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81–199 2013

BUILDING AMERICA: CHALLENGES FOR SMALL 

CONSTRUCTION CONTRACTORS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CONTRACTING AND 

TECHNOLOGY 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MAY 23, 2013 

Small Business Committee Document Number 113–019 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Richard Hanna ................................................................................................ 1 

Hon. Grace Meng ..................................................................................................... 2 

WITNESSES 

Mark McCallum, Chief Executive Officer, National Association of Surety Bond 

Producers, Washington, DC ................................................................................ 4 

Thomas J. Kelleher, Jr., Senior Parnter, Smith, Currie & Hancock, Atlanta, 

GA, testifying on behalf of the Associated General Contractors of America ... 6 

Helene Combs Dreiling, First Vice President, The American Institute of Architects, Roanoke, VA, testifying on behalf of the American Institute of 

Architects .............................................................................................................. 7 

Felicia James, President, Primestar Construction, Dallas Texas, testifying 

on behalf of the United States Women’s Chamber of Commerce ..................... 9 

James C. Dalton, Chief of the Engineering and Construction Division, Directorate of Civil Works, United States Army Corp of Engineers, Washington, 

DC .......................................................................................................................... 17 

Jeanne Hulit, Associate Administrator for Capital Access, United States 

Small Business Administration, Washington, DC ............................................. 19 

APPENDIX 

Prepared Statements: 

Mark McCallum, Chief Executive Officer, National Association of Surety 

Bond Producers, Washington, DC ............................................................... 25 

Thomas J. Kelleher, Jr., Senior Parnter, Smith, Currie & Hancock, Atlanta, GA, testifying on behalf of the Associated General Contractors 

of America ...................................................................................................... 57 

Helene Combs Dreiling, First Vice President, The American Institute 

of Architects, Roanoke, VA, testifying on behalf of the American Institute of Architects ........................................................................................... 71 

Felicia James, President, Primestar Construction, Dallas Texas, testifying 

on behalf of the United States Women’s Chamber of Commerce ............. 76 

James C. Dalton, Chief of the Engineering and Construction Division, 

Directorate of Civil Works, United States Army Corp of Engineers, 

Washington, DC ............................................................................................ 79 

Jeanne Hulit, Associate Administrator for Capital Access, United States 

Small Business Administration, Washington, DC ..................................... 85 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

American Subcontractors Association, Inc. (ASA) ......................................... 92 

The Design-Build Institute of America ........................................................... 99 

H.R. 776 Bill ..................................................................................................... 103 

H.R. ——: On Design Build Contracts ............................................................ 105 

H.R. ——: On Reverse Auctioning .................................................................. 108 

H.R. ——: On Subcontracting Goals ............................................................... 111 

Mechanical Contractors Association of America (MCAA) ............................. 114 

Surety & Fidelity Association of America ...................................................... 146 

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(1) 

BUILDING AMERICA: CHALLENGES FOR 

SMALL CONSTRUCTION CONTRACTORS 

THURSDAY, MAY 23, 2013 

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

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building, Hon. Richard Hanna [chairman of the Subcommittee] presiding. 

Present: Representatives Hanna, Bentivolio, Clarke, and Meng. 

Chairman HANNA. Morning, everyone. 

This hearing will come to order. We are here today to talk about 

the role that small businesses play in construction contracting and 

how Congress can act to increase the opportunities for small businesses. To that end, we are going to talk about four different problems facing small businesses in construction and potential legislative solutions to each of these. 

I am familiar with many of these issues we will discuss today because of my personal experience as a general contractor. Over the 

course of 30 years in private business, I have grown a small business where I worked alone, employed over 450 people over time, 

and successfully completed over 3,000 big and small jobs in upstate 

New York. 

Given that experience, I know how important small business construction contracting is. It is an industry where a small business 

can grow to a large business. Construction contracting builds communities. As you will hear today from our private sector witnesses, 

Federal construction contracting plays a big part in creating these 

opportunities. In the Federal space, construction and architecture 

and engineering, A&E, contracting represents about 1 in every 6 

prime contract dollars awarded to small businesses. That amounted 

to over $17 billion last year alone. 

However, as construction projects get larger, it becomes harder 

for small businesses to obtain the necessary bonding to bid these 

projects. In these cases, they sometimes turn to disreputable sureties who issue worthless bonds that place taxpayers at risk. That 

is why I am the sponsor of H.R. 776, which we will discuss today. 

This is a no-cost bill that makes it easier for small businesses to 

get legitimate bonds and that makes sure that all bonds are worth 

more than the paper on which they are written. The Small Business Administration is joining us to discuss making bonds accessible to small firms. Sometimes the way we buy construction A&E 

is as important to small businesses as what we are buying. 

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So we are going to also discuss two procurement methodologies: 

First, reverse auctions, which may work for commodities but I 

question whether it is appropriate for construction-related services; 

the second methodology is the two phase approach to design build 

contracts. Given the cost of bidding for design work, the twophased approach allows more small businesses to compete, yet it 

isn’t always used properly. The Corps of Engineers have looked at 

both methodologies. And I look forward to hearing more about their 

findings. 

Construction contracting more than almost any other industry 

creates opportunities for small businesses and subcontractors. For 

that reason, the law requires that prime contractors and large subcontractors track and report how they use small business subcontractors. We give large businesses credit toward their subcontracting goals if they use small businesses at their first tier of subcontracting but not small businesses at the second tier of contracting. Today we are going to examine whether we can create 

more opportunities for small businesses if we are allowed to count 

these lower tier subcontractors. 

I look forward to a good conversation today so that we can give 

the subcommittee recommendations on how to proceed legislatively. 

I want to thank you all for your testimony today and your time. 

And I would like to yield to the ranking member. 

Ms. MENG. Thank you, Mr. Chairman. 

And thank you all for being here this morning. As you know, recently, the economy has showed promising signs of recovery, adding 

6.8 million jobs private sector jobs in the past 3 years with more 

than 800,000 being created in the last 4 months alone. Consumer 

confidence has reached a 6-year high and the stock market has set 

new records. In many regards, it is small businesses leading the 

way as they increase hiring and expansion. A key part of this resurgence is the construction sector, which is dominated by small 

firms with less than 20 employees. In fact, the unemployment rate 

for construction workers fell to the lowest April level in 5 years as 

contractors added more than 150,000 employees in the past year. 

This recovery appears to be fairly broad-based, as nearly all 

types of construction specialties are growing, with architectural 

and engineering services employment up 2 percent from a year earlier. While this is welcomed progress, more work needs to be done. 

The unemployment rate in the construction industry remains at 17 

percent, more than double the national rate. And while jobs have 

been added recently, it masks the reality that employment in the 

sector remains stagnant at 1996 levels. 

The reason is clear: Construction spending—both private and 

public—has decreased dramatically over the last 5 years, with the 

recent sequester only adding to this challenge. 

But declining spending is not the only hurdle this sector faces. 

Winning Federal construction work continues to be difficult for 

many small firms. Contracting bundling continues to be among the 

largest obstacles, as last year more than 150 contracts were consolidated, worth over $260 billion. As a result, many small firms 

missed out on lucrative opportunities, opportunities that could 

have been the difference between staying in business and closing. 

By bundling large contracts such as these, the government effecSBREP-219 with DISTILLER

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tively shuts out many smaller firms from competing for work that 

they have the skills and expertise to perform. Splitting these 

megacontracts into smaller pieces would enable more construction 

firms to participate in these projects. By doing so, the government 

would avail itself of more qualified companies and the high quality 

craftsmanship they bring to the table. 

Another challenge that small construction firms face is receiving 

a surety bond which is required by the government and guarantees 

contractor performance. While the SBA operates a program to fill 

this gap, it is failing to achieve its full potential. This is due to a 

lack of consistency with industry practices and a failure to market 

this program effectively to construction companies. These concerns, 

as well as the fee increases required to fund the program, are preventing small firms from competing for Federal construction contracts. While bundling and bonding are the most notable obstacles 

to a small firm’s participation in Federal construction projects, 

other issues are also impeding their involvement. New innovative 

procurement methods, such as the two-step design build process 

and reverse auctions, may be well suited for a certain contracts but 

have to be evaluated for their impact on small businesses specifically. After all, it is important to ensure that the odds are not 

stacked against smaller firms and that, instead, there is a level 

playing field for them to compete fairly for a contract. 

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

both agency officials and industry experts on these issues. Making 

certain that small construction and A&E firms can fully compete 

in the Federal marketplace is crucial not just for them but for the 

country, as this sector is literally the foundation for so much of our 

Nation’s economy. 

In light of the sequestration, declining private sector investment, 

and reductions in State and local infrastructure investments, Federal contracts have become an increasingly important source of revenue for small businesses. With such spending doubling over the 

last decade to more than $500 billion, doing business with the Federal Government is no longer simply a nice option to have but is, 

instead, a critical factor in small businesses’ ability to succeed. 

Thank you and I yield back. 

Chairman HANNA. If additional members have an opening statement prepared, I ask that they submit it for the record. 

I would like to explain quickly our timing system. Everybody has 

5 minutes. We will be flexible. We are interested in what you have 

to say. And then when the yellow light goes on, you have got a 

minute. So that is how it works. 

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STATEMENTS OF MARK MCCALLUM, CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS, WASHINGTON, D.C.; THOMAS J. KELLEHER, JR., 

SENIOR PARTNER, SMITH, CURRIE & HANCOCK, ATLANTA, 

GA, TESTIFYING ON BEHALF OF THE ASSOCIATED GENERAL 

CONTRACTORS OF AMERICA; HELENE COMBS DREILING, 

FIRST VICE PRESIDENT, THE AMERICAN INSTITUTE OF ARCHITECTS, ROANOKE, VA, TESTIFYING ON BEHALF OF THE 

AMERICAN INSTITUTE OF ARCHITECTS; AND FELICIA 

JAMES, PRESIDENT, PRIMESTAR CONSTRUCTION, DALLAS, 

TEXAS, TESTIFYING ON BEHALF OF THE AMERICAN INSTITUTE OF ARCHITECTS 

Chairman HANNA. Our first witness today is Mr. Mark 

McCallum. Mr. McCallum is the chief executive officer of the National Association of Surety Bond Producers, NASBP, an international association of companies employing professional surety 

bond producers and brokers. 

Thank you for being here. You may begin. 

STATEMENT OF MARK MCCALLUM 

Mr. MCCALLUM. Thank you Chairman Hanna, Ranking Member 

Meng. I am here today in support of H.R. 776, the Security and 

Bonding Act of 2013, a needed bill that will prevent the continued 

victimization of construction businesses, many of which often are 

small businesses, by unscrupulous and unregulated individuals, 

who promise surety guarantees without valid or sufficient assets 

backing those guarantees. Surety bonds are an essential component 

of the Federal procurement process. They are required by the Miller act on Federal construction contracts. Bonds preserve taxpayer 

funds by ensuring only that qualified companies seek award of publicly funded contracts and by providing a third-party guarantee of 

performance to contracting agencies and payment remedies to subcontractors and suppliers should the prime contractor fail to pay 

them or become insolvent. Without recourse to a valid payment 

bond, unpaid substance suppliers—especially small businesses— 

may not continue as viable businesses. 

Performance and payment bonds are only as good as the financial soundness of the company or person issuing the bonds. A surety that is not sound financially cannot add to the credit standing 

of the firm to which it is bonded. It also is more likely to default 

on its obligation to supply the needed protection promised by the 

bond. For these reasons, well regulated and stable surety markets 

are imperative. But the words ‘‘well regulated’’ and ‘‘stable’’ only 

apply in the context of corporate sureties. They do not apply to the 

individual surety bond market. 

Let me explain. Corporate sureties writing on Federal projects 

must possess a certificate of authority from the U.S. Treasury Department, which conducts a thorough financial review of the surety 

and sets a single bond size limit for that surety. Corporate sureties 

are licensed in the States in which they conduct surety business 

and must obtain certificates of authority from State insurance commissioners. They are regularly audited. They file financial reports 

with regulators. They file the rates they intend to charge for their 

bonds and are subject to market conduct investigations. Individual 

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5 

sureties do not receive the same high level of scrutiny. Under applicable Federal regulations, they are vetted solely by contracting 

officers, who often are overburdened and under-resourced and are 

not trained to evaluate surety assets. Federal regulations do not require individual sureties to possess a certificate of authority as an 

insurer in any State. They are not required to furnish character information, such as information about criminal convictions, tax 

liens, bankruptcies, or cease and desist orders levied against them. 

If a contracting officer fails to perform the investigation of the individual surety adequately and the assets backing the individual surety bond prove insufficient or nonexistent, unpaid substance suppliers are denied their statutory payment remedy and contracting 

agencies are denied their guarantee of contract performance. The 

history of Federal procurement offers many examples of harmed 

small businesses which discover too late that no real assets back 

the individual surety bond furnished to the government. You can 

find such examples in my written testimony. 

H.R. 776 offers a straightforward solution to this problem. It requires individual sureties to pledge solely those assets that are 

public debt obligations unconditionally guaranteed by the U.S. Government, such as U.S. Treasury bills and notes. These assets are 

given to the Federal contracting authority which deposits them in 

a Federal depository, ensuring that pledge assets are real, sufficient, convertible to cash and in the physical custody and control 

of the Federal Government. 

Passage of H.R. 776 will close the door left open for unscrupulous 

individuals to place worthless bonds on Federal contracts. Contracting agencies and construction businesses of all sizes then will 

have confidence that the protections promised by individual surety 

bonds are, indeed, genuine and are backed with existent valuable 

assets. H.R. 776 also contains an additional benefit for small businesses. It will bolster the regulated surety markets available to 

small contractor participants in the U.S. SBA Surety Bond Guarantee Program, which provides guarantees to surety companies 

which extend surety credit to small, often emerging businesses 

which otherwise might not qualify for surety credit. These small 

firms then can pursue award of Federal contracts and do not have 

to resort to securing surety credit from unregulated and unsafe 

markets. 

H.R. 776 increases the guarantee against losses given the surety 

companies from 70 percent to 90 percent as an inducement for 

them to participate in the program. I encourage every member of 

the subcommittee to support H.R. 776, and I would be pleased to 

answer any questions you may have of me. Thank you so much. 

Chairman HANNA. Thank you. 

Our next witness is Thomas Kelleher. 

Mr. Kelleher is the senior partner for Smith, Currie & Hancock 

LLP in Atlanta, Georgia, where he specializes in Federal Government contracting and construction. He is testifying here today on 

behalf of the Associated General Contractors of America. Mr. 

Kelleher proudly served in the United States Army from 1968 to 

1973, and we thank you for your service. 

Sir, you may begin. 

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STATEMENT OF THOMAS J. KELLEHER, JR. 

Mr. KELLEHER. Thank you. For 4 years, since I left the service, 

I have counseled contractors large and small on a wide variety of 

small business issues. From my experience, AGC members, a majority of whom have less than 20 employees, recognize the benefits 

that the various small business programs provide for the industry 

as a whole as well as for those firms that qualify to participate in 

the small business programs. However, the AGC believes that the 

current rules are structured in a manner that causes firms to perform in a way that meets the technical requirements but may not 

fulfill the spirit and intent underlying these small business programs. Consequently, we thank the committee for its consideration 

and urge it to continue efforts to allow awards to lower tier small 

business subcontractors to count against prime contractor goals for 

small business subcontracting; secondly, to prohibit the use of reverse bid auctions or reverse auctions in the procurement of the 

construction or construction-related services. We agree with Mr. 

McCallum’s views on the bonding, and we fully support the notion 

that two-step design bill, which the AIA will address, should be the 

way that design bill procurement is obtained. 

Now turning first to reverse auctions, we concur with the position of the Corps of Engineers, and we recommend consideration of 

the Corps’ July 26, 2004, report on its pilot program with reverse 

auctions. Basically, the Corps found that it was not appropriate for 

construction-related services. I have got two personal observations. 

If bidders fail to exercise discipline in the reverse auction and get 

caught up in the auction atmosphere, they are going to bid under 

cost. Under cost results in problems for the owner, the contractors, 

and the subcontractors. Lawyers may benefit because there are 

more claims and disputes, but the quality of the project will suffer. 

Consequently, we support legislation to prohibit the use of reverse 

auctions in construction. 

Small business credits. The current small business program provides goals for general contractors who are large businesses to 

make the percentage of their awards as subcontracts to small business firms. However, they don’t allow the large general contractors 

to count any awards to small businesses at the second, third, and 

so forth lower tiers. Consequently, the prime’s focus is on the first 

tier only because that is what is getting counted. While there is a 

requirement to lower tier large business contractors have subcontracting plans, the members’ experience is that the adherence to 

the letter of that is spotty. The reporting is spotty. Consequently, 

it is entirely possible that the government—your committee—don’t 

have a full picture of what is being awarded to small businesses. 

We need transparency. And in my personal view, you need a single 

point of responsibility. 

Looking at the slides—and you have copies of these in your folders—the first one is the transparency slide. 

If the small business awards are made at the second and third 

tier, the general contractor, even though it has a plan, is not focused on second and third tiers. These may well get lost. Now 

under the current program, if we look at the next slide, we have 

a hypotheses of a $100 million project; 70 percent is going to be 

subcontracted. The agency has set a 40 percent goal, meaning $28 

SBREP-219 with DISTILLER

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million. The general contractor makes an award to a small business for $28 million at the first tier because that is what is counted 

and then its focus ends. It moves on to other topics. It may or may 

not be awards below that first tier made by these large businesses. 

It may not be reported. 

What we are proposing is that the general contractor be given 

the overall responsibility for the program. So the last chart, sir, is 

the same $100 million project. But the goal has been increased 

from 40 percent for small business subcontracting to 60 percent 

small business subcontracting. 

A good question is, what is the general contractor going to do? 

In my view, they are going to still first emphasize small business 

subcontracting at the first tier because they control that more directly. And if they can count second and even third tier, we may 

well have more subcontracting achieved than otherwise would be 

achieved. And that is the purpose of our supporting legislation to 

allow counting at lower tiers. 

The current electronic reporting system is capable of handling 

that. What we need is legislation to permit general contractors to 

award and count at lower tiers. In my view—I was managing partner in my law firm—when you have one person or one entity responsible, you get far better performance than when you split it up 

into a diverse group. Thank you. 

Chairman HANNA. Thank you. Thank you very much. 

Our third witness today is Ms. Helene Combs Dreiling. 

Ms. Combs Dreiling is the principal at Plum Studio, which she 

founded in 2009. In addition to this, she currently serves as vice 

president and president-elect for the American Institute of Architects, who she is testifying on behalf of today. Thank you for being 

here. You may begin. 

STATEMENT OF HELENE COMBS DREILING 

Ms. Combs Dreiling. Chairman Hanna, Ranking Member Meng, 

and members of the committee, I am Helene Combs Dreiling, 

FAIA, executive director of the Virginia Center for Architecture 

and the 2013 first vice president of the American Institute of Architects. I want to thank you for the opportunity to testify today on 

behalf of the AIA and its more than 81,000 members. 

The economic crisis has affected every American, and it hit the 

design and construction industry particularly hard. Architects are 

small business people: 95 percent of firms employ 50 or fewer individuals, and over 76 percent of firms make less than $1 million per 

year. The recovery seems to be fragile at best, as the construction 

industry lost 6,000 jobs just last month. The AIA’s April architectural billings index shows a downward trend at 48.6 which is the 

lowest result since July 2012. This figure indicates a potential for 

reduced construction activity in the next 9 to 12 months. 

Public sector work has been a lifeline for many small firms during this recession, but there is a significant financial burden to participate. When teams are short-listed an architecture firm spends 

roughly $260,000 to compete for a project. In almost 87 percent of 

Federal design build competitions, there are no stipends provided 

to the firm. Agencies would typically short list up to five teams for 

a design build project, but there have been recent reports where 

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some short list as many as eight to 10 teams. In these cases, the 

odds of being selected drop significantly. 

Due to the current economic climate, small- and medium-sized 

firms face the Hobson’s choice of betting it all on a contract they 

may not get or self-selecting out of the Federal design build market 

altogether. Unfortunately, Federal law enables agencies to create 

longer short lists. Under current law, agencies are required to 

short list between three and five teams. However, the law states 

that contracting officers have the flexibility to increase the number 

of finalists if doing so is in the government’s interest. This exception is so broad that agencies use it without giving it a second 

thought. Therefore, we ask the committee to look at tightening the 

statute so that all firms can accurately determine the risks and rewards of participating in this market. 

Another issue is when agencies use a one-step selection process. 

Agencies eliminate the preselection step and open the solicitation 

to all respondents. This allows the government to review as many 

responses as are submitted without reviewing the qualifications of 

the bidders prior to receiving a bid. This concept sounds attractive, 

but when a contracting officer receives multiple responses, this selection method becomes inefficient and costly to the Federal Government. 

That is why we respectfully ask that the committee consider limiting the use of single step design build to projects that are less 

than $750,000. This threshold is based on U.S. Army Corps of Engineers’ guidance issued in August of 2012. By limiting single step 

procurement to these projects, there will be less risk for teams who 

want to pursue this work, and it will allow for more small businesses to participate in the process. 

In conclusion, I would like to thank Chairman Hanna, Ranking 

Member Meng, and members of the subcommittee for giving me 

this opportunity to testify before you today. The AIA commends you 

for your commitment to addressing the challenges that small businesses face in this economy and your leadership in advancing legislation that help small businesses drive the recovery. The challenges 

that we, as small business people, face are serious, but so is our 

commitment to play a leading role in rebuilding our country. 

Thank you. 

Chairman HANNA. Thank you. 

I now yield to Ranking Member Meng to introduce our final witness. 

Ms. MENG. It is my pleasure to introduce Ms. Felicia James. Ms. 

James is the president of Primestar Construction located in Dallas, 

Texas. Primestar is a participant in several small business contracting programs, including the women-owned 8(a) and HUBZone 

programs. The construction firm specializes in tenant commercial 

improvements, parks, site improvements, and design build projects. 

Ms. James is testifying on behalf of the U.S. Women’s Chamber 

of Commerce, an organization that represents 500,000 members, 

three-quarters of whom are small business owners and Federal 

contractors. 

Welcome Ms. James. 

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STATEMENT OF FELICIA JAMES 

Ms. JAMES. Thank you. 

Good day, Chairman Hanna and Ranking Member Meng and additional committee members. I am Felicia James, and I am the 

president of Primestar Construction Corporation. 

Primestar is an 8(a) women-owned HUBZone full service construction firm having executed and successfully completed several 

trades identified in various construction projects. I am a member 

of the United States Women’s Chamber of Commerce and was recently appointed as the agency liaison for the U.S. Navy and Air 

Force. 

And we are a half a million member network of highly qualified, 

viable women-owned firms. I come to you today both having performed as a subcontractor and a general contractor with major specialty industries’ self-performance capabilities. To elaborate on the 

two-step design build contracting vehicle, the reverse auction bidding, the ability to acquire critical tiers other than the first as it 

relates to subcontracting small businesses, Primestar Construction 

supports the use of two-step design build contracts. 

Most design build public projects today are procured via a twostep approach. First, request for qualifications, RFQs, are sent to 

potential design build teams. Based on the responses to the RFQs, 

three to five design builders are short-listed and given request for 

proposals seeking competitive submittals, resulting in an award of 

a design build contract. Unfortunately, due in part to competition 

with large construction firms, many small businesses are not selected for inclusion among qualifying offerers at the second phase. 

For small businesses to be successful in the two-step design build 

process, there needs to be a percent allocation reserve for small 

business groups like women-owned business and other small business set-asides within the second phase contract report. Primestar 

Construction is in strong opposition towards using reverse auction 

for construction projects. Reverse auction was originally designed 

to procure commodities and manufactured goods. 

The procurement method should not be used for the following 

reasons: Reserve auctions do not necessarily guarantee lowest bid. 

Set-aside programs are nonexistent and could potentially violate 

Federal procurement laws, particularly the specified acquisition 

threshold, which helps small businesses currently. Small businesses are unable to compete with incumbents, typically large 

primes, who have multiple awards and can afford to reduce pricing. 

Primestar Construction believes that prime contractors should 

not receive credit for small businesses used as second- and thirdtier contractors. Prime contractors should be credited for first tier 

subcontractors only. Changing the credit process to include second 

and third tier contractors will encourage bundling projects into 

larger portions and diminish the amount of first tier subcontract 

awards to small businesses, thus making it harder to access larger 

portions of Federal projects and thereby making it difficult for 

small businesses to grow and become more competitive in the marketplace. 

Including these tiers into the subcontracting plan would lower 

the number of first tier contracts awarded to small businesses that 

desperately need and are qualified to perform the work. The curSBREP-219 with DISTILLER

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rent system allows for mentor protege relationships that will enhance my firm’s capability to more successfully compete for larger 

projects. Changing the program will dilute the leverage of small 

business entities within the mentor protege program, and their 

participation and completion of larger construction projects would 

significantly be reduced. 

Including second and third tier subcontractors in subcontracting 

plans would violate the intended purpose for the small business 

program, which is to maintain and strengthen the Nation’s economy by enabling establishment and viable small businesses. Why? 

Because essentially one large prime would utilize a second large 

prime at the first tier, thereby creating the first tier void of any 

small business participation. 

Primestar supports H.R. 776, the Security Bond Act of 2013. This 

bill adds transparency to the security assets. By increasing the 

guarantee to 90 percent, more small business and emerging businesses, like me, will have added opportunities to participate in the 

SBA’s Surety Bond Guarantee Program. The provisions to increase 

SBA guarantee from $2 million to $6.5 million will help make 

bonds available to more small and minority contractors. Being able 

to clearly assess the backing of a bond will allow contractors and 

Federal contracting officers to know that the guarantee promises 

on paper are backed by honest companies pledging real assets. 

Thank you for the opportunity to share my experience and provide my feedback on these key issues to the Small Business Committee. 

Chairman HANNA. Thank you. 

As you can see, we have a few minutes to get down to the floor 

and vote. And also there are 368 people who haven’t. So we will 

be fine. But take a break. I am imagining 15, 20 minutes do you 

think? So we will be right back for questions. Thank you very 

much. 

[Recess.] 

Chairman HANNA. I call this committee back to order. And I will 

take the first question. 

Mr. Kelleher, the law currently requires that a prime contractor’s 

subcontracting goals reflect the maximum practicable utilization of 

small business on that contract. If we allow prime contractors to 

count lower tiers, would that mean more or less—and a lot of this 

was in your statement—opportunity for small businesses? 

Mr. KELLEHER. Mr. Chairman, the law and the focus of the goals 

is set by the agencies in the procurements. For the general contractors, it is first tier. We fully expect that if lower tiers were counted, 

that those goals would increase and would also reflect awards to 

8(a)s, service disabled firms, and so forth, as were reflected in the 

goals that were included in the 2013 NDAA for small business subcontracting. 

So I think the opportunities would increase. And as I said earlier, I don’t think the awards at the first tier will decrease simply 

because that is where the general contractor has the most control 

over the award process. 

Chairman HANNA. Can I infer from what you are saying that you 

actually think the second tier group will have a faster track to become first tier contractors? 

SBREP-219 with DISTILLER

11 

Mr. KELLEHER. I think they can. And I think the more that we 

can stimulate small businesses at every tier, we are going to help 

the industry. Construction is a small business-based industry. 

Chairman HANNA. Can you see a reason to differentiate between 

small businesses and tiers in and of themselves? 

Mr. KELLEHER. I think it is done simply because the industry 

thinks in terms of tiers. The Miller act is tier-oriented, as interpreted by the Supreme Court. And we tend to think in terms of 

tiers. The lawyers are somewhat to blame because we have the 

privity of contract concept ingrained in our head from the first day 

of law school. And consequently, we see privity and tiers somewhat 

parallel. But on a construction project, where you essentially have 

a team effort, the second and third tiers are certainly elevated 

enough that the general contractor knows who he has, who is out 

there and can work with them. 

Chairman HANNA. Thank you very much. 

Mr. McCallum, just from my own experience, what I think a lot 

of people understand about the bonding business is that, in a very 

real way, you are the regulators of who does or does not enter the 

competitive environment that requires a bond. There is not a government agency that does this. We rely on the surety bonds incentive not to lose money to get qualified people who are financially 

and experientially capable of completing what it is they start at the 

level of bidding they are doing. Therefore, it takes years sometimes 

to get a $1 million bond, a multimillion dollar bond and many, 

many assets. Is that fair? 

Mr. MCCALLUM. Yes, Mr. Chairman. The central purpose behind 

surety bonding is to make sure that there is qualification, meaning 

a prequalification process that is undertaken by the surety to 

evaluate a construction firm to see if they will be qualified, in the 

surety’s opinion, to pursue award of a particular contract. And they 

want companies to be successful and they want them to have measured growth so that they can assume those obligations and then 

gradually grow so that they are successful over the long term. 

Chairman HANNA. So, to extrapolate then, to allow people into 

the market that do not have the financial capability or the experience—either one, but have to have both, in any way to pay a higher fee for a bonding order to get in, to have specious assets to get 

in or a bonding company to do the same, all of that kind of steps 

over the system that keeps people at a level that they are capable 

of competing at and completing. Is that fair? 

Mr. MCCALLUM. Yes. You have to remember, surety bonds are insurance. However, they are very much different from a traditional 

insurance policy. So they are more in the nature of a credit arrangement. And the importance there is that they are written so 

that there is no expectation of loss, unlike a typical insurance policy that it is actuarially determined because it assumes a loss. 

Chairman HANNA. So the zero loss ratio means that when you 

identify a company that you are willing to bond, you are virtually 

saying, we are 100 percent sure you can finish? 

Mr. MCCALLUM. They are confident that that is a company qualified to undertake—— 

SBREP-219 with DISTILLER

12 

Chairman HANNA. Right. So you become that wall that protects 

the public by your not wanting to lose money or have a bond defaulted on. 

Mr. MCCALLUM. Correct. So it is to protect the taxpayer dollars 

that are being invested in these public contracts in the first instance to make sure that these are qualified companies. And to the 

extent if there is a loss, if there is a default, in that event, they 

stand behind that, and they make sure that that contract will be 

completed. And also, very importantly, that the subs and suppliers, 

the lower tiers have a payment remedy. You have to remember on 

public work, there are no mechanics liens because it is public property. So the only remedy in the event of nonpayment by the sub 

and the supplier is recourse to a valid payment bond. And if that 

is not valid, then they are without that remedy and can go insolvent themselves, losing those jobs. 

Chairman HANNA. Thank you. 

I yield to Ranking Member Meng. 

Ms. MENG. Thank you. I have a question for Mr. McCallum. We 

have heard of instances in which sureties have used inadequate or 

nonexistent assets to secure multimillion dollar project bonds. 

What repercussions does this type of fraud have on the Federal 

Government and on the contractors that rely on these bonds? 

Mr. MCCALLUM. Thank you. It actually has very significant repercussions. So, again, if those assets aren’t there, then the contracting agency, in the event that the prime contractor defaults, 

has no recourse. They are going to have to use additional taxpayer 

funds to complete that work, where otherwise they would be able 

to place that risk on the surety who stands there to provide that 

protection. But on an individual surety context if there are no assets, then that paper is worthless. So you have more taxpayer dollars being expended. And again, as I said earlier, the downstream 

parties will be without payment because they are likely not paid 

by the prime because they may have defaulted, become insolvent 

and then there is no payment. They have no direct recourse against 

the government. They are not in privity of contract so that payment bond is the only remedy they have and there is nothing there, 

then they are out of payment and may be out of business. 

Ms. MENG. And you have also advocated for increasing the SBA 

guarantee to upwards of 90 percent. If this occurred, how many 

more small business bonds would your members issue? 

Mr. MCCALLUM. My members are the bond producers, so they 

are the agents that work with the companies to get them in position to be bonded to qualify for bonding. We believe that increasing 

the guarantee would add greater participation by surety companies 

in the program. Currently, the program is divided into two programs. There is the prior approval and the preferred program. And 

we have seen I think approximately 17 companies now participate 

in the prior approval program. But the preferred program only has 

four companies, and it currently provides a 70 percent guarantee. 

And we think that it would be important to increase that guarantee—one, to attract those companies, and two, to make a larger 

business case for their success in participating in the program. So, 

in certain instances, they may actually be able to go to a reinsurer 

and get a better situation than the guarantee that would be offered 

SBREP-219 with DISTILLER

13 

by the SBA. You increase the guarantee in the preferred program, 

and then now you have a better case—a business case for them to 

participate and write more bonds to small businesses that they otherwise wouldn’t and increase the regulated market for those small 

businesses. 

If I might add, one of the things that surety companies take 

great pride in as well as bond producers is maturing the businesses. So it is a relationship that they have. And they want to see 

those businesses succeed, and they provide all sorts of assistance, 

including referrals to professional service providers and others. 

They don’t make money unless these businesses make money. And 

it is very important for them to have measured growth for success 

in the long term. 

Ms. MENG. Do you think if there are more applicants for these 

bonds with an increase, that the SBA would be able to handle the 

workload? 

Mr. MCCALLUM. One of the things that we have been very encouraged about in the last I would say 5 years or so is that the 

SBA has really made tremendous outreach to industry, working on 

a dialogue and how they can improve their processes. And it wasn’t 

just listening. They have done things. So they have increased and 

streamlined their application. They have looked at making sure 

that the program responds in a design build context. A lot of different improvements that they have done. Plus there have been 

legislative enhancements to the program as well. 

All that, they have maintained a very low loss ratio. I think any 

surety would be proud to have the loss ratio that SBA has experienced. So I think we have, with growing confidence, believed that 

that program could continue to achieve, to achieve the potential 

that you alluded to and would be able to handle the increased business with a higher guarantee. 

Ms. MENG. Another question for Mr. Kelleher and Ms. James 

maybe. 

The proposed legislation for bid listing at the Federal level is 

modeled after laws that currently exist in many States. However, 

despite the effectiveness of these provisions, some argue that there 

are privy of contract issues within these laws. Do you find this criticism to be accurate? 

Mr. KELLEHER. I think the general criticism of bid listing at the 

Federal level needs to be looked at with one step removed from the 

privy issue. When I got out of the service, which was a long time 

ago, we were in the midst of a large GSA courthouse and Federal 

office building construction program all throughout the United 

States. The GSA instituted bid listing. It was a disaster, except for 

the lawyers, because you couldn’t fill out the forms without creating an opportunity for an ambiguity and a bid protest. Ultimately, GSA dropped the program after—I am going to say 5 or 6 

years. And I can get the information and provide it to the AGC as 

to what GSA said at the time. Privity issues I don’t think are as 

important as the impracticality of doing it within the context of the 

Federal program if it is seal bids in a negotiated area. 

What I am seeing the agencies doing, Corps of Engineers and the 

Naval Facility Engineering Command is asking contractors to— 

both large and small—to submit with their proposals on negotiated 

SBREP-219 with DISTILLER

14 

contracts what they are calling small business participation plans. 

In those RFPs, the agencies are setting forth goals for awards to 

small business firms at all tiers—multiple tiers, not just first tier. 

And they are saying contractor understand. That is different from 

the subcontracting plan. The labels are close but they are different 

plans, different goals. 

And then they tell the contractors, you will get greater evaluation credit when you review the proposal if you provide higher 

numbers at the various tiers, including every type of small business preference program that is there, and you will get a higher 

valuation if you give us evidence of a binding commitment to the 

firms that you designate. That allows the team to be put together, 

not in a shotgun marriage, and it incentivizes the contractors to 

stimulate small business contracting at every tier and involve 

every type of firm, women-owned, 8(a), service-disabled regular 

small business. 

That is a good approach to addressing the problem. When you 

have mandatory listing, you have a problem that—do I list A or B? 

They have given me different prices, different scopes; I don’t know 

if they are bondable or insurable the day. If it is done as part of 

a proposal where the team has worked together, then those issues 

take care of themselves. I think it can be done but listing in a seal 

bid, you are responsive or you are not responsive, is an invitation 

to go back to the late 1970s early 1980s, when every project that 

I was aware of in the southeast got protest. And then we rebid, and 

guess what happened the second time around? There would be a 

protest again because the underlying problem with the listing system was still there. 

Ms. JAMES. I can concur with Mr. Kelleher in that at the various 

tiers, when we provide that information with proposals, speaking 

from a general contractor now, what I do in providing that information with my proposal is provide the LOIs, the letter of intents, to 

be able to show that I have secured that subcontractor and the subcontractors beneath me, I make it a requirement to be sure that 

they have a committed letter as well, and therefore, I am able to 

manage both tiers and provide additional services to other small 

businesses. 

Ms. MENG. I have a question for Ms. Combs. 

Each construction project offers its own unique set of factors that 

will help determine its cost. For example, a company constructing 

a building in my district in New York will not face the same conditions as a firm with a project in Florida. Do you believe that the 

reverse auction process allows the agencies to consider the variables that construction projects face? 

Ms. Combs Dreiling. I am afraid I am not the reverse auction 

specialist, Ms. Meng. Mr. Kelleher would be the one to—I would be 

able to answer more questions in the design build realm, but that 

I think is probably better answered by him if that is okay. 

Ms. MENG. Thank you. 

Mr. KELLEHER. I am going to answer your question, Ms. Meng, 

with yes and then explain why I am saying yes without qualification. The reverse auction approach doesn’t reflect the conditions in 

any locale. It is designed—and the first time I heard it explained, 

the agency representative said, we have had success buying lettuce. 

SBREP-219 with DISTILLER

15 

And I thought lettuce is not a construction project. Design bid build 

or design build. There are so many variables whether you are in 

New York or Florida. The labor market, the team is going to be different. A contractor from New York could go down to Florida if it 

is licensed and bid on work, but the subcontractors would probably 

be different. The labor market is different the labor weather is different. The site conditions. So even if you take the same building 

and move it from here to there, it is not the same project. And reverse bid auctions assume that all the variables are fixed, like you 

are in a manufacturing plant turning out widgets, and that is why, 

in my opinion, it does not fit. It is the squarest peg in the roundest 

hole. 

Ms. MENG. I yield back. 

Chairman HANNA. Thank you. 

Mr. Bentivolio. 

Mr. BENTIVOLIO. Thank you, Mr. Chairman. 

Thank you all for coming here today. I apologize. I had to leave 

to go vote, and I missed part of your introductions, but as a former 

vocational education teacher teaching computer design, I have an 

interest in the design build process. And I thought the industry 

like design build, what has changed? 

Ms. Combs Dreiling. As you well know, any project delivery has 

challenges of its own, but I think what occurs with the particular 

use of design build with Federal Government projects here is that 

it requires architects, engineers, subcontractors, contractors to perform a great deal of work in order to even secure the project. Even 

with two step, what we are seeing is that our firms are—just architecture firms, and of course, this is multiplied when you consider 

the other members of the design construction industry who participated in the team, but just the architects are expending in the 

neighborhood of $260,000 of their own resources within their firms 

to sort of take the chance of getting a project. And if it is three 

firms, it is a one in three chance. If it is five teams, it is one in 

five. And with some of the one-steps, it is way up there in terms 

of how much they are risking to secure this work. 

Additionally, most of our firms are small; 95 percent of firms in 

the AIA are fewer than 50 employees—this happened when all the 

buzzing was occurring so I will say it again because I want to make 

sure that you all caught this—and 76 percent of these firms have 

gross revenues of under $1 million a year. Well, to think of sort of 

spending a quarter of that just on the chance of getting one project 

is just something that a lot of folks are not willing to do just to 

get the keep the doors open, so I think it is cutting out a lot of potential firms that could participate and narrowing the auctions that 

the government has on who could perform this work in terms of the 

teams. 

Mr. BENTIVOLIO. Okay. So let’s see if I understand this right. 

What somebody’s proposing— and I will have to go through my 

notes—but is that—well, how did it used to get done? Did the general contractor contract to the design firm and then make the proposal? How did that work before? 

Ms. Combs Dreiling. Well, typically, in the historic past, the 

project methodology design bid would have been utilized where 

there was not a sort of teaming effort between and among a numSBREP-219 with DISTILLER

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ber of players in the design and construction industry. So the architect would have designed the project and then sent it out for a bid, 

and contractors would have bid on it. And then it would have proceeded to construction. So design build was adopted in order to 

hopefully save time and hopefully save money for the Federal Government, which is what we all want as taxpayers. But it has resulted in some cases in a very difficult situation for architecture 

firms, contracting firms, engineering firms, and small subcontractors, and I would mention small and large, to be quite truthful, in 

doing so much work on the chance of actually being awarded the 

project. 

You are familiar with the construction process. So these firms 

are now—these teams are going through what would be in former 

design bid build terms well into design development because they 

have to know how much the project is going to cost. Well, in order 

to do that, you must have a notion of the heating, ventilating, and 

air conditioning systems, all the other building systems, the building components, the cost of those, and it requires a fairly detailed 

set of documents to get to that point to provide the actual bid. 

Mr. BENTIVOLIO. Because the contractor has a better feel for 

what the costs are in actual construction where the firm traditionally doesn’t because they are design. 

Ms. Combs Dreiling. That is right. 

Mr. BENTIVOLIO. Thank you. I appreciate it. 

I yield back, Mr. Chairman. Thank you. 

Chairman HANNA. I saw everyone’s head nodding when you 

spoke. Anybody disagree with that? The $750,000 limit and the 

sort of two-tier system or two-process system, what you are really 

saying, to paraphrase, so correct me if I am misinterpreting, is that 

it will increase opportunity because it will add certainty to the 

process and reduce the potential cost. So it is really venture capital 

that you are putting out there that you may never see again so it 

encourages you to get involved. 

Therefore, the limit, the 76 percent, under a million, all of that 

opens up the market to people—Ms. James and anyone else who 

falls under that headline, so in a very real way, it adds to competition. It adds certainty to the process, and it lowers your upside risk 

and gives you an opportunity to look at the process and say, do I 

want to go to the next step. 

Ms. Combs Dreiling. That is exactly it. 

Mr. MCCALLUM. That is right. 

Mr. KELLEHER. And Mr. Chairman, it applies across the board to 

the general contractors and the specialty trade contractors. They 

are incurring substantial costs developing the bids. They work 

closely with the design team to come up with a concept that they 

think the agency would accept. So they are investing money too. So 

there is a deterrent here in a one-step design build proposal for 

smaller contractors to participate. They don’t have the assets. And 

if the total cost of a proposal is $400,000 and you are doing $10 

million a year, how much money do you have to invest? 

Chairman HANNA. So what you are really saying, the way we 

keep it actually limits competition and un-invites or rather invites 

large companies who have venture capital and really severely proSBREP-219 with DISTILLER

17 

hibits smaller people from getting involved because they can’t begin 

to compete at that bigger level. Is that fair? 

Mr. KELLEHER. Yes, sir. 

Mr. MCCALLUM. That is fair. 

Chairman HANNA. Thank you. 

Just quickly, reverse bidding. Let me give you an interpretation 

of what I am getting at. If I were to say it encourages people to 

go to the least common denominator; it encourages people, in the 

frenzy of bidding, that people make mistakes on things that are 

subjective, pencils and lettuce, probably not that subjective. People 

know their exact costs; they know how close they can get to the 

bottom line. They know everything they need to know. So the reverse bidding construction projects as opposed to things does not 

make sense, that—and that is—does anybody disagree with that? 

Would anyone like to say anything about that? 

Mr. KELLEHER. May I add one comment, Mr. Chairman? In that 

reverse bid auction, the contractor sees the lowest prevailing price 

on a computer screen. It can opt to see the lower price or walk 

away. What he can’t do in that tightened bidding environment is 

sit down, think about its cost, coordinate with its contractors, who 

have a large piece of this action. So it is putting the number in. 

And maybe it works, and maybe it doesn’t work. But when it 

doesn’t work, I can assure you, Mr. Chairman, the disputes and the 

problems between the contractors, the sureties and the agencies 

are going to incur, and the only people who benefit are the lawyers. 

Chairman HANNA. So you are saying we encourage, by doing this 

in construction, people to do irrational things and reactive things. 

Mr. KELLEHER. Dumb. Dumb things. 

Chairman HANNA. And dumb things. 

Ms. Combs Dreiling. Yes, sir. 

Chairman HANNA. Thank you very much. 

I will close this panel. Thank you for your time today. And quickly, is there anything you want us to ask the next panel? 

If not, you are dismissed. Thank you for your time and service. 

Ms. Combs Dreiling. Thank you so much. 

Chairman HANNA. The second panel, you can proceed if you like. 

STATEMENTS OF JAMES C. DALTON, CHIEF OF THE ENGINEERING AND CONSTRUCTION DIVISION, DIRECTORATE OF 

CIVIL WORKS, UNITED STATES ARMY CORP OF ENGINEERS, 

WASHINGTON, D.C.; AND JEANNE HULIT, ASSOCIATE ADMINISTRATOR FOR CAPITAL ACCESS, UNITED STATES SMALL 

BUSINESS ADMINISTRATION, WASHINGTON, D.C. 

Chairman HANNA. Thank you. I would like to welcome our next 

panel. 

Our next witness today is Mr. James Dalton. Mr. Dalton serves 

as chief engineering and construction directorate at the United 

States Army Corps of Engineers. In his role, he is responsible for 

the execution of over $10 billion of design and construction programs for the Army, Air Force, Department of Defense, and other 

Federal agencies and over 60 foreign nations. You may begin, sir. 

STATEMENT OF JAMES C. DALTON 

Mr. DALTON. Thank you, Mr. Chairman. 

SBREP-219 with DISTILLER

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Mr. Chairman and members of the committee, as you just said, 

my name is James Dalton. I am the chief of engineering and construction for the Corps of Engineers. I guide the development of engineering and construction policy for the Corps’ worldwide civil 

works and military missions programs. I certainly thank you for 

the opportunity to testify here today for this important issue. 

The Corps fully recognizes the value small businesses bring to 

our national economy, and each year, we typically award over 40 

percent of the prime contract dollars to small business. My testimony will address the Corps’ policy regarding two-step design build 

contracts use of reverse auctions for construction, the Corps’ experience with accepting surety bonds provided by noncorporate sureties 

and whether allowing prime contractors to receive credit for lower 

tiered subcontractors will improve the use of small business. 

The Corps employs various acquisition strategies and contract 

types to perform its mission. The Corps uses the design build 

project delivery system for many construction requirements and 

prefers the use of a two-step or two-phase selection procedure. This 

allows offerers to submit experience and past performance information in step one, and then only the qualified offerers advance to 

phase two or step two of the competition. These offerers did have 

a much more favorable chance of winning, as the previous panel 

just discussed, and that also provides an incentive for them to submit superior proposals. 

With regard to reverse auctions, the Corps has limited experience in the use of reverse auctions. The Corps conducted a pilot 

study and found no basis to determine that reverse auctions provide significant savings over traditional acquisition methods for 

construction. Reverse auctions provide benefit when the acquisition 

is of a controlled and consistent nature with little or no variability. 

Construction is not a commodity, has variability, and it is more 

similar to a professional service. 

With regard to the Miller Act, it requires construction contracts 

to furnish a performance and payment bond for contracts greater 

than $150,000. The Corps considers the acceptability of noncorporate sureties when offered by a contractor. While we do not collect data requiring—regarding the use of noncorporate sureties 

generally, they are proposed much less frequently than the corporate sureties are. The use of noncorporate sureties requires an 

expenditure of government resources from the contracting officer 

and his or her team to investigate the susceptibility of pledge assets. Failure to establish the pledged assets claim value or the asset’s ownership generally causes rejection of the surety. It is unknown if allowing large primes—large prime contractors to claim 

credit for small businesses used by their second and third tier subcontractors would lead to improved usage of small business firms 

on Corps contracts. 

Subcontracting dollars are currently being reported regardless of 

their tier level. A contract with a subcontracting plan requires a 

prime to flow down the requirement to its subcontractors and for 

subcontractors to do the same to their subcontractors. Allowing 

prime contractors to receive credit, however, for subcontracting activity at all tiers would require a change in the method of accountSBREP-219 with DISTILLER

19 

ing for subcontracting activities across the entire Federal Government. 

Mr. Chairman, thank you for inviting the Corps to appear before 

this subcommittee to address challenges faced by small businesses, 

and I look forward to answering any questions from you or members. 

Chairman HANNA. Thank you. 

Thank you, Mr. Dalton. 

Our next witness is Jeanne Hulit. Ms. Hulit is the associate administrator for the Office of Capital Access at the Small Business 

Administration. 

Prior to her Federal Government service Ms. Hulit was the senior vice president for commercial lending at citizens bank. She also 

worked for key bank as a middle market lender. 

Welcome. You may begin. 

STATEMENT OF JEANNE HULIT 

Ms. HULIT. Thank you. Thank you Chairman Hanna, Ranking 

Member Meng, and members of the committee. I am pleased to testify before you today on the topic of surety bonds. 

The Small Business Administration Surety Bond Guarantee Program was established in 1971 to help small businesses obtain the 

surety bonds that are often required as a condition for awarding a 

construction contract or subcontract. For example, the Federal Government requires a surety bond on any construction contract valued $150,000 or more. Most State and local organizations have 

similar bonding requirements, as do private construction projects. 

SBA’s program helps small and emerging firms become bonded 

by guaranteeing a portion of the bond issued by a participating surety company. The SBA guarantee acts as an incentive for surety 

companies to bond eligible small businesses that might not otherwise fit traditional surety bonding criteria. 

There are two types of SBA surety bond guarantees. First, those 

made through our Prior Approval Program, which provide an 80 or 

90 percent guarantee, depending on the size of the contract or the 

type of the small business; and second, those made under SBA’s 

preferred program which provides a 70 percent guarantee. There 

are 20 surety companies participating in the SBA program, 17 in 

the Prior Approval Program, and four in the Preferred Program. 

Currently, about 86 percent of our bonds are issued through the 

Prior Approval Program, while 14 percent are made through the 

Preferred Program. 

I am pleased to report that in fiscal year 2013, it is on track to 

be the seventh consecutive year in program growth. To date, we 

have issued 7,595 bond guarantees, representing contracts valued 

at approximately $3.5 billion. This is approximately 49 percent 

ahead of last year’s volume in terms of the number of bonds issued 

and about 75 percent ahead of last year’s number in terms of the 

total contract value. The SBA values its partnership with the surety industry and knows that it is fundamental to the program’s 

success. 

We continue to refine our processes and procedures to strengthen 

this partnership. We are currently completing work on our regulatory changes that address several industry concerns while simpliSBREP-219 with DISTILLER

20 

fying and clarifying processes for our surety partners. In August, 

we implemented a new Quick App guarantee application, known as 

Quick App, for contracts valued at $250,000 or less. The streamlined process adopts an industry best practice by eliminating much 

of the paperwork on smaller contracts without increasing performance risk. So far this year, Quick App accounts for approximately 

19 percent of eligible applications. And since implementation, over 

685 quick bond guarantees have been issued. Based on our experience over the past 8 months as well as feedback from our surety 

partners, we are further refining the Quick App process and expect 

its use to increase substantially during fiscal year 2014. 

In terms of legislative changes within our program, the National 

Defense Authorization Act of 2013 raised the individual contract 

ceiling in the program from $2 million to $6.5 million. The new law 

also permits bonding of Federal contracts up to $10 million where 

the contracting officer certifies an SBA surety bond guarantee is in 

the best interest of the government. Additionally, the Defense Authorization Act provides SBA with broader discretion when it assesses bond liability. 

These changes have been well received across the surety industry 

and among small businesses. So far, we have issued 97 bond guarantees on contracts valued at $2 million or more. This represents 

approximately $290 million in new construction contracts. In addition, we have seen the number of participating surety agents increase by 15 percent and have admitted two new surety companies 

to the program in just the past few months. With respect to the key 

program performance measures, the average contract default rate 

over the past 5 years is approximately 3 percent. It is noteworthy 

that we have not seen any defaults on the larger contracts authorized under the Defense Authorization Act, and we have had zero 

defaults on the quick app contracts. Additionally, the program has 

experienced a positive cash flow in each of the past 6 years. 

The SBA Surety Bond Guarantee Program is helping the small 

business community grow and prosper during the critical time in 

our Nation’s economic recovery. We look forward to working closely 

with you and your staff on any changes to the program as well as 

other SBA initiatives that support small and emerging firms. I appreciate the opportunity to testify before you today. And I welcome 

any questions that you may have. 

Chairman HANNA. Thank you. 

So we are thinking of going, in H.R. 776, from 70 to 90. You said 

you had a positive cash flow. Can you interpret for me what that 

marginal increase would do? And do you think it would be a problem? And do you think you can absorb it if there is a problem, a 

proportionate problem? 

Ms. HULIT. Sure. We are looking very closely at the program. We 

have seen a decline in the preferred sureties going down from 50 

percent to 14 percent of our program, which is a very small number. We would like to see more participation in that program. Because of the additional cash flow we have, we do not expect it to 

increase our costs. And we have some history in our other programs that demonstrate that having the same guarantee level is 

not a disincentive. 

SBREP-219 with DISTILLER

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Chairman HANNA. So, to sum, you believe that you could absorb 

it, that there would be additional cash flow. Because certainly you 

write bigger bonds, perhaps more bonds. 

Ms. HULIT. Correct. In our historic track record, the default rate 

under the Preferred Program and the Prior Approval Program is 

not materially different. So I think that with appropriate analysis 

and resources that address oversight of any Preferred Program, we 

think that it is worth considering. 

Chairman HANNA. Thank you. 

Mr. Dalton, you mentioned that you currently keep track of all 

tiers of subcontractors. And then you went on to say that it would 

require—but you actually score somehow by the first tier. Is that 

fair? 

Mr. DALTON. Yes, Mr. Chairman. What we require from our contractors is—the previous panel talked about the small business 

participation and sort of that tiering process of keeping up with 

first tier, second tier, all the way down to the last sub. We actually 

require that of our contractors. What we report out, though, for the 

agency’s small business goals are just the first tier. 

Chairman HANNA. Sure. I guess what I am driving at is that it 

wouldn’t be an enormous burden to—since you already have the information—to count it differently. 

Mr. DALTON. We have the electronic small business system software that we would actually have to make changes to. I am not exactly sure what and how involved that would be. But that is what 

it would require is changes to that system, which is really an accounting system that keeps up with the numbers, percentages of 

small business per contract. We could right now tell you if you 

pointed to a specific contract, we can look in that ESRS and identify what the amount of small business participation is. 

Chairman HANNA. So you already know, it would just be a different way of adding the total. 

Mr. DALTON. That is correct. 

Chairman HANNA. Thank you very much. 

You have mentioned you have had limited experience with reverse auctions. I am assuming that means you have had some. And 

maybe feel free to talk about that. 

Mr. DALTON. Okay. We had a pilot program in which we looked 

at—I think it was, if I have got the numbers correct, five construction contracts and then a couple of—I will say—service type or 

commodity type contracts. And we looked at that as part of a pilot 

done during the—I think it was the fiscal year, maybe, 2008 program—I am not sure of the year. But we did a pilot program. And 

the purpose of that pilot was to actually look and determine if 

there were advantages in using reverse auction. Most notably is, 

was it a better way to get a better price for the government? Was 

it a better system in which we would actually secure contracts? The 

conclusion of that study, the pilot study, was that we did not find 

any substantial or even moderate advantage of using reverse auction. One of the problems with using reverse auction for construction—that is what I am referring to—is that because it is not a 

commodity, because it does have variability, it is difficult to measure one project or one solicitation against another. And so we could 

not conclude that there was a substantial savings in using reverse 

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auction over, for instance, seal bidding. I would agree with some 

of the comments made by the previous panel that when you are in 

a reverse auction environment, there is a tendency for—you know, 

you are trying to get to a lower bid so you don’t have time to go 

back and check with subcontractors. So you could, in fact, have 

bids that need to later go back and you need to validate and sort 

of renegotiate. 

The other thing we found with reverse auctions is that—and I 

am going to compare it to seal bidding because in seal bidding, 

what we are looking at is price as the determining factor. And so 

the same thing is the objective of reverse auctioning. But the reverse auctioning comes with a lot more administrative requirements and burden because of what has to be done by the contracting officer and that whole contracting community over and 

above just seal bidding. 

Chairman HANNA. So what evidence you have is negative, and it 

is anecdotal in some ways but—— 

Mr. DALTON. Chairman, it was inconsistent. We could not conclude to you in that study that—here is an advantage in using reverse auction. 

Chairman HANNA. Were you able to conclude the reverse, that it 

wasn’t an advantage, or it is not the same thing? 

Mr. DALTON. We do not think it is a good option for construction. 

We still maintain it as part of our—I will say toolkit. But we use 

it if we need commodities to go out and buy—if I was trying to buy 

bulk sand and stockpile bulk sand, then I could of course do it. But 

I would not recommend that for construction of facilities. 

Chairman HANNA. Thank you very much. 

Mr. Bentivolio. 

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

I probably need additional time because I have a lot of questions. 

I especially have an interest in how this might benefit some of the 

contractors in my district, of course. 

So walk me through this. I remember, years ago, if I wanted a 

government contractor, I would go to the Commerce Business Daily 

and look up what bids were out there, and I would, you know, petition or submit documents. I forget what it was, 30 years ago. What 

about now? I have to get a bond or a surety bond, correct? And 

then I have to go through a bidding process. Could you kind of 

walk me through that? And mainly, if one of my constituents asked 

me, what is the process? To be perfectly honest, I would be kind 

of like—well, I don’t know exactly. So what would be the first thing 

I would do? What are the steps, if you would, on how a contractor 

could bid on a government project in construction and the process— 

what you look for in a contractor getting a surety bond so they 

would qualify to get one, right? You have to go through an approval 

process, I am assuming, right? Could you explain that between the 

both of you? 

Mr. DALTON. Well, I will try to start that if you don’t mind. And 

I may miss some of these steps. But generally speaking, what happens is, instead of Commerce Business Daily right now, where you 

would go is you would look on the FedBizOpps, which is a Web site 

where we post all solicitations for Federal projects. 

Mr. BENTIVOLIO. BizOpps. 

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Mr. DALTON. FedBizOpps. 

Mr. BENTIVOLIO. I am sorry. 

Mr. DALTON. Federal business opportunities. 

Mr. BENTIVOLIO. Great. 

Mr. DALTON. And you would look at that. And that would include 

a multitude of different types of contracts. The design builds that 

we were talking about earlier or simply construction contracts, 

service contracts, whatever type contract is out there that you are 

interested in. And you simply—at that time, you would contact— 

for instance, our district offices if you needed to talk with them or 

identify the fact that you are interested in proposing on a particular project. And you would receive a set of the bid documents 

so that you could take a look at those, do your own estimate, determine if it is something that you really would be interested in bidding on. Now the only bonding required if you actually solicit or 

submit a proposal is, you would have to propose—I think it is a bid 

bond because what we are after there is the government needs assurance that people are not just submitting proposals with no intent to follow through with actually making good on those proposals. So that bid bond is different than the surety bonds that we 

are talking about once you secure a contract. And so once you decide you actually are interested in bidding on or proposing on a 

particular contract, you submit your proposal. Depending on if it is 

best value, meaning a negotiated procurement, or if it is a seal bid. 

If it is a seal bid, you submit your proposal and wait for the results. If it is negotiated procurement, meaning best value, something other than price is as important as price, then you would actually find out if you were within that competitor zone. And we 

would actually negotiate, take a look, evaluate your proposal 

against the conditions in the contract, determine if you are the best 

value for the government. After which, at that time, if you are 

the—I will say the selected firm, then you would have to provide 

a payment and performance bond or a surety bond because what 

that does is it says to the government that, one, the performance 

part of it says that you will perform; and if you don’t perform, then 

the government has a place to go to actually get another contract 

or someone will ensure the performance is done. And the payment 

bonding is to assure that you are paying the subcontractors. If you 

don’t pay your suppliers or subcontractors, then that bond is called 

into active. 

Mr. BENTIVOLIO. Thank you. 

Ms. Hulit, how would I go about getting a surety bond? And 

what are the requirements? 

Mr. DALTON. Well, the SBA provides a surety bond guarantee. 

We don’t provide the bond. So you would have to get a surety from 

a surety company, the bond from the surety company. The surety 

company would come to us to get the bond guarantee when, for reasons for their own underwriting purposes, they wouldn’t do it without the additional support of the government guarantee. That could 

be because it is in a particular industry or because it is a relatively 

new business, startup. They may not have had experience with a 

contract of that size for whatever reason. So we would look at the 

underwriting criteria provided by the surety company, do our own 

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assessment, and look at the reasons that they are asking for the 

government support. 

Mr. BENTIVOLIO. Thank you very much. 

I yield back. 

Chairman HANNA. Thank you. 

So, Mr. Dalton, just to sum up, the critical nature of this bonding, you have made it very clear how important it is—both of you— 

to the process. 

So, in terms of what Mr. Mark McCallum said generally, you 

agree that to maintain the integrity of the bonding process, it is 

critical to the functioning of what both of you do? 

Ms. HULIT. Clearly, because of the Miller Act, the government 

does require surety bonds for contracts over $150,000. We would 

like to see more small businesses be able to compete for government contracts, and the SBA Surety Bond Program works very 

closely in partnership. 

Chairman HANNA. So, to that end, to have capable, competent, 

solvent institutions issuing these bonds is absolutely critical to 

your ability to do your jobs and provide certainty all across the 

spectrum of what you do. 

Mr. DALTON. Yes, it is. In fact, there is a risk, and it is most of 

our district officers, our contracting officers, as was mentioned by 

the previous panel, have the burden of actually trying to determine 

if a noncorporate surety actually has the assets, the appropriate assets. If we are able to do the work and investigation that we should 

do up front, then that surety is rejected. We have got, I am sure, 

as others do, examples of where we may have had not fully investigated. So, therefore, we are in a bond when you find out that if 

you get to that point, that that surety—— 

Chairman HANNA. If we can find what those assets are, where 

they are coming, how they are secured, then your job is easier. 

Mr. DALTON. Yes, sir. 

Chairman HANNA. Thank you very much. I want to thank all our 

witnesses today. I appreciate your insights regarding the proposed 

legislative solutions. As we move forward, your insights, I am sure, 

will be invaluable. 

I ask unanimous consent that all members have 5 legislative 

days to submit statements and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. Thank you again. 

[Whereupon, at 11:55 a.m., the subcommittee was adjourned.] 

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1http://info.aia.org/aiarchitect/thisweek09/1009/1009b—firmsurvey.cfm 2 U.S. Department of Labor 

3www.census.gov/const/C30/total.pdf 

4www.naiop.org/foundation/contdev.pdf 

5http://money.cnn.com/2013/05/03/news/economy/construction-jobs/index.html (last visited on 

May 16, 2013) 

Introduction 

Chairman Hanna, Ranking Member Meng, and members of the 

Committee, I am Helene Combs Dreiling, FAIA, Executive Director 

of the Virginia Center for Architecture and the 2013 First Vice 

President of the American Institute of Architects (AIA). I want to 

thank you for the opportunity to testify today on behalf of the AIA 

and its more than 81,000 members. 

Federal Design Build Construction 

The current economic crisis has affected every American, but, as 

this Committee knows all too well, it has hit small businesses and 

the design and construction industry particularly hard. Architects 

are, by and large, small business people; 95 percent of U.S. architecture firms employ 50 or fewer people.1 In fact, the vast majority 

practice is one or two person firms. The recession has accelerated 

this trend as medium sized firms have been purchased by large 

firms, and some architects, having been laid off by their firms, 

have begun their own businesses. 

The health of the architectural profession matters greatly to the 

overall state of the economy. Architects are the starting point for 

the design and construction industry, which accounts for one in 

nine dollars of U.S. gross domestic product. 

Architects are job catalysts—they are the first workers to be involved in the construction process when they develop designs for 

homes, offices, retail spaces, hospitals, educational institutions, 

government buildings, and more. Hiring an architect leads to employment in other construction-related fields, from engineers and 

manufacturers, to steel and electrical contractors. In fact, there is 

one architectural service worker for every 34 construction industry 

workers in this country,2 creating over $1 trillion in economic activity in 2008.3 A study by the George Mason University Center for 

Regional Analysis found that every $1 million invested in design 

and construction creates 28.5 new full-time jobs.4

Recently there has been good news on the unemployment front 

for the construction industry, but the recovery seems to be fragile 

at best. The most recent job numbers show that the construction 

industry lost 6,000 jobs last month 5 even when the unemployment 

rate dropped. Because of a lack of financing in the private market 

since the start of the economic crisis in 2008, public sector work 

has literally been a lifeline for many small design firms. Government procurement, including at the federal level, has helped to 

keep the doors open at numerous firms across the nation. However, 

small firms are losing some of the contracts available because larger firms are ‘‘bottom feeding.’’ They are going after projects they 

never would have even considered several years ago just to pay 

their bills. In addition, clients are also negotiating fees downward, 

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6 AIA Large Firm Roundtable, Competition Survey Results, May 31, 2012 at 9. 7 Ibid at 9. 

using the threat that they can always find someone to do the 

project for a greatly reduced price. 

These factors, coupled with smaller construction budgets at federal agencies, have severely intensified the competition for federal 

contracts. This struggle has given the federal government undue 

strength in the negotiations and has enabled them to demand more 

from candidates. Although competition helps ensure that the taxpayer receives good value, there is a difference between getting a 

fair deal for the government and a procurement process that forces 

architects, engineers, contractors, subcontractors and suppliers to 

spend more money for a smaller chance of getting the job. The taxpayer does not win when government contracting leaves small businesses in difficult economic straits. 

Design Build Construction 

Federal agencies are able to use a number of different project delivery methods to design and construct buildings, including designbid-build, design-build, and joint ventures, among others. These 

methodologies allow agencies the flexibility to choose the right 

method for a specific project. According to a survey by the AIA 

Large Firm Roundtable, almost 66 percent of all domestic buildings 

from 2007 through July 2011 were built using the design-build 

method.6

When agencies choose design-build, they post a solicitation on 

Fed Biz Ops. Interested teams, typically comprised of an architect, 

engineer, contractor and subcontractors, submit their qualifications 

to the pre-selection board. In this first step, the board will review 

the teams’ qualifications, which include past performance, resumes 

of key personnel, and examples of relevant projects, to create a 

short list for the second step in the competition. 

At this point, the short-listed teams develop a more in-depth proposal based on the programmatic requirements within the solicitation. In order to develop an accurate cost, teams must complete approximately 80 percent of the design work in advance. The design 

work is considerable, as each team must determine space needs; 

mechanical, electrical, HVAC and other systems; building supplies 

and materials; and the cost of construction. Without this information, there is simply no way to determine a final price. This design 

work takes a considerable amount of time from the large group of 

professionals on each team, which places enormous economic burdens on each design-build team on the short list. 

Design-Build Competition Issues 

Another procurement issue small design firms face is the financial burden of the federal design-build construction process on architects. On average, the federal design build fee is approximately 

$1.5 million 7. The rewards are high for these projects, but the cost 

to enter the federal market is increasingly prohibitive for small 

firms. 

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8 Ibid at 9. 

9 Ibid at 12. 

10 11 USC § 3309(d) 

When teams are shortlisted in two-step design-build, an architec- ture firm spends a median of $260,000 to compete for a designbuild project, by making plans, models and other materials.8 In almost 87 percent of federal design-build competitions, there are no 

stipends provided to the architectural firm.9 The firm must hope 

that they win, with their team, to make up the costs they expend 

in competing for the job. 

When teams decide whether to compete for a design-build 

project, they weigh the costs of competing with the odds of winning. 

Agencies have taken advantage of their purchasing power during 

the recession to expand the number of short-listed teams. In the 

past, agencies would typically shortlist three teams for a design 

build project. Now, there are reports that some agencies are 

shortlisting as many as eight-to-10 teams. In these cases, the odds 

of being selected drop significantly, even as the cost to compete 

continues to rise. This is an especially difficult situation for small 

firms, which are less able to absorb the costs of competitions than 

larger firms. Due to the current economic climate, small and medium firms face the Hobson’s choice of ‘‘betting it all’’ on a contract 

they may not get, or self-selecting out of the federal design-build 

market. 

Unfortunately, federal law enables agencies to create ever-longing short lists. Under current law, agencies are required to short 

list between three and five teams. However, he law states that contracting officers have the flexibility to increase the number of finalists if increasing the number is ‘‘in the Federal Government’s interest and is consistent with the purposes and objectives of the twophase selection process.’’ 10 This exception is so broad that agencies 

use it without given it a second thought. 

Therefore, we ask the Committee to look at tightening the statute so that all firms can accurately determine the risks and rewards of participating in this market. 

One-Step vs. Two-Step Design Build 

Although many agencies employ the two-step design-build process outlined above, some agencies use a one-step design-build process. In a one-step process, agencies eliminate the pre-selection step 

and open the solicitation to all respondents. This allows for the 

government to review as many responses as they receive without 

reviewing the qualifications of the bidders prior to receiving a bid. 

This concept sounds attractive, but when a contracting officer receives 30, 40, or 50 responses, this selection method becomes an inefficient use of limited federal government time and resources. 

Moreover, one-step selection allows for teams that do not have experience, effective past performance, or accurate bids to participate 

in the process. Contracting with teams that do not have the qualifications for the specialized work that is required on government 

projects frequently creates problems in the execution of the project. 

This leads to higher costs and longer delivery time which is not in 

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the best interest of the government. In addition, inexperienced or 

under-qualified teams could become legally obligated to fulfill contractual promises they simply cannot meet—or a mistake in a bid 

will cause them devastating liability. 

That is why we respectfully ask that the Committee consider limiting the use of single-step design-build to projects that are less 

than $750,000. This threshold is based on U.S. Army Corps of Engineers guidance which was issued in August 2012. By limiting single step procurement to these projects, there will be less risk for 

teams who want to pursue this work, and it will allow for more 

small businesses to participate in the process. This limit allows 

smaller firms to gain valuable experience and exposure to the federal construction process, while also limiting federal agencies’ burdens in reviewing a large number of proposals. 

In conclusion, I would like to thank Chairman Hanna, Ranking 

Member Meng, and members of the Subcommittee for giving me 

the opportunity to testify before you today. The AIA commends you 

for your commitment to addressing the challenges that small businesses face in this economy and your leadership in advancing legislation that helps small businesses drive the recovery. The challenges that we as small businesspeople face are serious, but so is 

our commitment to play a leading role in rebuilding our country. 

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RECORD VERSION 

STATEMENT BY 

JAMES C. DALTON, P.E. 

CHIEF, ENGINEERING AND CONSTRUCTION 

U.S. ARMY CORPS OF ENGINEERS 

BEFORE THE 

COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON CONTRACTING AND WORKFORCE 

UNITED STATES HOUSE OF REPRESENTATIVES 

FIRST SESSION, 113TH CONGRESS 

ON THE CORPS’ POLICIES REGARDING TWO-STEP DESIGN BUILD CONTRACTS, THE USE OF REVERSE AUCTIONS FOR CONSTRUCTION, CORPS’ EXPERIENCE 

WITH ACCEPTING SURETY BONDS PROVIDED BY NONCORPORATE SURETIES, AND WHETHER ALLOWING 

THE PRIME CONTRACTOR TO RECEIVE CREDIT FOR 

LOWER TIERED SUBCONTRACTORS WILL IMPROVE 

THE USE OF SMALL BUSINESSES 

May 23, 2013 

NOT FOR PUBLICATION UNTIL RELEASED BY THE 

COMMITTEE ON SMALL BUSINESS 

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Mr. Chairman and Members of the Subcommittee, I am James 

Dalton, Chief of Engineering and Construction for the U.S. Army 

Corps of Engineers (Corps). I provide engineering and construction 

leadership to nine divisions, 45 districts, and guide the development of engineering and construction policy for our world-wide 

Civil Works and Military Programs missions. Thank you for the opportunity to testify today to discuss construction contracting and 

improved small business participation. 

The Corps fully recognizes the value that small businesses bring 

to our national economy, and is committed to using small businesses in performing our work. We use Small, Small-Disadvantaged, Women-Owned, HUBZone, Veteran-Owned, and Service-Disabled Veteran Owned firms to the maximum extent possible, and 

typically, each year the Corps of Engineers awards over 40 percent 

of its prime contract dollars to small businesses. 

My testimony will address the Corps policies regarding two-step 

design build contracts, the use of reverse auctions for construction, 

Corps experience with accepting surety bonds provided by non-corporate sureties and whether allowing the prime contractor to receive credit for lower tiered subcontractors will improve the use of 

small businesses. 

Use of Two-Step Design-Build Contracts 

The Corps employs various acquisition strategies and contract 

types to perform its mission whether the effort is for construction, 

engineering, environmental services, or operation and maintenance 

of facilities. During the last ten years the Design-Build project delivery system has been used for many of the Corps’ construction requirements. The Federal Acquisition Regulation (FAR) Part 36.102 

definition of Design-Build is the combination of design and construction in a single contract with one contractor responsible for 

the design and construction. The FAR further defines Two-Phase 

Design-Build, also known as Two-Step Design Build, as a source 

selection procedure in which a limited number of offerors (normally 

five or fewer) are selected during Phase One to submit detailed proposals for Phase Two. The Corps utilizes the Two-Phase DesignBuild process and has developed policy implementing the Federal 

Acquisition Regulation. The Corps also utilizes a One-Step DesignBuild for Turn-Key process as authorized by Statute 10 USC 2862. 

The Corps policy discourages the use of One-Step Design Build procedures for most construction requirements. 

The Two-Phase selection procedure allows offerors to submit (relatively inexpensively) information related to experience and past 

performance in step one. Based on this information, the source selection authority selects a limited number of the most qualified 

offerors to advance to Phase Two of the competition, where the 

down-selected offerors (generally three to five) submit much more 

resource intensive price and technical proposals for evaluation. The 

offerors advancing to Phase Two have a much more favorable 

chance of winning the competition and are therefore incentivized to 

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submit superior technical and price proposals, which reduces overall costs to the government and industry. 

Use of Reverse Auctions for Construction 

The Corps conducted a pilot program to evaluate the use of reverse auctioning at eight separate Corps Districts (Louisville, Ft. 

Worth, Norfolk, Omaha, Philadelphia, Savannah, Huntsville Center, and Pittsburgh). Contracting Officers used the reverse auction 

process on nine individual projects for construction (5), commodities 

(3), and supplies and services (1). The Corps received protests on 

two of the construction projects and one of the protests was sustained due to a problem with the software used to implement the 

auction. 

A reverse auction is conducted utilizing an online tool where buyers can procure commodity-type commercial items or services and 

satisfy competition, publicizing, and reporting requirements as part 

of the process. A vendor cannot view the name of other vendors 

during the bidding period, but knows the relative position of its 

price to those of its competitors and sometimes may be able to view 

the prices of other competitors. A vendor can reduce its bid and underbid another vendor until the bidding period closes. 

Vendors may be allowed to ask questions directly to the contracting officer during the bidding period and in that event the system allows the contracting officer to respond directly to the vendor 

that submitted the question. Vendors can only view other vendor’s 

questions and answers if these questions and answers are posted 

as an attachment to the RFQ. 

The Corps, through its pilot study, found no basis to determine 

that reverse auctioning provided any significant or marginal savings over a traditional contracting process for construction. Reverse 

auctioning provides benefit when the commodities or manufactured 

goods procured are of a controlled and consistent nature with little 

or no variability. Construction is not a commodity and is more 

closely related to a professional service. Procuring construction by 

reverse auction neither ensures a fair and reasonable price nor selection of the most qualified contractor. 

Our most recent experience with contracting using reverse auctions was in 2008 when the Corps solicited for clay borrow material 

in New Orleans. Using reverse auctions was intended to expedite 

the contracting process and ultimate delivery of the project. The 

outcome was poor as the contractor was unable to perform to the 

contract requirements and the contract was partially terminated 

for convenience. The requirement had to be reprocured using traditional construction contracting procedures where the prime construction contractors were responsible for the procurement of clay 

borrow materials. This experience did not reflect poorly on the reverse auction process itself, but rather on the scope of services procured. The scope of services required the delivery of a construction 

material (clay borrow material) to multiple construction sites for 

use by multiple prime construction contractors in the construction 

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of embankment levees. The coordination efforts proved to be more 

difficult than anticipated by either the Corps or the material supplier. 

Surety Bonds Provided by Non-Corporate Sureties 

Pursuant to the Miller Act as implemented by Regulation, before 

a construction contractor is allowed to start work on a contract of 

more than $150,000, it generally must furnish performance and 

payment bonds. A performance bond with a surety satisfactory to 

the contracting officer is required in an amount the contracting officer considers adequate for the protection of the Government. Generally, the penal amount—the penalty the principal could incur— 

of the bond is 100 percent of the contract price. A payment bond 

is also required for the protection of all persons supplying labor 

and material. The amount of the payment bond is the same as the 

amount of the performance bond. If the surety does not have the 

ability to pay in the event the contractor cannot perform, the 

project and the suppliers and subcontractors are put at risk. 

For contracts exceeding $30,000 but not exceeding $150,000, alternative payment protection (e.g. irrevocable letter of credit) may 

be provided in the amount of the contract price. 

The Corps complies with the Miller Act as implemented by the 

FAR. Performance and Payment Bonds are required on the vast 

majority of all construction requirements in excess of $150,000 

prior to the issuance of a Notice to Proceed. 

Sureties make money through volume, not by taking risks. Solid 

relationships with sureties and brokers remain the key to any construction companies attempting to obtain bonds. 

Approximately two thirds of the surety market is effectively controlled by fewer than a dozen companies (fewer for environmental 

contracting). This limited presence of market providers present 

small companies with financial challenges, such as bonding availability, pricing and risk evaluation. Smaller companies are more 

vulnerable than large companies as a result of this industry concentration. 

The FAR does contemplate the use of non-corporate sureties, but 

this option presents its own set of unique challenges. For example, 

a non-corporate surety must be creditworthy, and present acceptable security to support its promise to step into the contractor’s 

shoes, so to speak, to perform the work contracted for by the Government and to pay any subcontractors in accordance with the 

terms of the performance and payment bonds the surety has presented to the Government. 

In accordance with the FAR, the Corps gives full consideration 

to the acceptability of non-corporate sureties, referred to in the 

FAR as individual sureties. The Corps does not collect data regarding the frequency with which non-corporate sureties are proposed 

or accepted. Generally, non-corporate sureties are proposed much 

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vestigate the acceptability of pledged assets. In our experience, proposals to use non-corporate sureties are generally rejected by the 

contracting officer for two basic deficiencies: either the claimed 

value of the pledged asset cannot be established, or the asset’s 

ownership may be in question. The Corps will not accept sureties 

that do not meet the requirements of the FAR and that present an 

unacceptable risk to the Government. 

Prime Contractor Small Business Credit for Lower Tiered 

Subcontractors 

Present regulations allow only the prime contractor to report the 

dollars it awards directly to its subcontractors. However, regulations also require a subcontractor to report the dollars it awards 

directly to its subcontractors. So in effect, subcontracting dollars 

are being reported from the prime contractor and subcontractors 

regardless of their tier-level under the prime contract. 

The Corps requires small business subcontracting plans in negotiated acquisitions for construction contracts, which are expected to 

exceed $1.5M and have subcontracting possibilities (FAR 19.702). 

The Corps also requires each large business contractor with such 

type contract to also require the same for their large business subcontractors. The subcontractors are required to do the same to 

their subcontractors. As a result, a contract with a subcontracting 

plan requires the prime to flow-down the same requirement to its 

subcontractors, and for its subcontractors to do the same to their 

subcontractors. 

A subcontracting plan is contract specific to a contract and requires the contractor to provide goals ($ and %) it plans to subcontract to small business, small disadvantaged business, 

HUBZone business, women-owned small business, veteran-owned 

small business and service-disabled small business. The subcontracting plan also requires the contractor (prime and subcontractor) 

to report annually the dollars they award to their subcontractors. 

The reporting is accomplished via the federal Electronic Subcontracting Reporting System (eSRS). As a result, subcontracting can 

be determined cumulatively for a contract. This represents the subcontracting dollars reported by the prime contractor and all of the 

lower-tier contractors under the same prime contract. However, 

eSRS has some limitations; as a result, determining the subcontracting achievements for a department/agency/organization is difficult based on the contracts they award. Nonetheless, these issues 

are being addressed between the Department, GSA (system manager) and SBA. 

Allowing prime contractors to count all reported activity towards 

their goals would require a change to the processes for negotiating 

subcontracting goals, a change in the systems to collect the data 

and change in the method accounting for subcontracting activity 

across the entire Federal Government. Although these changes 

would still not guarantee improvement in subcontracting opportunities for small businesses, they would provide better data to manage subcontracting. It is unknown if allowing large primes to claim 

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credit for small businesses used by their second and third tier subcontractors would lead to improved usage of small business firms 

on Corps contracts. 

Mr. Chairman, this concludes my statement. Thank you again for 

allowing me to be here today to discuss the Corps small business 

construction contracting. I would be happy to answer any questions 

you or other Members may have. 

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U.S. SMALL BUSINESS ADMINISTRATION 

WASHINGTON, D.C. 20416 

TESTIMONY OF 

JEANNE A. HULIT 

ASSOCIATE ADMINISTRATOR 

OFFICE OF CAPITAL ACCESS 

U.S. SMALL BUSINESS ADMINISTRATION 

BEFORE THE 

SUBCOMMITTEE ON CONTRACTING AND WORKFORCE 

HOUSE COMMITTEE ON SMALL BUSINESS 

U.S. HOUSE OF REPRESENTATIVES 

MAY 23, 2013 

Thank you Chairman Hanna, Ranking Member Meng and members of the Subcommittee. I am pleased to testify before you today 

on the topic of surety bonds. 

The Small Business Administration (SBA) Surety Bond Guarantee Program was established in 1971 to help small businesses 

obtain the surety bonds that are often required as a condition of 

awarding a construction contract or subcontract. For example, the 

Federal government requires a surety bond on any construction 

contract valued at $150,000 or more. Most state and local organizations have similar bonding requirements, as do many private construction projects. 

The Small Business Administration (SBA) Surety Bond Guarantee Program was established in 1971 to help small businesses 

obtain the surety bonds that are often required as a condition of 

awarding a construction contract or subcontract. For example, the 

Federal government requires a surety bond on any construction 

contract valued at $150,000 or more. Most state and local organizations have similar bonding requirements, as do many private construction projects. 

SBA’s program helps small and emerging firms become bonded 

by guaranteeing a portion of the bond issued by a participating surety company. The SBA guarantee acts as an incentive for surety 

companies to bond eligible small businesses that might not otherwise fit traditional surety bonding criteria. 

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There are two types of SBA surety bond guarantees: (1) those 

made through our Prior Approval Program, which provide an 80% 

or 90% guarantee (depending on the size of the contract and the 

type of small business); and (2) those made under SBA’s Preferred 

Program, which provide a 70% guarantee. There are 21 surety companies participating in SBA’s program—17 in the Prior Approval 

Program and 4 in the Preferred Program. Currently, about 86% of 

our bonds are issued through the Prior Approval Program, while 

about 14% are made through the Preferred Program. 

I am pleased to report that Fiscal Year 2013 is on track to be 

the seventh consecutive year of program growth. To date, we have 

issued 7,595 bond guarantees representing contracts valued at over 

$3.5 billion. This is approximately 49% ahead of last year’s volume 

in terms of the number of bond guarantees issued, and about 65% 

ahead of last year’s numbers in terms of total contract value. 

SBA values its partnership with the surety industry and knows 

that it is fundamental to the program’s success. We continue to refine our processes and procedures to strengthen this partnership. 

We are currently completing work on regulatory changes that address several industry concerns while simplifying and clarifying 

processes for our surety partners. 

In August, we implemented a new Quick Bond Guarantee Application—known as Quick App—for contracts valued at $250,000 or 

less. This streamlined process adopts an industry ‘‘best practice’’ by 

eliminating much of the paperwork on small contracts without increasing performance risk. So far this year, Quick App accounts for 

approximately 19% of eligible applications. And since implementation, over 685 Quick Bond guarantees have been issued. Based on 

our experience over the past eight months, as well as feedback 

from our surety partners, we are further refining the Quick App 

process and expect its use to increase substantially during FY 14. 

In terms of legislative changes within our program, the National 

Defense Authorization Act of 2013 raised the individual contract 

ceiling in the program from $2 million to $6.5 million. The new law 

also permits bonding of Federal contracts up to $10 million where 

the contracting officer certifies that an SBA surety bond guarantee 

is in the best interest of the government. Additionally, the Defense 

Authorization Act provides SBA with broader discretion when it assesses bond liability. 

These changes have been well received across the surety industry 

and among small businesses. So far, we have issued 97 bond guarantees on contracts valued at $2 million or more. This represents 

approximately $290 million in new construction contracts. In addition, we have seen the number of participating surety agents increase by 15%, and we have admitted two new surety companies 

to the program in just the past few months. 

With respect to key program performance measures, the average 

contract default rate over the past five years is approximately 3%. 

It is noteworthy that we have not seen any defaults on the larger 

contracts authorized under the Defense Authorization Act, and we 

have had zero defaults on Quick App contracts. Additionally, the 

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Program has experienced a positive cash flow in each of the past 

six years. 

The SBA Surety Bond Guarantee Program is helping the small 

business community grow and prosper during a critical time in our 

nation’s economic recovery. We look forward to working closely 

with you and your staff on any changes to the program, as well as 

other SBA initiatives that support small and emerging firms. 

I appreciate the opportunity to testify before you today, and I 

welcome any questions you may have. 

Thank you. 

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Chairman Hanna, Ranking Member Meng, and Members of the 

Subcommittee, the American Subcontractors Association, Inc. 

(ASA) expresses its thanks for your clear commitment to assuring 

small business participation on Federal Government construction 

procurement. We ask that this statement be included in the hearing record. 

ASA is a national trade association representing subcontractors, 

specialty trade contractors, and suppliers in the construction industry. ASA members work in virtually all of the construction trades 

and on virtually every type of horizontal and vertical construction. 

ASA members frequently contract directly with the Federal Government. More often, they serve as subcontractors dealing with the 

Federal Government through a prime contractor. More than 60 percent of ASA members are small businesses. 

Construction contractors and subcontractors face numerous obstacles to participating on Federal projects. Two of the biggest obstacles are the bidding/proposal process itself, and, getting paid 

promptly for work properly performed. To address these obstacles, 

ASA recommends that Congress: 

• Deter bid shopping and bid peddling by prohibiting the use of 

reverse auctions for construction and construction-related services 

at both the prime and subcontract levels. 

• Deter bid shopping at the subcontract level by requiring the 

prime contractor to submit with its bid, a list of the subcontractors 

it intends to use. 

• Encourage small business participation on design-build contracts by requiring the use of the two-step method for the procurement on all but the smallest contracts. 

• Increase access to surety bonds by small firms by increasing to 

90 percent the guarantee available to sureties under the SBA Surety Bond Guarantee Program. 

• Assure subcontractor and supplier payment by applying to individual sureties the same standards currently applied to corporate 

sureties. 

• Assure subcontractor and supplier payment on the construction 

components of projects financed by public-private partnerships by 

requiring surety bonds on such contracts. 

• Assure payment to the smallest of subcontractors and suppliers by exempting the Miller Act from periodic inflation adjustments. 

Prohibit Reverse Auctions 

A reverse auction essentially is an online, real-time dynamic auction between a buying entity (e.g., owner, contractor) and pre-qualified vendors who compete against each other to win a contract. 

These vendors compete by bidding against other, usually over the 

Internet, by submitting successively lower-priced bids during a 

specified bid period, usually about one hour. 

Electronic reverse auctions have brought ever greater efficiency 

to the abhorrent practice of ‘‘bid shopping’’ in the construction industry. Bid shopping occurs when an owner or prime contractor diSBREP-219 with DISTILLER

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vulges the general contractor’s or subcontractor’s bid to secure a 

lower bid from a competitor. According to a joint statement issued 

by the Associated General Contractors of America, ASA, and the 

Associated Specialty Contractors: 

‘‘Bid shopping and bid peddling are abhorrent business practices that threaten the integrity of the competitive bidding system that serves the construction industry and the economy so 

well.’’ 

ASA concurs with AGC, in its May 23 statement to the Subcommittee: 

‘‘Reverse auctions create an environment in which bid discipline is critical yet difficult to maintain. The competitors 

have to deal with multiple rounds of bidding, all in quick succession. The process may move too quickly for competitors to 

accurately reassess either their costs or the way they would actually do the work. If competitors act rashly and bid imprudently, the results may be detrimental to everyone, including 

the owner. Imprudent bidding may lead to performance and financial problems for owners and successful bidders, which may 

have the effect of increasing the ultimate cost of construction 

as well as the cost of operating and maintaining the structure.’’ 

The same problems arise when a prime contractor uses a reverse 

action to obtain bids from subcontractors. 

Thus, ASA supports legislation prohibiting reverse auction procurement for construction and construction-related services at both 

the prime contractor and subcontractor levels. 

Require Subcontractor Bid Listing 

ASA also supports the implementation of a requirement that a 

prime construction contractor on a low-bid solicitation for construction and construction-related services submit with its bid a list of 

the subcontractors it intends to use if it is awarded the contract. 

On those contracts for which the Federal Government relies on 

a procurement system in which the lowest responsible and responsible bidder prevails, the cost to the Government is firmly established on the date of contract award. Should the successful prime 

contractor subsequently be able to reduce its cost of performance 

by persuading prospective subcontractors to submit ever lower 

bids—either slowly through individual telephone calls or quickly 

with an electronic reverse auction—the prime contractor alone 

reaps the cost savings. ASA believes that allowing a prime contractor to bid shop after it has been awarded a contract by the Government potentially leads to a lower quality of work, materials and 

equipment for the Federal customer. Further, the risk of prime contractor bid shopping deters the most qualified subcontractors from 

ever competing for such contracts. 

Thus, ASA strongly supports legislation, such as H.R. 1942, the 

‘‘Construction Quality Assurance Act of 2013,’’ which would require 

subcontractor bid listing on Federal construction projects exceeding 

$1 million procured through sealed bids. Essentially, subcontractor 

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contractors it intends to use on the Government project along with 

its bid. Subcontractor bid listing is, perhaps, the strongest deterrent 

to the ‘‘abhorrent’’ practices of bid shopping and bid peddling at the 

subcontract level. 

Subcontractor bid listing also will serve to further several other 

goals of the Federal Government. First, subcontractor listing will 

help protect homeland security by assuring that the Government 

knows in advance what firms are actually working on its projects, 

Second, subcontractor listing will help the Government better encourage and monitor the use of small and other historically underutilized businesses on its contracts, before the prime contractor 

awards subcontracts to other firms. 

ASA notes that the Congress already enacted, as part of the 

Small Business Jobs Act of 2010 (Pub. L. 111–240), a requirement 

that a large business prime contractor must represent that it will 

make a good faith effort to award subcontracts at the same percentage as indicated in the subcontracting plan submitted as part 

of its proposal for a contract and that if the percentage is not met, 

the large business primate contractor must provide a written justification and explanation to the contracting officer. Unfortunately, 

the U.S. Small Business Administration has still not implemented 

that statutory requirement, even though it issued a Notice of Proposed Rulemaking in Oct. 2011 (RIN 3245–AG22). That proposed 

rule would require a prime contractor awarded a Federal construction contract valued at more than $1.5 million to ‘‘notify the contracting officer in writing whenever the prime contractor does not 

utilize a subcontractor used in preparing its bid or proposal during 

contract performance.’’ ASA asks that the Committee direct SBA to 

expeditiously issue and implement a final rule. 

Encourage Two-Step Procurement for Design-Build Contracts 

ASA joins other construction associations in urging the Congress 

to use the two-step method of procurement for most design-build 

projects. By assuring that there is a first qualification step for such 

projects, before a design-builder or design/contractor team must 

submit a full proposal, the Government will help assure that smaller firms can afford to participate in its procurement process. 

Enhance the SBA Surety Bond Guarantee Program 

ASA remains a strong supporter of the programs operated by the 

Small Business Administration (SBA) to facilitate access to surety 

bonds issued by corporate sureties that have been vetted and approved by the Department of the Treasury. SBA’s Surety Bond 

Guarantee Program has helped many small business concerns to 

obtain the surety bonds that they needed to compete for Federal 

prime contract opportunities in construction. ASA was a major participant in the coalition that supported the legislation sponsored by 

former Senator Sam Nunn of Georgia that provided a statutory 

basis for the SBA’s Preferred Surety Bond Guarantee Program. The 

Preferred Surety Bond Guarantee Program broadened the pool of 

corporate sureties willing to participate in the SBA Program assistSBREP-219 with DISTILLER

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ing yet additional numbers of small business concerns. SBA has 

made marked strides to improve the application process for surety 

bonds provided under the Program. However, ASA believes that 

the Program could be further improved by enactment of Section 3 

of H.R. 776, the ‘‘Security in Bonding Act,’’ which would increase 

to 90 percent the guarantee offered to participating sureties. 

Require Individual Sureties to Meet the Same Standards 

as Corporate Sureties 

One of the principal obstacles to small business participation on 

Federal Government procurement is the concern that payment for 

work performed will not be forthcoming. On a typical construction 

project, subcontractors extend a significant amount of credit to 

their prime contractor clients. Thus, the American dream of winning a federal contract can quickly turn into an American nightmare if payment is not timely received. ASA strongly supports H.R. 

776, the ‘‘Security in Bonding Act,’’ which is designed to deter those 

individual sureties who succumb to the temptation to misrepresent 

the assets being pledged in support of the surety bonds that they 

are furnishing. 

Since the 1980’s, ASA has participated actively in the various 

regulatory efforts to assure that the payment bonds furnished by 

individual sureties actually provide the real payment protections 

for subcontractors and suppliers intended by the statutory mandate 

of the Miller Act. The use, and abuse, of individual sureties have 

tended to be episodic in nature. Unfortunately, the construction industry, and especially small subcontractors and suppliers, are currently facing another sustained episode. The potential for inadequate or worthless payment bonds to be furnished by individual 

sureties has been exacerbated by the advent of increasingly convoluted forms of financial instruments and the sustained overload 

of responsibilities that currently are being required of a deeply 

understaffed corps of Federal contracting officers and supporting 

acquisition professionals. 

The current coverage of the Government-wide Federal Acquisition Regulation (FAR) Subpart 28.2 (Sureties and Other Security 

for Bonds) provides the contracting officer very solid guidance, but 

implementation can be compromised by severe challenges, especially if the individual surety is determined and skilled in gaming 

the system. The core challenge for the contracting officer relates to 

assessing the assets being pledged by the individual surety in support of the surety bonds being furnished to the Government. Do the 

assets being pledged actually exist? What is the real value of the 

pledged assets? Can the pledged asset, although real and properly 

valued, be readily liquidated? Claims against a payment bond 

under the Miller Act are generally paid in cash, not, for example, 

timber ‘‘available’’ to be harvested for milling. 

By training and experience, even the most seasoned contracting 

officer in the acquisition of construction is likely at a distinct disadvantage in making these determinations with regard to the 

broad array of assets acceptable under FAR Part 28.203–2. The 

challenge is presented not only with regard to real property and 

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raw commodities, often in locations remote from the contracting officer’s location, but also by increasingly opaque forms of ‘‘secure’’ financial instruments. The determined individual surety has the 

ability to mount a focused and lengthy effort to get the contracting 

officer to accept the proffered assets. Today, the typical contracting 

officer has too many contract award and contract administration 

actions on-going simultaneously and too few supporting staff resources. To get forward motion on the award of a particular construction contract for the benefit of the ultimate Federal user, the 

contracting officer may be willing to acquiesce, especially if the exposure to the Government is relatively small due to the small likely 

contract award value of the contract, especially in this era of contracts valued in hundreds of millions of dollars, if not billions. A 

payment bond from an individual surety providing only illusory 

protection can, however, easily result in a catastrophic loss to a 

small subcontractor or supplier on the ‘‘small’’ contract. 

Given the Government’s responsibility as steward of the taxpayers’ money, as well as the practical limitations of the current 

FAR-based system for the protection of subcontractors and suppliers, ASA believes that Congress needs to enact remedial legislation to deter those individual sureties who succumb to the temptation to misrepresent the assets being pledged in support of the surety bonds that they are furnishing. 

H.R. 776, the ‘‘Security in Bonding Act,’’ is such a targeted Congressional intervention. It simply applies to individual sureties the 

same standards currently permitted by the Miller Act (31 U.S.C. 

9303) for a prime contractor choosing to furnish ‘‘eligible obligations’’ rather than a surety bond. When H.R. 776 becomes law, Federal contracting officers will be able to have certainty that the assets pledged by an individual surety are real, sufficient in amount, 

and readily available should any payment claims arise. For ASA, 

construction subcontractors and suppliers will be able to have confidence that the bonds furnished by the individual surety will provide the payment protection of last resort intended by the Miller 

Act. 

Require Surety Bonds on Public-Private Partnerships (P3) 

ASA strongly urges Congress to take steps to assure that contracts with construction components financed by public-private 

partnerships (P3) that include Federal support, provide payment 

protections to subcontractors and suppliers at least as effective as 

those provided by the Miller Act on construction undertaken directly by a Federal agency or by the so-called Little Miller Acts of 

the various States for construction projects undertaken by a state 

agency. The reality of construction contracting, whether public or 

private, has been for many, many years that subcontractors do the 

vast preponderance of the work. The use of a P3 does not change 

this practical reality. The successful undertaking and timely completion of a P3, with substantial contributions of public resources, 

including Federal assets or financial support, will require that construction subcontractors and suppliers be fully and timely paid, in 

accordance with the contract, for work performed. 

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Given the unpredictable diversity of public-private partnerships, 

subcontractors and suppliers too frequently encounter a dangerous 

void in essential payment protections for work performed. The severe risk inherent in the absence of reliable payment protection can 

only reasonably be expected to increase costs for the overall construction project being undertaken through the public-private partnership as subcontractors and suppliers seek to accommodate the 

increased risk or even completely deter bidding by the most skilled 

subcontractors and suppliers, whose resources can be directed at 

projects in which solid payment protections are available. 

Exempt the Miller Act from Inflation Adjustments 

Finally, ASA urges the Congress to add the Miller Act to procurement thresholds exempted from the periodic inflation adjustments required by 41 U.S.C. Sec. 431. In 2010, the Federal Acquisition Regulatory Council increased the threshold for payment security for subcontractors and suppliers on Federal construction contracts from $100,000 to $150,000, thus leaving many more small 

business subcontractors and suppliers exposed to the risk of nonpayment. Each additional increase in the threshold will expose 

even more small business subcontractors and suppliers to non-payment for work performed. 

Chairman Hanna, thank you for so promptly scheduling this legislative hearing. ASA urges equally prompt, and favorable, action 

by the Full Committee on Small Business, under the leadership of 

Chairman Graves. 

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INTRODUCTION 

Chairman Hanna, Ranking Member Meng, and members of the 

committee, thank you for holding this hearing examining barriers 

to the maximum practicable utilization of small business construction and architecture and engineering contractors. Further, thank 

you for the opportunity for the Design-Build Institute of America 

to submit this testimony. 

The Design-Build Institute of America (DBIA) is an institute of 

leaders in the design and construction industry utilizing designbuild and integrated project delivery methods to achieve high performance projects. DBIA promotes the value of design-build project 

delivery and teaches the effective integration of design and construction services to ensure success for owners and design and construction practitioners. 

DESIGN-BUILD 

Design-build is an integrated approach that delivers design and 

construction services under one contract with a single point of responsibility. Owners select design-build to achieve best value while 

meeting schedule, cost and quality goals. Best value ensures competitive proposals from industry that considers many factors as opposed to simply awarding contracts to the cheapest offer. 

Design-build provides benefits for both owners and practitioners. 

Owners experience faster delivery, cost savings and better quality 

than other contracting methods. Dealing with a single entity decreases owners’ administrative burden and allows them to focus on 

the project, rather than managing separate contracts. The approach also reduces their risk and results in fewer delays, disputes, 

claims and subsequent litigation for all parties involved. 

Practitioners reap benefits since an integrated team is fully and 

equally committed to controlling costs. Like owners, the designbuilder benefits from a decreased administrative burden because 

the communication between designers and builders is streamlined. 

When DBIA was founded 20 years ago design-build authority for 

government agencies and municipalities was very limited. In fact, 

at the state level design-build authority for government projects 

was only authorized in two states. Today, design build is permitted 

in every state in some fashion, and the number of projects has doubled in the last five years. We’ve had similar success at the federal 

level with many key agencies using design-build in more than 75% 

of their projects, including the Army Corps of Engineers, State Department, Navy Facilitates Engineering Command, and Bureau of 

Prisons. 

DESIGN-BUILD DONE RIGHT: QUALIFICATIONS BASED 

SELECTION (QBS) 

DBIA supports Qualifications Based Selection as a highly effective way of procuring a design-build services and ensuring project 

success, and encourages Congress to approve Design-Build QBS for 

all federal projects. 

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QBS is a method of selecting a design-build team for a given 

project in which the final criteria for selection are qualifications 

and demonstrated competence. price and cost are important factors, 

but under QBS they are considered when they should be, during 

contract negotiations, not during design-build team selection. 

Under QBS, the focus of the project and the entire team is on quality and value. It rewards teamwork, innovation, and proactive 

problem solving and ultimately the tax-payer is the winner. 

In other words, QBS provides a competitive environment where 

offerors must compete on quality, past performance, schedule, experience, etc., and not just ‘‘low bid’’. Successful design-builders must 

be ‘‘good’’ and provide a competitive price to the government. 

QBS exists in federal law today, also known as the Brooks Act 

(Public Law 92–582), but is limited to the selection of architects 

and engineers for federal projects. Further, full Design-Build QBS 

authority exists in three states, Florida, Arizona and Colorado, and 

several more have the authority in some way. QBS has proven to 

be a success on the state and federal levels, is strongly supported 

by architects and engineers who operate under it, and should be 

expanded to include design-build teams. 

DBIA is actively supporting federal Design-Build QBS legislation. We will have draft legislation during this Congress, and look 

forward to working with the members of this committee on its passage. 

DESIGN-BUILD DONE RIGHT: BEST VALUE SELECTION 

(BVS) 

Single-Step vs. Two-Step 

Federal regulation allows for the use of design-build project delivery, including both a single-step process and a two-step process. 

In the single-step process a request for proposals (RFP) is issued 

for a project. It is issued to an unlimited number of participants 

and any and all parties can respond with a proposal. A selection 

process is then used to determine the proposal that is best from 

both a cost and technical perspective. 

In a two-step process a request for qualifications (RFQ) is issued 

first, and any and all participants then respond with a statement 

of qualifications. The RFQ response is a simple and inexpensive 

procedure where the design-build teams submit documents detailing their past performance, staff resumes, and examples of similar 

projects they’ve completed. Based on these statements a short list 

of three to five of the most qualified respondents is determined. 

The RFP is then issued only to these ‘‘shortlisted’’ firms which 

then develop full proposals including cost, schedule, and technical 

response. (This should not be confused with Design-Build QBS discussed above.) 

As part of BVS, DBIA supports stipends paid to the unsuccessful 

shortlisted proposers. These modest payments—usually between 

0.01 percent and 0.25 percent of the project budget—help defray 

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petition and increase value by generating market interest and encouraging design-build teams to spend the time, money, and resources to provide creative, innovative, and complete proposals. 

Two-Step Is Better For Small Business 

In a single-step process, all design-build teams are asked to 

spend time and resources creating detailed proposals immediately, 

as opposed to simply submitting their qualifications. Due to the 

high costs of this first step—often reaching hundreds of thousands 

of dollar or even millions—many companies decide not to apply 

since their chances of final selection are so low. Small businesses 

in particular do not have the luxury to spend limited resources to 

apply for a project when the chance of being chosen may be less 

than ten percent. 

If small businesses were only required to initially provide their 

qualifications under the two-step process, as opposed to a full proposal under the single-step process, many more would be able to 

participate. This is not only good for American small businesses, it 

also benefits the American taxpayer, and federal government who 

can be sure the most qualified companies were not scared away 

from a project simply due to the costs and risks of applying. 

Best Value Selection Recommendations 

1) To limit the use of single-step, DBIA joins with other organizations, including the American Institute of Architects testifying here 

today, and recommends that Congress limit the use of single-step 

design-build to projects that are less than $750,000. This threshold 

is based on U.S. Army Corps of Engineers guidance which was 

issued in August 2012. Further, it will assure that for larger more 

complex projects risks for all firms are held in check, thus allowing 

small firms a greater chance to compete in the marketplace. 

2) We recommend Congress amend current law to encourage true 

short-listing of finalists in two-step design build. Under current 

law, agencies are required to shortlist between three and five 

teams. However, the law gives the agencies flexibility to increase 

the number of finalists if such an increase is ‘‘in the Federal Government’s interest and is consistent with the purposes and objectives of the two-phase selection process.’’ This exception is proving 

to be too broad and agencies regularly ‘‘shortlist’’ far more than five 

finalists. DBIA would like to work with this committee on appropriate legislative language to address this problem. 

CONCLUSION 

Thank you again for the opportunity to submit this statement. 

We look forward to working with this committee on the issues discussed and are ready to answer any questions you may have. 

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The Surety & Fidelity Association of America (SFAA) is a District of Columbia non-profit corporation whose members are engaged in the business of suretyship. SFAA member companies collectively write the majority of surety and fidelity bonds in the 

United States. The SFAA is licensed as a rating or advisory organization in all states, as well as in the District of Columbia and Puerto Rico, and it has been designated by state insurance departments 

as a statistical agent for the reporting of fidelity and surety data. 

H.R. 776 is a key tool in eliminating fraud, increasing the 

effectiveness of federal procurement and helping small contractors obtain government contracts 

Every contractor that bids and obtains a federal construction contract must secure its obligations under that contract. The most 

common form of security is a surety bond from a surety insurance 

company. 

Over the years what originally may have been a viable option to 

a surety bond for securing obligations to the federal government 

has not kept up with the changes in federal procurement and the 

economy. H.R. 776 would ensure that all security pledged to the 

federal government to secure an obligation is functionally equivalent, whether such assets pledged in lieu of a corporate surety are 

from the contractor or an individual surety on behalf of the contractor. 

Likewise, since the early 1970s, the Small Business Administration has operated its Surety Guarantee Program (SBA Bond Program) to assist small and emerging contractors obtain bonding in 

order to be able to bid on federal construction projects. This has 

been especially true in times of economic downturn when bonding 

sometimes becomes more scarce and difficult to obtain. This program needs updating to keep up with the changes in procurement. 

H.R. 776 would increase the maximum bond guarantee from the 

SBA Bond Program to the sureties from 70% to 90% in the Preferred Surety Program. This will help the SBA Bond Program to 

reach its full potential in this new economy. 

Background on Individual Sureties in the Federal Procurement Process 

Under current federal law and regulations, construction contractors for the federal government have three options for securing 

their obligations. They can obtain a surety bond from an insurance 

company that is vetted and approved by the U.S. Department of 

Treasury and licensed by a state insurance regulator. In lieu of a 

bond, contractors can pledge and deposit assets with the federal 

government until the contract is complete. Only assets backed by 

the federal government can be pledged. The third option permits 

individuals to pledge their assets to back the contractor. These individuals are called ‘‘individual sureties.’’ Only individual sureties 

are permitted to pledge assets not backed by the federal government. In fact, individual sureties are allowed to pledge stocks, 

bonds, and real property, and also are not required to deposit such 

assets with the federal government for the duration of the contract. 

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All individual sureties need to give federal contracting officers is a 

document listing the assets and their value and representing that 

theya re pledged in an escrow account to secure the contractor’s obligations. 

The original concept of an individual surety was a person with 

sufficient wealth that was willing to pledge his/her assets as security to the federal government if the contractor was awarded a federal construction project. Such individual sureties knew the contractor that they were backing personally. The individual surety 

many times was relative or close acquaintance of the contractor. All 

the individual surety needed to do was provide a sworn affidavit, 

verified by another party, that his or her net worth was sufficient 

to cover the contractor’s bond obligations. 

As the economy developed, the vast majority of bonds were provided by corporate insurers, and people who were providing individual surety bonds based on sworn affidavits began to do so for 

profit. They were individuals who were in the business of being an 

individual surety and were unknown or unrelated to the contractor 

providing the bond. Increasingly, the affidavits of such individual 

sureties were backed by insufficient and illusory assets and claims 

on the bond went unpaid. In 1990, the Federal Acquisition Regulation (FAR) was amended in an attempt to correct these abuses. The 

FAR now requires that individual sureties pledge specific assets in 

an escrow account at a federally insured financial institution equal 

to the penal amount of the bond. The affidavit that individual sureties now provide must include a specific description of the assets 

pledged, and represent that they are not pledged for other bonds. 

These rules, however, have not solved the problem of illusory and 

insufficient assets. 

Why H.R. 776 is Needed Now 

The individual surety concept has evolved over time from an uncompensated individual who was known to the contractor into an 

independent third party who agrees to post assets for the contractor for profit. While it may have made sense decades ago to 

permit individual sureties to post a variety of assets—real estate, 

stocks, bonds—it no longer makes sense in the current context of 

individual sureties as persons unknown to the contractor who 

pledge assets that are often non-existent or hard to value, fluctuate 

in value or are impossible to liquidate to pay claims. As noted 

above, in 1990, the FAR was amended to tighten the requirements 

for assets pledged by individual sureties in response to fraud. 

Those amendments did not solve the problem. The assets that individual sureties can pledge to the federal government continue to be 

problematic. 

Contracting officers today cannot enforce the existing requirements. They are presented lists of assets pledged that include assets that are not in an escrow account, are hard to verify, hard to 

value, that fluctuate in value, and that would be hard to liquidate 

if needed upon default. It is often difficult to determine whether 

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tion or whether the same assets have been pledged for many 

projects in different federal agencies. This remains a significant 

problem in federal construction projects. 

After one individual surety filed for bankruptcy and the United 

States asked the court to declare his debts to it non dischargeable, 

the court found, ‘‘The Debtor knew that he was pledging the same 

properties as bond collateral multiple times, and yet he patently 

denied doing so on each Affidavit . . . the Debtor repeatedly pledged 

property he did not own in support of his surety bonds . . . Moreover the Debtor made those false statements in order to induce the 

United States to accept him as a surety.’’ (United States v. Sears 

(In re Sears), Case No. 09–11053, Adv.Proc.No. 09–1070 

(Bankr.S.D.Ala. February 16, 2012)). 

Under H.R. 776 federal contracting officers no longer will have 

to attempt to determine whether the assets that individual sureties 

pledge exist, are owned by the individual surety, and are worth the 

actual value claimed. Just like the assets that the contractor must 

pledge, the assets that individual sureties pledge will have to be eligible obligations as determined by the US Treasury, and handed 

over to the federal government and held and scrutinized in the 

same manner. 

Why Congress Should Act Now 

The general contractor on federal construction projects is required to provide performance and payment bonds for the protection of the taxpayers and subcontractors, suppliers and workers on 

the job. If the general contractor’s bonds are backed by supposed 

assets of an individual surety that in fact do not exist, are difficult 

to verify, or are not readily convertible into cash to pay the obligations of the general contractor in case of default, everyone on the 

project is left unprotected. Experience has shown that if the assets 

pledged are uncollectible, subcontractors, suppliers, and workers on 

the job are left with no payment remedy if the contractor fails to 

pay them. These potential claimants cannot place a lien on public 

property or seek redress from the federal government for not obtaining a meaningful bond. The federal government is left with unfunded expenses to complete the construction projects and the persons who furnished labor and materials are left unpaid. 

For example, see judgments entered in U.S. for the use of Fuller 

v. Zoucha, C.A. No. 2:05–cv–325 (E.D. Cal.); U.S. for the use of 

Norshild Security Products LLC v. Scarborough, C.A. No. 8:09–cv– 

1349 (D. Md.); and United States v. Sears (In re Sears), Case No. 

09–11053, Adv.Proc.No. 09–1070 (Bankr.S.D.Ala. February 16, 

2012). 

Under federal law and regulations, a contractor pledging assets 

directly to the federal government is subject to far more stringent 

rules than an individual, acting for profit, who pledges his or her 

own assets to back the contractor for a fee. 

Major contracting groups support H.R. 776 because it would create clarity and certainty in any collateral given to the federal government. There would be either a surety bond from a croporate 

surety vetted by the U.S. Treasury Department to do business with 

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the federal government and licensed by a state regulator, or collateral provided to the designee of the Secretary of the Treasury by 

a contractor or individual surety in a readily identifiable form and 

value. All such collateral would be deposited with and vetted by the 

designee of the Secretary of the Treasury (currently the Federal 

Reserve Bank of St. Louis). 

The uncertainty of the current system increases the cost to the 

federal government. First, individual sureties charge more for 

bonding than corporate sureties. Corporate surety rates are regulated by state regulators. No one regulates individual sureties. Second, if a contracting officer rejects an individual surety bond the 

resulting bid protest is costly and delays the project. Of course 

there also is the cost of attempting to track down and liquidate an 

asset if a claim must be made on the bond. This holds true for 

claimants under the payment bonds as well. 

Individuals and small businesses working on a federal construction project—either as subcontractors, suppliers, or workers on the 

job—have no control over the general contractor’s choice of security 

provided to the federal government, but they suffer the most harm 

financially if the provided security proves illusory. The result of 

H.R. 776 is that laborers, subcontractors, and suppliers on federal 

construction projects will know that adequate and reliable security 

is in place to guarantee that they will be paid. 

Why H.R. 776 Makes Sense 

H.R. 776 is just common sense. The security that stands behind 

every federal contractor’s obligations to the federal government 

should be governed by the same rules. There should be either a corporate surety bond in place from a company approved by the U.S. 

Treasury and licensed by a state regulator, or assets with readily 

identifiable value pledged and relinquished to the federal government while the construction project is ongoing. The same rules 

should apply to the individual sureties that apply to any federal 

contractor that is securing obligations to the federal government. 

It does not make sense to permit an individual surety to post collateral that the contractor could not post on its own behalf. H.R. 

776 would require the collateral that the contractor can post and 

that the individual surety can post on its behalf, to be equivalent. 

If individual sureties have the assets they claim, they could easily 

provide U.S. debt obligations and turn them over to the contracting 

officer for deposit for the duration of the construction project. The 

individual would earn interest on that obligation while it is in the 

custody of the federal government. 

H.R. 776 makes the government procurement process more effective and efficient in a way that saves government resources and 

taxpayer dollars, reduces fraud, and will have no additional costs. 

Background on the SBA Surety Bond Guarantee Program 

The SBA Bond Program provides surety bond companies with 

partial repayment of losses from bonds that they would not ordinarily write for less qualified small and emerging contractors. The 

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purpose of the SBA Bond Program is to obtain surety bonds for 

small and emerging contractors so that they can develop a track 

record of success. As these contractors grow and establish themselves, they can already have a relationship with a surety company. This surety company then can provide the bonds they need 

as government contractors, either with or without the SBA’s bond 

guarantee. The goal of the SBA Bond Program is to graduate contractors into the standard surety market, making the SBA bond 

guarantee funds available for new small and emerging contractors. 

It is essential to understand why this is important. For most 

public construction projects, contractors are required to provide 

surety bonds to the government. These bonds guaranty that the 

contractor will perform the work and will pay the subcontractors, 

suppliers and workers on the project. Since the surety will be required to pay if the contractor cannot perform its contract and pay 

its bills, a surety carefully examines the contractor’s capability, experience and financial situation when determining whether or not 

to put its own financial wherewithal behind the contractor. Establishing a track record and building capital is a challenge for small 

and emerging contractors. Therefore, in order to assist these small 

businesses to obtain work on public projects, the federal government determined that it would act as a reinsurer for sureties willing to write bonds for these contractors. 

As the SBA Bond Guarantee Program has evolved, there are two 

plans under which sureties can participate in the Program. The 

Prior Approval Program (Plan A) was the original SBA bond guaranty program. In this program, the surety must obtain SBA approval for each bond prior to writing the SBA guaranteed bond. 

The SBA maximum indemnification of the surety’s loss as a result 

of a bond claim in Plan A is 80%, and 90% for bonds written for 

socially and economically disadvantaged contractors and bonds 

written for contracts under $100,000. The second program is the 

Preferred Surety Bond Program (Plan B). Under this plan, sureties 

apply to participate, submitting information up front on their underwriting practices and financial strength. Once a surety becomes 

a participant in Plan B, it is given an aggregate limit of bonds that 

it can write within the Program. As long as the surety complies 

with all of the requirements of Plan B, all bonds written within the 

Program qualify for reimbursement of losses. The SBA does not review or approve each individual bond before it is written and the 

guarantee attaches. In Plan B the surety receives a maximum 70% 

indemnification. 

Why H.R. 776 is Needed 

Over the years, surety participation in the SBA Bond Guarantee 

Program has ebbed and flowed. One primary driver is the economy, 

which includes the profitability of the surety industry and the appetite for bonding small and emerging contractors. The SBA’s current data shows that most of the bonds it guarantees comes from 

the Prior Approval Program, which has the higher bond guarantee. 

In the past in better economic times, the Preferred Surety Program 

accounted for over 50% of SBA Bond Program’s premiums, which 

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now is less than 15%. In this economy, taking this additional risk 

for such a low guarantee is not fiscally sound. 

Another factor of change in participation in the SBA Bond Program is the administration of the program. Increases in the SBA’s 

fees to sureties for participation and some internal problems have 

discouraged some sureties from participation in the SBA Bond Program, and caused others that do still participate to limit their participation. In recent years, however, the SBA has undertaken incremental efforts to improve the functioning and the appeal of the 

Program, such as improving its application process and procedures, 

its response time to claims and expanding the Program’s reach to 

include design-build contracts. Most recently, the SBA announced 

a rule to fast track bonding applications for $250,000 or less. The 

bottom line still is that the SBA Bond Program no longer makes 

financial sense to many sureties. 

The examples of the increases in the SBA’s loan programs for 

small businesses demonstrates that the increase in the maximum 

SBA bond guarantee under H.R. 776 would go a long way in making participation in the SBA Preferred Surety Program more attractive again. In the 111th Congress, the SBA’s appropriations bill 

included $125 million to continue enhancements made to the SBA’s 

7(a) and 504 loan programs in February 2009. The SBA was allowed to eliminate fees on 7(a) and 504 loans, the maximum government guarantee to banks that make these loans was increased 

to 95% and the maximum loan that could be guaranteed was increased from $2 million to $5 million. These enhancements to the 

loan program led to an immediate nationwide increase in lending. 

In June 2010, the SBA reported that its weekly dollar volume of 

SBA-backed loans had risen 90% in its 7(a) and 504 loan programs 

during the period of Feburary 17, 2009, until April 23, 2010. In October 2011, SBA reported that in fiscal year 2011, the SBA supported $30.5 billion (61,789 loans), a return to pre-recession levels. 

It is clear that an increase in the guarantee amount and the reduction or waiver of fees increases participation in government 

guarantee programs. Such reforms should be implemented in the 

SBA Bond Program to provide a boost to the bonding program. 

Why Congress Needs to Act Now 

The SAA believes that the SBA Bond Program is vital to the 

growth of small and emerging contractors in America. One, wellrun Surety Bond Program assures consistency of participation requirements and administrative procedures. Without the SBA Bond 

Program, many federal agencies may initiate their own program to 

assist small and emerging contractors. Some already have done so. 

States also have begun this process. Duplicative efforts among federal and state agencies waste time and resources that should instead be used to help small businesses. 

Congress has and continues to express its support for the SBA 

Bond Program. After Hurricane Katrina, Congress first looked at 

temporary increases in the maximum amount of the bond that 

SFAA is permitted to guarantee. The SBA’s maximum bond guarSBREP-219 with DISTILLER

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antee was increased for two years under the American Recovery 

and Reinvestment Act of 2009. Just last year, Congress enacted 

legislation that permanently raises the maximum amount of the 

bond that the SBA can guarantee from $2 million to $6.5 million 

and prevents the SBA from unraveling bond guarantees made with 

the SBA’s prior approval. Another new provision permits the SBA 

to guarantee a bond up to $10 million if a contracting officer of a 

federal agency certified that such a bond guarantee is necessary. 

The President also recently issued a waiver from rescission from 

the unobligated funds from the American Recovery and Reinvestment Act (ARRA) for certain programs, including the SBA Bond 

Guarantee Program. Currently, $15 million in funding remains unobligated for the Surety Bond Guarantees Revolving Fund. The 

amount will remain in the Program. The President’s order states 

that the retention of these unobligated balances will allow the executive agencies to continue to execute projects vital to the national 

interest in a fiscally responsible manner. 

Enactment of H.R. 776 is another logical and necessary step in 

the process towards the SBA Bond Program reaching its potential. 

Why H.R. 776 Makes Sense 

H.R. 776 would enhance the SBA Bond Program just the way the 

SBA loan programs were enhanced when needed in the economic 

downturn. This can be done right now for the SBA Bond Program 

with no additional cost. It does not make sense that the SBA Bond 

Program should be operating at less than full capacity now, at a 

time when small and engineering contractors need help all the 

more. Congress has acted to assist small and emerging contractor 

obtain the needed loans for construction projects and it only makes 

sense to enhance the SBA Bond Program to assist them in like 

manner with the required bonding as well. 

Æ 

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