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Hearing Transcript on Follow-up on the U.S. Department of Veterans Affairs Service-Disabled Veteran-Owned Small Business Certification Process

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FOLLOW-UP ON THE U.S. DEPARTMENT OF VETERANS AFFAIRS
SERVICE-DISABLED VETERAN-OWNED SMALL BUSINESS CERTIFICATION PROCESS

 



 HEARING

BEFORE  THE

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

AND

SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

OF THE

COMMITTEE ON VETERANS' AFFAIRS

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION


NOVEMBER 30, 2011


SERIAL No. 112-35


Printed for the use of the Committee on Veterans'
Affairs

 

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COMMITTEE ON VETERANS' AFFAIRS


JEFF MILLER, Florida, Chairman

 

CLIFF STEARNS, Florida

DOUG LAMBORN, Colorado

GUS M. BILIRAKIS, Florida

DAVID P. ROE, Tennessee

MARLIN A. STUTZMAN, Indiana

BILL FLORES, Texas

BILL JOHNSON, Ohio

JEFF DENHAM, California

JON RUNYAN, New Jersey

DAN BENISHEK, Michigan

ANN MARIE BUERKLE, New York

TIM HUELSKAMP, Kansas

MARK E. AMODEI, Nevada

ROBERT L. TURNER, New York

BOB FILNER, California, Ranking

CORRINE BROWN, Florida

SILVESTRE REYES, Texas

MICHAEL H. MICHAUD, Maine

LINDA T. SÁNCHEZ, California

BRUCE L. BRALEY, Iowa

JERRY MCNERNEY, California

JOE DONNELLY, Indiana

TIMOTHY J. WALZ, Minnesota

JOHN BARROW, Georgia

RUSS CARNAHAN, Missouri

 

 

 

Helen W. Tolar,
Staff Director and Chief Counsel


SUBCOMMITTEE ON OVERSIGHT AND
INVESTIGATIONS

BILL JOHNSON, Ohio, Chairman

CLIFF STEARNS, Florida

DOUG LAMBORN, Colorado

DAVID P. ROE, Tennessee

DAN BENISHEK, Michigan

BILL FLORES, Texas
JOE DONNELLY, Indiana, Ranking

JERRY MCNERNEY, California

JOHN BARROW, Georgia

BOB FILNER, California

SUBCOMMITTEE ON ECONOMIC
OPPORTUNITY

MARLIN A. STUTZMAN, Indiana,
Chairman

GUS M. BILIRAKIS, Florida

BILL JOHNSON, Ohio

TIM HUELSKAMP, Kansas

MARK E. AMODEI, Nevada
BRUCE A. BRALEY, Iowa,
Ranking


LINDA T. SÁNCHEZ, California

TIMOTHY J. WALZ, Minnesota

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, p

ublic 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

November 30, 2011


Follow-Up on the U.S. Department of Veterans Affairs Service-Disabled
Veteran-Owned Small Business Certification Process

OPENING STATEMENTS

Chairman Bill Johnson, Subcommittee on Oversight and
Investigations

    Prepared statement of Chairman Johnson

Hon. Joe Donnelly, Ranking Democratic Member, Subcommittee on Oversight and
Investigations, prepared statement of

Chairman Marlin A. Stutzman, Subcommittee on Economic Opportunity

    Prepared statement of Chairman Stutzman

Hon. Timothy Walz, Democratic Member, Subcommittee on Economic Opportunity

Hon. Bruce L. Braley, Ranking
Democratic Member, Subcommittee on Economic Opportunity, prepared statement of


WITNESSES

Thomas J. Leney, Executive Director, Small and Veteran Business
Programs, Office of Small and Disadvantaged Business Utilization, U.S.
Department of Veterans Affairs

Accompanied By:

    Prepared statement of Mr. Leney

John H. "Jack" Thompson, Deputy General Counsel, Office of General Counsel, U.S.
Department of Veterans

Gregory D. Kutz, Forensic Audits and Investigative Service, U.S. Government
Accountability Office

    Prepared statement of Mr. Kutz

Ralph O. White, Managing Associate General Counsel for Procurement Law, Office
of General Counsel, U.S. Government Accountability Office

    Prepared statement of Mr. White

 


SUBMISSIONS FOR THE RECORD

Steve L. Gonzalez, Assistant Director, National Economic Commission, American
Legion

Robert G. Hesser, Vetrepreneur, LLC, Herndon, VA

 

 


FOLLOW-UP ON THE U.S. DEPARTMENT OF VETERANS AFFAIRS
SERVICE-DISABLED VETERAN-OWNED SMALL BUSINESS CERTIFICATION PROCESS


Wednesday, November 30, 2011

U. S. House of Representatives,

Subcommittee on Oversight and Investigations and Subcommittee on Economic
Oppprtunity

Committee on Veterans' Affairs,

Washington, DC.

The subcommittees met, pursuant to notice, at 10:07 a.m., in Room 334, Cannon
House Office Building, Hon. Bill Johnson [chairman of the subcommittee]
presiding.

Present
from Subcommittee on Oversight and Investigations:  Representatives Johnson,
Donnelly, and Barrow.

Present
from Subcommittee on Economic Opportunity: Representatives Stutzman, Bilirakis,
Amodei, and Walz.



OPENING STATEMENT OF CHAIRMAN JOHNSON, SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS

Mr. JOHNSON.  Well, good morning.  This hearing will come to order.

I want to welcome everyone to today’s follow-up hearing on the VA’s
service-disabled veteran-owned small business certification process. 

I thank the Members of the Subcommittee on Economic Opportunity for their
participation today and their efforts in improving the process for
veteran-owned and service-disabled veteran-owned small businesses to do
business with the VA.

 In July, we held a hearing on this certification process.  And at that time, Mr.
Tom Leney was relatively new to his position as the executive director of Small
and Veteran Business Programs at VA’s Office of Small and Disadvantaged
Business Utilization commonly referred to as the OSDBU.

At that hearing, we promised a follow-up discussion with Mr. Leney to see how his
planned improvements for the process and certifying veteran-owned small
businesses had been implemented after several months.

Today is that follow-up.  I look forward to hearing of the progress made toward
achieving these goals and how much longer it will be until the goals are
finally realized.

I also have concerns regarding recent actions taken by the VA’s senior
procurement executive in response to the recent GAO Aldevra decision which
states that the VA should make efforts to contract with veteran-owned small
businesses when feasible and in accordance with the Veterans First Contracting
Program.

GAO recently upheld a bid protest filed by the Aldevra business on a VA contract
and recommended that VA rebid that contract.  Despite clear legislative and
committee report language outlining the intent of the Veterans First
Contracting Program, the VA decided that GAO’s decision would not apply to its
contracting operations and that it would continue as it pleased, doing away
with the preference for VOSBs and SDVOSBs in much of its contracting.

The VA has made it clear in correspondence and meetings following the Aldevra
decision that it has no intention of attempting to clear up its own questions
about Veterans First.  Despite acknowledging the problem, the VA is not trying
to solve the problem nor did it even ask Congress or this committee those
questions that needed to be answered years ago.

Even after the Aldevra decision and the VA’s response, efforts by these two
subcommittees to help explain parts of the new law that the VA had trouble
understanding several years after its passage were met with a lack of
cooperation on the VA’s part.

Instead the VA is determined to run this through the court system eliminating key
opportunities for VOSBs to contract with the Federal Government.

When the VA cannot or chooses not to implement clearly written legislation, we have
a problem.  This is not rocket science.  The Veterans First Contracting Program
exists to help the VA set the standard in Federal Government contracting with
VOSBs and SDVOSBs.

With Congress and the Administration sharing a goal of increasing contracting with
VOSBs and SDVOSBs, the Veterans First language facilitated the achievement of
that goal.

The law contains clear wording on how the VA can achieve that goal while
simultaneously helping our veterans do business and not hindering the VA in its
contracting efforts.

With straightforward language such as the secretary shall give priority to a small
business concern owned and controlled by veterans, it is difficult to
understand the VA’s failure to correctly interpret this law which also provides
reasonable accommodations when a VOSB or SDVOSB cannot fill the need.

We need to get this right.  The certification process must ensure that VOSBs and
SDVOSBs are efficiently processed and certified.  We then must ensure that
these same businesses are able to compete for the appropriate contracts. 
Otherwise, there is no point in having these businesses in the system if the VA
is going to ignore them.

I look forward to today’s testimony on improvements made in the certification
process since our last hearing and the further improvements we can look forward
to in the near future.  I also look forward to discussion on how we can make
the actual contracting system with VOSBs and SDVOSBs work as it is intended.

I am, however, disappointed that the VA’s testimony barely touches on the Aldevra
topic despite knowing for 30 days that it would be a part of this hearing. 
This is no surprise to anyone.

And since the VA’s October meeting with committee staff, we have seen no great
effort on the VA’s part to improve this situation.

I now yield to the acting ranking member, Mr. Walz, for an opening statement.

OPENING STATEMENT OF HON. WALZ,
DEMOCRATIC MEMBER, SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

Mr. WALZ.  Well, thank you, Mr. Chairman, and to our witnesses for coming today,
for holding this joint hearing.  I believe this follow-up hearing deserves this
Committee’s full attention. 

And because small business concerns do overlap into
the jurisdiction of Oversight and Investigation, we are certainly happy to work
with the Economic Opportunity Subcommittee to ensure proper oversight.

The tough economic times that we are in make it as important as ever to properly
address transparency, programmatic policy concerns, and thoroughly review the
service-disabled veteran-owned small business or SDVOSB certification process. 
Providing contracting opportunities to our deserving veterans through this
process is important.

But when you have a successful program such as the VA’s Small Business Contracting
Program and you are awarding millions of dollars, it potentially attracts
unqualified businesses whose intentions are unfortunately to commit fraud. 
This is why it is as important as ever for the VA to implement and enforce
fraud prevention measures.

During this joint hearing, I look forward to look at the following
things:  An overview of the VA’s preventative measures and monitoring controls
to minimize vulnerability or fraud; VA’s disbarment procedures; staff training
to identify and monitor potential fraud; VA’s verification process such as how
they verify SDVOSBs; and the process of conducting announced site visits.

These are just some of the items I have on today’s agenda.  I believe that unless we
remedy these concerns, the same problems that have haunted this really
important program and the problems with verification will remain.

I want to thank you, Mr. Chairman, for your leadership and I yield back.

Mr. JOHNSON.  I thank the gentleman for yielding back.

I now yield to the chairman of the Subcommittee on Economic Opportunity, Chairman
Stutzman, for his opening comment.

OPENING STATEMENT OF HON. STUTZMAN,
CHAIRMAN, SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

Mr. STUTZMAN.  Thank you, Chairman Johnson.

First, let me express my appreciation for offering to join forces on enabling
service-disabled veteran-owned small businesses to compete for contracts with
the Department of Veterans Affairs.

Let me begin by adding some context to why we are here today.  In 1999, the
President signed legislation that became Public Law 106-50 which established a
government-wide goal for all federal agencies to award three percent of their
contract dollars to small businesses owned and controlled by service-disabled
veterans.

Until that time, there was no goal for service-disabled veteran-owned small
businesses or SDVOSBs.  Since then, there have been several laws and an
executive order that made it clear that federal agencies are to make every
effort to award at least three percent of their acquisition dollars to
service-disabled veteran-owned small businesses.

This legislative effort has continued with the passage of two laws that established
and reinforced Section 8127 of Title 38 to provide VA with special tools and
priorities to meet and hopefully exceed the three percent goal.

By most indicators, the intent of Section 8127 has been met.  But meeting the
three percent goal is not the sole intent of Section 8127.  Another goal is to
establish a database of validated veteran and service-disabled veteran-owned
small businesses that any government agency can access as part of their efforts to
meet the three percent goal.  And that is why there are still significant
problems.

Today, VA data shows contract awards exceeding 20 percent and I congratulate them for
that effort.  However, the process in achieving those numbers has been painful
at best.  Until recently, implementation of the database of validated veteran
and service-disabled veteran-owned small businesses required by Public Law
109-461 has been less than professional to put it kindly.

The VA is still recovering from its initial reluctance to implement the law.  Its
policy of allowing self-certification of ownership and control status instead
of actively performing the validation function prescribed in the law was
frankly a disaster.

As a result, as we will hear today, millions of contract dollars went to
businesses that did not meet the veteran or disabled veteran-owned and
controlled status.

I also find VA’s recent decision to ignore GAO’s finding in favor of a protest by
Aldevra, a service-disabled veteran-owned small business, as evidence of a
continuing reluctance to fully embrace the clear requirements of Section 8127.

The law does not require VA to set aside all contracts for SDVOSBs or award all
contracts to SDVOSBs.  More importantly, nowhere in Section 8127 is there a
provision exempting acquisitions using the federal supply schedule.

If nothing else, setting aside contracts using the FSS will provide VA contracting
officers additional flexibility in meeting the SDVOSB goals.

Let’s assume for the moment that those who believe the provisions of Section 8127 go
too far and that they give too much advantage to SDVOSBs are correct.  To
those, I would point out the literally dozens of federal agencies who continue
to fail miserably to meet even the three percent goal.

For example, DoD, the largest department in the Federal Government, awarded only
1.82 percent to SDVOSBs in fiscal year 2010.  I suspect DoD could do better if
they limited janitorial awards to those SDVOSBs in that business.  So if VA is
picking up part of the slack for the rest of the Federal Government, so be it.

Finally, my staff and I have been hearing with increasing frequency that many legitimate
SDVOSBs are having an extremely difficult time being validated and several have
even had to close down as a result.

While I understand that verification rules must be enforced to ensure non-SDVOSBs are
kept out, there must be a balance.  I am interested to hear from Mr. Leney
about how he can better strike this balance and expedite reconsideration for
many of these small businesses.

I am also concerned about what happens to the very dubious arbitrary decisions to
deny status to businesses by contractors hired to validate the ownership and
control status.  And I suggest that may be as a result of a lack of clear
regulations on things like survivorship and conflicts with state laws.

Thank you, Mr. Chairman, and I will yield back.

Mr. JOHNSON.  Thank you, Mr. Chairman, for being here.

I thought we were going to have a statement from your ranking member from your
subcommittee, but I think he is not--

Mr. JOHNSON.  Yeah.

Mr. JOHNSON.  Okay.  Well, thank you both, for both subcommittees’ participation.

And I now invite the first panel to the witness table.  On this panel, we will hear
today from Mr. Tom Leney, the executive director of Small and Veteran Business
Programs at VA’s Office of Small and Disadvantaged Business Utilization.

Mr. Leney, your complete written statement will be made a part of the hearing
record and you are now recognized for five minutes.



STATEMENT OF THOMAS J. LENEY, EXECUTIVE DIRECTOR, SMALL AND VETERAN BUSINESS PROGRAMS,
OFFICE OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION, U.S. DEPARTMENT OF
VETERANS AFFAIRS ACCOMPANIED BY JOHN H. “JACK” THOMPSON, DEPUTY GENERAL
COUNSEL, OFFICE OF GENERAL COUNSEL, U.S. DEPARTMENT OF VETERANS AFFAIRS

     Mr.
LENEY.  Thank you, Chairman Johnson, Chairman Stutzman, Ranking Member Walz,
and Members of the subcommittees. 

I want to thank you for inviting me to testify on the VA’s implementation of
veteran-owned small business provisions in the Veterans Benefits Healthcare
Information Technology Act of 2006 and the Veterans Benefit Act of 2010.

I would like to briefly summarize my statement for the record so we can address
your questions and concerns.

The Vet First Program enables the VA to provide preferences to veteran small
businesses.  VA has used this program to lead the Federal Government in
contracting with veteran small businesses.

In the last fiscal year, the VA awarded more than $3 billion to veteran firms. 
The VA far exceeded the procurement goals of three percent for SDVOSBs.  We
also exceeded the higher VA goals of 12 percent for veteran small businesses
overall, providing nearly 22 percent of our total procurement to veterans.

This is real money in the hands of veteran small businesses and it establishes the
VA as a leader in this arena.

At the same time, the VA has actively implemented the statutory verification
provisions that you have given us in Public Law 109-461 so that procurement
preferences go only to legitimate firms.

I would like to update you on the progress VA has made to improve the
verification program and our plans to continue improving it so that legitimate
veteran businesses have greater access to VA procurement opportunities.

As promised, we have completed the removal of all non-verified firms from the
vendor information pages three months ahead of schedule. 

When I last met with you in July, it took an average of 127 days to process an
initial verification application.  We have now reduced that to 75 days.

In April, some applicants had waited months to receive word that there was an
issue with their veteran or service-disabled, service-connected disability
status.  Veterans now receive their status within 48 hours.

In response to valid complaints regarding lack of information on status of initial
applications, we have established a policy that applicants receive updates at
all key points in the process and the current standard for the CVE help desk to
provide a response is one business day.

In addition, applicants can now receive an update on demand via vetbus.gov. 

Along with more frequent correspondence, we have launched our Verification Assistance
Program to clarify the regulatory requirements and to explain the most frequent
reasons for denial.

This program enables applicants to eliminate common errors up front and helps
legitimate firms to receive favorable decisions more quickly.

In July, the GAO followed up its May 2010 evaluation of CVE verification and
identified some challenges and vulnerabilities that the VA has since overcome.

Among the issues identified were training, use of site visits, and debarment of
ineligible firms.

In addition to expanded internal training, CVE has initiated a program to train
all of its staff members as certified fraud examiners. 

We reduced the potential for ineligible firms to become verified by creating a
Risk Mitigation Program that requires high-risk firms to undergo a site visit
in addition to a document review.

We have increased the number of site visits nearly ten-fold from calendar year
2010 to calendar year 2011.

We have also increased training of the acquisition staff.  In the past six months,
we provided training to more than a thousand contracting officers.

The VA is serious about debarring companies who misrepresent their status.  VA has
developed and formalized specific processes and criteria related to debarment. 
They can be found on the VA Debarment Committee website.

It is important to note, however, that most firms that we find to be ineligible
are not intentionally misrepresenting their status and are not committing
fraud.

Those firms that do provide false information or material information are referred to
the VA’s Office of Inspector General.

Mr. Chairman, we were also asked to address the October GAO decision upholding a
bid protest by an SDVOSB.  My statement for the record addresses the VA
acquisition policy position on the Aldevra decision.  And Jack Thompson, the
VA’s deputy general counsel, is with me today to answer any questions you may
have on that issue.

In conclusion, the VA Verification Program has made significant progress in the
last six months.  We have overcome many of the challenges and vulnerabilities
that were raised by the GAO and OIG reports.

And I am confident that we are protecting the integrity of the Verification
Program.  We are not satisfied and we are not done improving the process.

Mr. Chairman and Members of the subcommittee, that concludes my statement.  I am
pleased to answer any questions you may have.

[The statement of Thomas J. Leney appears in the Appendix.]

Mr. JOHNSON.  I thank you for your testimony.  And we will begin questions at this
point.  And I begin with myself.

Mr. Leney, you state that VA has consistently interpreted the Vet First Program as
VOSBs having priority over any other class of small businesses when VA is
conducting full and open competition procurements.

In 2009 testimony, Jan Frye stated that the Vet First provisions are preferences
in open-market contracting for veteran entrepreneurs. 

Can you outline for us the purchasing priority hierarchy at VA and explain where
these VOSBs fall in the hierarchy?

Mr. LENEY.  Sir, there is hierarchy for procurement within the VA and within the
Federal Government.  Vets have priority within all open-market purchases.

Mr. JOHNSON.  What priority?  Where do they fall in the hierarchy?

Mr. LENEY.  On the open-market purchases, they fall first.  They are first
priority.

Mr. JOHNSON.  No, open market is like the eighth category in the priority. 
Where do the VOSBs fall in VA’s hierarchy?  You are saying it is all the way
down in open market?

Mr. LENEY.  Veteran-owned small businesses do not receive priority under FAR Part
18 purchases.  The acquisition policy related to these issues is--

Mr. JOHNSON.  Let me help you a little bit because I am not sure.  You are having
trouble crafting your answer here.

In June 19th of 2007 as written in VA’s information letter, VA
expressed that Public Law 109-461 changes the priorities for contracting
preferences within VA placing SDVOSBs and VOSBs first and second respectively
in satisfying VA’s acquisition requirements.

On August 20th, 2008 in the Federal Register, VA again noted that
Public Law 109-461 requires the secretary to give priority to a small business
concern owned and controlled by veterans.

If we go back to the June 20th, 2007 testimony, this approach changes
the small business hierarchy within VA placing service-disabled veteran-owned
small businesses and veteran-owned small businesses first and second
respectively in satisfying VA’s acquisition requirements.

And the Veterans Benefits Act, if we look at October 26, 2010, the United States
Court of Federal Claims, the ANGELICA decision stated that in part the Veterans
Benefits Act is a specific mandate to the department and only to the department
to grant first priority to SDVOSBs and VOSBs in the awarding of contracts.

So let me ask you again.  Where do VOSBs and SDVOSBs fall in your current practice
of priority within the Veterans Administration for contracting opportunities?

Mr. LENEY.  Mr. Chairman, the VA has an obligation to balance a number of objectives
that you have provided.

Mr. JOHNSON.  Where Mr. Leney, I want a straightforward answer.  Where in the priority
scheme do VOSBs and SDVOSBs fall? 

You said there is a priority and a hierarchy.  Putting them in open source which is
the eighth category down is not first and second as previously identified in VA
acknowledgment of the Title 38 requirements.

So straightforward answer.  Where do they fall?

Mr. LENEY.  Well, I appreciate the opportunity to become engaged in acquisition
policy issues.  I am not the right person to answer that question directly.

Mr. JOHNSON.  Who is the right person?

Mr. LENEY.  It would be our chief of acquisition policy.  As an advocate for
small businesses within the VA and my focus has been on helping small businesses
by promoting the verification process and--

Mr. JOHNSON.  Well, you know, we started asking these questions 30 days ago.  And
we were told that the people appearing before this subcommittee today would be
able to answer those specific questions.

So, Mr. Thompson, you were the one that was identified as being able to answer
those specifics.

Mr. THOMPSON.  Well, I--

Mr. JOHNSON.  Where do VOSBs and SDVOSBs fall in that priority?

Mr. THOMPSON.  Within department set-asides, service-disabled veteran-owned small
businesses are number one.  Other veteran-owned--

Mr. JOHNSON.  That is not what Title 38 says.  It does not say for VA
set-asides.  It says in the contracting acquisition process, they were to be
placed as number one and number two.  And that has been acknowledged by the VA
in the past.

Mr. THOMPSON.  Sir, I respectfully disagree.  VA has always been of the opinion
that the correct interpretation of those Veterans First provisions is that
within all set-asides, service-disabled veteran-owned businesses stay on top.

Mr. JOHNSON.  Well, Mr. Thompson, I would submit to you that that is contrary to
what the GAO says. 

Where are you getting your authorization?  Where in the law does it say that it is
based on set-asides and not the overall contracting requirements and
provisions?  Give me a reference.  Where is the law?  Where in the law does it
say that it is set-asides?

Mr. THOMPSON.  I believe you are referring to the issue in the Aldevra decision.

Mr. JOHNSON.  Partly.

Mr. THOMPSON.  And the reason VA attorneys, the principal reason VA attorneys are
not persuaded by GAO’s Aldevra decision is because it does not contain analysis
of all of the words of that statute.

The set-aside law provides that for purposes of meeting the secretary’s annual
goals for contracting with VOSBs and SDVOSBs, the department shall set aside
contracts for them if certain conditions are met.

I respectfully disagree that Congress said we are to use this set-aside authority
in all cases, but rather as a tool for meeting the secretary’s goals.

GAO’s opinion did not discuss this important qualifier that Congress placed on this
set-aside authority, that is it was to be used for purposes of meeting the
secretary’s contracting goals.

As Mr. Leney noted in his opening statement, VA has more than met, it is
surpassing the secretary’s small business contracting goals and, therefore, in
our opinion, VA is meeting both the letter and the spirit of that Public Law.

Mr. JOHNSON.  Mr. Thompson, we are not so concerned about percentages as we are
about process.  And the process according to the law and according to the GAO
opinion is that SDVOSBs and VOSBs are not being considered in the right
priority.  And how the VA can simply choose to ignore what the GAO is
recommending, I would commend to the VA that that deserves much more scrutiny.

We have seen only a few examples in previous administrations where GAO findings
were ignored or not followed.  And I can assure you that we have got lots of
concerns about this.

The clock is now running, gentlemen, so I am not sure how long I have got, but I am
going to yield to the ranking member for his questions.  We are going to have
multiple rounds.  I have got lots of them, so we are going to be coming around
again.

Mr. DONNELLY.  Mr. Leney, the SDVOSB contract accounting for $3.2 billion in
government-wide contracts during fiscal year 2010, we verified the eligibility
of 5,000 SDVOSB firms.

How many firms are in the queue that you are reviewing right now to become
eligible?

Mr. LENEY.  Sir, we now have about 8,000 firms verified--

Mr. DONNELLY.  Okay.

Mr. LENEY.  --within the VIP.  And we have approximately 1,700 firms in the
queue.

Mr. DONNELLY.  What has to be done to get those additional 1,700 firms certified
and what is the time line that you are using on those?

Mr. LENEY.  Right now the time line for initial verification is on average, we
are able to verify firms within 75 days which is a considerable reduction in
time required.  About 95 percent of all firms are receiving an initial
determination within the 90 day goal. 

So it is really a case of continuing the process and continuing to refine and
improve the process.  We have applied additional resources to the verification
process to ensure that we can meet those objectives.

Mr. DONNELLY.  In fiscal year 2011, the prime contracting goal for VOSB was 12
percent.  For SDVOSB, it was approximately 10 percent.

What is the impediment, if there is any, on bringing those numbers higher and to ensuring
that our VOSBs have the opportunity to become even more a part of our
contracting processes?

Mr. LENEY.  Well, the good news is with regard to those goals is we have
substantially exceeded them.  In 2011, we gave more than 19 percent of our procurement
dollars to SDVOSBs and almost 22 percent to VOSBs.  And even in our federal
supply schedules, we gave 13 percent of our federal supply schedule dollars to
veteran-owned firms. 

So we continue to attempt to identify maximum practical opportunities for small
businesses, particularly veteran small businesses, to do business with the VA. 

Mr. DONNELLY.  What we would like to see is monthly data on the certification
statistics and on what percentage is going to our VOSBs and SDVOSBs so we can
see that the effort, the service given by our vets is being recognized and
rewarded on the contracting portion as well.

Is that going to cause you any difficulty to make sure that we can get those on a
monthly basis? 

As just indicated, my numbers were a little behind.  I’m thrilled to hear we are
at 8,000, you know, hoping to push it to 9,000 because there are 1,700 in the
queue. 

Is that something that you can provide us with, monthly numbers on that?

Mr. LENEY.  Yes.  We can provide reports as required to the committee on the
status of verification.  In the last month, we verified an additional 116
firms.

One of the challenges that we are presented with is the reality that applications
do not come in a consistent fashion.  And as we attempt to be good stewards of
resources and apply our resources effectively--

[The VA subsequently provided the
following information:]

  

VA Veteran-owned small business (VOSB)
Verification Report

As of November 30, 2011

 

 

November 2011

Total
businesses in the Vendor Information Pages (VIP)

8,040

Businesses
approved

162

 

 

Nota
Bene

All businesses in VIP are verified.  There is no direct correlation between the
number of businesses approved each month and the increase in the number of
businesses in VIP.  This is due to companies being denied on re-verification
and companies who had been denied subsequently receiving approval in the request
for reconsideration process.

Mr. DONNELLY.  What do you mean they do not come in a consistent fashion?

Mr. LENEY.  Well, in October, we may get 300 applications.  In November, we may
get 20.

Mr. DONNELLY.  Okay.  Well, you know, whatever the number is, the number is, but
that enables us to see that there is continual progress on this front.

Mr. LENEY.  We can provide reports as required by the committee.

Mr. DONNELLY.  Thank you very much.

I yield back.

Mr. JOHNSON.  I thank the gentleman for yielding.

I will go to the chairman, Chairman Stutzman, for his questions.

Mr. STUTZMAN.  Thank you, Mr. Chairman.

I would like to go down the road a little bit on understanding how you certify
certain businesses.  We have heard from veteran-owned small businesses that
they were denied verification because as required by California State law, they
had an executive board for their company and it was determined that this showed
they did not have ownership and control despite the fact that the veteran held
all of the stock.

We have also heard other complaints about the denials based on the existence of a
corporate board.

Can you explain CVE’s reasoning for decisions like this and the process that they
use in determining who is eligible and who is not?

Mr. LENEY.  Yes, sir.  Our process for determining eligibility is based on 38 CFR
74 of the regulation that promulgates the standards established in Public Law
109-461.

There is no prohibition on a firm being eligible for the Vet First Program based on
the fact that they have a board.  There is no prohibition based on the fact
that a particular state requires them to have multiple members on the board.

As established in the regulation, however, there is a prohibition on verifying the
eligibility of a firm when the veteran does not have full control of the
organization.

You can have a board.  If the board has the capacity to out-vote the veteran, based
on the regulation, he is not in control of the board.  If the board has the
ability to make decisions for the corporation that are binding and legal, even
if the owner were to fire the board the next day, because he appointed the
board, that firm would not be eligible for verification because a decision
could be made that the owner was not in control of.  It would be binding on the
firm.

Mr. STUTZMAN.  You are saying it is not a veteran-owned business at that point?

Mr. LENEY.  It is a veteran-owned business, but the regulation requires it to be
both veteran owned and controlled.  A very small number of firms, less than
five percent, are denied verification based on ownership issues.  More than 90
percent of the denials that occur in the process of verification are a function
of control.

Mr. STUTZMAN.  Is that in federal statute?

Mr. LENEY.  Control--

Mr. STUTZMAN.  The federal statute requires ownership--

Mr. LENEY.  Owner controlled?

Mr. STUTZMAN.  --and control?

Mr. LENEY.  Yes, sir.

Mr. STUTZMAN.  Would that be consistent with SBA’s policy?

Mr. LENEY.  The policy that the CVE is responsible for implementing is 38 CFR 74
and that is the regulation that we are focused on implementation.

In my discussions with the SBA, they also require ownership and control and they
do a status when they do status verification.

Mr. STUTZMAN.  Okay.  Thank you.

Are
veterans with DoD disability discharge eligible for SDVOSB status if they are
not included in the VA’s BIRLS database that lists veterans with a VA
disability rating?

Mr. LENEY.  A veteran has to have a disability status to be eligible for the
SDVOSB Program.  We have made a modification six months ago.  If a person was
not in the BIRLS, the veteran was not in the BIRLS database, we rejected their
application. 

Currently our policy is if they are not in the BIRLS database, we continue to process
their application, but we require them to be in the BIRLS database before
making a final verification decision because that is the basis for ensuring
that veterans are, in fact, service disabled that we utilize in the VA.

Mr. STUTZMAN.  Okay.  Thank you, Mr. Chairman.  That is all I have right now.

Mr. JOHNSON.  I thank you.

Mr. Leney, you mentioned that the VA exceeded its procurement goals by reaching
nearly 20 percent of SDVOSBs and nearly 22 percent of VOSBs.

Are the 20 and 22 percents, are those clean numbers, meaning is there a zero
overlap between those two numbers?

Mr. LENEY.  There is overlap between the two numbers, sir.  The 22 percent that
go to veteran-owned small businesses includes the nearly 19 percent that go to
service-disabled veteran-owned small business.

So as you look at those numbers, the vast majority of our procurements that go to
veteran-owned businesses go to service-disabled veterans.

Mr. JOHNSON.  My apologies.  My peripheral vision blanked out on me there.  Mr.
Walz, no, please, please continue.  I apologize.

Mr. WALZ.  No, no.  Thank you, Mr. Chairman.

Again, thank you for being here, Mr. Leney.  Thank you for you and for the work you
are doing and for your service.    And as you can see, this committee is
committed to getting it right.  And sitting behind you are numerous folks,
small business owners, veterans, veterans’ advocates, and we all want to get
there. 

And I always say at these hearings I am certainly the VA’s staunchest supporter. 
But at times, I can be the harshest critic because this is one of those
examples.  This is a great program.  It is an important program.  We must get
it right.

And I know the battle that you are in and it is that razor’s edge on the fraud,
waste, and abuse, at the same time moving resources to the veterans.  It
appears like we might be in one of those odd cases where the attempt to fight
fraud is actually becoming waste in itself.  And that is a very challenging one
for me.

The question I had, and in your testimony, Mr. Leney, you said you are serious
about disbarment.  You stood up the committee in September of 2010 and by
October of 2011, we have disbarred one business.

According to the GAO’s report is what we are getting, when they spot check, they
estimated that there were at least ten businesses that they could verify that
were not veteran-owned small businesses in that hundred million.  At the pace
we are going, we will have those ten disbarred by 2022.

Now, the question sitting behind us is, that is a problem.  And what we are asking
for is, is only thing we want to see on this committee, and I know it is the
only thing you want to see is, is qualified veteran-owned small businesses
getting the priority to get the contracts, do business, grow their business,
and serve the VA and other veterans to the best of their ability.

Do you think it is being portrayed uncharacteristic or unfairly, I should say,
that there is a slowness here and that there is a resistence to what the GAO
said and there is a resistance to making changes because that is certainly the
way it feels to me? 

So I know this is somewhat of a subjective question because I have no doubt that
your hundred percent commitment is to delivering the resources to veterans in
the best way and shepherding the taxpayer dollars in a responsible manner.

How come it appears like there is a disconnect here?  What are we missing that is
making it appear, because I think you are seeing a lot of unanimous agreement
that there is a problem here?

Mr. LENEY.  Sir, I absolutely believe that we share the goals that you just
stated, not only myself as the director of Small and Veteran Business Program,
but the senior leadership at the VA, absolutely sure of those goals.  And I am
absolutely confident there is no hesitation to pursue aggressively the goals
that were laid in 109-461.  I think the numbers speak for themselves.  In terms
of--

Mr. WALZ.  Was my number correct on disbarment?  It was wrong?

Mr. LENEY.  We have actually made seven disbarment decisions at the Debarment
Committee and I am happy to provide for the record the details for that.

[The VA subsequently provided the
following information:]

   
VA Response
:  VA is serious
about debarring companies who misrepresent their status as a VOSB or SDVOSB,
and in September 2010 formed the 8127 Debarment Committee, named after the
portion of the U.S. Code that implements the Veteran small business acquisition
portions of P.L. 109-461.  VA has developed and formalized specific
processes and criteria related to the 8127 Debarment Committee which can be
found on the committee’s web site at: (http://www.va.gov/oal/business/8127debarments.asp).  The
committee consists of representatives from the Office of Acquisition,
Logistics, and Construction (OALC); the Office of Small and Disadvantaged
Business Utilization (OSDBU); the Office of General Counsel (OGC); and the
Veterans Health Administration (VHA).  The committee will review referrals
for debarment and make formal recommendations to the debarring official
pursuant to the procedures in VAAR 809.406-3.

    As of December 2011,
the committee had debarred seven separate firms and ten individuals associated
with those firms.  These firms are:

  • Seabreeze Contracting, Inc.
  • Triton Services, Inc.
  • Chevron Construction Services, LLC
  • Mitsubishi Construction Corp.
  • KDV, Inc.
  • T.E.M. Group, Inc.
  • DAVID Construction, Inc.

    Of this seven, one firm has
completed the debarment period and is no longer listed in Excluded Parties List
System (EPLS) listing.  This firm is:

  • DAVID Construction, Inc.

    Of this seven, two have filed a lawsuit against VA in federal
district court, and the court directed VA to remove the names of the firms from
EPLS pending resolution of the litigation.  These firms are:

  • KDV, Inc.
  • T.E.M. Group, Inc.

    The remaining four firms are currently debarred and listed in
EPLS.   These firms are:

  • Seabreeze Contracting, Inc.
  • Triton Services, Inc.
  • Chevron Construction Services, LLC
  • Mitsubishi Construction Corp.

Mr. WALZ.  Okay.

Mr. LENEY.  We have referred over 60 cases in the last 12 months to the Office of
Inspector General.  So there is absolutely no resistence within the VA to
supporting and maintaining the integrity of the 109-461 Veterans First
Verification Program.

The senior leadership of the VA has put resources into it.  The challenges we face
is the implementation of resources.  When it comes to hiring, when it comes to
contracting, these things do not happen overnight.

I think in the last six months, we have made major strides.  As I said in my
opening statement, we are not satisfied.  We are not done.

And I apologize, Mr. Chairman, for my stuttering in response to your question, but
these are very important issues of acquisition policy.  And I would like to
submit for the record from the VA a response that we can lay out in detail both
our Vet First preferences and how they link to FAR Part 18.

Mr. WALZ.  Mr. Leney, if I could ask you.  On some of these firms, it is high
risk.  I hear what you are saying.  We want to give you all the tools
necessary.  And I think with the GAO and the IG and things, those are all tools
to streamline the process.

Do we do unannounced visits to high-risk firms?

Mr. LENEY.  Yes, sir, we do.  One of the things we established about four months
ago was a program of unannounced visits.  As part of our Risk Mitigation
Program, we now rank firms based on a number of factors in terms of their risk
to the VA and the taxpayer.

We not only do unannounced visits with respect to high-risk firms as a part of the
application process, we now have established visits to already verified firms
based on their risk category.

We have also included a random element to that.  We have instituted random site
visits for verified firms because we realize that verification is a snapshot in
time.

Mr. WALZ.  Do you think those things are helpful?  Are those tools helpful?  Is
this good best practices in terms of fraud and management?

Mr. LENEY.  Yes, sir, I believe so.  It works for the IRS and it is working for
us as well.

Mr. WALZ.  Okay.  I yield back, Mr. Chairman.  Thank you for the time.

Mr. JOHNSON.  I thank you and thank you for your indulgence.  I apologize that I
did not scan down.

Mr. Leney or Mr. Thompson, I apologize.  We have got more Members showing up.  I
got to get my scan down.  I yield to our colleague from Florida, Mr. Bilirakis.

Mr. BILIRAKIS.  Thank you, Mr. Chairman.  I appreciate it.

I recently had a veteran small business roundtable and the difficulty they have
encountered with the verification process is extensive.

I particularly am concerned that the reconsideration process is taking much too
long and could inhibit the legitimate veteran small business owners from
opportunities to create jobs and keep their doors open.

Specifically one of my constituents, and I would like to discuss this with you, Mr. Leney,
but specifically one of my constituents competed in a 17 month VA bid
process and was awarded a multiple award task order contract in mid October.

He found out that he had been denied service-disabled veteran-owned small business
status and submitted a request for reconsideration.  However, his business
needs to be verified by December 6, 2011 to meet the deadline to maintain the
multiple award task order contract.

Yet, under the first in, first out methodology, it seems improbable that this time
frame will be met which will cost jobs, of course. 

I worry that a process intended to help veterans is hurting them, Mr. Chairman.

What solutions would you suggest to this circumstance?  Would it be feasible to
expedite requests for reconsideration pending a documented contract award that
will reflect specific deadlines or, in the alternative, would it be possible to
maintain a conditional verified status until the reconsideration review is
complete?

I am concerned about the lack of due process under the current reconsideration
structure and how this lack of due process affects legitimate service-disabled
veteran-owned small businesses.

Can you specifically answer those questions and if you can, please, I would like to
get them in writing and maybe share with the committee as well? 

Thank you.  Mr. Leney, please.

Mr. LENEY.  Sir, I would be happy to provide for the record information with
regard to the specific situation that you referred to.  But I would like to
address some of the more general and important issues that you raised.

First, I want to reassure the committee there is an absolute commitment to due process
both in our initial verification and our request for reconsideration.  One of
the prices we are paying for a commitment to due process is time.

I mentioned in response to Congressman Walz’s question the ebb and flow of
applications.  We have received recently a dramatic surge in requests for
reconsideration.  And at one point going, almost a thousand requests for
reconsideration came in within 45 days.

Our priority has been to ensure that those firms when patiently in line to receive
a verification determination get that in a timely way.  Every request for
reconsideration it is important to note is those firms have failed to meet the
requirements of Public Law 109-461.

I have a difficult time putting those firms in front of firms that have, as far
as we know, met all of the criteria and, again, are waiting patiently in line.

We have shifted resources in CVE to put more resources against requests for
reconsideration.  I have made a policy decision to not disadvantage those firms
who are undergoing initial verification and to avoid sending us over the 90 day
limit so that those firms can have some expectation that we will meet our
objective and meet our goals in their initial verification.

That has resulted quite frankly in the fact that we are now not meeting our
objective in terms of turning around all of our requests for reconsideration
within 60 days.  But it is not a capricious process.

In order to ensure that a firm that has been determined to not meet the
requirements, that firm is now a higher risk, when they submit a request for
reconsideration, we do a complete reevaluation.  All of those firms are
referred to our Office of General Counsel to ensure that they do receive due
process and that we make an accurate determination.

Many of them receive site visits because their issues are more complex.  And our
first priority based on the communications we receive from this body are to
ensure the integrity of the process to ensure that when the GAO and the IG come
by the next time and they are coming back that they report to you that we have
maintained the integrity of the program and that ineligible firms are not being
verified.

And, unfortunately, sir, that takes time.

Mr. BILIRAKIS.  Thank you, Mr. Chairman. 

I would like to follow-up with you on this.

Mr. LENEY.  Be happy to do that, sir.

Mr. BILIRAKIS.  And the lack of communication as well and what these folks are
doing wrong, what the requirements are.  They need to know these things. 

And, you know, this guy has a contract, Mr. Chairman, and this is
creating jobs in my district. 

So I would like to follow-up with you on that.  Thank you, sir.

I yield back.

Mr. JOHNSON.  Thank you.

We are going to go to Mr. Amodei to see if he has questions.

Mr. AMODEI.  Thanks, Mr. Chairman.  I do not at this time.  I yield back.

Mr. JOHNSON.  Okay.  Well, thank you.

Then I would like to follow-up a little bit on yours just quickly.

How does a company get a contract if they have not been verified?

Mr. LENEY.  Sir, they do not--

Mr. JOHNSON.  Well, they did.  That is what you said, right?

Mr. BILIRAKIS.  Absolutely.

Mr. JOHNSON.  Okay.  So how do they get a contract if they have not been
verified?

Mr. LENEY.  There are a number of firms that currently have contracts with the VA
who were verified under the self-certification process.

Mr. JOHNSON.  This is a new one.  They were awarded the contract in October. 
That is recently.  How does that happen?

Mr.
Thompson, you got any ideas?

Mr. LENEY.  Sir, I am not aware of any firms--I am not aware of any firms to
include that one receiving a contract from the VA that is not verified. 

Mr. JOHNSON.  Okay.  Well, I look forward to hearing some feedback on that
further discussion then because it sounds like we have got a dichotomy. 

Mr. LENEY.  If I could clarify.  My understanding, what does occur is we have
firms that submit proposals for procurements.  Prior to award, contract
officers are required to check the vendor information pages to ensure that
firms are, in fact, verified.

At that time, we have had requests by contract officers, hey, I have an apparent
awardee and we need them to be verified.

Unfortunately,
our response is we are happy to verify firms that have submitted applications
and have been through the process, but we do not currently have a program of
accelerating the--

Mr. JOHNSON.  Is it typical to even consider?  Why would we consider a firm and
entertain a proposal from a firm that is not verified?

Mr. LENEY.  You raise an excellent point, Mr. Chairman.  And we have clarified to
the acquisition community that they now check, as part of my training to the
thousand contracting officials in the VA, they now check VIP upon receipt of
proposals because it is a waste of good government resources.

Mr. JOHNSON.  When did that policy go into effect?

Mr. LENEY.  The policy was always in effect, sir.  We clarified that policy and
conducted training because there were instances where contracting officials did
consider proposals prior to confirming verification.

Mr. JOHNSON.  Well, it appears somebody is not following the internal rules then
if indeed this contractor or this firm was considered.  I am glad you have
clarified that and hopefully--

Mr. BILIRAKIS.  Mr. Chairman, will you yield?  I understand that he was certified
under the old process.

Mr. JOHNSON.  Okay.

Mr. BILIRAKIS.  He did the recertification and that is what he is waiting for. 
And he has secured the contract and he has to be recertified.  And this is a
legitimate small business.  I can attest to that.  But he has to be recertified
by December 6th.  Otherwise, he loses the contract. 

Mr. JOHNSON.  How long does it take once a company is certified, how long does it
take to get them into system so that they are visible and can compete for
contracts?

Mr. LENEY.  Currently that time is measured in hours.  It was--

Mr. JOHNSON.  It is measured in hours?

Mr. LENEY.  --measured in weeks.  Right now upon determination, whether it is a
denial or an affirmation, we immediately now post it into the VIP system--

Mr. JOHNSON.  Okay.

Mr. LENEY.  --that same day.

Mr. JOHNSON.  So if a company is verified today, you are saying within hours--

Mr. LENEY.  Yes, sir.

Mr. JOHNSON.  --they would show up in the system?  Are you familiar with a
company called Ironclad?

Mr. LENEY.  The name is familiar, sir.  I would hesitate to speak to the details.

Mr. JOHNSON.  They received their congratulatory verification letter on November
7th.  Any idea why they are not in the system?

Mr. LENEY.  I would have to check, sir, because I would be surprised that they
are not in the system given the changes that we have made.  If they received a
congratulatory letter on November 7th, they should have been in the
system on the same day.

Mr. JOHNSON.  Well, as of today, they are still not in there.  So I--

Mr. LENEY.  I will be happy to check on that, sir, and provide you a response for
the record to find out why not.

Mr. JOHNSON.  Yeah.  I would like some feedback.

Mr. Leney, your testimony specifically mentions the tools to aid veteran
entrepreneurs provided in the Vet First Program, yet, as you are aware from the
recent Aldevra decision by GAO, VA does not always use these tools according to
the VAO analysis.

Do
you think VA is fully utilizing the Vet First Program given its stated
preference for using the federal supply schedule?

Mr. LENEY.  Sir, while I do not claim to be an expert on acquisition policy, I do
believe that the department does have an obligation to balance a number of
objectives. 

First
we have an obligation to seek best value for the 23 million veterans we
support.  We have got an obligation to promote competition and to reduce costs
to the Federal Government.  And we have an obligation to help veteran
businesses in the federal procurement process.

And
as we balance these obligations, I think we have made use of the federal supply
schedules in a positive way.  Forty percent of our federal supply schedule
dollars go to small businesses.  Across the government, the figure is 20
percent.  Thirteen percent of our federal supply schedule dollars go to veteran
businesses.

So
I think we are making use of the federal supply schedules.  And it allows us to
support veterans.  It allows us to provide opportunities to veteran firms.  It
also allows us to be good stewards of the taxpayers’ dollars.

The
federal supply schedules are an important tool for all agencies within the
government to include the VA.  We use that tool.  We use that tool to get to
veteran businesses.   

And
so my efforts have been to encourage and to educate veteran small businesses on
how to get on these federal supply schedules so we can--

Mr. JOHNSON.  Based on your preference for using the federal supply schedule,
where do the VOSBs and SDVOSBs fall in open source, where do they fall on that
federal supply schedule?

Mr. LENEY.  You mentioned our preference to use the federal supply schedules.

Mr. JOHNSON.  Yeah.

Mr. LENEY.  Only about 20 percent of our procurement is done through the federal
supply schedule.  Eighty percent is done in the full and open marketplace. 
Within that 20 percent, we do 13 percent to veterans.  Currently veterans do
not, as Mr. Thompson stated, do not have a preference.  Our position is, our
understanding of the law is that veterans do not have a preference within the
federal supply schedule.

Mr. JOHNSON.  When did your interpretation of the law change, Mr. Leney? 

As
I reiterated earlier, as early back as October 26 of 2010, the United States
Court of Federal Claims, the ANGELICA decision stated that the Veterans Benefit
Act is a specific mandate to the department and only to the department to grant
first priority to SDVOSBs and VOSBs in the awarding of contracts.

You
go even further back than that.  April 28th of 2010 in a VA
information letter, the VA again noted that on December 22nd, 2006,
Public Law 109-461, the Veterans Benefits Healthcare and Information Technology
Act of 2006 was signed.  Sections 502 and 503 of the legislation authorized a
unique veterans first approach to specific VA contracting implemented as the
Veterans First Contracting Program.

And
going back to the June 20th, 2007, this approach changes the small
business hierarchy within VA placing service-disabled veteran-owned small
businesses and veteran-owned small businesses first and second respectively in
satisfying VA’s acquisition requirements.

It
does not talk about percentages.  It does not talk about the federal supply
schedule or any of that.  It says first and second respectively in satisfying
the VA’s acquisition requirements.

When
did your interpretation of the law change?

Mr. LENEY.  Our interpretation of the law has not changed.  But in terms of that
interpretation, I defer to our deputy general counsel, Mr. Thompson.

Mr. THOMPSON.  Sir, he is correct.  We have always interpreted the Veterans First
legislation as it is sometimes called as establishing within the hierarchy of
set-asides the primacy of service-disabled veteran-owned small businesses.

Mr. JOHNSON.  Mr. Thompson, nothing in previous VA statements on this issue says
anything about VA set-asides.  And the GAO disagrees with your interpretation
of the law.

Mr. THOMPSON.  I understand GAO is of a different opinion.

Mr. JOHNSON.  And can you please tell us, tell this committee--

Mr. THOMPSON.  Uh-huh.

Mr. JOHNSON.  --how VA considers itself exempt from the requirements laid out in Title
38, Section 8127 of Public Law 109-461?  You see, the Federal Government cannot
be sued for not meeting goals, but the Federal Government can be sued for not
adhering to the law.  And that is what this committee is concerned about.

Your
department is supposed to be looking out for veteran-owned businesses.  Why is
there such reluctance from the department to follow the intent and the spirit
of the law as identified by the GAO?

Mr. THOMPSON.  Sir, as I indicated, we have a different interpretation than GAO. 
And, you know, our interpretation has consistently been that Public Law 109-461
did several things, among them establishing service-disabled veteran-owned
businesses as having primacy within the categories of all set-aside categories.

It
also authorized VA and only VA to do restricted competitions that are limited
to VOSBs and SDVOSBs for purposes of meeting the secretary’s goals.  And VA has
been meeting those goals.  It has complied with the letter and with the spirit
of the law in our humble opinion.

Mr. JOHNSON.  I am going to yield to the ranking member to ask some questions. 
Just one final follow-up on this issue.

Obviously
there is great disagreement with the VA’s interpretation of the law.  The GAO
disagrees.  I disagree.

Is
there going to be a review to go back and look at this because you have been
told by the GAO that your interpretation is wrong?

Mr. THOMPSON.  We have been told by GAO.  GAO recommendations are just that to
federal agencies.  This issue is still being discussed with the executive
branch.  There has been no final decision as to what position the
Administration will take on this issue.  And so as soon as that is resolved, we
will certainly be back in touch.

Mr. JOHNSON.  I yield to Mr. Donnelly.

Mr. DONNELLY.  Mr. Leney, with the prime contracting goals at 12 percent for VOSB
and 10 percent for SDVOSB, and we exceeded those, why can’t those goals be 25
and 25 or 35 and 35?  Do we have enough contractors to meet those numbers and
shouldn’t our efforts in the VA above all--not even above all federal agencies,
but as an example to all federal agencies that we not shoot for the lowest
number but push hard for higher numbers?  What will hold us back from moving
those to a higher percentage?

Mr. LENEY.  I believe that the VA has served as an example in this arena.  We are
a leader in this area.  We have exceeded the goals.  We have not attempted to
do minimum necessary.  We have not--

Mr. DONNELLY.  I did not say that.  What I am trying to say is how can we move
those numbers higher?  And, for instance, what would stop us from doing 25 and
25 this year and 35 and 35 next year?

Mr. LENEY.  You asked a very important question, what are we doing to move those
numbers higher, and we are doing a number of things.

First
of all, with respect to verification is to promote the number of firms that are
being verified while at the same time ensuring that only eligible firms are
verified because if we fail in that regard, then we put at risk all of the
firms who are receiving the preferences and the benefits of the Vet First
Program.

Secondly,
we have initiated an aggressive program to directly connect veteran-owned small
businesses with procurement decision makers within the VA.

At
the national veterans conference back in August, we brought more than 250
procurement decision makers to New Orleans.

Mr. DONNELLY.  So who sets the 12 and 10?

Mr. LENEY.  In this case, the secretary set expanding goals.

Mr. DONNELLY.  Then it would be the Secretary we would go to to say can we make
it 25 and 25 for next year?

Mr. LENEY.  Yes, sir.  At the end of the day, the secretary drives the train at
the VA.

I
would just caution you that as we put more and more of our procurement dollars
into a relatively small group of firms that we run the risk of--whenever we
limit competition via set-asides, we run the risk of increasing the cost to the
government in terms of its procurements.

Mr. DONNELLY.  Well, let me ask you this.  And we run the risk.  If our veterans can
match them on price, shouldn’t we be giving it to our veterans?

Mr. LENEY.  If we have veteran-owned businesses that are qualified, if we have
veteran-owned businesses that are competitive, absolutely.  And in our program,
when we have those situations, we give preference to veterans.

Mr. DONNELLY.  And I understand your concern because you want to be a good
steward of the taxpayers’ dollar.  But at the same time, if we can do it at 12
and 10 and we are already pushing way over our number and we look and we say
let’s shoot for 25 and 25 and we are able to do it in a taxpayer-funded
protected way, wouldn’t that be a good thing?

Mr. LENEY.  I think it is a good thing and I support maximum practical
opportunities to small businesses and particularly veteran-owned small
businesses.  And that is what we seek to do is to identify maximum practical
opportunities and get to those businesses.  I am not able to speak to whether
or not 25 is the right number or 22 is the right number.

Mr. DONNELLY.  I am not saying that is the right number.  I am saying why don’t
we continue to push our numbers in an effort to continue to try to pay back the
people who have put their lives on the line for our country.

I
yield back, Mr. Chairman.

Mr. JOHNSON.  I thank the gentleman for yielding back.

Mr. Stutzman.

Mr. STUTZMAN.  Thank you.

And
I think that is an excellent point in what Mr. Donnelly is saying is, and if I
understood his comments correctly, is what is the harm in trying to pursue
more?  I mean, if this is the VA, it should be a priority in finding
and contracting to those veteran-owned businesses.

It should not be an obligation.  It should really be at the top of our
priority list.  And I think back to the question that the chairman is asking is
why not?

And
the question here is, why are there fully eligible firms being denied because
of state community property laws?  Any comments?  It sounds like there are
fully eligible businesses out there that are being denied.

Mr. LENEY.  Mr. Chairman, I am not aware fully eligible businesses are being
denied.  We have had an issue with and we have examined the issue of community
property laws in a number of different states. 

And
we have actually provided some assistance as part of our Veteran Assistance Program,
our Verification Assistance Program to clarify how a firm can meet the
community property requirements of their state while still meeting the
requirement to have ownership and control.

The
problem that we encountered in the past was the lack of understanding and how
to address both of those issues.  And we provided clarification to applicants
on how they--and we are getting applicants who are, in fact, from community
property states who are being verified.

Mr. STUTZMAN.  Are they being denied?

Mr. LENEY.  Sir?

Mr. STUTZMAN.  Are they being denied?

Mr. LENEY.  If an applicant has not met the requirements of 38 CFR 74, they are
denied.  If they have not taken the action to disassociate and to ensure that
they have 51 percent ownership, then they are denied.  And in some cases,
applicants primarily through ignorance have not met those requirements.

Mr. STUTZMAN.  Can you give us an interpretation for the 60 percent increase in
the last two months on the number of denials that are requesting
reconsideration?

Mr. LENEY.  Yes, sir.  That is primarily a function of our efforts to move a
larger number of firms through the process.  We have had great success in
completing verification decisions on initial applications.  As a result, more
decisions have come out.  And when you have more decisions, we are denying
almost 50 percent of those applications because they do not meet the
requirements of the law.

Mr. STUTZMAN.  And it appears you have hired contractors to assist with
verification.  How do you determine whether their employees are qualified to
make verification decisions?

Mr. LENEY.  No verification decisions are made by contractors.  All verification
decisions are made by government employees.  Without the support of government
contractors from SDVOSBs, I would not be able to sit here and demonstrate any
progress over the last six months.

Mr. STUTZMAN.  It just sounds to me like our veteran-owned businesses, small
businesses are having to scrap and scrap for--I mean, they should not be
getting their crumbs.  They should not be the ones that are having to fight so
hard.

I
mean, is this typical for any other small businesses?

Mr. LENEY.  Sir, I came out of the small business community and I will tell you
that I have enormous respect for small businesses because small businesses do
scrap.  They have to be scrappy. 

Mr. STUTZMAN.  I agree with that.  I am a small business owner and I agree with
that.

Mr. LENEY.  It is not our intent to make it difficult or more difficult for small
businesses to be successful.  It is I believe our responsibility as provided by
this body to ensure that when we give preferences to veteran-owned businesses
that they are eligible to receive those preferences.  And that is what we seek
to do and that is what we are working very hard at.

We
realized we are also trying to balance the challenge of ensuring that you do
not confront us with a failure to ensure that only eligible businesses get
verified and to ensure that we do have due process.  Our rules are not
capricious.  Our process is not capricious.

Yes,
we use contractors to assist us with this process in order to speed up.  We
have expanded the number of contractors we use in the process.  Why?  Because I
had an imperative to get 127 days to get an initial determination made down to
less than our 90 day commitment that we have made to small businesses.  And we
have successfully done that.

But
we have a process.  Is it as streamlined as I want it to be?  Absolutely not. 
Is it a lot better?  Absolutely yes.

Mr. STUTZMAN.  Let me ask you this because I am a nonveteran and I am a small
business owner.  And if I am trying to get a contract, is it easier for me to
get a contract than it would be for a veteran-owned small business?

Mr. LENEY.  Not in the VA.  Not in the VA because currently in the VA, if you
look at our numbers, last year we did 37 percent, actually a little over 36
percent to small businesses.  Twenty-two percent went to vet--two-thirds of our
small business dollars go to veterans.

So
if you are a small business, my advice to you and my advice to small businesses
who are not veterans is the VA is probably not a lucrative market for you
because we do give preference to veterans and we have demonstrated that.

Mr. STUTZMAN.  Thank you.

I
will yield back.

Mr. JOHNSON.  Thank you for yielding back.

Mr. Walz.

Mr. WALZ.  Thank you, Mr. Chairman.

Thank
you, Mr. Leney. 

We
are trying to get at this and I cannot help but think this is somewhat of a
microcosm of what goes on in the country, that we are polarized.  We have the
either/ors.  We are all in here together working on the same cause.  We have
the private sector.  We have the government sector. 

But
I also am certainly not going to defend what we are not moving quickly enough.

I
was going to ask and not facetiously or whatever, how many of those contractors
helping on the contractor verification process were veteran businesses?

Mr. LENEY.  Every contractor that we used in the verification process is a
veteran-owned business.

Mr. WALZ.  That is great.

Mr. LENEY.  Every company.

Mr. WALZ.  And how did you come to that?  How did you do that?  How did you fill
that or how did you succeed at a hundred percent in that because the question I
think that has been very important asked today is, if the VA is not going to
give the highest veteran preferences, who then?  Who then?     There is nobody
else to do it.  I argue that with our offices that we have a hiring preference
and my last hire comes right back from Iraq and gets hired.  We have to live by
our own rules.  I am just curious on that.  That is good.

How
did you get that done?  So you got a hundred percent of these contractors that
are helping with verification are veteran-owned small businesses that is great and that is
a positive story.  How did we get to that?

Mr. LENEY.  Well, we took advantage of the tool that you provided us which is
109-461 and opted into the Vet First Program.  We were able to reach out to
service-disabled veteran-owned small businesses who are fully qualified and
fully competitive.

And
I am fully satisfied that we have received quality work at a competitive price
from these firms.  And there are many, many service-disabled veteran-owned
small businesses and veteran-owned small businesses that fall in that category.

My
focus is to ensure that we enhance the opportunities for those business and
that is why we have undertaken a major effort within the VA to enhance their
ability to deal directly with program decision makers.

Mr. WALZ.  And this is where I am going to be your staunchest supporter on this. 
I want to tell that story.  That is good.  You have got some folks behind you
that have I do not think been overly appreciative.  I think they are glad to
hear that.

My
question is, is part of this equation that we are talking some carrot and doing
some of this?  Is the stick to be there? 

What I want to know is, if you are a business and you are applying
fraudulently on the backs of veterans, I think we should smoke you in the public
like you have never been smoked because I tell you whether there is a legal
precedence, the public’s perception of that business trying to scam off
veterans will be enough to keep people away from it.

Can
we give more tools to make sure that that hammer that drops, you better think
twice about signing that paper?  If you do not have the DD214 and you are not
going to be in there working the number of hours doing this, there is going to
be hell to pay because what you are doing is not just defrauding the taxpayers,
you are cheating a veteran who is coming back from serving this Nation.

Is
that a part that can help?  Is that part of the equation that would strengthen
your ability to cut down on these because it just seems like you are being
bombarded with these? 

And
I am asking the staff up here who has the audacity to put in a false claim as a
veteran-owned business knowing you are taking away from a deserving veteran? 
Is that a place where we can help you?

Mr. LENEY.  I want to assure you of a couple things.  One, we agree that we are
also opposed to any fraudulent business doing business with the VA or any part
of the Federal Government.

I
think it is important to note that a very, very small percentage of those firms
that we deem to be ineligible to participate in Vets First are intentionally
misrepresenting or are pursuing a fraudulent endeavor.

All
of those that we believe to be in that category, we refer to the IG for
action.  As I said, we have referred over 60 firms.

However,
that is 60 firms out of over 2,000 that we have denied verification.  There
is--

Mr. WALZ.  Are the rules so unclear that people do not know?  Is that what is
happening here, the rules on what a veteran-owned small business? 

I
was just asking here.  The colonel was sitting here.  If he and I as both
veterans decided we wanted to do this, how would you verify us?  I got a 214. 
He has got a 214.  We are going to invest some money.  We are going to hire our
kids to work in the company or whatever.  Would we get a contract?  What would
stop us from getting a contract?

Mr. LENEY.  Less than one percent of the denials are a function of the owner not
being a veteran.  There are very few instances that I have seen in the last--

Mr. WALZ.  Okay.

Mr. LENEY.  --six months, very few where the person who asserts that I am a
veteran is, in fact, not.  That is the outlier.  That is the extreme outlier.

Mr. WALZ.  The reason for getting thrown is control of the company--

Mr. LENEY.  Yes, sir.

Mr. WALZ.  --and the rules?

Mr. LENEY.  Yes, sir.  And the rules within 38 CFR 74 that came out of 109-461
are rigorous.  And we believe--

Mr. WALZ.  Are they too rigorous because you are telling me these are real
veterans really applying, but they are getting thrown out? 

Now,
some of them you want to be thrown out if they are a firm that does not have
the capacity to fill the contract.  I certainly do not expect you to award them
the contract.  But if they have the capability, what is throwing them out?

Mr. LENEY.  Well, let me address I think the core of your question.  I believe
that the current policy is designed to ensure only legitimate businesses,
veteran-owned businesses are verified as eligible for Vet First.

And
I really welcome and I have reached out to veterans service organizations and a
large number of veteran-owned businesspeople to engage in policy discussions on
where should we and how should we and is it appropriate to change the policy.

And
I was surprised at the lack of consensus over what policy changes should be
made.  And while I have initiated these conversations, given the diversity of
viewpoints that I have run into, it is going to require considerable discussion
and consideration by the VA and by this body.

And
I will confess my focus over the last six months has been to improve the
process because I am painfully aware having come out of that community of what
it means to a small business and its ability to do business with the VA.

So
I have been focused on making sure that we communicate and that we implement
the policy that exists rather than focusing on how to change that policy.  But
there are those who would argue for changes and I confront those who would
argue that it should not be changed.

Mr. WALZ.  No.  I thank you.  That is helpful to me.  This is one of those
things, if the Chairman would indulge me for just a minute, I always like
myself to know the exact process that goes through this. 

I
would be curious, and I certainly do not want to take up your time on a
hypothetical or whatever, but I would be curious to see what it would be like
for myself.

Do
you know if there are any Members of Congress who are veterans that have used
this program who would have firsthand experience of what these small business
owners are frustrated about?

Mr. LENEY.  I am not aware that there has been any Member of Congress.  I will
check and respond.

Mr. WALZ.  I am just curious because I think it would probably be for me to go
back again and look at every single one of those forms, look at every single
verification, look at the potential because this is--I was hopeful that it
would not be a whole bunch of people fraudulently claiming to be veterans.  And
you are telling me that is the absolute anomaly.

But
I am curious now and maybe even a little more concerned of these veterans that
are saying I am a veteran, I still got thrown out.  It made no difference. 
That is the part that I am a little more concerned about.

Mr. LENEY.  If I could respond to that, Mr. Chairman.

Mr. WALZ.  Sorry.

Mr. LENEY.  The major issue is about control of the firm.  And as I say, I
believe the current policy is designed to ensure that veterans are, in fact, in
control of the firm, that veterans are not used as passers, veterans are not
used as fronts.

We
have had instances where that has happened.  And I do not think it is the
intent of this body to allow that to go forward.  The nature of the rules is
such that it does make it difficult sometimes for a veteran to do business like
he would like to or he or she would like to do business and still meet the
requirements of 109-461.

I
will give you one clear example that has an adverse effect on small
businesses.  And I am not making a statement about whether I support the policy
or do not support the policy.  I support the VA policy on this.  I support 38 CFR 74. 

But
109-461 makes it very difficult for a veteran-owned small business owner to get
equity financing.  Why?  Because, sir, if you were providing me with a million
dollars to my business and I am the veteran and you are not a veteran, are you
going to give me 100 percent control of that organization?  Are you going to
allow me to sell that business out from under you and you receive 49 percent of
the million dollars I get for the business and I receive 51 percent of that
million dollars when I put in not a nickel and you put in a million dollars?  I
do not think--

Mr. WALZ.  Does it have to be a hundred percent then?  We were just asking that
question.  This hypothetical could be real, though, this--

Mr. LENEY.  It is very real to a lot of firms.  That is how it works.

Mr. WALZ.  Well, that is very helpful.  I do not want to--

Mr. LENEY.  The current requirement is for 100 percent control.  Right now the
regulation says I could sell the business in which you have invested a million
dollars tomorrow for $500,000 and walk away with 51 percent of the sale price
and give you 49 percent of that sale price.

Mr. WALZ.  Thank you, Mr. Chairman, for indulging me.

Mr. JOHNSON.  I thank you for your line of questioning.

We
are going to have to wrap this up because we have got a second panel that we
want to hear from today.

But
did I understand you correctly that the law currently says in your
interpretation that the veteran has to own 100 percent of the company?

Mr. LENEY.  Absolutely not.  The veteran has to own 51 percent of the company.

Mr. JOHNSON.  Okay.

Mr. LENEY.  But the veteran must be in control of the company.

Mr. JOHNSON.  Okay.

Mr. LENEY.  One hundred percent in control.

Mr. JOHNSON.  Isn’t 51 percent in control of the company?

Mr. LENEY.  No, sir, it is not.

Mr. JOHNSON.  On the outside, if you have got two partners and one partner is at
51 percent and one partner is at 49 percent, the 51 percent makes the decision. 
That is who is in control of the company, right?

Mr. LENEY.  Unless your operating agreement authorizes the board that may and is
often comprised of or includes nonveterans.

Mr. JOHNSON.  Okay.  All right.  Well, obviously there are some details that we
do not have time to get into here today.  That is helpful.  And, you know, I do
not want to come across as berating. 

I
know that what the intent of your department is, but I think you can see from
the questions and the concerns from this subcommittee and our other
Subcommittee on Economic Opportunity, we have got some real concerns whether
veterans and disadvantaged veterans, disabled veterans’ businesses are getting
the fair shake that was intended in the law. 

The
GAO has validated our concerns.  We have expressed those concerns to you
folks.  We are going to continue to address this issue until we feel that we
have got an adequate answer and a response and a process that is going to
ensure that our veterans are getting the shake that they are supposed to.

With
that, I want to thank you for your testimony.

Mr. LENEY.  Thank you, sir.

Mr. JOHNSON.  And you are now excused.

I
will call the second panel.  On our second panel today, we will hear from Mr.
Greg Kutz and Mr. Ralph White from the U.S. Government Accountability Office.

Mr. Kutz and Mr. White, your complete written statements will be made a part of the
hearing record.

Mr. Kutz, you are now recognized for five minutes.

STATEMENTS
OF GREGORY D. KUTZ, FORENSIC AUDITS AND INVESTIGATIVE SERVICE, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE; RALPH O. WHITE, MANAGING ASSOCIATE GENERAL COUNSEL FOR
PROCUREMENT LAW, OFFICE OF GENERAL COUNSEL, U.S. GOVERNMENT ACCOUNTABILITY
OFFICE

  STATEMENT
OF MR. KUTZ

Mr. KUTZ.  Chairman and Members of the subcommittees, thank you for the
opportunity to discuss the Service-Disabled Veteran-Owned Small Business
Program.

Today’s
testimony highlights the results of our assessment of the Department of
Veterans Affairs’ fraud prevention controls.

My
testimony has two parts.  First, I will discuss progress made in the
Verification Program and, second, I will discuss our recommendations.

     [Chart]

 

Flow Chart showing GAO's Fraud Prevention Framework

 

Mr. KUTZ.  As you can see on the monitor, this shows GAO’s fraud prevention
framework which we use to assess VA’s controls.  On the left is prevention
which includes steps to keep ineligible firms from entering the program.

In
the middle is monitoring which is making sure that verified firms remain
eligible.  And on the right is investigation and consequences for fraud and
abuse.

Let
me start by saying that VA has made the most progress in the area of
prevention.  This is evident with progress and enhanced staffing, as Mr. Leney
mentioned, and stronger verification of firms and individuals.

According
to VA, these steps have helped the agency deny the applications of 1,800
ineligible firms.  They also led to the rejection of our applications for two
bogus firms that used fictitious individuals that were not service-disabled
veterans.

Overall,
there has been less progress in the areas of monitoring and consequences. 
However, with respect to monitoring, VA is doing random announced site visits
for verified firms to ensure that they remain eligible.

They
have also with respect to consequences established a Debarment Committee and,
as Mr. Leney said, taken several debarment actions.  They have also, as was
mentioned, referred 70 is what we understand firms to the VA Inspector General
for further investigation.

Moving
on to my second point, we are making 13 recommendations to address a number of
remaining vulnerabilities.  VA generally has concurred with these
recommendations and is taking action on most of them.

We
will work with Mr. Leney and his staff to determine which of these 13
recommendations has been fully implemented and report our results back to you.

There
are three areas in particular that VA should focus on starting with human
capital.  For this program to succeed, VA needs expert staff dedicated to
maintaining program integrity.

Mr. Leney has shown strong leadership and very good progress in a short period of
time.  However, VA needs to develop a deep bench of expert staff to sustain
progress made and to perhaps build on it in the near future.

Second,
unannounced site visits are an important tool that we use in our own
investigations.  For example, the monitor shows what we found during an
unannounced site visit to Fort Irwin in California as part of a past
investigation.

The
portable toilet and hand wash stations that you see belong to an ineligible
pass-through firm that was actually performing the work.  We recommended VA use
unannounced site visits like this as part of their application process and as
part of re-verification with a particular focus, as Mr. Leney said, on
high-risk firms.

Third,
historically the vast majority of fraud and abuse in this program was not
identified and the bad actors face absolutely no consequence. 

For
example, the front firm for the portable toilet case again that you see on the
monitor was highlighted not only in our investigation but was found to be
ineligible by the SBA during a protest.  This firm was not debarred by SBA and
got to keep the contracts that they won through fraud and abuse.

We
recommend that VA strengthen its Debarment Committee established in September
of 2010 to prevent known bad actors like this from entering the program.

In
conclusion, stealing money from legitimate service-disabled veterans should not
be tolerated.  That is why we are here today and that is why this is so
important.

I
look forward to continuing to work with both subcommittees and VA to help
protect the rights of legitimate service-disabled veteran entrepreneurs.

Mr.
Chairman, that ends my statement and I look forward to your questions.

[The
statement of Gregory D. Kutz appears in the Appendix.]

Mr. JOHNSON.  Thank you for your testimony.

Mr.
White, you are now recognized for five minutes.

 STATEMENT
OF RALPH O. WHITE

Mr. WHITE.  Thank you, Mr. Chairman.

Chairman
Johnson, Chairman Stutzman, ranking members, and Members of the subcommittees,
my name is Ralph White and I am the head of the Bid Protest Unit at GAO.

Thank
you for asking for us to come today and talk about GAO’s recent bid protest
decision, sustaining a protest filed by a service-disabled veteran-owed small
business named Aldevra.

Mr.
Chairman, for more than 80 years, GAO has provided disappointed bidders with an
objective, independent, and impartial forum for the resolution of disputes
concerning the award of Federal Government contracts.

In
1984, Congress provided a statutory basis for these protests with the passage
of the Competition in Contracting Act.

Under
this statute, any business participating in a federal procurement can challenge
the award or the solicitation for a government contract provided it acts within
a very short time. 

When
a protest is filed within this short time, executive branch agencies are
required by the law in most instances to wait for GAO’s decision.  In return,
GAO is required to produce its decision within 100 days.

The
standard of review set by Congress is simply whether the award or planned award
violates procurement law regulation.  Unlike GAO’s audit function, we do not
consider issues of whether the agency is properly managing a program or buying
the right mix of goods or services.

In
the case called Aldevra, which has been discussed a fair amount here, we were
given a protest that involved two VA solicitations seeking to buy industrial
kitchen equipment using the federal supply schedule.

As
you know, the federal supply schedule is administered by the GSA available for
us by all executive branch agencies and open to businesses of all sizes.

Aldevra
appearing before us without the benefit of a lawyer argued that the VA’s use of
the federal supply schedule violated a statute passed by this committee, the
Veterans Benefits Healthcare and Information Technology Act of 2006.

Aldevra
argued that under the 2006 act, the VA first had to consider whether this
equipment could be purchased using a competition between two or more
service-disabled veteran-owned small businesses.  In our October 11 decision,
we agree with Aldevra.

In
short, our decision applied the plain meaning of the 2006 act.  The act sets up
a two-step priority first for service-disabled veteran-owned small businesses,
then followed by veteran-owned small businesses, and it then states that the VA
shall set aside contracts for these businesses whenever, one, there are two or
more of them capable of performing the work and, two, they can do the work at a
fair and reasonable price.  If these conditions are not met, the VA is free to
procure in any manner appropriate. 

In
conclusion, just a few observations.  First, the 2006 act applies only to the
VA.  It is different from the 2003 act which applies to the entire executive
branch.

Second,
the 2006 act does not always require set-asides.  It only operates when there
are two or more veteran-owned small businesses capable of doing the work at a
fair market price.

Thus,
Congress directed the VA to rely upon the power of competition and the power of
the free market, but if the competition and the marketplace permit, give first
priority to veteran-owned small businesses.

Third,
because GAO is a legislative branch agency, we cannot compel the VA to follow
our recommendations.  GAO’s statute gives the VA 60 days to decide whether to
follow the recommendation and five more days to advise us of their decision.

If
the VA elects not to follow the recommendation, GAO is required to notify the
Congress of the agency’s decision.  The due date for the VA to respond to GAO
is December 15th.

Finally,
I just would like to also mention that the owner of Aldevra and his family are
in the audience here today. 

Mr.
Chairman, with that, that is the end of my prepared statement and I would be
happy to answer any questions that you might have.

[The statement of Ralph O. White appears in the
Appendix.]

Mr. JOHNSON.  Well, thank you, gentlemen.  Thank you both.

We
will start with the questioning.  Mr. White, how many bid protests are filed
with the GAO each year?  Do you have an idea of what number would be?

Mr. WHITE.  I do.  We have been seeing an increase in protests in recent years
and we had just over 2,300 in fiscal year 2011.

Mr. JOHNSON.  Okay.  How many get sustained?

Mr. WHITE.  Actually, a good number of our decisions do not go all the way to a
decision.  Agencies voluntarily pull back a number of procurements.  But of the
cases that go to a decision, that was 417 of them, we sustained 67.

Mr. JOHNSON.  Okay.  Is it safe to say then that the remainder get denied?

Mr. WHITE.  Yes, the 417 minus 67.  The percentages, Mr. Chairman, just to put it
in perspective, we deny about 84 percent of protests.  We sustain 16 percent of
the ones we decided on the merits.

Mr. JOHNSON.  Okay.  How many protests are there of VA procurements?

Mr. WHITE.  Actually, we have not quite topped 200 in VA procurements.  I have
the numbers for the last few years.  I think it was about 180 in fiscal year
2011.  If I could, I would like to provide you for the record both the total
number of VA protests and denies and sustains for the record.

Mr. JOHNSON.  Okay.  All right.  I would appreciate that.

You
have heard in previous testimony this morning that the VA does not interpret
the law the same way that GAO does.

Would
you care to comment on that, either of you?

Mr. WHITE.  Well, first, I just would not mind mentioning that we view our
obligation is to in thinking about legislative history to look at the plain
meaning of the statute.  And if we can decide a question based on the plain
meaning, that is really where we stop. 

And
the plain meaning of this statute led us to conclude that Congress used the
word shall.  It did not include any exceptions.  And we could not see nor did
the VA provide any explanation of how they could justify going elsewhere.

Mr. JOHNSON.  Just a good distinction.  The word shall has a very, very explicit
meaning in government contracting, right?  What does the word shall mean?

Mr. WHITE.  It certainly does not mean may.

Mr. JOHNSON.  That is right.  It does not leave much to interpretation.  Is that
safe to say?

Mr. WHITE.  Yes, sir.

Mr. JOHNSON.  Okay.  All right.  In dealing with the certification process, of
your 13 recommendations, several relate to the need for VA to enhance its staff
capabilities.  You have noted that there is enhanced staffing at VA, but that
more needs to be done in this area.

How
important is the staffing or the human capital element of the VA employees to
the overall success of the Verification Program?

Mr. KUTZ.  Well, it is very important.  You have got the human capital element,
processes, uses of technology, but none of it works unless you have got strong expert
government employees running the operation.  That is really very important.

As
Mr. Leney and some of you mentioned, there are a lot of contractors involved in
this process, so contract management and oversight is also important.  But I
really believe that the human capital is probably central to the success of
this Verification Program, not only the quality of the people but the right
number of people. 

Mr. JOHNSON.  Okay.  Has the VA taken steps to evaluate the sufficiency of the
number of staff and the training and qualifications of the staff that are
overseeing this program?

Mr. KUTZ.  Yeah.  They have taken steps and there are two parts to it.  Again,
there is the government employee group which is between 10 and 20.  I do not
know what the current number is.  And then there is the contracting group which
is larger.

And
so it is a combination of both.  And I think at this point, they have got good
people, but I think that they may not always be trained in the right areas. 
Mr. Leney has talked about having them trained in the area of certified fraud
examination, for example.

So
I believe they are doing an assessment and looking to see ways to upgrade their
own staff and perhaps the contract staff also.

Mr. JOHNSON.  Okay.  In regards to debarments, how do you explain the gap between
1,800 ineligible firms, 70 firms referred by VA to the IG, and only a few
debarment actions?

Mr. KUTZ.  Well, I think it is difficult.  I mean, the way the law was written,
it said misrepresentation, but I think we all could agree that the
interpretation would be willful misrepresentation. 

I
do not think we want to debar people who are making mistakes necessarily.  But
there is a large gap between what has been done so far and perhaps the people
that should have been debarred.  And I think what it creates is a situation
where people are going to be able to get into the system that perhaps should
not and stay in the system. 

They
may even be kicked out here or denied, but then they go do work with DoD or
NASA or someone else because keep in mind you are looking at $3.2 billion or so
out of $10 or $11 billion government-wide in service-disabled contracting.  So
I think that it is a matter of--right now all the staff as we understand are
part time on the Debarment Committee, so it is a matter of perhaps resources
and how many can you actually do.  A debarment is very difficult,
time-consuming process.

Mr. JOHNSON.  Okay.  All right.  Thank you.

I
will yield to Mr. Walz for his questions.

Mr. WALZ.  Well, thank you both for being here.  It is good that we are having
both these panels.  Obviously we want to hear the whole thing.  It seems like
there is a bit of a disconnect.

How
often does it happen, if you can help me with this, where a GAO’s recommendation,
and we heard from the last panel that they are just interpreting it
differently, do you have an idea how often that happens in your experience?

Mr. WHITE.  That happens very rarely, Mr. Walz.  In fact, I think I can think of
fewer than five times in the last decade.

Mr. WALZ.  Okay.

Mr. WHITE.  We had about 2,000 cases.

Mr. WALZ.  And I am also curious and I am a stickler for getting the details
right.  I mentioned the one disbarment.  We got that from the GAO, from you
guys, was the number that we were using.

I
want to be very clear.  The VA says it is seven now.  Is that just the lag time
in reporting it is happening there?

Mr. KUTZ.  Well, you are talking about the ten cases that we identified in our
first report.  None of those have been debarred by VA.  The ones that they have
debarred have come through their own processes.

In
fact, one of those ten in--

Mr. WALZ.  My scenario of 20, 22 is actually optimistic on those ten cases.

Mr. KUTZ.  Yeah.  I do not think it is going to happen at VA probably, but one of
the ten recently this month was indicted on 15 counts of wire fraud and other
fraud.  So as you may be aware of that, that was one of our original cases,
and--

Mr. WALZ.  And they are still not disbarred?  Now, I want to give due process. 
They were indicted.  They were convicted.

Mr. KUTZ.  They were indicted and I believe the individual and not the firm right
now is debarred which that is questionable.  And we are going to look at that. 

Part
of our follow-up work for both subcommittees here is to report back to you the
details of what happened to those ten firms.  And I believe SBA did debar or
suspended a couple of them.  And now this is the first indictment out of the
ten and there a couple of others that are still under investigation.

Mr. WALZ.  I am curious about this.  You know, I mentioned one.  They said, no,
it is seven.  And we have a disconnect here.

Are
those still small numbers?  I know it is the statistics here type of thing.  I
finished seventh in my class which was great, but there were only 25 of us.  So
that is a little different. 

So
is this is a case of this--yeah, they know it is Congress.  Do you know what I
am saying?  It seems like an inordinately small number, but maybe the problem
is not as great in the ineligibles. 

I
am trying to get at this of where--I just get a feeling and maybe I will take
this one step further to you, Mr. White.  This is a very unusual disconnect
between GAO and an agency since I have been here.  I am feeling that.  And I
have to say your initial statement mentioning Aldevra being here seemed highly
unusual to me.

Do
you feel that strongly that that is why you mentioned that?  I am glad they are
here and it is an open public hearing, but for the GAO to mention that they are
here and their statement seems to me to show--maybe I am misinterpreting
here--that you feel very strongly about this.

Mr. WHITE.  I actually noticed they were here and I thought it was a nice
gesture.

Mr. WALZ.  Okay.  Well, good.  And I do not want to read anything into it.  I
want to be very clear on that.  You know, and I think it is great for the
citizens.  I think what we are seeing is a great example of how the checks and
balances can work. 

What
I am trying to figure out is, is how we use what you have given us, how we
apply that to improve which is, as I said again, an incredibly good
organization, the VA, an incredibly good program that is serving veterans.  We
just want to make it even better and get these out.

Do
you get the feeling they are implementing your suggestions at a pace that can
be done, Mr. Kutz?  Do you think they are?

Mr. KUTZ.  With respect to the 13 recommendations--

Mr. WALZ.  Yes.

Mr. KUTZ.  --they are taking action on most of those and, as I mentioned, I
believe that the prevention area is where they are the strongest and perhaps
the debarment is the area where they are the weakest. 

And
I wanted to mention that firm that I showed you on the monitors is one of our
original firms and they were never debarred by SBA.  They got to keep the
contracts, millions of dollars of contracts they got through fraud and abuse,
and now they are vet bus verified today.

Now,
I am not going to blame VA on that necessarily because they may look good
today, but the point is that protecting the government interest was not done in
the first place through a firm in this case that misrepresented their status
and our belief intentionally and committed fraud.

Mr. WALZ.  So this is one of the egregious ones here probably.

Mr. KUTZ.  Yes, this is an egregious case.  And, again, it just shows the impact
of not debarring someone, that they are able to continue to exist and move
around the government and stay in programs and keep doing business.  And if
they are going to lie about this, what else are they going to lie about?

Mr. WALZ.  I am always very careful and I think the group up here tends to be
that way.  Is this a case where we can clarify or tweak--I know this gets
people nervous--the original law to make the intent very clear that our spirit
and letter of the law converge very clearly as with shall and may and some of
those?  Is that your interpretation?  Would that help you make the case?

Mr. KUTZ.  Well, not on debarment.  I mean, I think debarment--

Mr. WALZ.  Just in general on the whole program.

Mr. KUTZ.  On the whole program, no.  I think the framework you have set up for
the VIP--I mean, the bigger issue here, we are--I am just here to talk to you
about VA.

Mr. WALZ.  Right.

Mr. KUTZ.  The bigger issue is you have not addressed, no one has addressed what
happens outside of VA.  So you still have the ability of firms--it is still a
self-certification program for service-disabled vets outside of VA. 

Now,
granted, some of the agencies I think are using the VIP pages, but it is not
necessarily happening across the government.  And so you still have a little
bit bigger problem.  Even if VA gets it tight here for their $3 or $4 billion
worth of service disabled, you have got the other $7 billion or so happening
outside of that that is still self-certification basically.

Mr. WALZ.  Very good.  Well, I thank you for your time.  That is very helpful.

Mr. JOHNSON.  Mr. Stutzman.

Mr. STUTZMAN.  Thank you, Mr. Chairman.

How
often do executive branch agencies refuse to follow the recommendation--I think
maybe, Mr. White, you kind of  touched on that--in a GAO bid protest?

Mr. WHITE.  Very rarely.  This would be the first time this year.  It happened
last about two years ago.  And it happened involving a very similar statute
where the word shall in one statute versus may in some others.  And it was a
difficult situation because different Members of Congress felt that the
different statutes should have had priority in that situation.

And
could I say just one other thing about that?  We do not get invested in which
of the statutes sets a priority.  We simply try to interpret the statutes that
Congress passes.

Mr. STUTZMAN.  Sure.  What will happen if the VA refuses to follow the recommendation
in the Aldevra decision?

Mr. WHITE.  Under the statute that governs the bid protest process, the
comptroller general is required to notify the Congress, the committees
involved, that would be this committee, and then it would be a matter between
the executive branch and the legislative branch.

Mr. STUTZMAN.  Has the VA in recent past refused any other?  Has there been any
other GAO reports to the VA?

Mr. WHITE.  I am not aware that there has ever been an instance where the VA has
not followed a GAO bid protest recommendation.

Mr. STUTZMAN.  Why on this one?

Mr. WHITE.  Why?  I do not really understand why.  Could I speak factually about
a couple of things that I think they are mistaken about?

In
the testimony earlier, they mentioned that they will get back to the committee
on where this is laid out in the Federal Acquisition Regulation Part 19 which
governs small businesses and set-aside programs.

Well,
I can tell you that there is only one subpart of Part 19 that addresses
service-disabled veteran-owned small business contracting preferences.  And it
has a preamble and in its preamble, it expressly states that it is implementing
the 2003 Veterans Benefits Act that applies government-wide and is codified in
Title 15.

It
was not written to implement the 2006 Veterans Benefits Act that is specific to
the VA and codified in Title 38.

Mr. STUTZMAN.  And I agree with Mr. Walz’s statements earlier that if there is
somebody out there that is taking advantage of this particular program, I mean that the hammer should come down.  But at the same time, we do not
want to overreact and make it so difficult for businesses that are legitimate.

And
I guess would there be an appropriate way to have appeals reviewed by a third
party like SBA’s Office of Hearings and Appeals?  Is there something we could
add to the process that would make it more fair or make the appeal process
legitimate for a business that would be denied?

Mr. WHITE.  And do you mean other than the federal courts?

Mr. STUTZMAN.  Yes.

Mr. WHITE.  I know that there have been exchanges between the VA and the SBA
about whether or not SBA would review the VA’s decisions in this area.  And I
think the SBA has taken the view that it will not.  So I do not know why they
took that position.  I imagine they have reasons for their views.

Mr. STUTZMAN.  But doesn’t it seem inappropriate to have SVE reviewing their own
decisions when it comes to verification?

Mr. WHITE.  I can understand that they may view it that Congress did not
anticipate anyone else doing that kind of review other than the courts, but--

Mr. STUTZMAN.  Okay.  Thank you, Mr. Chairman.  I yield back.

Mr. JOHNSON.  I thank the gentleman for yielding back.

I
think that is all the questions that we have.  You have certainly enlightened
us here. 

We
talk about the word shall.  We talk about Title 38 versus Title 15.  I am very
concerned with the VA’s refusal to accept the GAO’s response to this particular
bid protest.

I
am looking forward to see their response.

What
did you say again the deadline is?

Mr. WHITE.  The deadline works out to be December 15th.

Mr. JOHNSON.  Okay.  All right.  Well, gentlemen, I appreciate your being here. 
Our thanks to you today and you are now excused.

In
closing, improvements in the SDVOSB verification process are obviously a good
thing, but I believe we all know and we have seen from today that the work is
far from over.

I
look forward to the VA’s continued reporting to this committee on progress made
in this effort, not only in approving those eligible companies, but also in
taking prompt action against those that seek to defraud the government and take
business away from our deserving veterans.

Our
concerns regarding the Aldevra decision are fairly clear as well.  Knowing that
for the last 30 days that it would come up at this hearing, the testimony
provided was disappointing at best. 

There
is a prime opportunity for the VA to solve this issue without the added time
and expense of forcing it into the court system.  Our veterans serve this
country with pride and we should be proud to do business with them when they
return to the workforce.  The VA can maintain leadership in this arena, but
instead it is choosing to only do so when it is convenient.  That is not the
treatment our veteran small business owners deserve.

With
that, I ask unanimous consent that all Members have five legislative days to
revise and extend their remarks and include extraneous material.  Without
objection, so ordered.

I
want to thank all Members and witnesses for their participation today,
especially to Chairman Stutzman in today’s hearing and the ranking members from
both the subcommittees for being here today.

With
that, this hearing is now adjourned.

[Whereupon,
at 11:53 a.m., the subcommittees were adjourned.]


APPENDIX


Prepared Statement of Hon. Bill Johnson, Chairman, Subcommittee
on Oversight and Investigations

Good
morning.  This hearing will come to order.

I
want to welcome everyone to today’s follow-up hearing on the VA’s Service-Disabled
Veteran-Owned Small Business Certification Process.  I thank the members of the
Subcommittee on Economic Opportunity for their participation today and their
efforts in improving the process for veteran-owned and service-disabled
veteran-owned small businesses to do business with the VA. 

A
first item I would like to mention is the several outstanding deliverables due
to the Committee, some of which are now nearly two months overdue.  If the VA
is sincere about working with this Committee to better the lives of our
Veterans, I would expect action that reflects that desire.  Failing to identify
the leadership structures of your own VISNs for over two months, or not being
able to identify efficiency measures in patient visits for over a month is
alarming, and makes me wonder whether the VA is fully aware of events happening
under its watch. 

In
July, we held a hearing on this certification process.  At that time, Mr. Tom
Leney (“Linn-ee”) was relatively new to his position as the Executive Director
of Small and Veteran Business Programs at VA’s Office of Small and
Disadvantaged Business Utilization, commonly referred to as the “OSDBU”
(“Ausd-booh”).  At that hearing, we promised a follow-up discussion with Mr.
Leney to see how his planned improvements for the process in certifying
veteran-owned small businesses had been implemented after several months. 
Today is that follow-up.  I look forward to hearing of the progress made toward
achieving those goals and how much longer it will be until the goals are
realized. 

I
also have concerns regarding recent actions taken by the VA’s Senior
Procurement Executive in response to the recent GAO Aldevra decision,
which states that the VA should make efforts to contract with veteran-owned
small businesses when feasible, and in accordance with the Veterans First
contracting program.  GAO recently upheld a bid protest filed by the Aldevra
business on a VA contract, and recommended that the VA re-bid that contract. 
Despite clear legislative and committee report language outlining the intent of
the Veterans First contracting program, the VA decided that GAO’s decision
would not apply to its contracting operations and that it would continue as it
pleased, doing away with preference for VOSBs and SDVOSBs in much of its
contracting.

The
VA has made it clear in correspondence and meetings following the Aldevra decision
that it has no intention of attempting to clear up its own questions about
Veterans First.  Despite acknowledging a problem, the VA is not trying to solve
the problem, nor did it even ask Congress or this Committee those questions
that needed to be answered years ago. 

Even
after the Aldevra decision and the VA’s response, efforts by these two
subcommittees to help explain parts of the law that the VA had trouble
understanding- several years after its passage- were met with a lack of
cooperation on the VA’s part. 

Instead,
the VA is determined to run this through the court system, eliminating key
opportunities for VOSBs to contract with the federal government. 

When
the VA cannot, or chooses not to, implement clearly written legislation, we
have a problem. 

This
is not rocket science.  The Veterans First contracting program exists to help
the VA set the standard in federal government contracting with VOSBs and
SDVOSBs.  With Congress and the Administration sharing a goal of increasing
contracting with VOSBs and SDVOSBs, the Veterans First language facilitated the
achievement of that goal.  The law contains clear wording on how the VA can
achieve that goal, while simultaneously helping our veterans do business and
not hindering the VA in its contracting efforts.   With straightforward
language such as “the Secretary shall give priority to a small business concern
owned and controlled by veterans,” it is difficult to understand the VA’s
failure to correctly interpret this law, which also provides reasonable
accommodations when a VOSB or SDVOSB cannot fill the need. 

We
need to get this right.  The certification process must ensure that VOSBs and
SDVOSBs are efficiently processed and certified.  We then must ensure that
those same businesses are able to compete for the appropriate contracts. 
Otherwise, there is no point in having these businesses in the system if the VA
is going to ignore them. 

I
look forward to today’s testimony on improvements made in the certification
process since our last hearing and the further improvements we can look forward
to in the near future.  I also look forward to discussion on how we can make
the actual contracting system with VOSBs and SDVOSBs work as it is intended.  I
am, however, disappointed that VA’s testimony barely touches on the Aldevra
topic
despite knowing for 30 days that it would be a part of this hearing.  This is
no surprise to anyone, and since VA’s October meeting with Committee staff we
see no great effort on VA’s part to improve this situation. 

Closing
remarks

Improvements
in the SDVOSB verification process are obviously a good thing, but I believe we
all know the work is far from over.  I look forward to VA’s continued reporting
to the Committee on progress made in this effort, not only in approving those
eligible companies but also in taking prompt action against those that seek to
defraud the government and take business away from our deserving Veterans. 

Our
concerns regarding the Aldevra decision are fairly clear as well. 
Knowing for the last 30 days that it would come up at this hearing, the
testimony provided was disappointing at best.  There is a prime opportunity for
VA to solve this issue without the added time and expense of forcing it into
the court system.  Our Veterans served this country with pride, and we should
be proud to do business with them when they return to the workforce.  The VA
can maintain leadership in this arena, but instead is choosing to only do so
when convenient.  That is not the treatment our veteran small business owners
deserve. 

Prepared Statement of Hon. Marlin A. Stutzman, Chairman,
Subcommittee on Economic Opportunity

Thank
you Chairman Johnson.  First, let me express my appreciation for offering to
join forces on enabling  service disabled veteran-owned small businesses to
compete for contracts with the Department of Veterans Affairs.

Let
me begin by adding some context to why we are here today.  In 1999, the
President signed legislation that became Public Law 106-50, which established a
government-wide goal for all federal agencies to award three percent of their
contract dollars to small businesses owned and controlled by service-disabled
veterans.  Until that time, there was no goal for Service Disabled Veteran
Owned Small Businesses or SDVOB’s.

Since
then, there have been several laws and an Executive Order that make it clear
that federal agencies are to make every effort to award at least three percent
of their acquisition dollars to service disabled veteran-owned small
businesses. 

This
legislative effort has continued with the passage of two laws that established
and reinforced section 8127 of title 38 to provide VA with special tools and
priorities to meet, and hopefully exceed, the three percent goal.  By most
indicators, the intent of section 8127 has been met.  But meeting the three
percent goal is not the sole intent of section 8127.  Another goal is to establish
a database of validated veteran and service disabled veteran-owned businesses
that any government agency can access as part of their efforts to meet the
three percent goal.  And that is where there are still significant problems.

Today,
VA data shows contract awards exceeding 20 percent and I congratulate them for
that effort.  However, the process in achieving those numbers has been painful
at best.  Until recently, implementation of the database of validated veteran
and service disabled veteran-owned small businesses required by PL 109-461has
been less than professional, to put it kindly.

VA
is still recovering from its initial reluctance to implement the law.  Its policy
of allowing self-certification of ownership and control status instead of actively
performing the validation function prescribed in the law was frankly, a
disaster.  As a result, as we will hear today, millions of contract dollars
went to businesses that did not meet veteran or disabled veteran-owned and
controlled status.

I
also find VA’s recent decision to ignore GAO’s finding in favor of a protest by
Aldevra, a service disabled veteran-owned small business, as evidence of a
continuing reluctance to fully embrace the clear requirements of section 8127. 
The law does not require VA to set aside all contracts for SDVOSBs or award all
contracts to SDVOSBs.  More importantly, nowhere in section 8127 is there a
provision exempting acquisitions using the Federal Supply Schedule.  If nothing
else, setting aside contracts using the FSS will provide VA contracting
officers additional flexibility in meeting the SDVOSB goals.

Let’s
assume for the moment that those who believe the provisions of section 8127 go
too far and that they give too much advantage to SDVOSBs are correct.  To those
I would point out the literally dozens of federal agencies who continue to fail
miserably to meet even the three percent goal.  For example, DoD, the largest
Department in the Federal government, awarded only 1.82 percent to SDVOSBs in
FY 2010.  I suspect DoD could do better if they limited janitorial awards to
those SDVOSBs in that business.  So, if VA is picking up part of the slack for
the rest of the federal government, so be it.

Finally,
my staff and I have been hearing with increasing frequency that many legitimate
SDVOSB’s are having an extremely difficult time being validated and several
have even has to close down as a result. While I understand that verification
rules must be enforced to ensure non-SDVOSB are kept out there must be a
balance.  I am interested to hear from Mr. Leney about how he can better strike
this balance and expedite re-consideration for many of these small businesses.  I
am also concerned about what appears to be very dubious arbitrary decisions to
deny status to businesses by contractors hired to validate the ownership and
control status and I suggest that may be as a result of a lack of clear
regulations on things like survivorship and conflicts with state laws.

I
yield back.

Prepared Statement of Hon. Joe Donnelly, Ranking Democratic Member, Subcommittee on
Oversight and Investigations

The
tough economic times make it as important as ever to properly address
oversight, programmatic, policy concerns, and thoroughly review the Service Disabled
Veteran Owned Small Business or SDVOSB certification process.

Providing
contracting opportunities to our deserving Veterans through the SDVOSB process
is important, but when you have a successful program such as the VA’s small
business contracting program awarding millions of dollars, it attracts non-veteran
business owners whose intentions are unfortunately to commit fraud.  This is why it’s important for the VA to
implement and enforce fraud prevention measures. 

During
this joint hearing, I will look for the following: an overview of VA’s
preventive measures and monitoring control to minimize vulnerability to fraud,
VA’s debarment procedures, staff training to identify and monitor potential
fraud, VA’s verification process such as how they verify SDVOSBs and the
purpose  of conducting unannounced site
visits.  These are just some of the few
items I have in today’s agenda.  I
believe that unless we remedy these concerns, the same problems that have
haunted the VA’ verification program will remain.

Prepared Statement of Hon. Bruce L. Braley, Ranking
Democratic Member, Subcommittee on
Economic Opportunity

The
opportunity we have to hold this hearing with the Subcommittee on Oversight and
Investigations is rare but shows how important today’s topic is.  By having this joint hearing, I believe it
will bring to light the importance of preventing service-disabled veteran owned
small business program fraud by non-veteran small business.

Providing
contracting opportunities to veterans owned small businesses and
service-disabled veteran owned small businesses was a preference that Congress
agreed veterans and disabled veterans merited. 
The purpose of the three percent set-aside for SDVOSB was to increase
contracting opportunities throughout the federal government; this was a right
that our service-disabled veterans earned.  

At
this time, I would like to take the opportunity to thank the Department of
Veterans Affairs for their support to VOSBs and SDVOSBs and for exceeding the
government-wide goal as well as the VA’s own internal goals.  This program lacks rigorous controls to
prevent fraud by contractors seeking to perform under the
SDVOSB program when they deliberately misrepresent themselves as such.  VA has a long history of problems in its
verification program but I’m please to hear that they are working through these
hurdles.  However, verification doesn’t
only happen once, businesses are required to be re-verified yearly which means
the VA needs to be prepared to have enough staff, resources, and proper
guidelines to re-verify SDVOSBs.

I
would like to thank my colleagues from the Subcommittee on Oversight and Investigations
for including us in this hearing today.  I
look forward to today’s joint hearing and hearing from all of our panelists
here today. 

Prepared Statement of Thomas
J. Leney, Small and Veteran Business Programs, Office of Small and Disadvantaged
Business Utilization, U.S. Department of Veterans Affairs

Chairman Johnson, Chairman Stutzman, Ranking Member Donnelly, Ranking Member
Braley, and members of the Subcommittees, thank you for inviting me to testify
on the VA’s implementation of Veteran-owned small business (VOSB) provisions in
the Veterans Benefits, Health Care, and Information Technology Act of 2006
(Public Law 109-461, Sections 502 and 503), and the Veterans Benefits Act of
2010 (Public Law 111-275 Section 104). 

The goal of VA’s Office of Small and Disadvantaged Business Utilization (OSDBU)
is to help small and Veteran-owned businesses contribute most effectively to the
important mission of VA.  The Center for Veterans Enterprise (CVE), which is
part of OSDBU, is responsible for ensuring that all money and contracting
preferences set-aside for Veterans and service-disabled Veterans go to
legitimate Veteran-owned small businesses through a verification process that is
intended to put contracts and job-creating opportunities into the hands of
legitimate Veteran owned and controlled businesses.

Congress has provided VA with tools to aid Veteran entrepreneurs. The Vet
First program under P.L. 109-461 enables VA to provide preference to Service
Disabled Veteran Owned Small Businesses (SDVOSB) and Veteran Owned Small
Businesses (VOSB). VA has used this program aggressively and leads the federal
government in contracting with service-disabled Veteran-owned small businesses (SDVOSBs). 
VA is also the only agency with specific authority to contract with all VOSBs,
regardless of service-disability.  In Fiscal Year 2011, VA awarded more than $3
billion in contracts to both categories, out of our contracting base of $15.5
billion. P.L. 109-461 enabled VA to far exceed its procurement goals of 10
percent for SDVOSBs and 12percent for VOSBs, by reaching nearly 20 percent and
nearly 22 percent respectively. 

That is real money in the hands of Veterans and their small businesses, and
it establishes VA as a leader in this area. At the same time, VA has actively
implemented statutory provisions to ensure the Public Law 109-461 procurement
eligibility goes only to legitimate SDVOSBs and VOSBs.  We are carrying out the
direction of Congress to verify such firms, and to ensure that only those firms
whose business models meet the criteria laid out in P.L. 109-461 gain the
benefits of the preferences it provides.  We have also moved aggressively
against the relatively small number of firms who would misrepresent their status
in order to obtain illegitimate benefit. 

I would like to update you on the progress VA has made to improve the VA VOSB
Verification Program and our plans to continue improving so that legitimate
SDVOSBs and VOSBs have greater access to VA procurement opportunities.  As we
promised, we have completed the removal of all non-verified companies from the
Vendor Information Pages (VIP).  In April 2011, we had nearly 1,800 non-verified
companies in VIP.  As of September 4, 2011, only verified companies are listed
in VIP, three months ahead of schedule.  In June, 2011, it took an average of
127 days to process an initial verification application.  Today it takes an
average of 75 days.  When the Veterans Small Business Verification Act (Public
Law 111-275, Section 104) required business owners to send in documents, we did
not have an easy way for them to do so.  We received CDs, paper copies and even
email attachments, and our first attempt at an online upload site did not
produce the desired results.  Veterans now have the ability to submit their
entire application on line, to include uploading all required documents directly
to their VIP profile.  In April, a Veteran may have waited months to receive
word that there was an issue with their Veteran or service-connected status in
the VA Beneficiary Identification Records Locator Subsystem (BIRLS) database.
The BIRLS database is used to determine the Veteran’s status, character of
service and whether or not the Veteran has a service-connected disability. 
Veterans now receive this status within 48 hours.

To further ensure the accuracy of our verification process, CVE conducts an
additional Quality Check (QC) on 10 percent of its approval decisions.  The QC
check includes site visits for a randomly selected sample of approved
applications.  CVE officials have also increased our communications with
applicants.   Our policy is that applicants receive updates within 30 days, and
at all key points in the process.  The CVE help desk provides a response within
one business day regarding at what stage the application is in and applicants
can receive an update on demand in our new on line system. Decision letters are
also now delivered electronically to avoid the delay of conventional mail.  VA’s
online application tool also posts the approval letters in the company’s
profile.

Along with more frequent correspondence, we have launched our Verification
Education Program, which is a series of fact sheets that explain the most
frequent reasons for denial.  This program aims to educate applicants on common
issues.  Our goal is to eliminate common errors up-front to help legitimate
SDVOSB/VOSBs quickly receive favorable decisions.  We are also seeking
partnerships with the Association of Procurement Technical Assistance Centers,
the Association of Small Business Development Centers and Veterans Service
Organizations so that applicants can receive assistance from local business
counselors.

VA has recently launched a new online application and tracking system called
VIP-6.  The initial launch of VIP-6 created a number of challenges, but the
platform is now fully operational.  The project is a complete overhaul of the
legacy system, built on a new platform.  It seeks to provide VA with a robust
application process that gives Veteran business owners the ability to complete
applications online, immediately obtain the results of their Veteran status
check by VA from BIRLS, and track the status of their application on demand.

The Government Accountability Office (GAO) did a follow-up on its May, 2010
evaluation of the CVE verification and identified some challenges and
vulnerabilities that VA has since overcome.  Among these were issues of
training, unannounced site visits and debarment of ineligible firms.  CVE staff
are now evaluated and provided on-the-job-training for job functions.  A fraud
awareness program is in place for CVE staff that will provide Certified Fraud
Examiner credentials for all CVE staff through training and evaluation. 
Qualified supervisors train staff on fraud awareness on a rotating basis.  All
firms identified by the risk mitigation program as high risk currently undergo
an in-depth second examination that includes an announced site visit.  Site
visits are an important part of our risk mitigation program and a tool to ensure
eligibility; we have increased them nearly ten-fold from calendar year 2010 and
2011.  Verified firms that are identified as high risk undergo unannounced site
visits. CVE also has initiated random unannounced site visits for verified
firms.

In June and October 2011, OSDBU provided training to 500 contracting officers
on the use of VIP.  The Office of Acquisition and Logistics (OAL) clarified
policy regarding contracting officer (CO) use of VIP for SDVOSB or VOSB
set-aside and sole-source actions.  The policy clarification states that the CO
must check VIP at both the proposal receipt and again before making the award. 
Those businesses not in VIP are ineligible to submit a proposal and ineligible
to receive an award.  Checking the database a second time ensures that a company
has not lost its eligibility between the proposal submission and award.

VA is serious about debarring companies who intentionally misrepresent their
status as a VOSB or SDVOSB, and has formed the 8127 Debarment Committee, named
after the portion of the U.S. Codes that implements the small business portions
of P.L. 109-461.  VA has developed and formalized specific processes and
criteria related to the 8127 Debarment Committee which can be found on the
committee’s web site.  As of October 2011, it had debarred seven separate
contractors and related individuals. Two additional concerns which VA had worked
to debar, filed suit and a resulting Court Order required VA remove the concerns
and associated individuals from the Excluded Parties List System (EPLS) listing
pending remand to VA for further action and final decision of the Court. 
However, it is important to note that most ineligible firms are not committing
fraud.  The vast majority of firms self-report issues that preclude their
eligibility for verification.  Those firms that provide false information or
omit material information are referred to VA’s Office of the Inspector General (OIG)
for action.

Even with the substantial progress that VA has made, we realize that there
are still challenges to face and improvements to be made.  Our request for
reconsideration option has faced a tremendous increase in use.  Historically,
about 20 percent of applicants who received an initial denial submitted a
request for reconsideration.  Over the last two months, this has increased to
more than 60 percent.  We have shifted and increased resources to speed up the
process.  In order to be fair to all applicants, we continue to process all
requests for reconsideration on a first-in, first-out basis.

Mr. Chairman, we were also asked to address an October 11, 2011, GAO decision
upholding a bid protest by an SDVOSB on two VA solicitations for the purchase of
food-preparation equipment.  In the Matter of Aldevra decision, B-405271 &
B-405524, GAO determined that before placing purchase orders against the Federal
Supply Schedule (FSS), VA should have first determined whether the factual
predicates for a set-aside for VOSBs using the restricted-competition standards
of 38 U.S.C. §8127(d) were satisfied.

GAO’s decisions in these matters are advisory and its recommendations are not
binding on executive agencies.  This particular decision is still being
discussed internally within the Executive Branch.

However, VA has consistently interpreted the authority Congress gave it in
Public Law 109-461 as a small business set-aside program with VOSBs having
priority over any other class of small businesses when VA is conducting
full-and-open-competition procurements.  Congress also gave the Department
authority to do “restricted competitions” (set-asides) “for the purpose of
meeting the goals” set by the Secretary for contracting with VOSBs.  VA has not
interpreted the latter as a requirement that VA always endeavor to do restricted
competitions, nor have we interpreted it as abridging VA’s authority to make FSS
buys when it is appropriate to do so.  VA has always been of this view, as it
made clear in the Federal Register notice (74 Federal Register 64619 (December
8, 2009).

Conclusion

VA has made significant progress in the last six months in its VOSB
verification program.  We have overcome many of the challenges and
vulnerabilities that were raised by the GAO and OIG reports, and are working to
resolve those that remain.  We are being proactive in our approach to these
issues and seek continuous improvement.  Mr. Chairmen and Members of the
Subcommittees, this concludes my statement.  I am pleased to answer any
questions you may have.

Prepared Statement of Gregory D. Kutz, Director, Forensic
Audits and Investigative Service, U.S. Government Accountability Office

Service-Disabled
Veteran-Owned Small Business Program:  Additional
Improvements to Fraud Prevention Controls Are Needed

Chairmen Stutzman and Johnson, Ranking Members Braley and
Donnelly, and Members of the Subcommittees:

Thank you for the opportunity to discuss the fraud
prevention controls within the Service-Disabled Veteran-Owned Small Business
(SDVOSB) program at the Department of Veterans Affairs (VA). Today’s testimony
summarizes our report, released today, on the design of VA’s fraud prevention
controls within the SDVOSB verification program, including recent improvements
in controls.[1] The SDVOSB
program is intended to provide federal set-aside and sole-source contracts to
small businesses owned and controlled by one or more service-disabled veterans.
About $10.8 billion in contracts were awarded in fiscal year 2010 to firms that
self-certified as SDVOSBs in the Central Contractor Registration (CCR),
according to the Small Business Administration (SBA).[2]
VA’s SDVOSB contracts accounted for $3.2 billion, or about 30 percent of the
$10.8 billion in governmentwide SDVOSB contracts during fiscal year 2010. As of
October 2011, VA’s VetBiz Vendor Information Pages database shows that the
agency has verified the eligibility of more than 5,000 SDVOSB firms. In
addition, more than 15,000 firms also self-certified their SDVOSB eligibility
in CCR.

In audits of the SDVOSB program conducted in 2009 and
2010, we identified weaknesses in fraud prevention controls that allowed
ineligible firms to receive about $100 million in SDVOSB contracts.[3]
These weaknesses included a lack of governmentwide controls, which allowed
ineligible firms to receive contracts by self-certifying that they were
legitimate SDVOSB firms. In addition, we found the absence of continued
monitoring of firm eligibility and an ineffective process for investigating and
prosecuting firms abusing the program. We also found that VA had made limited
progress enacting an effective verification program as required by the Veterans
Benefits, Health Care, and Information Technology Act of 2006.[4]
To improve governmentwide program controls, we recommended that SBA and VA
explore the feasibility of expanding the use of VA’s verified VetBiz database
to the rest of the federal government. SBA and VA generally agreed with our
recommendation.

After the Veterans Benefits, Health Care, and Information
Technology Act of 2006 was passed, Congress passed laws further intended to
strengthen the SDVOSB program within VA and governmentwide. The Veterans Small
Business Verification Act requires VA to verify a firm’s eligibility before
including that firm in the database and permits VA to request additional
documentation substantiating veteran ownership and control of a firm in order
to establish eligibility.[5] Furthermore,
Congress also passed the Small Business Jobs Act of 2010, which facilitates
prosecution of firms that willfully seek and receive small business awards
through misrepresentation of their status, including SDVOSBs.[6]

Today’s testimony summarizes our report on the design of
VA’s fraud prevention controls within the SDVOSB verification program,
including recent VetBiz verification efforts, instituted in response to the
Veterans Small Business Verification Act. The report is being released today as
a separate product.[7] To conduct
this work, we reviewed prior findings from GAO audits and investigations of the
SDVOSB program. We reviewed applicable guidance on internal control standards
from GAO’s Standards for Internal Control in the Federal Government,[8]
the fraud prevention framework,[9] VA’s Office
of Inspector General (OIG) report,[10] and VA’s
Verification Process Guidelines and internal control policies. We also
interviewed VA officials and reviewed related documents. In addition, we
conducted undercover tests to assess initial screening controls of an
individual’s service-disabled veteran status within VA’s verification process.
The undercover tests were limited in scope to providing a fictitious firm
controlled by an individual whose Social Security number was not listed as a
service-disabled veteran in VA’s database of service-disabled veterans. Our
assessment is part of an ongoing review of fraud prevention controls for the
entire SDVOSB program. This testimony focuses on the design of VA’s SDVOSB
verification controls within its Center for Veterans Enterprise (CVE) office.
With the exception of undercover tests to assess initial screening controls, we
did not test the effectiveness of VA’s fraud prevention controls or attempt to
project the extent of fraud and abuse. Additional information on our scope and
methodology is available in the issued report.

We conducted the work related to the report from July 2011
to October 2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives. We performed our investigative work, limited to our
undercover tests, in accordance with the standards prescribed by the Council of
the Inspectors General on Integrity and Efficiency.

Summary

VA’s fraud prevention controls for the SDVOSB program
within VA have improved since the Veterans Small Business Verification Act was
enacted. Specifically, VA has made progress in implementing an enhanced initial
SDVOSB verification process that reduces the risk that ineligible firms will
receive VA contracts. However, further enhancements could do more to reduce the
program’s vulnerability. Improvements in the areas of preventive controls,
detection and monitoring, and investigations and prosecutions could be made
within VA’s VetBiz verification process. With a comprehensive framework in
place, VA can be more confident that the billions of dollars meant to provide
VA contracting opportunities to our nation’s service-disabled veteran
entrepreneurs make it to the intended beneficiaries. In an effort to improve
controls, in our report, we made recommendations to improve fraud prevention
controls in the areas of prevention, detection and monitoring, and
investigations and prosecutions. VA generally agreed with the recommendations.

VA’s
SDVOSB Program Controls Have Improved, but Vulnerabilities Remain

VA’s fraud prevention controls for the SDVOSB program have
improved since the Veterans Small Business Verification Act was enacted, but
additional enhancements would further reduce the vulnerabilities we identified
in the areas of preventive controls, monitoring and detection, and
investigations and prosecutions. These are also the components of GAO’s fraud
prevention framework (see fig. 1). First, preventive controls are an effective
and efficient way of preventing ineligible firms from being verified. Second,
active and continual monitoring of verified SDVOSB firms is necessary to detect
any changes in their status that may affect eligibility. Third, investigations
and prosecution is a strong deterrent for those considering misrepresenting
their SDVOSB status.

Figure 1: GAO’s Fraud Prevention Framework

Flow Chart showing GAO's Fraud Prevention Framework

Additional Improvements to Preventive Controls Are Needed

VA has enhanced deterrents to ineligible firms becoming
verified through VetBiz. As of April 2011, VA had established verification
guidelines, including a requirement to search the exact names of company
principals in the Excluded Parties List System, and developed a risk assessment
model to examine applications. VA also updated its data systems to limit manual
data entries. Its process of verifying service-disabled veteran status allowed
VA to prevent two fictitious ineligible SDVOSB applications submitted by GAO
from being verified. Specifically, we submitted two fictitious companies for
verification, listing the names and Social Security numbers of the majority
owners who were not service-disabled veterans. VA’s controls appropriately
identified that our company owners were not service-disabled veterans and
rejected our applications. VA also hired additional CVE staff to conduct
initial file reviews and site visits. Additionally, VA has conducted announced
site visits at high-risk firms before they receive VetBiz approval. Finally, VA
created a quality review team to inspect a subset of initial file examination
decisions. VA’s enhanced deterrents under new guidelines have resulted in VA’s
denial of verification to over 1,800 firms under the new verification
guidelines, according to VA.

Even with these enhanced deterrents, program weakness and
vulnerabilities remain within VA’s SDVOSB program. During our interviews with
CVE officials, we found that CVE had not performed a systematic assessment of
the qualifications of its staff. In addition, CVE staff and contracting officials
had not received fraud awareness training. VA also did not have formal
processes or procedures for considering all SBA status protest decisions
related to an applicant, and was not validating applicants’ self-reported
information. VA also did not have a formal process for selecting high-risk
companies for unannounced site visits or using information from previously
denied SDVOSB applications to prevent individuals and fraudulent companies from
repeated attempts at breaching VA controls. Additionally, we found that VA was
not requesting that denied companies reassess their self-certified SDVOSB
status in CCR. By addressing the identified vulnerabilities, VA could further
improve its fraud prevention controls.

Additional
Improvements to Detection and Monitoring Controls Are Needed

VA has developed some controls that may help identify
firms in the VetBiz-verified database that do not meet SDVOSB eligibility
requirements, such as a reverification initiative designed to review previously
verified SDVOSB firms under new controls. VA has also developed a process for
interested parties to protest a firm’s status, and instituted random announced
site visits of verified SDVOSB firms. However, even with enhanced controls,
certain weaknesses and vulnerabilities remain because of VA’s focus on initial
eligibility verification. For example, VA does not monitor firms’ continued
compliance with North American Industry Classification System size standards,
nor does it have contact with contracting officials to determine whether the
required percentage of work on SDVOSB contracts has been performed. VA also
does not systematically data mine existing contract awards for review and
further inspection. VA also does not have a formal process for selecting
companies for unannounced site visits to contract performance locations and
does not have a formal process for interviewing contracting officials. Finally,
VA has not formalized its quality assurance process for selecting verified
companies for unannounced site visits to determine if the verification process
is effective. Further improvements in these areas would increase the design of
detection and monitoring controls within the verification process.

Additional
Improvements to Investigations and Prosecutions Are Needed

VA has taken some actions to debar firms violating SDVOSB
program requirements. VA may debar an ineligible firm in accordance with the
Veterans Benefits, Health Care, and Information Technology Act of 2006, which
requires that any business determined to have misrepresented its status as an
SDVOSB shall be debarred from contracting for a reasonable period of time, as
determined by VA. VA instituted a debarment committee in September 2010
specifically to debar firms violating SDVOSB regulations. As of October 2011, the
committee had debarred one SDVOSB firm and related individuals that had
misrepresented their status as an SDVOSB. Several other debarment actions are
currently pending or are being litigated. Additionally, CVE officials have sent
about 70 referrals to the VA OIG for potential fraudulent actions by firms
receiving SDVOSB contracts. VA OIG is currently investigating these cases.

We identified certain weaknesses and vulnerabilities in
the investigation and prosecution controls during our site visits. The debarment
of only one firm and related individuals suggests that there is room for
additional action given the 1,800 firms rejected by VA during its verification
process and the 70 firms referred to VA OIG for potentially fraudulent actions.
Additionally, VA does not have specific procedures for CVE staff to refer
companies to the debarment committee or VA OIG, and has no specific guidelines
documenting how VA is implementing debarments or outlining the debarment
committee’s decision process. Providing more emphasis on debarments and
investigations could further help VA deter firms from attempting to
fraudulently gain access to its SDVOSB program.

Conclusions

In conclusion, VA has made progress in implementing a
valid verification program to deter ineligible firms from becoming verified and
receiving SDVOSB contracts. However, additional improvements can be made,
particularly in monitoring and detection and investigations and prosecutions.
Specifically, developing a robust unannounced site visit process for verified
firms and aggressively pursuing debarments and prosecutions of firms found to
have violated program rules will further enhance fraud prevention controls.
With a comprehensive framework in place, VA can be more confident that the
billions of dollars meant to provide VA contracting opportunities to our nation’s
service-disabled veteran entrepreneurs make it to the intended beneficiaries.

To minimize the risk of fraud and abuse within VA’s SDVOSB
program, in the report released today, we recommended that the Secretary of
Veterans Affairs take 13 actions in the following three areas:

  • Improve VA’s preventive controls to provide reasonable assurance
    that only eligible firms gain access to the VetBiz database.
  • Strengthen VA’s detection and monitoring controls over verified
    firms.
  • Strengthen VA’s investigative and prosecutorial actions for firms
    violating SDVOSB program laws and regulations.

VA generally concurred with our recommendations and noted
a number of significant actions planned or taken since the time of our site
visits and development of our findings, which, according to VA, address many of
the identified vulnerabilities.

According to VA officials, VA has recently made
improvements of its preventive controls. For example, VA officials stated that
CVE staff and most contractors assisting with the application evaluation are
now required to receive Certified Fraud Examiner training, and additional
VetBiz training has been provided to contracting officials. VA officials also
stated VA has recently strengthened the agency’s monitoring and detection of
verified SDVOSB firms. Specifically, VA officials stated that VA conducts
unannounced visits to verified companies either randomly or during the course
of a high-risk SDVOSB reverification assessment. Finally, VA officials stated
that VA recently strengthened the investigative and prosecutorial actions by
creating guidelines for referring firms to VA OIG and the debarment committee.
We plan to follow up on actions taken by VA as part of our ongoing work and will
report back to the subcommittees on our findings.

Chairmen Stutzman and Johnson, Ranking Members Braley and
Donnelly, and Members of the Subcommittees, this completes my prepared
statement. I would be pleased to answer any questions that you may have at this
time.

GAO
Contacts

If you or your staff have any questions about this
testimony, please contact Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov.
Contact points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this statement.

Related GAO Products

Service-Disabled Veteran-Owned Small Business Program:
Additional Improvements to Fraud Prevention Controls Are Needed
. GAO‑12‑152R.
Washington, D.C.: October 26, 2011.

Service-Disabled Veteran-Owned Small Business Program:
Preliminary Information on Actions Taken by Agencies to Address Fraud and Abuse
and Remaining Vulnerabilities
. GAO‑11‑589T.
Washington, D.C.: July 28, 2011.

Department of Veterans Affairs: Agency Has Exceeded
Contracting Goals for Veteran-Owned Small Businesses, but It Faces Challenges
with Its Verification Program
. GAO‑10‑458.
Washington, D.C.: May 28, 2010.

Service-Disabled Veteran-Owned Small Business Program:
Fraud Prevention Controls Needed to Improve Program Integrity
. GAO‑10‑740T.
Washington, D.C.: May 24, 2010.

Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions
of Dollars in Contracts
. GAO‑10‑306T.
Washington, D.C.: December 16, 2009.

Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions
of Dollars in Contracts
. GAO‑10‑255T.
Washington, D.C.: November 19, 2009.

Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions
of Dollars in Contracts
. GAO‑10‑108.
Washington, D.C.: October 23, 2009.

(192388)


[1] GAO,
Service-Disabled Veteran-Owned Small Business Program: Additional Improvements
to Fraud Prevention Controls Are Needed
, GAO‑12‑152R
(Washington D.C.: Oct. 26, 2011).

[2] CCR
is the primary contractor registrant database for the U.S. federal government.
CCR collects, validates, stores, and disseminates data in support of agency
acquisition missions.

[3] See
the list of related GAO products at the end of this testimony.  

[4] The
act requires VA to institute controls over its SDVOSB contracts. The
requirement to maintain a database of VA-verified SDVOSBs and Veteran-Owned
Small Businesses (VOSB) became effective June 2007. The act also requires that
VA only use its set-aside and sole-source award authority for SDVOSB firms
listed in the database and to debar for a reasonable period of time, as
determined by VA, firms that misrepresent SDVOSB and VOSB status. Pub. L. No.
109-461, § 502, 120
Stat. 3403, 3431 - 3435 (2006).

[5] Veterans
Small Business Verification Act, Pub. L. No. 111-275, § 104, 124 Stat. 2864,
2867 – 2868 (2010).

[6] Small
Business Jobs Act of 2010, Pub. L. No. 111-240, § 1341, 124 Stat. 2504, 2543 -
2544 (2010).

[7] GAO‑12‑152R.

[8] GAO,
Standards for Internal Control in the Federal Government, GAO/AIMD‑00‑21.3.1
(Washington, D.C.: November 1999).  

[9] GAO,
Service-Disabled Veteran-Owned Small Business Program: Fraud
Prevention Controls Needed to Improve Program Integrity
, GAO‑10‑740T
(Washington, D.C.: May 24, 2010).

[10] VA
OIG, Office of Audit and Evaluations, Department of Veteran Affairs: Audit
of Veteran-Owned and Service-Disabled Veteran-Owned Small Business Programs
,
10-02436-234 (July 25, 2011).

Prepared Statement of Ralph O. White, Managing Associate General Counsel,
Office of General Counsel , U.S. Government Accountability Office

Veterans Administration Procurement::  Protests Concerning Service-Disabled
Veteran-Owned Small Business Preferences Sustained

GAO Highlights

GAO’s Role Under
The Competition in Contracting Act

Under the Competition in
Contracting Act of 1984, GAO is required to consider protests filed by
interested parties concerning the terms of solicitations or contract awards. 
In deciding protests, GAO makes a determination of whether the agency’s actions
complied with procurement statutes and regulations.  Aldevera, an SDVOSB
concern, argued that two solicitations issued by the Veterans Administration
should have been set aside for SDVOSB concerns.

GAO’s
Recommendations

GAO recommended, for the solicitation where the record
showed that two or more SDVOSBs were capable of meeting the agency’s
requirements at a fair and reasonable price, that the VA cancel the
solicitation and obtain its requirements using an SDVOSB set-aside.  GAO also
recommended, for the solicitation where the record did not indicate whether
there were two or more SDVOSBs capable of meeting the agency’s requirements at
a fair and reasonable price, that the VA conduct reasonable market research
regarding its requirements.  If the VA determines that there is a reasonable
expectation of receiving offers from two or more SDVOSB concerns capable of
performing the requirements at a fair and reasonable price, we recommended that
the VA cancel the solicitation and re-solicit its requirements using an SDVOSB set-aside.

GAO’s Findings

The Veterans Benefits, Health Care, and Information
Technology Act of 2006, 38 U.S.C. §§ 8127-8128 (2006) (the 2006 Act) provides
in relevant part that the Department of Veterans Affairs (VA) must set aside
procurements for Service-Disabled Veteran-Owned Small Business (SDVOSB)
concerns if the contracting officer has a reasonable expectation of receiving
offers from two or more SDVOSB concerns and that award can be made at a fair
and reasonable price that provides the best value to the government.

Aldevra, an SDVOSB concern, challenged the terms of two
solicitations issued by the VA for kitchen equipment.  In both protests,
Aldevra argued that the VA should have restricted the competitions to SDVOSB
concerns, instead of issuing the solicitations for competition under the
General Services Administration’s (GSA) Federal Supply Schedule (FSS).  In its
response to the protest, VA argued that the SDVOSB set-aside requirements of
the 2006 Act did not apply to the FSS.

In a decision issued by our Office, GAO concluded that the
2006 Act applies to the FSS.

Accordingly, GAO sustained the protests.  The decision is
available at:  http://www.gao.gov/decisions/bidpro/405271.pdf.


Chairman Johnson, Chairman Stutzman, Ranking Members, and
Members of the Subcommittees:

Thank you for the opportunity to be here today to discuss
the bid protest decision recently issued by the Government Accountability
Office (GAO) in response to two protests challenging the issuance of
solicitations by the Department of Veterans Affairs (VA). This decision
addressed the statutory preference for setting aside VA procurements for
Service-Disabled Veteran-Owned Small Business (SDVOSB) concerns.

GAO provides an objective, independent, and impartial
forum for the resolution of disputes concerning the awards of federal
contracts. Since 1984, the Competition in Contracting Act (CICA) has
established statutory authority for GAO’s bid protest function. GAO has issued
implementing regulations establishing the procedural framework for our bid
protest forum in Title 4, Part 21, of the Code of Federal Regulations.

In Fiscal Year 2011, we received 2,353 bid protests
challenging procurements across the federal government. The bid protest process
is a legal one, and both the process and the resulting product differ from
those associated with the reports that GAO issues in connection with its
program audits and reviews. Protests are handled solely by GAO’s Office of
General Counsel (OGC), not by its audit teams. In developing the record, OGC
provides all parties—the protester, the awardee, and the contracting agency—an
opportunity to present their positions. In some cases, OGC conducts a hearing
to further develop the record. Under CICA, as amended, we have 100 calendar
days to decide a protest.

The product of a GAO protest—our legal decision—does not
address broad programmatic issues such as whether or not a particular
government program is being managed effectively or consistent with best
practices. Instead, our bid protest decisions address specific allegations
challenging particular procurement actions as contrary to procurement laws,
regulations, and the evaluation scheme set forth in the solicitation. We
sustain a protest when we find that the procuring agency has not complied with
procurement laws, regulations, or the solicitation’s evaluation scheme, and
that the violation prejudiced the protester’s chances of winning the contract.

With that background, my testimony today will summarize
our recently issued decision concerning challenges to the VA’s interpretation
of the statutory requirement that VA set aside procurements for SDVOSB
concerns.

Background

Our decision concerns two protests filed by Aldevra, an
SDVOSB. The first protest, which was received on July 1, 2011, challenged the
terms of solicitation No. VA-69D-11-RQ-1170 for a tilting skillet/braising pan
and one countertop electric griddle for the Federal Health Care Center in
Chicago, Illinois. The second protest, which was received on August 12,
challenged the terms of solicitation No. 693-11-4-179-0306, for two griddles
and one food slicer for the VA Medical Center in Wilkes-Barre, Pennsylvania. Our
decision of October 11 addressed both protests by the 100-day deadline for the
first protest.

The VA issued both solicitations under the Federal Supply
Schedule (FSS), which is a program consisting of contracts administrated by the
General Services Administration that is available for all Executive Branch
agencies to use in their procurements. The solicitations here were not
restricted to SDVOSB concerns, or concerns under any other socio-economic
program.

The
Legal Standard

The sole issue raised by Aldevra was whether the Veterans
Benefits, Health Care, and Information Technology Act of 2006, 38 U.S.C.

§§ 8127-8128 (2006) (the 2006 VA Act), required the VA to conduct market
research to determine whether the VA should set aside the procurements for
SDVOSB concerns before using the FSS to satisfy its requirements.

In relevant part, the 2006 Act provides as follows:

… a contracting officer of [the VA] shall award contracts
on the basis of competition restricted to small business concerns owned and
controlled by veterans if the contracting officer has a reasonable expectation
that two or more small business concerns owned and controlled by veterans will
submit offers and that the award can be made at a fair and reasonable price
that offers best value to the United States.

The statute also sets out an order of priority for the
contracting preferences it establishes, providing that the first priority for
contracts shall be given to SDVOSB concerns, followed by veteran owned small
businesses (VOSBs).

A regulation issued by the VA implementing the 2006 Act
similarly stated that a contracting officer “shall” set aside a procurement for
SDVOSBs (or VOSBs) if there is a “reasonable expectation” that offers will be
received from two or more SDVOSB (or VOSB) concerns, and award will be made at
a reasonable price. Veterans Administration Acquisition Regulation (VAAR), 48
C.F.R. § 819.7005(a) (2011).

The VA argued that, notwithstanding the statutory language
in the 2006 Act, the agency is not required to conduct market research to
determine whether SDVOSBs (or VOSBs) are capable of performing the requirement
if the VA instead chooses to procure its requirements through the FSS. In
support of its position, the VA cited provisions of Federal Acquisition
Regulation (FAR) part 19.14, which states that agencies “may” set aside
procurements for SDVOSBs if they have an expectation of receiving two or more
offers from SDVOSB concerns capable of performing the requirements at a fair
and reasonable price. As relevant to the protests—and the VA’s response to the
protests—FAR part 8.4 states that the small business set-aside rules under FAR
part 19—including SDVOSBs—do not apply to the FSS.

GAO’s
Review of the Record

Our Office reviewed the
language of the 2006 Act, as well as the FAR provisions cited by the VA. We
concluded that the 2006 Act plainly states that the VA “shall” set aside
procurements for SDVOSB (or VOSB) concerns if it determines that there is a reasonable
expectation of receiving offers from two or more SDVOSB (or VOSB) concerns
capable of performing the requirements at a fair and reasonable price. This
statutory language takes precedence over any regulatory language to the
contrary.

Moreover, the FAR
provisions cited by the VA, which state that agencies “may” consider using an
SDVOSB set-aside, were implemented to meet the statutory requirements of the
Veterans Benefit Act of 2003, 15 U.S.C.

§ 657f (2006) (the 2003 Act), which applies government-wide. The 2006 Act,
however, is a separate statutory authority codified within the statutes that
govern the VA (i.e., Title 38 of the U.S. Code) that applies only to the VA.

Thus, the FAR provisions, which state that agencies “may”
set aside procurements for SDVOSBs, and which are also exempt under the FSS
from the provisions of FAR part 19.14, do not apply to the VA, because the VA
is governed by the later-enacted and VA-specific 2006 Act, and not the 2003
Act, which applies government-wide. Put differently, the VA is subject to
procurement rules concerning SDVOSBs that do not apply to any other Executive
Branch agency.

For the record, our decision does not state that the VA
must set aside every competition for SDVOSB (or VOSB) concerns. Instead, our
decision states that the VA must first conduct market research to determine
whether it will receive offers from two or more SDVOSB (or VOSB) concerns. If
the VA concludes that there is a reasonable expectation of receiving offers
from two or more SDVOSB (or VOSB) concerns capable of performing the
requirements at a fair and reasonable price, the agency must set aside the
procurement for SDVOSBs (or VOSBs). If the VA concludes that there is not a
reasonable expectation of receiving offers from two or more SDVOSB (or VOSB)
concerns capable of performing the requirements at a fair and reasonable price,
it may use any other authorized procurement method.

Recommendation

Based on our review of the record, we sustained the
protests. For the first solicitation, the VA conceded that there were two or
more SDVOSB concerns capable of performing its requirements at a fair and
reasonable price. GAO therefore recommended that the VA cancel the first
solicitation and re-solicit its requirements using an SDVOSB set-aside. For the
second solicitation, the record did not address whether there were two or more
SDVOSB concerns capable of performing the requirements at a fair and reasonable
price. GAO therefore recommended that the VA conduct market research regarding
its requirements for that solicitation.

If the VA determines that there is a reasonable expectation of receiving offers
from two or more SDVOSB concerns capable of performing the requirements at a
fair and reasonable price, we recommended that the VA cancel the solicitation
and re-solicit its requirements using a SDVOSB set-aside. We also recommended
that the agency reimburse the protester the costs of filing and pursuing the
protests.

Under CICA, a GAO
decision sustaining a protest results in a recommendation. The statute gives
agencies 60 days to implement a GAO recommendation. In the event an agency does
not implement a GAO recommendation, the agency must advise GAO within 5 days
after the conclusion of the 60-day period. In the event an agency advises it
will not follow a GAO recommendation, CICA requires GAO to advise the Congress
of the agency’s decision.

Here, the VA has until December 15, 2011, to respond to
our recommendation. As of today, the VA has not yet responded.

Chairman Johnson, Chairman Stutzman, this concludes our
prepared statement. I would be happy to respond to any questions regarding our
bid protest decisions that you or other Members of the Subcommittees may have.

Statement of Steve L. Gonzalez, Assistant Director, National
Economic Commission, American Legion

Chairman Bill Johnson, Ranking Member Donnelly and Members of the
Subcommittee:

Thank you for the opportunity in allowing The American Legion to submit for
the record its views on the Department of Veterans Affairs’ (VA) Center for
Veterans Enterprise and Veterans First Contracting Program.

For more than half a century, it has been the policy of the federal
government to provide “maximum practicable opportunity” for small businesses to
participate in federal contracts. To achieve this objective, Congress
established an aspirational goal in 1978 for the percentage of annual prime
contract spending awarded to small businesses each year. Congress later set the
government-wide goal at 23 percent and created a set of sub-goals to support the
participation of special segments of the small business community: small
disadvantaged businesses (5 percent), women-owned small businesses (5 percent),
service-disabled-veteran-owned small businesses (3 percent), and small
businesses in Historically Underutilized Business Zones (HUB Zones) (3 percent).
These goals help ensure that a diverse set of small businesses share in the jobs
and opportunities created by federal contracting.[1]

America has benefited immeasurably from the service of its 23.4 million[2] living veterans, who have made great sacrifices
in the defense of freedom, preservation of democracy, and the protection of the
free enterprise system. Due to the experience veteran’s gain in the military,
the success rate of veteran-owned businesses is higher than non-veteran-owned
businesses. The current Global War on Terror has had a devastating impact on the
Armed Forces and has exacerbated this country’s veterans’ unemployment problem,
especially within the National Guard and Reserve components. According to the
most current federal data available, veterans owned 2.4 million businesses.
 Another 1.2 million firms were at least 50 percent veteran owned[3] within the fifty states and District of
Columbia. According to this survey, veteran-owned and co-owned firms accounted
for 13.5 percent of all non-farm businesses in the United States, employed 11
million people (4.9 percent of total U.S. employment) and generated $1.655
trillion in receipts.[4]

According to the Department of Labor, the present unemployment rate for
recently discharged veterans is as high as 12.1 percent. One way of combating
unemployment or underemployment is through the creation of new jobs.
Increasingly, the growth and stability of this nation’s economy is dependent on
the long-term success of the small business networks across the country.
However, during a time of war there is much to be accomplished. Ironically, for
too many years, the very men and women who served in uniform, stood ready to
fight, and if necessary die in order to protect and preserve the free enterprise
system, are summarily ignored by the federal agencies responsible for meeting
their small business needs.

The barriers to entry for small businesses are numerous: weak policies and
rules that limit the effectiveness of tools that are supposed to facilitate
contracting opportunities; inadequate workforce training to help contracting
officers, small business advocates, and program offices to successfully use
contracting tools; and a lack of coordination among and accessibility to agency
training and outreach events designed to help small businesses navigate the
contracting system. Action must be taken to remove these barriers and ensure
small businesses get access to federal contracts.  

THE CENTER FOR VETERANS ENTERPRISE

According to its website, the VA’s Center for Veterans Enterprise (CVE) “is
designed to improve the business climate for veterans, to minimize access
barriers and to inform the public about the benefits of working with
veteran-owned small businesses.” In addition, CVE provides opportunities for
veteran-owned small businesses by collaborating with like-minded individuals and
organizations who believe that veterans in business are still serving the
American public. They work and link with partner organizations to provide local
support to veteran-owned small businesses, because they are the face of a local
economy. They also support acquisition teams through procurement coaching, free
market research, awareness briefings and provide awards for noteworthy
achievements. Their goal is to provide smart business information for those
veteran-owned small businesses in search of starting their business or
continuing to grow their business.

PUBLIC LAW 109-461

On December 22, 2006, President Bush signed Public Law (P.L.) 109-461, The
Veterans Health Care, Benefits and Information Technology Act of 2006. This law
directs the Secretary of Veterans Affairs to “give priority to a small business
concern owned and controlled by veterans, if such business concern also meets
the requirements of that contracting preference.” 38 U.S.C. § 8128(a). To
implement the Veterans Benefits Act, VA established the “Veterans First
Contracting Program” on June 20, 2007. See AR 38-540 to 541 (New
Guidelines for Placing Items and Services on the AbilityOne Procurement List
(Apr. 28, 2010) (“New Guidelines”)). The program directed VA to consider
service-disabled veteran-owned small businesses (“SDVOSB”) and veteran-owned
small businesses (“VOSB”) as a first and second priority when satisfying its
acquisition requirements. Id. at 38-541. A final implementing rule
establishing changes to the Department’s acquisition regulations was made
effective January 7, 2010. See 74 Fed. Reg. 64619-01 (Dec. 8, 2009)
(codified in scattered sections of 48 C.F.R. Subparts 802, 804, 808, 809, 810,
813, 815, 817, 819, 828, and 852).

VA’S IMPLEMENTATION OF PUBLIC LAW 109-461

In 2006, Congress created the Veteran First contracting program to help
provide preference to small businesses owned by veterans and service-disabled
veterans over other companies. VA was charged with putting procedures in place
to verify the ownership and status of the companies that wanted to participate
in Veterans First. The VA has failed time and time again to follow the “Veterans
First” law, which establishes set aside guidelines for service-disabled
veteran-owned small businesses. While the GAO has investigated and agreed with
the protest’s claims, an internal memo from the VA dated October 17th
makes the assertion that since the GAO is part of the legislative branch, the VA
is not bound by their findings and that the courts would decide the issue.. The
memo goes on further to state that “GAO recommendation does not change how VA
will acquire goods and services in support of its mission.”

On October 26, 2010, the United States Court of Federal Claims (USCFC) set
precedence on behalf of all SDVOSB / VOSB, when it ruled in favor of Angelica
Textile Services, Inc., in the case of Angelica Textile Services, Inc., v.
United States
(10-496C)[5]. The Federal Court decision
confirmed that veterans have a contract preference and priority. Here are some
excerpts from the court ruling[6]:

  • “The Veterans Benefits
    Act is a specific mandate to the Department, and only to the Department, to
    grant first priority to SDVOSBs and VOSBs in the awarding of contracts.”
  • Above “any other provision
    of law” such as FAR Part 8 Required Sources of Supply
  • Above “any other provision
    of law” such as FAR Part 19.14;
  • Above general federal
    statues and initiatives
  • In all market types such
    federal supply schedules and open market;
  • Exclusively within the VA
    under 8127 (b), (c), or (d) and 8128

In March 2007, Scott Dennison, Director of the VA’s Office of
Service-Disabled Veteran-Owned Small Business Utilization (OSDBU) wrote in his
department’s local newsletter the Small Business Advocate “a major
challenge to implementing P.L. 109-461 will be educating and training VA’s
workforce of the significant changes brought by the law. To that end, OSDBU is
available to provide training to acquisition professionals, program officials
engineering officers and personnel, purchase cardholders and anyone else
involved in the acquisition process that could use this training.”

Challenges:

  • Over the past 10 years, VA has built CVE through non-appropriated funds.
    CVE markets itself as a technical training and assistance center that
    maintains a database of veteran-owned small businesses. With regard to CVE’s
    technical assistance capabilities, this effort represents a negligible
    impact locally and virtually no impact nationally. CVE maintains one small
    assistance center in Washington, DC, where they see a small amount of
    clients and field phone calls.
  • It takes anywhere from one month to one year to have a company
    registered with VA. One veteran complained after registering, he was deleted
    from the data system a few months later.
  • Veterans cannot register multiple businesses at one time, and owners
    must work full time in their registered business.
  • CVE staff qualifications have been questioned by many.
  • A 10-case Government Accountability Office study proved approximately
    $100 million in SDVOSB sole-source and set-aside contracts through fraud and
    abuse of the program.
  • The website is not user-friendly and needs to be improved.
  • An inability to foster communication between veteran-owned small
    businesses on the website.

On July 21, 2009, Secretary of Veteran Affairs Eric Shinseki addressed SDVOSB
/ VOSB at the 5th Annual National Veteran Small Business Conference
in Las Vegas and stated, “VA will begin putting Veterans first – fully first
– in our contracting efforts because we recognize the on-time, on-budget,
quality solutions that you offer to meet our contracting needs.
[7]
This statement seems to be contradictory to VA Department official’s actions
when issuing VA contracts to businesses.

RECOMMENDATIONS

The American Legion fully understands and support Title 38 section 8127 and
8128 does not automatically award VA government contracts to SDVOSB / VOSB;
however, when qualified SDVOSB / VOSB are being overlooked or ignored by the VA
this is cause for great concern.

CVE’s marquee program is their VIP database. As the only federal database
focusing strictly on veterans-owned small businesses, the VIP database has
established itself as the premiere database for veterans in the country. CVE has
successfully promoted this database commercially, as well as cross agency and
has established a strong foundation and infrastructure that can easily be
interwoven into other federal databases such as the Central Contractors Registry
(CCR).

VA and the Small Business Administration (SBA) should develop a comprehensive
partnership to assist veterans who are interested in participating in federal
procurement. CVE should maintain the database (VIP) and verify accurate
veteran/service-connected disabled veterans’ status. SBA should retain the
responsibility for validating the business ownership, size standards, and
structural integrity of the business. SBA should have direct reporting and input
authority to the VIP database through the Office of Veterans Business
Development once this information is collected. VA should maintain the
eligibility status regarding veteran status. SBA is responsible for verifying
all other socioeconomic categories for the purpose of federal procurement. SBA
already maintains the infrastructure, expertise and established regulatory
guidance to include the veterans’ population within their authority. VA should
develop clearer and more comprehensive small business contracting policies[8].  

Recommendation 1: Update acquisition policies and regulations to
provide clear guidance on small business set-asides and related tools.

Recommendation 2: Issue guidance clarifying practices and strategies
to prevent unjustified contract bundling and mitigate any negative effects of
justified contract bundling on small businesses.

Recommendation 3: Identify where focused efforts will likely have the
most positive effect on increasing small business utilization in prime
contracting.

Recommendation 4: Strengthen the skills of the acquisition workforce
by revising existing core certification, requiring training on small business
contracting, procurement policies and regulations, and creating focused
refresher materials for continuous learning.

Recommendation 5: Use meaningful “carrots and sticks” to create a
greater sense of agency accountability for reaching small business federal
contracting goals.

Recommendation 6: Facilitate the identification and rapid adoption of
best practices across the agencies to maximize successful strategies.

These observations come from The American Legion’s National Small Business
Task Force. This Task Force is made up of veterans who are successful business
owners, federal agency officials and The American Legion leaders. Their mission
is to gather information, data and research regarding the current and future
economic status of veteran businesses. These individuals are the very
individuals who are using the CVE and are a part of the database that CVE is
maintaining.

CONCLUSION

While The American Legion applauds the federal government in setting up and
implementing a program that is designed to assist Veteran-Owned and
Service-Disabled Veteran Owned Small Business to start up and receive government
contracts, it is our belief that this program could be improved. VA and SBA
should develop a comprehensive partnership to assist veterans who are interested
in participating in federal procurement, with each Department utilizing their
resources to ensure proper implementation. As interpreted by Federal Court, the
VA is mandated by law to purchase all products and services from SDVOSB / VOSB
as mandated by the Veteran First law, as long as those SDVOSB / VOSB meet both
the legal and contract requirements. Any regulations, policies, and procedures
disseminated by the VA that deny SDVOSB / VOSB their contracting preference and
priority as defined by the United States Court of Federal Claims is a violation
of law.

Unfortunately, SDVOSB and VOSB businesses have been relegated to last in the
VA’s procurement hierarchy even when Congress and United States Court of Federal
Claims said they should be first. The irony and greatest insult is that this
agency which was created to help veterans appears to be actively and knowingly
shutting them out when it’s time to award government contracts.

The American Legion appreciates the opportunity to present this statement for
the record. Again, thank you Mr. Chairman, Ranking Member Donnelly, and Members
of the Subcommittee for allowing The American Legion to present its views on
these very important issues.


[1]
http://www.sba.gov/content/interagency-task-force-federal-contracting-opportunities-small-businesses

[2]
http://www.va.gov/opa/publications/factsheets/fs_department_of_veterans_affairs.pdf

[3] http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24

[4] Survey of Business
Owners – Veteran-Owned Firms: 2007
. U.S. Census Bureau.
http://www.census.gov/econ/sbo/get07sof.html?17

[5]
http://www.uscfc.uscourts.gov/sites/default/files/LETTOW.ANGELICA102610.pdf

[6] Ibid

[7]
http://www.va.gov/opa/speeches/2009/09_0721.asp

[8]
http://www.sba.gov/sites/default/files/contracting_task_force_report_0.pdf

Statement of Robert
G. Hesser, Vetrepreneur, LLC

SDVOSB Owner, Herndon, VA

Retired Master Chief, USN

This document is a
compilation of comments from members of the veteran business community and
includes suggestions, ideas and concerns. Most of the comments were
unsolicited and frequently passionate. Our commenter’s represent almost
every ethnic, cultural, age, gender and possible demographic. We are united in
our concern for how veterans, their families and employees are treated.

We are also united in
our belief that the VA’s mission of helping veterans should be integral to
acquisition planning and implementation….as we understand that the greatest
value to the taxpayers is to have a robust and competitive small business
industrial base. To us, that means that the objectives of Vets First
include the impact on veteran unemployment and homelessness as well as
opportunities through the marketplace to improve access to medical care through
employer funded plans.

Vets helping vets, it’s that simple. We ask the committee to reinforce
the importance of including the Department Veterans Affairs mission in the
planning and execution of their acquisitions. In today’s economic
environment, it will be good to get a win-win where we are helping our nation’s
veterans while reducing the total cost of implementing the VA’s mission.


Vets First = Vets Last

The
Department of Veterans Affairs (VA) has stated that it “conducts its contracting
with small businesses in good faith and in the spirit of the
“Veterans First” legislation that gives preference to eligible veteran-owned
small businesses (VOSB’s) and service-disabled veteran-owned small businesses
(SDVOSB’s).” Despite the value that veteran small business owners bring to VA
procurement, they continue to face barriers and obstacles.  One of the lateral
benefits of the Veterans First law is its ability to decrease veteran unemployment,
which is currently 11.5[1]
percent with estimates as high as 25 percent when the troops return from Iraq
and Afghanistan.  Veterans hire veterans! From battle to business, veteran
small businesses care for fellow comrades.

Background
on Vets First Law 

On
December 22, 2006, Former President Bush signed P.L. 109-461, The Veterans
Health Care, Benefits and Information Technology Act of 2006, which directs the
Secretary for Veterans Affairs to “give priority to a small business concern
owned and controlled by veterans, if such business concern also meets the
requirements of that contracting preference.” 38 U.S.C. § 8128(a).  Note that
there is no mention of federal supply schedules, open market, or other
qualifiers.  The law clearly and profoundly declares that veteran owned small
businesses shall be given priority when the VA procures goods and services.

VA
Understood Vets Come First

It’s
clear that the VA initially understood the intent of the law.  In the June 19, 2007 Information Letter (IL 049-07-08), VA stated that “this approach changes the
priorities for contracting preferences within VA, placing SDVOSB’s and VOSB’s
first and second, respectively, in satisfying VA’s acquisition requirements.” 

A
year later, the VA still clearly understood the intent of the law to consider
veteran owned businesses first because they declared in the August 20, 2008 Federal Register that “We interpret section 8128 and the legislative history to
mean that SDVOSB’s and VOSB’s must receive priority in VA contracting
opportunities without regard to other provisions of law concerning contracting
preferences…VA finds that section 8128 requires VA contracting officers to have
the authority to override other statutory contracting preferences to
provide priority
to SDVOSB’s and VOSB’s…”[2]

VA
Puts Vets Last

Then,
in testimony before the US House of Representatives Committee on Veterans’
Affairs Subcommittee on Economic Opportunity on April 23, 2009, everything changed.  Jan Frye, VA Deputy Assistant Secretary, Office of Acquisition and
Logistics, testified, “It is important to note that the unprecedented and
extraordinary contracting authorities granted to VA under Public Law 109-461
are preferences in open market contracting for veteran entrepreneurs.”[3]

In
one fell swoop; veteran owned small businesses were moved from FIRST to LAST in
the VA Purchasing Priority List.  The VA’s unilateral interpretation that the
law only applies to “open market” purchases means that veteran businesses are
now first in the LAST category on the purchasing priority hierarchy.

VA
Uses Convoluted Purchasing Priority List

Eight
months later, a commenter in the Federal Register (December 8, 2009) asked that the VA Purchasing Priority Hierarchy be specifically defined for contracting
personnel to avoid confusion.  The VA disagreed by stating “this rule clearly
implements the priority purchasing preference for SDVOSB and VOSB in accordance
with the statute.  Under section 8128(a), VA must give priority to small
business concerns owned and controlled by veterans, if the business concern
meets the requirements of that contracting preference.  In this rule, VA will
provide discretion to its contracting officers to override certain statutory
priority preferences, such as Federal Prison Industries and Government Printing
Office. Under section 8128, VA is implementing priority for SDVOSB’s and VOSB’s
to the extent authorized by the law...”

Yet,
there is confusion for VA contracting personnel.  The VA purchasing priority
list basically goes like this.  First and Second in the purchasing hierarchy includes
– Number 1-Agency inventories and Number 2-Excess from other agencies. 
Veterans understand that the Vets First law does not apply here as the VA is
not buying goods and services because they were previously purchased or are
from an existing agency on-hand inventory.  Number 3 – Federal Prison Industries. 
VA regulation (808.6) states that veteran businesses come before Federal Prison
Industries.  Number 4 – Supplies which are on the Procurement List maintained
by the Committee for Purchase From People Who Are Blind or Severely Disabled
(Ability One).  The United States Court of Federal Claims found in the
“Angelica” decision on October 26, 2010 that veteran businesses take priority over Ability One (otherwise known as “Javits-Wagner-O’Day Act” (JWOD)).  The
court found that “the New Guidelines…provide mandatory procedures for
Departmental contracting officers and procurement officials to explore whether SDVOSB and VOSB entities are potential suppliers, in which instances they are
to be accorded first priority over that provided by the Javits-Wagner-O’Day
Act.” The court further found that the “Veterans Benefits Act is a specific
mandate to the Department [VA], and only to the Department, to grant first
priority to SDVOSB’s and VOSB’s in the awarding of contracts.”

Let’s
continue down the VA purchasing priority list.  Number 5 – Wholesale supply
sources.  Number 6 – Mandatory Federal Supply Schedules.  There are no
mandatory federal supply schedules.  This will be further clarified once the
proposed rule FAR Case 2009-024 takes effect.  Number 7 – Optional use Federal
Supply Schedules (“FSS”).  The October 11, 2011 Government Accountability Office (GAO)
Aldevra decision states, “We see nothing in the VA Act or
the VAAR that provides the agency with discretion to conduct a procurement
under FSS procedures without first determining whether the acquisition should
be set aside for SDVOSB’s.  The provisions of both the VA Act and the VAAR are
unequivocal; the VA "shall" award contracts on the basis of
competition restricted to SDVOSB’s where there is a reasonable expectation that
two or more SDVOSB’s will submit offers and award can be made at a fair and
reasonable price. Thus, contrary to the agency's position, the VA Act
requires, without limitation, that the agency conduct its acquisitions using SDVOSB set asides where the necessary conditions are present.  38 U.S.C. sect.
8127-8128.”

Finally,
we arrive to the bottom, last category on the VA purchasing priority list -- Number
8 – Commercial sources and open market.  This “open market” area is where Jan
Frye testified that the Vets First law applies.

Based
on these findings, it’s no wonder why VA contracting personnel and the veteran
business community are confused.  The purchasing priority list is convoluted –
how are veteran businesses ahead of some areas, yet below others? It makes no
sense.  The VA allows this confusion to continue as a means to NOT consider
doing business with veterans first.

VA
Refuses to Comply with Law

Even
after the US Federal Court of Claims and GAO declared that VA should be
considering veteran small businesses first, VA stands by its faulty
interpretation.  VA says in an October 17, 2011 internal memo from Jan Frye that the agency will continue to violate the law, “VA is of the opinion
GAO’s interpretation is flawed and legally incorrect….Because GAO is part of
the Legislative Branch, Executive Branch agencies are not bound by GAO's legal
advice.  Therefore, VA determined this GAO recommendation…shall not be
followed…The GAO recommendation does not change how VA will acquire goods and
services in support of its mission.”

VA
Refuses to Consider Vets with a Federal Supply Schedule First

Even when veteran business owners have a Federal Supply Schedule contract,
they are still not considered first! The VA has stated the “Vets First” program
does not apply to awards made using Federal Supply Schedules, although the
recent interim FAR rule FAR Case 2011-024 implementing the Small Business Jobs
Act of 2010 would allow this evaluation factor.

Service
disabled veteran owned small business owners have done their best to comply
with all the VA terms to do business with them – the arduous task of
verification, in business for two years, obtain past performance, apply and be
awarded a Federal Supply Schedule contract, etc.  Yet, after obtaining all
these requirements, their opportunity to do business with the VA is given to
others.

VA
Transformation Twenty-One Total Technology (T4) Contract - $12,000,000,000 IT
Contract Awarded to Six Veteran Small Businesses and Eight Non-Veteran
Businesses with the existence of P.L. 109-461

Prior to solicitation release, during briefings and
discussions with VET-Force the TAC (VA Technology Acquisition Center) provided
an organizational and mission overview. A key point emphasized during
this briefing was that T4 would capture funds, such as the GSA/VA Schedule
Industrial Funding Fee (IFF) for the supply fund.

T4 Solicitation Q&A’s openly flaunted PL
109-461, “Vets First” in at least six of the Q&A responses to industry
where TAC emphasized that the SDVOSB and VOSB awards were not set-aside and
therefore were not subject to “Limitations of Subcontracting.” 

T4, as procured, may actually serve to reduce the
SDVOSB and VOSB industrial base. In an SDVOSB set-aside, more than 50 percent of
the direct labor must be performed by the prime and any combination of SDVOSB’s. By not having an SDVOSB set-aside “limitations of
Subcontracting” several SDVOSB companies will do quite well, but the key objective
of 109-461 – to build SDVOSB capabilities and industrial base – will not be met.

With recent GAO and CoFC decisions re-affirming “Vets
First” as the VA acquisition priority, it would appear that only six of the
awardees (the SDVOSBs) will be eligible for Task Order Awards.  

VA
Buys Chinese Gloves Instead of Gloves Made in US from a Veteran with FSS

In
one egregious example, a veteran invented a medical glove.  The VA buys tens
of millions of gloves annually.  These gloves are manufactured in the United States in a historically underutilized business zone (HUBZone) in Alabama by a
company that employs veterans.  The gloves are distributed by a verified
service disabled veteran with a Federal Supply Schedule.  About 32 U.S. jobs are created for every $1 million in gloves sold.  So where do you think the VA
spends millions buying gloves to care for veterans? The VA spends our hard
earned tax dollars to buy these gloves from a company that makes them in China
and sells them to the VA for more money than the American manufactured, veteran
distributed gloves[4].

The
VA states that it “continues to strongly support eligible Veteran-owned small
businesses who seek to do business with the federal government.”  Yet this
example and many others demonstrate otherwise.

VA
Touts Inaccurate Numbers

The
VA touts their achievements in awarding 23 percent of contracts to VOSB’s and 20
percent to SDVOSB’s.  This is commendable; however, it is not accurate.  The VA is
double dipping.  They're counting service disabled veteran owned small
businesses as part of the veteran owned small business contracting
percentages.  The true numbers are that 3 percent of contracts go to VOSB’s and 20
percent
to SDVOSB’s. This includes $500 millionawarded
to 1,400 ineligible businesses highlighted in the July 25, 2011 VA Office of Inspector General audit. In addition, considering that there is a law to consider
veteran small businesses first 100 percent of the time, the VA’s performance is
disappointing and signifies a loss of approximately $11.8 billion a year to
veteran owned small businesses.

VA
Gives Small Contracts to Large Businesses

VA
fails to first consider qualified veteran small businesses in Simplified
Acquisitions. These are purchases valued between $3,000 and $150,000. The
Small Business Act exclusively reserves these contracts for small businesses. For FY 2011, the VA had more than 213,000 simplified acquisition purchases
equating to more than $3.8 billion[5]
More than 55 percent of these purchases went to large businesses, most of which
hold a Federal Supply Schedule contract.  The VA awarded 7.74 percent to SDVOSBs and
4.25 percent to VOSBs of a combined total of $606 million of the $3.8 Billion of VA
simplified acquisition transactions. This equates to $3.2 billion in
simplified acquisition contract awards to non-veteran businesses.

VA Leadership Contradicts Itself

On July 21, 2009, Secretary of Veteran Affairs Eric Shinseki addressed veteran entrepreneurs at the 5th Annual
National Veteran Small Business Conference in Las Vegas and stated, “VA will
begin putting Veterans first – fully first – in our contracting efforts because
we recognize the on-time, on-budget, quality solutions that you offer to meet
our contracting needs.
[6]
This statement seems to contradict VA practices.  The hypocrisy continues in
the VA’s strategic plan for 2010-2014, which states that “As the economy begins
to recover, small firms will be the most likely source of new jobs for
Veterans.  Small firms employ about half of all private sector employees,
create 60 to 80 percent of net new jobs annually, and tend to lead the way in
new employment when the economy improves.  In this vein, VA has a longstanding
commitment to contracting with Veteran-Owned Small Businesses (VOSB’s).” The VA
is not doing what they say they will do!  Vets hire vets!  The only thing
veteran small businesses ask is for first consideration at the VA.  Right now,
they don’t have it.  If they’re not being considered, veterans can’t create
jobs for themselves or for another veteran.

Recommendations:

VA
and the Small Business Administration (SBA) should develop a comprehensive
partnership to assist veterans who are interested in participating in Federal
procurement.  VA
should develop clearer and more comprehensive small business contracting
policies[7]:

Recommendation 1: Update
or revise existing VA acquisition policies and regulations to comply with P.L.
109-461 and provide clear guidance to VA contracting personnel to increase
veteran small business set-asides. The revision must clearly state that
veteran small businesses have a contracting preference and priority:

  1. above statutory
    preference entities from General Federal Statutes under FAR Part 8
    Required Sources of Supply
    that lists Federal Prison Industries,
    AbilityOne, and federal supply schedules;
  2. above statutory
    preference entities from General Federal Statutes under FAR Part 19 Small
    Business Programs
    that lists 8(a), HUBZone, & WOSB;
  3. above General
    Federal Procurement Statutes and Acquisition Initiatives such as Strategic
    Sourcing Initiative;
  4. in all
    acquisition thresholds;
  5. in all NAICS
    Codes;
  6. in all market
    categories such as Federal Supply Schedules and Open Market;or all goods or
    services procured by the VA;
  7. exclusively
    within the VA.

Recommendation 2: Issue guidance clarifying
practices and strategies to prevent unjustified contract bundling and mitigate
any negative effects of justified contract bundling on veteran small businesses.

Recommendation 3: Identify industries where
focused efforts on existing qualified veteran small businesses would likely
have the most positive effect on increasing small business utilization in prime
contracting.  Then develop a plan to increase veteran small business
participation in those industries where veteran small businesses are
non-existent to increase contract awards.

Recommendation 4: Strengthen the skills of the
acquisition workforce by revising existing core certification, requiring
training on veteran small business contracting, procurement policies and
regulations, and creating focused refresher materials for continuous learning
to increase the number of contract awards to veteran small businesses in all
industries.

Recommendation 5: Increase the number of
simplified acquisition procedure (SAP) transactions awarded to SDVOSBs at
16,000 (7.74 percent) and VOSBs at 9,000 (4.25 percent) of VA total awards of 213,000 to 60
percent
of SAP transactions within one year.  This can be accomplished due to the fact
that more than 100,000 transactions (more than 50 percent) were awarded to non-veteran
businesses for commodities.  An increase in simplified acquisition
transactions to the veteran small business community has a direct effect on
increasing veteran employment.

Recommendation 6:  Create a separate budget
line item designating that the funds are to be used for only the Center for
Veterans Enterprise.  The Center for Veterans Enterprise will assist veterans
in obtaining verification of their small business in accordance with 38 USC 74.

Summary

The veteran small business community has the best overall
understanding and is in the best position to fully support VA’s mission with an
in-depth procurement knowledge, experience, and understanding for mission
success.  The veteran small business community has a vested interest in VA’s
mission success and the healthcare, job creation, and homelessness of their
fellow veterans that goes beyond profits.  There is no finer group of small
business owners and their families who have invested through their individual
sacrifices to ensure the American Nation persevered with each new and challenging
millennium.


[1]Bureau
of Labor Statistics “Employment Situation of Veterans News Release” October 20, 2011 http://stats.bls.gov/news.release/vet.htm

[2]VAAR 808.603 Purchase Priorities, VA
Proposed Rule in Federal Register August 20, 2008  

[3] Testimony before the
US House of Representatives Committee on Veterans’ Affairs Subcommittee on
Economic Opportunity, APRIL 23, 2009

[4]VA Basic Ordering Agreement (BOA) V797P2071

[5] Simplified acquisition transaction numbers extracted from
USASpending.gov on 11/18/2011.

[6] http://www.va.gov/opa/speeches/2009/09_0721.asp

[7] http://www.sba.gov/sites/default/files/contracting_task_force_report_0.pdf