U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office,

http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,

U.S. Government Printing Office. Phone 202–512–1800, or 866–512–1800 (toll-free). E-mail, gpo@custhelp.com.

i 

72–932 2012

[H.A.S.C. No. 112–94] 

DOING BUSINESS WITH DOD: UNIQUE 

CHALLENGES FACED BY SMALL AND 

MID-SIZED BUSINESSES 

HEARING 

BEFORE THE

PANEL ON BUSINESS CHALLENGES WITHIN THE 

DEFENSE INDUSTRY 

OF THE

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD 

JANUARY 17, 2012 
(II) 

PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

BILL SHUSTER, Pennsylvania, Chairman 

BOBBY SCHILLING, Illinois 

JON RUNYAN, New Jersey 

ALLEN B. WEST, Florida 

RICK LARSEN, Washington 

BETTY SUTTON, Ohio 

COLLEEN HANABUSA, Hawaii 

LYNN WILLIAMS, Professional Staff Member 

TIMOTHY MCCLEES, Professional Staff Member 

CATHERINE SENDAK, Research Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2012 

Page 

HEARING: 

Tuesday, January 17, 2012, Doing Business with DOD: Unique Challenges 

Faced by Small and Mid-Sized Businesses ........................................................ 1 

APPENDIX: 

Tuesday, January 17, 2012 ..................................................................................... 27 

TUESDAY, JANUARY 17, 2012 

DOING BUSINESS WITH DOD: UNIQUE CHALLENGES FACED BY 

SMALL AND MID-SIZED BUSINESSES 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

Larsen, Hon. Rick, a Representative from Washington, Ranking Member, 

Panel on Business Challenges within the Defense Industry ............................ 8 

Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman, Panel 

on Business Challenges within the Defense Industry ...................................... 1 

WITNESSES 

Hillmer, Linda, Chair, Small Business Division, National Defense Industrial 

Association ............................................................................................................ 4 

Schubert, Lynn M., President, The Surety & Fidelity Association of America .. 6 

Shoraka, A. John, Acting Associate Administrator for Government Contracting and Business Development, U.S. Small Business Administration .... 2 

APPENDIX 

PREPARED STATEMENTS: 

Hillmer, Linda .................................................................................................. 41 

Larsen, Hon. Rick ............................................................................................. 33 

Schubert, Lynn M. ............................................................................................ 48 

Shoraka, A. John .............................................................................................. 35 

Shuster, Hon. Bill ............................................................................................. 31 

DOCUMENTS SUBMITTED FOR THE RECORD: 

[There were no Documents submitted.] 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

[There were no Questions submitted during the hearing.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

[There were no Questions submitted post hearing.] 

(1) 

DOING BUSINESS WITH DOD: UNIQUE CHALLENGES 

FACED BY SMALL AND MID-SIZED BUSINESSES 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, PANEL ON BUSINESS CHALLENGES WITHIN

THE DEFENSE INDUSTRY, Washington, DC, Tuesday, January 17, 2012. 

The panel met, pursuant to call, at 3:04 p.m., in room 2118, Rayburn House Office Building, Hon. Bill Shuster (chairman of the 

panel) presiding. 

OPENING STATEMENT OF HON. BILL SHUSTER, A REPRESENTATIVE FROM PENNSYLVANIA, CHAIRMAN, PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

Mr. SHUSTER. We are going to get started. Mr. Larsen is en 

route. We had a very hectic schedule last week; we traveled to the 

west coast and to Hawaii. So maybe Mr. Larsen is still jet lagged 

or, like me, is not sure where he is. We had to get up every day 

and say, ‘‘What State are we in?’’ 

But we will go ahead and get started. The hearing will come to 

order. 

I want to welcome our panelists today. I look forward to hearing 

your testimony. 

The Armed Services Committee Panel on Business Challenges in 

the Defense Industry is meeting today to continue our dialogue regarding the health and future of our Nation’s defense industrial 

base. And today we specifically look at the unique challenges that 

small and medium-sized businesses face in trying to do business 

with the Department of Defense [DOD]. 

Members of the panel, as I said, just returned on Friday morning 

from meeting with businesses in southern California and Honolulu. 

And as I have said before, these roundtable discussions have been 

extremely valuable to the panel. And meetings we had last week 

provided us with a great deal of insight into many of the challenges 

that they face in the defense industry. We were honored to have 

a hearing in Chairman McKeon’s district in Santa Clarita, and we 

also had a meeting in San Diego with Congressman Duncan 

Hunter and Susan Davis, who both serve on the Armed Services 

Committee. 

In addition to the three industry roundtables, we also had an opportunity to meet with Admiral Willard, the Commander of the 

U.S. Pacific Command, and we toured many of the DOD industrial 

facilities that support our Navy in the Pacific. 

While we were in Hawaii, one of the small business owners commented that DOD takes the view that small businesses should take 
2 

a small role. In reality, small businesses are the backbone of this 

economy. And, according to the Small Business Administration 

[SBA], small businesses play a leading role as the driver of economic growth and job creation in the national economy and that 

more than half of working Americans own or work for a small business and that small businesses are responsible for two of every 

three net new private sector jobs created in recent years. We also 

heard from some of the large companies out there how important 

small business is in the defense industrial base and what they 

make up. 

There is no doubt that the DOD acquisition community is very 

risk-averse, and we have to find ways to meter that risk-aversion 

and reduce the bureaucracy and leverage this critical sector of our 

economy to meet our national security requirements. 

We have three terrific witnesses today, and they are with us 

today to explore this topic and assist us in trying to understand 

this paradigm. 

We have with us Mr. John Shoraka, Acting Associate Administrator for Government Contracting and Business Development for 

the Small Business Administration. 

Ms. Linda Hillmer is the chair of the Small Business Division of 

the NDIA [National Defense Industrial Association]. And Ms. Lynn 

Schubert is president of The Surety & Fidelity Association of America. 

While Ms. Hillmer and her organization are very familiar with 

HASC [House Armed Services Committee], I know that Mr. 

Shoraka and Ms. Schubert are probably a bit out of their comfort 

zones. It is not often that someone from the SBA or the world of 

surety bonding comes to testify before the defense committees. 

However, your experience and insight and recommendations are 

going to be very important to us, and we are honored you are here 

with us today. 

I also would like to thank Mr. Dan Else and the rest of his team 

at the Congressional Research Service [CRS] for their assistance in 

preparations for today’s hearing. I am looking forward to the discussion. 

And, with that, I was going to turn to Mr. Larsen, but he is still 

probably on another time zone. So what we will do is once Mr. 

Larsen—and we will go through your testimony first, and then 

when Mr. Larsen arrives maybe he will have some opening remarks to make. 

So, with that, we will proceed. Mr. Shoraka, if you want to go 

first, you have 5 minutes. And proceed, please. 

[The prepared statement of Mr. Shuster can be found in the Appendix on page 31.] 

STATEMENT OF A. JOHN SHORAKA, ACTING ASSOCIATE ADMINISTRATOR FOR GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL BUSINESS ADMINISTRATION 

Mr. SHORAKA. Thank you, Chairman Shuster and members of 

the House Armed Services Committee. Thank you for inviting me 

to testify today. 
3 

Our top priority at the SBA is to maximize opportunities for 

small businesses and ensure that the benefits of our programs flow 

to the intended recipients. My office works each day to get Federal 

contracting dollars into the hands of small and disadvantaged businesses. 

Contracting with small business is a win-win. Small businesses, 

who are drivers of the American economy, get the revenue they 

need to grow and create jobs. Meanwhile, the Federal Government 

has the opportunity to work with the most innovative and responsive companies in the country. 

My office’s primary objective is to ensure that eligible small businesses receive their fair share of Federal prime and subcontracting 

dollars. One way we do that is through our oversight of the Federal 

Government’s efforts to meet the statutorily mandated small business goals, which include prime contracting dollars, awarding 23 

percent to small businesses. 

Over the last 2 years, the Federal Government has made significant improvements in contracting to small businesses. For example, in fiscal year 2010, small businesses won nearly $100 billion, 

or 22.7 percent, of Federal prime contracting dollars. This marks 

the second consecutive year of percentage and dollar increases after 

3 consecutive years of decline and was the largest 2-year increase 

in over a decade. 

Small businesses also won $74 billion, or 35.4 percent, of subcontracting dollars. 

Throughout the fiscal year, we at the SBA track and monitor 

Federal agencies’ small business contracting performance closely 

and publish the annual ‘‘Small Business Procurement Scorecard.’’ 

In fiscal year 2010, DOD achieved a grade of ‘‘B,’’ reaching 95.8 

percent of its small business contracting goals. 

The Department awarded 20.94 percent, or $61 billion, of its 

Federal contracts to small businesses. The Department awarded 

$10.4 billion in prime contracts to women-owned small businesses; 

$20.7 billion to small disadvantaged businesses; $5.3 billion to 

service-disabled veteran-owned small businesses; and $8.7 billion to 

Historically Underutilized Business Zones, or HUBZones. It also 

significantly exceeded overall subcontracting goals of 31.7 percent 

to small businesses, awarding 37.3 percent. 

DOD submitted a fully responsive plan to increase small business contracting within its procurement. The Department was fully 

receptive to SBA during the reporting period and demonstrated its 

procurement data was fully and accurately reported. 

Congress took a major step toward helping small businesses engage in the Federal marketplace with the passage of the Small 

Business Jobs Act of 2010. Since its enactment, we continue to roll 

out many benefits to small businesses, specifically the 19 contracting provisions contained in the Jobs Act that will help redirect 

billions of contracting dollars into the hands of small business. 

Among changes already enacted include: making it harder to 

bundle contracts, a practice that makes it more difficult for small 

businesses to compete; holding large prime contractors more accountable to their own subcontracting plans; and strengthening the 

skills of Federal acquisition workforces by implementing manda-
4 

tory small business training, revising existing core certifications, 

and requiring training on small business contracting. 

While the Jobs Act has made marked improvement to the Federal procurement environment for small businesses, contracting 

with a large and complex agency like the Department of Defense 

naturally comes with unique challenges. My office works regularly 

with all branches of the DOD and their small business communities conducting outreach and training events and finding new 

ways to support small businesses and help DOD hit and/or exceed 

its small business contracting goals. 

Because of the significant amount of contracts coming from the 

Department of Defense, my office is in constant contact with the 

DOD’s Office of Small Business Programs and Office of Small Business and Disadvantaged Business Utilization [OSDBU] to track 

and monitor DOD’s small business contracting goals. Monthly, the 

SBA chairs the Small Business Procurement Advisory Council, a 

meeting where we collaborate with OSDBUs from across the Federal Government to find out how we can best support agencies and 

address any issues they have with their small business contracting 

goals. 

DOD has continued to work to increase small business contracting opportunities for small businesses demonstrating unprecedented top-level commitment to small business procurement. As an 

example, in August of 2011, Secretary of Defense Leon Panetta 

issued a memorandum urging the Department’s acquisition workforce to identify opportunities to increase contracting with small 

businesses. In addition to Secretary Panetta, the Assistant Secretaries of each component of the Department of Defense issued detailed memoranda to their respective acquisition teams and program buyers to encourage the increased use of small businesses. 

The SBA remains committed to working with Federal agencies to 

get even more contracts and subcontracts into the hands of small 

businesses in the coming years. 

I want to thank you for allowing me to share SBA’s views and 

initiatives with you today, and I will be happy to answer any questions you may have. 

[The prepared statement of Mr. Shoraka can be found in the Appendix on page 35.] 

Mr. SHUSTER. Thank you very much. 

And, Mr. Larsen, when they get done with testimony, if you have 

an opening statement. 

Mr. LARSEN. That is fine. Thank you. 

Mr. SHUSTER. Okay. Thanks. 

Ms. Hillmer. 

STATEMENT OF LINDA HILLMER, CHAIR, SMALL BUSINESS 

DIVISION, NATIONAL DEFENSE INDUSTRIAL ASSOCIATION 

Ms. HILLMER. Thank you. 

Good afternoon, Chairman Shuster, Ranking Member Larsen, 

and other distinguished members of the committee. My name is 

Linda Hillmer, and I am the chair of the Small Business Division 

of America’s leading defense industrial association promoting national security. NDIA has 95,000 members worldwide, more than 
5 

1,700 corporate members, and nearly 900 Small Business Division 

members. 

In addition to volunteering as the chair of the NDIA Small Business Division, I am a small business owner whose company has 

supported DOD since 2001. I am also a former Federal Government 

contracts professional, which means I am kind of bilingual; I speak 

English and I speak Federal acquisition. In fiscal year 2010, DOD awarded over $61 billion in prime contracts to small businesses. I am here today to talk about some of 

the challenges that small businesses face in doing business with 

DOD. 

One of those challenges is bundling. We know why DOD bundles 

contracts. There was a war on two fronts, increasing budgets and 

a stretched acquisition staff. Bundling appeared to be a logical answer to meeting the wartime requirements. We are now in a different time, however, and different solutions are required. 

DOD is very concerned, and rightly so, with avoiding what it 

calls a ‘‘hollow force’’ inside the military. I believe the Department 

ought to also be concerned about a hollow small business industrial 

base. One of the acquisition approaches bringing about this hollow 

small business industrial base is the increased use of bundling. 

Let me give you an example of how bundling hurts small business. Bundling puts small businesses in a dependent subcontracting role, well-hidden from government decisionmakers. It 

keeps us at arm’s length from the government program managers 

who set the requirements. It also means that the government contracting leaders who make all the acquisition strategy decisions do 

not see the small businesses who are performing the work under 

the primes. 

But bundling contracts not only hurts small business, it hurts 

DOD. Bundling means the government pays twice on overhead; it 

pays for the prime and again for the sub. But more important than 

dollars, bundling hurts the government by attacking quality. As 

DOD is awarding more and more IDIQ [Indefinite Delivery, Indefinite Quantity] task orders based on the lowest price, the large 

primes are putting the squeeze on small businesses. This may 

mean lower costs for DOD, but at what ultimate cost? Don’t get me 

wrong, lower prices are not bad, but where are the cuts coming 

from? Are they coming from the prime’s profit or from the small 

businesses? 

In an effort to stay alive, small businesses will generally cut 

quality or leave the defense industrial base entirely. Both decisions 

ultimately result in lower-quality products and services in support 

of the warfighter. 

Bundling is an acquisition approach, and it is a symptom of a 

much larger issue at DOD, and that is the perception of small business within the Department. It is an issue that requires the meaningful inclusion of small business in all funded requirements. It 

needs to be the responsibility of three players: the requirements 

community, which has the need and the money and forecast requirement; the acquisition community, which commits the funding 

and sets the acquisition strategy; and the small business directors, 

who have the responsibility to meet the Federal small business 

goals. 
6 

Through deliberate organizational approaches and strategic cultural changes, DOD can ensure maximum small business participation, smartly stretching limited budgets to meet our Nation’s defense and security needs. 

Thank you again for the opportunity to speak, and I am happy 

to take any questions. 

[The prepared statement of Ms. Hillmer can be found in the Appendix on page 41.] 

Mr. SHUSTER. Thank you. 

And, with that, Ms. Schubert, you are recognized. 

STATEMENT OF LYNN M. SCHUBERT, PRESIDENT, THE 

SURETY & FIDELITY ASSOCIATION OF AMERICA 

Ms. SCHUBERT. Thank you, Chairman Shuster and the committee, for inviting us here to testify on this critical issue. 

The Surety & Fidelity Association [SFA] is a trade association of 

more than 450 insurance companies who write surety bonds. They 

write the vast majority of surety bonds written here in the United 

States, as well on core projects around the world. We also are a 

rating agency and licensed by each insurance department across 

the country. We work closely with Federal agencies on surety 

issues and particularly well with the Corps of Engineers. 

One of the many requirements for performing construction 

projects for the DOD, as well as other Federal agencies, is to provide surety bonds to protect the taxpayers and workers, subcontractors, and suppliers on construction projects. For small and 

medium-sized contractors, this requirement provides both protections and challenges. 

There is good public policy for the universal requirement of surety bonds on public construction projects. These performance and 

payment bonds guarantee that the project will be completed and 

that the subcontractor suppliers and laborers on the job will be 

paid. Contractors on DOD projects over $150,000 must be able to 

provide these required bonds. If the contractor defaults and additional funds are needed for completion and to pay the subcontractors and workers, the surety pays the excess costs. 

There is a direct connection between a contractor’s capability and 

its bond ability. There are a number of things DOD can do to increase both that capability and the bond ability. 

If a contractor is bidding for a job that is too large for its business to perform, it will have difficulty in obtaining the surety bonds 

that were required. Over recent years, the size and dollar value of 

contracts being let by DOD has increased, and, almost by definition, small and medium-sized contractors cannot perform those 

large contracts. Therefore, many of the contracts from the DOD are 

just simply too large. 

Also, as you have already heard, bundling is a tremendous problem with DOD projects. While this may assist in administration of 

the contract for the DOD, it directly impacts the ability of small 

and mid-sized contractors to perform the contract and, consequently, to get the required surety bonds. 

To address the needs of small businesses, Federal procurement 

rules should contain both mandates and incentives to break construction contracts into smaller parts. 
7 

First, Federal construction contracts need to be subject to the 

current anti-bundling regulations. Unfortunately, there is a recent 

case that holds that construction contracts are not even subject to 

the existing anti-bundling regulations, and that needs to be 

changed by legislation. 

SFA also recommends that a Federal agency letting construction 

contracts should let 5 percent of its total budget in contracts of no 

more than $5 million. 

Third, the projects that are set aside for small businesses need 

to be of a size that small businesses can perform. 

And, fourth, the Joint Venture and Mentor-Prote ́ge ́ Programs 

must be allowed to work more effectively. The current Federal regulations lack clarity and standardization among the procuring 

agencies as to what arrangements are acceptable. In addition, the 

regulations present a disincentive for smaller contractors to participate in Federal construction projects with larger contractors as 

joint ventures or with the Mentor-Prote ́ge ́ Program. SFA suggests 

that small businesses should not lose their status and be disqualified from bidding on small business opportunities because of their 

participation in these programs or because surety bonds were 

issued based on the strength of the larger contractor joint venture 

program. The larger contractor’s indemnity to the surety for losses 

under the bond should not threaten the small contractor’s status. 

What happens is you have the partnership, and if a surety is allowed to use the financial status of the larger contractor to begin 

to develop a relationship with the smaller contractor, ultimately 

they will develop a surety relationship for that smaller contractor, 

who will be able to bid individually without a joint venture or as 

part of the Prote ́ge ́ Program. 

We also urge Congress to look at improvements to the SBA Surety Bond Guarantee Program. We have worked very closely with 

the SBA over the years on improvements that are necessary, and 

quite recently as well. And I believe legislation will be introduced, 

and we urge you to support that legislation. 

If you are interested, we work very closely with the Department 

of Transportation and other agencies on programs to assist small, 

emerging contractors in getting surety bonds. We would be more 

than happy to roll out a program with the DOD for DOD contractors as well. 

Last two other points. There is an automatic increase in the Miller Act threshold, which is the threshold below which bonds are not 

required, that has been put in place, and it has exemptions in 

there for certain statutes. The Miller Act needs to be added to that 

exemption. And all of the details on that are in our written testimony. 

And last, there is a bill pending in Congress, H.R. 3534, called 

the ‘‘Security in Bonding Act of 2011’’ that would ensure that the 

small and mid-sized contractors who are adversely impacted by 

fraudulent sureties would no longer have to face that. And I urge 

you to look at that bill and consider it when it comes to the House. 

Thank you very much. 

[The prepared statement of Ms. Schubert can be found in the Appendix on page 48.] 

Mr. SHUSTER. Thank you very much. 
8 

With that, Mr. Larsen, if you have an opening statement. 

STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE 

FROM WASHINGTON, RANKING MEMBER, PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

Mr. LARSEN. Thank you, Mr. Chairman. And we had a great 

CODEL [congressional delegation], and I appreciate your leadership on that CODEL. And it was good to see several of the Members be able to attend all or part of it and really provide good further insight for us out in the field about what our small businesses 

are facing as part of their contracting with the DOD. 

I have a statement I will enter for the record, but I just want 

to make a few key points. 

A key message that has been shared by a lot of the stakeholders 

that we have met with is the importance of the defense industrial 

base to our Nation’s security and how important that base is to ensuring our women and men in the Armed Forces have the best 

weapons, the best services, the best products to do their job, and 

this defense industrial base is a force multiplier for our military. 

But, as we are even hearing today and we have heard over this 

last week as part of the CODEL and in other hearings, this defense 

industrial base is a force multiplier but not a monolithic entity. It 

has many faces to it. It has large, multinational corporations; small 

companies that provide important subsystems and parts to major 

weapons programs, as well as services. And we are even hearing 

some of the concerns today expressed that we have heard as part 

of the trip we just had. 

But I just want to be sure that we continue to focus the panel 

on what we feel the key elements hindering small and mid-sized 

businesses are in their ability to contract with the DOD and what 

steps we can take to open up opportunities with the Department 

of Defense. 

With that, Mr. Chairman, I will just enter the rest of the statement into the record, without objection, if that is possible. 

Mr. SHUSTER. Without objection, so ordered. 

Mr. LARSEN. Thank you. 

[The prepared statement of Mr. Larsen can be found in the Appendix on page 33.] 

Mr. SHUSTER. Thank you, Mr. Larsen. 

And, with that, we will go to questions. I am going to start off 

first. 

Mr. Shoraka, you said that for 3 years running, prior to this 

year, or I guess it would be 2011 where your numbers came from 

22.7 [percent]? Is that from 2011 or 2010? 

Mr. SHORAKA. 2010. 

Mr. SHUSTER. Okay. Prior to that, you said, for 3 years straight 

there was a decline in the percent. What was the reason for that? 

Did it have to do with we were at war and getting contracts out 

quick, or was there some other reason that you feel that that was 

on a decline? 

Mr. SHORAKA. The numbers for 2009 and 2010 showed 2 consecutive years of increases. 

Mr. SHUSTER. Right. 

Mr. SHORAKA. Before that, there was 3 years of declines. 
9 

I would say that, in the last several years, there has been a high 

priority given from the Administration to small business contracting, from the President and his advisor, Valerie Jarrett, having quarterly meetings with Deputy Secretaries from each of the 

agencies. And I think that has had a significant positive impact on 

the agencies meeting their goals. 

Mr. SHUSTER. Right. And who were those business meetings with 

you said? 

Mr. SHORAKA. The quarterly meetings are White House initiatives with all the Deputy Secretaries from each of the CFO [chief 

financial officers] agencies, the 24 agencies. 

Mr. SHUSTER. Okay. 

And, Ms. Hillmer, you said that the government is paying twice 

from a prime to a sub. Can you sort of explain why you think they 

are paying twice? 

Ms. HILLMER. Sure. 

The prime contractor has the main contract, and they have their 

own overhead structure and the profits requirements that they 

need to meet. Small businesses who are the subs to these primes, 

we have our own overhead as well. So you are paying—or DOD is 

paying for our overhead as well as the prime’s overhead. Whereas 

if they came to us directly and contracted, it would be one overhead—— 

Mr. SHUSTER. Right. 

Ms. HILLMER [continuing]. But it requires more administration 

on their part. 

Mr. SHUSTER. Right. And you don’t feel—I mean, I think the idea 

behind subbing it out is you lower your overhead because you are 

going out to a subcontractor, but you don’t feel that is happening 

there. Their overhead is their overhead; they are going to—they are 

subbing it out because it is a way for them to increase their profit 

as well. 

Ms. HILLMER. That is exactly correct. 

Mr. SHUSTER. Okay. 

And as we are moving forward with this panel, we see that when 

the Office of the Secretary of Defense [OSD] focuses on—we look 

at the MRAPs [Mine Resistant Ambush Protected vehicles] and 

some of the other products that had to get out there quickly, do you 

believe that the Office of the Secretary of Defense, that Small Business Programs, is focused enough on working with the small businesses? 

You mentioned there were some, here, White House initiatives. 

But at OSD, is there enough focus on small business, do you believe? 

Any one of you can all comment on that if you care to. 

Mr. SHORAKA. If I may first? 

Mr. SHUSTER. Sure. 

Mr. SHORAKA. I think certainly when we talk about the last fiscal 

year and looking at the continuing resolutions at the end of the fiscal year, some challenges obviously—that presented some challenges. But there was very close collaboration between our agency 

as the SBA along with the Department of Defense, along with their 

Office of Small Business as well as their OSDBUs. And I think, 

moving forward, we have identified opportunities to continue where 
10 

we left off last quarter of last year and adding additional identification of opportunities. 

As an example, we talk about our procurement center representatives, which are SBA officials who sit at the most active buying 

activities that the DOD has. So the procurement center representatives identify opportunities where small businesses should be participating. And if they don’t go small business set-aside, they can 

object to that. 

Mr. SHUSTER. And what happens if they object? 

Mr. SHORAKA. They can object, and there have been cases where 

the contracting officer has turned around and made a portion of it 

small set-aside. If the procurement agency does not agree, we can 

file for an appeal, which raises it up to a higher level. 

Mr. SHUSTER. Okay. 

Ms. Hillmer. 

Ms. HILLMER. It has been interesting watching the OSD Small 

Business Office, having been in DOD for quite a few years. You 

know, that office sat vacant for 2 years, and during that time it 

really hurt small business. Now they have put a director in there, 

and he has worked very hard and made a lot of progress. He is 

working very closely with NDIA. They have put a lot of policies in 

place. Yet to see how those policies are going to affect small business per se. But the focus that I have seen at DOD on small business has been more serious than what I have seen in a number of 

years. 

Mr. SHUSTER. Just in the past couple years. 

Ms. HILLMER. Yes. 

Mr. SHUSTER. Ms. Schubert, do you have a comment? 

Ms. SCHUBERT. We have not worked directly with that office. We 

have for a number of other agencies but not with DOD. 

Mr. SHUSTER. And just so I am clear, on surety bonds the contracting is just on construction? 

Ms. SCHUBERT. There are other requirements, there are other 

Federal requirements for surety bonds for a particular service: contracts—there are hundreds of them. 

Mr. SHUSTER. Right. 

Ms. SCHUBERT. Construction is the one that is most impacted by 

this. 

Mr. SHUSTER. But building a component for a bigger system, are 

you required to have a surety bond for that? If one of the small 

companies is building, you know, an engine for a Humvee, does 

that require a surety bond? 

Ms. SCHUBERT. I don’t believe so. 

Mr. SHUSTER. Okay. 

Ms. SCHUBERT. But I will get back to you with the answer on 

that. 

Mr. SHUSTER. Okay. 

All right. With that, we go to Mr. Larsen for questions. 

Mr. LARSEN. First, for Ms. Schubert, can you just explain again 

to me on the Mentor-Prote ́ge ́ Program, does the prote ́ge ́, for the 

sake of definition, become subsumed in the definition of a larger 

contractor, and therefore they can lose their ability to get a surety 

bond? Is that kind of what you are saying? 
11 

Ms. SCHUBERT. Yes, that is what I am saying. And one of the 

major problems is that it is handled differently throughout the various agencies. There is no one way that it is acceptable or unacceptable. And what we would love to see is one standard that, 

‘‘This is what is acceptable.’’ 

Not only do they get subsumed, but even if they don’t, if the surety looks to the larger contractor for the bond, then there is a—— 

Mr. LARSEN. It applies to the prote ́ge ́? 

Ms. SCHUBERT. Yes. Exactly. 

Mr. LARSEN. Only in the DOD? 

Ms. SCHUBERT. No. It is a problem throughout the Federal—all 

the Federal agencies. 

Mr. LARSEN. Okay. And then how would you specifically fix that? 

Ms. SCHUBERT. Well, we would suggest that it not make the 

smaller contractor lose out on its small contractor status. What 

happens is they lose out on their status and then they no longer 

can qualify for the set-aside program. 

Mr. LARSEN. Yeah. To do your bonding, do you need to have a 

certain—does the contractor need to have a certain size contract to 

do surety—— 

Ms. SCHUBERT. Well, in the Federal Government, the size contract where bonding is required is $150,000—— 

Mr. LARSEN. Oh, okay. 

Ms. SCHUBERT [continuing]. And above. In States, some of them 

are $50,000. Local municipalities, some of them are $10,000, 

$20,000. 

Mr. LARSEN. So those are relatively small? 

Ms. SCHUBERT. It is. 

Mr. LARSEN. Relatively. 

Ms. SCHUBERT. It is—no, it is definitely relatively small. 

Mr. LARSEN. Yeah. Yeah. 

Ms. SCHUBERT. And what happens is you have contractors who 

are starting to get bonding at $100,000 or $150,000, and then the 

project they want to bid on is a $5 million project, and they don’t 

have the capability to perform the project, and now they need a 

surety bond, and therefore they can’t get that bond. 

Mr. LARSEN. Yeah. Are these largely construction? 

Ms. SCHUBERT. Yes. 

Mr. LARSEN. Yeah. Yeah. Okay. 

Ms. SCHUBERT. And there is plenty of that in DOD. 

Mr. LARSEN. Yeah. And we always want more. 

Ms. SCHUBERT. Yes. So do we. 

Mr. LARSEN. And if we ever get a transportation bill, we will 

have more. 

Ms. Hillmer, in your written testimony on page 3 and your oral 

testimony, you talked about the longer-term cultural and organizational shift necessary. How can that happen, and how could we 

write that into legislation? Give me something to grab on to here. 

Ms. HILLMER. I love it. Thank you for asking. 

It really needs to start from the top, as with any cultural change. 

If there is any way that Congress can put teeth to the small business goals, that would be a huge step in the right direction. Right 

now, if DOD or any agency doesn’t meet its small business goals, 
12 

they get hauled before Congress and get their wrist slapped. But 

there is no—there is no price to pay literally. 

Ms. HILLMER. So if there were some teeth to those goals, that 

would help. 

Just having the Secretaries of the services understand the importance of the small business industrial base and embrace that and 

push that down through their services I think would make a huge 

difference. The program managers themselves, the requirers, have 

to understand the importance of small business and the role that 

small business plays. 

I believe you mentioned before that the DOD culture is riskaverse. Nobody gets fired for hiring IBM, right? But for a small 

business, there is some risk there. And so they are not as embracing of small business as they could be. And if the requirements 

community were perhaps held accountable for including small business, they might be a little bit more open to doing that. 

Mr. LARSEN. One of the issues we heard about last week—and 

we may have heard about it before, and it may have been stated 

a different way—had to do with—and I want to see if I can get this 

right, and the staff could help me remember this correctly—it is a 

difference between, you know, being allowed to compete and then 

actually being qualified to compete or qualified to do the job. 

Is that—you are nodding your head, for the record, as if you understand what I am talking about. So maybe you could help me out 

with the problem and what you think the solution is. 

Ms. HILLMER. I do understand the problem. And that is actually 

something that the OSD Office of Small Business has been looking 

into in their market research surveys, to their credit. 

When a commercial company wants to do business with a small 

business, they do a lot of research on that small business, and they 

make sure that they are not only qualified, they are viable, they 

are able to perform. And that is the type of information that is 

missing from the market research that is available to PMs [program managers] and small business specialists and contracting officers right now. 

Mr. LARSEN. Okay. All right. 

Is it ‘‘Shoraka,’’ Mr. Shoraka? 

Mr. SHORAKA. That is correct. 

Mr. LARSEN. Can you discuss briefly your view about the teeth 

or lack of teeth in enforcing the small business goal, the goal of 

achieving the small business contracting goals? 

Mr. SHORAKA. Sure. I think there are several, I guess, different 

layers of that. 

As mentioned earlier, there is an emphasis on small business 

goals from the White House on down. The Administration, through 

Valerie Jarrett, has made it very clear to each agency that the 

goals are very important to meet. Our agency, Karen Mills, holds 

regular conversations with each of the agencies to make sure that 

the goals are met. 

Our Deputy Administrator, beginning as soon as the goals were 

released this year, has held calls with each of the Deputy Secretaries, emphasizing, one, the importance of the goals, but, also, 

what are the tools to meeting those goals. As I mentioned, the 

Small Business Jobs Act gave us some additional tools. So what are 
13 

the tools under there? Like, we talk about bundling and the restrictions on bundling now. We talk about indefinite quantity contracts 

and how those can now be set aside. So what are the tools? 

Another thing that I would point out is that, from the White 

House initiative, all SESes [Senior Executive Service] that have in 

their program procurement activity are now under their performance metrics graded on understanding the small business and 

meeting the small business goals. So that is one thing we have 

worked with agencies, to make sure that the program officers are 

now also aware of and are rated on the goals. 

Mr. LARSEN. Are they rated individually, or are they rated as an 

agency and then their budget requests reflect the achievement? 

Mr. SHORAKA. With regards to the goals for the agency, obviously 

it is rated as an agency. But supervisors, then, that are doing reviews on SESes, as an example, can rate them individually. 

Mr. LARSEN. Uh-huh. Yeah. Thank you. 

Thank you, Mr. Chairman. 

Mr. SHUSTER. With that, Mr. Schilling is recognized for questions. 

Mr. SCHILLING. Thank you, Chairman. 

Welcome. Happy New Year. It is good to be back. 

I would like to start out with Mr. Shoraka. I am going to be, here 

soon, going to be introducing a small business bill that will address 

the Mentor-Prote ́ge ́ programs. Its main goal is to allow the SBA to 

either create a new program for a qualifying small business or to 

participate to open up a current program for them. Anyway, it 

would also streamline—and I think that is one of the things that 

we are getting at. 

And I got to say I am very impressed with what is going on here. 

I mean, I think we are really getting a good grip here. I am a small 

business owner. I kind of jump ahead of myself all the time. 

But it will streamline and make the process easier for small businesses to participate by setting standard regulations for each department. Specifically, it will put SBA in charge of overseeing and 

setting standard rules, and the department would implement regulations for all of the programs. This bill would also require SBA to 

present data to Congress about the progress of the programs with 

regard to how successful prote ́ge ́s are in general and in terms of 

obtaining and retaining Federal contracts. 

Currently, 13 departments sponsor programs, which differ in eligibility and incentives to participate, but each program exists to 

pair new businesses with businesses that are more experienced 

with Federal contracting. However, success among departments 

varies widely. 

Do you think something like this would help the small businesses? And then, in what ways? 

Mr. SHORAKA. I think we hear about the Mentor-Prote ́ge ́ Program at the Department of Defense oftentimes, and we often hear 

that that is one way of engaging mentors along with the prote ́ge ́s 

and bringing them on board either as a subcontractor or on a prime 

contract relationship. And that has been very successful. 

Different agencies have different models, certainly. At the SBA, 

our Mentor-Prote ́ge ́ Program as it stands focuses on our 8(a) portfolio, our 8(a) portfolio being disadvantaged firms. This provides an 
14 

opportunity for a prote ́ge ́ to team up with a mentor and submit for 

a joint venture application. Under that joint venture application, 

that entity now is considered an 8(a), so they can actually pursue, 

even though they are joined together now, a set-aside project. This 

is an incentive, I think, for the large business because now they 

can pursue small businesses, but it is an incentive for the small 

business because now they can be mentored and pursue larger 

projects. 

I think there are different models that work at different agencies 

in certain respects, and they have been modeled after what works 

at their own agency. I know the Small Business Jobs Act allowed 

for the SBA to roll out the Mentor-Prote ́ge ́ Program to our other 

set-aside programs, and that is something that we are working on 

currently. 

Mr. SCHILLING. Very good. 

My next question will go to Mrs. Hillmer. DOD has been used 

as an example of successful mentor-prote ́ge ́ programs, which is basically why my bill gives them the option to remain separate if they 

want to in the program. 

Can you speak on your experiences with the DOD’s mentorprote ́ge ́ programs and why they are so successful? 

Ms. HILLMER. I have no personal experience with it. However, I 

do know other small businesses that do participate. And it is true, 

DOD has a very good Mentor-Prote ́ge ́ Program in place. It is well 

structured, and it is implemented well. So I think it would serve 

as a very good example. And I have known several small businesses that have found it to be very useful and it has helped them. 

Mr. SCHILLING. Very good. 

Ms. Schubert, in reference to the unbundling, can you give—I 

mean, we have got some ideas as to why we should unbundle, but 

what would be some of the adverse things, some of the reasons why 

we shouldn’t unbundle? Are there any reasons why not to 

unbundle, I guess? 

Ms. SCHUBERT. Well, what we hear from the Federal Government is the ease of administration. They want to see one contract, 

one place, one sense of responsibility. And, unfortunately, that 

eliminates vast numbers of small businesses when you do that. 

And it also does double bill overhead, there is no question about 

that. 

Unbundling would make a lot more small businesses eligible for 

surety bonding, which would allow them to then participate as general contractors and not just subcontractors on the jobs. 

Mr. SCHILLING. Very good. 

Thank you very much. 

Mr. SHUSTER. I recognize Ms. Hanabusa for questions. 

Ms. HANABUSA. Thank you, Mr. Chair. 

Ms. Hillmer, I understand the theory behind why we shouldn’t 

bundle, and I agree with you. However, if it is not one company 

that is doing it and bundling, then who takes that role? In other 

words, say you have one project, you have to have these different 

components, and now we have it bundled. Does it then mean that 

we increase the government acquisition staff so they then become 

responsible, where before we kind of pushed it onto the prime? 
15 

Ms. HILLMER. I have been with DOD a while now, so I am watching this come full circle. It used to be where DOD did have program integration, and those program integrators were responsible 

for, yes, hiring scores of contractors to do various types of work 

under the bigger programs. 

So, yes, it does result in more work for the Department of Defense, quote, unquote. But I just think that the importance of 

maintaining a strong industrial base and the small businesses in 

that industrial base outweighs that. 

Ms. HANABUSA. So that would be the cost that would have to be 

paid if we decide that small business is the priority. And we have 

decided that. But to implement it—in other words, to put our 

money where our mouth is—we would need to then realize that 

maybe the unintended intended consequence of that action is going 

to be that we are going to have to increase the acquisition force 

within DOD so that they would now be overseeing the contracts in 

a different manner. 

Ms. HILLMER. The short answer is yes. DOD has been increasing 

its acquisition workforce, as you know. So I say, why not? 

Ms. HANABUSA. But they are still bundling? 

Ms. HILLMER. They are still bundling. 

Ms. HANABUSA. It takes a while to refocus. 

Ms. HILLMER. Right. It takes a while to turn the ship around. 

Ms. HANABUSA. Thank you. 

Ms. Schubert, I understand a lot about surety bonds. And the interesting part about surety bonds in the construction context is 

that it really has been the mechanism by which we have kept 

smaller contractors out of large construction projects, because they 

just can’t bond it. I think one of the issues that people do not realize is small businesses, when they actually go out for those bonds, 

really put a lot of their personal assets on the line because that 

bond has got to be backed by someone’s assets. And if you are a 

big corporation, you have assets, but usually a small business is an 

individual. So that is why, for many of them, they not only do not 

have the capabilities of getting the bonds, but they also may not 

want to put their home, for example, on the line. 

So, having said that, as the consequence of that, is there an alternative for that surety requirement to keep the small business 

contractor being able to bid and to be competitive? Because for a 

lot of them one bad project could wipe them out forever. 

Ms. SCHUBERT. Well, that is actually our concern. One bad 

project could wipe a subcontractor out forever, as well. So if you 

don’t have the performance and the payment bonds in place, then 

the other people, the other small businesses are definitely impacted 

because that protection is not there. In fact, there is some excellent 

testimony from a number of years ago by subcontractors who said 

they just would not participate on Federal contracts any longer 

until the size of the payment bond was made equal with the size 

of the performance bond. So you have both sides of the story. 

We represent sureties who write a tremendous number of bonds 

for small contractors. We actually have some statistics that I would 

be happy to provide for you at a later date in writing about the 

number of small contractors that have bonding. 
16 

It is extraordinarily rare that a surety company is interested in 

taking somebody’s house as collateral, particularly in this economy, 

but even in previous economies it just isn’t something that a surety 

wants to do. They have to have the capital, but, more importantly, 

they have to have the capacity to do the work. 

And if you look at—what Ms. Hillmer was talking about is analyzing the capability and the qualifications of the contractor. That 

is what a surety bond does, that is what the surety does, is they 

evaluate the contractors to make sure that they can do the work. 

We have a number of excellent programs that actually help small 

contractors get their first bond. 

Ms. HANABUSA. So you are acting like a pre-qualifier for the government as well, is what you are saying, by having that contract? 

Ms. SCHUBERT. Correct. And that is why the requirement was 

put in place in the first place, was contractors not performing—— 

Ms. HANABUSA. But most of the big contracts, like, for example, 

in Hawaii, they have to be able to bond a 50-year project. 

Ms. SCHUBERT. A 50-year project? 

Ms. HANABUSA. Fifty. That is the way military construction 

works in Hawaii. The housing is built on a 50-year project. So 

there are very few companies who are able to bond a 50-year housing project. 

Ms. SCHUBERT. That is correct. I would recommend that you 

change the requirement—because you are not going to get contractors to bond 50 years. 

Ms. HANABUSA. Congress did it well. I wasn’t here, but they did 

it well. And there are few who qualify for that. 

Ms. SCHUBERT. We would be happy to help with that. 

Ms. HANABUSA. Thank you. 

Ms. SCHUBERT. The direct answer to your question is there are 

alternatives. You are allowed to post letters of credit, you are allowed to post assets. And those assets have to be pledged to the 

Federal Government, and they are put in a federally insured financial institution. 

It is much more difficult to do that for a contractor than it is to 

get a surety bond. That is why we like working through the mentor-prote ́ge ́ programs and joint ventures to try and assist those contractors. 

Ms. HANABUSA. Thank you very much. 

Thank you, Mr. Chair. 

Mr. SHUSTER. Mr. Runyan is recognized for questions. 

Mr. RUNYAN. Thank you, Mr. Chairman. 

And, Ms. Hillmer, as we go through this, in talking, obviously, 

you say the double charge on bundling—and we get that, because 

it is a redundant overhead on both sides. But with your experience 

with acquisitions and contracting officers, as we have been through 

many of these hearings, a lot of time, and you mentioned it too, 

that there is no history, no research, and they are afraid to take 

that step and give them that contract. Therefore, a lot of the subs 

actually have to go through the primes to even get their foot in the 

door. 

And a lot of times—and we experienced this out in California— 

a lot of times the subs will just get bought up by the primes, and 
17 

their intellectual property [IP] and everything will just disappear, 

and it is not getting to the DOD. 

How do we deal with the lack of background and the lack of the 

acquisition or the contracting officer being out there and being exposed also? There has to be a way we can help that process. 

Ms. HILLMER. That is a very good question, and it is a difficult 

one to answer. I mean, I have been wrapping my brain around it, 

the division has been wrapping their brains around it. We are trying to come up with the answer to that. 

Part of it is about market research. Right now, DOD—none of 

the military services have really sufficient market research tools. 

How to get the small businesses to—how to get DOD to take that 

chance on a small business, that is part of the SBIR [Small Business Innovation Research] program, too, SBIR—which, by the way, 

thank you very much for reauthorizing that. It has made a huge 

difference to our members, and we are really appreciative. So SBIR 

is a good way to get some of the new technology into DOD. 

How to get new services and approaches and get DOD program 

managers to take that chance? Maybe it is part of the culture and 

rewarding them for taking chances and bringing in small business 

and creating a different kind of incentive program. 

You know, those are all things we have been thinking about. 

There is no clear-cut answer. It is a tough one. It is a tough, tough 

nut to crack. 

Mr. RUNYAN. I agree. And you hear it at every field hearing we 

have, and that is a frustrating aspect. And it is a big reason why 

this panel was put together. 

Ms. HILLMER. And I can tell you, with the bundling issue and 

IDIQs, the increasing use of IDIQs, you are not getting those small 

businesses involved who haven’t had past performance with DOD. 

None of those companies are invited to the table. So you are missing out on an entire possible industrial base there. 

Mr. SHUSTER. Which companies are not invited did you say? 

Ms. HILLMER. Small businesses who don’t have any experience in 

doing business with DOD. Because the primes who are going after 

these large IDIQs, the small businesses they want on their teams, 

just like everybody, they want them to have experience and past 

performance that they can use to win the work. And if you don’t 

have past performance with DOD, you don’t get invited to the 

party. 

Mr. RUNYAN. Thanks. 

I yield back, Chairman. 

Mr. SHUSTER. Ms. Sutton. 

Ms. SUTTON. Thank you very much, Mr. Chairman. I was sorry 

I had to miss the field hearings. I know that they were tremendously informative, and I am looking forward to gathering—— 

Mr. SHUSTER. If you will yield for 1 second? 

Ms. SUTTON. Certainly. 

Mr. SHUSTER. We brought up, you know, one of the topics—I 

think we brought up a number of times the topics we learned about 

corrosion. And, in fact, we brought it up to the chairman, and he 

looked at us and said, ‘‘How much?’’ 
18 

Ms. SUTTON. I know. I am telling you, I am so proud. Thank you 

so much for doing that. There is a lot of money to be saved and 

progress to be made by mitigating and preventing corrosion. 

But I digress. This has been very informative, as well, and I appreciate it. 

And I just want to clarify, Ms. Hillmer, I think that you said a 

few moments ago that you notice that the focus on small business 

in the past couple of years has been better, has been notably better. Is that correct? 

Ms. HILLMER. Within DOD, since they have the new director, 

there is a focus. And they have actually elevated him, directly reporting to the AT&L [Acquisition, Technology and Logistics]. 

Ms. SUTTON. Well, I appreciate hearing that. That is always the 

kind of news we want to know. 

There were some things that were discussed already that I would 

just like a little more clarification. 

Ms. Hillmer, let me ask you, on page 3 of your testimony, you 

talk about how the whole, the IDIQ contracts based on lowest 

price, the large primes are putting the squeeze on their smaller 

subcontractors. I would just like to explore that a little bit more. 

You talk about how that may reduce the quality or leave the defense market—they may leave the defense market space entirely. 

But could you just give me, without naming names, some sort of 

example of how quality might be at risk and anything else you 

want to talk about along these lines? 

Ms. HILLMER. Actually, I would like to give you a personal example of my own company, if I could. 

Ms. SUTTON. Certainly. 

Ms. HILLMER. We spent $8,000 to participate in a proposal, an 

IDIQ proposal. And the large prime won, and as soon as they won, 

the first thing they did was come back to us and say, ‘‘We need to 

slash your rates.’’ 

My company prides itself on the quality of the products and services that we provide to DOD. It is very different than some of the 

large contractors. We are very focused on what we do and very 

much personally involved and very creative. Doing low-quality 

work doesn’t interest us, and, quite frankly, I think it hurts the Department of Defense. 

Ms. SUTTON. Sure. 

Ms. HILLMER. And in order for us to continue with that contract, 

we would have had to cut our salaries, cut everything, and hire 

people who are not as creative and talented as the people that we 

have. And so we simply removed ourselves from the contract. So we 

will not be participating and providing our services under that contract to the Air Force. 

Ms. SUTTON. I appreciate that. Does anyone else have a comment 

on that? Okay. 

Sir, you were talking about the ratings when goals aren’t met, 

and Ms. Hillmer, you were also talking about the need to change, 

it starts at the top, and the need to sort of implement effective 

measures to make sure that those goals are met. Can you tell me 

how the ratings translate? I guess part of being an incentive or disincentive for certain behavior, so if a goal isn’t met, what is the result? What happens? 
19 

Mr. SHORAKA. Well, first of all, I should say that since there is 

emphasis on this from higher, from the White House down, there 

is a huge incentive, I think, for the agencies to meet the goals. But 

having said that, the score cards are published. If the goal is not 

met, their grade reflects that. However, the agency is also required 

to develop a plan, which we negotiate and which we agree to, on 

how they will meet their goals moving forward. In other words, we 

didn’t meet our goals last year; this is why, and this is how we are 

going to meet them next year. And that plan is developed in consultation with us. 

One point that I would add with regards to the subcontracting, 

I just wanted to add that under the Small Business Jobs Act, it 

does provide four additional provisions for prime contractors to 

meet their subcontracting goals, so there is more teeth for prime 

contractors to meet their own subcontracting goals that they 

present in their proposals. 

Ms. SUTTON. Would you like to add anything, Ms. Hillmer? 

Ms. HILLMER. I think your question was, what are the ramifications if they don’t meet? 

Ms. SUTTON. Right. 

Ms. HILLMER. And what I am hearing is that the ramifications 

are you have to report back and come back with a plan. I think 

that money talks, and if you affect a budget, they will feel it. 

Ms. SUTTON. Thank you. 

Mr. SHUSTER. Thank you. 

With that, Mr. West is recognized for questions. 

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

thanks to the panel for being here. 

You know, one of the important things you brought up was the 

invite to the table. I did, you know, 22 years with a fun organization called the Army. You know, when you go to the Association, 

the United States Army trade show, if you want to call it that, one 

of the things that I think we need to focus on, you don’t see a lot 

of the small businesses there, you know. 

Do we have something or can we start something like this AUSA 

[Association of the United States Army] that you see up in Washington, DC, or down in Fort Lauderdale, that can go around regionally, and we can start—instead of focusing on the big contracts, can 

we focus on, you know, small businesses, and we can highlight 

them, and especially some small businesses that don’t have the experience so they can get that invite to the table; is that something 

that we are looking at doing with some of these trade organizations? 

Mr. SHORAKA. Thank you. 

If I just may add, with regards to sort of matchmaking events, 

et cetera, we are working with the Department of Defense to ensure that we increase matchmaking events. As has been mentioned, they have a new Office of Small Business Programs director. I should also mention that the Administration has asked that 

senior level officials, Senate-confirmed officials participate in at 

least two small business matchmaking events from each agency, so 

that should increase the opportunities for small businesses to participate. And I think that level of commitment from the agency 

would encourage small businesses, would encourage program buy-
20 

ers at the agency to be present, but it would encourage small businesses to participate as well. 

Mr. WEST. Well, the AUSA winter symposium is coming up for 

Fort Lauderdale, which happens to be our district. Is there any 

kind of way that we can say to AUSA, you need to earmark out, 

you know, ‘‘X’’ amount of space on that floor for some of these local 

small businesses that do DOD type of contracts? I can name about 

10 off the top of my head. But is that something that we can go 

to them and, you know, try to get them to do? 

Mr. SHORAKA. I wouldn’t know the answer to that right off the 

top of my head, but I can certainly work on that when I get back 

to the office and get an answer to you. 

Mr. WEST. Ms. Hillmer. 

Ms. HILLMER. Well, I can speak from NDIA’s perspective. Actually, what we are doing this year, because NDIA has an annual 

small business conference, we are actually making it more regionalized, so we do attract the regional small businesses. 

Speaking from a small business point of view, the reason you 

don’t see those small businesses at these bigger events is because 

of the cost. When I first started my business, I spent a lot of money 

attending a lot of events, a lot of matchmaking, things like that. 

Didn’t result in any business. 

So I think what we have to do, and to the Department’s credit, 

Department of Defense, they are actually looking at this as well, 

how do you make these events a return on investment for small 

businesses who participate? How do you measure that? And, quite 

frankly, just ask them, did you get any business out of this, a year 

later, 2 years later, things like that? 

Regarding your specific question, can you ask an association to 

set aside some space or some time for small businesses? I say, try 

it. Let’s see what happens. 

Mr. WEST. Okay. You guys try that, and I will try it on my end. 

The other question I have real quickly, a good friend of mine, 

Colonel Pete Newell, started a great organization with the Army, 

called the Rapid Force Initiative, where they go over into these 

combat theaters of operation, they find out immediately the type of 

things that the men and women on the ground need. And they 

come back, and they go looking for small businesses that can provide those type of goods and services right off the shelf. What are 

we doing to try to, you know, use that type of small business innovation to cut down on this procurement and acquisition process 

that we have that, you know, can go from, you know, until ad infinitum, ad nauseam, so is there something we can do with that to 

take what Colonel Newell has with the Army and extend that out 

for the other branches of service or maybe make that a DOD type 

of, you know, agency? 

Mr. SHORAKA. If I can answer, with regards to the SBA, we have 

several cluster initiatives where we have some of them focused on 

the Department of Defense, which provides incentives for identifying opportunities, as you have mentioned. Also, as was mentioned 

earlier, the SBIR and STTR [Small Business Technology Transfer 

Program] initiatives, and with the 6-year extension that provides, 

you know, a level of comfort for small businesses and certainty. I 

think that encourages them to participate in the program, and I 
21 

would say that with the increase in the grants, that should also encourage them to participate in the program. 

Ms. HILLMER. I believe DOD has something called a Rapid Innovation Fund [RIF], where they are specifically targeting some small 

businesses and helping them get through—they have really neat 

products and services—and helping them get through the procurement process without having to jump through all the hoops. But I 

like your idea very much, and I think we should try to do it. 

Mr. WEST. Very well. 

Thank you, Mr. Chairman. I yield back. 

Mr. SHUSTER. Thank you. 

As we talked a little bit about here, I said in my opening statement and a couple other members mentioned about the Department of Defense, the project, the program managers being riskaverse, something was said, put some teeth into the mandates. I 

always get a little concerned when we are more forcing things 

down, sometimes you force bad decisions, and I think somebody 

was talking a little, how do you reward taking those risks? And in 

Washington, DC, everybody is concerned about taking a risk because The Washington Post or the Los Angeles Times or one of 

these newspapers pile on and say how terrible it was that this program manager or this Member of Congress or this company took 

a risk to try to do something, and obviously, it didn’t succeed. So 

as I am going through this process, and I will just try to throw this 

idea out there. You know, we have heard about, today we talked 

a lot about not enough market research out there, you know, DOD 

has to, they want to deal with somebody they have got experience 

with because they have experience and they know they can perform 

something. We have heard a lot about the DCAA [Defense Contract 

Audit Agency] and their auditing and how difficult that is, and so 

as I am thinking about this and trying to think a little bit outside 

the box, is it possible that—there are industries in America that 

self-regulate, the financial services industry, FINRA [Financial Industry Regulatory Authority] is self-regulatory, CPAs [Certified 

Public Accountants]; even, God forbid, the lawyers I think self-regulate to a certain degree. Is it possible to have an organization that 

is funded by industry that, you know, for one thing maybe certifies 

a company? Because a lot of the work when you go into—in Hawaii, we went into, and the arsenal and other places, we have gone 

into where a lot of the work they do, they are machine shops, and 

you are machining things, but industry all across America, not Department of Defense, they get things machined and built all the 

time that isn’t specialized to the Department of Defense. And sometimes we try to make it that, oh, it has got to be machined exactly 

this way or it is not going to fit where if you are manufacturing 

any kind of high-performance vehicle or item, it has got to be machined properly. So is it possible in your minds to set up an organization that maybe certifies companies and says, yeah, this company 

can machine or this company can manufacture this? Is it possible 

in that organization to sort of self-regulate and go in and do the 

audits on smaller businesses? And of course, you would still have— 

for instance, FINRA has the SEC [Security and Exchanges Commission] over top of it, and when FINRA goes in, the SEC some-
22 

times goes in behind and says, no, not good enough or you need to 

change. 

And I think we do two things, you know, I am saying this and 

across the street, if people hear me saying this, you know, we are 

going to eliminate a lot of DCAA employees, but push them out 

into the private sector, let them self-regulate. I believe they are 

going to have a better understanding of small businesses and, 

again, funded by, but FINRA’s been working for 70 years very well, 

as well as some of these other agencies, so when you talk about 

changing the culture over there, when you talk about how do we 

look at this differently, does that—when I say this thing to you, 

though not fully created in my mind, but is it completely out of the 

box, it is too crazy, or is that something that you see as potentially 

workable? 

Ms. HILLMER. It is an interesting thought. I hadn’t thought about 

self-regulation. The biggest negative I could see to that would be 

competition. Once you start regulating, giving the seal of approval, 

then those companies that don’t have that or don’t know how to get 

it or can’t afford it because there will be a price associated with it, 

then you kind of maybe knock them out. 

Mr. SHUSTER. But we are doing that already, aren’t we, if you 

don’t know how to get into DOD? And this is, you know, when I 

look at the FINRA model, I keep coming back to the industry, you 

want to be a financial broker in this country, you have got to go 

through the process and get certified by FINRA, and then you can 

sell the various products, where same thing, especially—you know, 

I am not concerned about the Boeings and the Lockheeds of the 

world, they have got it figured out. But it is very difficult for, and 

I have got small businesses come to me in my district all the time, 

how do I get business with DOD? And they think there is some 

magic, but it is get in there and pound away and go through the 

process, and it may take 3 years, 5 years, you know, 10 years to 

get business. 

Mr. SHORAKA. The only comment that I would make is, you 

know, my concern would be an additional layer of work for the 

small business. I mean, we hear about small businesses and getting on a schedule or small businesses and getting into the 8(a) 

program, as an example. Another layer of certification I would 

maybe be concerned about that or costs associated thereof. 

Another thing, just with my perspective, I come out of the small 

business government contracting world myself before I was appointed to the SBA, and I know, as a small business that was a 

government contractor, I know that the DCAA oftentimes gets 

thrown under the bus, but they are for—and, you know, this is the 

perspective of the SBA, they are, you know, stewards of the taxpayer dollars, and I do know that the DCAA has certain restrictions that don’t necessarily always apply to small businesses under 

contracts, from contract-to-contract provisions, but as stewards of 

the taxpayer dollars, they are sort of tasked with doing that work, 

but again, with the comment with regards to a certification process, 

that is the only thing I think that I would add. 

Mr. SHUSTER. Ms. Schubert. 

And with that, I believe Ms. Hanabusa has further questions. 

Ms. HANABUSA. I just had a follow-up for Ms. Schubert. 
23 

Ms. Schubert, is there like a percentage that is the cost of a surety bond on a project? 

Ms. SCHUBERT. There is. A premium on a surety bond is somewhere about 1 percent of the contract price or below. 

Ms. HANABUSA. So according to your testimony, you know, you 

were taking issue with the fact that the council went from 

$100,000 to $150,000, and you felt that it was going to leave unprotected any sub [subcontractor] that was doing work, I guess, on a 

$150,000 contract, am I reading that correctly? 

Ms. SCHUBERT. Yes, that is correct. 

Ms. HANABUSA. That would be a sub to a contractor is a $150,000 

contract? 

Ms. SCHUBERT. Right. 

Ms. HANABUSA. So what if we were to go to a situation where 

we unbundled and they all became general contractors, then 

wouldn’t a lot of the smaller guys also have to come up, if they 

were all about $150,000, that they would then all have to come 

with their own surety bond and payment bonds attached to them 

versus a general contractor who we assume would have that? 

Though I do know some generals who actually require certain large 

subs to carry subcontracting bonds as well, and the ones I was referring to are really the smaller subcontractors who, under the 

terms of their contract with the general, have to also carry surety 

and payment bond requirements, but if we were to, quote, 

unbundle it, wouldn’t we result with more surety bonds out there, 

too? 

Ms. SCHUBERT. There wouldn’t be more surety bonds, you would 

just have different contractors who had the contracts up to the 150, 

you are talking about the $150,000. 

Ms. HANABUSA. Right, but if they were in this normal structure, 

you probably would have one large contractor who would have a 

surety bond, and the subs, probably depending on how their general felt, may or may not be required to carry the bonds, correct? 

Ms. SCHUBERT. Right. And you could end up actually, as backwards as it sounds, you could end up with more surety bond requirements that way. The bond requirement covers the entire contract price, so say you have a $500,000—make something easy, a 

million dollar contract, you have one surety bond, and it is based 

on a million dollars. You divide it up into $150,000 contracts, you 

would still have the same overall value of surety bonds out there, 

it is just they would be provided by smaller contractors. 

Ms. HANABUSA. Different? 

Ms. SCHUBERT. From different people, yes. 

Ms. HANABUSA. Do you know what the percentage rate on the 

call on those bonds are, from your industry standpoint? Military 

construction, for example, what is the failure rate that we are looking at that has called upon the bonds? 

Ms. SCHUBERT. I can provide those statistics for you. That is one 

of the things our organization does, and one of the things to keep 

in mind is the point of—there are two points to the bond. One is 

the prequalification, as you described it very accurately. 

Ms. HANABUSA. Right. 
24 

Ms. SCHUBERT. And then the second is to pay if, in fact, the surety is wrong with their prequalification, they then turn around and 

pay, so I can provide the loss ratios for you. 

Ms. HANABUSA. Yes. 

Ms. SCHUBERT. And the premium volume, and we can—the way 

it is divided up is Federal versus non-Federal. I don’t believe that 

we have statistics specifically on military, but I can get you as 

much detail as we have. 

Ms. HANABUSA. Do you by any chance have statistics—this has 

been a curious thing for me. When they were in Hawaii, they got 

to see our example of corrosion, which was the stadium. And having been part of that litigation, I can tell you the litigation costs 

on many of it—I had a surety company—on the surety issues far 

exceeded the actual original construction costs, so do you have statistics that when we start to do all of this, at what point is it, you 

know—did all—everything associated with the bond exceed the actual benefit that we receive? In other words, did government ever 

have to step in, finish the project anyway? Do you have any statistics like that? 

Ms. SCHUBERT. No. We have plenty of cases, I am sure, going 

both ways on that, and I would be happy to sit down and talk with 

you about that. 

Ms. HANABUSA. Sure, I would appreciate it. Thank you. 

Thank you, Mr. Chair. 

Ms. SCHUBERT. Could I also—one suggestion that might address 

not these questions but the earlier question, the SBA surety bond 

guarantee program is a very useful tool for small contractors to get 

the bonds, so we work very closely with SBA on that, and if you 

would like, we could also sit down with you about the changes that 

are necessary so we can help increase the number of contractors 

who can get the benefit of the bond guarantee program. 

Ms. HANABUSA. I would appreciate that. Thank you. 

Ms. SCHUBERT. You are welcome. 

Mr. SHUSTER. Thank you, Mrs. Hanabusa, and thank you for 

hosting us out there in Hawaii. 

And also, Ms. Sutton, we also saw examples of corrosion in 

Palmdale with some of our Air Force fighters, and they are telling 

us that coming in from Hawaii from Hickam Air Force Base, F–22s 

are going to come in, and because of the climate there, as well as 

some other places in the country, corrosion is a huge problem, so 

you were on our mind. 

No, I think of solving problems, and that is a big problem to 

solve. 

Mr. LARSEN. No, we don’t have problems like that in the Northwest also, if anybody wants to send the stuff there, it is fine. 

Ms. SUTTON. It is good because we can actually—we do it in the 

United States. 

Mr. SHUSTER. Absolutely, absolutely. 

Well, again, I want to thank all of our panelists for being here. 

Appreciate you taking the time and providing us with your insights. And again, we are going to continue to do our work here. 

We are charged with coming up with some concrete language for 

legislation to help improve the environment for the folks that are 

working in the defense industrial base. And it is my thought that 
25 

this—we were set up for 6 months. It is my thought this is going 

to take more than 6 months to really get at the core because when 

we talk about things like changing the culture and how do you get 

people to not be risk-averse, it is a difficult challenge. But it is 

something I think we are going to need to do, especially facing the 

kind of budget constraints we are going to have for the foreseeable 

future and also the need to continue to come up with new and better ways to defend our country, to give our warfighters the tools 

they need to keep America safe and secure. 

So, again, thank you for being here today. Appreciate your time. 

And the hearing is adjourned. 

[Whereupon, at 4:17 p.m., the panel was adjourned.] 

A P P E N D I X 

JANUARY 17, 2012 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

JANUARY 17, 2012 

(31) 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
49 
50 
51 
52 
53 
54 
55 
56 
57 
58 
59 
60 

Æ