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40–408 PDF 2008

S. HRG. 110–335

INCREASING GOVERNMENT ACCOUNTABILTY AND

ENSURING FAIRNESS IN SMALL BUSINESS CONTRACTING

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JULY 18, 2007

Printed for the use of the Committee on Small Business and Entrepreneurship

(

Available via the World Wide Web: http://www.access.gpo/gov/congress/senate

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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine,

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

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CONTENTS

Page

OPENING STATEMENTS

Kerry, The Honorable John F., Chairman, Committee on Small Business

and Entrepreneurship, and a United States Senator from Massachucetts ..... 1

Snowe, The Honorable Olmphia J., a United States Senator from Maine ......... 3

Dole, The Honorable Elizabeth, a United States Senator from North Carolina 6

Isakson, The Honorable Johnny, a United States Senator from Georgia ........... 7

TESTIMONY

Hsu, Paul, Associate Administrator, Office of Government Contracting and

Business Development, U.S. Small Business Administration, Washington,

DC .......................................................................................................................... 8

Martoccia, Anthony, Director, Office of Small Business Programs, U.S. Department of Defense, Arlington, Virginia ........................................................... 15

McCracken, Todd, president, National Small Business Association, Washington, DC ............................................................................................................. 36

Rice, Patricia, director, Maine Procurement Technical Assistance Center, Bangor, Maine ............................................................................................................. 45

Silva, Magdalah, chief executive officer, DMS International, Inc., Silver

Spring, Maryland, on behalf of Women Impacting Public Policy ..................... 49

Newlan, Ronald, president and chairman, HUBZone Contractors National

Council, Rockville, Maryland .............................................................................. 55

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bond, The Honorable Christopher S.

Prepared statement .......................................................................................... 88

Post-hearing questions posed to Ronald Newland and subsequent

responses ....................................................................................................... 90

Dole, The Honorable Elizabeth

Opening statement ........................................................................................... 6

Hsu, Paul

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 11

Response to post-hearing questions from:

Senator Kerry ............................................................................................ 90

Senator Lieberman .................................................................................... 90

Senator Snowe ........................................................................................... 91

Isakson, The Honorable Johnny

Opening statement ........................................................................................... 7

Kerry, The Honorable John F.

Opening statement ........................................................................................... 1

Post-hearing questions posed to Ronald Newland and subsequent

responses ....................................................................................................... 90

Post-hearing questions posed to Paul Hsu and subsequent responses ........ 90

Post-hearing questions posed to Anthony Martoccia and subsequent

responses ....................................................................................................... 93

Lieberman, The Honorable Joseph I.

Post-hearing questions posed to Ronald Newland and subsequent

responses ....................................................................................................... 90

Post-hearing questions posed to Paul Hsu and subsequent responses ........ 90

Page

IV

—Continued

Post-hearing questions posed to Anthony Martoccia and subsequent

responses ....................................................................................................... 94

Martoccia, Anthony

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 18

Response to post-hearing questions from:

Senator Kerry ............................................................................................ 93

Senator Lieberman .................................................................................... 94

Senator Snowe ........................................................................................... 96

McCracken, Todd

Testimony .......................................................................................................... 36

Prepared statement .......................................................................................... 39

Newlan, Ronald

Testimony .......................................................................................................... 55

Prepared statement .......................................................................................... 58

Maps depicting HUBZones for various States ............................................... 61

Response to post-hearing questions from Senator Bond ............................... 90

Rice, Patricia

Testimony .......................................................................................................... 45

Prepared statement .......................................................................................... 47

Silva, Magdalah

Testimony .......................................................................................................... 49

Prepared statement .......................................................................................... 51

Snowe, The Honorable Olmphia J.

Opening statement ........................................................................................... 3

Post-hearing questions posed to Paul Hsu and subsequent responses ........ 91

Post-hearing questions posed to Anthony Martoccia and subsequent

responses ....................................................................................................... 96

Supplementary charts and graphs:

Small Federal Vendors in FY 2005 (shows at least 6 of the top 30

small vendors as large companies) .............................................................. 99

Complete List of Excluded Items, FY 2005 .................................................... 100

Total Government and Small Business Procurement Without Exclusions,

FY 2006 .......................................................................................................... 101

Exclusions Spending Summary, FY 2006 ....................................................... 102

COMMENTS FOR THE RECORD

Dorfman, Margot, CEO, U.S. Women’s Chamber of Commerce .......................... 104

Young, Cris, president, National Procurement Council ....................................... 106

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INCREASING GOVERNMENT ACCOUNTABILITY

AND ENSURING FAIRNESS IN SMALL BUSINESS CONTRACTING

WEDNESDAY, JULY 18, 2007

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP,

Washington, DC.

The Committee met, pursuant to notice, at 2:08 p.m., in room

428–A, Russell Senate Office Building, the Honorable John F.

Kerry (Chairman of the Committee) presiding.

Present: Senators Kerry, Snowe, Dole, and Isakson.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MASSACHUSETTS

Chairman KERRY. We are already in order. The hearing will be

opened. I apologize for being a little late. A lot of things were running a little late here today, except for Senator Isakson and Senator Dole.

[Laughter.]

Chairman KERRY. I congratulate them.

Good afternoon and welcome. I know Senator Snowe is out in the

corridor. She will be in in a moment. We appreciate your attending

this hearing today to examine the state of Federal contracting. All

of us know that we have made a long and strong commitment here

in the Congress to try to maximize small business’s ability to access the enormous amount of Federal dollars that are part of our

procurement and contracting process. We also want to look at the

role that small businesses play and, frankly, look at the Administration’s record with respect to giving small businesses a fair opportunity to compete for Federal contracts.

I am disappointed that Administrator Preston is not able to be

here today. We consider this a very important topic. We know he

is working hard and we certainly respect a lot of the things that

he is trying to do, but we would like him to be a part of this dialogue, and while Associate Administrator Hsu is here, I hope he

will let him know that we really do hope that we can arrange to

have him come up here at some time to sort of put the full imprimatur, if you will, of the Administrator’s approval or disapproval

on the things that we are trying to achieve, and we think that is

important. There will be more hearings on this. I know that he did

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promise us in the nominating process to be available and I don’t

think we have been excessive in our requests, so I hope that we

can make that happen.

I am also concerned that Ms. Doan of the GSA pulled out of the

hearing at the last minute. I am concerned about that, and I want

to have a chance with Senator Snowe to dialogue and see how we

might get them to participate in a subsequent follow-up.

As we all know, it is repetitive, I suppose, and to the point of exhaustion that small businesses drive our economy. There are somewhere between 98 to 99 percent of all the firms in the country, half

of our GDP and two-thirds of all new American jobs are created by

small businesses. So they are very important to the growth of our

economy, to the high-paying jobs that workers depend on to be able

to meet increasing costs of living, and to take advantage of the better opportunities of the economy which are in those kinds of new

jobs, particularly important to the new prospects for women and

minorities and for innovative cutting-edge products.

Twenty-three percent of Federal contracting dollars are supposed

to go to small businesses. It is not supposed to go as a matter of

nice, maybe we will do this. It is a matter of the law. That is what

is supposed to be happening. That is required. But the claims that

that goal has been met in most people’s judgment takes pretty creative math and selective contracting analysis in order to arrive at

that conclusion.

According to Eagle Eye publishers, the Federal Government spent more than $412 billion in 2006. Only 20 percent of that total,

under some calculation, went to small businesses. That means that

more than $12 billion that was supposed to could have gone to

small businesses that didn’t, and $12 billion is a lot of money to

small businesses.

Moreover, small businesses are challenged by a maze of complicated laws, regulations, that many have judged make it difficult

for them to be able to succeed in that arena. Those barriers include

contract bundling, size standards with loopholes for big businesses,

a lack of protections for subcontractors, and a difficult-to-navigate

GSA schedule.

When a Federal agency bundles contracts, it limits a small

business’s ability to bid for the contract. It reduces competition and

it leaves the taxpayers to pick up the tab for the increased costs

that occur over time, and they do.

Size standards are also a very important issue. As you all know,

the size standard is, in most cases, the highest gross income that

a business can have and still be considered a small business. There

has been no serious update to size standards in years. So we need

to update them. We can update them, but we should do it in a way

that doesn’t harm small businesses. Moreover, reevaluating size

standards is critical as agencies promote larger and larger contracts. Small businesses shouldn’t be restricted to just subcontracting due to their size, which is increasingly becoming the case

as the contract amounts get bigger and they are held to their size

and the bundling takes place.

Current regulations allow large businesses to retain small business contracts. In 2005, 6 clearly-identifiable large businesses were

counted as among the top 30 small businesses in Federal procureVerDate 11-MAY-2000 13:50 Apr 02, 2008 Jkt 040408 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\40408.TXT DianeA PsN: DianeA
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ment. How can that work? I know that SBA has implemented a

new rule that will give a business a 5-year grace period, but why

should we allow big businesses to get small business set-aside contracts for 1 day, let alone for 5 years? I think that we can do better,

and I think the Members of this Committee believe we can.

I have heard from a number of small business owners that they

have waited many months to get paid after they have completed

their subcontracting work for a prime contractor, so the prime contractor winds up squeezing them, and the result is, if you are a

small business and you have done a subcontract, it usually puts

you in pretty tough straits.

Many small businesses have also partnered with large businesses

to bid on projects, so they become part of the empowerment of the

large contractor to get the job by being part of the bid as a small

business, and then guess what, they never hear from the large

business again once the contract has been won. I would like to

know where the Administration has been and why that is going on,

because it is a form of sham transaction. It is fraud and it is inappropriate.

Last but not least, many small business owners have expressed

their frustration that it is tough and expensive to get on the GSA’s

schedule, not to mention a nightmare to navigate for a small firm

with very few resources. They are thrown into a pool with many

other businesses, some the largest in the world, and they are told,

you are on your own, and that has proven to be very difficult for

them.

We made a good attempt last year to legislate on a number of

these issues as part of last year’s comprehensive small business reauthorization bill led by Senator Snowe, so this is not ground that

is being tilled because there has been a change here in the Congress. This is not Democrat or Republican ground; it is small business interest ground, and it is bipartisan in the way in which we

need to till it.

So although there were many good provisions in that bill last

year, we weren’t able to get it through the Senate, so we are prepared to try to rework it, compromise, do the things necessary to

address concerns, and I hope we can make that bill move this year.

We are certainly not interested in putting a lot of provisions in

that bill that make people unhappy and then have a bill that can’t

get out of the Senate. We are not interested in wasting the Committee’s time or anybody else’s. So we hope to do something that

is measured and has a chance to succeed. It won’t be perfect, but

I think it can be a good start and that is why we are here today,

to hear from the Administration and from small business. Tell us

what is working, what is not, and help us to understand how we

can deal with these issues.

Senator Snowe.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, A UNITED STATES SENATOR FROM MAINE

Senator SNOWE. Yes, thank you, Mr. Chairman. I certainly appreciate your holding today’s hearing on such a vital matter to

small business and clearly a contentious issue, one that has been

challenging and difficult. It remains one of the single greatest imVerDate 11-MAY-2000 13:50 Apr 02, 2008 Jkt 040408 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\40408.TXT DianeA PsN: DianeA
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pediments for small business, to access Federal contracts in the

Federal agencies. This is a critical hearing and hopefully, as we

have in so many of the other issues and the disaster-related bill

that is on the floor, we can work on a bipartisan basis to move this

forward and to correct many of the deficiencies and barriers to success for small business in accessing to the Federal contracting opportunities that exist government-wide.

I welcome all of our panelists here today, the Administration officials, from the Small Business Administration and the Department

of Defense. Most especially, I welcome Patricia Rice, who is testifying today from Bangor, Maine. Patricia is the director of Maine’s

Procurement Technical Assistance Center, which last year assisted

Maine’s small businesses to gain more than $123 million in Government contracts and helped create and sustain more than 2,857

jobs. So Patricia, I am very pleased that you are able to be here

today and appreciate all that you have done.

As Ranking Member of this Committee, I am dismayed by the

myriad ways that Government agencies have time and again egregiously failed to meet most of their small business statutory

goaling requirements. This afternoon, I am looking forward to hearing from the Administration on specific and realistic solutions for

finally achieving contracting goals for small business. I am alarmed

that only one Federal small business contracting program, the

Small and Disadvantaged Business Program, has met its statutory

goal and that the three other small business goaling programs have

all fallen drastically short.

For example, in fiscal year 2005, women-owned small business

only achieved 3.3 percent, failed to meet its 5 percent small business goal, while the Historically Under-Utilized Business Zones,

the HUBZone Program, met only 1.9 percent of its 3-percent goal.

Most troubling of all, our Nation’s service-disabled veteran-owned

small businesses received a government-wide paltry total of only

0.6 percent of its 3 percent small business goal. Shockingly, the Department of Defense granted an abysmal 0.49 percent to servicedisabled veteran-owned small businesses. This is no way to treat

those who have given all for their country and who seek to contribute more through business.

The Federal Government can and must provide more to our

country’s small businesses. This afternoon, I intend to explore what

actions Federal agencies are taking to confront contract bundling,

which takes contracting opportunities out of the hands of small

business. Other issues I want to probe include subcontracting, inaccurate small business size determinations, flawed reporting data,

under-utilization, and the litany goes on and on.

As the Chairman is well aware, these problems are not new and

this Committee has held countless hearings on various contracting

concerns. Business opportunities through Federal contracts provide

vital economic benefits for small business. This is why last year,

the Small Business Administration reauthorization bill that the

Chairman referred, which to passed out of this Committee unanimously, contained a robust package of small business contracting

initiatives.

The President’s 2002 nine-point anti-bundling initiative directly

addresses the challenges small businesses confront, but unfortuVerDate 11-MAY-2000 13:50 Apr 02, 2008 Jkt 040408 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\40408.TXT DianeA PsN: DianeA
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nately for our Nation’s small businesses, the President’s initiative

has yet to be followed agency-wide. I would like to ask our panel

of Administration witnesses a simple question. Why? Our Government cannot claim to be serious about contracting opportunities for

small businesses if the laws are not followed and goaling deficiencies of this magnitude are allowed to continue. Now is the time

for actions, not words.

That is why, last month, Chairman Kerry and I requested that

the Government Services Administration refrain from terminating

its Office Supply Stock Program, at least until the Government Accountability Office conducts a report on the economic impacts that

this potential termination will bear on hundreds of small businesses across this country, and so that is why I, too, am extremely

disappointed that Lurita Doan, Administrator of the GSA, was unable to testify before the Committee today. I was looking forward

to pressing the Administrator on why the GSA continues to take

actions, including the bundling of contracts, that are detrimental to

small businesses.

And so I specifically wanted to press the GSA on its decision last year not to set aside a $500 million government-wide acquisition

contract task order for HUBZone small businesses. According to

SBA and industry estimates, this set-aside would have created over

3,700 jobs in HUBZones across this country and over 350 jobs combined in Oxford, Franklin, Somerset, Piscataquis, Arostook, and

Washington counties in my State of Maine.

And finally, I have been a longstanding champion of small business programs such as the HUBZone program. In my home State

of Maine, only 118 of 41,026 small businesses are qualified

HUBZone businesses. HUBZones represent a tremendous tool for

replacing lost jobs for our Nation’s declining manufacturing and industrial sectors. Clearly, this program should be better utilized.

And towards that end and earlier this week, I requested with Senator Bond that the GAO investigate how the Federal Government

can increase the use of the HUBZone Programs.

Today, I intend to find out again, what can we do to further increase the use of all small business contracting programs, including

the HUBZone, the women-owned business, service-disabled veteran-owned small businesses, and, of course, the small business

disadvantaged programs. So I look forward to working with you,

Chairman Kerry, and Members of the Committee in developing a

bipartisan approach to these contracting programs.

I think it is frustrating, frankly, that we have been unable to

overcome these major handicaps to small business accessing Federal contracting opportunities when you think of the more than

$300 billion of Federal contracts that are issued every year. For

some reason, Federal agencies are totally resistant to including

small businesses in those prime opportunities. So hopefully, we can

reverse that direction through the course of legislative initiatives

and can build upon what we did last year and any other ideas. But

clearly, the time has come to address these inequities and deficiencies.

Thank you, Mr. Chairman.

Chairman KERRY. Thank you very much, Senator Snowe, for an

important and candid statement. I hope the record will adequately

6

be reflected to the Administrator that the Chairman was easier on

you than the Ranking Member.

[Laughter.]

Chairman KERRY. Senator Dole.

OPENING STATEMENT OF THE HORORABLE ELIZABETH DOLE,

A UNITED STATES SENATOR FROM NORTH CAROLINA

Senator DOLE. Thank you, Mr. Chairman, Ranking Member

Snowe, for convening this afternoon’s hearing on critical issues of

importance facing our small businesses, and thank you to the panelists for sharing your expertise and time with us.

For many folks, starting and growing a business is the means to

achieving the American dream. There are many programs in place

at the Small Business Administration to assist along the way, such

as the special contracting program which affords small businesses

owned by socially- and economically-disadvantaged individuals,

women, and service-disabled veterans the opportunity to compete

for Government contracts.

While all of the groups served by the special contracting program

are well represented in my home State of North Carolina, I want

to focus today on our service-disabled veterans. Too many of our

servicemembers are coming home from service overseas with a disability, and small business ownership is a viable option for many

of them, especially when entering the general workforce is not.

Federal contracting opportunities for these individuals’ businesses

should be enhanced.

As Ranking Member Snowe noted in her opening remarks, it is

simply unacceptable that in fiscal year 2005, the most recent numbers available, only 0.6 percent of all Federal contracts were

awarded to service-disabled veterans. In fact, they were awarded

just 0.49 percent of Department of Defense contracts.

When these individuals return to civilian life and take on the responsibilities and challenges of running their own business, they

certainly deserve every opportunity to succeed. The Federal goal

that at least 3 percent of contracts be awarded to service-disabled

veteran-owned small businesses must at least be met and should

be exceeded.

In North Carolina, SBA’s assistance to small businesses owned

by service-disabled veterans is especially important, as our State

has a very large military and veteran presence. In fact, more than

125,000 men and women are stationed at our numerous military

installations in North Carolina. According to the SBA, there are

approximately 1,000 service-disabled veteran-owned businesses in

North Carolina. This number will very, very likely continue to increase, given our State’s growing military and veteran population

and the rigors of the ongoing war against terror. I would expect the

same could be said for many other States.

Again, thank you, Mr. Chairman, for holding this important

hearing, and I certainly look forward to working with my colleagues and the various agencies represented by the panel to ensure that service-disabled veterans and other special contractors be

given fair opportunities to do business with the Government.

Thank you.

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Chairman KERRY. Thank you very much, Senator Dole, and

thank you particularly for that focus on disabled veterans, which

is critical, needless to say, and we appreciate it very much.

Senator Isakson.

OPENING STATEMENT OF THE HONORABLE JOHNNY ISAKSON,

A UNITED STATES SENATOR FROM GEORGIA

Senator ISAKSON. Well, thank you very much, Mr. Chairman. I

want to at the outset associate myself with your remarks with regards to subcontracting and small business by the larger contractors. The last meeting I had in Atlanta before I left to come here

on Monday was with an award-winning travel agency subcontractor who had been a part of a bigger contractor’s bid that was

procured and the business never materialized. The cost of meeting

the compliance of the larger contractor was greater than the revenue from the small business contract. So that is a problem, and

Senator Snowe was right on target in terms of the bundling issue

and I associate myself completely with both those remarks.

I have read some of the testimony which is going to talk about

the importance of transparency of information from the agencies,

and that is important, but it is not only the transparency of the information, it is that we need better information.

I have heard horror stories from small businesses who try to use

GSA’s Federal Procurement Data System Next Generation. Many

complain of the system producing a ‘‘busy’’ error any time one goes

up to access it during the work day, leaving many small businesses

with no choice but to go online on weekends or late at night. In

fact, there are even stories of for-profit firms actually doing the

search and then selling it to the small business contractors for

whom it was originally intended.

My point is, transparency is key, but only if the data is userfriendly, and I think the Government must be user-friendly to

those small businesses we seek to provide with portions of these

Government contracts. I believe we must make the Next Generation system far more user-friendly in order to benefit small business.

And on that subject, I think GSA must also work to keep its

schedule Web site updated. GSA keeps meticulous records on all

purchases made through the Federal Supply Schedule because, as

I understand, that is the way they collect their fee on each transaction. But you wouldn’t know it when you review theie online

records. I have also heard from constituents in Georgia who complain that there are huge gaps in the posted schedule of contract

awards. This, too, is unacceptable because it prevents businesses

from conducting basic market research and from finding potential

subcontracting opportunities.

As for SBA, I feel it must do a better job in small business community advocacy. Keep in mind I am not saying SBA has to build

a new Web site, develop a new program, or hire new personnel, but

SBA must simply make better use of its existing resources. I think

SBA’s Business Opportunity Specialists should do more to ask

agencies for set-asides once a reasonable expectation of adequate

competition among small businesses has been determined. Small

businesses would get an edge on many more contracts if the SBA

8

did a better job of implementing its advocacy on their behalf. A

push to be more proactive instead of reacting could make a huge

difference in the number of contracts awarded to small businesses.

So in conclusion, we must address the current challenges facing

small businesses trying to win contracts by targeting selected areas

and improving on these, making transparency real, and SBA a

user-friendly organization. I once again thank the Chairman and

Ranking Member for making this valuable hearing available to us

today.

Chairman KERRY. Senator, thank you. Thanks for your participation and contribution.

So we will now hear from our first panel. I ask all the witnesses

if you would summarize your testimony. Your full testimony will be

placed in the record as if read in full. If you could do the summary

within 5 minutes, it would help the Committee to focus on questions.

First, we’ll hear from Mr. Paul Hsu, the Associate Administrator

of the SBA’s Office of Government Contracting and Business Development, and then from Mr. Anthony Martoccia, Director of the Office of Small Business Programs in the Department of Defense.

Thank you for being here.

STATEMENT OF PAUL HSU, ASSOCIATE ADMINISTRATOR, OFFICE OF GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL BUSINESS ADMINISTRATION,

WASHINGTON, DC

Mr. HSU. Chairman Kerry, Ranking Member Snowe, and Members of the Committee, I know Administrator Preston is looking forward to his testimony next week before this Committee. My name

is Paul Hsu. I am the Associate Administrator for Government

Contracting and Business Development. I appreciate the opportunity to testify today on behalf of Administrator Preston regarding

the operation and success of SBA’s Government Contracting Program and our continuous effort to ensure greater transparency and

accountability throughout the Federal Government process, especially in terms of increasing the opportunity for small businesses.

As a first-generation immigrant myself, in 1984, I started my

first high-tech company. After my company won the first contract,

we needed working capital, money to buy parts and material. Fortunately, I was able to find the finance I needed with the help of

an SBA loan guarantee, and this was how I first came to know the

agency. Later, my company was certified to participate in SBA’s

8(a) Program. My company is an example of the power of this program to give businesses opportunity to grow.

SBA helped me to develop a successful business. It provided me

with the access to capital, training, the development experience

and solid competitive opportunities. Simply put, without the agency, I could not have come this far. So it is absolutely an honor and

privilege, Mr. Chairman, for me to join an agency that I truly, truly

believe in.

Government contracting dollars to the small business have grown

significantly since fiscal year 2000. There were $30.6 billion more

in small business prime contracts in fiscal year 2005 than fiscal

year 2000, supporting an estimated 235,000 new jobs.

9

SBA recognized the need for improving our Government Contracting Program and is taking the lead, along with the Office of

Federal Procurement Policy, to carry out a number of initiatives,

including working with agencies to ensure their reporting is accurate. The integrity of the data reported to the Congress and the

public is crucial to instill the confidence in the Federal contracting

system. Along with the Administrator of the Office of Federal Procurement Policy, Administrator Preston issued a memorandum to

all Federal agencies requiring them to review their procurement

data and identify any necessary changes to help resolve the apparent discrepancy in the Federal Procurement Data System, which is

as we call it FPDS–NG.

Under Administrator Preston’s leadership, SBA has taken a

number of steps to make contracting data more transparent and

accurate. Just last month, all Federal agencies completed the final

review of fiscal year 2006 data in the Federal Procurement Data

System. We expect to publish an official Small Business Goaling

Report for fiscal year 2006 very shortly and also a reissued fiscal

year 2005 report. These reports may not be flawless, but there will

be a substantial improvement in the quality of the small business

procurement information.

SBA also will publish the first Small Business Procurement

Scorecard this month. This scorecard is a method of ensuring the

Federal agencies provide the maximum opportunity for small business in the Federal marketplace. It reflects the current performance and the progress in improving such performance. The new

scorecard aligned with President Bush’s Management Agenda and

the data integrity is the key element of it. The scorecard, along

with the advances made in the FPDS–NG, are a significant step in

adding transparency to the goaling process.

The way to increase competition further is to decrease the practices like contracting bundling and the long-term sole source contracting, which can be done with a strong commitment to procurement planning and changing the way agencies approach the contracting. The Administration, through the SBA Small Business

Procurement Scorecard, will encourage agencies to meet all small

business goals and give them credit for progress. Each scorecard

will be tailored to individual procurement characteristics to the

agencies and SBA will work with each agency to establish its milestones and measure it against its own achievement. We have developed a simple, straightforward, and measurable criteria for the

government-wide small business procurement scorecard.

Also, SBA is in the process to implement the new size recertification rules. This regulation requires all small businesses to recertify their size status on long-term contracts at the end of the first

5 years and whenever the contract option is exercised. Recertification is also required for short-term contracts when a small business is purchased or merged with another business. This will assure the data is more accurately reflected and further support our

effort to help the small businesses receive prime contracts throughout the Federal Government.

Additionally, SBA asked over 1,000 large prime contractors to review any small business contract they may hold in order to more

accurately report a small business award to Congress. This is anVerDate 11-MAY-2000 13:50 Apr 02, 2008 Jkt 040408 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\40408.TXT DianeA PsN: DianeA
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other step to providing more accurate and transparent contracting

data that will lead to more opportunities for small business to compete in the Federal marketplace.

SBA is also focused on a number of other initiatives within the

Government contracting arena. This includes Administrator Preston’s initiative to expand opportunity for small business in the

under-served markets, such as women-owned small business,

HUBZone certified firms, and service disabled veteran-owned small

businesses.

SBA’s fiscal year 2008 budget includes a request for $500,000 to

examine how best to serve the 8(a), HUBZone, and SDB communities, as well as the women-owned and service disabled veteranowned small businesses.

Furthermore, SBA already committed to and is in the process of

bringing on-board additional Procurement Center Representatives

with a proposal in the fiscal year 2008 budget and requests an additional five PCRs. To better serve small businesses who do business with the Government, SBA redefined rules and responsibilities so the PCRs can devote more time to finding opportunities for

small business while the district offices and the resources partner

will be devoting more time and on getting small business ready to

do business.

Mr. Chairman, this concludes my testimony and I am looking forward to your questions.

[The prepared statement of Mr. Hsu follows:]

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Chairman KERRY. Thank you very much, Mr. Hsu.

Mr. Martoccia.

STATEMENT OF ANTHONY MARTOCCIA, DIRECTOR, OFFICE OF

SMALL BUSINESS PROGRAMS, U.S. DEPARTMENT OF DEFENSE, ARLINGTON, VIRGINIA

Mr. MARTOCCIA. Thank you. Good afternoon. Chairman Kerry,

Ranking Member Senator Snowe, distinguished Committee Members, it is my pleasure to testify before you today about small business contracting at the Department of Defense. I will read a condensed version of my written testimony submitted for you.

Small businesses have proven time and again to be a wellspring

of initiative, ingenuity, and tireless dedication to the mission of the

Department. For this and many other reasons, DOD is a loyal supporter of the small business community. My testimony today will

focus on contract bundling, small business size standards, subcontracting opportunities, and payments to small businesses.

In the mid-1990s, Congress passed several statutes requiring the

Government to buy products and services more efficiently. Federal

acquisition professionals became adept at leveraging the immense

buying power of the Government to enable prudent stewardship of

public funds and fewer internal resources. The consolidation of several requirements into a single contract to save money and gain

other benefits is one such methodology. Consolidation and bundling

may not be used without first taking into account the effect it may

have on small businesses. Even if bundling and consolidation can

be justified by its anticipated benefits, contracting professionals

must develop acquisition strategies to mitigate the impact on small

businesses.

With regard to size standards, the Department is concerned that

unrealistically low small business size standards will have a negative impact on the Defense small business supplier base. The Defense Department believes that a number of size standards representing critical defense industries have not kept pace with the

U.S. economy. For example, the size and complexity of engineering,

professional, and information technology services within the Department have increased dramatically over the last decade.

DOD would favor the adjustment of size standards as needed to

keep them in line with the dynamics of the U.S. economy and the

U.S. military. My office has met with representatives of SBA and

the Office of Federal Procurement Policy in March 2007. All parties

agreed that a comprehensive review of the size standards is needed. Last month, the SBA advised that they would proceed with the

review, focusing on size standards associated with military systems

and engineering services. The Department is optimistic that resolution of the size standards issues will enable small businesses to

take on an even greater role in the competitive playing field.

Subcontracting opportunities—military departments and agencies use various techniques to encourage prime contractors to subcontract and team with small businesses. Contractual incentives

that reward prime contractors for exceptional subcontract performance is one technique. In addition, we are increasingly using proposed subcontracting performance for small businesses as a source

selection factor. When a contractor fails to make a good faith effort

16

to achieve its subcontracting goals, contracting officials will note

this information in the contractor’s official past performance record.

Past performance information is maintained in the governmentwide Past Performance Information Retrieval System.

One subcontractor initiative that we are using in the Defense Department is the Comprehensive Subcontracting Plan, and the purpose of this plan is to determine whether the negotiation and administration of comprehensive small business subcontracting plans

on a corporate, division, or plant-wide basis increases subcontracting opportunities for small businesses while reducing the administrative burdens on contractors.

Under the Comprehensive Subcontracting Test Program, eligible

contractors establish annual Comprehensive Small Business Subcontracting Plans that cover their entire business operation in support of all DOD contracts and subcontracts. There are currently 14

firms participating in the programs.

And finally, payments to small businesses. It is the Department’s

policy to assist small business concerns in obtaining payments

under their prime contracts, late payments, interest penalties, or

information on contractual payment provisions. With regard to

prime contractor payments to their small business subcontractors,

it is the policy of DOD to ensure that prime contractors establish

procedures for the timely payment of amounts due pursuant to the

terms of their subcontracts.

Although DOD does not have priority of contracts with subcontractors, a DOD Contracting Officer that determines a prime

contractor’s certification of payment to be inaccurate in any material respect must investigate the matter. Depending on the contract

type, the Contracting Officers will encourage the prime contractors

to make timely payments to subcontractors or the Contracting Officer may reduce or suspend progress payments until the contractor

applies. Failure of prime contractors to pay their subcontractors in

a timely manner is negative past performance and will be recorded

in their Past Performance Rating System.

In conclusion, the small business community plays a prominent

role in the acquisition of the materials, supplies, and services needed by men and women in uniform. DOD is committed to providing

maximum opportunities for small businesses in both the prime and

subcontracting areas. They are an integral part of the success of

the armed forces, and it is DOD’s obligation to afford small businesses every opportunity for contracting.

Today, I have given a brief overview of our four critical issues as

they relate to small businesses and I look forward to any questions

or comments.

Thank you.

[The prepared statement of Mr. Martoccia follows:]

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Chairman KERRY. Thank you very much, Mr. Martoccia.

Let me just raise right off the bat the issue that Senator Dole

raised about disabled veteran contracting. This is something that

the Committee has heard some testimony on previously. Why is the

record of DOD so poor with respect to its base constituency, its fundamental constituency? It just seems extraordinary to me, particularly in the time of Iraq and Afghanistan.

Mr. MARTOCCIA. We agree that it is too low and——

Chairman KERRY. Why is it too low? I am asking you, why?

Mr. MARTOCCIA. Well, the trend has a significant increase, but

we are changing the way we do business with veterans. We are

making it a priority.

Chairman KERRY. Is it safe to say it hasn’t been a priority?

Mr. MARTOCCIA. No, it has been a priority, but it is being made

more of a priority.

Chairman KERRY. Why are you making it a priority? Are you

making it more of a priority?

Mr. MARTOCCIA. That is correct, and we are focusing on getting

the decision makers to look at and conduct sources sought to find

capable veteran disabled-owned companies that can perform the

work.

Chairman KERRY. When you say, to find the capable disabled

veteran company, for a lot of veterans who have been disabled,

they may not know what they are capable of yet. Don’t you think

there ought to be a proactive, you can do it, we are going to help

you set up, here is the kind of thing you can do, effort?

Mr. MARTOCCIA. Yes. We have representatives from——

Chairman KERRY. If you just go out and look for people who have

already started a business, you are not going to find a lot of people,

probably.

Mr. MARTOCCIA. Obviously, training, and our PTACs, we have a

representative here from Maine who will be talking about it, will

help small businesses learn about how to do business with the Government. It is a complicated process and SBA helps in the training.

Our small business specialists, we have many resources throughout

all departments——

Chairman KERRY. Let me stop you there for a minute.

Mr. MARTOCCIA. OK.

Chairman KERRY. Why does it have to be so complicated? What

is inherent about it that makes it so complicated? I mean, this is

what drives citizens crazy, is the notion that you do business with

the Government and it is complicated. It makes them jump

through hoops unlike anything else.

Mr. MARTOCCIA. Obviously, it has to be fair. It has to be competitive. It has to be fully evaluated. So it does take time.

Chairman KERRY. Does that, by definition, have to be complicated?

Mr. MARTOCCIA. Not necessarily, but it does take time. It does

take a lot of resources. It takes a lot of effort by the companies who

put in proposals to the Government to make sure that they are

proper and they address all the issues required in the solicitation.

Chairman KERRY. But everybody else does that in any normal

set of subcontracting and contracting process. It seems to me that

when a business comes along, if there is work to be done, you can

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let it out in the appropriate way. Requests for proposals go out.

You review the proposals and you let the business. But somehow,

it gets super convoluted according to everybody I talk to.

Mr. MARTOCCIA. Well, I was a Contracting Officer for 30-someodd years. It does take effort and they have to learn how to put

a proposal together to address specific Government requirements,

and that is the challenge. They have to have a financial system

that can record costs. That is a governmental accounting system

that is required to make sure the taxpayers’ dollars are spent appropriately. So those are the——

Chairman KERRY. But aren’t all of those conditions precedent to

being able to actually apply? I mean, don’t you say that, don’t bother applying if you don’t have the following in place, boom, boom,

boom, and then they either apply or they don’t. I mean, that is a

pretty quick elimination process.

Mr. MARTOCCIA. Correct. Again, the resources have been reduced

over the last 10 years.

Chairman KERRY. Who reduced the resources?

Mr. MARTOCCIA. The agencies reduced the resources in the 1102

Series. We have fewer contracting professionals to conduct the procurements.

Chairman KERRY. Well, let me ask you about that for a minute,

because Senator Snowe and I have certainly been fighting that significantly. I think that as of March 2006, there were only 43 fulltime Procurement Center Representatives and a total of 58 total

employees with PCR duties. Mr. Hsu, this goes to your testimony

also. You said that SBA has requested fiscal year 2008 funding for

an additional nine Procurement Center Representatives.

Mr. HSU. Yes, sir.

Chairman KERRY. Senator Snowe and I have pushed for 100, so

that is a big difference, a mighty big difference. In 2005, the Inspector General found that SBA didn’t have enough Procurement

Center Representatives to review bundled contracts, with a survey

that SBA had not reviewed 87 percent of bundled contracts. So how

are we possibly supposed to hold out the promise to people that the

system is going to be fair and accountable and enforced if you are

not asking for the right numbers of people to do the job?

Mr. HSU. Well, Mr. Chairman, from an SBA point of view, this

is really nothing new to us. Almost a year ago, we realized the Government has not historically met the social-economic Government

goals, including HUBZone and especially the service disabled veterans.

The PCRs, we are scheduled to hire five more this year, but my

personal——

Chairman KERRY. How do you say five more? You have only requested funding for an additional nine, so are you down from the

43 slots?

Mr. HSU. Oh, no, no, no. We are going to—I think before the end

of the fiscal year, we are going to hire five more, and then I think

the first part of next year, we are going to hire four more. So the

total will be nine.

We are looking at the PCRs very closely, sir. We refocused our

PCRs to work primarily with the Federal Procurement Office to

help the agency to meet their goal and there are many ways that

25

we can help the PCRs. The technology is there. We provide the

tools, such as Quick Market Search, to help the agencies to conduct

a market search very quickly, very easily, and——

Chairman KERRY. Let me just interrupt you for a minute.

Mr. HSU. Yes, sir.

Chairman KERRY. How long have you been over there?

Mr. HSU. A little over 3 months, sir.

Chairman KERRY. And you are talking about things that you are

going to do. But we are here to look at what has been done and

what you are doing and can do. I mean, I have been through years

and years now of sitting at this table listening to people say, well,

we are going to do this, we are going to do that, we are going to

do this. But it doesn’t happen, number one, and number two, the

statutory requirements year after year don’t get met. Now, tell me

how nine additional PCRs are going to review $300 billion worth

of contracts.

Mr. HSU. Well, because we are introducing a lot of high technology, like a quick market search, sir. That information is right

there. They don’t really have to be physically——

Chairman KERRY. Let me—fill that out for me.

Mr. HSU. OK. The Quick Market Search is a tool that will provide the agencies or contracting officers, if any new requirement is

happening, this information is right there, right in front of their

screen.

Chairman KERRY. What is? What is right in front of them?

Mr. HSU. It is the information of the contractors, the service disabled veterans. How many of them are in your area? How many

of them are in your State? How many of them are in your region?

Chairman KERRY. I am talking about a bundling of a contract,

the reviewing of a bundled contract. How are you going to review

the bundled contract?

Mr. HSU. Well, we have—in addition to the PCRs, we have our

field services people. We have——

Chairman KERRY. Why is it not happening today? Why do 87

percent of the contracts go unreviewed? Eighty-seven percent—that

means you are doing about 13 percent. Do you realize the impact

of that and the implications of it?

Mr. HSU. We do not like the bundling of contracts at all, sir. We

are trying to stop——

Chairman KERRY. I know you don’t like it, but how do you stop

it——

Mr. HSU [continuing]. Each and every one of them.

Chairman KERRY. If you can’t review it and you don’t review

it——

Mr. HSU. We are working——

Chairman KERRY. [continuing]. And you don’t enforce it?

Mr. HSU. We are working very closely with the DOD, which is

the primary——

Chairman KERRY. Working very closely——

Mr. HSU. Because we provide the guidance. We provide even the

oversight about each and every procurement to prevent any kind

of——

Chairman KERRY. What guidance have you provided? Mr.

Martoccia, what guidance have you been provided?

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Mr. MARTOCCIA. Well, they have provided guidance to us——

Chairman KERRY. To do what?

Mr. MARTOCCIA. Well, you have to remember, sir, that we do

have in each of the departments the procurement activity contract

specialists that help SBA and the PCRs look at every requirement,

especially the large requirements, the consolidated, those contracts

that are bundled or have been bundled 20 years ago to see if there

are more opportunities available to small businesses. So there are

resources and they are being utilized and they are being effective

in breaking out some of these large contracts so small businesses

can bid on them.

Chairman KERRY. Do you believe that it is adequate to have 87

percent of bundled contracts not reviewed?

Mr. MARTOCCIA. I don’t think that is a correct number myself. I

mean——

Chairman KERRY. Do you have a correct number to offer the

Committee?

Mr. MARTOCCIA. No. I can go by experience, but my experience

says——

Chairman KERRY. I am just going by the numbers that the Inspector General found. You disagree with the Inspector General?

Mr. MARTOCCIA. Well, maybe the PCRs have a lower level. But

as I said, there are a number of small business resources that

every department has that will help SBA look at every requirement

for small business opportunities. Now, I don’t know what the——

Chairman KERRY. Honestly, I am not trying to be difficult, but

I honestly don’t know what that means in the context of what I am

asking.

Mr. MARTOCCIA. Well, they have expertise in contracting with

small——

Chairman KERRY. Where are they applying it? What are they

doing?

Mr. MARTOCCIA. They are looking at the procurement requirements. They are looking at the procurement strategies. They are

looking at the forecast. They are working with the program offices

and the contracting officers to look at large contractors—large contracts that are consolidated, that are task orders——

Chairman KERRY. Why do you think the Inspector General came

to the conclusion the Inspector General came to? Is the Inspector

General wrong, in your judgment?

Mr. MARTOCCIA. I think he is talking about the PCRs, not our

total small business workforce.

Chairman KERRY. The PCR-reviewed bundled contracts?

Mr. MARTOCCIA. Correct.

Chairman KERRY. As opposed to?

Mr. MARTOCCIA. We have, in the Department of Defense, I don’t

know the exact number, but close to 500 part-time or full-time

small business specialists that look——

Chairman KERRY. What percentage of your contracts are reviewed for the bundling, do you think?

Mr. MARTOCCIA. I would hope all of them.

Chairman KERRY. Now, why should we have—I mean, help me

to understand why I should have confidence in what you are saying

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when, in essence, you claim to have met the goal of small business

contracting, correct?

Mr. MARTOCCIA. The latest data is not out.

Chairman KERRY. But previously——

Mr. MARTOCCIA. Right.

Chairman KERRY [continuing]. In the last round of data, you

claim to have met it, I believe with a 24.6 percent claim.

Mr. MARTOCCIA. That is correct.

Chairman KERRY. But you don’t include any overseas contracting.

Mr. MARTOCCIA. That is not in the base, I don’t believe.

Chairman KERRY. It is. You don’t include overseas contracting.

What percentage is overseas contracting of Pentagon contracts?

Mr. MARTOCCIA. I would have to get back to you with that number. I know it is significant.

Chairman KERRY. I know it is very significant, too. So, in effect,

when you include overseas and do the proper math of the money

spent by the Federal Government, you are way below 22 percent.

You are not at 24 percent, so it is a false claim.

Mr. MARTOCCIA. But I think the statute is based upon the available opportunity for small businesses.

Chairman KERRY. And you are saying there is no available opportunity?

Mr. MARTOCCIA. No, I am not saying that. I am looking——

Chairman KERRY. What is that?

Mr. MARTOCCIA. I am not saying that, sir. I am looking at the

base of those contracts eligible to be set aside for small businesses.

That is what we base our numbers on, and that is——

Chairman KERRY. Well, I would sure like to look at that, and we

will look at that. I would like the Committee staff to take a look

at this question of eligibility and see where we come out on that.

And I would be very surprised—I am prepared to be, but I would

be very surprised if it gets you over the required percentage.

Let me cede to Senator Snowe, if she is ready, and then I will

come back to a couple of other things.

Senator SNOWE. Thank you, Mr. Chairman.

If you can sense our frustration, it is only because we seem to

confront repeatedly the same problems, the same resistance, and

the same inability to get these contracting programs right and administer them on behalf of the small business community. It is

truly a challenging problem and it is hard to understand why. The

Department of Defense obviously is a major agency when it comes

to issuing contracts and the ability for small business to access

many of those procurement contracts, and yet you fall far short.

We held a hearing in January of this year on the service disabled

veteran-owned small business, and as the Chairman indicated, we

are clearly woefully short of the 3 percent goal. These businesses

receive 0.6 percent out of a 3 percent statutory goal, and yet the

Department of Defense accounts for more than half of all procurement contracts issued by the Federal Government and nearly $220

billion were spent in contracts in fiscal year 2005, but issued less

than all the other agencies government-wide at an egregious 0.4

percent.

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So I think the question is why, Mr. Martoccia, as to why the Department of Defense is woefully deficient when it comes to ensuring

their service disabled-owned small businesses have the opportunity

to have access to these contracting opportunities. I mean, this isn’t

the first year. It has just been going on year after year.

Mr. MARTOCCIA. I understand. I have been in the job 2 months

and I can tell you, as——

Chairman KERRY. Is this—can I just interrupt for a minute? We

habitually get people sent up here who have been in a job for 2

months and 3 months.

Mr. MARTOCCIA. Right.

Chairman KERRY. Is this part of the calculation, or——

[Laughter.]

Mr. MARTOCCIA. I was in Paul’s job previously, so I am in this

job, so I do know the program.

Chairman KERRY. What do they do, ask you all to raise your

hand, who has been here the least time?

[Laughter.]

Chairman KERRY. Who has the least answers? We will serve you

up tomorrow to the United States Senate.

[Laughter.]

Mr. MARTOCCIA. But you can be assured, Senator Snowe, that

the Department and Secretary Gates and my boss are totally committed. I have been there, like I said, a couple of months, and I

have never seen such effort that is being made to make the opportunities available to service disabled veteran-owned companies. It

is going down from the top to the bottom, and the decision makers

understand the need to improve those numbers.

Senator SNOWE. Well, you should have been here for that hearing in January. It is a sad commentary on our Government, and

most especially the Defense Department, to hear from these service

disabled veterans coming back, struggling to make a transition

after serving our country and sacrificing so much and the Government lets them down. We heard tragic stories. I just cannot understand why there is such resistance and intransigence. Obviously, it

is bureaucratic resistance and intransigence, and it is just

stonewalling this process.

Mr. MARTOCCIA. Well, I don’t think it is a lack of effort. I mean,

we have had a good trend. We are up, but we are only at 4.9. It

is not good enough, and we are going to make every effort to get

to those businesses. We are going to do sources sought. The Army

alone has come up with $1.7 billion in the next fiscal year of those

requirements that they have already identified that they want to

set aside for service disabled veterans. So we are going to do

sources sought. We are going to make it a priority.

Senator SNOWE. And how will you do that? I mean, if you think

about the amount of defense spending with respect to Iraq, Afghanistan, worldwide, it is obviously astronomical—

Mr. MARTOCCIA. And we have——

Senator SNOWE [continuing]. So it is really hard to comprehend

as to why this constituency, the most deserving for providing selfless sacrifice to this Nation and not even being able to participate

to help them make this transition. We owe them no less.

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Mr. MARTOCCIA. I agree, and we at DOD have a special relationship with the veterans’ community and we are doing and we will

continue to do all we can do to make those numbers better quicker

rather than later.

Senator SNOWE. Well, you are talking about $220 billion for DOD contracting and $1 billion for service disabled veterans, $1 billion

out of $220 billion. That is just really abysmal. It is paltry.

Mr. MARTOCCIA. It is a factor of 6 below what we would like to

call the floor of 3 percent.

Chairman KERRY. Could I just interrupt for 1 second? It is not

4.9 percent.

Mr. MARTOCCIA. I mean, .49 percent. I misspoke.

Senator SNOWE. Yes. And so how quickly can we expect a turnaround? More importantly, how quickly can the service disabled

veterans expect a turnaround, a different response?

Mr. MARTOCCIA. Very soon. I would think that—I think they are

at the right place at the right time to do Government contracting.

There is going to be a major effort, and there is currently a major

effort ongoing to get those opportunities out and improve the 0.49

of 1 percent so we can get closer to 3 in a shorter amount of time

than most people think.

Senator SNOWE. Yes. If you think of $220 billion and $1 billion,

it really is incredulous to think that we are making such a minimal

effort. It really is hard to believe, and those are the 2005 numbers.

I hate to think what they are today.

Mr. MARTOCCIA. Again, Senator Snowe, it is not because of lack

of effort.

Senator SNOWE. I know. It just is, the question is, it is getting

beyond the effort and it is getting it done. It is achieving real results on behalf of this most deserving group of individuals serving

our Nation. What does it say about our country if we can’t help the

Nation’s veterans——

Mr. MARTOCCIA. I agree.

Senator SNOWE [continuing]. And those who have been disabled

as a result of their service? So I really hope that we can turn this

around. Make it your legacy. Make it the Department of Defense’s

legacy. This problem just didn’t develop today, but we are at a very

difficult and challenging point in our own country’s history with respect to the war in Iraq and the War on Terror in Afghanistan, so

we should make a special extraordinary effort to send the right

message to those who are serving our Nation that we understand

what they have contributed and that we are prepared to do everything we can to move heaven and earth to serve them as they have

served our country.

So I hope we can get this right sooner, because really, it requires

a major initiative, energy, and the drive to make it happen; and

you are in the position to do it.

Mr. Hsu, in all the contracting programs other than the Small

Business Disadvantaged Contracting Program, all the other goals

of the programs have not been met, as I cited earlier, womenowned business, obviously the service disabled veteran-owned, have

not met the goals. HUBZone has never met their goals since the

inception of the program. The same is true for women businessowned contracting. That has never been met. It has never been acVerDate 11-MAY-2000 13:50 Apr 02, 2008 Jkt 040408 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 C:\DOCS\40408.TXT DianeA PsN: DianeA
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complished. When can we expect a different record of experience

with respect to these programs?

Mr. HSU. Well, Senator, we recognize that. That is the reason

why almost a year ago, the agency started the initiative, to me, it

is the initiative increasing the opportunities for American small

business. We have all the different things that we want to do, and

in particular Senator Kerry mentioned about the PCRs.

We are implementing a new tool that is called EPCR. EPCR

stands for Electronic Procurement Center Representative. It will

provide a very effective and efficient tool for PCRs and the Federal

agencies to review all these requirements for set-asides under the

procurement program to ensure the opportunity for all small businesses. This year, we will implement the initiative, and so all——

Senator SNOWE. What is the goal of SBA with respect to making

sure that these programs meet their statutory requirements?

Mr. HSU. Our goal is going to be 23 percent of small business,

5 percent of women, 3 percent of service disabled——

Senator SNOWE. But by which deadline, though, would this be accomplished? What is the agency setting for a deadline to meet this

goal——

Mr. HSU. Well, we want to do it as soon as possible——

Senator SNOWE [continuing]. These goals? What?

Mr. HSU. We want to do it as soon as possible, ma’am.

Senator SNOWE. Yes, but is that going to take a matter of months

or the rest of the year? I mean, how long is it going to take? You

must have some estimate, because obviously that is the standard

of measurement that you would use in order to make sure you have

the right program in place to have it accomplished.

Mr. HSU. Well, we anticipate—take the Women-Owned Small

Business Federal Contracting Assistance Program, for example. We

anticipate the program will be implemented the end of this fiscal

year. It is—I have to admit, though, we thought it could be very

easy to identify the industries in which the women-owned small

businesses are, quote, ‘‘under-represented,’’ but as it turned out, it

was more complicated than we expected. And also, for the government-wide set-aside program based on gender, this is very new to

us. It is really a new concept, so we want to make sure that all

these withstand the constitutional scrutiny.

But again, we are committed to increase the number of contracts

made for small business for women, for HUBZone, for service disabled, and—

Senator SNOWE. Yes, but you see, like the women’s contracting

program has been in place for 61⁄2 years, so how long do you think

it will take?

Mr. HSU. Well, ma’am, we did our first study in 2001, which is

less than 10 months after the Congress passed the law. But unfortunately, the National Academy of Science did not agree with our

study, so that is the reason why in 2006, we contracted with RAND

Corporation to do another study, and——

Senator SNOWE. Yes, I know, but we are talking 61⁄2 years. Twothousand-one—we are in 2007.

Mr. HSU. Yes, ma’am, but the study completed——

Senator SNOWE. What?

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Mr. HSU. The study completed. The RAND Corporation did a

study and the study completed and we are moving very quickly to

publish the final rule, and this, like I said——

Senator SNOWE. Is it going to address the problem?

Mr. HSU. It will, ma’am, if we—yes.

Senator SNOWE. So how long will that process take? What can

you tell the Committee? What can we expect——

Mr. HSU. We will——

Senator SNOWE [continuing]. So that we don’t have to repeat this

process? At least get it implemented for the first time in the history of the program.

Mr. HSU. Yes, ma’am. We will implement the Women–Owned

Small Business Federal Contract Assistance Program by the end of

this fiscal year.

Senator SNOWE. OK. And so now how about HUBZones?

Mr. HSU. Yes, HUBZones——

Senator SNOWE. That is since 1999.

Mr. HSU. OK. The HUBZone Program is a place-based, race-neutral program. We understand you stimulate the economic development and create jobs in the Historically Under-Utilized Business

Zone. We are going to put effort under my watch. This is my program, Senator. This is my program. We will put more effort in

marketing to the contracting agencies. We will put PCRs, like I

was just mentioning, and also we let all the contracting officers understand there is a ‘‘rule of two.’’ In other words, if there are two

HUBZone companies that can provide these services, this requirement will be and can be set aside for HUBZone.

We continue the Fed-Biz Op electronic monitoring systems. In

other words, we will remind the Contracting Officer that the three

percent statutory goal. And most importantly, we will proceed with

the HUBZone set-aside letter system. This means an e-mail message will go to the Contracting Officer automatically and formally

requesting that the future requirements can be and will be——

Senator SNOWE. When is that system going to be up and running?

Mr. HSU. It will be——

Senator SNOWE. We have been told since 2005——

Mr. HSU. No. I think under my watch, it will be by the end of

this fiscal year, ma’am.

Senator SNOWE. The same is true for the HUBZones?

Mr. HSU. Yes, ma’am.

Chairman KERRY. By the end of this fiscal year? In other words,

by this October?

Mr. HSU. Uh—yes.

Senator SNOWE. Mr. Martoccia, one other question. I have many,

but more one for this round. I sent a letter on March 21 to Peter

Gehren, who is the Secretary of the Department of Army, requesting documents, work performed by small businesses, small business contracts at Walter Reed, and I had asked for a response by

April 5. Now, when could I expect this report, do you think, since

it has been 3 months?

Mr. MARTOCCIA. I don’t know the answer to that, Senator——

Senator SNOWE. Well, because I am concerned that some of these

contractors could have contributed to the substandard and disVerDate 11-MAY-2000 13:50 Apr 02, 2008 Jkt 040408 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\40408.TXT DianeA PsN: DianeA
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graceful work at Walter Reed that we are all familiar with now,

and so I wrote a letter back in mid-March.

Mr. MARTOCCIA. I don’t think my particular office was involved

in it, but I will look into it when I get back.

Senator SNOWE. OK, would you?

Mr. MARTOCCIA. Yes, ma’am.

Senator SNOWE. I would appreciate a response to that.

Mr. MARTOCCIA. OK.

Senator SNOWE. Thank you. Thank you, Mr. Chairman.

Chairman KERRY. Thank you, Senator Snowe.

We have another panel and I don’t want to prolong this too long

because we need to get the other panel in, but Mr. Martoccia, in

answer to Senator Snowe about this question of disabled veteran

procurement, you said, and I will quote you, ‘‘that it is not because

of a lack of effort.’’ I want to respectfully disagree with you, because I think when the military commits itself to something, those

within the Pentagon, they usually get it done.

I think it is a lack of effort. I don’t think that there has been a

real commitment to it. I don’t think there has been a real awareness of it. And I am confident that if there had been a sufficient

effort, you would be here saying that we have reached out to Xnumber of places. We have put the following proactive marketing

efforts in place. We have reached out to the following numbers of

people and here is what we have run up against, and you would

define it much more specifically than you have.

So, I mean, I hate to say that, but I really think it has just been

off the radar screen, for whatever reasons.

Mr. MARTOCCIA. In all due respect, Senator Kerry, I have been

there 2 months and I have never seen in my contracting background the effort and the commitment——

Chairman KERRY. Oh, yes. I understand that——

Mr. MARTOCCIA. No, in the actions——

Chairman KERRY [continuing]. Because this issue got burning in

January.

Mr. MARTOCCIA. In the actions——

Chairman KERRY. You have been there for 2 months. It is now

July.

Mr. MARTOCCIA. We have——

Chairman KERRY. The fact is that long before you got there, this

Committee lit a few burners on the issue on a bipartisan basis, and

even before that, there were a lot of questions being raised about

it, and particularly with Walter Reed and other things that have

happened, there is now an understanding. And I will grant this, I

think Secretary Gates is aware of it and it committed to it and I

think he is the kind of person who will get the job done ultimately.

But I don’t think there has been the effort to date.

Mr. MARTOCCIA. Well, going forward, you can be assured——

Chairman KERRY. If there has been, then shame on whoever has

been making that effort, because it is inadequate. You know, the

Army, as you know, says they never leave any of their wounded behind and the Marines don’t leave their dead and the military is famous for committing never to leave anybody behind, but these

folks, as we have seen, have been grievously left behind.

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Mr. MARTOCCIA. Well, during my stay there, and hopefully it will

be until the end of the Administration, I will see to it that it is a

priority and there are actions taken and people held accountable to

get the job done.

Chairman KERRY. Well, we are going to obviously stay right on

this, and I know that Patty Murray and the Veterans Affairs folks

are going to be staying on it. I may even raise with the Majority

Leader the idea of having some kind of special oversight effort that

really keeps the spotlight on this and makes certain that we are

all in pursuit of this, so that by the end of the year, there is just

no possibility of having overlooked any way of making this happen.

Mr. MARTOCCIA. Well, we have a number of initiatives ongoing

that I can’t talk about right now that I think you will be pleased

with with regard to the veterans——

Chairman KERRY. Helping disabled veterans is top secret?

Mr. MARTOCCIA. No, it is not——

[Laughter.]

Mr. MARTOCCIA. No, it is not. We are going to bring in groups

on a regular basis to discuss issues, to get their feedback, to get

their advice, small business, disabled business, veterans’ businesses, stakeholders——

Chairman KERRY. Well, we will look for all of it. That sounds to

me like real effort, and obviously we will welcome it and we look

forward to it.

Let me just ask you very quickly, both of you, Mr. Hsu, if you

are able to, can you share with us this question of size of businesses? We hear from a lot of small businesses that they repeatedly

bump up against the size standards. For example, a certified public

accountant has a size standard that is around $6.5 million, but

then you get the four big accounting firms and they are somewhere

up around the $25 billion level in revenue. So how does a small

firm compete against that? You can run down the list of different

things.

Mr. HSU. Yes, sir. The SBA——

Chairman KERRY. Should the size standards be changed?

Mr. HSU. It will. We——

Chairman KERRY. By the end of this fiscal year?

Mr. HSU. No. This is going to take about 18 to 24 months, and

here is why. We have a size standard for every private sector industry in the U.S. economy. We use the NAICS code to identify the

industry. So we use either the number of employees or the average

annual receipt for the size standard. For example, manufacturing,

we use 500 people. In the professional services, we use $6.5 million.

The size standard, like you said, sir, represents the largest size

that a business may be to remain as a small business in the Federal Contracting Program, so we know that is so important. We

are, sir, we are conducting a comprehensive study under the Administrator’s leadership to reevaluate the size standard for all industries.

Chairman KERRY. Are you doing them one at a time, or——

Mr. HSU. We are doing two to three sectors at a time. So it will

take about 3 months for us to complete the two to three sectors,

and then the effort will be ongoing. So overall, this is probably

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going be about 18 to 24 months’ effort. But toward the end, we will

complete our comprehensive study for the entire economy——

Chairman KERRY. I may want to pick up on some of these questions with the Administrator when we have him here, and I appreciate your being here certainly. But if you see these lists of items

up here, Mr. Martoccia, these are the excluded items and they are

excluded both statutorily and by regulation. I think there is a very

legitimate question as to whether they are appropriately excluded.

[The list of excluded items referred to follows:]

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Mr. MARTOCCIA. I agree.

Chairman KERRY. OK. So maybe we can work at seeing whether

or not we broaden this base a little more effectively, and we will

certainly continue to do that.

In the interest of time, not because we don’t have more questions, I am going to leave the record open for 2 weeks so that Committee Members can submit questions in writing. But I do need to

move to the next panel in the interest of time. So we are grateful

to you for being here today and we look forward to following up and

working with you on this issue.

If I could ask the second panel to come right up, we will try to

move with a minimum amount of disruption.

Can we stay in order, please? I would like to get folks seated as

fast as possible with minimal disruption. Thank you very much.

We have a variety of accomplished witnesses in the second panel

today and we are very grateful to you for your patience. First, we

are going to hear from Mr. Todd McCracken, president of the National Small Business Association. Then we will hear from Ms. Patricia Rice, the director of the Maine Procurement Technical Assistance Center. Our third witness on this panel is Ms. Magdalah

Silva, the chief executive officer of DMS International, Inc., and

testifying on behalf of Women Impacting Public Policy. And finally,

we will hear from Mr. Ronald Newlan, president and chairman of

the HUBZone Contractors National Council.

Thank you again, all of you, for taking time to be here. I know

there was a little question mark about how we might meet and so

forth. I appreciate your patience, and Ms. Rice, especially. I know

you were questioning whether, I think, either to be here or to go

home or whatever, but we are glad we could make it work for our

neighbors from down East and we are glad to have you here.

So if we could start, Mr. McCracken, please, first. Thanks.

STATEMENT OF TODD McCRACKEN, PRESIDENT, NATIONAL

SMALL BUSINESS ASSOCIATION, WASHINGTON, DC

Mr. MCCRACKEN. Thank you very much for having me. Again,

my name is Todd McCracken. I am the president of the National

Small Business Association. We are the largest national—excuse

me, the oldest national small business organization. I appreciate

the opportunity to be here on behalf of all of our members, most

especially those that are engaged or trying to be engaged, as it

were, in Federal contracting.

You have done, I think, a pretty fine job of outlining what many

of the problems are, so with your indulgence, I am going to summarize my statement and not continue to belabor points that have

been made and just try to focus——

Chairman KERRY. Can I just interrupt you for 1 minute?

Mr. MCCRACKEN. Absolutely.

Chairman KERRY. Is Mr. Martoccia still here? Yes, he is. Good.

And Mr. Hsu is here. Thank you, because I want you to be able

to hear some of the testimony. Thank you. Mr. McCracken?

Mr. MCCRACKEN. Thank you. We believe that we need to increase the small business goal. Twenty-three percent, we think,

looked at appropriately, still isn’t being met, but even 23 percent

is not representative of the role that small business plays in the

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economy and we think that it needs to be higher than, in fact, the

23 percent. We also think we need to look at goals by agency and

that each agency should be required to meet the minimum Federal

goal on an agency-by-agency basis.

We are also in complete agreement with some remarks that have

already been made today that the base, as it were, needs to be increased. We specifically think that overseas contracts should be included in the calculation of small business goals, but it doesn’t necessarily stop there. There are a lot of items that are excluded and

we think it should be looked at very carefully. There are probably

some that are appropriately excluded, but not everything, we don’t

think.

Bundling—clearly, there has been a huge move toward bundled

contracts in this arena. Unfortunately, one of the biggest problems

is that the Federal definition of bundling isn’t sufficient. What we

all think of as bundling often doesn’t meet the Federal definition

for what is bundling to be reviewed in the first place. And so we

think that definition needs to be changed to include a much broader range of contracts and not just the narrow definition that currently is in play.

When it comes to fraud and the inclusion—the definition of

which small business are getting the contracts, there has been a

very serious problem there, obviously, and it has been exacerbated

by the trend in recent years of larger companies buying smaller

contractors, which has been happening at a much greater pace

than it had been in the past. So now you have, as your previous

chart showed, very large defense contractors being listed as small

business, or their subsidiaries as small business contractors, which

clearly is not the case.

In the last month, the SBA has put into place some new regulations which should, we think, help a great deal on this. They may

need to go further, we there is, we recognize here, a difficult line

because clearly many businesses may grow during the course of a

contract and may no longer be small businesses. While we want to

make sure that the goals really do help small businesses get contracts, we also don’t want to discourage that small business growth

at the same time. We don’t want them to be counted as small business contracts once they have grown beyond small businesses, but

it is important not to disrupt those relationships so the businesses

will be able to plan, as well.

Subcontracting is a huge, huge issue for small companies. We

talked ad nauseam about prime contracts at these hearings and

other fora, but subcontracting is critically important to many,

many small companies across the country and there are a whole

host of issues there, some of which have been talked about already,

the case where a small company may never, in fact, get the business that was promised by a larger business when that larger business gets the prime contract and we think there needs to be some

additional accountability there with those larger companies.

Secondarily, there is the question of payment, which has been a

perennial issue for small subcontractors. They often are not paid in

a timely fashion and we think that there is a very significant potential role for the agencies to hold those prime contractors’ feet to

the fire a little bit better than it has in the last number of years.

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That clearly should be a prime criteria that agencies use in evaluating those companies for the awarding of prime contracts.

I think I will stop there and save time for questions. I see my

time is up anyway. Thank you very much.

[The prepared statement of Mr. McCracken follows:]

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Chairman KERRY. Thank you very much.

Ms. Rice from Bangor?

STATEMENT OF PATRICIA RICE, DIRECTOR, MAINE PROCUREMENT TECHNICAL ASSISTANCE CENTER, BANGOR, MAINE

Ms. RICE. From Bangor, yes. Mr. Chairman, Senator Snowe,

thank you for your support for the Nation’s small businesses. I am

honored to be here. As was mentioned, I am the director of the

Maine Procurement Technical Assistance Center, often referred to

as the Maine PTAC. The Maine PTAC is part of the Procurement

Technical Assistance Program that has 93 centers nationwide,

funded through the Defense Logistics Agency.

The Government funding provided by the program allows the

Maine PTAC to offer what I consider the most important service,

and that is one-on-one counseling with the professionals knowledgeable in Government contracting. This personalized counseling

benefits the business because they can find reliable and timely answers to their Government contracting questions. But our center

also offers a bid match service, information on past procurements,

contracting workshops and training on Government contracting,

matchmaker events held in conjunction with other New England

PTAC Programs.

At this time, I would like to talk about some of the challenges

that have already been mentioned before. Top among them would

be contract bundling. I would like to give a Maine example.

After pursuing Government contracts for more than a year and

then getting some small contracts, a Maine machine shop was

awarded a 5-year multi-million-dollar contract to make precision

parts for the U.S. Army Tank Automotive and Armaments Command. That is TACOM. The small business ramped up, hired people, filled orders, and then about 18 months later, the machine

parts that he was supplying to TACOM were wrapped into a large

bundled contract that ultimately went to a large prime contractor.

The company was unable to recover many of the costs of ramping

up and now is not actively looking for Government contracts.

Contract bundling is promoted as making the contract process

more streamlined and providing cost savings to the Government.

However, nearly always, it impacts small business, resulting in diminishing opportunities for a small business in Government contracting. And if it is happening in Maine, it is happening in other

States.

Another pesky problem is the International Traffic and Arms

Regulations, ITAR. It presents a burden that is particularly hard

because of the registration and the high fee associated with the—

imposed upon by the Directorate of Defense Trade Controls. In separate cases, two small Maine businesses who supply a small part

or component to a prime contractor found out that the small part

is for a weapons system. The businesses received a letter informing

them of the DDTC registration requirement and the $1,750 annual

fee in order to come into compliance. One such company was a

woman-owned small business of four people supplying a $49 component.

The HUBZone Program, although it is not a hurdle and I believe

that the HUBZone Program has been a benefit to small businesses,

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there are some areas that I see in need of improvement. I see there

are a lot of small businesses that could be considered located in an

economically-depressed area of Maine, but are not eligible for

HUBZone certification because of how the HUBZones are defined.

Some economically-depressed, sparsely-populated sectors get overlooked by the program because they get counted in with larger surrounding areas that are more affluent or doing well.

So in conclusion, while I think small businesses face hurdles in

Government contracts, I don’t think the process is broken, only

strained. The Maine PTAC works with businesses every day to provide them with the tools that they need to benefit from the Government opportunities, and nationally, the figures for the PTAC Program are impressive. Nationwide, the PTAC program has assistted

55,000 clients, generated over $14 billion in Government contracts,

and creating or retaining over 300,000 jobs. So although the PTAC

Program is small, it does work.

I greatly appreciate the Committee leadership in assisting small

and medium-sized businesses and its focus today on Government

contracting. I thank you also for your support of the PTAC Program and for the honor and opportunity to testify today.

[The prepared statement of Ms. Rice follows:]

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Chairman KERRY. Thank you so much for taking time to come

down here and be with us. We appreciate it.

Ms. Silva.

STATEMENT OF MAGDALAH SILVA, CHIEF EXECUTIVE OFFICER, DMS INTERNATIONAL, INC., SILVER SPRING, MARYLAND, ON BEHALF OF WOMEN IMPACTING PUBLIC POLICY

Ms. SILVA. Chairman Kerry, Ranking Member Snowe, thank you

for the opportunity to be here today. I applaud your passion and

commitment to the development of small business. My name is

Magdalah Silva, president and chief executive efficer of DMS International, a management and technology consulting firm located in

Silver Spring, Maryland. DMS is a woman-owned company established in 1994 and has been providing information assurance, software development, statistical reporting, as well as instructor and

Web-based training to both the defense and civilian agencies. Our

primary Federal customers include the Department of Defense,

Army, Navy, and Air Force, as well as the U.S. Department of

State and the Department of Housing and Urban Development.

Thank you for inviting me to testify today.

My testimony today is on behalf of Women Impacting Public Policy. Women Impacting Public Policy is a bipartisan, nonprofit organization that represents well over half-a-million women in businesses nationwide and 46 small business associations. The title of

this hearing adequately reflects our overall concerns on Federal

contracting, ‘‘Ensuring Fairness in Small Business Contracting.’’

As Senator Snowe observed, the Government failed to meet it

goals for contracting with women-owned businesses. In fiscal year

2005, only 3.3 percent of Federal contracts were awarded to

women-owned businesses. That represents billions of dollars left on

the table and hundreds of qualified companies without opportunity.

Furthermore, WIPP members believe that the small business

contracting goals should be increased. We strongly agree with the

H.R. 1873 passed by the House, which raises the overall small

business goal from 23 percent to 30 percent and raises the womenowned goal from 5 percent to 8 percent.

We have said for a long time that since WIPP’s existence, that

Pub.L. 106–554, the law authorizing the Women-Owned Small

Business Federal Contract Assistance Program, must be implemented in order to meet the 5-percent goal for women-owned businesses passed by Congress. For 7 long years, women have waited

for the SBA to implement this program. It is our understanding

that the proposed regulations are in the process of being formulated and we ask Congress to continue to press SBA for those proposed regulations.

Contract bundling continues to pose a real threat to small business contracting. Despite the President’s initiative in 2002 which

clearly stated that unbundling of contracts was a priority of the

Administration, we see the trend in Government contracting toward larger bundled contracts. The Office of Management and

Budget reported that for every $100 awarded on a bundled contract, there is a $33 decrease to small businesses.

Despite strong evidence that bundling is not good for small business or for the Government, for that matter, a 2004 GAO report

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shows that Federal agencies remain confused about what actually

constitutes contract bundling, which results in poor accountability

and disparity in reporting. We urge the Committee to clear up the

confusion for the agencies by putting into place concise language to

define what triggers a bundling review.

As Federal contracts get larger, subcontracting integrity becomes

more important. With regard to subcontracting, we continue to believe that if you list us, use us. The Committee language last year

required that prime contractors utilize the small businesses included in their subcontracting plan unless the small businesses

could no longer meet the requirements. It also included penalties

for violating the subcontracting plans.

Prompt payment from the prime contractors to the subcontractors also continues to be an issue for small business. Currently, the

Government does not have the authority to intervene because its

relationship is with the prime contractor, not with the subcontractor. Nevertheless, we continue to hear stories from our members that this is an ongoing problem. WIPP recommends that the

Government withhold further payments to prime contractors who

are not paying their subcontractors in a timely manner.

Another issue for small businesses is the current size standards

administered by the Small Business Administration. WIPP members tell us that as the Government contracts get larger, the small

business size standards must be adjusted to reflect that trend. In

some cases, the size standard limit restricts an award to very small

companies instead of small companies. This inhibits the ability of

our small businesses to compete in the Federal market and has the

counter-effect of ensuring that women- and minority-owned companies, in effect, stay small.

One example which is particularly in my case is the size standard for IT services. One commonly used code by the agency for administrative IT services is capped at $6.5 million. According to our

members who have IT companies, this is simply too low. The effect

of having a size standard too low is that very small firms will be

selected and will require a major integrator behind them to successfully execute the contract. If the size standard is higher, a

small business will be able to successfully perform at least 100 percent of the work and ultimately grow their business.

While we are not advocating a wholesale reworking of the size

standards, we are suggesting that for the problematic ones, SBA

should be willing to review them. This is critical not just for the

Federal Government procurement, but also because States and cities look to the SBA size standards on which to base their own programs.

Thank you for this opportunity to speak on behalf of a number

of important issues to WIPP members and many small businesses.

We look forward to working with the Committee on changes to contracting laws and regulations to ensure continued small business

growth in the Federal sector. I will be happy to answer any questions that you may have. Thank you.

[The prepared statement of Ms. Silva follows:]

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Chairman KERRY. Thank you very much, Ms. Silva.

Mr. Newlan.

STATEMENT OF RONALD NEWLAN, PRESIDENT AND CHAIRMAN, HUBZONE CONTRACTORS NATIONAL COUNCIL, ROCKVILLE, MARYLAND

Mr. NEWLAN. Chairman Kerry, Ranking Member Snowe, distinguished Members of the Committee, thank you for inviting me here

today. For those I have not met, I am Ron Newlan, chairman of the

HUBZone Contractors National Council. Our council is the only national trade association that focuses exclusively on expanding the

implementation of the Federal HUBZone contracting program.

A HUBZone is an area of our Nation that has high unemployment or low household income. Today, 37 million Americans live in

poverty. There is a strong correlation between the locations of our

HUBZones and the locations where these 37 million impoverished

Americans live.

This program was designed to create jobs where America needs

jobs the most. The program creates these jobs by offering competitively-awarded Federal contract opportunities to small businesses

that locate in a HUBZone and hire employees who live in these

HUBZones.

Awarding Federal procurements to HUBZone firms is good public

policy for several reasons. First, awards under the program are almost always based on competition, so the Government receives the

advantages of competitive pricing.

Second, each HUBZone firm must have its largest office in a

HUBZone. This stimulates the economic development of these

zones of poverty.

Third, at least 35 percent of each HUBZone firm’s employees

must live in a HUBZone. In many instances, these employees, before being hired by a HUBZone firm, were drawing unemployment

and/or welfare, so it is a double win as we move the unemployed

or the welfare recipient back to the roles of a productive tax-paying

employee.

The HUBZone Program was very well designed and I thank all

of the Members of this Committee who were here 10 years ago,

particularly former Chairman Senator Bond for his sponsorship

and leadership in creating the program.

Today, there are 13,000 HUBZone firms. Their collective annual

revenues exceed $25 billion. If they were collectively ranked, they

would be ranked number 90 on the Fortune 500 list, larger than

General Dynamics or Coca-Cola. Our resources as a community are

vast. In Massachusetts, there are 110 HUBZone firms and their

annual revenues exceed $370 million. In Maine, we have 118

HUBZone firms whose collective annual revenues are approximately $410 million.

Unfortunately, this well-designed program has been very poorly

implemented by the Federal agencies that buy America’s goods and

services. The HUBZone statute sets forth a goal for HUBZone contracting at three percent of total Federal contracting dollars. Despite the large size of our HUBZone contractor community, the

Federal Government has never come close to meeting this level. In

fiscal year 2005, the Government achieved 1.94 percent, and this

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was by far the best year ever. If I could just repeat your opening

statement, Chairman Kerry, it is not about being nice. It is a matter of it is the law, the 3 percent goal and all the other goals in

the Small Business Act.

If I had to attribute the program’s lack of success to one thing,

I would attribute it to the procurement community’s reluctance to

change their methods of doing business. For every 1 HUBZone setaside competition conducted in 2005, there were 78 small business

set-aside competitions conducted. Yet the statutes and regulations

are clear that the HUBZone Program is a higher priority program

than the small business set-aside program.

Now to make matters even worse, the House of Representatives

has passed a bill, H.R. 1873, and sent it to the Senate. One aspect

of this bill is to increase the contracting goals for small disadvantaged business and women-owned business to 8 percent annually.

The House completely ignored increasing the HUBZone goal to 8

percent. If H.R. 1873 was to become law, this would increase the

emphasis on the SDB and the women-contracting program at the

expense of the HUBZone Program.

It is time for the Federal procurement community to follow the

law. For the past 10 years, far too many procurement officials have

ignored the HUBZone statute. For 37 million Americans who live

below the poverty level, the time for action has arrived.

I ask this Committee to, one, convey to all senior officials and

Federal procurement officials that the HUBZone rule of two means

what it says. When there are two or more qualified HUBZone

firms, make the procurement a HUBZone set-aside.

Two, reemphasize that the HUBZone Program has priority over

the small business set-aside program. There should never again be

78 small business set-asides for every 1 HUBZone set-aside.

Three, ensure the SBA headquarters HUBZone Program regains its budget line item status and appropriate no less than $15 million

annually so this hard-working SBA staff can create the tools required to ensure the Federal departments give the program the

emphasis that it deserves. For every dollar spent on this SBA

budget line item, the return to the taxpayers is many-fold in reduced welfare payments, reduced unemployment payments, and increased income taxes.

Four, increase the oversight of any department that fails to meet

the HUBZone minimum level set by Congress.

And five, increase all small business goals to 8 percent or do not

increase any of them. The HUBZone Program goal cannot be ignored.

In closing, I would like to salute the departments and agencies

who have proven that achieving HUBZone contracting goals is possible when senior leaders commit to the task and their procurement communities focus on goal accomplishment. The Departments

of Agriculture and Interior each achieved 9 percent. The Department of Army achieved their 3 percent goal. HUD achieved 4 percent, and GSA achieved 4 percent.

Thank you for the opportunity to bring these urgent matters to

your attention. I would like to just add that I have brought some

color-coded maps of each State represented on this Committee, so

if the staff would like to pick them up, there are packets here. I

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will leave them in these orange folders. But color-coded maps of

where the HUBZones are in every one of your States. Thank you.

[The prepared statement of Mr. Newlan follows with attachments:]

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Chairman KERRY. That would be terrific. That is very helpful

and we will collect them and we will put them to good use.

While we are on the subject of HUBZones, let me just ask you

very quickly, in May of this year, the Inspector General, SBA’s Inspector General, released a report showing a very high level of decertification of people who had been previously certified, and I

think that the IG found that in fiscal year 2005, a 3-year certification review found that more than 81 percent of the firms that

were initially approved as HUBZones were decertified or recommended for decertification. What is going on here and what

needs to be done to guarantee a higher level of accountability for

the HUBZone process?

Mr. NEWLAN. I think the number one component for the

decertifications or the dropping out of the program is it costs extra

money oftentimes to run your company in a HUBZone. You hire

employees that live in a HUBZone that you might not necessarily

hire, and then when you don’t get any payback with winning and

be awarded Federal contracts, firms are just walking away from

the program. It is not——

Chairman KERRY. The lack of follow-through on procurement is,

you are saying, a very significant mark in the failure rate.

Mr. NEWLAN. Yes, sir.

Chairman KERRY. What do you think—Ms. Silva, also, I wanted

you to weigh in. I want everybody or anybody who wants to weigh

in on this. This is essentially the heart of your testimony. We have

both of our Government witnesses here and listening to you, so you

have an opportunity both with the Defense Department and the

SBA to kind of put it on the line as directly as you can. I am grateful to both of you for staying here to hear this because it is important. It is valuable, I think.

But, Ms. Silva, in your judgment, what is the biggest restraint

on the ability of women, but also these other entities to be able to

get the procurement that you have talked about? What happens, in

your judgment?

Ms. SILVA. Well, I think accountability, first and foremost, and

I will just give you a quick story of having a conversation with a

Contracting Officer—well, actually not a Contracting Officer, a

small business representative for one of the major agencies. I went

to see him and actually talked about the fact that what happens

to you if you don’t meet your goals, and he told me that actually

what happens is he walks around the other side of the table and

he gives himself a stern talking to. That, I think in a nutshell, represents what happens with the goals. I mean, we have objectives

that are set. We have goals in some instances——

Chairman KERRY. But nobody is enforcing it.

Ms. SILVA [continuing.] But nobody is enforcing it and there is

no accountability.

Chairman KERRY. You are nodding.

Mr. NEWLAN. I couldn’t agree more. Procurement officials

throughout the country are breaking your statute, the statute that

started HUBZones, started in this Committee, and, of course, all

the goals are overseen by this Committee and they break them on

a yearly basis and they get away with it.

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Chairman KERRY. Do you think there is something inherent in

the procurement process that drives a procurement officer to not do

it because it is bothersome, because it is more of a hassle, because

you don’t get the bang for the buck? What are the ingredients of

sitting there saying, I am not going to pay attention to this? It is

easier for me to go off and do it here. Anybody. Mr. McCracken,

you represent a large number of businesses in that regard——

Mr. MCCRACKEN. Well, I think that is—my view is that is exactly

it. I mean, we are talking about a very large population of people,

obviously, and so they are all going to have different motivations.

But I think at the end of the day, it is easier to go to one company

that can do a lot of things for you than to put out a number of

smaller contracts, whereas those may be more efficient, they may

save more money, but if it is only looked at as most efficient from

the Contracting Officer’s perspective, from their own lives as opposed to what is most efficient for the American taxpayer or the

overall——

Chairman KERRY. To what degree is that a balance? I mean, to

what degree does the taxpayer get a better return in that regard?

Can you make the argument appropriately, as we always have

here, and we try to, that there is a return to the taxpayer in broadening the base and in increasing the numbers of jobs and in sharing that wealth that it may not be recorded in the same way as

the quick and easy 1-year return on, wow, we got the whole job

done with one contract and here is what it cost us. I mean, is that

the relationship that has to be better defined, or what?

Mr. MCCRACKEN. I think it does, and unfortunately, when we

were moving primarily back in the 1990s toward much greater

bundling of contracts, when that whole argument was going on effectively in Congress and in the Administration, the case was really

only looked at, I thought at that time, from the perspective of what

is most efficient for Government bureaucrats who are doing contracting. The whole rest of the balance wasn’t really looked at.

Chairman KERRY. You were going to add to that, Ms. Silva, and

then——

Ms. SILVA. No, I was just going to say that you eloquently pointed out, Senator Kerry, that basically what everyone knows, that

the small businesses drive innovation, and whether it is the Federal Government or whether it is the private sector, we want the

best quality for the best price, and when you tend to be focused on

a kind of a single contractor and not opening up the opportunities

for small business, you really limit the amount of innovation opportunity and advancement overall for the country in terms of being

able to draw resources from pools of businesses that have a wide

area of expertise but don’t have accessibility or don’t have visibility

and don’t have opportunity.

Chairman KERRY. Mr. Newlan.

Mr. NEWLAN. Mr. Chairman, one thing that has probably never

been said at this Committee before, but I think customer service

is getting in the way. If you think the way the Government is typically organized, you have a program office that has a need and

funding and you have a procurement office whose job it is to make

the award for the needs and services of that program office. And

I have heard time and time again when I go to a contracting office

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or procurement shop and say, why wasn’t this a HUBZone setaside?

Their answer is, we are in the customer service business. The

program office is our customer and if we don’t give them what they

want, they are going to take this requirement to another contracting shop down the road or in another agency through an interagency government-wide acquisition contract and they will get

what they want down there. So how can I give you, the HUBZone

community, what you want, and I would like to give it to you, but

I am going to lose the business. They are going to go down the

street and it is going to be an unrestricted procurement down the

street. So we have got procurement shops that want to do the right

thing, i.e., customer service, and they fail to hit their goals because

of it.

Chairman KERRY. Ms. Rice, you are at the real delivery level

there.

Ms. RICE. Yes, I am.

Chairman KERRY. You see it where the rubber meets the road.

Ms. RICE. I see it a little differently. I think that Federal agencies and large prime contractors are risk-adverse and they don’t

want to take on new contractors, especially small businesses, if

they don’t know. So it is very, very difficult for the small business

to break into Government contracting because of this risk-adverse

attitude out there in Federal agencies——

Chairman KERRY. For the agency itself?

Ms. RICE. Federal agencies and——

Chairman KERRY. So you think there is a fear factor in terms of

accountability? There is a reverse accountability. It is not just the

accountability for meeting the standard, but there is accountability

for meeting the goal of the procurement itself and they have a fear

that somebody smaller isn’t going to do that.

Ms. RICE. For performing the job. In a contract, they want the

existing contractor to perform the job. They are very

comfortable——

Chairman KERRY. Why? What is the reason, just comfort?

Ms. RICE. Comfort. They are comfortable with the status quo,

with the current contractor, and if that is a large contractor, they

are very risk-adverse to initiate change.

Chairman KERRY. Well, isn’t the key to this—this is my last

question and then I will turn to Senator Snowe—the accountability

issue? I mean, don’t you need somebody there? It is like any office

anywhere. If somebody isn’t saying, have you met your goal——

Ms. RICE. Oh, absolutely.

Chairman KERRY. Are you on top of this? When are you going to

meet it?

Ms. RICE. Oh, I agree with all the panelists here——

Chairman KERRY. If you don’t meet it, you are not going to work

here anymore. It is a pretty simple equation, isn’t it?

Ms. RICE. Absolutely, Mr. Chairman. I believe that with all the

panelists here, we think that there is accountability that needs to

be there at the Federal Contracting Officer level and the oversight

that is needed by SBA.

Chairman KERRY. Senator Snowe.

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Senator SNOWE. Thank you all for your great testimony. It is

very helpful, given the wide array of problems and challenges that

exist with the variety of programs that could so well serve small

businesses in creating jobs, helping so many communities across

this country, and particularly rural areas, as Ms. Rice and I know.

In the State of Maine, the HUBZone Program, for example, is a

prime illustration, very little money, because the Federal Government is going to be spending this money anyway through the contracting process and through procurement that to allow these small

businesses in areas that are impoverished, under-employment, or

major closure of a facility to help boost the economy in a particular

region.

But I am just mystified to the extent to which it is such an

under-utilized program. As you might recall, Ms. Rice, the Committee and I conducted forums in the counties in my State that are

obviously designated as HUBZone eligible. I mean, roughly twothirds of the State of Maine is designated as such, but it is only

118 companies as I mentioned earlier that are HUBZone eligible.

And this is also true nationwide.

I am just wondering what steps you think that the Committee

could take to improve this program. First of all, there are very few

people aware of the program. That is what I discovered in conducting these forums across the State and through the counties.

There is very little awareness about the existence of the program.

They might have a different experience as you go around, Ms. Rice,

but I think given the fact it is so under-utilized, that is obviously

the case.

Now, second, could it be the process? I know you lend great assistance in helping people apply so they will become designated as

eligible. Is the application process burdensome? What is your experience, and is there anything we can do to make it easier?

Ms. RICE. I don’t really think the application process is that burdensome. There are steps that the small business has to go through

in order to get certified by SBA, but if we are knowledgeable about

that, the company trying to apply for certification, we will help

them through the entire process.

What I have found is sometimes the small business sometimes

doesn’t follow through enough on getting certified. That was one of

the things that—and lack of opportunity. Once they do get certified, they don’t see the opportunity out there and to get recertified, they might not have that interest anymore in pursuing Federal contracts because they don’t see—

Senator SNOWE. How often do they have to get recertified?

Ms. RICE. I think there is a recertification every 3 years or so

that is looked at by the SBA, I believe.

Senator SNOWE. I would imagine on the recertification process

overall.

Ms. RICE. I don’t think—I am not that familiar with the recertification process.

Senator SNOWE. I see. Ok. I could just say, though, if you are

running a small business, it is very difficult to find the time. You

don’t have the resources. You have to travel, the expense. It seems

overwhelming, I mean, the bureaucracies and the paperwork.

Ms. RICE. It does——

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Senator SNOWE. There is nothing there that is appealing, frankly, in order to go through that process and just in talking to businesses. They think, OK, this is going to be complex and difficult.

So I think that is part of the issue. We have to simplify it in some

way to make it user-friendly.

Ms. RICE. I think that the small business does see it as a complicated process.

Senator SNOWE. That is what I heard in comments, is just that,

where are you going to find the time to just work their way

through the maze. Your office is terrific and once you can get them

there and hook them up with you, it is great. But it is getting to

that point and many of these businesses are located in very rural

areas. So I think it makes it especially difficult.

So if you have any suggestions you think that we can improve

upon that process in some way that might also get the message

out, I think that is the other issue. I just don’t sense that this is

widely known across the country. Do you, Mr. Newlan? I mean,

what is your—

Mr. NEWLAN. I think that is the issue, Senator Snowe. It is getting the message out to the firms and then getting the message out

to the Government procurement offices that we are serious and 3

percent means 3 percent.

The certification and recertification process is not very complicated as Government programs go. It is a completely online system. It is Internet-based, should take less than 30 minutes to apply

and then 30 minutes to update the data every 3 years. So it is not

a particularly burdensome administrative process, but the word

has to get out to the community that there are benefits to being

located in this HUBZone, Federal procurement benefits, and then

to the procurement people.

What is it you don’t understand about 3 percent as a floor? That

is the message that has to get out. I am not sure how the SBA

HUBZone Program Office would spend the $15 million if the Congress were to appropriate it, but I am sure some of it would go to

getting the message out.

Senator SNOWE. So you think that that would be one way of

doing it, of helping?

Mr. NEWLAN. Oh, absolutely. Yes.

Senator SNOWE. You think that would advance the program in

some way?

Mr. NEWLAN. Absolutely.

Senator SNOWE. Yes.

Mr. NEWLAN. Absolutely.

Senator SNOWE. You mentioned HUBZone goals not being met,

and you talked about that earlier. Back in 2001, I referred to the

GAO report. It cited a number of issues Federal contracting offices

provided for not using the HUBZone Program. One was the relatively small number of certified HUBZone firms; two, the difficulty of identifying certified HUBZone firms that provide particular goods and services; and three, SBA guidance and internal

policies that favored the 8(a) Program over the HUBZone Program.

As I said, Senator Bond had sent a letter to the GAO requesting

a follow-up on the 2001 GAO report detailing all these barriers. Do

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you think that those are the same problems that exist today as

they did back in 2001?

Mr. NEWLAN. Oh, no. Those problems have all been fixed.

Senator SNOWE. OK. So we have a new set of them?

Mr. NEWLAN. The small community issue is the HUBZone community is the second-largest specialty small business program in

the Federal Government. The women-owned program is a larger

program. There are more women-owned firms than there are

HUBZone, but there are more HUBZone firms than there are service disabled veteran firms, veteran-owned firms, SDBs, or 8(a)s. So

the community is large. It is getting the word out and having

HUBZone set-asides created by the executive branch. That is the

key.

Senator SNOWE. That is the key.

Mr. NEWLAN. The good thing about a HUBZone set-aside is you

are guaranteed a HUBZone firm will win, and that will count towards the 3-percent goal.

Senator SNOWE. I see. Yes. There is much more incentive and it

is probably more attractive, a guarantee that there is going to be

that sort of—

Mr. NEWLAN. Some HUBZone firm is going to get it.

Senator SNOWE. Yes, exactly, rather than being in a pool.

Mr. McCracken, talking about expanding subcontracting opportunities, what do you think should be done in that regard? We talked

earlier, and I know Mr. Hsu was talking about their whole certification process, especially to examine the larger companies that do

the bait and switch.

Mr. MCCRACKEN. Right.

Senator SNOWE. They front as small businesses and the next

thing you know, they take over the contracts, as we have heard.

So one of the issues that I think is important is that, really, the

SBA doesn’t have any strong authority to enforce any penalties

with respect to those violators of these provisions. Do you think

that that would be an effective approach?

Mr. MCCRACKEN. I think it could be, yes. We certainly think

there needs to be some additional enforcement in those areas. We

have to make sure that the primes, when they don’t use the firms

that were included in their subcontracting plans, are very specific

in reporting back to what their reasons for that were, and we have

to make sure that we are very clear those are valid reasons, that

there was a significant change in the contract or there is a significant change in the ability of that small firm to do the work. If

there isn’t what will be deemed a valid reason, then there should

be some significant penalties, because—

Senator SNOWE. Do you think the lack of penalty, the lack of enforcement authority, is a detriment to preventing this kind of

abuse, because we have seen a number of violators. Obviously, it

has been pervasive. It is not a minimal problem.

Mr. MCCRACKEN. It is not a small problem at all. When we get

a group of small companies together in a room that do contracting

and do subcontracting work, I would probably say that the most

common story I hear, is that we have been used by these companies again and again. Many of them have just stopped working

with some of these larger companies. The large companies will

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reach out to them. They are not campaigning, necessarily. The

large companies will come to them and say, hey, we have this great

opportunity. They will put in a great deal of time and effort in

working with the company and the company gets the contract and

they never hear from them again. It happens again and again.

Senator SNOWE. One of the provisions I had in last year’s reauthorization—and hopefully we can include it at some point—is the

disbarment of those who violate the requirements. Do you think

that would be helpful? Do you think that would be a disincentive?

Mr. MCCRACKEN. It would certainly be a disincentive.

[Laughter.]

Mr. MCCRACKEN. I think we would tend to support that. We

would have to make clear that, you know, it is a pretty severe penalty, so you have to make sure that there are clear definitions in

place. But if it can clearly be shown that companies are doing what

we described, then absolutely.

Senator SNOWE. Yes. Given what has happened out there, it

seems to me that we need to do something. I mean, we hear about

it consistently before this Committee.

Ms. Rice, you spoke to that question, as well.

Ms. RICE. With regard to subcontracting?

Senator SNOWE. Yes, well, and to the Maine company, the machine tool company.

Ms. RICE. Yes. It did not become a subcontractor of that prime

for various reasons. But I do think there should be an enforcement

of goals. Prime contractors often do not attain those goals. There

should be some oversight by SBA and enforcement of why the

prime is not attaining those goals.

Senator SNOWE. Ms. Silva, what do you think should be the primary focus of our priorities, given your experience with small business and the varying contracting procedures? Should it be size regulations? What do you think we should focus on?

Ms. SILVA. Well, I think that you have identified the major obstacle to the programs that exist currently is enforceability and accountability. Before we actually go further in creating more programs and expanding programs, we need to make sure that the

programs that are in place-the goals that are in place—that there

are repercussions, whether you are talking about disbarment or

whether you are talking about any kind of repercussions at the

prime level for non-use of subcontractors, or whether it is a 3 percent or 5 percent goal. But what happens when those goals aren’t

met? So I think it is really a question of accountability. As a priority, it is accountability.

Senator SNOWE. Would you all agree with that, in terms of that?

OK. Thank you, Mr. Chairman. Thank you all.

Chairman KERRY. Thank you, Senator Snowe. Accountability, accountability seems to be leaking out here. It is just a question of

leadership.

Senator SNOWE. Yes.

Chairman KERRY. We are certainly going to, in this Committee,

do our best to try to achieve that accountability and watch what

is happening.

I do have some questions that I am going to submit in writing,

pursuant to the 2-week period for other colleagues, also.

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We really want to thank you for your contribution here. I think

it has been very helpful to understanding the challenge.

Just one very quick question I might ask. Mr. McCracken, you

suggested that the goal needs to be higher than the 23 percent. In

fact, you suggested, I think, a third. So you are looking at 33 percent. Which, in your judgment, is more important, since we are not

meeting the goal now of the 23 percent? Is it going up to the higher

percentage or the enforcement and achieve the 23?

Mr. MCCRACKEN. If we were forced to choose between one or the

other, I think enforcement of the current system, we think would

be probably——

Chairman KERRY. But you think, in fact, both ought to happen.

Mr. MCCRACKEN. But we think both ought to happen. I don’t

think that they ought to be mutually exclusive goals.

Chairman KERRY. Fair enough. Not necessarily. I am not sure if

that is the right level or not. That is something we have to look

at. But I appreciate the thought. Some of the questions I want to

pursue in writing, would be sort of what the appropriate level is,

how you achieve that, and so forth.

Is there anything anybody felt they really had to say that they

didn’t have a chance to say, especially Ms. Rice? You traveled that

distance. I want to make sure you are fully on record.

Senator SNOWE. I do have a question, one more question.

Chairman KERRY. Go ahead.

Senator SNOWE. We talked about a redefinition of HUBZone, because in Penobscot County, for example, they are a metropolitan

area.

[Laughter.]

Chairman KERRY. Boy, that is a stretch.

Senator SNOWE. Some of the areas are excluded as HUBZones,

so we wanted to redefine for HUBZone eligibility. Do you agree

with that?

Ms. RICE. Yes. In fact, that is what I was hinting at in my testimony was that very fact. Penobscot County is a very large, long

county and very depressed areas are not defined as HUBZones because they got counted with larger more prosperous areas. Thus,

any small business in that area can’t be certified as a HUBZone

company, disqualifying them from participation in the program. So

looking at that, how you define HUBZone areas, should be part of

the Committee’s oversight and—yes, I think that is something that

should be looked at.

Senator SNOWE. I appreciate that. Mr. Newlan, do you agree?

Mr. NEWLAN. I completely agree, yes.

Senator SNOWE. OK. Thank you very much. Thank you again for

being here today.

Chairman KERRY. Ms. Rice, thank you. How come you don’t talk

like some of those folks out there?

[Laughter.]

Chairman KERRY. Anyway, we are glad to have you here. Thank

you all very much.

We stand adjourned. Thanks.

[Whereupon, at 4:12 p.m., the Committee was adjourned.]

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APPENDIX MATERIAL SUBMITTED

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RESPONSE BY RONALD NEWLAND TO WRITTEN QUESTIONS FRON SENATOR BOND

Question. I noted in your testimony your recommendation to fund the SBA

HUBZone Office at the $15 million level. Would you please elaborate on that. Thank

you.

Answer. I believe that the SBA Headquarters HUBZone Program Office should be

funded at the annual level of $15 million and they should have their own line item

to accomplish the following tasks:

• Train procurement personnel throughout the Government on the HUBZone

Program

• Work closely with any Department that does not achieve their 3 percent annual HUBZone Program goal

• Work with the SBA PCRs to ensure HUBZone contracting meets the 3 percent

contracting level

• Build the systems to facilitate enhancing HUBZone contracting

• Provide adequate staffing to manage the Program

• Allow for increased HUBZone Program re-examination

• Provide the resources to SBA so they can encourage state governments to utilize the SBA-certified firms for state contracting

• Add a business development component to assist the less experienced

HUBZone firms

Thank you for your interest in this matter.

RESPONSE BY PAUL HSU TO WRITTEN QUESTIONS FROM SENATOR KERRY

Question 1. What plan does the SBA have to increase the number of PCRs beyond

the nine slated to be hired in the next 2 years?

Answer. At this juncture, we believe that a full complement of sixty-six procurement center representatives (PCRs) will be sufficient to support attainment of statutory small business and socioeconomic procurement preference program goals. We

believe that this number will be adequate given the systemic steps that we are now

taking to increase contracting opportunities for small businesses, women owned

small businesses, service disabled veteran owned small businesses and HUBZone

small businesses. These measures are described in our response to Senator Snowe’s

first question, below.

Question 2. Will the SBA release its updated size standards on a rolling basis as

they are completed or all at once of the end of the 24-month time period?

SBA plans to publish a series of proposed rules during a 24-month period. During

that time, SBA will evaluate a specific group of related industries and issue proposed rules to revise size standards as appropriate. Upon completion of a group of

industries, an evaluation of another group of industries will begin. This process will

continue until all industry size standards have been evaluated.

RESPONSE BY PAUL HSU TO WRITTEN QUESTIONS FROM SENATOR LIEBERMAN

Question 1. Mr. Hsu: The SBA has asked 1000 prime contractors to review voluntarily their status as small business contractors with regards to size. Has the SBA

set my guidelines for penalties if such firms do not comply with this request?

Answer. The letter requested voluntary action on the part of prime contractors,

beyond that required under the newly implemented regulations, to accelerate improvement of the contracting data base regarding characterization of awards as having been made to small firms. In essence, the letter sought cooperation and collaboration with large prime contractors. Because the letter requested voluntary action

on the part of vendors, it contemplated no adverse action for failure to act. Indeed,

threat of adverse action would have undermined the intent and objective of the letter.

Question 2. Mr. Hsu: In your testimony, you stated that there may be some ‘‘constitutional’’ considerations for small business programs based upon gender. Can you

elaborate on these concerns? Why would there be constitutional restrictions for a

program to assist women-owned businesses in securing Federal contracts? Does the

SBA support such an effort?

Answer. The Equal Protection Clause of the United States Constitution and court

cases interpreting that clause require a heightened scrutiny analysis for genderbased set-aside programs. For that reason, SBA and the Department of Justice are

working together to ensure compliance with this constitutional standard.

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Question 3. Mr. Hsu and Mr. Martoccia: The San Diego based company, SAIC, is

a multibillion dollar firm with more than 44,000 employees worldwide. But last

year, SAIC received over $512 million in Government based small business contracts with the Defense Department. Lockheed Martin and General Dynamics also

boasted high numbers for small business contracts with the Defense Department.

I understand that the Small Business Administration has different definitions for

what constitutes a ‘‘small business’’ in its regulations, but I’m fairly certain that

none of these large companies fits the bill. How will the SBA address this problem?

Are current contracts being reviewed? What will be the penalty for the failure of

a firm to recertify as a small business?

Answer. The SBA has, and is addressing this issue through a number of measures. On November 15, 2006, the Agency published regulations requiring periodic

recertification of size on long-term contracts to ensure greater accuracy in reporting,

and to encourage agencies to pursue new small business sources. On July 5, 2007,

a companion change to the Federal Acquisition Regulation (FAR) was issued. The

SBA’s regulation, and the change to the FAR, are effective June 30, 2007. The regulations may apply to existing contracts and acquisitions and mergers of companies

that occurred before June 30, 2007, rather than merely applying prospectively. This

makes them much more meaningful and effective.

Over the last eighteen months, SBA has worked very closely with acquisition

agencies and the Integrated Acquisition Environment (IAE) to ‘perfect the electronic

records’ in contracting data base, ‘scrub’ data, and to make systemic changes to reduce the possibility that vendors that are ‘other than small’ are miscoded as ‘small.’

During the summer of 2006, some $12 billion of fiscal year 2005 contract awards,

characterized as having been made to small businesses, was challenged. In September 2006, the Administrators of the Office of Federal Procurement Policy (OFPP)

and SBA required agencies to review their 2005 procurement data, identify discrepancies, and correct the records, as necessary. This process was completed in March

of 2007.

In April 2007, SBA required that agencies review fiscal year 2006 contracting

data by June 30, 2007, and IAE deployed an analytical ‘tool’ and issued a battery

of ‘exception’ reports to assist in data cleansing, On June 30, 2007, IAE ‘locked

down’ the contracting data base, and on August 17, 2007, SBA issued the fiscal year

2006 Small Business Goaling Report, and re-issued the fiscal year 2005 Small Business Goaling Report.

On August 17, 2007, SBA issued the first Small Business Procurement Scorecard.

The Scorecard is modeled after the one used to track the President’s Management

Agenda. It provides for a ‘current’ status rating, based on actual performance, and

a ‘progress’ rating based on what agencies have done, and are planning to do, to

improve performance. Notably, the scorecard includes an element addressing agencies efforts to ensure data integrity.

We also note that in March 2007, OFPP began requiring that the Chief Acquisition Officers of agencies establish comprehensive, statistically-valid contracting data

verification and validation procedures, and that they certify data accuracy and completeness to the General Services Administration (GSA), the ‘owner’ of FPDS–NG,

each year. The first statement of data verification and validation must be submitted

by December 15, 2007.

Collectively, these measures will yield quantum improvement in contracting data

integrity. It may take fifteen to eighteen months for the fill benefits of these improvements to accrue. But, we believe that fiscal year 2006 data is substantially

more reliable than that of prior years, and that the quality of data will increase

measurably each year, well into the future.

RESPONSE BY PAUL HSU TO WRITTEN QUESTIONS FROM SENATOR SNOWE

Question 1. You referred to an ‘initiative increasing opportunities for American

small bussiness . . . different things we want to do.’ Beside the Electronic Procurement Center Representative, what does this initiative entail?

Answer. The initiative referenced is intended to assist small businesses in securing more Federal procurement opportunities, by concentrating on areas in which the

Federal Government has failed to meet contracting goals—HUBZone, Service Disabled Veteran Owned Small Business, and Women Owned Small Business Programs. The initiative includes implementation of an enhancement to the Central

Contractor Registration (CCR)/ Dynamic Small Business Search engine called Quick

Market Search. This tool will allow procurement officials to conduct market searches

quickly and easily to find firms that can perform Federal contracts.

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Under this initiative, Procurement Center Representatives’ (PCRs’) efforts will be

geared more fully to assisting Federal buying activities in meeting their goals. Up

until now, requirement coordination between SBA and procuring agencies was essentially limited to review and appeal of unrestricted requirements for possible

small business set aside. Under this initiative, requirement coordination will extend

to review and appeal of requirements for set-asides under HUBZone, Service Disabled Veteran Owned Small Businesses, and Women Owned Small Business Programs. Specifically, PCRs will review existing unrestricted requirements, and new requirements, restricted and unrestricted, for appropriateness of possible set-aside

under not only small business program, but also under above noted programs. Further, SBA will exercise formal authority to appeal decisions not to set-aside requirements under not only small business program, but also under above noted programs.

Question 2. You [Dr. Hsu] stated, ‘‘We will implement the Women-Owned Small

Business Contract Program by the end of this fiscal year.’’ Does that mean by October 1, 2007, certain contracts will be set-aside for women-owned small business;

please explain this situation?

Answer. At this juncture, our draft final rule has been sent to OMB and remains

in interagency clearance. The regulation will set forth an effective date which will

define when requirements in eligible industries may be set-aside for competition

under the program.

Question 3. What is SBA ’s specific plan and timetable for ensuring the governmentwide service disabled, women owned, and HUBZune goals are met?

Answer. Please reference our answer to Senator Snowe’s question 1., above. At

this time, we cannot reliably estimate when the each of the socioeconomic preference

goals will be met governmentwide. However, it is our intention to work with acquisition agencies, at national and buying office levels, to develop and implement strategies that will yield increased opportunities for small businesses under these programs that will be reflected in higher levels of goal accomplishment.

Question 4. Prime and subcontracting data are equally important. Data is presently unavailable for subcontracting goaling by agency. Please provide these Government-wide statistics for years FY 04, FY 05, and including your most recent

data.

Answer. Government-wide data for fiscal years 2004, 2005, and 2006 has been

posted to our website, and can be found at the following address: http://www.sba/

gov/aboutsba/sbaprograms/goals/SBGR 2006 SCGR.html.

Question 5. What are the ramifications SBA proposes for corporations that do not

follow Administrator Preston’s letter on July 3, 2007, requesting hundreds of larger

corporations to identify and report by September 30, 2007, to the SBA, any small

business contracts that their corporation or subsidiaries presently hold?

Answer. The letter requested voluntary action on the part of prime contractors,

beyond that required under the newly implemented regulations, to accelerate improvement of the contracting data base regarding characterization of awards as having been made to small firms. In essence, the letter sought cooperation and collaboration with large prime contractors. Because the letter requested voluntary action

on the part of vendors, it contemplated no adverse action for failure to act. Indeed,

threat of adverse action would have undermined the intent and objective of the letter.

Question 6. Following my recent GAO request for an overall review of HUBZone

underutilization, what are the effects of decertification on HUBZone firms? Why are

firms being decertified? What can be done to increase HUBZone certification?

Answer. HUBZone firms that no longer meet the basic eligibility criteria and

therefore need to be decertified must remain out of the program for a full year from

the date of decertification.

The underlying cause for failure to recertify firms under the HUBZone program,

pursuant to program examinations, is substantially non-responsiveness. For those

firms expressing a reason for not responding to a request for continuing eligibility

information, most often cited is limited opportunity to compete for contracts setaside under the HUBZone program. This may suggest that firms that have committed resources to secure HUBZone status, see limited direct benefit to continuing

in the program.

We believe that increasing set-aside of requirements under the HUBZone program

will increase interest in entering the program, and remaining in it. As noted above,

increasing set-aside of requirements and award of contracts under the HUBZone,

Women Owned Small Business and Service Disabled Veteran Owned Business proVerDate 11-MAY-2000 13:50 Apr 02, 2008 Jkt 040408 PO 00000 Frm 00096 Fmt 6601 Sfmt 6601 C:\DOCS\40408.TXT DianeA PsN: DianeA
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grams are key objective of the Agency, and the focus of its principle government contracting initiative for the foreseeable future.

RESPONSE BY ANTHONY MARTOCCIA TO WRITTEN QUESTIONS FROM SENATOR KERRY

Question 1. What is the Department of Defense doing to protect small business

sub-contractors who are not getting paid in a timely fashion by their prime contractors?

Answer. The Department’s policy is to assist small business concerns, particularly

small disadvantaged business firms in obtaining payments under their prime contracts, late payment, interest penalties, or information on contractual payment provisions. Pursuant with the Government Accountability Office’s recommendation,

Wide Area Work Flow—Receipts and Acceptance (WAWF–RA) will soon be updated

to include a small business indicator flag to alert Department of Defense (DoD) payment officials when an invoice is from a small business and to process the invoice

expeditiously.

The DoD follows the policy in Part 32 of the Federal Acquisition Regulation to

ensure that prime contractors establish procedures for the timely payment of

amounts due pursuant to the terms of their subcontract(s). DoD contracting officers

will encourage the prime contractor to make timely payments to the subcontractor,

or the contracting officer may reduce or suspend progress payments until the contractor complies. If prime contractors fail to pay their subcontractors in a timely

manner then, negative past performance information is reported into the Federal

Government Past Performance Information Retrieval System (PPIRS.) PPIRS is a

Web-enabled, Government-wide application that provides timely and pertinent past

contractor performance information to the Federal acquisition community to use in

making source selection decisions.

Question 2. Do you believe that the prompt payment act should be extended to

all subcontracting?

Answer. No. The Department has no ability to enforce the provisions or resolve

disagreements regarding payment amounts or timing between prime contractors

and their subcontractors.

Question 3. When DoD relies on the credentials of subcontractors in the awarding

of bids don’t they have an interest in ensuring that those subcontractors are used

for the work?

Answer. To the extent the Government evaluates the capabilities of proposed subcontractors in making award decisions with respect to prime contracts, the Government would expect any replacement subcontractor to have equivalent capabilities.

Question 4. In your testimony you stated that the DoD has suffered from a lack

of funding for contracting officers. What plan does the DoD have to increase its

number of contracting officers?

Answer. The Director of Defense Procurement and Acquisition Policy (DPAP),

serving as the Functional Advisor for the Contracting, Purchasing and Industrial/

Contract Property Management Career Field (hereinafter referred to as the contracting community) is working hand-in-hand with the Department’s Senior Acquisition Executives to develop a human capital plan for this community—drawing upon

the strengths of the contracting community to ensure the Department has the right

people, with the right skills mix.

DPAP’s human capital strategy will ensure that the Department’s contracting

community continues to effectively deliver equipment and services that meet the

needs of the warfighters. DPAP is using competency-based management techniques

to define current and future competency needs to support the Department’s contracting community. By using competency-based management, DPAP is able to assess competencies resident in the contracting community, and identify gaps for current and future requirements. The Department of Defense completed development

of a comprehensive competency model for the contracting career field in March

2007. Beginning in the second quarter of calendar year 2007 and continuing through

2008, the Defense Acquisition University and DPAP are working with the contracting community to assess workload demands for these competencies and the degree to which members of the workforce possess these competencies. The results of

these competency-based capability assessments will reveal where gaps exist in personnel and/or skill levels so that the Department can adjust efforts in hiring, allocation of resources and training to address these gaps.

Question 5. At present, what percentage of contracts are reviewed for bundling at

the department?

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Answer. Defense Federal Acquisition Regulation Supplement 219.201 requires that all acquisitions over $10,000, except those under $100,000 that are totally setaside for small business concerns, be reviewed by a small business specialist. Bundling is one element of this review.

Question 6. Once a bundled contract is identified, what steps does the department

take to break out contracting opportunities for small businesses?

Answer. There are a number of strategies a DoD acquisition team may employ

to avoid or lessen the adverse impact of contract bundling on small businesses, such

as:• Conduct industry forums or pre-solicitation conferences to determine small

business interest and/or suggestions for potential strategies that will allow small

businesses to participate as prime contractors; • Remove obstacles to small business participation by configuring solicitations to

be small business friendly. For example, if practicable, divide requirements into

smaller geographic requirements or quantities, and/or adjust delivery schedules to

increase the likelihood of small business participation; • Fncourage teaming arrangements or joint ventures involving two or more

small businesses; • Take into account circumstances that may negatively affect the small business

community. For example, the preservation of the small business base may be a significant consideration for avoiding bundling.

Even if bundling can be justified by its anticipated benefits, the use of acquisition

strategies that increase small business subcontracting opportunities are encouraged

throughout the entire acquisition process—from the pre-award stage to post-award.

To maximize small business participation, the acquisition team may develop a strategy that results not only in the setting of goals, but also ensures the achievement

of these goals. In the pre-award stage, the acquisition team emphasizes the prime

contractors’ small business subcontracting performance during the source selection,

including the establishment of aggressive subcontracting goals and incentives. Acquisition strategy teams are encouraged to implement a process (established during

the pre-award stage) to ensure the prime contractor’s achievement of subcontracting

goals and enforcement of the requirements of the resultant subcontracting plan.

RESPONSE BY ANTHONY MARTOCCIA TO WRITTEN QUESTIONS FROM SENATOR

LIEBERMAN

Question 1. In your testimony, you indicated that a comprehensive review of small

business size standards is needed. To meet the Defense Department’s small business

contracting goals, how would you change current SBA size standard guidelines by

industry? Will the Defense Department consult with the SBA as the SBA issues new

guidelines on size standards?

Answer. The Department of Defense (DoD) is currently working with the Small

Business Administration (SBA) to determine which North American Industry Classification System codes small business size standards need adjusting and the magnitude of any necessary adjustment.

In March of 2007 representatives from the DoD Office of Small Business Programs (OSBP) met with staff members from the SBA and the Office of Federal Procurement Policy to discuss this matter at length. Since then the DoD OSBP has conducted a preliminary analysis to assess changes in the percentage of contracts

awarded by the Department to small businesses for the most highly demanded commodities over the last 5 years. We intend to forward these results lo the SBA.

Question 2. What is the Defense Department’s goal for the percentage of contracts

awarded to women-owned small businesses? What is the current percentage of Defense Department contracts awarded to women-owned small businesses? Do you

have a plan to increase the current percentage? What is that plan? Is it a priority

within the department?

Answer. The Department’s goal for participation by women-owned small business

(WOSB) is 5 percent of all eligible prime contract dollars and 5 percent of the total

dollars subcontracted. In FY 2006 the Department of Defense (DoD) achieved 2.9

percent for WOSB prime contracting; the Department’s subcontracting achievement

for WOSBs was 5.5 percent.

Within DoD the WOSB is a special emphasis program; therefore improving our

performance in this small business category is a priority. Our plan includes a combination of training (including Web casts) and outreach to emphasize the importance

to our acquisition professionals of the need to maximize contracting opportunities

for WOSBs. We anticipate that with the publication of the Small Business Administration’s final rule regarding set-asides for WOSB (as authorized by section 8(m) of

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the Small Business Act, Public Law 85–536, as amended), we will have an even

greater ability to increase our contract awards to companies owned by women.

The Military Departments and Defense Agencies use outreach and matchmaking

events to ensure that WOSB’s are kept informed regarding contracting and subcontracting opportunities within the Department. In addition, the Procurement Technical Assistance Centers, which have offices and representatives in every state, participate in numerous outreach events and provide training and one-on-one counseling.

Question 3. The San Diego based company, SAIC, is a multi-billion dollar firm with more than 44,000 employees worldwide. But last year, SAIC received over $512

million in government based small business contracts with the Defense Department.

Lockheed Martin and General Dynamics also boasted high numbers for small business contracts with the Defense Department. I understand that the Small Business

Administration has different definitions for what constitutes a ‘‘small business’’ in

its regulations, but I’m fairly certain that none of these large companies fits the bill.

How will the SBA address this problem? Are current contracts being reviewed?

What will be the penalty for the failure of a firm to recertify as a small business?

Answer. There have been instances where a large business has mistakenly been

identified as small in the Federal Procurement Data System—Next Generation

(FPD–SG). DoD has acknowledged there were miscoding errors in the FPDS–NG

and has dedicated a considerable amount of time and personnel resources to correct

these data entry errors.

The Small Business Administration formally requested all agencies to revalidate

and correct certain historic records with respect to business size. The Defense Manpower Data Center is continually running reports in the FPDS–NG to flag activity

that may appear to have been reported incorrectly for small business size determination. As of FY07, all DoD contract action reports are submitted to the FPDS–

NG. Most of the DoD contract action reports in the FPDS–NG for FY06 and prior

years are a result of migrated data from DoD’s historical DD350 system. Due to the

differences in the two systems, data migration was extremely complex requiring revalidation and correction of individual records. DoD is working with General Services Administration (GSA) to manage data corrections.

The Defense Department has a number of initiatives in place to address data accuracy in reporting. In May of this year DoD sent a letter to the Administrator, Office of Management and Budget. to provide the Department’s plan for improving the

data in the FPDS–NG. In addition to the plan, DoD has established a Data Management Team to oversee the Department’s data improvement program. DoD’s plan

also includes dedicated resources to the FPDS–NG training with an emphasis on improving data quality.

Congress has also expressed concern that a small business firm that received a

contract award may, over the life of a contract, outgrow its small business size status yet still be counted by the awarding agency as a small business. This is most

likely to occur in long-term contracts or when a contractor is merged or is acquired

by another company. To account for these occurrences and ensure that the source

data used to populate the FPDS–NG is as accurate as possible, DoD worked with

the Small Business Administration (SBA) in support of its efforts to develop a new

rule for small business size ‘‘rerepresentation.’’

SBA published a final rule in the Federal Register on November 15, 2006. This

rule was implemented in the Federal Acquisition Regulations (FAR) on July 5, 2007.

The FAR revision became effective on June 30, 2007 and was issued as an interim

rule to provide an opportunity for public comment. The final rule may vary from

the interim rule to reflect changes resulting from the comments received.

Under the interim rule, a contractor that represented itself as a small business

before contract award must now ‘‘rerepresent’’ its size status within 30 days in the

event of a novation agreement or merger or acquisition that does not require a novation and for a long-term contract (i.e., a contract with an anticipated performance

period longer than 5 years). This must be completed within 60–120 days prior to

the end of the fifth year of the contract and prior to the exercise of any remaining

contract option. Furthermore, if the contractor ‘‘rerepresents’’ that it is no longer a

small business, then from that point forward the agency may no longer include the

value of options exercised or the orders issued against the contract in its small business prime contracting goal achievements..

DoD is working with GSA (the administrator of the FPDS–NG system) to make

the necessary modifications to the FPDS–NG to accommodate the ‘‘rerepresentation’’

rule requirements.

Current contracts are being reviewed, in accordance with the applicable acquisition regulations and policies. The new FAR clause was added to solicitations issued

and contracts awarded on or after June 30, 2007.

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If the conditions of the FAR ‘‘rerepresentation’’ rule are met and a contracting officer receives a size protest or if the contracting officer has reason to believe the contractor is no longer small, the size protest would be submitted to the SBA in accordance with FAR 19.302. A change in size status does not change the terms and conditions of the contract and does not require termination of the contract.

Question 4. I have received some less than flattering reports about the Defense

Department’s Mentor-Prote ́ge ́ program. Some large contractors (mentors) are apparently requiring small business subcontractors to sign up for the program to generate

reimbursable expenses for the mentor company. Can you explain how this program

works? Specifically, how much money can a large contractor receive in reimbursed

expenses when the firm takes on a prote ́ge ́?

Answer. All Department of Defense (DoD) Mentor-Prote ́ge ́ agreements must undergo an extensive review and approval process. This review includes an in depth

assessment of the developmental assistance that will be provided, the period of performance of the agreement, and the funding required.

Section 831 of Public Law 101–510, as amended, and the Defense Federal Acquisition Regulation Supplement mandate reports and reviews on the performance of

both the mentor and prote ́ge ́. The Defense Contract Management Agency (DCMA)

is required to perform annual performance reviews on every active Mentor-Prote ́ge ́

agreement. Their review includes evaluation of the developmental assistance provided by the mentor to the prote ́ge ́ (which includes audit by the Defense Contract

Audit Agency to ensure that the expenditures are allowable, allocable and reasonable), and separate interviews with both the mentor and the prote ́ge ́ to establish

the health and welfare of the agreement.

In addition to the report mentioned above, mentors and prote ́ge ́s are mandated

as part of their participation to provide the DoD OSBP a semi-annual report (recently updated to a quarterly requirement) on their return on investment, employment, performance metrics and milestones, contract awards, and the status of funding provided. Misuse of funding is not tolerated.

The total amount reimbursed to a mentor firm for costs of assistance furnished

in a fiscal year to a prote ́ge ́ firm may not exceed $1 million, except when the Secretary of Defense determines in writing that unusual circumstances justify a reimbursement of a higher amount.

RESPONSE BY ANTHONY MARTOCCIA TO WRITTEN QUESTIONS FROM SENATOR SNOWE

Question 1. You stated at the hearing that ‘‘the Department and Secretary Gates

and my boss are totally committed . . .’’ to make opportunities available to servicedisabled veterans. Please provide specifies of the commitments and the timeframe

when DoD will meet the 3 percent goal for service-disabled veterans.

Answer. The Department has made achievement of the service-disabled veteranowned small business (SDVOSB) goal one of our highest priorities. The following list

provides a chronology of the actions taken by the Department during Fiscal Year

2007, to promote contracting with SDVOSB firms:

• April 12, 2007—Mr. Kenneth Krieg, the Under Secretary for Acquisition, Technology & Logistics, issues memorandum to Department of Defense (DoD) leadership,

making interagency commitment to use the General Services Administration (GSA)

Veterans Government-wide Acquisition Contract and pursuing SDVOSB 3 percent

goal ‘‘with vigor’’.

• May 18, 2007—Mr. Shay Assad, Director, Defense Procurement and Policy,

issues memorandum to senior acquisition officials encouraging the use of set-aside

and sole source tools to increase procurement awards to SDVOSBs.

• May 24, 2007—Mr. Tony Martoccia, Director, DoD Office of Small Business

Programs (OSBP), issues memorandum to senior acquisition officials encouraging

acquisition personnel to increase awards to SDVOSBs.

• June 6, 2007—Beginning of a series of interviews with the Director, OSBP by

various news organizations including ABC News, National Public Radio, Federal

Computer Week, the Kansas City Star, Federal News, the Federal Times, USA

Radio, and WTOP-FM, regarding DoD’s initiatives to increase contract awards to

SDVOSBs. (These interviews occurred during June 6, 2007 through August 27,

2007).

• June 7, 2007—Letter from Secretary of Defense Robert Gates to Senator John

Kerry, establishing a high priority within the Department for implementing the

SDVOSB program and enumerating initiatives to reach the statutory goal.

• June 23. 2007—The third year of the DoD Strategic Plan for SDVOSBs is

amended to emphasis the use of data bases for increasing contracts and subcontracts to SDVOSBs.

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• June 26, 2007—The Honorable Dr. James Finley, the Deputy Under Secretary

of Defense (DUSD) for Acquisition and Technology (A&T), provides keynote address

at the third Annual Veterans Business Conference on third Year of DoD’s Strategic

Plan before an audience of 1,200. Later that day during the same event the Director, OSBP, participated in a Federal acquisition panel to discuss various DoD initiatives for SDVOSBs. • August 7, 2007—The Director, OSBP met with officials from Walter Reed Hospital, the Director of Small Business Programs at the Army Medical Command, and

the Deputy Director of TRICARE, to develop a strategy and an implementation plan

to increase awards to SDVOSBs at military medical facilities. • August 7, 2007—The DUSD A&T met with the Director, OSBP and Small

Business Director for United States Transportation Command and representatives

from various Veteran Service Organizations (VSOs) to develop transportation initiative for SDVOSBs.

August 9, 2007—The Director, OSBP, is a guest speaker at the third annual GSA

Service Disabled Veteran-owned Small Business Conference, in New Orleans. The

focus of his presentation was the DoD Strategic Plan and other SDVOSB initiatives

with the Department. • August 10, 2007—The Director, OSBP, is among several participants in GSA’s

SDVOSB Roundtable in New Orleans. The purpose of the round table was to discuss

opportunities for SDVOSBs in the Gulf Coast area. Other participants were representatives of the Army Corps of Engineers (Hurricane Prevention Office), the

GSA, VSOs, prime contractors and local chambers of commerce. • August 20, 2007—The DUSD, A&T, and the Director, OSBP, present the inaugural Golden Talon awards for fiscal year 2006. The DUSD, A&T, closed the ceremony by calling for Golden Talon nominees for next year. (The Golden Talon Award

is presented to DoD acquisition professionals in recognition of their outstanding contributions to the Department’s SDVOSB program.) • August 21, 2007—The DUSD, A&T, met with senior DoD leadership and Directors of Small Business Programs for the Military Departments to impress upon

these leaders the importance of achieving the 3 percent goal and to develop strategies and initiatives for increasing awards to SDVOSBs. • August 27, 2007—The Director, OSBP, is a guest speaker at the American Legion National Convention. His speech focused on DoD’s Strategic Plan and initiatives. • September 13, 2007—The Director, OSBP, met with officials from DoD Installations and Environment (the DoD organization responsible for executing the Base

Re-alignment and Closures (BRAC)), Navy and Air Force senior procurement officials to develop initiatives for SDVOSBs for the BRAC schedule. • UPCOMING EVENT: November 5, 2007—The DoD OSBP will host the inaugural SDVOSB Achievement Awards at the beginning of Veterans Day Week, honoring outstanding achievements by DoD employees in the SDVOSB program and

outstanding DoD SDVOSBs contractors. The ceremony will take place at the Pentagon.

As evidenced by the above policy statements and initiatives, senior Departmental

leadership and the entire DoD acquisition workforce are working aggressively to

achieve the 3 percent goal. However at present the Department cannot provide a

timeframe for achieving the SDVOSP goal.

Question 2. You disagreed with the figure that 87 percent of bundled contracts

at DoD are not reviewed? What is the correct figure? Please outline specifically what

DoD is doing to reduce bundling of requirements and give specific examples.

Answer. The 87 percent pertained to the finding made by the Small Business Administration (SBA) Inspector General regarding the fact that the SBA did not have

enough Procurement Center Representatives to review bundled contracts and that

according to SBA IG’s survey, the SBA had not reviewed 87 percent of bundled contracts. This was not a statement concerning contract reviews within the Department

of Defense.

Defense Federal Acquisition Regulation Supplement 219.201 requires that all acquisitions over $10,000, except those under $100,000 that are totally set-aside for

small business concerns, be reviewed by a small business specialist. Bundling is one

element of this review. All of those contracts that fit this category under DoD purview were reviewed.

The Department has focused its efforts in four areas: (1) data accuracy; (2) increasing awareness training for the acquisition workforce on the concepts of consolidation and bundling; (3) developing more tools to assist the acquisition workforce,

as well as small business; and (4) taking small business participation into account

in strategic sourcing decisions. I will discuss our progress as we are attempting to

address each of these areas.

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Data accuracy: DoD has dedicated a significant number of resources to ensure the

successful transition into the Federal Procurement Data System—Next Generation

(FPDS–NG). Additionally, the DoD Office of Small Business Programs is currently

developing a ‘‘Data Monitoring and Analysis Plan.’’ The intent of the Plan is to ensure small business data is reviewed for anomalies and to perform analysis of the

data. As a result of this latter initiative, OSBP recently discovered 2,066 actions in

fiscal year 2007 that were coded as bundled by one DoD component. Further investigation revealed that all 2,066 of these actions had been miscoded as a result of

issues related to migration of data into the FPDS–NG.

Training: The Department requires analyses of alternatives, including methods

for mitigating the impact on small business, even if the bundling or consolidation

can be justified by its anticipated benefits. During the past year. DoD has provided

training to acquisition professionals in our efforts to facilitate the successful use of

small business joint ventures, partnerships, and teaming. In addition. the DoD Office of Small Business Programs is currently developing an online Guidebook and

a formal workshop that will identify Federal and commercial best practices and real

world examples.

Tools: The Department is working to provide tools that will assist the acquisition

workforce, further ensuring that requirements are not improperly consolidated or

bundled. One such tool is the Benefit Analysis Guidebook that the DoD Office of

Small Business Programs (OSBP) developed and posted online in 2002 to assist DoD

acquisition personnel with the justification and analysis requirements necessary

prior to bundling or consolidating. We are in the final stages of revising this Guidebook and will post it online soon. Additionally, OSBP is developing a Teaming/Joint

Venture Guidebook as well as training to assist small businesses in pursuing larger

procurements. This Guidebook and training will be available by the end of the year.

Finally, OSBP collaborated with the Defense Acquisition University this past year

to establish a small business community of practice (COP) Website. The COP provides invaluable small business information and resources to the DoD acquisition

community.

Small business in strategic sourcing considerations: In May of 2005 the Office of

Management and Budget directed agency heads to identify no fewer than three commodities that could be purchased more effectively and efficiently through the application of strategic sourcing. The Department is working to ensure that strategic

sourcing does not result in bundling; however, it can many times result in consolidation. Each strategic sourcing action includes a small business advocate and seeks

to increase, rather than decrease, achievement of socioeconomic goals.

Question 3. How specifically does DoD monitor and enforce subcontracting plans?

Answer. It is the post-award responsibility of Department of Defense contracting

officers and small business specialists to ensure prime contractors’ make a good

faith effort to comply with their subcontracting plan. Military Departments and

Other Defense Agencies may delegate contract administration, including monitoring

and oversight of the prime contractor’s entire small business program to the Defense

Contract Management Agency (DCMA). DCMA conducts small business program

compliance reviews to assess the effectiveness of the prime contractor’s overall small

business subcontracting program, and when delegated, will monitor individual subcontracting plans.

The monitoring of an individual subcontracting plan is usually performed by the

cognizant DCMA Administrative Contracting Officer (ACO). The ACO evaluates and

monitors subcontracting plans in accordance with Federal Acquisition Regulation

(FAR) 19.706. If warranted, section 8(d) of the Small Business Act as implemented

in FAR 19.705–7 provides for liquidated damages to be paid by a prime contractor

when the prime contractor fails to make a good faith effort to comply with the requirements of the small business subcontracting plan.

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