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

  SIZING UP SMALL BUSINESS: SBA'S FAILURE TO IMPLEMENT CONGRESSIONAL 
                               DIRECTION

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

                                HEARING

                               before the

               SUBCOMMITTEE ON CONTRACTING AND WORKFORCE

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              JUNE 4, 2015

                               __________

   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                            
                               

            Small Business Committee Document Number 114-014
              Available via the GPO Website: www.fdsys.gov
                                     ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

94-804 PDF                     WASHINGTON : 2015 
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                        TOM RICE, South Carolina
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                          MIKE BOST, Illinois
                         CRESENT HARDY, Nevada
               NYDIA VELAZQUEZ, New York, Ranking Member
                         YVETTE CLARK, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts
                           MARK TAKAI, Hawaii

                   Kevin Fitzpatrick, Staff Director
            Stephen Dennis, Deputy Staff Director for Policy
            Jan Oliver, Deputy Staff Director for Operation
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Richard Hanna...............................................     1
Hon. Mark Takai..................................................     2

                               WITNESSES

Mr. Jim Fontana, Dempsey Fontana, PLLC, Reston, VA, testifying on 
  behalf of the Small Business Value Added Reseller Consortium...     4
Mr. Stephen Charles, Co-Founder, Executive Vice President, 
  immixGroup, Inc., McLean, VA...................................     6
Mr. Ronald Reim, Executive Vice President, Oculus, Inc., St. 
  Louis, MO, testifying on behalf of the American Institute of 
  Architects.....................................................     7
Mr. Roger Jordan, Vice President of Government Relations, 
  Professional Services Council, Arlington, VA...................     9

                                APPENDIX

Prepared Statements:
    Mr. Jim Fontana, Dempsey Fontana, PLLC, Reston, VA, 
      testifying on behalf of the Small Business Value Added 
      Reseller Consortium........................................    22
    Mr. Stephen Charles, Co-Founder, Executive Vice President, 
      immixGroup, Inc., McLean, VA...............................    36
    Mr. Ronald Reim, Executive Vice President, Oculus, Inc., St. 
      Louis, MO, testifying on behalf of the American Institute 
      of Architects..............................................    52
    Mr. Roger Jordan, Vice President of Government Relations, 
      Professional Services Council, Arlington, VA...............    57
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Engineering/Remediation Resources Group, Inc. - ERRG.........    64
    Kemron Environmental Services................................    66
    Nobis Engineering, Inc.......................................    69
    The 562910 Small Business Community..........................    73
    Sovereign Consulting Inc.....................................    77
    Tantara Corporation..........................................    80
    USA Environmental, Inc.......................................    82
    Watermark....................................................    84

 
  SIZING UP SMALL BUSINESS: SBA'S FAILURE TO IMPLEMENT CONGRESSIONAL 
                               DIRECTION

                              ----------                              

                         THURSDAY, JUNE 4, 2015

                  House of Representatives,
               Committee on Small Business,
         Subcommittee on Contracting and Workforce,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Richard Hanna 
[chairman of the Subcommittee] presiding.
    Present: Representatives Hanna, Knight, Bost, Hardy, Chu, 
Lawrence, Takai, and Clarke.
    Chairman Hanna. I call this hearing to order. I want to 
welcome Congressman Mark Takai, who is joining us today as the 
new ranking member of this Subcommittee.
    Welcome. I look forward to working with you. I look forward 
to a hearing in Hawaii, incidentally. That might be not a bad 
thing.
    Mr. Takai. Everyone is invited.
    Chairman Hanna. Also, I would like to welcome Congressman 
Mike Bost, who is sitting in on this hearing today.
    The topic of today's hearing goes to the essence of what we 
do as a Subcommittee since it deals with who we consider a 
small business. When we ask who qualifies as a small business, 
the answer to that question has ramifications for all the Small 
Business Administration programs. The answer also governs which 
companies are eligible for the $200 billion in prime and 
subcontracts each year.
    The answer isn't necessarily a simple one. A small aircraft 
manufacturer isn't going to look like a small architectural 
firm. If you ask most businesses, they will tell you that they 
are small, but that their next largest competitor isn't a small 
business. For these reasons, Congress gave the SBA the ability 
to decide which firms are small on an industry by industry 
basis. However, we require that the SBA base these decisions in 
a rigorous rulemaking process.
    Unfortunately, today's hearing highlights a problem with 
that process. During the 112th Congress, the Small Business 
Committee strengthened the rules governing how the SBA defines 
a small business. This legislative change, which was signed 
into law on January 2, 2013, was prompted by complaints from 
industries such as architects, engineers, and technology 
service providers that the size standards do not reflect the 
reality of who they were in their businesses.
    However, 2-1/2 years later the SBA has yet to implement the 
changes that were made during the 112th Congress. Indeed, a 
recent proposed rule ignored these important bipartisan 
statutory changes. At the time, the Committee submitted 
comments warning the SBA that unless they withdrew the proposed 
rule they were courting a lawsuit they couldn't win. The SBA is 
proceeding with this proposed rule and says it will be 
implementing the statutory changes sometime next year.
    In the interim, they are deciding whether the size 
standards that govern tens of billions of Federal contracts 
each year. Currently, firms in these industries have little 
recourse. They can sue in Federal district court at a great 
cost of money and time that they can ill afford.
    I look forward to hearing from today's witnesses about the 
effects of the SBA's failure to comply with these statutory 
changes. The Subcommittee also welcomes any comments you may 
have on Congressman Bost's proposed solutions to the problem, 
H.R. 1429, the Stronger Voice for Small Business Act of 2015, 
which passed the House as part of this year's National Defense 
Authorization Act.
    The testimony collected today by us will go to the SBA, to 
the Office of Management and Budget, in a effort to further 
inform how the SBA is promulgating size standards.
    I now yield to the ranking member for his opening comments.
    Mr. Takai. Thank you, Mr. Chairman, and thanks for holding 
today's hearing.
    Small business plays a critical role in America's economy. 
I come from Hawaii where over 90 percent of the businesses are 
considered small and more than 50 percent of the workforce 
works for a small business.
    Over the years, Congress has created numerous program set-
asides, tax preferences, and SBA loan programs to help these 
small businesses succeed. However, the advantages conferred by 
these programs have led to heated debate over what is truly a 
small business and acceptable small business size standards to 
govern eligibility.
    The definition of what exactly is a small business has 
eluded us in many different areas in policy as the definition 
may work for a business in one context but may be entirely 
inefficient in another. On numerous occasions, the SBA proposed 
a comprehensive revision of its size standards, but the end 
result was a confusing patchwork of regulation.
    The Jobs Act of 2010 attempted to clarify these standards, 
yet in conducting reviews various stakeholders raised concerns 
about the oversimplification of the process and questioned 
whether true small businesses were being left out of the 
definitions.
    To address these concerns, provisions were included in the 
NDAA of 2013 that required SBA to continue its process only if 
certain data was made publicly available prior to the issuance 
of any proposed size standards revisions. But for reasons 
unclear to us, SBA has yet to implement these requirements and 
small businesses continue to be disadvantaged by these reviews.
    Without an accurate small business definition, firms are 
excluded from programs designed to aid in their growth and 
allow them to create more jobs. For example, last year, small 
entities accessed over $30 billion in capital using SBA loans. 
Many businesses use loan proceeds to keep their doors open, 
retain employees, and create new jobs. However, firms deemed 
other than small were precluded from accessing this capital.
    Not only does this process harm business operations, it 
impacts Federal protections guaranteed to small firms. If a 
business is not considered small, agencies are neither 
obligated to review the impact that regulatory changes have on 
small firms nor offer alternatives. Most importantly, 
businesses excluded from the definition are barred from 
participating in various contracting programs which awarded 
almost $100 billion in contracting dollars just last year.
    On the other hand, if a size standard is overinclusive, 
businesses that would otherwise be considered large would be 
able to compete in these programs, depriving small businesses 
of contracting opportunities.
    As previously attested before this Committee, small 
businesses already have difficulty competing in the Federal 
marketplace. With some large businesses already receiving small 
business contracting dollars, it is vital the size process be 
fair and balanced.
    Today we will hear from multiple people that have been 
affected by the process currently in place. I want to be clear 
that we are not advocating for one size standard over another, 
but rather looking for a transparent process that results in 
sizes reflective of industry standards.
    In advance of the testimony, I want to thank all the 
witnesses for their participation and insights into this 
important topic.
    Thank you, and I yield back.
    Chairman Hanna. Thank you.
    Our first witness is Jim Fontana, cofounder and managing 
partner of Dempsey Fontana, PLLC. He has over 30 years of 
experience as an attorney, specializing in government and 
commercial contracts. He is testifying today on behalf of the 
Small Business Value Added Reseller Consortium.
    Sitting next to him is our second witness, Stephen Charles, 
cofounder and executive president of immix, Inc. Mr. Charles is 
the coauthor of ``The Inside Guide to the Federal IT Market,'' 
a resource for technology companies interested in doing 
business with the government. Immix's group manages the 
contracts of many small businesses, working with more than 600 
value added resellers.
    I now yield to my colleague, Congressman Bost, to introduce 
our next witness.
    Mr. Bost. Thank you, Chairman and Ranking Member, thank you 
both for being involved with this hearing today and allowing me 
to introduce the next participant.
    Mr. Ronald Reim serves as executive vice president of 
Oculus, Inc., a small business architectural design firm with 
offices in St. Louis and Dallas. While Oculus is not physically 
located in my congressional district, many of the employees 
actually live in the 12th Congressional District of Illinois. 
The company has also worked on a project in southwest Illinois, 
which also include projects at Scott Air Force Base. He is 
testifying here today on behalf of the American Institute of 
Architects.
    Mr. Reim, thank you for being here, and I look forward to 
hearing your testimony.
    Chairman Hanna. I now yield to Ranking Member Takai to 
introduce our fourth witness.
    Mr. Takai. Thank you, Mr. Chairman.
    It is my pleasure to introduce Mr. Roger Jordan. Mr. Jordan 
is the vice president of government relations at the 
Professional Services Council, a national trade association of 
government, professional, and technical services industry 
businesses. At PSC, he is primarily engaged in leading PSC's 
legislative efforts on a number of issues impacting Federal 
acquisition policy.
    Prior to joining PSC, he worked for 10 years as executive 
director of the Small Firm Council and the director of the 
international and state legislative programs at the American 
Council of Engineering Companies.
    Welcome, Mr. Jordan.
    Chairman Hanna. Mr. Fontana, you may begin.

 STATEMENTS OF MR. JIM FONTANA, DEMPSEY FONTANA, PLLC, RESTON, 
  VA, TESTIFYING ON BEHALF OF THE SMALL BUSINESS VALUE ADDED 
RESELLER CONSORTIUM; MR. STEPHEN CHARLES, COFOUNDER, EXECUTIVE 
VICE PRESIDENT, IMMIXGROUP, INC., MCLEAN, VA; MR. RONALD REIM, 
    EXECUTIVE VICE PRESIDENT, OCULUS, INC., ST. LOUIS, MO, 
 TESTIFYING ON BEHALF OF THE AMERICAN INSTITUTE OF ARCHITECTS; 
 AND MR. ROGER JORDAN, VICE PRESIDENT OF GOVERNMENT RELATIONS, 
          PROFESSIONAL SERVICES COUNCIL, ARLINGTON, VA

                    STATEMENT OF JIM FONTANA

    Mr. Fontana. Thank you. Good morning, Chairman Hanna, 
Ranking Member Takai, and members of the Subcommittee. As you 
stated, my name is Jim Fontana, founding member of Dempsey 
Fontana law firm. I thank you very much for the opportunity to 
testifying today.
    Today I am going to chat and testify on behalf of 13 small 
information technology value added resellers. That is a 
mouthful, so we will just say IT-VARs. These 13 companies have 
formed a coalition called the VARC, Value Added Resellers 
Coalition. The companies are representatives of thousands of 
other, similarly situated IT-VARs around the Nation that 
compete on individual Federal agency small business set-aside 
solicitations or multibillion-dollar agency program 
requirements only for small business.
    The VARC members fall under various programs, including the 
Small Disadvantaged Businesses, Women-Owned Businesses, 
Veteran-Owned Businesses, and small businesses that are located 
in what we know are HUBZones.
    On behalf of the VARC, I am expressing my support for H.R. 
1429, introduced by Representative Bost, called the Stronger 
Voice for Small Business Act of 2015. The underpinnings of my 
support are twofold. First, businesses selling goods and 
services to the government that are certified as small under 
SBA regulations are subject to the SBA's changing size 
standards. And as was mentioned and as you are aware, the Small 
Business Jobs Act of 2010 directs the SBA to conduct a detailed 
review of all size standards every 5 years.
    The only avenue for these small companies to challenge an 
SBA size standard is for such companies to file Federal 
lawsuits under the Administrative Procedures Act. The Stronger 
Voice Act will allow small firms a quicker and much less 
expensive administrative forum to challenge such size 
standards, as opposed to the mounds of pleadings, motions, 
discovery, hearing-related documents. At the end of the day, 
these small companies will be afforded a much less expensive 
forum than going to Federal court or resorting to full-blown 
litigation.
    Secondly, the administrative forum created by the Stronger 
Voice Act is particularly needed at this time, given the SBA's 
recent proposed deletion of the 150 employee-based size 
standard contained under Note 18 of the NAICS Code 541519, 
which applies to IT-VARs. The deletion of this employee size 
standard would leave only the $25.5 million revenue-based size 
standard under that code.
    I say $25.5 million. That is what the SBA used to do its 
analysis. The real standard was at the time $27.5 million. So I 
will just use $27.5 million.
    I will say that the SBA had mentioned to me, in a meeting 
with them on March 24, that they had written a letter to the 
full Committee stating that they would finalize the rule 
sometime this summer.
    Now, there are a number of reasons why this proposed rule 
with respect to this particular NAICS code applying to IT-VARs 
should not be implemented and represents a valid backdrop for 
the Stronger Voice Act. And so in the interest of time, I will 
just summarize those reasons.
    First, the SBA's decision to eliminate the IT-VAR employee 
size standard is based on outdated data that claims that the 
IT-VAR, the 150-employee count, is more or less equivalent to 
$27.5 million in receipts under this NAICS code. And just 
quickly, that assumption is clearly wrong.
    I have attached to my full statement data a survey of some 
of the major government-wide acquisition contracts, or GWACs, 
that show clearly, just on that data--it is not perfect data, 
but just on that data--that at least 43 percent of those IT-
VARs that were considered small will not be considered small if 
this proposal is put through. And so just doing our own 
analysis, we find out that that percentage is much higher.
    I will add that in 2002, going into 2003, the SBA, when 
they first established this size standard, had concluded, and I 
will just quote briefly from the language of that notice, 
quote: ``An employee size standard is considered a better 
measure of the size of IT-VAR operations than receipts.''
    The SBA based this conclusion on a very exhaustive and 
detailed quantitative analysis, but no such analysis was 
performed under this proposed rule. Frankly, I don't think 
those numbers are there. I don't think that the SBA can provide 
any such explanation under any objective standard why the IT-
VAR business is different today than it was back then.
    The bottom line is that the proposed rule is not supported 
by accurate and relevant market data, and it should not be 
passed. I think that the SBA should consult further with the 
procuring agencies and affected small IT-VARs as well as this 
Subcommittee.
    In addition, Congress should adopt the Stronger Voice Act 
to allow small businesses the ability to administratively 
challenge these proposed changes to fairly protect their 
interests.
    Again, I thank you for the opportunity to testify at this 
hearing. I would be pleased to answer any questions you or any 
member of the Subcommittee may have.
    Chairman Hanna. Thank you.
    Mr. Charles.
    I should have mentioned there is a 5-minute rule, but we 
want to hear what you have to say.

                  STATEMENT OF STEPHEN CHARLES

    Mr. Charles. Thank you, Chairman Hanna, Ranking Member 
Takai, and members of the Subcommittee. Thank you for this 
opportunity to testify on issues related to small business 
contracting and size standards. My name is Steve Charles, 
cofounder of the immixGroup, where for two decades I have 
worked to help information technology manufacturers succeed in 
the government marketplace.
    Since our founding in 1997, with my partner and I, 
immixGroup has grown into a recognized leader in the public 
sector IT marketplace representing more than 250 manufacturers 
as a distributor to more than 600 value added resellers, most 
of them small businesses. We are a top 10 IT 70 GSA multiple 
awards schedule contractor with IT product sales over $420 
million in fiscal year 2014.
    On March 31, immixGroup was acquired by Arrow Electronics, 
a Fortune 200 company, so we are no longer small by any 
standard. And moving forward, as a public sector subsidiary of 
a global IT distributor, we do plan to continue our involvement 
in small business and product procurement issues on behalf of 
the hundreds of channel partners who source IT products from 
us.
    We believe it is critically important for the Federal 
Government to maintain small business size standards that 
accurately represent each industry sector and subsector and 
support efforts to ensure that SBA's review of size standards 
and NAICS code updates are based on accurate, relevant data 
performed in a statutorily correct, transparent, and thorough 
manner.
    We also support an enforcement mechanism to formally 
challenge size standards through the SBA Office of Hearings and 
Appeals, such as that proposed in the Stronger Voice for Small 
Business Act of 2015 introduced by Representative Bost and 
cosponsored by our own Congressman, Representative Connolly.
    A key recommendation of immixGroup is for SBA to analyze 
Federal procurement data, in addition to census data, as part 
of the size standard review process. By way of example, we look 
at the SBA's recent proposed size standards rule eliminating 
the IT-VAR exception, also known as Footnote 18 from NAICS Code 
541519, which is entitled ``Other Computer Services.'' In its 
proposal, the SBA notes that the lack of data on 
characteristics of firms involved in IT-VAR activities to 
evaluate the current 150-employee size standard also justifies 
SBA's proposal to eliminate the IT-VAR subindustry category.
    Indeed, immixGroup is not aware of any research conducted 
to justify this subindustry. We firmly believe that if a 
nonpartisan independent review were conducted on orders placed 
pursuant to multiple award delivery order contracts set aside 
under the IT-VAR exemption, the research would clearly show how 
agencies' use of this exception to limit competition for the 
purchase of products has been confusing and misguided, 
categorizing many billions of dollars, about $10 billion to $12 
billion a year spent for products manufactured by large 
businesses as ``Other Computer Services'' under this NAICS 
code, while inhibiting the ability of otherwise qualified small 
contractors to compete for Federal IT product orders.
    The use of Footnote 18 in this way excludes a large segment 
of prospective small business contractors and violates a 
contracting officer's obligation to designate a NAICS code that 
describes the principal nature of the product or service being 
acquired.
    According to current statutes, should a mix of products and 
services be required, the NAICS code chosen is supposed to 
represent the industry accounting for the largest percentage of 
the contract price. We believe that for the vast majority of 
the nearly 60,000 contract actions per year conducted pursuant 
to 541519 this is not the case.
    For these reasons, immixGroup supports the SBA's objective 
of striking the Footnote 18 exception. Our hope is that issues 
related to eliminating this exception can be resolved in a way 
that promotes clarity, consistency, and confidence in how 
socioeconomic policy is being implemented within the 
procurement system for the purchase of products.
    Related to SBA's IT-VAR exception proposal, the SBA 
released another proposal clarifying COTS software and the use 
of the nonmanufacturer rule. We support these as well. Every 
day we see solicitations requesting a quote for items 
manufactured by a large business that are set aside for small 
businesses with no NMR waiver, creating a Catch-22. Meanwhile, 
all the dollars obligated count toward meeting the agency's 
small business goals.
    We respectfully request that before Congress considers 
increasing the statutory government-wide small business prime 
contracting goals, it requests order level line item data to 
quantify the extent of this practice across all product 
industries.
    In conclusion, we thank the Subcommittee for considering 
these commonsense measures to ensure that SBA conduct size 
standard evaluations are based on relevant data in full 
compliance with the law. Thank you for this opportunity.
    Chairman Hanna. Thank you.
    Mr. Reim.

                    STATEMENT OF RONALD REIM

    Mr. Reim. Chairman Hanna, Ranking Member Takai, and members 
of the Subcommittee, thank you for the opportunity to testify 
today on behalf of my firm and on behalf of the American 
Institute of Architects on the critical issues of SBA size 
standards.
    My name is Ronald Reim. I am an executive vice president 
and founding principal of Oculus, Inc., a full service 
architectural and strategic facility planning, interior design, 
and move management firm with offices in St. Louis and Dallas, 
Texas. In addition to serving these communities, we work with a 
number of Federal agencies and do projects all across the 
country.
    My firm is grateful for the assistance that the SBA has 
provided. Our designation as a small architectural practice has 
helped our company bridge into more complex and interesting and 
meaningful projects, giving us an avenue to work on private 
sector work as well through gaining this experience.
    Our SBA designation also helped us keep our doors open 
during the recession. During that time, our firm was forced to 
severely cut staff as our private sector work dropped off 
precipitously. For the most critical 6-month period, we cut pay 
20 percent for our senior people and laid off staff as a 
necessary survival tactic, but our Federal Government work 
provided an avenue for us to essentially keep our doors open, 
and the SBA designation truly helped in that.
    Dramatically increasing the size standards, as the SBA 
proposed in 2011, would create a ripple effect for us much like 
the recession, we think. It would just simply change the 
competitive nature of our industry, opening up the door to much 
larger competitors in our arena. The SBA proposed lumping 
together architecture and engineering firms into a single 
massive size standard that would have effectively defined 98 
percent of the architectural practices as small.
    Substantially raising the size allowance would for all 
intents and purposes eliminate Oculus' ability to compete for 
these Federal contracts for set-aside projects. It would 
reclassify mid- to large-size firms, essentially making David 
and Goliath the same. Yet competitively we are very different 
organizations and companies.
    The current size limitation provides opportunities for 
truly small businesses to have a legitimate shot at performing 
Federal work and opens the door for us to get in. And gaining 
access to restricted set-aside contracts is essential for us to 
essentially have a shot at it. This allows an emerging firm to 
gain experience with these types of projects in the government 
arena that allows us to build a portfolio that we then can 
compete on a more even keel with larger companies, and that is 
essential for us to be able to survive. You don't get Federal 
projects unless you have that portfolio, and this is the way 
for us to build it.
    Had the proposed 2011 size standard been put into place, it 
is very likely that we would have decided it was just too 
difficult to even compete for Federal work and taken a 
different direction, cutting off a very vital avenue for us to 
gain those experiences. The SBA is required to review and 
adjust size standards only once every 5 years. Five years of 
being cut out of this type of work would be devastating to our 
firm. It is just we couldn't survive that length of time.
    This is why it is essential that the SBA gets the size 
standards right. It is also why I am pleased that members of 
this Committee, led by Representatives Bost and Connolly, have 
introduced House 1429, the Stronger Voice for Small Business 
Act. Giving us this avenue to be able to question and challenge 
these designations in a more cost-effective manner is 
absolutely essential as well. Litigation is just not really an 
option for a small company like mine.
    I am pleased that the House incorporated this bill into the 
defense bill, and I hope it can become law later this year. 
Related to the issue of size standards and how contractor 
payments are calculated in net revenue of an architecture firm, 
as much as 50 percent of our revenue passes directly through 
our company as the team leaders on these contracts, so it is 
money that goes to us directly through to our subconsultants. 
We have very little, essentially, in that process at all to 
manage that.
    To suggest that a firm is not a small business merely 
because it handles the revenue of these other companies, 
however briefly, before using it to pay other firms is simply 
unfair. The SBA could easily address this issue by not counting 
that money passing through those firms or changing the standard 
through which how it designates small business.
    In conclusion, the SBA is an immensely valuable institution 
that has helped innumerable small businesses. The SBA's vast 
reach, however, means that even minor changes to the rules and 
policies can have dramatic consequences for small businesses. 
Therefore, we ask that the SBA follow the letter and intent of 
the law and ensure that any size standard adjustments be made 
to reflect current market conditions.
    I would like to thank Chairman Hanna and Ranking Member 
Takai and the distinguished members of the Subcommittee. Thank 
you.
    Chairman Hanna. Thank you.
    Mr. Jordan.

                   STATEMENT OF ROGER JORDAN

    Mr. Jordan. Chairman Hanna, Ranking Member Takai, thank you 
for the opportunity to testify today.
    Prior to 2009, PSC was calling upon SBA to undertake a 
thorough analysis of the size standards, particularly for the 
54, or the professional, scientific, and technical services 
sector in which many PSC member companies operate. We viewed 
this review as necessary because it had been years since SBA 
had last conducted a thorough review.
    SBA began such a review in 2009 by first developing a 
methodology to calculate size standards based on five factors, 
only one of which was focused on the Federal contracting 
marketplace. PSC commented on the methodology, which was 
finalized without substantive change.
    Subsequently, in March of 2011, SBA issued a proposed rule 
to revise size standards for 36 industries in the 54 sector. 
For most industries, the increase in the size standards were 
fairly substantial. For example, most size standards that had 
been established at $7 million in annual gross receipts were 
increased to either $10 million or $14 million. That increase 
provided much-needed flexibility for small firms to mature 
while still having access to restricted competitions. However, 
for other industries, primarily for computer-related services, 
that size standard remained essentially stagnant.
    In our comments on the proposed rule, we raised several 
concerns, and our views remain unchanged. Our concern is that 
SBA is ignoring the fact that computer-related services has 
undergone and continues to undergo a significant change over 
the last 25 years. The Federal Government is purchasing more of 
these services than at any time in history, and companies 
across industry are focusing on providing a comprehensive set 
of solutions to the Federal Government that include a 
combination of telecommunications, information technology, and 
other solutions and services. Yet SBA proposed raising the size 
standards for those categories only by $500,000, from $25 
million to $25.5 million.
    Additionally, SBA established a common size standard for a 
handful of IT-related industries, even though the industry data 
supported a distinct same size standard for some of those 
industries. For example, SBA's own analysis shows that for 
computer facilities management services the calculated size 
standard was $35.5 million, but SBA still chose to retain the 
lower common size standard for this category.
    Therefore, by establishing the common size standard that 
incorporates this NAICS code and other computer-related NAICS 
codes at that common level of $25.5 million, SBA has eliminated 
legitimate small businesses from being able to qualify as such. 
PSC's comments to SBA focused heavily on this point.
    However, in its 2012 final rule, SBA declined to adopt our 
recommendation that common size standards be avoided altogether 
or that they default to the higher threshold to avoid 
negatively impacting small businesses. To this Committee's 
credit, you recognized that reliance on a common size standard 
could have a negative effect on small businesses, and in May of 
2011 a hearing was held on the issue at which PSC provided 
testimony.
    Later, legislation was enacted via Section 1661 of the 
fiscal year 2013 National Defense Authorization Act that 
requires SBA to justify the use of common size standards. 
Unfortunately, the NDAA language was enacted after the SBA 
final rule changing the size standards for the 54 sector was 
complete and no SBA justification has been provided. Thus, 
legitimate small businesses have been denied the ability to 
compete for set-aside contracts since the final rule went into 
effect.
    An additional effect is that companies have been denied the 
ability to increase their revenues while maintaining their 
small business size status. In the computer facilities 
management services industry, for example, firms that were 
close to exceeding the $25 million size standard in 2012 would 
have been able to grow their business to $35.5 million while 
still being afforded the benefits that come with being a small 
business Federal contractor.
    The added growth that the higher size standard would have 
provided to these companies could have eased their transition 
into the full and open competitive market. Instead, the result 
has likely been that businesses have either refrained from 
growth in order to maintain their small business status or they 
have had to transition exclusively into the full and open 
market much sooner that they would have had SBA actually 
followed its own methodology.
    We expect SBA to undertake a required review of the 54 
sector within the next 2 years, and while SBA should not be 
allowed to ignore the law in the interim, we are disappointed 
that they have not proactively made necessary updates. We 
certainly look forward to SBA complying with Section 1661 at 
the time of the next review.
    PSC also reiterates its support for an SBA size standard 
methodology that gives more weight to the Federal marketplace 
dynamics or creating a completely separate set of size 
standards to be used for Federal procurement purposes only.
    Lastly, it is important to recognize that 1661 is one of 
many small business contracting statutory provisions enacted 
since 2010. This Committee has been vigilant about holding SBA 
and the FAR Council accountable for implementing those 
provisions, and PSC shares the frustration expressed at the 
recent Subcommittee hearing about the length of time it has 
taken to complete implementation.
    As such, PSC supports efforts to move towards concurrent 
and collaborative SBA and FAR rulemaking to speed the 
implementation process. It is simply unacceptable that 
implementation of enacted small business provisions has taken 3 
or more years to fully implement.
    Mr. Chairman, this concludes my testimony. Thank you again.
    Chairman Hanna. Thank you.
    I am going to yield the first question to Mr. Bost.
    Mr. Bost. Thank you, Mr. Chairman.
    Mr. Reim, I am going to just go right into it. I know that 
you have done work for Scott Air Force Base and Department of 
Veterans Affairs, but your business obviously works for other 
projects besides that. How is working on Federal projects 
different than in the private sector?
    Mr. Reim. In the private sector, we compete with large 
companies and small businesses. What is different about it is 
that the Federal work offers us the ability to team with large 
companies and gain parallel experience along with them. So 
prime contracts, for example, where we have large companies as 
our subconsultants give us expertise and allow us exposure to 
project types that we would never be selected for typically out 
in the private sector. Those would normally be primed by large 
firms and we might be the subconsultant to them.
    So, for example, our work with the VA has allowed us 
exposure to very high-level projects in a planning and 
oversight role that then has opened the doors for us with our 
private clients as well. So, for example, our work with the VA 
has opened up project opportunities for us with local 
healthcare provider BJC on larger, more complex projects.
    Mr. Bost. All right. Good.
    So in your type of business with architecture, what is the 
level of competition that is out there, and how many are small 
and how many of you are you going head to head with the larger 
companies?
    Mr. Reim. The vast majority of firms are small companies, 
but there is a big, extreme difference between firms providing 
architectural services that are independent architectural 
firms, like mine, and larger conglomerate firms that consist of 
a full array of product services and types, including 
construction and construction management, all disciplines of 
engineering, and there are essentially global companies doing 
it.
    We are a local company providing local jobs and keeping 
expertise in the local community, and that is really important. 
I think that if companies like ours weren't allowed to 
essentially start and grow and use these types of tools to 
merge into or emerge as more mature companies, then there would 
be a separation of really big firms and really small firms not 
doing Federal work and really almost nothing in between.
    Mr. Bost. Would you say that having the opportunity to 
compete on that level instead of everybody trying to go against 
the big dogs without any opportunity like this, beneficial for 
the taxpayer?
    Mr. Reim. Yes, absolutely. I think that our small firm cost 
structures for the government are lower than large firms. Our 
overhead structure is lower. So we afford a good value for the 
Federal Government in competing on those projects, as well as 
we are able to put teams together that tap into the expertise 
that some of these larger firms obviously have, given their 
size and the number and types of projects they work on, to 
provide the same level of knowledge back to the government and 
a quality level to the service.
    Mr. Bost. I have got one question for the whole panel, if I 
can. Have any of you actually had to go through the law suit 
process that, if the bill goes all the way through and passes, 
that you can go directly to the appeals process to the Small 
Business Administration? Have any of you had to go through the 
process right now of law suits for any changing of definition 
of a small business or not?
    Mr. Jordan. No, sir.
    Mr. Bost. Okay.
    Mr. Fontana. Congressman Bost, I have been involved with 
lawsuits under the APA, Administrative Procedure Act, 
challenging agency decisions. You can challenge designations of 
NAICS codes, but not the decision to change the size standard 
of a NAICS code. So this would be a very new process.
    Mr. Bost. Okay.
    Mr. Fontana. But they are daunting and they are expensive 
lawsuits, like any Federal lawsuit.
    Mr. Bost. I have in my district right now a situation with 
a boot manufacturer that has been a small business and always 
been rated as small business, and a lot of the competitors are 
now arguing, and they are actually smaller than they were when 
they first got that standard. But I know they are going through 
that process right now.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hanna. I yield to Ranking Member Takai.
    Mr. Takai. Thank you, Mr. Chairman.
    Mr. Jordan, in your testimony you discussed how SBA 
traditionally analyzes the five primary factors when making its 
size determination. You also discussed that the impact of 
government contracting should be given more weight. Why do you 
believe this is such an important factor?
    Mr. Jordan. Well, the Federal Government marketplace is 
much different from the commercial marketplace. The services 
and the solutions that our member companies are providing are 
usually a lot bigger, a lot more complex, a lot more 
comprehensive. And so we often see larger contracts. We have a 
larger barriers to entry, some government-unique reporting and 
compliance requirements, for instance, that businesses of all 
size must comply with. So you have to be a little bit more 
savvy to enter the marketplace, which usually means you are a 
little bit bigger.
    And back to my point on the size of contracts, I mean, we 
continue to see some very large contracts being set aside for 
small businesses, and that is not necessarily a bad thing, but 
sometimes the Federal agencies go a little bit too far. There 
is a great example within NGA that is moving right now that 
would set aside a contract under a size standard of $15 
million, and it is a 5-year contract with a ceiling of $850 
million and they want to make award to four to eight companies.
    So when you look at that and you do the math, it is 
somewhere in the neighborhood of $20 million to $40 million per 
year per company in terms of what they would need to perform 
under a size standard of $15 million. It just doesn't make 
sense.
    Now, there are certainly other cases where contracts are 
structured in the right way, but I think it paints a picture of 
the requirements are often larger, more complex, and therefore 
you don't get the kinds of one- or two-man small firms that are 
operating in the commercial space.
    Mr. Takai. Thank you.
    So we have seen agencies, and you mentioned one in 
particular, bundle contracts. I am assuming the one you just 
mentioned is a bundled contract. This, along with the 
predominance of multiple award contracts, has caused the 
overall value of contracts to increase significantly. Do you 
believe these developments have caused businesses to outgrow 
their size standards at a higher rate than if they won single 
award contracts?
    Mr. Jordan. Absolutely. We are hearing that more and more 
frequently, that, again, because of the size of these 
contracts, you can win a single award and almost overnight 
eclipse your size standard.
    Now, that is not necessarily always a bad thing, but if it 
is a 5-year contract and you are dedicating all of your small 
business resources to performing on that contract, what happens 
when that contract comes to conclusion? One, you are no longer 
eligible to bid on the work if they set it aside as a small 
business, and so you are going to lose that work when a 
competition comes around, and if you haven't built up your 
overall capacity, then you are going to see a precipitous drop 
in your revenue, and that is going to be a real business 
challenge.
    Mr. Takai. So what would the size standards be for these 
types of situations as a result of these trends?
    Mr. Jordan. Well, it is hard to say. I mean, I continue to 
believe that each and every NAICS code needs to be assessed on 
an individual basis. And SBA has developed a methodology, it is 
fairly complex, and without getting into the nuances of that, I 
think that what they ought to be doing is applying that 
methodology consistently to all the NAICS codes and avoiding a 
reliance on common size standards where the individual NAICS 
codes that are included under that common size standard would 
be different. Why do we want to penalize any small business? It 
just doesn't make any sense. Just for the sake of efficiency 
for whom? Efficiency for SBA's process of establishing the size 
standards?
    Mr. Takai. All right. So during the initial review of your 
organization's size standards, PSC requested additional 
information from the SBA to better inform comments you 
submitted. The NDAA provisions discussed here today were meant 
to better inform the public about how SBA arrived at their 
proposed size standards so that all relevant information was 
available. What effect could this information have on the size 
standards process, as well as industry's ability to participate 
in the comment processing? You have got about 30 seconds to 
answer that one.
    Mr. Jordan. I think basically, sir, it comes down to 
transparency, and that just by requiring the SBA to submit a 
justification for why they have bundled NAICS codes together 
under a common size standard can help industry understand their 
approach, but also where we think that that approach is 
misguided, it gives us a little bit more information to push 
back on.
    Mr. Takai. All right. Thank you.
    I yield back.
    Chairman Hanna. Thank you.
    It would be nice if the SBA was here to also participate in 
this, but they are not.
    The expectation is that H.R. 1429 will somehow settle some 
of this. With all the different NAICS codes and size standards 
and the proposal for more size standards, is the work, Mr. 
Fontana--or anybody--so subjective as to never be able to get 
it right, which in my mind would make the appeal process that 
more critical? And how do you view the appeal process in terms 
of resolution?
    I mean, it is nice to be able to go to court, it is nice to 
have some kind of arbitration, but at the end of the day you 
want a resolution in a timely fashion that allows architectural 
firms and IT firms to have a fair shot in their own sectors. 
What would you like it to look like? What is your expectation, 
Mr. Fontana?
    Mr. Fontana. You mean of the appeal process?
    Chairman Hanna. Yeah.
    Mr. Fontana. I think as the bill, as written, it is as near 
as you can get in terms of what that due process would be. You 
would be able to challenge it before the SBA, go before the 
SBA's Office of Hearings and Appeals, which is a fairly 
simple--compared to litigation--it is a fairly simple process. 
It would be like a small business size protest or a status 
protest. Their paper exchange is usually one each, it might be 
several others.
    So it is a fairly simple process. And then after that you 
would have judicial review of that process if the parties so 
desire. So it does introduce a much less expensive process that 
small companies would be able to afford relatively.
    Chairman Hanna. But are there teeth within that that you 
would like to see? I mean, it is one thing to win your own 
appeal. It is quite another matter to have the kind of broad 
change that you are appealing because what you are really 
saying is that this industry, this sector is not being treated 
fairly broadly, or you might not be there in the first place. 
Do you agree with that?
    Mr. Fontana. I agree with that in the sense that this is a 
fairly narrowly tailored bill. It has to do with the creation 
or revision of a size standard. So it is narrow in that 
respect. There is no other forum, other than going through the 
SBA comment period, as many have done, out of 170 there was 
overwhelming opposition to elimination of Note 18, or going to 
court. We took it a step further. We are having continuing 
dialogue with the SBA on this issue prior to their finalization 
of some rule.
    But to answer your first question on the subjectivity, does 
the SBA never get it right under these circumstances, I can 
cynical and say, yes, they never get it right. In this case, 
they just did not. They didn't follow the law, they didn't 
follow the Jobs Act, they didn't follow NDAA 2013. They got all 
the data wrong. The SBA said it would be a 1 percent impact. We 
are showing much, much more of that.
    So having this type of mechanism, and I would doubt that 
this mechanism would be in place by the time the rule is 
finalized, but having this mechanism would allow these 
companies to challenge SBA in this case simply not following 
the law.
    Chairman Hanna. Mr. Charles, would you like to respond?
    Mr. Charles. Well, I too wonder what the effect of an 
appeal decision would be. Would SBA actually change course and 
modify the size standard of a particular NAICS code? I don't 
know. I am not familiar enough with the bill and the downstream 
implications.
    I would like to add the perspective that I would hope that 
we could look at Federal procurement data in these discussions 
in addition to census data. We are looking at census data in 
terms of size of companies, and some of the other witnesses 
here have alluded to this point, that the Federal marketplace 
is a little different. And to my knowledge, SBA is not 
analyzing Federal procurement data at the NAICS code level, and 
further, is not analyzing procurement data down at the line 
item level in these orders, which would bring us a whole lot of 
information about whether or not Footnote 18 comports with 
other statutes.
    Chairman Hanna. Thank you.
    Mr. Reim, you mentioned almost in passing, and I have got 
about 30 seconds, that you see they are driving social and 
economic policy. What did you mean by that?
    Mr. Reim. You know, if these codes change or the amounts, 
the limits, change dramatically, we would see the landscape for 
competition change dramatically, and it would often restrict 
small businesses from being able to gain an entree into that. 
And it is pretty much making a decision then that if you are 
not going to contract or not able to contract with the Federal 
Government, that you are locked out of that element of 
business.
    Chairman Hanna. All right. Thank you very much.
    I yield to Ms. Clarke.
    Ms. Clarke. I thank the chairman and ranking member. I also 
thank our witnesses here today.
    Establishing up-to-date and pragmatic small business size 
standard methodologies is important for the entire small 
business sector. This is the determining factor behind many SBA 
assistance programs, such as capital access and technical 
assistance. And while I understand that the SBA faces a 
cumbersome task in constantly updating size standards to keep 
current with industry growth and inflation, I appreciate the 
concerns that you have put forth here today.
    I want to ask if you could just drill down a little bit 
more on the bundling of the NAICS codes, because I think that 
there may be where some realignment and perhaps the remedy may 
exist. Mr. Jordan, you spoke about that, but I would like to 
hear from the panel. Thank you.
    Mr. Jordan. Sure. I will start.
    So SBA is driving towards what they say is streamlining the 
size standard process, and so they want to, in my view, limit 
the number of different size standards that are out there. And 
again, to my point earlier, that makes little sense when you 
consider the variation and the dynamics of the vast number of 
industries that are comprised within the NAICS code structure.
    And so to me it is almost as if each industry should be 
assessed on its own merits, and whatever that size standard, 
based on that, the SBA's own calculation comes out to be, that 
is really where they ought to focus. And again the example that 
I used in my oral statement was around the computer-related 
facilities where by SBA's own calculation they determined that 
the size standards for that NAICS code was $35.5 million, yet 
they chose to go with a size standard that was $10 million 
lower.
    And so that meant that any companies that were in between 
that delta, essentially, by SBA's own definition, were small, 
but would be considered to be other than small, they would be 
ineligible to compete for small business set-asides. And to me, 
I think that is a fundamental flaw.
    Ms. Clarke. So let me ask, do you think there is 
realignment required or do you think that there needs to be a 
decoupling or debundling, if you will, and a breakdown of 
industry? Because I am just trying to think about capacity of 
SBA to do that level of assessment when you can be talking 
about hundreds of industries.
    Mr. Jordan. Well, let me be clear. I think that there 
certainly are circumstances in which creating a common size 
standard makes sense. For example, if you have a group of 
industries where the capabilities or the functions are 
essentially similar or there is a lot of overlap and the 
individual size standard determination determined by the 
methodology that SBA uses comes out and it is relatively the 
same, then by all means go ahead and use a common size 
standard, provide the justification, and I don't think you will 
get a lot of opposition from industry. But when you have a 
significant variation in those individual NAICS codes, then it 
doesn't make sense to bundle them.
    So I think it is, to answer your question, a mix of both. 
In some cases, yes, it is fine, but in others it doesn't make 
sense.
    Ms. Clarke. Okay. Let me ask if you can please elaborate on 
suggestions that you have to improve the current size standard 
methodologies that affect your sectors.
    Mr. Jordan. I will start by again focusing on the Federal 
contracting marketplace. Again, it is very different, but it is 
only one of the five significant factors that the SBA uses to 
calculate size standards today. And there are factors like the 
impact on the SBA loan programs that they factor in, and I 
think that factor has a very minor impact. I mean, the 
companies that are operating in the Federal space are not 
necessarily the same companies that are seeking to access 
capital through the SBA loan program.
    So to the extent that they are artificially keeping those 
size standards lower so they don't have a dramatic impact on 
loan programs doesn't make a whole lot of sense when you are 
looking at size standards through the Federal contracting lens.
    Ms. Clarke. Gotcha.
    Mr. Fontana. I will just add, I agree with Mr. Jordan's 
analysis on this. It is very simple. With this particular 
subindustry on IT-VARs or with any industry, the idea is for 
the SBA to understand the business, understand that industry or 
subindustry, use reasonable methodology, look at the market and 
the competitive impact data, which the law requires to make 
that reasonable decision, and that is it, but the SBA is not 
doing that here.
    Ms. Clarke. Thank you, gentlemen.
    I yield back, Mr. Chairman.
    Chairman Hanna. Ms. Chu.
    Ms. Chu. Yes. I would like to address this to Mr. Reim. 
Last Congress I hosted a roundtable and heard from the 
architects in my district about the effect that size standards 
have had on their businesses, and they reported that the 
average size of architectural firms is less than 15 people, but 
the current size that the SBA has for architectural services is 
$7.5 million, which they found to be very, very high. They were 
extremely concerned about the potential changes to the size 
standards and being forced to compete with larger firms that 
are not actually small.
    From your perspective, is the current size standard for the 
architects, for your industry, is it too high?
    Mr. Reim. I don't believe that it is. I think that when it 
was much smaller we actually for a time grew out of the size 
standard. I believe back the last standard was at $4.5 million. 
We actually grew out of it.
    In the current size standard, we might face that in a year 
or 2 as our company continues to recover from the recession and 
grow. But I think that if it goes up much higher than the $7.5 
million that it changes the playing field rather substantially, 
especially if it goes up to the newly proposed amount.
    And even if it were to be raised, I think that one of the 
things is the speed at which it is changing. If it were to 
change from $7.5 million to the $19 million abruptly, then 
suddenly the landscape looks instantly overnight very 
different. If we were all told that it is going to migrate to a 
different number, that would be a much more acceptable 
transition to us.
    But still, there is such wide variety in architectural 
firms, from large to small, and there are so many firms that 
are small, that the smaller, ours and down, I would say, would 
have a very difficult time gaining entry into that market, 
gaining the portfolio and experience they need to compete and 
to have the actual credentials to do the projects in that 
market if the standard goes up substantially.
    Ms. Chu. What is the best indicator for an architectural 
firm size standard?
    Mr. Reim. You know, again, because when I testified about 
the amount of pass-through revenue, we think that actually a 
better size standard would be the number of employees or a more 
accurate accounting of how much money is retained by the firm 
in terms of direct labor cost. We think that would be a much 
more accurate standard at least for our NAICS code.
    Ms. Chu. And then there is this proposal to combine the 
architecture and engineering industries together under one 
standard. And I wonder what you think about this and how does 
this impact the ability of truly small businesses to win 
government contracts?
    Mr. Reim. Well, we don't think that lumping the two, while 
we are similar at businesses, we don't think that we are 
aligned in the same way the engineering firms are. We think 
that engineering is truly a different type of practice. Much 
more of the revenue that goes to engineering firms, we often 
see, stays with those engineering firms. Almost 50 percent of 
our revenue passes through our firm and goes to engineering 
firms. So for that reason we think that categorizing us both 
together would be a big mistake.
    Ms. Chu. And just for the panel, we have heard from 
witnesses that certain size standards are either too high or 
other size standards are too unrealistically low. How do we 
find the balance between allowing those slightly larger firms 
to compete for contracts while protecting the ability of 
smaller businesses to gain access to the market?
    Mr. Charles. I think one of the ways is actually to--I 
heard the idea earlier, Mr. Jordan proposed it--the idea of 
having different size standards for procurement, restricting 
competition, as opposed to SBA assistance. I think there is 
real validity in looking at that, and I believe that the 
Federal Procurement Data Systems data would inform what the 
size standard should be, separating the dominant from the 
nondominant, in this particular market.
    Mr. Jordan. I would just add to that. The key phrase there: 
Separating the dominant from the nondominant. And right now, 
when I look at where we are with computer-related size 
standards, there are clearly nondominant firms that would not 
be included in the definition of a small business today.
    And I am not suggesting that our size standards should be 
raised by tens of thousands, tens of millions of dollars. We 
have this ongoing debate even within our own companies about 
what a midsize firm is, and it ranges from anywhere from $25.5 
million and above to up to a billion. And it really comes down 
to where you sit is where you stand in terms of your position 
on size standards.
    So I think it is a big, big challenge, but certainly one 
that needs to be explored further. And I think that, again, by 
focusing more on what the Federal contracting market looks 
like, you can begin to get a better sense of what a small 
business contractor should look like.
    Mr. Fontana. I think it is market driven and it is industry 
and subindustry driven as well. I agree that using FPDS and 
other sources to look at that and understand that subindustry 
is very important; doesn't make it any less challenging or any 
less daunting.
    But looking at the business side of it to see what are the 
business models, the organizational models of the companies in 
that industry or subindustry are important, because that, along 
with looking at the available data, or any other data that 
could be obtained, would give a good indication of what the 
size standard should be, whether it should be employee based, 
revenue based, or a combination of both.
    Ms. Chu. Thank you. I yield back.
    Chairman Hanna. Thank you.
    Mrs. Lawrence.
    Mrs. Lawrence. Thank you.
    Thank you, gentlemen, for being here today.
    Michigan has over 850,000 small businesses, so it goes 
without saying that small businesses are the backbone of our 
economy, making that much more important that we succeed.
    Mr. Fontana, let's say a small business owner in Detroit 
wants to challenge an established or revised size standard by 
SBA. It is my understanding that the only avenue for the small 
business owner is to file a Federal lawsuit against the 
government. Is that correct?
    Mr. Fontana. Yes, ma'am, that is correct. That is as 
opposed to a particular NAICS designation on an individual 
procurement. But that is correct, they would have to go to 
Federal court.
    Mrs. Lawrence. I want for the record, please, if you could 
explain the time line and the costs associated with a small 
business owner trying to make this appeal.
    Mr. Fontana. Or any business owner. And don't hold me to 
the numbers, because each case is always different.
    In mounting an APA, Administrative Procedure Act, claim 
against the government, it would have to be filed in Federal 
district court, and I will just dispense with really the court 
fees and other related costs. That can be anywhere from, if it 
is very short where you get it to a summary judgment stage or 
you get it to a higher stage where there are more briefs or 
more motions and more delays, it can be anywhere from $50,000 
to $100,000 or more.
    Typically, they are not jury issues unless there are 
disputed facts, and typically here that is not the case. But it 
is still, for small businesses, a very, very expensive 
proposition.
    Some small businesses in the VARC that I represent, 13 
companies, they have pooled resources in some cases, but it is 
a little less common that their interests will be totally 
aligned in that kind of challenge. So they would be more apt to 
do individual lawsuits, and then each small business would have 
to pay that individual expense.
    Mrs. Lawrence. What is the time line?
    Mr. Fontana. The time line for something like this, it is 
usually several months. It could be up to or over a year, 
depending on the court docket, depending on the amount of 
evidence, or depending on the amount of hearings that would be 
held. And discovery is another big issue where I call it the 
long pole in the tent in litigation. Discovery itself could 
take a year or more.
    Mrs. Lawrence. So your recommendation to fix this would be?
    Mr. Fontana. Well, the Stronger Voice Act is a good start. 
For one, allowing small businesses like in size and status 
protests, to use that administrative forum and that 
administrative remedy, still have the availability of judicial 
review as this bill has. But allowing that to go before the SBA 
and the SBA Office of Hearings and Appeals is a start.
    Another avenue, and it is the other way to look at it, as 
the Subcommittee is, is to counsel the SBA or compel the SBA 
through legislation to follow the standards that this Congress 
has mandated.
    Mrs. Lawrence. Thank you.
    Mrs. Lawrence. Mr. Charles, I have a few minutes. I want to 
ask this question. Michigan is home to very large numbers of 
engineers in comparison to anywhere else in the world, so we 
have a lot of technology companies and startups.
    How would this proposed new rule have an impact on 
technology manufacturing or the technology service providers? 
Do you have a sense of the impact it would have? And I am 
concerned about that because in Michigan that is one of our 
driving economies.
    Mr. Charles. So are we talking about the proposal to 
eliminate Footnote 18? Is that the rule we are talking about?
    Mrs. Lawrence. We are talking about the ability for these 
entrepreneur startup incubators to provide opportunities for 
small businesses going there. Will that impact it, the 
legislation that you are speaking of?
    Mr. Charles. I am sorry. I am not familiar with the rule 
you are referring to.
    Mrs. Lawrence. Okay. The new law, the new rule that we are 
proposing to correct or make sure that the SBA is in 
compliance, will that have an impact on startups?
    Mr. Charles. So we are talking about the Stronger Voice?
    Mrs. Lawrence. Yes. Yes.
    Mr. Charles. Okay. So I believe it is really important for 
truly small businesses to make sure that the government 
understands what they do, how their business works within the 
NAICS code structure, and that the government customers are 
requesting the proper NAICS code for what it is they expect to 
be happening under the contemplated contract action.
    I believe I am very much in support of the Stronger Voice 
Act. My concern, generally, about new technology companies is 
that the NAICS code structure itself is perpetually a decade 
old. And that is the root of the problem, in my opinion.
    Mrs. Lawrence. That is where I was trying to go. Thank you.
    Chairman Hanna. Thank you.
    If the Committee doesn't mind, we can open this up to 
another round or anybody who wants to ask a second question 
can. Does anyone mind if I do?
    Mr. Takai. No, Mr. Chairman.
    Chairman Hanna. Okay. Thank you.
    You have all been through the process with the SBA. How 
receptive are they without going through hell?
    Mr. Fontana. Of course, you would have to describe hell in 
this.
    Chairman Hanna. Sure.
    Mr. Fontana. It varies. I have dealt with the SBA on more 
than several occasions, and I have had the privilege to deal 
with a number of Federal agencies over 30 years of being in 
this practice.
    There are times that the SBA is very accommodating. After 
the comment period ended for this rule, they did entertain a 
meeting with representatives of the VARC, the small IT-VARS 
that we represent. Now, it took quite a bit to get them in a 
room, but they did. I have had conversations with their general 
counsel's office on this.
    And so it is not that they have not been willing to 
discuss. The issue is, are they willing to listen? And that is 
the key issue, are they willing to listen to the realities of 
this particular subindustry and understand that they have to 
use and analyze the correct data in making these rulemakings 
relative to size standards? If that is the case, they are not.
    Chairman Hanna. Does that mirror your experience, Mr. 
Charles, Mr. Reim?
    Mr. Charles. I have had good relationships with SBA. They 
take meetings and are happy to discuss things. I find that they 
often are not familiar with the downstream consequences of 
their rulemaking, and it is why I continue to repeat my 
interest in having more thorough analysis of procurement data 
at the line-item level be part of this process, because when I 
bring these things up, they are not knowledgeable.
    Chairman Hanna. Mr. Reim?
    Mr. Reim. I would concur. The subject of our increase, for 
example, and our NAICS code growing has been proposed several 
times, and it doesn't seem to reflect the reality of our 
business. So I wonder if they have really dug into it and tried 
to understand it sometimes.
    Mr. Jordan. I would agree with Mr. Fontana. They have been 
open to sitting down and having a dialogue, but I haven't seen 
them be willing to make a whole lot of changes. Their 
methodology is what it is. I don't see them going back and 
reviewing that and making changes to it, and I don't think they 
are paying a whole lot of attention to the Federal contracting 
dynamics.
    So when we raised those concerns, we raised them both in 
our comments to the methodology, we raised those concerns when 
we commented on the proposed rules. And even though they were 
willing to come down and sit and talk with us, it feels like 
our comments fell on deaf ears.
    Chairman Hanna. So it is atrophy and a war of attrition, 
perhaps.
    The interesting thing, Mr. Reim, is that in your business 
you would like to have the size standard smaller. Ninety-five 
percent of all architects fit under the standard that is 
existing, $7.5 million.
    And in your case, Mr. Charles and other people, it is kind 
of the opposite. The relationship between revenue and employee 
is completely different. So you need to have a different 
standard.
    I want to thank everybody.
    Anybody else would like to ask another question?
    Mrs. Lawrence. No.
    Mr. Takai. No.
    Chairman Hanna. We are pushing up against votes any second 
here, so if there are no further questions for these witnesses, 
I want to thank all of you for your testimony. Getting the size 
standards right is one of the most important jobs the SBA has, 
and it is shameful that they are not faithfully executing the 
laws.
    I want to thank you, Mr. Bost, for your legislation, 1429, 
which would at least provide a check for the SBA and an 
opportunity to appeal.
    This issue is important to this Subcommittee, and we will 
continue to monitor it.
    I ask unanimous consent that members have 5 legislative 
days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    Chairman Hanna. This hearing is now adjourned. Thank you 
all.
    [Whereupon, at 11:12 a.m., the Subcommittee was adjourned.]
    
    
    
    
    
    
    
    
    
                            A P P E N D I X

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman Hanna, Ranking Member Takai, and members of the 
Subcommittee, thank you for the invitation to testify and the 
opportunity to discuss small business size standards.

    My name is Roger Jordan and I am the vice president of 
government relations at the Professional Services Council. PSC 
is the national trade association of the government 
professional services and technology industry. PSC's nearly 400 
member companies represent small, medium, and large businesses 
that provide federal agencies with services of all kinds, 
including information technology, engineering, logistics, 
cybersecurity, facilities management, operations and 
maintenance, consulting, international development, scientific, 
social, environmental services, and more. Roughly 20 percent of 
our members are small businesses and another approximately 30 
percent would be considered small mid-tier firms. Together, the 
association's members employ hundreds of thousands of Americans 
in all 50 states.

    The Importance of Size Standards

    Small business size standards and the associated North 
American Industry Classification Systems (NAICS) play an often 
overlooked, yet significant role in the federal contracting 
marketplace. Whether a specific industry's size standard is 
employee-based or revenue-based, the methodology used by the 
Small Business Administration and the resultant size standard 
impacts competitiveness throughout the marketplace, including 
contracts that are set aside for small business competition and 
prime contractors' subcontractor utilization plans and 
implementation. For companies throughout the supply chain, size 
status carries significant weight not only because of the 
benefits offered by small business size status but also because 
of the potential penalties associated with misrepresentation of 
size status. Hence, there is broad interest whenever the SBA 
undertakes a review of, or revision to, an industry size 
standard.

    Such interest and impact is amplified by the binary nature 
of the size standards: companies are either small business or 
``other-than-small.'' This binary approach means that once a 
company exceeds its industry size standard, even if only by one 
dollar or one employee, they are left on their own to compete 
in the full and open marketplace. Some will succeed, others 
will not. In short, since SBA's decisions can have 
transformational impacts on individual companies, the 
importance of accuracy and consistency in conducting size 
standard reviews cannot be overstated.

    At PSC, we believe the philosophy of the overall small 
business program should be to facilitate long-term growth of 
companies with entrepreneurial spirit through awards to and 
performance of federal government contracts. We believe this 
philosophy is shared by the current SBA leadership. However, it 
is not always evident in policy or practice.

    The statutory definition of a small business is designed to 
include firms that are not dominant in their primary field. But 
achieving an appropriate balance that allows companies with 
revenues or employees at the lower end of the size standard to 
break into the market while also protecting the ability of 
companies that are larger, but by no means ``dominant'' in 
their field, to compete for set-aside opportunities is not a 
simple endeavor. At the time SBA initiated its review of the 
size standards, PSC's position was, and remains, in support of 
size standards that lean toward the higher range. SBA must seek 
to balance size standards so that all small businesses have 
legitimate opportunities to compete, yet higher revenue 
generating small firms are not shut out from competing for 
small business set-asides. PSC's position has been and 
continues to be that federal government policies should foster 
robust competition for federal contracts whether set-aside for 
small businesses or not. As such, we have not endorsed 
legislative proposals to create new set-aside programs, 
particularly for emerging or very small businesses.

    Prior to 2009, it had been nearly 30 years since a 
comprehensive revision to industry size standards was 
conducted, and PSC was calling upon SBA to undertake a thorough 
analysis of the size standards, particularly for the ``54'' or 
``Professional, Scientific, or Technical Services'' sector in 
which many PSC member companies operate. Examples of industries 
that fall under sector ``54'' include legal services, tax 
preparation services, architectural and engineering services, 
many computer related and information technology services, and 
a number of consulting services, including management 
consulting, logistics consulting, scientific and technical 
consulting.

    Hence, PSC was pleased that SBA began a comprehensive 
review of the size standards in 2009. SBA began its process of 
revising the size standards by developing a methodology based 
on five significant factors: average firm size; startup costs 
and entry barriers; industry competition; distribution of firms 
by size; and impact on federal contracting and SBA loan 
programs. SBA also considered other factors such as 
technological changes and industry growth changes. In addition, 
SBA established their discretion to use ``common size 
standards'' for industries that share similar characteristics. 
According to SBA, these common size standards reflect cases 
where many of the same businesses operate in multiple 
industries, and might also make size standards among related 
industries more consistent than establishing separate size 
standards for each of those industries.

    PSC Concerns with the SBA Approach

    In December 2009, PSC submitted comments to SBA on their 
proposed methodology. SBA finalized this methodology in 2010 
but did not accept any of our recommendations.\1\
---------------------------------------------------------------------------
    \1\ PSC comments on the SBA Size Standard Methodology are available 
at http://www.pscouncil.org/PolicyIssues/SmallBusiness/
SizeStandardsSetAsides/
Comments--on--Other--Se.aspx.

    Subsequently, in March 2011, SBA issued a proposed rule to 
revise the size standards for 36 industries in the ``54'' 
category. In total, federal spending on contracts in this 
category represents over $100 billion, or 20-25 percent, of the 
---------------------------------------------------------------------------
government's annual spending on contracts.

    While PSC recognized the difficulty SBA faced in collecting 
and digesting significant amounts of data about the commercial 
and federal marketplaces, we raised a number of concerns with 
the SBA proposed rule.\2\
---------------------------------------------------------------------------
    \2\ PSC comments available at http://www.pscouncil.org/
PolicyIssues/SmallBusiness/SizeStandardsSetAsides/
Comments--on--SBA--Prop.aspx.

    On February 10, 2012 SBA published a final rule regarding 
the ``54 category'' that increased size standards for 34 
specific industries. For most industries, the increases to the 
size standards were fairly substantial. For example, most size 
standards that had been established at $7 million in annual 
gross receipts were increased to either $10 million or $14 
million. That increase provided much-needed flexibility for 
small firms to mature while still having access to restricted 
competition. In our comments on this proposed rule, we raised 
concerns about proposals for computer-related services that we 
believed required greater scrutiny, and our views remains 
---------------------------------------------------------------------------
unchanged.

    Our concern is that SBA is ignoring the fact that computer-
related services has undergone, and continues to undergo, 
significant changes over the last 25 years. The federal 
government is purchasing more of these services than at any 
time in its history and companies across the industry are 
focusing on providing a comprehensive set of solutions and 
offerings to the federal government that include a combination 
of telecommunications, information technology and other 
solutions and services. Yet, in 2011, the SBA proposed raising 
size standards for those categories by only $500,000, from $25 
million to $25.5 million. The $25.5 million size standard 
remained unchanged in SBA's final rule.\3\
---------------------------------------------------------------------------
    \3\ The size standard for computer-related NAICS codes is currently 
set at $27.5 million because SBA has made inflationary changes over the 
past several years.

---------------------------------------------------------------------------
    Common Size Standards

    Additionally, SBA established a common size standard for 
the Computer Systems Design and Related Services industries 
(NAICS 541511, NAICS 541112, NAICS 541513, NAICS 541519 and 
NAICS 811212), even though the industry data supported a 
distinct size standard for each industry. The common size 
standard proposed by SBA for these categories was also $25.5 
million. However, SBA's own analysis shows that for NAICS 
541513--Computer Facilities Management Services--the calculated 
industry-specific size standard is $35.5 million. Therefore, by 
establishing a common size standard that incorporates this 
NAICS category and other computer related categories at a 
common level of $25.5 million, SBA has eliminated legitimate 
small businesses from being able to qualify. PSC's comments to 
SBA focused heavily on this point. However, SBA declined to 
adopt our recommendations that ``common size standards'' be 
avoided and instead retained a size standard of $25.5 million 
for all computer-related NAICS codes.

    To this committee's credit, you recognized that the 
reliance on ``common'' size standards could have a negative 
effect on small businesses, and in May 2011 the Subcommittee on 
Economic Growth, Access to Capital, and Tax held a hearing on 
the issue at which PSC provided testimony. Soon after, 
legislation was introduced by Representatives Joe Walsh and 
Gerry Connolly to restrict SBA's practice of relying on common 
size standards. The legislative proposal was ultimately adopted 
in Section 1661 of the fiscal year 2013 National Defense 
Authorization Act (NDAA). Unfortunately, the NDAA language was 
enacted after the SBA final rule changing the size standards 
for the ``54 category'' was complete and SBA has yet to take 
any action to address the reliance on common size standards in 
this category.

    Thus, legitimate small businesses have been denied the 
ability to compete for set-aside contracts since the final rule 
went into effect in March 2012. An additional effect, and one 
that is being felt by a broader number of companies, is that 
companies have been denied the ability to increase their 
revenues while maintaining their small business size status. In 
the Computer Facilities Management Services category, for 
example, firms that were close to exceeding the $25 million 
small business size standard in 2012 would have been able to 
grow their business to $35.5 million while still being afforded 
the benefits that come with being a small business federal 
contractor. The added growth that the higher size standard 
would have provided to these companies could have eased their 
transition into the full and open competitive federal market. 
Instead, the result has likely been that businesses have either 
refrained from growth in order to maintain their small business 
status or they have had a tougher transition from their small 
business status because they are entering the full and open 
market much sooner than they would have if SBA had designated 
the appropriate size standard that their own methodology 
established.

    Currently, SBA is required to update the individual size 
standards at least every five years. Although PSC believes 
rapidly evolving industries such as information technology and 
complex professional service should be reviewed more 
frequently, we understand the broad scope of SBA's 
responsibility to review all the size standards. We expect SBA 
to initiate and potentially complete a fresh review of the ``54 
category'' within the next two years, and while SBA should not 
be allowed to ignore the law in the interim, we certainly look 
forward to SBA complying with Section 1661 of the fiscal year 
2013 NDAA at that time.

    Other Considerations

    As mentioned above, SBA evaluated five major factors to 
determine the proposed size standards: average firm size; 
startup costs and entry barriers; industry competition; 
distribution of firms by size; and impact on federal 
contracting and SBA loan programs. SBA determined that each 
factor would be given equal weight in its calculations. 
However, PSC continues to recommend that greater weight be 
given to the ``impact on federal contracting'' factor. In 
addition, SBA should broaden its evaluation of the federal 
contracting market to examine if typical contract requirements 
under a specific category tend to gravitate toward larger 
contracts. If so, SBA might determine that a higher size 
standard is warranted. If typical requirements under a specific 
category seem better suited to small contract awards, then 
perhaps a lower size standard would be more appropriate.

    PSC further encourages SBA to reconsider the merits of 
adopting separate size standards for federal contracting. The 
adverse impact on small businesses of a single size standard 
that covers federal procurement and all other SBA programs is 
documented in SBA's own methodology. SBA acknowledges that the 
disparity between small business federal market share and 
industry-wide share may be attributed to a variety of reasons, 
such as extensive administrative and compliance requirements 
associated with federal procurement, the different skillsets 
required by federal contracts compared with typical commercial 
contracting work, and the size of specific contracting 
requirements of federal customers. Such a structure would allow 
SBA to focus more on the market dynamics regarding federal 
contracting and in turn make the size standards more reflective 
of the realities of the marketplace they so significantly 
impact.

    PSC also recommends regular review of the NAICS codes 
themselves to ensure that they are properly aligned with the 
ever-changing dynamics within specific industries. Within the 
information technology space, for example, the emergence of new 
and much needed capabilities such as cybersecurity and cloud 
computing are significant. Yet these capabilities or offerings 
are lumped together with other computer-related industries 
under a limited number of computer-related NAICS codes, which 
does not reflect how industry is organized or how federal 
agencies acquire these goods and services. This recommendation 
is not intended to suggest that each new capability is 
deserving of its own NAICS code. Instead, it is merely intended 
to require regular review of the NAICS codes to ensure that, as 
industries evolve at an increasing pace, the NAICS codes are 
still appropriately structured.

    Lastly, it is important to recognize that Section 1661 of 
the fiscal year 2013 NDAA is one of many small business 
contracting statutory provisions enacted since 2010. This 
subcommittee has been vigilant about holding SBA and the FAR 
Council accountable for implementing those provisions and PSC 
shares the frustration expressed at the recent subcommittee 
hearing about the length of time it has taken to complete 
implementation. As such, PSC supports efforts to move toward 
concurrent and collaborative SBA and FAR rulemaking to speed 
the implementation process. The need to implement these laws 
quickly is underscored by the fact that this year's House-
passed NDAA also contains a number of small business 
provisions. It is simply unacceptable that implementation of 
those provisions, if enacted, and other previously enacted 
reforms, will take three or more years before they will be used 
in the federal contracting marketplace.

    Conclusion

    PSC commends the Congressional action over the past several 
years to improve the size standard determination process. The 
enactment of Section 1661 is an important element of those 
reforms, and although it was enacted after work on the ``54 
category'' of NAICS codes was last revised, we look forward to 
SBA complying with the law promptly and certainly no later than 
their next substantive review of the Professional, Scientific 
and Technology Services sector. PSC also reiterates its support 
for an SBA size standard methodology that gives more weight to 
federal marketplace dynamics and creating a completely separate 
set of size standards to be used for federal procurement 
purposes only.

    Mr. Chairman, this concludes my testimony. Again, thank you 
for inviting PSC to testify today and for your attention to 
this important issue. I would be happy to answer any questions.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 [all]
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