Joint Hearing of the Committee on Homeland Security and Governmental Affairs of the U.S. Senate and the Committee on Veterans’ Affairs of the U.S. House of Representatives at 1:00 p.m. CDT.
Witness Testimony of Charles Maurice Baker, MCB Lighting and Electrical, Owings, MD, President and Chief Executive Officer
Broken Spirit / Unrealized Dreams
The laws for small businesses to participate in our economy were created to help provide governance to those in the federal government involved in awarding contracts.
The 8(a) program for example was created to help socially disadvantaged businesses grow and develop into viable, sustainable and competitive businesses. The spirit of the law was to make a demonstrative impact on procurement by giving it the tools it needed to provide the maximum practicable utilization of opportunities to 8(a) participants. The same intent and principles of the laws apply to other socio-economic groups such as women owned, hub zone, service disabled veterans and small disadvantaged businesses.
As we will discuss today, somewhere and somehow along the way we have become disconnected with this spirit and the intent of the law. We have lost our passion to ensure that there is economic opportunities for all as was envisioned when our laws were enacted. We have set-aside our commitments to support and embrace our socio-economic companies instead of setting aside business opportunities for them. Results of this broken spirit are more and more unrealized dreams.
Our presentation will focus on some of the major issues contributing to challenges faced by small and socio-economic businesses. The primary issues are contract bundling, sole source contracts, the rule of two and inconsistent interpretation and application of the rules.
The Small Business Reauthorization Act of 1997 defines contract bundling as consolidating two or more procurement requirements for goods or services previously provided or performed under separate, smaller contracts into a solicitation of offers for a single contract that is unlikely to be suitable for award to a small business concern.
Contract bundling is one of the biggest obstacles to small business growth and creates a lack of capacity reducing competition. By combining several smaller contracts into one huge package results in jobs too big for small and minority-owned companies to handle. In a decade-long, David-and-Goliath struggle, small companies are receiving fewer and fewer contracting opportunities. In fact, a smaller number of government contracts are being awarded to small businesses and when combining this effect with increased government spending it is clear evidence that contract bundling is on the rise. Moreover, consolidating multiple government contracts into single contracts limits the participation of small businesses as prime contractors and it is more difficult for small businesses to compete for multiple service contracts due to the high cost of preparing proposals and the low probability of winning against large businesses.
Sole Source Contracts
There is a disparity in contract law for sole sourcing arrangements for large and small businesses. Large businesses can be awarded sole source contracts without competition while small businesses have to compete for contracts under what is commonly known as the rule of two.
The rule of two specifies that a requirement may be set-aside for small business, within the applicable dollar thresholds, as long as there are two or more companies that can satisfy the requirement. However, if there is only one company available with the capability and capacity the contracting officer may award the contract as sole source as long as the contracting officer first advertises the requirement.
Obviously the playing field is not level based on the rule of two. The rule of two along with contract bundling contribute to the proliferation of sole source contracts for large businesses while closing the door for small businesses.
In 2006, according to a Federal Times article, sole source contract spending reached an all time high of $207 billion – up from $145 billion (or 45%) in 2005. At $207 billion, sole source contracts account for 50% of total procurement spending. The growth is even more staggering if we compare 2006 to 2000. Sole source contract spending in 2000 was $67 billion and has increased $140 billion (or 209%) in six years.
While small businesses have the hurdle of the rule of two, big businesses run their races without any obstructions and benefit at significant dollar amounts.
The result of growing sole source spending among large business is the death sentence for small businesses. We have seen from above that contract bundling has had a profound negative effect on small business contracts. Sole source is having the same negative effect. At the end of the day, small businesses will become less economically viable at the federal level.
The Bush Administration made it a priority in 2002 to address the inequities of contract bundling by tasking the Office of Management and Budget (OMB) to prepare a strategy for unbundling contracts. OMB, in late March, 2002, through its Office of Federal Procurement Policy (OFPP), created an interagency working group to develop strategies for unbundling contracts. The strategies are intended to reintroduce competition in contracting.
Contract bundling inevitably leads to sole source contracts as the intent of consolidating products and services into “bundles” reduces the number of companies that have the capability and capacity to compete. This was clearly understood by the task force and their agenda was based on this premise.
Let us fast forward to 2007. The data shows that the landscape and appetite for bundling have not been decreased rather it has increased where from 2004 to 2005 contract bundling increased 16%.
Over the past five years, total government contracting has increased by 60 percent, while the number of small business contracts has decreased by 65 percent. Not only are substantially fewer small businesses receiving federal contracts, but also the federal government is suffering from a reduced supplier base. We constantly hear about competition all the time, yet this is only big businesses propaganda as they look to limit competition further.
In order to increase competition the federal government has to increase its supplier base with different supplier and service codes and provide set-asides for small businesses and promote and fund business development programs. If small businesses are not developed and allowed to grow, eventually there will be limited or no competition. This lack of competition resulted in $145 billion of sole source contracts in 2005 and $207 billion in 2006. The sole source spending is not the non-competitive vehicle provisions in the 8(a), Hubzone or SDVOB programs as some would like to us believe.
There are several reasons for the lack of competition:
- Contract bundling
- Sole source contracts
- Lack of small business development
Competition must be increased in the large business arena and small businesses have to play a major role in that competition. Competition can be increased if bundled contracts are “unbundled” so that small businesses have a viable opportunity to compete. By competing, small businesses will have access and funding to further develop their businesses and bring back much needed dollars to support their communities. Right now there appears to be a gap in the balance of commerce for small businesses with its tax base. Taxes are being removed from small business neighborhoods but revenues are not coming back through business opportunities. Small businesses continue to contribute their fair share of tax dollars to federal spending yet have never received their fair share of the money in federal contracting.
What the Law Says
The basic premise of the law is to shape the programs it addresses for the benefits of the groups included. It is the intent of the law that is important as well as the underlying enforcement guidelines that sets out governance rules and mandates compliance.
The Small Business Reauthorization Act of 1997 lists several factors that might cause unsuitability for award to a small business. The Act requires each federal department and agency, to the maximum extent practicable, to: (1) structure contracting requirements to facilitate competition by and among small business concerns, taking all reasonable steps to eliminate obstacles to their participation; and (2) avoid unnecessary and unjustified bundling of contract requirements that may preclude small business participation in procurements as prime contractors.
Prior to bundling any contracts, agencies are required to conduct market research to determine whether contract bundling is necessary and justified. To justify contract bundling, agencies must demonstrate "measurably substantial benefits," such as cost savings, quality improvements, reduction in acquisition cycle times, or better terms and conditions. The Small Business Administration’s implementing regulations further define "measurably substantial benefits" by requiring agencies to demonstrate - -for contracts of $75 million or less - - benefits equivalent to 10 percent of contract value (including options), or contracts over $75 million - - benefits equivalent to 5 percent of contract value (including options) or $7.5 million, whichever is greater.3
How the Law is Applied
Much latitude has been taken by the procurement community to interpret the rules and regulations to support their procurement decisions.
The law is being ignored.
What is Wrong with the Way the Law is Applied
According to a report prepared for SBA’s Office of Advocacy, for every 100 “bundled” contracts, 106 individual contracts are no longer available to small businesses. For every $100 awarded on a “bundled” contract, there is a $33 decrease to small businesses. Because these types of contracts “run longer and encompass a greater scope, competition is reduced in terms of frequency and the number of opportunities.”
The Impact of Big Business
If we had spent the increase in federal procurement in the small business community our economy would be thriving instead we have a few top defense companies with record profits. The war is not about oil, or securing stability in a region, it’s really about the defense industry who contributes 10 times more dollars than big oil to its causes. We have CEOs profiting off the veterans yet they are not providing the maximum practical utilization of SDVOB in their subcontracting plans because there is no penalty for them not doing it and they see or understand the benefits of providing this requirement in a good faith effort its all about how to maximize their profits.
Currently, we have about 6 major defense contractors receiving approximately 30% of the defense budget, and 40% of these contracts are sole sourced!!!!
Lockheed Martin, Boeing, Northrop Grumman, Raytheon, General Dynamics and United Technologies—the Defense Department’s six largest contractors get over $100B in defense contracts, mostly on a sole source basis. Yet small businesses, like service disabled veterans, can not sole source unless there are two or more small business competing. We have already talked above about the rule of two principle.
No-bid contracts have accounted for more than 40 percent of Pentagon contracting since 1998, which amounts to some $362 billion in taxpayer money to companies without competitive bidding. We discovered that out of the top ten contractors, only one—Science Applications International Corp., or SAIC—won more than half it's dollars through full and open competition. All the others won most of their federal funds through sole source and other no-bid contracts.
Indeed, these are good times for defense contractors. From fiscal year 1998 through 2003, the Pentagon's overall dollars to contractors has risen up 59 percent, from $129 billion in 1998 to $219 billion in 2003. The biggest defense contractors the past six years (1998-2003) have been Lockheed Martin ($94 billion); Boeing ($81.6 billion); Raytheon ($39.9 billion); Northrop Grumman ($33.8 billion); General Dynamics ($33.3 billion); United Technologies ($17.9 billion); General Electric ($10.6 billion); SAIC ($10.6 billion); Carlyle Group ($9.3 billion); and Newport News Shipbuilding ($8.85 billion). These totals do not include the extra billions of dollars these companies collected as partners in joint ventures. Halliburton ($6.8 billion) came in 14th on our list of the biggest 100. These biggest contractors also received the most money in no-bid contracts.
Over 737 companies, including several thousand of their subsidiaries and affiliates have received at least $100 million in contracts over the past six years, with breakdowns of each company's total contract dollars, the types of contracts they won, the competition they faced, a list of their key subsidiaries, analysis of their lobbying and campaign contributions, and a list of the chief products and services they sold to the Pentagon is available on the inter net.
CEOs at the biggest defense contractors are personally profiting from the war in Iraq: Military contractor CEOs received a 200 percent raise since 9/11.
Right now defense contractors are profiting on the deaths and disabilities of our soldiers, and they appear unwilling to provide subcontracting opportunities to the very soldiers who have risked their lives for democracy and a safe America.
Effects of Contract Bundling
Contract bundling creates a decline in new contract awards to small businesses.
The lack of competition has pushed sole source contracts from $67 billion in 2000 to a staggering $207 billion in 2006. This represents a 218% increase. The effect of this shift from competitive contracting to sole source contracting has resulted in less participation by small businesses in the overall economy.
While overall spending has increased 16%, small business contracting actions have decline 65%.
According to data captured in the Federal Procurement Data System - Next Generation (FPDS-NG), the federal government spent over $417 billion in Fiscal Year (FY) 2006, but only 43 contracts over $5 million were reported to GAO as bundled and accounted for $5.7 billion. The number of bundled contracts is closer to 928.
For 2005, the SBA’s FPDS showed the Department of Defense with 970,009 small business contract actions. Of these, 57,376 were actually awarded to companies that are not small. Therefore, the Department’s actual number of small business contract actions was 912,633 – a decline of 65 percent from 2004. This should be contrasted with the Department’s increase in total contracting dollars of 13 percent from 2004 to 2005. The increase in contracting dollars, compared to the decrease in small business contract actions, is indicative of contract bundling. Let’s also not forget the $12B in miscoding of big business as small business.
And How do We Fix the Procurement System
On July 12, I gave testimony to this committee on how I believe the procurement system should be fixed. I will reiterate that we must follow the existing laws, rules and regulations and we must comply with the intent of the laws. We advocate that creativity and innovation within the rules are in the best interest of the government and not in the best interests of big business. Our procurement system has migrated towards bundled contracts as the cure for all of its ills created by reduced staff and increased workloads. Somehow we let the people with the gold (money) and political influence change all the rules in their favor. This is why we don’t have competition in contracting and sole source contracts have increased 115% over the last 5 years to $145B.
Until Congressman Waxman is successful in implementing additional staffing through his 1% initiative, the procurement workforce needs to begin an intense training regimen, the laws and rules on the books today needs to be followed and enforced and we need to seek out more inclusion of the Service Disabled community for their experience and expertise.
Resolution to Contract Bundling
We have created a logical plan for DOD to use immediately to assist it in reaching its 3% goal.
Currently DOD spending with SDVOB companies is at 0.49% with a goal of 3.0%. In its second year strategic plan, DOD is committed to meeting its statutory 3.0 target. Unfortunately DOD does not elaborate on the specifics of achieving the goal. Our experience is that this goal is similar to the analogy of “covering the waterfront” which past history has demonstrated does not work for the federal government because other preference goals have never been met because they never had a logical analytical plan to follow. There has to be a strategy with meaningful targets set with milestones and timelines attached.
Our plan creates an implementation strategy based on the historical data of SDVOB procurements with DOD from the most current Fiscal Year 2005 data in the Federal Procurement Data System-NG.
Our plan is a goal attainment strategy based on actual data which clearly demonstrates the immediate possibility of delivering 3% using a simple logical thought process using product or service categories where SDVOB companies have the most potential for success. The process identifies product or service categories for all DOD procurement requirements. DOD can use this process to specifically target product and service categories where there is little or no participation currently for SDVOB companies. Our plan is very effective for program managers and contracting officers. Each product or service code is assigned a percentage target for SDVOB participation. The percentage target is based on dollar volume spending in Fiscal Year 2005. There is a tiered percentage scale that is used. The scale is dollar volume driven with the percentage declining the higher the spending. The percentage scale is as follows:
- Up to$100 million – 6%
- Up to $500 million – 5%
- Up to $1 bililion – 4%
- Up to $10 billion – 3%
- Over $10 billion – 2.5%
Our vision is to have DOD implement our plan immediately so that it can contribute to helping SDVOB companies become sustainable, competitive and viable businesses as well as satisfy its goal of 3%.
Our plan was created by MCB Lighting & Electrical of Owings, MD POC Charles Baker 301-812-2591 and Mazyck and Associates of Sacramento, CA POC Edward V. Mazyck, Jr. 650-465-6403. MCB INC. at the request of CEO Charles M Baker worked with Mazyck & Associates to develop this goal attainment strategy.
How can we fix some of the procurement problems that we are facing today?
We can start by making good management decisions. One decision is considering shifting over a taxing workload to an innovative program that we have.
Over 90% of all procurement transactions are under the $100K threshold and represent only 10% of the total procurement dollars. A significant amount of time and effort is consumed by the procurement workforce processing small dollar transactions. We think this is wasting limited, valuable resources and time. These resources and the associated time can be better focused on the real money and the real acquisition issues.
The time involved in processing smaller transactions not only is burdensome to the acquisition workforce but it’s equally time consuming and a nightmare for customers also. I speak with 20 years of frustration of dealing with federal procurement and trying to accomplish the mission as a government employee. As the ex-chief of facilities for Andrews AFB I can tell you horror stories of having HVAC units broken for weeks and sometimes months for a $5K part my people went and put their hands on but could not fix the units for several months because of the slow procurement process. After all was said and done the procurement rules in the name of competition cost the tax payers enormously as the administrative cost would some times even exceed the cost of the parts. In addition, the cost of a temporary solution would some times triple the purchase cost of the item ordered.
And finally, we believe that by working together we can all share in the success of our efforts and achieve great things.
Thank you for the opportunity to share some of our thoughts with you today and we hope that it has been informative, educational and helpful.