 

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.. -

.. -

.. -

.. -

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SF LBE and SFPUC Certified Firms by M/W/OBE 

Category 

Certified LBE Firms 

1400 1200 

1000 

800 

600 

400 

200 

o 

Jul-l0 Jan-ll Apr-ll Jun-ll 

Minority Business Enterprises 522 521 524 535 

Other Business Enterprises 355 384 416 424 

Woman Business Enterprises 298 314 314 316 

Total 1175 1219 1254 1275 

SFPUC Certified LBE Firms 

Jul-l0 Jan-ll Apr-ll Jun-ll 

Minority Business Enterprises 43 62 

Other Business Enterprises 81 119 

Woman Business Enterprises 14 11 

Total 138 192 

Woman 

Enterpris

Other Bu

Enterpris

III! Minority 

Enterpris

77 

116 

11 

204 
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Airport 

Contracts 3rd Quarter FY 2010/11 

(5 Contracts - $9 M) 

... . 

. 

$!'j,265,!'j90 

aBE WBE 

- LBE prime contractor on 3 (or 60%

awarded contracts 

- 3 construction and 2 professiona

service contracts 

-1 micro set-aside contract awarde-1 contract with waived goals 

$10.0 

$9,0 $8,0 $7,0 $6,0 

$5,0 

$4,0 

$3,0 

$2,0 $1.0 $0,0 

lstQ 2nd Q 3rd Q

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1 

) contractor on 3 

1 

contract 

$600 

$500 $400 $300 1II lBE P

WI LBE S

$200 Non L

$1.0 $0,0 

1st QFY 2nd Q FY 3rd Q FY 

10/11 10/11 10/11 

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1 

contracts 

$10.0 

$8.0 

$6.0 

$4.0 

$2.0 

contractor on 7 

Non 

LBE 

Q 20dQ 3rd Q 

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m 

1 

) ·lBEs are contractors on 5 

awarded contracts 

-5 different lBE contractors utilize

-6 construction and 1 servi

contracts 

·lSE utilization 

HTWTP 

$200,0 $180,0 $160,0 $140,0 $120,0 

$100,0 

$80,0 

$60.0 $40,0 

$20,0 

$0,0 

lstQ lndQ 3rdQ 

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LBESub 

NOl1LSE 

Total $9,265,990 

"Contracts over 

-2 micro set 

are not 

contracts 

lstQ 2ndQ 3rdQ 

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1 

• lBE contractor on 1 (or 50%) of 

awarded contracts 

-2 contracts awarded were Marina West 

Harbor Renovation and Mission Clubhou

Rebuild 

-All contracts awarded were construction 

contracts 

-Zero micro set-aside contracts 

-A\/pr::'fJP lBE goal is 13% 

'"' c 

$25.0 $20.0 

$15.0 

$10.0 

$5.0 

$0.0 

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·PropQ for and 

from LBEs remained at 13% from FY 

Q from lBEs remain at 16% for the firs

three quarters of FY 

5 procurement categories 

• Common Diesel Parts 

Rail Vehicle 

Services 

• Electric Vehicle Parts 

• Labor 

-Top 5 Prop Q 

• PUC 

-MTA 

·OPH ·OPW 

'AIR 

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°HRC received 29 Chapter 148 waiver requests, 28 were ""

-Five largest request: 

-Port -PUC -PUC Sole Source 

-SFPD Goal 

-PUC $1.2M Sole Source 
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Telephone (202) 874-6850 

February 3, 2006 

SPECIAL INFORMATIONAL NOTICE TO ALL BOND-APPROVING 

(CONTRACTING) OFFICERS 

Important Information Regarding the Use of Individual Sureties on Federal Bonds 

Subchapter E, Part 28 of the Federal Acquisition Regulation (FAR) provides guidance as 

to the acceptability of sureties and other security for Federal bonds. Acceptable security 

on Federal bonds include, but are not limited to, both corporate and individual sureties. 

FAR § 28.201. Acceptable corporate sureties must appear on the Department of 

Treasury's Circular 570. Treasury's Financial Management Service, Surety Bond 

Branch (FMS), publishes Department Circular 570 in the Federal Register. 

Contracting officers determine the acceptability of individual sureties and ensure that the 

individual surety's pledged assets are sufficient to cover the bond obligation in 

accordance with the guidance outlined in the FAR § 28.203. 

Although FMS is not substantively responsible for approving individual sureties, we 

believe it prudent to issue this Special Informational Notice on a FYI basis to Agency 

Bond-Approving (Contracting) Officers who do have that responsibility under the FAR. 

Recently, FMS has been made aware of instances where individual sureties are 

listing corporate debenture notes and other questionable assets on their 

"Affidavit of Individual Surety", Standard Form 28. In some instances, the individual 

sureties used a form other than the Standard Form 28 as their affidavit. FAR § 

28.203(b) specifically requires the use of the Standard Form 28. In addition, FAR § 

28.203-2(a) states that "the Government will accept only cash, readily marketable 

assets, or irrevocable letters of credit from a federally insured financial institution 

from individual sureties to satisfy the underlying bond obligations." 

FAR § 28.203-2(b) includes examples of acceptable assets, such as: 

• cash, or certificates of deposit, or other cash equivalents with a federally insured 

financial institution 

• United State Government securities 

• stocks and bonds actively traded on a national U.S. security exchange 

• real property owned fee simple by the surety subject to certain conditions (refer to 

FAR 28.203-2(b)(4» 

• irrevocable letters of credit issued by a federally insured financial institution in the 

name of the contracting agency and which identify the agency and solicitation or 

contract number. 

Furthermore, FAR § 28.203-2(c) lists unacceptable assets, but indicates that the list is 

not all-inclusive. The following are listed as unacceptable assets: 

• notes or account receivable 

• foreign securities 
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• real property located outside the United States, its territories or possessions 

• real property used as the principal residence of the surety 

• real property owned concurrently 

• life estates, leasehold estates, or future interest in real property 

• personal property except as listed in FAR 28.203-2(b) 

• stocks and bonds of the individual surety in a controlled, affiliated or closely held 

concern of the offeror/contractor 

• corporate assets 

• speculative assets 

• letters of credit except as provided in FAR 28.203(b)(5) 

The FAR also requires that the Government be given a security interest in any 

acceptable assets pledged by an individual surety. FAR § 28.203-1(a). 

Prior to acceptance of an individual surety, FAR guidelines require contracting officers to 

obtain the opinion of their legal counsel as to the adequacy of the documentation 

pledging assets. FAR § 28.203(f). 

If you have any questions, please feel free to contact this office at the above number. 

Sincerely, 

ISignedl Rose Miller 

Rose Miller 

Manager 

Surety Bond Branch 
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SHEET METAL AND AIR CONDITIONING CONTRACTORS' NATIONAL ASSOCIATION 

February 9, 2012 

The Honorable Mick Mulvaney, Chair 

The Honorable Judy Chu, Ranking Member 

Subcommittee on Contracting and Workforce 

Committee on Small Business 

United States House of Representatives 

Washington, D.C. 20515 

Re: Feb. 9 Hearing -- Construction Contracting: Barriers to Small Business Participation 

Dear Chainnan Mulvaney and Ranking Member Chu: 

I am writing on behalf of the Sheet Metal and Air Conditioning Contractors' National Association 

(SMACNA). SMACNA is supported by more than 4,500 construction fInns supplying expertise in industrial, 

commercial, residential, architectural and specialty sheet metal and air conditioning construction throughout 

the United States. The majority ofthese contractors run small, family-owned businesses. We are grateful to 

the Committee for its willingness to examine and take action on public contracting matters affecting small 

businesses in such an unprecedented and comprehensive manner. Your efforts to enhance and facilitate the 

participation of small businesses in the federal marketplace are needed and welcome. Many of the proposed 

changes will strengthen the federal procurement process to the benefit ofthe government, the taxpayer and the 

small business contractor. 

SMACNA represents a broad group of high skill specialty construction industry employers who perfonn 

federal construction work across the nation. Many perfonn as prime contractors but many of them contract as 

subcontractors on federal government projects. The comprehensive set of issues and recommendations that 

have been drawn up by the committee addresses many of the challenges faced by small businesses when 

bidding work for the federal government. 

Proper and well thought-out refonus will attract a broader base of well-qualified small business contractors to 

compete for federal government contracts, increasing project perfonnance and value for the federal 

government. SMACNA supports refoTInS that would enhance prompt and fair payment procedures and 

processes that would create reliable retainage policies. RefoTInS in these two areas would address signifIcant 

barriers to small business owners that currently are wary of bidding on federal work and would increase the 

number and quality of small business contractors entering the federal marketplace. 

We also believe tbe federal government should make the best use of federal dollars on construction at every 

level and that integrity and high business ethics are important. SMACNA takes a strong stance against fraud 

and supports fair application of suspension and debarment tools, including unfair representation of eligibility 

for small business contracting programs. SMACNA strongly advocated for and supported the 2008 enactment 

of the federal compliance database for contractor responsibility determinations in the Contractors and Federal 

Spending Accountability Act. Federal government dollars should go only to legally compliant and reliable 

contractors and any fIrm that misrepresents itself as a small employer should be held accountable. 

CAPITOL Hill OFFICE: 305 4TH STREET NE • WASHINGTON DC 20002 

PHONE: 2025478202. FAX: 2025478810 

HEADQUARTERS: 4201 LAFAYETTE CENTER DRIVE. CHANTILLY VA 20151-1209 

MAIL ADDRESS: P.O. BOX 221230 • CHANTILLY VA 20153-1230 

PHONE: 7038032980 • FAX: 7038033732 

WEB: l<WW.smacna.oll1 
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-2-

Additionally, small businesses must have access to surety bonds to successfully compete in the federal 

marketplace. Surety bonds are a vital mechanism to protect taxpayers and workers on public construction 

projects from the danger of contractor default. Requiring individual sureties to pledge solely those assets 

described as "eligible obligations" and to deposit them in the custody and control of the federal government 

ensures the security of the bond obligation and helps the small business secure necessary bonding while still 

protecting the taxpayer dollar. 

SMACNA is pleased the Subcommittee is considering the issue of in-sourcing. When contractors ar~ involved 

in building or retrofitting high performance buildings to meet federal energy policy goals, the utmost 

consideration must be given to building operations and maintenance to achieve and sustain the highest level of 

energy savings. It is a function that should be contracted out to those with the greatest expertise and 

experience and in-sourcing this function should be open to notice and comment. 

There is one major issue not addressed today that SMACNA feels must be attended to if the federal 

govermnent is to get the best value for its construction contracting dollar. It is the practice of post-award bid 

shopping. We believe that low bid contractor selection procedures for federal construction projects of$1 

million or more should require that prime contractors list major subcontractors and require those 

subcontractors to be used except for clearly defmed good cause. Post-award bid shopping and bid peddling is 

criticized by all yet it remains a pervasive practice. Many of the states represented by Members of this 

committee address the issue of bid-shopping and bid-peddling and the time has come for bid listing in federal 

contracting. 

The federal govermnent has moved to best-value negotiation selection procedures for some very good reasons, 

including performance and administrative problems with the low-bid system. It is, therefore, very important 

when the low-bid system is used for projects of appropriate scope that legitimate, competing small businesses 

do not face unfair barriers or unchecked practices. Agency projects and taxpayers would benefit by top 

quality reforms 

In closing, SMANCA supports your efforts to strengthen procurement systems and procedures for small 

businesses participating in the federal marketplace and recognizes that the Small Business committee, in 

general, is to be commended for efforts it takes on behalf of small businesses across America on a bi-partisan 

basis in a climate that is sometimes sharply divided. We look forward to being a part ofthat process in this 

and other matters. 

Respectfully, 

)\t;:i\~~ 

Stanley E. Kolbe, Jr. 

Director, Legislative Affairs 

SMACNA's Capitol Hill Office 
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National Association of 

Surety Bond Producers (NASBP) 

1140 19th Street, NW, Suite 800 

Washington, DC 20036 

The Surety & Fidelity 

Association of America (SFAA) 

1101 Connecticut Ave. NW, Suite 800 

Washington, DC 20036 

H.R. 3534. the "Security in Bonding Act 0[2011 " 

Dear Congressmen Hanna and Mulvaney: 

On behalf of the national trade associations listed below, representing contractor and specialty contractor 

firms, bonding agencies, and surety and property/casualty insurers, operating tbroughout the United States, 

we support legislation to protect small businesses and taxpayer funds with the introduction ofH.R. 3534, the 

"Security in Bonding Act of 20 11." 

Surety bonds on federal construction projects ensure that such projects will be completed, preserving public 

funds, and that subcontractors and suppliers, many of which are small businesses, will be paid. 

At present, construction firms may furnish security on a federal construction project: 

1. By securing a bond written by a corporate surety, that must be vetted and approved by the U.S. 

Department of Treasury; 

2. By posting an "eligible obligation," i.e. a U.S.-backed security, in lieu ofa surety bond. The security 

is pledged directly and deposited with the federal government until the contract is complete; or 

3. By securing a bond from an unlicensed individual, if the bond is secured by an "acceptable asset," 

which includes stocks, bonds, and real property owned in fee simple. 

Individual sureties, allowed in item 3 above, neither are subject to the same vetting and scrutiny as corporate 

sureties, nor are they required to relinquish the custody and control of the assets that they pledge to secure 

their bonds. This lack of meaningful oversight has resulted in documented cases where assets pledged by 

individual sureties have proven to be illusory or insufficient, causing substantial fmancial harm to the federal 

government, to taxpayers, and to subcontractors and suppliers. 

H.R. 3534, the "Security in Bonding Act of 20 II," will remedy this significant problem by requiring 

individual sureties to pledge solely those assets described as "eligible obligations" and to deposit them 

in the custody and control ofthe federal government. By doing so, H.R. 3534, eliminates future 

instances where individual surety bonds are pledged with insufficient or illusory assets. Thus, if an 

individual surety bond is furnished in the future, the small businesses which provide goods and services 

on those federal construction contracts will not need to worry about the integrity of their payment bond 

remedy. 
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Thank you again for your leadership on this critical issue. We strongly support your legislation. 

Yours sincerely, 

National Association of Surety Bond Producers 

NASBP 

1140 19" Street, NW Suite 800 

Washington, DC 20036 

202·686·3700 

Contact: Larry LeClair, Director, Government Relations 

Associated Builders and Contractors (ABC) 

4250 North Fairfax Drive, 9lli Floor 

Arlington, V A 22203 

703·812·2041 

Contact: Liam P. Donovan, Director, Legislative Affairs 

American Insurance Association (AlA) 

2101 L Street, NW, Suite 400 

Washington, DC 20037 

202·828·7100 

Contact: Melissa W. SheIk, Vice President· Federal 

Affairs 

Mechanical Contractors Association of America 

(MCAA) 

1385 Piccard Drive 

Rockville, MD 20850 

301·869·5800 

Contact: John McNerney, General Counsel 

National Electrical Contractors Association iNECA} 

3 Bethesda Metro Center, Suite 1100 

Bethesda, MD 20814 

301·215·4522 

Contact: Lake A. Coulson, Executive Director 

Government Affairs 

Sheet Metal and Air Conditioning Contractors' National 

Association (SMACNA) 

Capitol Hill Office 

3054'" Street, NE 

Washington, DC 20002·5815 

202·547·8202 

Contact: Stanley E. Kolhe, Jr., Director, Legislative 

Affairs 

The Surety & Fidelity Association of America (SF AA) 

1101 Connecticut Avenue, NW, Suite 800 

Washington, DC 20036 

202·463·0600 

Contact: Lenore Marema, Vice President of Government 

Affairs 

American Subcontractors Association. Inc. (ASA) 

1004 Duke Street 

Alexandria, VA 22314 

703·684·3450 

Contact: Franklin Davis, Director of Govemrnent 

Relations 

Associated General Contractors of America (AGe) 

2300 Wilson Blvd., Suite 400 

Arlington, VA 22201 

703·548·3 !l8 

Contact: Marco Giamberardino. Senior Director, Federal 

& Heavy Construction Division and Sean O'Neil, 

Director Congressional Relations, Infrastructure 

Advancement 

National Association o[Minority Contractors !NAMe) 

The Ronald Reagan House Office Building, Suite 700 

1300 Pennsylvania A venue, NW 

Washington, DC 20004 

(410) 268·9227 

Contact: Hamilton V. Bowser, Sr., P .E. 

President Emeritus and 

Former Chair, Bonding Committee NAMC 

Property Casualty Insurers Association of America 

(PCI) 

444 North Capitol Street, NW 

Suite 801 

Washington, D.C. 20001 

202·639·0490 

Contact: Ben McKay, Senior Vice President, Federal 

Government Relations 

2 
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ffi" 

Barbour GrouI?cc 

WOMEN CONSTRUCTION OWNERS AND EXECUTIVES ASSOCTIATION 

TESTIMONY OF 

KAREN PECORA-BARBOUR 

MEMBER 

COUNCIL OF 200 

& 

PRESIDENT OF THE BARBOUR GROUP, LLC 

A SMALL BUSINESS - WOMAN OWNED FIRM 

US SBA SMALL BUSINESS PERSON OF THE YEAR (MD) 2008 

SERVICING CONTRACTORS IN NEED OF CONSTRUCTION BONDS AND 

COMMERCIAL INSURANCE 

BEFORE THE 

COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON CONTRACTING AND WORKFORCE 

UNITED STATES HOUSE OF REPRESENTATIVES 

ON 

CONSTRUCTION CONTRACTING AND THE NEED TO STREAMLINE AND 

INCREASE THE EFFICIENCY OF THE SMALL BUSINESS 

ADMINISTRATION BOND GUARANTY PROGRAM 

AND 

THE NEED FOR FEDERAL CONTRACTGING AGENCIES TO STOP DE· 

BUNDLING/CONSOLIDATING OF CONSTRUCTION CONTRACTS 

AND 

TO CREATE A COUNCIL TO PRE-APPROVE AND SCREEN INDIVIDUAL 

SURETIES IN ORDER FOR CONTRACTING OFFICERS TO POSSESS A LIST 

OF ACCEPTABLE Il\1JJMDUAL SURETIES THAT COMPLY WITH 

FAR 28.203 

FEBRUARY 9, 2012 

www.thebarbourgroup.comISurety Bonds I Commercial Insurance 

20 Liberty St, Suite 2D I Westminster, MD 21157 I 410.876.9610 I Toll Free 866.876.9610 I Fax 410.876.9954 
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Mr. Chairman and Members of the Subcommittee, thank you for allowing me to present information to 

you. I am a member of Women Constl1lction Owners and Executives. Today, you will no doubt hear 

about the barriers that prevent small businesses from securing meaningfnl work from federal agencies. 

But, the biggest barrier to small business contractors is surely bonding. You will hear that programs exist 

to help educate small business on bonding, but few, if any, guaranty the contractor that they will be able 

to qualify for a bond upon graduation of such a program. 'There are ways to overcome this issue which I 

will present to you below. 

At present, I am the owner and founder of The Barbour Group. Established in 2002 as an 

independent insurance agency, our focus is on construction bonding and commercial insurance. 

The Barbour Group primarily services the surety needs of a wide range of construction clientele, 

from startups to medium-sized companies ($50M - $ 100M) to large firms with more than $100M 

in annual gross revenue, including Fortune 1000 companies. Winner of multiple industry awards 

and holder of several key certifications, the agency continues to enjoy consecutive double-digit 

sales growth. 

We are nationally known as one of the most knowledgeable and creative brokers in the business, 

providing a comprehensive suite of surety bonds for the construction industry, from Alaska to 

Puerto Rico. Prior to starting my agency, I was a partner of Barbour Construction Corp. (trading 

as Specialized Metals) for 10 years. The company performed work throughout the Mid-Atlantic 

region as a steel erection and metal fabrication subcontractor. I am proud to state that we 

fabricated and installed all the metal work in the Washington Monument, including the steel 

casings to house the glass membrane. 

Serving as an underwriter for two notable carriers for 9 years, an agent for 8 years for two 

brokerage firms in the DC Metropolitan Area, my experience developed relationships with key 

strategic partners and industry leaders. At times USACE has asked for my consultation on small 

business issues. In 1998, I formed the Professional Council of General Construction - a forum, 

lasting two years, consisting of key personnel of the Baltimore Army Corps of Engineers and key 

members of various construction trade associations to openly discuss and resolve issues 

surrounding certain procurement models negatively impacting small businesses. 

My insurance agency has received numerous awards and distinctions for our contributions to the 

success of contractors in the building industry, including selection as one of nine women 

entrepreneurs to participate in the 2009 Ernst & Young Entrepreneurial Winning WomenTM 

program. I was named 2008 Maryland Small Business Person ofthe Year by the U.S. Small 

Business Administration (SBA) - the first surety agent to receive this SBA top honor. I was also 

honored as one of The Daily Record's 2010 Innovators of the Year for enabling success for small 

businesses nationwide. 

The Governor of Maryland has appointed me his Co-Chair for The Governor's Commission on 

Small Business and I also serve as Vice Chair for the Small Business Development Center 

(SBDC) for the State of Maryland, while representing my community as a Board Member for the 

Economic Development Commission for State of Maryland. 

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WRITTEN TESTIMONY; 

Small Business Administration's (SBA) Bond Guaranty Program: 

The American Recovery Reinvestment Act when passed included an amendment that increased the ability 

of the SBA to guaranty up to 90% of performance and payment bond for a participating surety company 

for construction projects having a contract value of$2 million to projects having a contract value of$5 

million, with discretionary authority to cover individual contracts up to $10 million. ARRA also 

increased the SBA bond program eligibility standards from $7 million in sales (average over 

three years) to that of the NAICS codes for small business. With the sunset of ARRA, the 

project cap for SBA is back to $2 million. Thankfully, however, the sales cap under ARRA 

remains. 

SBA Sales Cap is a Disconnect with Set Aside Programs 

Much of the set aside contracts for 8(a)s, WaSBs, SDBs, HUB Zone, VaBs and/or SDVOBs are 

too large for SBA consideration now. Currently, The Veterans First Contracting Program, 

Department of Veterans Affairs (VA), is the only sole-source contract acquisition progranl that 

enables non-competitively bid contracts for Veterans. This program authorizes VA 

contracting officers to sole-source projects up to $5 million to VOB and SDVOBs 

(http://www1.va.gov!oanm1f bf/oaliI07-08.pdf). 

However, many veterans coming back from Iraq are not in the best financial health and have 

credit scores that are below the comfort level of many corporate sureties. Unless the ceiling cap 

for SBA is raised to at least $5 million, bonding capacity will not be enabled for the sole source 

projects above as the current SBA cap is set at $2 milion. As for the 8(a) program, the Federal 

Govermnent can sole source projects up to $4 million. However, few 8(a) contractors can obtain 

bonding at tills level without SBA assistance and SBA currently cannot help due to its current $2 

million contract ceiling price. 

• Reinstate the bond limits for the SBA Bond Program under ARRA to enable SBA to 

consider projects up to $5 million with discretionary authority to consider individual 

projects up to $10 million. 

Understanding MATOC and shortcomings of SBA 

MA TOC, Multiple Award Task Order Contract, is a common contract delivery vehicle used by 

Department of Defense agencies. It is established for small business contractors. Here, the 

Government will typically make 1 to 7 contract awards to separate contractors based on the 

agency's "best interests." Such contracts typically have a base year and 4 options years to be 

exercised unilaterally by the Government. Winning such a contract at the end of fifth tenn as an 

8{A) contractor can maintain an 8(A) contractor for an additional five years in the program. 

Under the MATOC, each contractor could receive up to $10 million in awards annually. The 

timing of and amount of the awards are not certain and subject to the ongoing needs of the 

agency. The contractor is not guaranteed any task orders under the MA TOC. The problem arises 

when the contractor's surety treats the full $10 million contract award as committed-project3 
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backlog, irrespective of actual MAToe awards. This underwriting approach significantly 

reduces a contractor's capacity for additional bonding. 

Many MA TOe vehicles require that the contractor need only post a $1 million bond each year at 

the onset of each term. If the contractor performs more that $1 million in projects for the year, 

then additional bond premium is billed against any additional work. 

The $1 million bond is not an issue for many small businesses. The issue is that MATOCs 

require the following: 

"Contractor shallfurnish proofin writingfrom their certified bonding company that they can 

obtain $10, 000, 000 dollars' worth of bonds each year. The Contractor's proposal shall include 

a letter from hislher bonding company, which certifies the contractor's ability to obtain bonding 

up to the Maximum Award Amount of$10,000,000 each year. Failure to provide said letter with 

the contractor's proposal will malre the offeror ineligible for award. " 

The SBA cannot help. They cannot provide such a $10 million bond support letter even 

though the initial bond is for $1 million as stated above. 

AGAIN, REINSTATE THE BOND LIMITS FOR SBA BOND PROGRAM UNDER 

ARRA TO ALLOW SBA TO PROVIDE $10 MILLION BOND CAPACITY LETTERS 

• If SBA could have discretionary authority to consider projects up to $10 million as they did under 

ARM they eouId approve bond support letters for MATOCs and avoid the need of the 

disadvantaged contractor from partnering with big business and foregoing 50% or more of the 

profit. 

One SEA Program - Don't Consolidate - Allow Only Plan A 

At present, there are two programs/plans for bonding with the SBA: 

• Prior Approval Program (Sec 411 (a) Small Business Investment Act) - Plan A 

• Preferred Program (Sec 411 (a) (3) Small Business Investment Act) -Plan B 

PLAN A requires that each contract bond submission is reviewed and approved either by the Denver or 

Seattle Office of the SBA and simultaneously with the participating surety. (Office location is determined 

by physical location of the contractor.) I work with both offices of SBA. 

PLAN B allows a surety company to authorize and issue bonds and pay claims without SBA's prior 

approval and review. The SBA will perform audits of the surety underwriting and bond files at least once 

every three years. 

Unlike Plan A, Under PLAN B, it is typical for the corporate sureties not to implement all of the 

underwriting caveats the SBA Bond Guaranty Program has to offer. For example, the SBA will include 

the unused portion of a contractor's bank line of credit as a current asset to the current financial statement 

and often extend up to 10 times working capital (current assets minus current liabilities) to compute the 

contractors aggregate bond limit. Working capital is key to setting bonding capacity limits for a 

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contractor. For example, if a contractor only has $10,000 in working capita] bnt a $100,000 unused 

line of credit, the contractor can receive under SBA $1,100,000 in bond capacity versus $100,0001! 

As an industry standard, corporate sureties will not eonsider a line of credit as additional working 

capitaL 

Under PLAN A, the bonding agent has direct access to the SBA offices. The SBA offices will go above 

and beyond to help agents and contractors in the program succeed and will provide guidance to the agent 

on enabling more capacity for the contractor. 

Further, the differences between PLAN A and PLAN B, as addressed in this letter, are not clearly 

evident to contractors. Contractors are not aware that PLAN B may not provide as much bonding 

capacity as Plan A. (plan B typically does not weigh in the unused portion of the bank line to 

increase working capital). When a contractor is declined surety credit under PLAN B, he or she 

may not know that they can resubmit their bond request under PLAN A. Having one SBA Plan 

would eliminate this precarious issue. 

SBA and the hindering of Joint Velltures 

The SBA can consider joint ventures (JV) but the new ceiling cap for annual sales cannot breach the 

NAICs limitation. While the sales cap is generous, the SBA will add in the sales of the non-SBA JV 

partner which could be in the hundreds of millions. This add-in will preclude the bonding for the JV 

entity with SBA. As an aside, few corporate sureties will support JV relationships for small business. 

Also, with a project cap of $2 million, the pluses to JV make no sense. 

• Change the regulation to only bond the small business contractor ,mder the SBA and have the 

larger JV partner provide a bond from their surety (co-surety relationship). 

• Allow regulation to only consider the sales ofthe SBA bond client so as not to disallow the JV's 

total sales of the two parties from exceeding the size standards. 

• Again, reinstate the limits provided by ARM for SBA - $5 million single with discretionary 

authority to consider $10 million projects - as anything less would not be couducive to JV. 

SBA and Teaming Agreements 

The SBA Bond Guaranty Program cannot accept teaming agt'eements, such as those found at 

www.sba.gov. Such agreements delineate the responsihilities of each partner and outline their working 

relationship per project. Here, the small business contractor is the prime or general contractor and 

typically partners or teams with a major (big business) subcontractor. The subcontractor can indemnify 

the prime contractor against any and all loss or provide subcontractor performance and payment bonds to 

the prime contractor. 

Current regulation prohibits the SBA from discounting the teaming partner's sales and amount of work 

they are performing as a subcontractor to the small business contractor. Unlike joint ventures agreements, 

there is no joint and several liability with a teaming agreement if the big busiuess teaming partner bonds 

back their portion of work (typically 80%) in lieu of joint iudenmification. 

Example: Small Business Prime has a $5 million project but needs support in performing the work. 

HeiShe teams with a larger business and subcontracts out 80% of the work to the subcontractor. The 

subcontractor provides a bond back to the small business prime. Small Business prime is self -performing 

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$1 million dollars or work. This $1 million is under the current bond cap of$2 million. With such an 

arrangement in place, an exception could be made to consider larger work outside the current SBA limits. 

Reducing Cost and Increasing Efficiencies for Surety Agents 

The SBA Bond Program is an expensive program for agents to utilize. It is primarily the small, 

independent bonding agencies that broker SBA bonds. And, such agents have limited resources. It takes 

1.0 to 1.5 hours to input an underwriting file into the SBA's electronic system by experienced personnel. 

A hard copy of the file must be sent to the SBA and to the surety. More often than not, we are given last 

minute notification from the contractor that a bond is needed. The federal government requires that 

performance and payment bonds be supplied within 10 days after contract award. 

• It would be more cost effective if the SBA fonns could be scanned and emailed with acceptance 

of electronic signatures. 

Moreover, an approval for a performance and payment bond cannot be obtained without the SBA having 

a check made payable to the SBA in the amount of $7.29 per thousand of the contract value. 

• It would be more cost effective to have the contractor to "pay by fax." This process of payment is 

common and used by my agency as an option for payment on non SBA accounts. The check is 

received via fax and sent to our bank electronically. Another option would be to wire the money 

to SBA. . 

De-BundIingfDe-Consolidation of Federal Contracts 

Much of the stimulus funds received for federal construction contracts from the eyes of a small business 

contractor fueled large construction projects, such as hospitals and new construction ranging from 

$450,000,000 to over $1 billion in value. Very little meaningful work trickled down to small businesses. 

By the time the large general contractors had their out-reach sessions for small business, most all of the 

nuljor sub-trade work was already under contract, leaving just "crumbs" for minority and small business 

firms. 

One such small business emailed me the following: 

"Please see the item regarding bundling for FeOOl'IlI Contracts. This is very important for our small construction 

businesses to respond to as for the past eight years aimost all jobs in this marketplace have been bundled. When this 

happens small bUBiness does not have a chance and the larger contractors bid (price) shop the projects again and 

again. In addition, they are only required to give out 27% of the jobs to small business by law .. Since the majority 

of the companies in this country are small and because small bUBiness employs more people than large businesses, 

this has been very unfairly skewed and our small business community has gotlen largely nothing. Senator Cardin 

sponsored a bill a year ago to ask Contracting Officers for reasoning for doing this when letting out projects. I think 

now their reasoning is that they can save 10% overall on the contracts. We must fight this as a group. The General 

Contractors mark up their jobs a few percentage pointll after they have covered all expenses on the jobs. This is the 

same thing that the smaller companies do. There is less need for Federal Contracting Officers when the jobs are 

bundled but the overhead is shifted to the General Contractors as they need personnel to run the jobs for them. The 

Largest Gelleral Contractors that get these bundled cantractll may not even have offices in this area and then take the 

revenues earned out of this market place and spend it elsewhere even though our taxes support their initiatives. We 

need to employ our local workforce in this time of recession and support our small business community. This must 

now be responded to timely as our businesses in this marketplace have not been given the opportunities that are 

available. I have oounted 67 billion dollars in construction bundled jobs in this region this year alone. Almost 

nothing has been given to the small business community in construction per Federal Biz Ops. Imagine how we 

conld grow with these opportunities as a group. Bundling has been done by the Army Corp of Engineers in two 

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large Contracts that have tied up the majority of repair and small construction work in the next three yem's to only 

one or two General Contractors. This involves work in virtually every trade. If work is needed on these bases, it 

goes through the General Contractor or perhaps they will self-perform only. The largest companies get bigger and 

bigger and the small ol1es go out of business. With numbers, we may be successful. Thank you for your time and 

help. It was good seeing you last week at another successful function. Cheryl London Choreco Co., Iue." 

(Chereco is Ii woman owned firm in Maryland that performs glass and glazing work) 

Above is just one exanlple of the many emails I received regarding bundling. The new term 

small business contractors are hearing is consolidation in lieu of bundling. The effect is 

nonetheless the same. Btmdliug or consolidating contracts is an obstacle for small businesses. 

• Support legislation that will prevent unnecessary bundling/consolidation offederal 

construction projects to allow more small business participation at the prime level. 

Credit Inquiries and Impact on Bonding 

Owners and spouses of small businesses are required to provide personal and corporate 

indemnity to surety companies in order to be extended any form of bonding credit. Surety is not 

insurance. If Ii contractor defaults and the surety makes any payments to suppliers andlor the 

project owner, the surety will seek subrogation against the owners, spouses and principal on the 

bond (the small business) to be made whole. This is why you will often hear surety companies 

say that they underwrite risks based on a zero loss ratio, As I am sure you are aware, sureties 

have losses and often there is very little left to recoup of the small business and its owners. 

Before a small business can be considered for bonding, the surety company will pull a credit 

report on the owners and spouses. If the corporate surety for some reason does not frnd this 

contractor a fit for their company, the surety broker will send the contract file to another market, 

which in turn, will also pull credit. In some cases, several tries may be needed before a solid 

proposal can be provided by the broker. In the meantime, for every report pulled, the credit 

scoring companies will deduct points, anywhere from 4 to 1 ° points, for each credit inquiry, 

Not only do corporate sl.Jreties pull credit reports on owners and spouses of small businesses, but 

so do vendors and banks. While owners and spouses may have fair credit, hovering around 700, 

by the time outside parties pull credit, the inquiries alone could drop the score to unfavorable 

levels. 

Each tinle a personal credit is pulled, the company maldng the inquiry is listed. So, if I, as the 

broker, send a small business accolmt to Surety A and they decline, the next surety, Surety B will 

see that Surety A pulled credit and wonder why Surety A did not approve the account. 

Disclosing the name of the company making the inquiry on the credit report is a Privacy Act 

issue. Disclosing the inquirer should be made only to the individual under credit investigation, 

no one else. 

Big business does not have this issue. Most large companies do not personally indemnify. 

Sureties here rely on the credit reports such as Dunn and Bradstreet. 

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• Support legislation to stop credit reporting authorities from deducting any points for 

inquiries from personal credit scores when the inquiry was made for the risk evaluation of 

the amall business. 

• Support legislation not to openly disclose and name the entity making the inquiry on the 

personal credit report for any individual/consumer. 

Individual Sureties as allowed by FAR 28.203 

In the summer of200S, five corporate sureties closed down their bond operations within 30 days 

of each other. Those sureties were Atlantic Mutual, Harleysville, Frontier, XL Surety, and Crum 

and Foster. Last week, a corporate surety who focused on serving amaH business closed its 

doors. One day is it was rated A+ by Am Best and nearly the next day it was rated C. The 

company is now in bankruptcy. Since most sureties who service small business contractors are 

small themselves in comparison to the top ten sureties, they often require collateral and/or funds 

control to hedge bond losses. Today, many agents and contractors can't get news as to how to 

get their collateral back from First Sealord Surety, the recently bankrupt corporate surety. And, 

owners of the projects are requesting replacement bonds as the surety no longer meet the 

contractual requirements, a premium that the contractor andlor its agent may have to absorb. 

When corporate sureties close they leave their col1tractors "on the street" to be cherry picked by 

the corporate sureties who elect to help them. Many of the contractors find themselves without 

sufficient bonding capacities. 

My firm services many construction firms that are minority, women and vet owned. They need 

assistance. Individual surety has helped many. In fact, there are over 7,000 success stories. 

Individual surety as allowed by FAR 28.203 gives contractors an option. However, it is 

interesting to note that most uldividual surety bonds were not accepted by contracting officers 

where the contractor was a minority or women owned firm. Data can be provided to you if you 

so prefer. 

While many federal agencies accept individual surety bonds, the Baltimore Army COE district 

will not. The individnal surety bonds that are provided guaranty a cash payout by a leading 

FDIC bank. The bank signs off on the commitment to the federal agency. Unlike what you may 

hear, the federal agency is not getting coal but cash. 

Some will say that if the individual surety guarantees cash then why can't that surety post a letter 

of credit? The reason is that a letter of credit (LOC) provides no defenses. If the contractor is 

declared to be in default, the federal agency calls the LOC. The contractor then has to sue the 

federal government for any wrong doing. Under a bond, the surety has defenses that can protect 

the contractor. Individual sureties do not want to be in a position, I assume logically, to sue the 

federal government for their money. It would preempt the entire individual surety process as 

allowed by FAR. 

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There are many interpretations of the FAR and they vary with every contracting officer andior 

agency. It makes it very difficult to pl"Ovide assurance to contractors that the individual surety 

bonds will be accepted. 

Individual surety is a tool to groom contractors back into corporate surety credit. Some now 

enjoy preferred rates ftomleading surety companies. With the harsh economic times that we are 

in, small business contractors' financial conditions will not be stellar. For those that can weather 

the storm, an excess lines market for bonding needs to exist-individual surety. It is the only 

one. 

• Rather than have each contracting officer determine the acceptance of the individual 

surety bond, support legislation to mandate that the federal government create a council 

for federal contracting agencies to pre-screen individual sureties. Those that pass the 

FAR requirements are to be enrolled on a list of acceptable individual sureties. The 

individual surety should be able to provide their data and have their attorneys present to 

address any legal issues with regard to FAR compliance. There should also bean appeal 

process if the individual surety believes that they were not treated fairly. This will also 

alleviate any concerns that bonding agents will have with regard to FAR compliance. 

Please keep in mind that there is currently no list of approved individual sureties as there is with 

corporate sureties by the US Treasury's 570 Circular. The US Treasury does 110t approve 

individual sureties, nor does any insurance administration of allY state. Individual sureties are 

not regulated and are unable to obtain any certificate of authority from any state, as well. But as 

mentioned with First Sealord Surety, regulation is not always fail safe. 

Some will say that the US Treasury should approve individual sureties. In the past they have 

refused. Further, they may not be impartial given their long standing relationships with 

corporate sureties. It may be best to create a federal council who better understands the FAR 

requirements, the federal contracting vehicles and the needs for small business. 

Miller Act Compliance Disclosure & Retention Reform 

Miller Act 

According to FAR 28.102-1 and pursuant to 40 U.S. C. 3132, for construction contracts greater than 

$30,000, but not greater than $150,000, the contracting officer shall select two or more of the following 

payment protections, giving particular consideration to inclusion of an irrevocable letter of credit as one of the selected alternatives. Contracts exceeding $150,000 (Miller Act) require payment and performance 

bonds. 

My fu:st-haud experience on federal contracts in excess of $300,000,000, the federal agency allowed the 

bonds to be phased during the duration of the project, or incremental phasing. On one proj ect exceeding 

$650,000,000, the contractor's surety would not provide a bond even though initially it said it would. The 

contractor asked the federal agency to accept sub-guard in lieu of a bond. Sub-guard is a product of 

Zurich Insurance. It provides protection to General Contractors against subcontractor failure. However, 

it offers no protection for the subcontractors against non-performance of the General Contractor. 

However some owners will waive the General Contractor's bond if they feel comfortable with the blanket 

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protection against subcontractor failure afforded by sub-guard. Additionally, it is not uncommon to hear 

in my industry that the federal agency took the contractor's corporate guaranty in lieu of a bond on mega 

projects ($1 billion or more). Here there is 110 Miller Act protection for small business contl1lctors. 

• Support legislation for federal contracting officers to disclose what type of security was provided 

by the General Contractor and accepted by the contracting officer in support of the contract 

award: performance and payment bond, perfonnance bond only, payment bond only, letter of 

credit, corporate guarantee or sub-guard. 

Mr. Chairman and Member of the Committee, this concludes my written testimony. Ithank you for your 

time and consideration and on behalf ofWCOE, your help in alleviating barriers to bonding for small 

business is exceptionally important. My contact infolmation is below should you have any questions or 

comments. 

Retention Reform for FAR 

At present there are three FAR clauses fOlOld that address retention. 32.102 gives resson why retention 

can be withheld from general contractors by contracting officers, 52.232-5 provides the amount that can 

be withheld by the contracting officer for poor perfonnance, and 52-232-27 that allows a flow down to 

subcontractors to allow subcontractors to withhold retention form their subcontractors. See below 

32.103 Progress payments under construction contracts. 

When satisfactory progress has not been achieved by a contractor during any period for which a 

progress payment is to be of the payment may be retained. 

Retainage .. , 

officer .sn()U1(l·nc~t:W'1tru 

amount of retainage not 

exceed 10 percent approved estimated amount in accordance with the terms of the contract 

and may be adjusted as the contract approaches completion to recognize better than expected 

perfonnance, the ability to rely on alternative safeguards, and other factors. Upon completion of 

all contract requirements, retained amounts shall be paid promptly. 

52.232-5 Payments under Fixed-Price Construction Contracts. 

(e) Retainage. Ifthe Contracting Officer finds that satisfactory progress was achieved during any 

period for which a progress payment is to be made, the Contracting Officer shall authorize 

payment to be made in full. However, Yf satisfactory progresshas nofbeen made/the· Contracting 

Officer may retain a uuu{imum.ofl 0 percent ofthc.amotmt of thepaymen{ until satisfactory 

progress is achieved: When the work is substantially complete, the Contracting Officer may 

retain from previously withheld funds and future progress payments that amount the Contracting 

Officer considers adequate for protection of the Government and shall release to the Contractor 

all the remaining withheld funds. Also, on completion and acceptance of each separate building, 

public work, or other division of the contract, for which the price is stated separately in the 

contract, payment shall be made for the completed work without retention of a percentage. 

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52.232~27 Prompt Payment for Construction Contracts. 

(1) Retainage permitted. Permit the Contractor or a subcontractor to retain (without cause) a 

specified percentage of each progress payment otherwise due to a subcontractor for satisfactory 

performance under the subcontract without incurring any obligation to pay a late payment 

interest penalty, in accordl\llce with terms and conditions agreed to by the parties to the 

subcontract, giving such recognition as the parties deem appropriate to the ability of a 

subcontractor to furnish a performance bond and a payment bond. 

While general contractors may not have any retention withheld by the contracting officer, they 

will nonetheless hold retention from their subcontractor's payments, up to 10% without cause. 

And, the general contractors will not release any retention to the subcontractor until all the work 

is completed. Given the extreme size of many federal projects, the subcontractors may not see 

that retention (profit) for several years. 

11 

• Support legislation to change FAR retention clauses to disallow any retention to be 

withheld from the subcontractor (if performing satisfactorily) by the general contractor if 

no retention was withheld from the general contractor by the contracting officer or if the 

subcontractor has posted a bond. 

• Support legislation to mandate that the general contractor must release the 

subcontractors' retention upon successfhl completion of the subcontractor's work. 
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United Stares Department of the Interior 

OFFICE OF THE SECRETARY 

WashillglOlI. DC 20240 

SEP 082009 

Department of the Interior Acquisition Policy Release (DIAPR) 2009-15 

SUbject: Individual Surety Bonds 

IJ==:; .# 

~/ 

TAKE PRIDe:' INAMERICA 

References: Department oflbe Interior (001) Office of Inspector General (OlG) 

June 29. 2007, memorandum. Management Advisory of Investigative 

Results: Individual Surely Bonds. OIG Case Number 

0l-NM-06-0174-1; and 

Federal Acquisition Regulation (FAR) Part 28. Bonds and Insurance 

1. Purpose: 

The purpose of this D1APR is to remind contracting persounel of key FAR requirements 

associated with accepting an individual surety bond for a contract to protect the Federal 

Govemmentfrom financial losses. 

2. Effective Date: Effective upon signature. 

3. Expiration Date: 

This D1APR will remain in effect until superseded or cancelled. 

4. Background and Explanation: 

The OIG investigated allegations of misuse of individual surety bonds for construction 

contracts. The investigation identified several areas of concern that require our attention. 

There is concern that Contracting Officers (COs) are: (I) unfamiliar with the FAR 

requirements for individual surety; (2) accepting individual surety bonds without 

knowing or verifying the assets backing the bonds; (3) not vetting questions about the 

individual surety bonds through the DOl Office of the Solicitor; and (4) not verifying 

individual sureties against the General Services Administration's Excluded Parties List 

System. 

The Miller Act, 40 U .S.C. 3131. requires performance and payment bonds for any 

construction contract exceeding $100.000, with some limited exceptions. Agencies must 

obtain adequate security for bonds with contracts for supplies or services. including 

construction. Acceptable forms of security include corporate or individual surety bonds. 

as well as others described in FAR Part 28.204. 
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The majority of surety bonds for government contracts are supplied by corporate sureties. 

Corporate sureties are companies approved by the Treasury Department to provide surety 

bonds. However, the FAR permits a contractor to secure bonds from "individual 

sureties" if approved by the CO. 

FAR Part 28.203, Acceptability of Individual Sureties. outlines procedures COs must 

follow to determine the acceptability of an individual surety. 

5. Action Required: 

To reduce the risk of financial loss to the Department from contracts backed with 

individual surety payment and performance bonds, 001 COs must: 

• Familiarize themselves with FAR requirements for individual surety bonds. 

• Identify and verify assets, backing individual surety payment and performance 

bonds, prior to accepting them. 

• Confirm and ensure that the government has control over pledged assets through 

the duration of the contract. 

• Vet matters involving the acceptance ofindividual surety bonds with the Office of 

the Solicitor. 

• Verify whether individual sureties are suspended or debarred. 

6. Additional Information: 

Please disseminate this guidance within your bureau. It will also be available on the web 

at http://www.doLgov/pam/diapr.html. Questions may be directed to Brigitte Meffert, 

Senior Procurement Analyst, Office of Acquisition and Property Management, at (202) 

208-3348, or via e-mail atBrigitteMeffert@ios.doi.gov. 

~:~tnd~ Director, Office of Acquisition and Property Management 

and Senior Procurement Executive 
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Subcommittee on Contracting and Workforce 

Hearing on February 9, 2012 

Questions for the Record 

James Dalton, US Army Corps of Engineers (Corps) 

1. Does the Corps have the technical expertise to develop, evaluate, and award 

construction contracts or does it rely on a general contractor to fulfill that role? 

2. A construction project manager typically provides the contracting officer with 

the project spec/requirements documents and a list of suggested sources. 

a.' Is the project manager taught to consider developing specification in a 

way that maximizes the use of small businesses? 

b. What stage of the acquisition process are the Office of Small and 

Disadvantaged Business Utilization and the Procurement Center 

Representative included in the review of solicitations for contract 

bundling and small business set-aside purposes? 

3. DoD's January 2002, "Small Business Participation in Consolidated Contracts," 

available at http://www.acg.osd.mil/osbp/news/consolidationmemo.pdf. states 

that DoD recognizes that consolidation of requirements previously bought on 

smaller contracts in some instances may be deemed necessary and justified, but 

efforts must be made to avoid unnecessary and unjustified bundling of 

requirements and to mitigate the negative impact that contract bundling has on 

small business concerns. 

a. How is the Corps implementing this policy? 

b. When and what kind of contract bundling analysis is done to evaluate 

construction requirement? 

4. DoD's regulations allow for the issuance of Multiple Award Task Order 

Contracts (MA TOC) for construction services with multiple awardees. 

a. Please explain the scope of these contracts. 

b. What analysis is performed to ensure that consolidation of 

requirements under MA TOC has not morphed into contract bundling? 

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5. With MA TOC contracts, the awardees constitute a pool of contractors who then 

compete for subsequent task orders. A contractor who is not a part of the 

MATOC pool to compete for task orders over a three to five year period may 

not be able to compete for the next project as a prime contractor for a long time. 

a. What percentage of contract awardees are small businesses and what 

percentage are task order awardees? 

b. Who monitors the subcontracting plan for MA TOCs or are the 

contractors managing themselves? 

c. How are small businesses able to compete for subcontracting 

opportunities under the MA TOC? 

6. How do you ensure that the Corps is following the prompt payment 

requirements and that subcontractors are also being paid promptly? 

7. What is Corps policy on contract bundling and consolidation, sealed bid 

contracts, reverse auctions, retention and bond requirements for construction 

contracts contract administration (enforcement and monitoring of 

subcontractin$ plans)? If yes, please provide. 

8. What outreach is conducted to ensure small businesses are included in the 

Corps procurement opportunities as prime contractors and as subcontractors? 

9. Since small businesses playa significant role as subcontractors on construction 

projects, how does Corps encourage prime contractors to subcontract with small 

businesses past their first tier subcontractors? 

10. In your testimony, you indicate that Corps has a 98.5 percent record of paying 

contractors, at the prime contract level, in a timely manner in 2010 and 2011. 

The Administration says it is trying to pay small businesses faster than required 

under the prompt payment mles. 

a. Does the Corps have a different prompt payment rule for small 

business prime contractors? 

b. Is Corps aware of problems with prime contractor's timely payment to 

its subcontractors on their projects? 

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c. Is there any reason why we distinguish between architect 

&engineering (A&E) contractors and construction contractors when it 

comes to prompt payment? 

d. If payment is not made after a proper invoice is submitted, who is the 

contractor suppose to call for assistance? 

11.1f the government can withhold payment for performance related reasons, why 

is retainage necessary? 

12.1f a surety bond is required to guarantee payment and performance under 

construction contracts, under what circumstances would the Corps' also find 

retainage desirable? Does the answer change if the contractor is a small 

business? 

13. Are bonding issues an impediment to the Corps using small business 

construction contractors? To what extent does the SBA Surety Bond program 

help? 

14.0n the MATOC construction contracts, the contractor is required to furnish 

proof from a certified bonding company that they can obtain $10 million worth 

of bonds each year. Given that a small business specialty contractor cannot have 

receipts over $14 million a year, how feasible is it for small businesses to 

compete for these projects? What is the Corps during to help small businesses 

in this area? 

IS.Construction contracts are awarded out of various Corps district offices. 

a. Who makes the decision about whether a construction project will be 

issued out of the local district office or headquarters? 

b. Does this decision influence whether local contractors are more likely 

to be used? 

c. How many contracts were awarded in the district where the work was 

performed and what were they? 

d. How many contracts were performed by workers in the district of the 

construction project? 

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Subcommittee on Contracting and Workforce 

Hearing on February 9, 2012 

Questions for the Record 

William Guerin - GSA 

1. According to your testimony, in FY 2011, GSA awarded 41 percent of all 

contract dollars to small businesses. What percentage of that was in the 

construction industry? 

2. Does GSA have the expertise to prepare government construction specifications 

and drawings and other requirements document for construction projects? 

3. When GSA is forecasting its acquisition opportunities, when do the acquisition 

officials aqd construction program managers discuss the small business 

opportunities with the GSA Office of Small Business Utilization (OSBU)? 

4. In your testimony, you indicated that "PBS uses proven selection procedures 

that enable us to award contracts to deserving competitors who can offer the 

Government the best overall value." 

a. What are those "proven selection procedures" and who are the 

"deserving competitors"? 

b. How do small businesses fit into this statement - are they 

deserving competitors? 

5. In your testimony, you state that small businesses also have many opportunities 

to work on large GSA modernization and new construction projects, primarily 

as subcontractors. 

a. Why isn't using small businesses as prime contractors a priority 

on these projects? 

b. Is there a bias towards or risk associated with awarding large 

construction projects to a small business? 

6. Tell us about GSA's experience with using internet reverse auctions for prime 

contractor selection. 
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a. What is GSA's policy on use of reverse auctions for construction 

requirements? 

b. How do small businesses fair? 

7. In 1983, GSA abandoned the use of bid listing. 

a. Can you explain the reasons for doing so and are those reasons 

still valid today given the Small Business Jobs Act requirement to 

use subcontractors used to develop proposals? 

b. How do you explain GSA's rationale for not using bid listing 

when a number of states have adopted this practice? 

8. The government is collecting data in the Federal Subcontracting Reporting 

System and the Electronic Subcontracting Reporting System to track 

subcontracting, so we have transparency with regards to subcontracting data. 

a. How and is the data in these systems being used to monitor 

contractor compliance? 

b. Is compliance with small business subcontracting plans a systemic 

problem that needs to be addressed or a series isolated incidents 

that resulted from a few contracting officers and contractors not 

following the regulations? 

c. What is GSA's contract administration policy for construction 

projects specifically regarding the enforcement and monitoring of 

subcontracting plans and the limitation on subcontracting rules? 

9. How does GSA ensure that the agency is following the prompt payment 

requirements and that subcontractors are also being paid promptly? 

1O.How does GSA evaluate a prime contractor's performance for delayed or late 

payment to subcontractors? 

11.What is GSA's policy on contract bundling and consolidation, sealed bid 

contracts, reverse auctions, retention and bond requirements for construction 
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contracts contract administration (enforcement and monitoring of 

subcontracting plans)? rfyes, please provide. 

12.The Federal Acquisition Regulation requires surety bonds and authorizes the 

use of retain age on construction projects. 

a. What is GSA's policy on retention and bond requirements? 

b. If the government can withhold payment for performance related 

reasons, why is retain age necessary? 

13.If a surety bond is required to guarantee payment and performance under 

construction contracts, under what circumstances would GSA also find 

retainage desirable? Does the answer change if the contractor is a small 

business? 

14. Are bonding issues an impediment to GSA using small business construction 

contractors? To what extent does the SBA Surety Bond program help? 

15.Many agencies, such as DoD use multiple award contracts for construction. 

a. Does GSA use multiple award construction contracts? If so, how 

is potential bundling addressed? 

b. When consolidating requirements, how does GSA ensure 

bundling is not the outcome and small businesses are not excluded 

as a result of the consolidation? 

16.Construction contracts are awarded out of various GSA regional offices. 

a. Who makes the decision about whether a construction project will 

be issued out of the regional office or headquarters? 

b. Does this decision influence whether local contractors are more 

likely to be used? 

c. How many contracts were awarded in the regional offices where 

the work was performed and what were they? 

d. How many contracts were performed by workers in the region of 

the construction project? 
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Subcommittee on Contracting and Workforce 

Hearing on February 9, 2012 

Questions for the Record 

Jeanne Hulit - SBA 

1. Please provide details on how the SBA Surety Bond program works and 

explain: 

a. The differences between the Prior Approval Program (PAP) and 

Preferred Program and why are bonds rejected under the PAP 

b. The program funding. 

c. SBA measurements of success for the program - processing time, 

number of applicants, number of approved applicants, etc. 

d. The percentage of claims on the guarantees SBA accepts and if SBA 

can partially honor a guarantee or must it 100% honor or deny a claim. 

2. Currently, SBA cannot guarantee bonds over $2 million; however, for 2 years 

SBA was permitted to issue bonds up to $5 million. Please explain whether 

the increase led to increased defaults, volume of bonds, or increased costs for 

the program. 

3. On a project like Army Corps of Engineers MA TOC construction contracts, 

the contractor is required to furnish proof from a certified bonding company 

that they can obtain $10,000,000 dollars worth of bonds each year. How does 

the SBA surety bond help a small business that wants to compete for this 

contract? 

4. We have heard a number of complaints about the processing time. How long 

does it take for SBA to process a bond application? Does the processing time 

often impact the contractor's ability to compete on other jobs? 

5. The SBA Bond Program is not an inexpensive program for agents to use. 

SBA charges the surety company 26% of the fee the surety changes the small 

business. SBA charges the small business .729% ofthe contract price for the 
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bond guarantee. This can be a significant amount for small businesses. On 

the average they pay around $19,000 for a $500,000 contract. 

a. Are there any plans to stabilize or decrease the fees? 

b. What does SBA do with the fees? 

6. According to your testimony, SBA will be publishing a proposed rule that 

will adopt a streamlined application process for any bond guarantee on a 

contract valued up to $250,000 to reduce paperwork requirements. How 

many bonds does SBA guarantee under $250,000? 

a. Was this a primary concern of small business or just a tactic that SBA 

chose to take to show some improvement in the program? 

b. What is SBA planning to do to make real improvements to the 

program? 

c. What are SBA's plans for helping small businesses on the contracts 

over $250,000? 

7. According to your testimony, SBA plans to make a number of changes to 

update, streamline, and simplify the surety bond regulations. What exactly 

are those changes and what is the schedule? 

8. Numerous complaints about SBA's bonding program and its currency with 

commercial bonding practices have been received. 

a. Specifically, does SBA require notification of change orders in excess 

of what commercial sureties believe it is valuable to monitor? 

b. Could this be the reason why more commercial sureties are not 

participating in SBA's program? 

c. How is SBA addressing this problem and what does SBA plan to do to 

appropriately align its practices with commercial practices? 
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Subcommittee on Contracting and Workforce 

Hearing on February 9, 2012 

Questions for the Record 

1. According to your testimony, in FY 2011, GSA awarded 41 percent of all contract dollars to 

small businesses. What percentage of that was in the construction industry? 

Of the $1.4 billion (41 percent of total contract dollars awarded by GSA in FYll) of contracts 

GSA awarded to small businesses last year, approximately 27 percent was for construction 

contracts procured through GSA's Public Buildings Service (PBS). 

2. Does GSA have the expertise to prepare government construction specifications and 

drawings and other requirements document for construction projects? 

Yes, GSA maintains the level of contracting and construction expertise required to develop 

construction specifications, drawings, and necessary documents; however, we typically contract 

out design services. GSA reviews the bidder submissions and awards the contract. 

3. When GSA is forecasting its acquisition opportunities, when do the acquisition officials 

and construction program managers discuss the small business opportunities with the 

GSA Office of Small Business Utilization (OSBU)? 

GSA regional acquisition officials continually communicate with the regional small business 

offices. Additionally, GSA's national Office of Small Business Utilization receives quarterly 

updates from its regional offices and acquisition officials to update its Forecast of Contracting 

Opportunities (found online at http://www.gsa.gov/portal!content!101163). 

4. In your testimony, you indicated that "PBS uses proven selection procedures that enable 

us to award contracts to deserving competitors who can offer the Government the best 

overall value." 

a. What are those "proven selection procedures" and who are the "deserving 

competitors"? 

PBS primarily relies on procedures found in FAR Part 15 to select construction contractors. FAR 

Part 15 allows consideration of factors other than cost, such as management experience, 

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technical approach, and past performance, and allows for negotiation during the selection 

process. Evaluating both technical factors and price allows GSA to ensure that the selected 

contractor has the requisite qualifications and can provide the best value to the taxpayer. 

b. How do small businesses fit into this statement - are they deserving competitors? 

Yes. Small businesses, however, often lack the resources necessary to meet the requirements 

of prime contractors for our largest and most complex projects - new construction and major 

modernizations. GSA makes every effort to create prime contracting opportunities for small 

businesses on our smaller repair and alterations projects, as well as subcontracting 

opportunities on projects of all sizes. 

S. In your testimony, you state that small businesses also have many opportunities to work 

on large GSA modernization and new construction projects, primarily as subcontractors. 

a. Why isn't using small businesses as prime contractors a priority on these projects? 

GSA understands the value of small businesses to our economy, and advocates for the 

participation of small businesses, including small disadvantaged, women-owned, HUBZone, 

veteran, and service-disabled veteran-owned small businesses, in its procurement process at 

both the prime and subcontracting levels. GSA has aggressive goals for small business 

participation in our acquisitions. 

GSA does not preclude small businesses from bidding on GSA's new construction and 

modernization projects. However, small businesses often have difficulty obtaining prime 

contract awards due to the bonding and experience needed for these large, complex projects. 

As a result, GSA creates opportunities for small businesses to work as prime contractors on 

smaller repair and alteration projects and as subcontractors on larger projects. GSA's prime 

contractors on our large projects exceeding $1.5 million must have small business plans and 

goals for these projects that are considered during the contract selection process. GSA then 

evaluates the small business subcontracting plan in relation to the small business 

subcontracting goals set for the project in the solicitation. 

b. Is there a bias towards or risk associated with awarding large construction projects 

to a small business? 

In the selection process, GSA considers each bidder's qualifications to meet the requirements 

outlined in the solicitation and makes an independent decision for each award based on these 

qualifications. Experience is one of the key factors in selecting a contractor for a large, complex 

project. Due to the limitations that small businesses typically have acquiring the bonds 

required under the Miller Act for GSA's projects, most construction projects with a value that 

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exceeds $10 million are not ideal for small businesses. During the project planning process, 

GSA conducts market research to determine the availability of small businesses for each 

project. 

6. Tell us about GSA's experience with using internet reverse auctions for prime contractor 

selection. 

a. What is GSA's policy on use of reverse auctions for construction requirements? 

PBS does not conduct reverse auctions for construction requirements and has no policy on the 

issue. 

b. How do small businesses fair? 

See above. 

7. In 1983, GSA abandoned the use of bid listing. 

a. Can you explain the reasons for doing so and are those reasons still valid today 

given the Small Business Jobs Act requirement to use subcontractors used to 

develop proposals? 

According to GSA's 1983 Federal Register revision that removed bid listing requirementsI, 

listing of subcontractors' requirements resulted in award delays and higher procurement costs 

due to the rejection of low bids. We believe these concerns remain valid. 

b. How do you explain GSA's rationale for not using bid listing when a number of 

states have adopted this practice? 

In keeping with the Federal Acquisition Streamlining Act of 1994 and the Clinger-Cohen Act of 

1996, GSA has established efficient and effective methods for conducting procurements for 

construction. Adding additional requirements to the process may result in higher procurement 

costs and award delays. 

8. The government is collecting data in the Federal Subcontracting Reporting System and the 

Electronic Subcontracting Reporting System to track subcontracting, so we have 

transparency with regards to subcontracting data. 

1 See 48 Fed. Reg. 49,305 (1983). 

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a. How and is the data in these systems being used to monitor contractor 

compliance? 

GSA uses data in the Electronic Subcontracting Reporting System (eSRS) to determine whether 

prime contractors are making progress toward, and successfully meeting, the small business 

goals established in their subcontracting plans. Contracting officers are trained to reject 

reports that are incomplete, omit data, or inaccurately report data; however, failure to meet 

the goals in the subcontracting plan is not a valid reason to reject the report. Contractors that 

fail to meet their goals because they did not award the anticipated number of contracts to 

small businesses may still be compliant with their subcontracting plan if they provided 

maximum opportunities to small businesses and documented those opportunities. Contracting 

officers can request assistance from the central or regional Offices of Small Business Utilization 

for support, if needed, to assist the contractor in finding ways to increase utilization of small 

businesses. 

Additionally, the Small Business Administration can provide training on how to report using 

the eSRS. If the contractor is unsuccessful in its execution of its subcontracting plan by failing 

to make a "good faith effort" as defined by SBA regulatory guidance, the contracting officer 

can assess liqUidated damages against the contractor. Further, the contracting officer shall 

rate/provide documentation on the contractor's successful or unsuccessful execution of its 

subcontracting plan which will be utilized in future contract consideration when GSA evaluates 

the contractor's past performance. 

b. Is compliance with small business subcontracting plans a systemic problem that 

needs to be addressed or a series isolated incidents that resulted from a few 

contracting officers and contractors not following the regulations? 

With the exception of a minimal number of isolated incidents, which were immediately 

addressed, GSA has not encountered problems with compliance with the Electronic 

Subcontracting Reporting System (eSRS). 

c. What is GSA's contract administration policy for construction projects specifically 

regarding the enforcement and monitoring of subcontracting plans and the 

limitation on subcontracting rules? 

GSA's contract administration and oversight process includes monitoring compliance with 

contract conditions. On contracts that include subcontracting plans, the contracting officer 

monitors the contractor's performance by reviewing semi-annual reports submitted through 

the Electronic Subcontracting Reporting System. The contracting officer evaluates the 

contractor's performance in obtaining the goals of the subcontracting plan to ensure the 

contractor is providing sufficient small business subcontracting opportunities. 

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9. How does GSA ensure that the agency is following the prompt payment requirements and 

that subcontractors are also being paid promptly? 

GSA paid 98.5 percent of its invoices on time in FY 2010, and 98.8 percent in FY 2011. We 

continue to be proactive in ensuring that small businesses are paid in a timely manner. On 

January 24, GSA issued a memorandum entitled "New Requirements Related to Accelerated 

Payments to Small Businesses," which requires GSA to pay all small businesses within 15 days of 

receipt of relevant documents instead of 30 days. 

For each construction payment, prime contractors are required to certify that payments to 

subcontractors and suppliers have been made from previous payments received under the 

contract. If we are notified that the prime contractors are not paying their subcontractors, our 

contracting officers reach out to the prime contractor and direct them to discuss the allegations 

with the subcontractor. Our contracting officers also provide information to subcontractors on 

payment bonds and their rights under the Miller Act. 

10. How does GSA evaluate a prime contractor's performance for delayed or late payment to 

subcontractors? 

GSA does not have contractual privity with subcontractors; our contractual responsibilities are 

to prime contractors. GSA does not evaluate the contractual relationship between the prime 

contractor and its subcontractors. Subcontractors can reach out to the GSA contracting officer 

regarding delayed or late payments and the contracting officer will facilitate communication 

with the prime and subcontractor to help resolve the issue. If the contracting officer finds that 

the payment was delayed without just cause, he or she can add a note to the prime 

contractor's performance evaluation. 

11. What is GSA's policy on contract bundling and consolidation, sealed bid contracts, reverse 

auctions, retention and bond requirements for construction contracts contract 

administration (enforcement and monitoring of subcontracting plans)? If yes, please 

provide. 

GSA does not have specific policies on contract bundling, consolidation, or reverse auctions. 

We have a supplemental policy on completing past performance evaluation in the Federal 

Contractor Performance Assessment Reporting System, which requires assessment of the 

contractor's achievement of the approved small business subcontracting plan.2 

The FAR and the General Services Acquisition Manual (GSAM) give guidance on all acquisition 

methods. GSA follows the procedures outlined in FAR Part 14, Subpart 36.213 and GSAM Part 

514, Subpart 536.213 when procuring construction services through the sealed bidding process, 

and applies the regulatory guidance of FAR Part 28 and GSAM Part 528 to determine the 

2 See PBS Procurement Instructional Bulletin 11·02 (20ll). We have enclosed a copy of this policy. 

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applicability and requirements of bonding for certain construction and non-construction 

procurements. Retention is allowed under the FAR Payments under Fixed-Price Construction 

Contracts clause 52.232-5 and contracts are administered in accordance with this clause. 

12. The Federal Acquisition Regulation requires surety bonds and authorizes the use of 

retainage on construction projects. 

a. What is GSA's policy on retention and bond requirements? 

GSA follows FAR and GSAM requirements in administering its construction contracts and does 

not have any additional policies regarding bonds or retention. The FAR allows for retention 

when the contractor is not making satisfactory progress on a job for protection of the 

Government's interest. 

b. If the government can withhold payment for performance-related reasons, why is 

retainage necessary? 

Retention is an important tool that helps the Federal Government hold contractors accountable 

and ensures that taxpayers receive a solid return on their investment. Retention is at the 

contracting officer's discretion and is not intended to adversely affect small businesses. In fact, 

if government retention will affect a subcontractor, the prime contractor is required under FAR 

52.232 (Prompt Payments for Construction) to notify that subcontractor as well as GSA. 

Subcontractors who believe they are being treated unfairly may have recourse under the Miller 

Act and can contact GSA for assistance. 

13. If a surety bond is required to guarantee payment and performance under construction 

contracts, under what circumstances would GSA also find retainage desirable? Does the 

answer change if the contractor is a small business? 

The payment bond is required as security for the protection of those supplying labor or 

materials in the construction of public buildings. Public buildings are not subject to mechanics' 

liens, which are used in the private sector as recourse for nonpayment. The performance bond 

insures completion of the job if the prime contractor fails to perform. Retention is a tool for 

the government when a contractor is not making progress. It also ensures that the government 

is not overpaying progress payments. GSA does not consider business size in determining 

whether to enforce contract terms and clauses. 

14. Are bonding issues an impediment to GSA using small business construction contractors? 

To what extent does the SBA Surety Bond program help? 

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Bonding can be an impediment to a small business participating in a procurement, particularly 

for our largest and most complex projects - new construction and major modernizations. 

Businesses qualify for bonding based partially on their financial capability and ability to 

perform. PBS routinely refers small businesses to the OSBU, which provides the contractor with 

information on SBA's many bonding resources. 

15. Many agencies, such as 000 use mUltiple award contracts for construction. 

a. Does GSA use multiple award construction contracts? If so, how is potential 

bundling addressed? 

GSA has several regions that issue multiple award Indefinite Delivery Indefinite Quantity (lDIQ) 

contracts for smaller construction and repair and alteration projects. Many of these multiple 

award contracts, typically below $lS0,000, are reserved solely for small businesses. These 

multiple award contracts ensure that we have sufficient contractors with contract personnel 

that meet our security clearance requirements to work in Federal buildings. 

b. When consolidating requirements, how does GSA ensure bundling is not the 

outcome and small businesses are not excluded as a result of the consolidation? 

GSA rarely uses bundled contracts for construction contracts. Since most construction projects 

represent discrete requirements, bundling as it is currently utilized is untenable for 

construction. Large new construction and major modernization projects are considered 

discrete requirements and are procured as such. Small businesses have many opportunities to 

participate in such projects at the subcontracting level. GSA requires small business plans as a 

part of our review process for selection of a prime contractor and sets aggressive small business 

subcontracting goals. 

If there are reasonable and effective ways to do so, we can split separate and distinct 

reqUirements, as with the Robert A. Young Federal Building in Missouri. In many cases, 

however, dividing major construction projects into several separate requirements would create 

additional administrative burdens, result in a less well-integrated product, and cost the Federal 

government more money. 

16. Construction contracts are awarded out of various GSA regional offices. 

a. Who makes the decision about whether a construction project will be issued out of 

the regional office or headquarters? 

In accordance with GSA's procedures and practices, construction contracts are awarded out of 

the regional offices. The regional offices are responsible for acquisition planning for their 

facilities. 

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b. Does this decision influence whether local contractors are more likely to be used? 

No. The decision to use local contractors is not influenced by whether the contract is managed or 

awarded at a regional or headquarters office. 

c. How many contracts were awarded in the regional offices where the work was 

performed and what were they? 

GSA's construction projects are managed at the regional level and for that reason, our construction 

contracts are executed at the regional level. 

d. How many contracts were performed by workers in the region of the construction 

project? 

GSA does not track this information because many of these workers are hired at the 

subcontractor level. 

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Subcommittee on Contracting and Workforce 

Hearing on February 9, 2012 

Questions for the Record 

Jeanne Hulit - SBA 

1. Please provide details on how the SBA Surety Bond program works and explain: 

a. The differences between the Prior Approval Program (PAP) and Preferred 

Program and why are bonds rejected under the PAP? 

SBA Response: 

There are two program components in the SBA Surety Bond Guarantee (SBG) Programthe Prior Approval Program and the Preferred Program. As the name suggests, an SBG 

under the Prior Approval Program requires SBA 's prior approval before the SBA 

guarantees the bond. A bond issued under the Prior Approval Program provides an 80% 

or 90% SBA guarantee, depending on the contract size or the nature of the bonded 

contractor. The 90% guarantee applies to bonds on contracts valued $100,000 or less; it 

also applies to bonds for small business contractors: (i) owned and controlled by a 

socially and economically disadvantaged individual, (ii) owned and controlled by a 

veteran or service disabled veteran, or (iii) qualified under SBA 's HUBZone program. 

For all other contracts under the Prior Approval Program, the bond guarantee rate is 

80%. Applications for bond guarantees under the Prior Approval Program may be 

declined under the regulations when,for example, the contractor is ineligible or lacks 

creditworthiness. In addition, under the Prior Approval Program, sureties submit claims 

for reimbursement for losses paid by the surety, and SBA conducts a full review before 

payment of the claim. 

In SBA 's Preferred Surety Bond Program (PSB), surety companies are authorized to issue 

SBA-guaranteed bonds without the Agency's prior review and approval, and the bond 

guarantee rate under this program is 70%. In addition, PSB sureties submit claims for 

reimbursement for losses paid by the surety, and SBA pays these claims with limited 

review, but conducts a full review of the claims during an on-site audit that is conducted 

every 2 to 3 years for each surety. 

b. The program funding. 

SBA Response: 
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For FY 2012, SBA has $1 billion in bond guarantee authority. There is a separate 

revolving fund within the Treasury that is used to pay a claim that arises when an SBAguaranteed bond defaults. The fond is comprised of the contractor and surety foes, along 

with the recoveries SBA receives on any defaulting bonds, as well as funds appropriated 

by Congress from time to time. 

As of February 2012, there is approximately $58 million in reserve, which includes $15 

million for America's Recovery and Reinvestment Act of 2009 (ARRA) bonds and $43 

million for non-ARRA bonds. Loss studies are performed on a regular basis to ensure 

there is a sufficient reserve to pay potential claims. 

In addition, the SBG Program's office operating budget for FY 2012 is approximately 

$173,000, excluding salaries and benefits. 

c. SBA measurements of success for the program - processing time, number of 

applicants, number of approved applicants, etc. 

SBA Response: 

SBA uses various indicators to assess program performance, activity, and trends. These 

include the number of bonds approved, the contract value of bonds approved, the number 

of jobs supported, and the number of small businesses assisted. The number of 

participating sureties and their individual performance are also reviewed. Claims paid, 

recoveries received, and related loss, default, and recovery rates are monitored, as well as 

application and claim processing cycle times. 

d. The percentage of claims on the guarantees SBA accepts and if SBA can 

partially honor a guarantee or must it 100% honor or deny a claim. 

SBA Response: 

SBA honors the guarantee and reimburses surety companies for all allowable incurred 

costs. In FY 2011,/or example, we received approximately $5.9 million in claims in the 

Prior Approval Program and, after review, paid 99.9% of the claims, disallowingjust 

$8,294. 

Under § 4 J J (e)(3) of the Small Business Investment Act, SBA must deny full bond 

guarantee liability if any of the circumstances described in paragraphs (1) through (4) of 

that provision exist. Such full denial of liability has been rare over the past fifteen years. 

Under a temporary provision in ARRA, which expired on September 30, 2010, SBA was 
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given the discretion to deny liability in whole or in part, which was received positively by 

our industry partners. 

2. Currently, SBA cannot guarantee bonds over $2 million; however, for 2 years SBA 

was permitted to issue bonds up to $5 million. Please explain whether the increase 

led to increased defaults, volume of bonds, or increased costs for the program. 

SBA Response: 

ARRA temporarily increased the contract ceiling from $2 million to $5 millionfor public 

and private contracts and subcontracts, and authorized SBA to guarantee bonds on 

Federal contracts up to $10 million if the contracting officer certified that a bond 

guarantee in excess of$5 million was needed. ARRA had a very positive impact on the 

SBG Program. During this period, 218 of the bonds guaranteed by SBA exceeded $2 

million,for a total contract amount of$663 million. To date, there has been only one 

default on an ARRA bond. The number of bonds guaranteed in FY 2010 rose 36% above 

the previous year. This increase was accompanied by the admission of six new sureties to 

the program. After the expiration of ARRA, SBG Program activity increased by 

approximately 3% in FY 2011. 

3. On a project like Army Corps of Engineers MATOC construction contracts, the 

contractor is required to furnish proof from a certified bonding company that they 

can obtain $10,000,000 dollars worth of bonds each year. How does the SBA surety 

bond help a small business that wants to compete for this contract? 

SBA Response: 

SBA can guarantee bonds on contracts up to $2 million in value. As a result, SBA cannot 

assist a small business in obtaining a bond on an individual MATOC or Task Order issued 

under a MATOC that exceeds $2 million. 

4. We have heard a number of complaints about the processing time. How long does 

it take for SBA to process a bond application? Does the processing time often impact 

the contractor's ability to compete on other jobs? 

SBA Response: 

In 1995, as part of the agency's consolidation effort, six of the ten Regional offices were 

closed and, in 2006, another two offices were closed. These closings resulted in increased 

processing times for bond guarantee applications and claims. Over the last several years, 

we have made a concerted effort to reduce processing times, including the implementation 

of an electronic application process and the addition of an application review function in 

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Headquarters to supplement the two area SBG offices. Cycle time for the review and 

approval of Prior Approval applications now averages approximately 2 days and does not 

interfere with a contractor's ability to compete for contracts. The cycle time for the review 

and approval of surety company claims has been reduced to approximately 8 days. 

5. The SBA Bond Program is not an inexpensive program for agents to use. SBA 

charges the surety company 26% of the fee the surety changes the small business. 

SBA charges the small business. 729% of the contract price for the bond guarantee. 

This can be a significant amount for small businesses. On the average they pay 

around $19,000 for a $500,000 contract. 

a. Are there any plans to stabilize or decrease the fees? 

b. What does SBA do with the fees? 

SBA Response: 

SBA charges both the small business and the surety company a foe for payment and 

performance bond guarantees. There is no fee for a bid bond guarantee. The contractor 

and surety fees collected are deposited in the revolvingfund that is used to pay SBA 's 

share of claims on defaulted bonds (See SBA Response to Question l.b). 

In the example above, the SBA contractor fee would be $3,645 on a $500,000 contract. 

The remaining amount paid by the contractor would be the premium charged by the 

surety. SBA does not set the surety premium. SBA has found that the foe charged by a 

surety company is very competitive with fees charged by the reinsurance industry. 

Furthermore, the foe charged to small businesses has not been found to be an impediment 

to small businesses obtaining bonds and competing for contracts. 

At this time, there are no plans to change the surety bond guarantee foes; however, SBA 

monitors fees, recoveries, and claims on an ongoing basis to ensure appropriate funds 

management. 

6. According to your testimony, SBA will be publishing a proposed rule that will 

adopt a streamlined application process for any bond guarantee on a contract valued 

up to $250,000 to reduce paperwork requirements. How many bonds does SBA 

guarantee under $250,000? 

a. Was this a primary concern ofsmall business or just a tactic that SBA chose 

to take to show some improvement in the program? 

b. What is SBA planning to do to make real improvements to the program? 

c. What are SBA's plans for helping small businesses on the contracts over 

$250,000? 

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SBA Response: 

In FY 2011, SBA guaranteed approximately 4,300 bonds under $250,000. The new 

"Quick Application" process was a direct response to feedback that SBA heard from the 

surety industry. This process consolidates two forms into one and eliminates the 

requirement to submit two other forms, and represents a serious effort to streamline the 

application process. 

The proposed Quick Bond Guarantee Application complements the current industry 

practice of using streamlined applications for smaller contract amounts and will help to 

address surety concerns about the amount of paperwork needed to apply for bond 

guarantees in the Prior Approval Program. And, while SBA believes this change is a 

positive step, we believe that other improvements may be made to make the program more 

attractive. To that end, we may pursue other structural changes to the Prior Approval and 

Preferred Programs as part ofSBA 's FY 2013 Legislative Package. 

7. According to your testimony, SBA plans to make a number of changes to update, 

streamline, and simplify the surety bond regulations. Wbat exactly are tbose cbanges 

and what is tbe schedule? 

SBA Response: 

In addition to the Quick Application process, we recently developed an automated tool to 

complement our electronic bond guarantee application that was implemented a few years 

ago. Now surety companies, their agents, and small businesses can upload a variety of 

underwriting documents and transmit them electronically to our field offices as opposed to 

incurring mail costs. 

In addition, we added a Prior Approval application review jUnction in our Headquarters 

operation to supplement the application review process in our two area SBA offices in 

Denver and Seattle. This change makes communication with the surety agents and 

application processing more efficient because SBA personnel and agents are located in 

the same geographical areas and time zones. 

8. Numerous complaints about SBA's bonding program and its currency witb 

commercial bonding practices have been received. 

a. Specifically, does SBA require notification of cbange orders in excess of what 

commercial sureties believe it is valuable to monitor? 

b. Could this be tbe reason why more commercial sureties are not participating 

in SBA's program? 

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c. How is SBA addressing this problem and what does SBA plan to do to 

appropriately align its practices with commercial practices? 

SBA Response: 

In the Prior Approval Program, the surety must notifY SBA of any increases or decreases 

in the contract or bond amount that aggregate 25% or $50,000, as soon as the surety 

acquires knowledge of the change. In addition, the surety must obtain SEA's prior written 

approval whenever the original bond amount increases as a result of a single change 

order of at least 25% or $50,000. See 13 CFR 115. 132(d)(1}. Increases and decreases in 

the bond or contract amounts may result in changes in the fees payable to SBA, and the 

surety and principal may be entitled to a refund. Our industry partners have expressed 

concerns over these provisions. These and other requirements of 13 CFR Part 115 are 

currently being reviewed by SBA. 

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