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

Mr. Chairman, Ranking Member, and members of the Subcommittee, thank you for inviting me to appear before you today to discuss the Department of Veterans Affairs’ (VA) 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), as well as subsequent legislation.

The Congress has provided VA with tools to aid Veteran entrepreneurs, and these authorities complement our responsibility to aid Veterans in their transition to civilian life.  VA has used these tools aggressively and leads the 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 as such, regardless of service-disability.  In Fiscal Year 2010, VA awarded more than $3 billion in contracts to both categories, out of our contracting base of $15.4 billion.  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 debar firms that misrepresent themselves to obtain contracts through fraud.  VA has accomplished these actions at a time of great challenge in the leadership of the Office of Small and Disadvantaged Business Utilization (OSDBU), but I believe we are increasingly well-positioned to carry out these missions:  ensuring contracting opportunities for Veterans, and limiting opportunities for those who would abuse the program fraudulently.

Changes and Challenges for OSDBU

On April 18, 2011, I became the new Executive Director for OSDBU, taking the reins from Ford Heard, who filled in as Acting Executive Director since December 6, 2010.  I come to VA most recently from two successful government contractors, where building partnerships and mentoring small businesses were central aspects of my work.  I am also a Veteran, having served 21 years in the Army.

In my Army career and in work for both nonprofits and businesses, I have extensively led and participated in strategic planning efforts.  It is a trite saying, but nevertheless true:  most people do not plan to fail, they fail to plan.  This is very true for small firms, whether they are startups trying to identify a market and a product or service where they can compete, or they are successful businesses trying to manage growth.  They often underestimate the investments they need to make to begin operations, and they overestimate the rate at which they will gain market share and become profitable.  OSDBU can be a valuable source of referral to resources that can help entrepreneurs in more detail than is possible for our small office.  For example, Small Business Development Centers (SBDCs) across the nation can help startups with developing business plans that a lender will find credible and an entrepreneur can use as a roadmap to success.

Planning is also key for government organizations.  I have applied my planning experience to develop and implement that address concerns raised by the Government Accountability Office (GAO) and others.  GAO has noted concerns with staffing, the verification process, and timely site visits to selected applicants.  We have taken steps in all these areas.  In addition, although last year was a good year for VA and for OSDBU, we faced a major challenge in implementing significant new statutory requirements.  VA senior leadership ensured OSDBU was properly resourced to meet those tight deadlines.  The senior leadership continues to support the resourcing requirements of OSDBU, as we expect that FY 2012 will continue to have an expanded workload as we begin full examinations on all verified businesses whose verifications have expired.

Ensuring Contracting Opportunities for Veterans

As noted earlier, VA awarded over $3 billion in Fiscal Year (FY) 2010 to service-disabled as well as other Veteran-owned small businesses.  Specifically, VA awarded $3.5 billion to VOSBs, of which $3.1 billion went to SDVOSBs, out of a contracting base of $15.4 billion.  These awards represent 23% to VOSBs and 20% to SDVOSBs, and greatly exceed VA’s goals of 12% and 10%, respectively.  This performance also establishes VA as a leader in contributing toward the governmentwide SDVOSB goal of 3%.  In FY 2010, VA achieved 37.3% for all small business, and as of July 2011 has achieved 33.8% for small business, 19% for VOSBs and 16.9% for SDVOSBs.

Certainly the contracting authorities in Public Law 109-461 contribute significantly to this positive performance.  However, those authorities are not self-executing.  They depend on VA’s people to make the day-to-day contracting decisions that, over the course of a year, determine what VA will achieve on its contracting goals.  Toward this end, I would note the top-level commitment from the Secretary as a key factor.  In addition, OSDBU’s regular engagement with VA’s acquisition professionals is indispensable.

  Public Law 109-461 recognizes the importance of the “tone at the top.”  The law directs the Secretary to set goals for contracting with SDVOSBs and VOSBs, then provides contracting authorities for VA in support of those goals.  The Secretary’s goal for SDVOSBs shall be not less than the goal in the governmentwide SDVOSB program, and the Secretary’s goal for VOSBs is a unique requirement with no governmentwide counterpart.  On May 7, 2010, Secretary Shinseki issued a memorandum establishing the prime contracting goals outlined above for Fiscal Years 2010 and 2011.  He also adopted goals for VOSBs and SDVOSBs in subcontracting with VA prime contractors, at 5% and 3%, respectively, for both years.  Finally, and most importantly, he continues to track these metrics at his Monthly Performance Review sessions with VA’s senior leadership. 

VA is now in the beginning stages of implementing a a new program to increase scrutiny of subcontracting with SDVOSBs and VOSBs.  VA will be  conducting subcontracting compliance reviews, and is in the process of including third-party access language in its contracts that will allow  access to VA contractors’ records.  Once the access language is incorporated into VA contracts, VA will begin randomly accessing prime contractors for subcontracting compliance.

Operationally, OSDBU’s engagement with VA’s acquisition professionals ensures they remain conscious of opportunities that may be appropriate for SDVOSB or VOSB sole-source or set-aside authority under Public Law 109-461.  OSDBU reviews prospective acquisition strategies on all open market procurements valued over $500,000.  Because Public Law 109-461 established a unique procurement hierarchy for VA, with SDVOSBs first and VOSBs second, before any other category of small business program, OSDBU reviews the market research documentation to ensure the contracting officer properly followed the hierarchy.  Below $500,000, the proposed acquisition strategy still faces review by the head of contracting activity (HCA) or the HCA’s assigned small business liaison.  For Fiscal Year 2011 through July 12, 2011, OSDBU has reviewed 868 of these forms, of which 310 indicated prospective SDVOSB set-asides.

OSDBU also engages the acquisition community on significant contracting opportunities as a voting member on VA’s Integrated Product Teams (IPTs).  These are cross-functional teams charged with developing acquisition strategies, risk mitigation strategies, and milestones on new acquisitions of $5 million or more, and on complex acquisitions below $5 million when posing technical, program or business risk to the government.  This allows OSDBU to collaborate with the program office, procurement office, General Counsel, or other interested stakeholders at the early stages of developing an acquisition.  We help with market research, advise on applicable small business policies, identify opportunities for small business participation, and recommend appropriate acquisition strategies.  OSDBU currently is participating in 26 IPTs.

A success story to come out of these activities is the  Transformation Twenty-One Total Technology  contract (referred to as T4).  VA recently issued 15 awards for the very large indefinite delivery / indefinite quantity contract..   The contract is for five years and has a ceiling of $12 billion.  Of the 15 awardees, seven firms are SDVOSBs or VOSBs.  Three of the awardees are participating in the VA Mentor Protégé program (two as mentors and one as a protégé.)

Keeping the acquisition community engaged and informed on small business programs and policies, especially the requirements of Public Law 109-461, is vital to ensuring contracting opportunities exist.  It is equally important, though, for small businesses to be ready to take advantage of those opportunities when they arise.  OSDBU can assist small businesses in understanding how and what VA buys and who does the buying; this provides firms with basic information on how to property and effectively market themselves as a credible prospective contractor.  OSDBU also educates small businesses about VA-specific regulations, such as Public Law 109-461.  Few things can deflate a firm’s marketing pitch more than to show a lack of preparation and knowledge of their VA customer.  For example, a health care firm that does not understand how the Veterans Health Administration (VHA) is organized runs the risk of losing a lot of time and expense marketing to those who do not buy what the firm has to offer.  OSDBU provides monthly vendor counseling sessions in its offices to provide firms with the basics of marketing to VA, and provides similar phone consultations for firms not located in the Washington, DC, area.

OSDBU also conducts numerous outreach efforts at conferences, business fairs, and other events to ensure this information reaches firms outside the Washington D.C. area.  In addition, the annual National Veterans Small Business Conference and Expo sponsored by VA will take place August 15-18, 2011, at the Ernest N. Morial Convention Center in New Orleans, Louisiana.  This conference is hosted by Secretary Shinseki, and the entire VA senior leadership will be present.  As of mid-July, we are expecting over 2,300 attendees and representation from 139 federal, state and local agencies.  There will be over 120 learning sessions with featured speakers to include the Honorable Frank Kendall , Principal Undersecretary of Defense, Acquisition, Logistics and Technology and the Honorable Jane Holl Lute, Deputy Secretary from the Department of Homeland Security.  Additionally, more than 116 VA acquisition professionals will be present to meet with owners.

Preventing Fraud and Abuse

As much as VA enthusiastically seeks Veteran participation in our small business contracting opportunities, we also seek to keep out those who misrepresent themselves from taking away opportunities from those Veterans who have rightfully earned contracting opportunities.  We have heard, loud and clear, from Veterans as well as from various Congressional statutes, oversight, and direction, that a credible Veteran small business program must ensure appropriate safeguards.

The clear standard, both in the VA-specific program and the government wide small business contracting programs overseen by SBA, is that a service-disabled Veteran-owned small business must be both owned and controlled by one or more service-disabled Veterans; Veteran ownership and control is the standard for a VOSB.  It is not sufficient for a Veteran or service-disabled Veteran to own the firm while non-Veterans control its day-to-day operations.  Moreover, the requirement that eligible firms be small businesses provides further defense against abuse by those who would put up a legitimate SDVOSB as a front while an ineligible, typically large, firm runs the show and collects the benefits.  SBA’s tests for affiliation provide guidance to examine the true nature of business partnerships, to see whether they are legitimate teams or joint ventures, or front operations for ineligible firms.

VA has applied these standards rigorously in implementing the Congressional mandates of Public Law 109-461.  As originally passed, the law very clearly directs that only firms listed in the Vendor Information Pages (VIP) database may receive VA contract awards under the law’s special sole-source and set-aside authorities.  The program regulations originally adopted on May 19, 2008, describes how VA's OSDBU’s Center for Veterans Enterprise (CVE) would examine firms for ownership and control, incorporated SBA’s standards for affiliation, and listed the types of documentation a firm would need to compile to support an application for verification of its SDVOSB or VOSB status.  The Office of Management and Budget approved the data collection requirement under control number 2900-0675, as required under the Paperwork Reduction Act.  In many cases, however, the firm would need only to keep the information on file and readily at hand in the event CVE needed to conduct an examination of the firm’s status.

In 2010, Congress further clarified the statutory mandates on verification.  Public Law 111-275, Section 104 directed VA not to list any firm in the VIP database unless CVE had first verified its SDVOSB or VOSB status.  Further, all unverified firms previously listed in the database on the date of enactment (October 13, 2010) would need to submit their applications for verification, with supporting documentation, or face removal from the database.  The law directed VA to contact all unverified firms within 60 days of enactment, or not later than December 12, 2010.  Within 90 days after receiving the VA notice, the firms were required to submit their materials or be removed. 

VA met the statutory deadlines.  On December 10 and 11, 2010, VA notified all unverified firms in the database, as well as those whose prior verifications were within 120 days of expiring.  The notices explained the new statutory verification mandate, and provided a list of documents needed for verification, tailored according to the type of firm to try to avoid unnecessary paperwork demands.  In practice, this mandate required firms to submit copies of documents they formerly could retain on file.

The letters offered recipients the option to send their materials on a CD-ROM or to wait until early February 2011 for deployment of an on-line document uploading utility.  Either approach would allow the firm to meet the 90-day response deadline in mid-March.  VA deployed this utility on February 4, 2011.  VA received 2,653 applications as a result of this process, and on March 21, 2011, CVE removed the profiles of about 8,100 non-respondent firms.  At this point, the only unverified firms visible in the VIP database are those that submitted applications in response to the December, 2010, VA notice and are still currently being processed.  Since the implementation of P.L. 111-275, we have verified approximately 2,000 firms and denied approximately 1600.

  VA’s VIP database is the  mandatory go-to source for VA’s acquisition professionals to confirm the SDVOSB or VOSB status of firms being awarded contracts under Public Law 109-461.  Having only verified firms in the database, as Public Law 111-275 directed, will greatly reduce the risk of human error from misreading a database entry and erroneously awarding to an unverified firm.  When the verification requirement in VA’s acquisition regulations takes effect January 1, 2012, VA will be well-positioned to ensure compliance.

VA is not sitting idly by until the January 1, 2012, regulatory requirement takes effect.  In the interim, VA has adopted a policy for verifying firms under an expedited process whenever an SDVOSB or VOSB is the apparently successful offeror on a contract under a Public Law 109-461 authority (i.e., SDVOSB or VOSB set-asides or sole-source awards).  This policy, referred to as a “Class Deviation,”[1] directs VA contracting officers to include a provision in all solicitations issued under such authorities, notifying eligible offerors that they will have to submit their applications and supporting materials for verification if they are apparently successful.  CVE will then conduct a verification of the offeror within 21 business days.  If CVE is unable to verify the firm, the offeror will not receive the contract award.  As of July 12, 2011, CVE has received 347 applications under the Class Deviation process since the requirement took effect October 1, 2010. CVE has approved 199, denied 100, found 8 unverifiable, 10 voluntarily withdrew their applications and 11 had untimely submissions.  As part of the process, CVE performed site visits on 202 and 19 are still in process.  Twenty-nine percent have failed to meet verification requirements for Veteran ownership and control.

Public Law 109-461 also recognized some purported SDVOSBs or VOSBs will get past the verification screen, such as by misrepresenting themselves to abuse these contracting opportunities.  VA is handling this concern with a two-pronged approach.  First, with respect to individual contract awards, we invoke the self-interest of those who did not win the contract.  If they have specific grounds (as opposed to an unsupported or general allegation) to believe an awardee is not in fact an SDVOSB or VOSB, they can protest the status of the awardee.  The protestor submits its information in writing to the contracting officer, within 5 days after notice of the award (or bid opening).  The contracting officer refers a status protest to the Executive Director, OSDBU, for decision; if a protest involves issues of size (whether the awardee is, in fact, a small business), those issues are referred to SBA for decision.  Timelines for these actions are very tight because the outcome of a contracting action often depends on the decision.  Since VA adopted its status protest process in December 2009, 138 such protests have been filed, 67 were sustained, 50 were dismissed, 17 were denied and 4 are pending as of July 12, 2011.  Firms found ineligible in a status protests are effectively deemed unverified, become ineligible for future SDVOSB or VOSB awards at VA, and their profiles are removed from public view in the VIP database.  Additionally, many of these cases develop into additional workload in developing support for court cases or responding to inquiries from Members of Congress.

CVE has made 70 referrals to the VA Office of the Inspector General (OIG) this fiscal year.  For cases of misrepresentation, Public Law 109-461 directs VA to debar SDVOSB or VOSB firms for up to five years.  VA has implemented this provision and has begun debarment proceedings.  In September, 2010, VA established the 8127 Debarment Committee, so named after section 8127 of title 38, United States Code, as adopted in Public Law 109-461.  The 8127 Debarment Committee has provided guidance on the VA website on when and how to refer cases to them for review.  The Committee makes recommendations to the agency debarring official, the Deputy Assistant Secretary for Acquisition and Logistics.  If a firm is debarred, VA makes an entry in the government wide Excluded Parties List System (EPLS), which has created two data codes specifically for recording 8127 Debarment actions.  The Federal Acquisition Regulation (FAR) directs contracting officers to consult the EPLS (and document to the contract file) prior to making a contract award, to ensure debarred firms do not receive contracts during the period of the debarment.  As of July 12, 2011, VA has debarred 12 companies or individuals for a period of up to five years, and has four more pending.  VA publishes this information for public view at http://www.va.gov/oamm/oa/8127debarmentActions.cfm.

Finally, let me note one further issue that goes beyond verification.  Verification seeks to ascertain the status of a purported SDVOSB or VOSB.  Are you who you claim to be, and does the Veteran or service-disabled Veteran own and control the small business?  This is a snapshot in time for the date that the verification was granted.  CVE reviews these status issues for verification before VA may make a contract award.  At that point, it is not possible to know how a contractor will perform on a contract, what its capabilities are with respect to a future solicitation, or if the firm will receive a contract award at all.  When an SDVOSB or VOSB subsequently receives a contract under Public Law 109-461 set-asides or sole-source authorities, it will be required to perform a certain fraction of the work itself or with another SDVOSB or VOSB, depending on the nature of the contract.  How the firm will perform on those requirements cannot be known at the time of verification.  Instead, matters such performance fraud are issues of contract administration, tracked as all other contract performance issues are, by the contracting officer.

Performance fraud is a serious potential risk to the integrity of the program, as it becomes another way ineligible firms might tap into the program using eligible firms as fronts.  VA’s Office of Acquisition, Logistics, and Construction is heightening its scrutiny in this area on VA contracts.  We will begin sampling contracts and reviewing them for compliance, as well as reviewing contracts whenever instances of alleged fraud have taken place.  As VA finalizes details on this Subcontracting Compliance Review Program, I am sure the cognizant officials will readily share them with Congressional stakeholders.

Conclusion

VA has sought to overcome recent challenges while sustaining its commitment to SDVOSB and VOSB contracting under Public Law 109-461.  VA has implemented and continues to monitor contracting actions for opportunities suitable for Veteran small firms.  We also continue to implement provisions of the law, as well as other good common-sense initiatives, to ensure the program’s integrity.  As OSDBU’s new Executive Director, I appreciate the benefit of your advice and recommendations, and the insights that your constituents share.  Your constituents are our Veteran clients, and that is why we dubbed the program under Public Law 109-461 as the Veterans First Contracting Program.

Mr. Chairman and members of the Subcommittee, this concludes my statement.  I would be pleased to answer any questions you may have.


[1]  Both the Veterans Affairs Acquisition Regulation (VAAR) and the governmentwide Federal Acquisition Regulation (FAR) permit deviations from their requirements, when found appropriate under agency processes.  Deviations applicable to only one contract action are referred to as “individual deviations” while deviations that cover multiple contract actions (a class) are deemed “class deviations.”  Federal Acquisition Regulation, subpart 1.4.