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Hearing Transcript on Contract Bundling Oversight.

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CONTRACT BUNDLING OVERSIGHT

 



 HEARING

BEFORE  THE

SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

OF THE

COMMITTEE ON VETERANS' AFFAIRS

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION


JULY 26, 2007


SERIAL No. 110-39


Printed for the use of the Committee on Veterans' Affairs

 

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COMMITTEE ON VETERANS' AFFAIRS

BOB FILNER, California, Chairman

 

CORRINE BROWN, Florida
VIC SNYDER, Arkansas
MICHAEL H. MICHAUD, Maine
STEPHANIE HERSETH SANDLIN, South Dakota
HARRY E. MITCHELL, Arizona
JOHN J. HALL, New York
PHIL HARE, Illinois
MICHAEL F. DOYLE, Pennsylvania
SHELLEY BERKLEY, Nevada
JOHN T. SALAZAR, Colorado
CIRO D. RODRIGUEZ, Texas
JOE DONNELLY, Indiana
JERRY MCNERNEY, California
ZACHARY T. SPACE, Ohio
TIMOTHY J. WALZ, Minnesota

STEVE BUYER,  Indiana, Ranking
CLIFF STEARNS, Florida
JERRY MORAN, Kansas
RICHARD H. BAKER, Louisiana
HENRY E. BROWN, JR., South Carolina
JEFF MILLER, Florida
JOHN BOOZMAN, Arkansas
GINNY BROWN-WAITE, Florida
MICHAEL R. TURNER, Ohio
BRIAN P. BILBRAY, California
DOUG LAMBORN, Colorado
GUS M. BILIRAKIS, Florida
VERN BUCHANAN, Florida

 

 

 

Malcom A. Shorter, Staff Director


SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
STEPHANIE HERSETH SANDLIN, South Dakota, Chairwoman

JOE DONNELLY, Indiana
JERRY MCNERNEY, California
JOHN J. HALL, New York
JOHN BOOZMAN, Arkansas, Ranking
RICHARD H. BAKER, Louisiana
JERRY MORAN, Kansas

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Veterans' Affairs are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

 

       

C O N T E N T S
July 26, 2007


Contract Bundling Oversight

OPENING STATEMENTS

Chairwoman Stephanie Herseth Sandlin
        Prepared statement of Chairwoman Herseth Sandlin
Hon. John Boozman, Ranking Republican Member
        Prepared statement of Congressman Boozman


WITNESSES

U.S. Small Business Administration, Calvin Jenkins, Deputy Associate Administrator, Office of Government Contracting and Business Development
        Prepared statement of Mr. Jenkins
U.S. Department of Defense:
Lieutenant Colonel James A. Blanco, Assistant to the Director, Office of Small Business Programs, Department of the Army
        Prepared statement of Lieutenant Colonel Blanco
Anthony R. Martoccia, Director, Office of Small Business Programs, Acquisition, Technology and Logistics
        Prepared statement of Mr. Martoccia
U.S. Department of Veterans Affairs, Scott F. Denniston, Director, Office of Small and Disadvantaged Business Utilization
        Prepared statement of Mr. Denniston


CSSS.NET, Bellevue, NE, Lisa N. Wolford, President and Chief Executive Officer
        Prepared statement of Ms. Wolford
MCB Lighting and Electrical, Owings, MD, Charles Maurice Baker, President and Chief Executive Officer
        Prepared statement of Mr. Baker
MicroTech, LLC, Vienna, VA, Anthony R. Jimenez, President and Chief Executive Officer
        Prepared statement of Mr. Jimenez


SUBMISSION FOR THE RECORD

Veteran Corps of America, John R. Wheeler, Executive Vice President, statement


MATERIAL SUBMITTED FOR THE RECORD

Post-Hearing Questions and Responses for the Record:

Hon. Stephanie Herseth Sandlin, Chairwoman, Subcommittee on Economic Opportunity, Committee on Veterans' Affairs, to Anthony R. Martoccia, Director, Office of Small Business Programs, Acquisition, Technology and Logistics, U.S. Department of Defense, letter dated October 30, 2007, and DoD responses


CONTRACT BUNDLING OVERSIGHT


Thursday, July 26, 2007
U. S. House of Representatives,
Subcommittee on Economic Opportunity,
Committee on Veterans' Affairs,
Washington, DC.

The Subcommittee met, pursuant to notice, at 2:03 p.m., in Room 334, Cannon House Office Building, Hon. Stephanie Herseth Sandlin [Chairwoman of the Subcommittee] presiding.

Present:  Representatives Herseth Sandlin, Donnelly, Hall, Boozman.

OPENING STATEMENT OF CHAIRWOMAN HERSETH SANDLIN

Ms. HERSETH SANDLIN.  Ladies and gentlemen, the Committee on Veterans’ Affairs Subcommittee Economic Opportunity hearing will now come to order on Contract Bundling.

Before I begin with my opening statement, I would like to call your attention to the fact that Mr. John Wheeler, Executive Vice President of the Veteran Corps of America, has asked to submit a written statement for the record.  If there is no objection, I ask for unanimous consent that his statement be entered for the record.  Hearing no objection, so entered.

[The statement of Mr. Wheeler appears in the Appendix.]

Ms. HERSETH SANDLIN.  Some of the panelists and those of you in the audience today may recall that we had a hearing in May on the subject of veterans' entrepreneurship and self-employment and then an additional hearing earlier this month on Federal procurement and the three-percent set aside rule.  During these hearings, many of our panelists expressed several concerns, such as the failure of Federal agencies to meet the three-percent set aside for service-disabled veteran-owned businesses (SVDOBs) and a lack of knowledge on current laws on the part of many contracting officers.  While this is discouraging to me, I am pleased to hear that some agencies are moving ahead to address some of these concerns.

Veterans of our armed forces have been, and continue to be, a vital part of securing our Nation’s economic prosperity and development.  When given the opportunity to start and manage their own small businesses, these brave men and women add tremendous value to the success of our economy as they strive to lead a successful life back in the civilian workforce.  Time and time again, we have seen these veterans, many disabled, return home to live out this American dream that they so bravely fought to protect.

With over 17,000 veteran-owned small businesses back in my State of South Dakota, I am concerned that we are not able to give veteran entrepreneurs the proper assistance to expand their enterprises.  I am also concerned that we are not giving them enough opportunities to compete for more contracts with the Federal Government.

I applaud the efforts of the Federal agencies to address the needs of our veterans while trying to secure goods and services from competitive suppliers.  I know that, if given the opportunity, our veterans can compete, as they do every day.

I appreciate the opportunity to work with Ranking Member Boozman and the distinguished Members of the Subcommittee as we continue to work in a strong bipartisan effort to meet the needs of our Nation’s veterans and the challenges they face.  I look forward to hearing from our panelists and to discussing ways to mitigate the negative effects of contract bundling on small businesses.

[The statement of Chairwoman Herseth Sandlin appears in the Appendix.]

Ms. HERSETH SANDLIN.  I now recognize our Ranking Member, Mr. Boozman, for any opening remarks he may have.

OPENING STATEMENT OF HON. JOHN BOOZMAN, RANKING REPUBLICAN MEMBER

Mr. BOOZMAN.  Thank you, Madam Chair.  It is important that contracting processes promote small business development, especially those owned by veterans and service-disabled veterans.  In the 109th Congress, you and I passed what may be called landmark legislation that improved opportunities for veteran and service-disabled veteran-owned businesses at the U.S. Department of Veterans Affairs (VA). 

This hearing is certainly not about bashing large businesses.  In fact, I suspect the goal of most entrepreneurs is to be successful and outgrow their small business status.  Large companies have capabilities vital to the national economy that cannot be replicated by small business.  But also, small businesses provide a significant portion of the Nation’s jobs.  In fact, they are the backbone of our economy in creative thinking and that is certainly very vital to our economy.

I believe Ms. Wolford’s testimony provides a good snapshot of that contribution.  I want to hear from the witnesses, especially those representing the government, how we can ensure that our veteran entrepreneurs get their fair share of the Federal procurement buy.  Based on their written testimony, I believe that we will need to tighten up the procurement changes we made in P.L. 109-461 and I would like to work with you, Madam Chair and staff, to see if we can make that happen.

There is also another serious problem facing small business and that is the diversion of dollars meant for small business to companies that are often very large corporations.  While there are sometimes valid reasons such as a company outgrowing its small business status over the period of the long contract, a recent article in the July 16th issue of Defense News states that 37 percent of small business set aside dollars, about $11.9 billion went to the Nation’s largest companies.

What we will hear today will be valuable to our work with VA, but also I urge you to present this case to the Small Business Committee and other committees with jurisdiction over the Federal agencies.

Thank you, Madam Chair.

[The statement of Congressman Boozman appears in the Appendix.]

Ms. HERSETH SANDLIN.  Thank you, Mr. Boozman. 

I now would like to invite our first panel of witnesses to the table, and as I do so, I will introduce you to the rest of the folks that are here today.  Joining us we have Mr. Charles Baker, President and Chief Executive Officer of MCB Lighting and Electrical, Mr. Anthony Jimenez, President and Chief Executive Officer of MicroTech, LLC, and Ms. Lisa Wolford, President and Chief Executive Officer of CSSS.NET.  Welcome, and we look forward to your testimony.

Mr. Baker, we will start with you, and just a reminder, as in prior hearings, your entire written statement and testimony has been made part of the record.  If you could summarize that and share other views with the Subcommittee in the five minutes you have availabe, we can get to questions as quickly as possible and engage in a discussion that way.  You are recognized, Mr. Baker, for five minutes.

STATEMENTS OF CHARLES MAURICE BAKER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MCB LIGHTING AND ELECTRICAL, OWINGS, MD; ANTHONY R. JIMENEZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MICROTECH, LLC, VIENNA, VA; AND LISA N. WOLFORD, CHIEF EXECUTIVE OFFICER, CSSS.NET, BELLEVUE, NE

STATEMENT OF CHARLES MAURICE BAKER

Mr. BAKER.  Good afternoon, Madam Chair and Ranking Member—

Ms. HERSETH SANDLIN.  Can you make sure that the microphone is on and pulled pretty close to you there?

Mr. BAKER.  Can you hear me now?

Ms. HERSETH SANDLIN.  I am not sure that it is—

Mr. BAKER.  How about now?  Okay.  Good afternoon, Madam Chairwoman, Ranking Members of Congress, other Members of the Subcommittee, veterans. 

I would like to take this opportunity to—sorry about that.  I would like to take this opportunity to talk about bundling.  As a 20-year veteran who, in 20 years of working in the Federal Government, I had a lot of experience with the mission of the military and bundling contracts.  So I would just like to talk about my personal experience with bundling, first of all.  And then I want to focus on more of the solutions I look at versus, you know, like Mr. Boozman said about bashing big businesses.  I think it is more important that we look at how do we move forward and how do we correct some of the issues that are affected by bundling, instead of looking back at the problems that bundling caused.

So basically, one of the biggest issues that I experienced with bundling as a member of the military and as a private business, the main thing was, we had a lot of procurements that were under $100,000 that when you go between $2,500 and $100,000, it becomes a big problem in Federal procurement, okay, and a big problem for the government customers.

We end up spending a lot of money and a lot of time trying to make procurements under $100,000.  Now, what Defense Logistics Agency (DLA), which is an agency within the U.S. Department of Defense (DoD) did, they went and combined for MRO, which is Maintenance Repair and Operations type facilities, they went and combined all of the requirements that were under $100,000 and they put all of these requirements under one, under like five regional contracts.  They were all half a billion dollar contracts. 

Now, these were all types of requirements that were normally going to small businesses and this had a very, very bad effect on the local businesses, and on myself, as even a person who, as a government, a person who responsible—I am a retired Chief of Facilities for Andrews Air Force Base.  So when I would need something that costs $4,000, instead of me being able to readily get it, I would have to go to DLA and pay a 20-percent surcharge to be able to get this.  This would—and none of these things ever went through base contracting or anything like that.  The issue was that it was about convenience and getting the things done, or using the procurement system.

And what we had to do was get the job done, because if I had the base and half the water was down to the base, I couldn’t worry about how much it cost.  I had to worry about I needed it now.  Okay?  And this bundled contract was the vehicle for me to be able to get it.  But let’s keep in mind, it would cost me an additional 20 percent for me to be able to do this.

Now, like I said, it is not about being negative and knocking what is going on.  It is about how do we look at instituting a corrective solution to this problem.  Okay?  And this is where I believe that we have to look at bundling as a whole and whether it is really in the best interest of the government, because I believe that all procurement decisions should be based on what is in the best interest of the government, okay, not what is more convenient for a contracting officer, you know, not that there is a big company that has a lot of influence, not that, you know, anything.  It is the mission that comes first.  And we have to make sure that we focus on the mission and when we focus on the mission, we have to take the customer into consideration.  We have to take the industry into consideration, and we have to also take the contract into consideration.

And it is my opinion that we should have a joint input.  If we want to really solve the problem, we need to have all three involved.  We need to have the synergistic approach to being able to resolve the problems.  It is going to take input from the customer, it is going to take input from contracting, and it is going to take input from industry.  If we want to resolve bundling, we are going to have to put our heads together and work together as a team to be able to see how we can satisfy the mission in a better method.  Okay? 

And I will reserve the rest of my time for questions.

[The statement of Mr. Baker appears in the Appendix.]

Ms. HERSETH SANDLIN.  Thank you very much. 

Mr. Jimenez, you are now recognized.

STATEMENT OF ANTHONY R. JIMENEZ

Mr. JIMENEZ.  Good afternoon, Chairwoman Herseth Sandlin, Ranking Member Boozman, distinguished Members of this Subcommittee and distinguished guests.  It is a privilege to be here today and I want to thank the Subcommittee for once again allowing me to share my thoughts, this time regarding contract bundling.

My name is Tony Jimenez and I am the Founder and Chief Executive Officer and President of MicroTech, LLC.  We are a Hispanic-owned and service-disabled veteran-owned small business and we are located in Vienna, Virginia.  I retired from the Army in 2003 and after serving 24 years on active duty, I started MicroTech, LLC in 2004.  Today, I employ over 50 people, have become a powerful job creation engine and a force for economic development in my community and in my State.

MicroTech has over 20 prime contracts with the Federal Government, at least as many subcontracts, and many of those contracts that we support as either a prime or a subcontractor are contracts that were at one time bundled.  And many are still bundled.  That is, that these contracts were previously satisfied by two or more contractors and were combined to achieve cost savings, price reduction, quality improvements, enhanced performance or better terms and conditions for the government.

I personally think that makes sense for the taxpayers and for the government.  Some of those bundled contracts have done exactly what they were intended to do and in addition, they have also been able to provide service-disabled veteran small businesses such as mine with great growth and opportunity.  Others, unfortunately, have not.

As a former contracting officer for the Federal Government, I was involved in a number of contract consolidation initiatives, or bundling.  Many of those initiatives start off as great plans and took all of the procurement management factors into consideration.  We established, during the initial phase, very aggressive small business goals that we believe could reasonably be met if they were given the proper attention and effort.  Those plans included all of the steps I have talked about, cost savings, quality improvement.

However, in many of those cases, the initiatives, which eventually become requests for proposals, RFP’s, had been stripped of many of their social economic small business goals.  On many of them there was no mention whatsoever of subcontracting initiatives for service-disabled veterans or veteran small businesses, even though they were in the original documentation.

The normal procedures for contract bundling requires agencies to provide justification.  The problem with the procedure is that the decision is oftentimes made in a vacuum and small business have no means to be able to object to the bundling decisions and are at the mercy oftentimes of the decision makers.  Perhaps the most overlooked contracting bundling problem for small business is the myth that big businesses who receive very large bundled contracts will make it up to the small businesses who receive a portion of the subcontract under the subcontracting plan.

Large businesses are almost, in every instance I know of, required to provide small business plans as part of their bid.  These plans are supposed to match the small business goals laid out in the Federal Acquisition Regulation (FAR), which in most instances is 23 percent.  However, in a number of cases, small business goals are never reached.

Today, there is no current status by which large businesses are measured or graded with respect to their actual subcontracting plan or goals and no one looks at the type of work that the big businesses are giving to the small businesses that are part of that subcontracting plan. 

In addition, when they fail to meet the standard, I personally know of no case where liquidated damages have ever been assessed against a large business for failing to make, and I use the word good faith effort to comply with the subcontracting plan.  And that is what is required in the FAR, a good faith effort.  Many of the contracting officers I know and have worked with feel that any effort to penalize a large business for, and this is a quote, "failure to make a good faith effort to comply with the subcontracting plan as required in FAR21-219-16."  They feel it would be a waste of time.  What is a good faith effort?  How do you establish whether a good faith effort was made?  If you are a contracting officer with more time than you have, or more work than you have time, are you really interested in fighting a battle that you can’t win with ammunition like good faith?

The objective of the government should be to find ways to use the power of procurement reform to help small businesses, while at the same time seeking out ways to perform services and purchase products more efficiently and for a lower price.  One of the unbundling strategies for the U.S. Small Business Administration (SBA) is to collect and disseminate examples of successful strategies for maximizing small business opportunities.

I think some of the solutions are consolidating contracts so small businesses can share on the benefits of bundling.  What that means is, give some of those bundle opportunities to small businesses.  I think orders should be placed under small business government wide Government Wide Acquisition Contracts (GWACs), such as Veterans Technology Services (VETS), such as Solutions for Enterprise Wide Procurement (SEWP).  Those are the only two large indefinite delivery/indefinite quantity (IDIQ)-type GWACs, bundled contract type of capabilities that I know of where service-disabled veterans are primes.

I think that the government should solicit quotes for U.S. General Services Administration (GSA) Federal supply schedule orders from small businesses or other socioeconomic small groups.  Even though the Federal supply center is not allowed to set aside business, they are allowed to limit consideration on small business and socioeconomic small business.  Once again, the U.S. Department of Affairs has done an outstanding job of using this vehicle and have limited consideration to service-disabled veteran-owned small businesses on numerous occasions.

Create a small business participation enforcement team.  Consider taking a portion of the savings realized through contract bundling and implement a small business plan enforcement team that enforces small business participation in accordance with the request for proposal.

Consider hybrid contract bundling, teaming such as what GSA uses, called contract teaming arrangement.  And last, establishing a Mentor Protégé Program at the Small Business Administration for veteran and service-disabled veteran-owned small businesses.  The benefits of establishing a service-disabled veteran Mentor Protégé Program at SBA that mirrors the 8(a) program is numerous.

I also believe that a proliferation of long-term indefinite delivery and indefinite quantity contract vehicles has also become a serious problem.  There are a number of IDIQs that have very, very little small business participation, and put the goals of the military, in some cases, and the goals of other small business or, rather, agencies that wish to give business to small businesses at risk.

It is difficult to set aside contracts for service-disabled veterans, 8(a), women-owned, HubZone small businesses when the prime contracts are all going to the large businesses or a very small number of small businesses.

Other than VETS and SEWP, there have been very few large IDIQ contracts for service-disabled veterans.

I am going to jump ahead because I am running out of time.  So I want to thank you, Madam Chairwoman, distinguished Subcommittee Members.  I appreciate the time you and other Members of the Committee on Veterans' Affairs have spent on this and other topics concerning veteran entrepreneurship.

I think I speak for all veteran entrepreneurs when I say how very proud we are of this Committee and the hard work you and your staff members do for veterans.  Thank you for helping to level the playing field, for believing in us and our ability as business men and women to give back to the Nation that has given us so much.

This concludes my testimony and I would be happy to answer any questions you have.

[The statement of Mr. Jimenez appears in the Appendix.]

Ms. HERSETH SANDLIN.  Thank you, Mr. Jimenez.  We appreciate your testimony and your written statement, some of which you didn’t get a chance to get to, but we will want to visit in some of the questions that we will pose.

Ms. Wolford, we would now like to recognize you.

STATEMENT OF LISA N. WOLFORD

Ms. WOLFORD.  Thank you.  I want to thank the Subcommittee for the opportunity to speak today on this critically important issue of contract bundling and its impact on the SDVOB community. 

I have been in business for over ten years and the last six years exclusively with the Federal Government.  I have never worked on the Federal Government side other than my Marine Corps time, so I am not like these two gentlemen.  I am a veteran of the Marine Corps and my firm is a SDVOB women-owned business 8(a) small disadvantaged business.  We provide information technology (IT) engineering systems and solutions to the Federal Government, both in DoD and civilian agencies.  Therefore, the majority of my testimony will regard contract bundling concentrating on the IT sector.

We have an excellent record of past performance and yet even with this, my firm has been dramatically impacted personally by the issue of contract bundling.  I would like to remind each of you that veterans have vested into their citizenship rights in a way that no other group has through the service in our country. 

Small businesses do not have access to the money or the access to PACs or lobbyists that the large businesses have.  Consequently, many laws and modifications to regulations make it into the FAR and business practices of the government that favor large business and are harmful to small business.  And as you know, the economic preference for SDVOBs is fairly new to the Federal market, and therefore, the impact to SDVOBs, I believe, is greater to the average small business.

I synopsized my oral testimony, but my full written testimony has other detailed facts in it that I won’t go through at this time regarding small businesses and contract bundling. 

In 2001, the Army had a record of contracting 27.2 percent prime contracting dollars with small businesses and 35 percent of that was through the Army Corps of Engineers.  Now that all IT service contracts have been bundled, their achievements will go down substantially and that has just happened this year just recently.

It is a known fact that the majority of contract bundling occurs within the DoD environment and I consider this particularly reprehensible since if anyone in the Federal Government bears a greater responsibility of veteran business centers, I think DoD and the VA should be held to a higher standard in culpability.  I can say that I have a great deal of respect for the substantial challenges and changes that Mr. Scott Denniston has faced and wrought in the VA.  And by the way, I wrote that in there before I knew he was appearing today.

Multiple work contracts are another issue and they are subject to FAR clauses that require the contracting office to allow all awardees fair opportunity to compete on the individual task orders.  This means that small businesses have to compete head to head with the largest of Federal contractors.  This is another form of Federal contract bundling, although it doesn’t get measured as such, and therefore, has the same negative impact on the small business community.

Another abuse of the small business community is the way GSA scheduled contract buys occur that are not set aside opportunities.  If a contracting officer sends out an opportunity to bid only to a particular socioeconomic group, say on a schedule 70, they can count the entire award as a small business award.  However, since it is not a set aside, work share rules of 51 percent do not apply.  So the small business can do as little as zero percent, but the agency will get a hundred percent credit.  This practice is legal currently through the rules of the FAR and GSA contracting and these rules must be modified to prevent such atrocities.

My firm has been regularly asked to bid on such opportunities by multiple Federal agencies.  It is the standard practice across the Federal Government.  Since IT purchases represent such a large portion of the Federal budget, I think it is particularly imperative that attention is paid to this sector.  In Nebraska, where I am from, United States Strategic Command (STRATCOM) is one of the largest commands.  It is the joint forces command.  As you are probably aware, there is a contract that was bundled called ITCC that is about $550 million over ten years.  That contract used to be a lot of small business contracts.  It has effectively shut out all opportunities for small businesses in that area because between STRATCOM and the Corps of Engineers, that was the Federal opportunities in Nebraska for IT services.

Some solutions I have written down that I would like to suggest is don’t allow contract bundling if it will prevent a command or an agency in a particular geographical region from meeting its small business prime contracting goals.  Do not allow contract bundling if it will bundle all requirements for a particular North American Industry Classification System (NAICS) code at that command or agency in a particular geographical region.  Some people want to talk about, you know, a particular agency and only talk about what has happened in Washington, DC.  And probably not all of us here are from DC.  So I think it is really important to look at the geographical regions because that does directly impact our veterans wherever they are starting their businesses.

Require GSA schedule buys that are not set asides to only allow the government to count towards their small business goals that percentage of the business that the small business actually executed versus their large business subcontractor.  Charge FAR part 16 to allow awardees under a Multiple Award Contract (MAC) to have restricted small business competitions for any reason post-award of the blanket purchase agreement, which is what the issue is.  Implement the findings, the full findings from the Office of Management and Budget (OMB) report titled "A Strategy for Increasing Federal Contracting Opportunities for Small Businesses" that was dated October 29, 2002.

I appreciate your holding this hearing today and I thank you for giving me the opportunity to speak and share my experience with you.  I am glad this hearing is being held and I hope that my testimony will help you to develop some real solutions to this critical issue.  And I would happy to answer any questions you may have.

[The statement of Ms. Wolford appears in the Appendix.]

Ms. HERSETH SANDLIN.  Thank you very much, Ms. Wolford.

I appreciate the testimony of all three of our witnesses.  I am going to start with one or two questions and then turn it over to the Ranking Member and then to Mr. Hall.  Then we will come back to explore some other areas.

Mr. Boozman and I were talking as you spoke, Mr. Baker, because you mentioned the 20-percent surcharge that you would have to go through after you described that MROs under $100,000 all got combined into five regional bundled contracts that were about a half a billion dollars apiece.  Is that what you testified to?  Then you had to go through DLA to have your needs met at your particular installation and that didn’t meet the needs often in your case at the installation, as well as the local small business needs.

Could you tell us more about where the 20-percent surcharge is coming from?  Just explain with a little more detail what you mean by that.

Mr. BAKER.  First of all, the 20-percent surcharge, I believe the maximum that can be charged is 23 and a half percent.  And traditionally, the prime contractor gets about 16 and a half percent and then DLA gets 3.9 percent on the DLA contract.  Okay?  So that is where you come up with the 20 percent.  But the real issue is that what we run into, you know, being in the military and having to perform the mission, when we need, what we need to perform our mission, we need to have choices and when you are between—and this micropurchase threshold got changed to $3,000.  So it is $3,000 to $100,000 now.

But the problem is, is that when you go between $3,000 and $100,000, there is like no way for you to get anything quick.  I mean, I had situations where I had no water and I would have to spend another $20,000 to make a repair on something that costs $4,000, because even though under urgent and compelling needs I could actually get the product that I need.  The problem was, the problem was it would take an enormous amount of time for us to be able to get through the contracting process for a simple procurement that would wind up costing $4,000 to buy a $4,000 part.

Now, what I suggest, and I have talked to some people in DoD, that what we needed to do is, we need to create a innovative method where we can actually take the procurements that are under $100,000 which are exclusively reserved for small business, and I don’t know why my phone won’t cut off.  Excuse me about that.  What we need to do is make sure that when we develop a plan, that we can, number one, make sure all that business is going to small business.  That is the first thing.

Ms. HERSETH SANDLIN.  So let me—

Mr. BAKER.  Go ahead.

Ms. HERSETH SANDLIN.  I want you to describe that further in terms of your conversations in that plan.  In what you described, when you have a consolidation into five regional contracts—

Mr. BAKER.  Yes, ma’am.

Ms. HERSETH SANDLIN.  —all of those contracts are required to submit a plan for subcontracting to small businesses?

Mr. BAKER.  That is one hundred percent correct, yes.

Ms. HERSETH SANDLIN.  Did they?

Mr. BAKER.  Well—

Ms. HERSETH SANDLIN.  Did you have options at the local level?

Mr. BAKER.  Well, I am sure that the plans are submitted.  The problem is, what happens—this is the reality.  And I am talking about this from when I was a government employee, not as a business owner.  What I found that was happening was that what they would do is, they would get the contract and then if I told them I wanted a part that cost $4,000, what they would do is they would go to the manufacturer.  They would circumvent the local supplier.  They would go straight to the manufacturer so they could make more profit, because basically what we had to do to make sure that we get the best value for our buck, was we would have to go out and negotiate the best price that we could find in the local market—and let’s say the valve cost $5,000.  Well, we would have to tell them we want you to buy this valve for $5,000 from this place and this is the phone number.  We don’t want you to go out and find anything any higher, okay, because we would come back—sometimes they come back with a $12,000 valve and it is the same valve and we are like woah, woah, woah. 

So we would have to go out and basically do the market research and come back and tell them, this is what we found, this is what we want.  It is right here.  It is local.  But because of the system, we would have to go through DLA and pay 20 percent instead of being able to get this through local contracting.  And see, a lot of local contracting people aren’t even aware that this is happening.  And this is happening to the tune of $2 million per Air Force Base.  I can’t speak about any other military.  But on average, you spend about $2 million on MRO-type items under $100,000. 

And the problem with this is that this destroys the creation of small businesses and the whole problem that we are having with the lack of capacity is all based on the fact that if we don’t have some type of system where you can get constant work and where you can get work that you can handle when you are small companies, then how are you going to ever grow into being small—into a big business?  How are you going to ever become a viable sustainable competitive business?  It is almost impossible.  You know, so by having all of these requirements under the $100,000 bundled and then taken away from small business, it really cripples the whole small business market.

Ms. HERSETH SANDLIN.  Okay.  Very compelling testimony and I want to come back in a little bit to pursue more of the discussions you had had about the solution.  It sounds to me like the primary justification for contract bundling, which is to save taxpayers dollars, in many instances isn’t even being realized due to a lack of monitoring to ensure that subcontracts go to local small businesses.  I think that is what you're saying in some cases.

Mr. BAKER.  That is one hundred percent correct.  It is my belief that I could look at those contracts that are bundled, that are supposed to save ten percent, and I think they could save more.  You could save ten percent by reversing it and doing it the way it was done or doing a different approach.  I mean, this is what I am saying about how we need to take industry and the customer and contracting and we need to brainstorm on how this process works, because if you look at it from a contracting standpoint, and like Tony, I have contracting experience, too.  If you look at it strictly from a contracting standpoint, you don’t understand the mission.  Okay.  So you have to take the mission into consideration, because that is the most important element.

The problem is that now the customer, who understands the mission, you need to now understand industry.  Okay.  And the whole problem is, is no one understands—there is no synergy.  There is no synergistic relationship between everybody.  And that is what needs to happen.  If we really want to, you know, mitigate bundling, we have got to have creative ways where we can really mitigate, you know, the effects of bundling.

Ms. HERSETH SANDLIN.  Thank you.

Mr. Boozman?

Mr. BOOZMAN.  Let me start with Mr. Baker.  And again, I want all of you all to comment on this.  I guess I am trying to really sort this out as far as the bundling.  You bundle for different reasons.  I think everyone understands that it is the will of Congress to try and make more room for small business.  And yet, we toughen those things up.  I guess I would like for you all to comment about with the bundling, how much of that is the result of increased bundling because we have tightened things up as a way to avoid parsing out to small business and being favorable to large business.  And yet there is other cases where bundling, I am sure, is appropriate.  And then there is other cases where perhaps we just don’t have as many procurement officers as we need and this is a very convenient way of doing things, for them to get their job done, and again, stay out of jail in doing that.

So can you all comment about that, as to where you see—and again, we have got a couple guys that have kind of played that game somewhat.  And then Ms. Wolford is here and kind of seeing it in a different light.  What is your gut feeling as to what is going on in relation to those three?  Does that make sense?

Go ahead, Ms. Wolford.

Ms. WOLFORD.  I think—my opinion is there are a lot of different reasons that contract bundling is done.  One is, I think, plain and simple, it is easier in some regards and there is not a lot of rules against it really.  Once—my SBA reps have told me that so long as the government runs through the right hoops, they can bundle pretty much anything that they want to.  And they do use a justification that will be cheaper to the government because they will have less procurement officers that have to watch over the contract.

However, like what I said with the ITCC program and the Corps of Engineers impact on the State of Nebraska, those have both been bundled, I think, for ten-year life spans definitely on ITCC and I think the Corps of Engineers almost ten years as well.  What effectively that does, is it completely prevents any small business from entering that market if they are not currently on that contract, because if you aren’t a part of that team when that is being bid, you don’t get on later.  That is it.  It is over.

So for ten years those opportunities are gone in that geographical region.  So maybe it is cheaper.  But the long-term impact in the actual cost to the government by the loss of the innovation that you get from the small business community is huge and you can’t even measure that.

Mr. BOOZMAN.  No.  I understand.  I guess the thing is for us to figure it out.  There is kind of a core deal as to if we need more procurement officers, if we need to toughen up the law.  It doesn’t do a whole lot to toughen up the law if you don’t have the underlying infrastructure to support the need.  You kind of need to figure out was this done in an effort to exclude small business in favor of a specific big business, or was it done because the amount of staff that was there.  It was just easier to get it done that way, or they had some deal that perhaps they felt like in doing that, it was more cost effectively truly, and more whatever to do it.  Does that make sense?

Ms. WOLFORD.  Yeah.  I mean I think that it is true that they can use less procurement officers to manage it and to do the competition in the long run, especially when it is a ten-year life cycle versus multiple five-year contracts, for instance.  So yes, obviously, that requires less people to do that, and therefore, it is less expensive.  Okay?

So I think those are obviously true and I think it is a very easy case to prove that.  I don’t know that—I think it is a fallacy personally to use it as an argument for contract bundling.

Mr. BOOZMAN.  No.  I agree.  I guess what I am saying though, is if we want to unbundle these things, then we also would need to put in place a mechanism where we had more procurement officers.  See, that is what I am saying, is you can’t—

Ms. WOLFORD.  Yes.

Mr. BOOZMAN.  I am trying to figure out if you can do one without the other.

Ms. WOLFORD.  I think you can if you do like what we were talking about with the multiple work contract vehicles.  For instance, if you had a multiple work contract vehicle and you allowed an on-ramp for new small business during the life span of that contract which allows new businesses that are entering that market to come in, okay, that is what the on-ramp is for.  And this is currently done in different agencies on different IDIQs.  And so then you have that ability to add new companies in and then you can do separate procurements.  And a classic one actually is a C Port E contract with the Navy.  That is a Navy MAC multiple work contract.  They do do small business competitions on those contracts.  But the problem with MACs today is you can’t say that—you have to specify the rules on the front end of a MAC about how that is going to be competed.  You can’t just one day say I want to have this piece of work competed only in the SDVOB market.  Okay.  You have to—that rule had to have been set up with the MAC was originally being competed.  Does that make sense?

Mr. BOOZMAN.  Yes.

Ms. WOLFORD.  So that is one of the barriers.  So there are ways to do that, it is just not—that is not what is being done.

Mr. BOOZMAN.  Mr. Jimenez? 

Thank you.  Thank you, Ms. Wolford.

Mr. JIMENEZ.  Congressman Boozman, I think that what we are all trying to say is that there are instances where the government could do a better job of instituting contract policy and procedures.  Contract bundling—and frankly, I have been a contracting officer and spent a large amount of my life in the military.  I saw distinct advantages to having contracts bundled.  It provided efficiencies that I desperately needed as a contracting officer because of the resources that I didn’t have that I desperately needed.  So it was a combination of both.

I think where the Federal Government falls short is that there either are not enough IDIQs, contract bundling, MACs or other contract vehicles that provide prime opportunities to socioeconomic groups.  They are all—for some reason, people think bundling means big.  They don’t understand that I have a contract bundle right now that I do for VA and my subs are Microsoft and Insight and they are great companies.

And originally, the thought was give it to one of those big companies.  The concern, obviously, for us, not necessarily with that contract, but with anybody who is doing it, is bigger is better.  And bigger is not better.  Bigger may sometimes be easier and less risk, which is normally what is driving a lot of these two the large businesses is if I give this to a large company I have got less risk. 

And the fact is, the big company gives it to the small company.  The small company does it and then much of the quality work is kept for the larger prime.  And the fact of the matter, sir, is prime is king in this business.  When you are the person negotiating with the government, you control your destiny.  The sub gets the flow down.  You get what is left and you say thank you very much.  And oftentimes it is not the kind of opportunities that I or anybody else in the business need to become that prime.  And you can’t afford to say no in this business.

One of the other examples, I think, are many of these large IDIQs that are being put out—one in particular that comes to mind is ITEST, great, great contract vehicle, $20 billion IDIQ.  It has got 16 primes.  Two of them are small business.  Four originally were small business, and all the socioeconomic groups are participants.  However, it has got to be aggressively managed. 

If somebody isn’t up there looking at the large primes, which are 14 of the 16, that $20 billion is not going to filter down to the service-disabled veterans or the 8(a)s or the women-owned or the HubZone or any of the other small businesses.  And more importantly, the quality of work that is going to flow down that is going to enable those small business to ultimately some day be a big business isn’t going to flow down, because, sir, there is profitable business on every contract and there is business that is not very profitable.  And I can guarantee you that when you are the prime, you are not giving away the profitable to the guys you are subbing to.  You are looking for somebody who can come in and help you out on a dime.

Ms. HERSETH SANDLIN.  Thank you, Mr. Boozman.

Mr. Hall, do you have questions for the panel?

Mr. HALL.  Thank you, Madam Chair and Ranking Member Boozman and thank you to our panelists.

Mr. Jimenez, you stated that by the time an initiative becomes a request for proposal, it is frequently stripped of all socioeconomic small business goals, including veteran and service-disabled small businesses.  How often does this happen in your estimation and can it be avoided?

Mr. JIMENEZ.  Sir, I am not sure that I am equipped to answer that question in the sense that I honestly don’t know.  I know that being on the receiving end, it happens more than I want it to happen because I would like to be able to be the recipient of some of those opportunities and be able to compete.  So obviously, my view is tainted being on the receiving end.  I think it happens every day, but I don’t know that that is realistic.

I think that what happens is, is that it is a hard job for the folks who work in the small business offices because their job is to remind procurement officials, contracting officers, think small business, think socioeconomic groups, think service-disabled, think 8(a), think woman-owned, think HubZone, think about all the people that we are trying to turn into big businesses that can come in and provide competition, which is a great thing.  And there are not enough of those folks to get around to all the contracting officers that need to be reminded that there are small business goals that need to be met.

So that is a challenge and sometimes some organizations do a better job.  It doesn’t happen in every instance and it is getting better for service-disabled veterans.  But we are not there yet.

Mr. HALL.  Okay.  Thank you.  And I think, I was going to ask you, while you said it is a myth that big businesses who receive these very large contracts will make it up to the small businesses in their subcontracting plans, I think you just kind of answered that question a minute ago.

And Ms. Wolford, I wanted to—first of all, I thought your goals—your bulleted goals here look very thoughtful and worthy of consideration, in particular the ones that require GSA schedule buys that are not set asides, to only allow the government to count toward their small business goals that percentage of the business that small business actually executed versus their large business subcontractor.

Ms. WOLFORD.  Thank you.

Mr. HALL.  I think that is something that we might want to take a look at codifying.  But you mentioned in your written testimony that Federal agencies is only acting on negotiations with prime contractors and not with subcontractors.  If the contracting officers communicated with subcontractors more, would this increase subcontractor participation?

Ms. WOLFORD.  Subcontractors can communicate all day long but it has no value because we don’t have privity of contract with the government as a subcontractor.  The contract is only between the government and the prime contractor entity that is a part of the FAR.  And so that is just the rules of the road of contracting.  The subcontractor has no standing on the contract.  You can go talk to the contracting officer, certainly, and most of them are nice people and will talk to you, but it won’t—it doesn’t change anything at the end of the day because you are not privy to the contract.

Mr. HALL.  Should—and this is still to you, Ms. Wolford.  Should multiple award contracts subject to Federal acquisition regulations regulate what size companies compete with each other?

Ms. WOLFORD.  Well, the point with that is, is FAR part 16 currently what happens on a MAC is you go through the competition.  If they didn’t set up the rules on the front end of the MAC for the blanket purchase agreement (BPA) that is going to be awarded out of the multiple award contract, if they didn’t set up the rules on the front end of how competitions for small business in different socioeconomic categories can happen, then they can’t do it later on.  Okay?  They can’t hold small business competitions at all. 

So it is not an issue of setting size standards.  It is  allowing the contracting officer the latitude to be able to hold a small business competition for any reason post-award of a BPA.  Okay?  Does that make more sense?

Mr. HALL.  Yes, it does.  Thank you.

And Mr. Baker, I just wondered how you know that six major defense contractors are receiving approximately 30 percent of the defense budget and 40 percent of their contracts are sole sourced?  And can anyone else offer the services offered by those six major defense contractors?

Mr. BAKER.  Well, sir, I will tell you that that information was obtained from—I will get back to you to make sure, but I believe it was Eagle Outsource was the source for that.  But I have seen it in numerous, numerous different publications and stuff. 

And why do I feel like small business can actually obtain it?  It is my belief that, first of all, if the government really wants to obtain three percent for service-disabled veterans, the first thing we have to do is, you have to have what I call an attainment strategy.  Okay?  You can’t just say give me three percent and throw it up against the wall and you have got three percent.  Okay?

If you look at the Federal procurement data, 2005 Federal procurement data, which is the latest data, and if you go to each category, you can tell how much was spent with serviced disabled vet, women, whatever.  I believe if the government—let’s use the very first one in the category, which is aircraft charter.  I believe that the government set aside three percent for aircraft chartering.  Then, even if I didn’t do aircraft chartering and you guaranteed me that I was going to get three percent over the next ten years and nobody else did it, I would go to aircraft chartering.

And I believe if you go down the whole system like that, if you just take every category, whether it is a category or whether it is a service, and you actually put money on the table for veterans, service-disabled veterans, 8(a)s, you actually develop a plan like that, you will—we lack—I am not going to say the capacity is there now.  But the capacity can be created.  And what comes first, the chicken or the egg?  You know, put the money on the table.  I guarantee you we will be able to go and create what we need through teaming, you know, joint ventures (JV’s), mentor protégés, you know. 

If you put us in the driver’s seat, I think this is what, you know, Tony and Lisa were saying.  The problem is, we are in the backseat.  If you put us in the driver’s seat, we can Do some great things.

Mr. HALL.  Thank you.  The last hearing that we had on this topic, I threw out the idea of only using this three percent of whatever budget it is for these particular small businesses and fencing it off, or sequestering it so it couldn’t be used for other businesses that weren't veteran-owned or disabled veteran, or women-owned and so on.  And there wasn’t—there didn’t seem to be any support for the idea.  But it sounds to me like your—is that what you are saying roughly is that—

Mr. BAKER.  We are going to tag-team you on this one, so he is going to—

Mr. JIMENEZ.  Sir, I was actually here on May the 17th when you brought that up and I thought it was a stupendous idea.  It did not gather much support from the government officials because it is extra work.  I think that if I, as a former contracting officer, and I, as a small business owner, am being told that you now have this money set aside, and I, as a contracting officer, know that I have my standard pot of money and I have this money over here that I can apply to service-disabled veterans, I would be incentivized to make sure I don’t leave any money on the table.

Mr. HALL.  Right.  And if you don’t come up with a service-disabled veterans’ business, you lose the money.

Mr. JIMENEZ.  Correct, sir.  My only concern about that is one that I voiced, I think it was on the same day, May the 17th, is that, sir, that is a floor.  I don’t want to have anybody in the government and I have never had that impression when I was in the government that that is the ceiling.  That is where we need to begin giving service-disabled—

Mr. HALL.  I understand.

Mr. JIMENEZ.  —veterans opportunity.  And my only concern would be setting three percent aside would tell every contracting officer—

Mr. HALL.  That is all you have to do.

Mr. JIMENEZ.  —in the Federal Government that is all you get for service-disabled veterans.  And the goal is that the greater the small business engine is in this country, the greater this country is going to be—

Mr. HALL.  Excuse me, for running over time—

Mr. JIMENEZ.  —for more opportunity—

Mr. HALL.  —Madam Chair.  It may be that we need a temporary thing to get us to where we want to be and that might be a—

Mr. BAKER.  But can I make a comment on this tag-team and back?  The goal is really something called maximum practical utilization, okay, which is much different than three percent.

Mr. HALL.  But we are not at three percent yet though.

Mr. BAKER.  But it is still maximum practical utilization.  If you shoot here, you are going to wind up there.

Mr. HALL.  Right.  Okay.

Ms. WOLFORD.  And let me just add something here.  What I have always found in life is that if I impact somebody’s financial, personal financial impact, meaning I impact your personal checkbook, you suddenly get a lot more interested in things.  Okay?  So if you and all of your review boards show that you are not me