[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
CONTRACTING AND THE INDUSTRIAL BASE II: BUNDLING, GOALING AND THE
OFFICE OF HEARINGS AND APPEALS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MARCH 17, 2015
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 114-005
Available via the GPO Website: www.fdsys.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
93-731 PDF WASHINGTON : 2015
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
TOM RICE, South Carolina
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Stephen Dennis, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Richard Hanna............................................... 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Mr. Joe Wynn, President, VETS Group, Inc., Washington, DC,
testifying on behalf of VET-Force.............................. 4
Mr. Robert Burton, Partner, Venable LLP, Washington, DC.......... 5
Mr. Alan Chvotkin, Executive Vice President & Counsel,
Professional Services Council, Arlington, VA................... 7
Mr. Damien Specht, Partner, Jenner & Block LLP, Washington, DC... 9
APPENDIX
Prepared Statements:
Mr. Joe Wynn, President, VETS Group, Inc., Washington, DC,
testifying on behalf of VET-Force.......................... 24
Mr. Robert Burton, Partner, Venable LLP, Washington, DC...... 31
Mr. Alan Chvotkin, Executive Vice President & Counsel,
Professional Services Council, Arlington, VA............... 45
Mr. Damien Specht, Partner, Jenner & Block LLP, Washington,
DC......................................................... 52
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
National Office Products Alliance (NOPA)..................... 59
CONTRACTING AND THE INDUSTRIAL BASE II: BUNDLING, GOALING AND THE
OFFICE OF HEARINGS AND APPEALS
----------
TUESDAY, MARCH 17, 2015
House of Representatives,
Committee on Small Business,
Subcommittee on Contracting and Workforce,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Richard Hanna
[chairman of the subcommittee] presiding.
Present: Representatives Hanna, Knight, Curbelo, Hardy,
Velazquez, Chu, Meng, and Lawrence.
Chairman HANNA. Good morning, everyone. I call this hearing
to order. Happy St. Patrick's Day.
This is our first Subcommittee on Contracting and Workforce
of the 114th Congress. I am happy to welcome Ranking Member
Nydia Velazquez. I am sure we are going to do important work
together in the next couple of years.
As Chairman Chabot stated in his hearing of February 12,
2015, having a healthy small business and industrial base means
that taxpayers benefit from increased competition, innovation,
and job creation. However, the testimony received by the
Committee last month indicates that our small business
technological and industrial base is at risk. With the
percentage of prime contracting dollars awarded to small
businesses is increasing, the number of small businesses
seeking contracts with the Federal Government has fallen by
over 100,000 since 2012. In the past four years, the number of
contract actions with small businesses has fallen by 60
percent, and at the Department of Defense, the number of
contract actions fell by almost 70 percent. The size and
average of individual small contract actions increased by 230
percent during that same period and nearly 290 percent at the
DoD. The percentage of subcontracted work going to small
businesses has also fallen by nearly 2.5 percent. All of this
data indicates that small businesses are at risk; yet the Small
Business Administration gave the Federal Government--and this
is a mystery--an A on its latest small business procurement
scorecard.
Today, we will examine how the government can be receiving
a superlative grade when half of the dollar-base goals are not
met, bundling and consolidation are increasing, small business
subcontracting is decreasing, and size standards are being
manipulated.
Today's witnesses are going to address specific
recommendations to improve the competitive viability of our
small business contractors. This is the second of a series of
hearings we will be having on this topic--we will be back here
in a couple of days, on Thursday. I expect that as a result of
the testimony received today, the Subcommittee will actively
pursue ways to increase opportunities for small businesses to
compete for contracts.
I look forward to working with each of you and hearing your
testimony. I now yield to Ranking Member Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman, for holding this
valuable hearing.
As this committee seeks ways to foster small business
growth and expansion, we must always carefully consider what is
being done to maximize entrepreneurs' participation in the
federal marketplace. As we all know, when small companies are
awarded federal contracts, the result is a win-win. Small
businesses provide quality goods and services at affordable
prices, meaning a better deal for the government and the
taxpayer. At the same time, it can mean significant growth
opportunity for small businesses and even the need to hire new
employees. With these benefits in mind, Congress, and this
committee in particular, have long worked to ensure small
businesses receive their fair share of federal contracts.
There has been some progress in this regard. In Fiscal Year
2013, the federal government finally met its statutory goal of
providing 23 percent of federal contracting dollars to small
enterprises. For Fiscal Year 2014, it appears as much as 25
percent of federal contracting dollars may flow to small
companies.
While this represents an improvement over previous years
when these goals were not met, much work remains. For example,
there continue to be reports of ineligible businesses receiving
small business contracting dollars. Additionally, the
scorecards issued by the Small Business Administration have
been questioned as agencies continue to receive high grades
despite failing to meet all of their small business goals.
With budgets, time, and spending reduced due to the ill-
advised policy of sequestration, there are simply fewer
procurement actions to go around. This means it is more
important than ever that agencies are doing everything possible
to ensure legitimate small companies can tap into suitable
federal business opportunities.
One longstanding barrier to small business participation in
the federal marketplace has been the practice of contract
bundling. When federal agencies group smaller procurement
actions together, they reduce competition by making projects
too large for small companies to bid on. Publicly available
data suggests that for every $100 worth of federal work that is
bundled, small firms lose $33 in revenue.
Unfortunately, this practice is widespread. In Fiscal Year
2013, it was estimated that over $107 billion was awarded
through consolidated or bundled contracts. That means small
companies missed out on $35 billion worth of contracting
opportunity.
Considering the prevalence of this problem, it is vital we
ensure the SBA is doing everything possible to prevent
unnecessary bundling. This raises a number of important
oversight questions for the committee, including whether the
SBA has sufficient staff to monitor contracting actions and
whether the agency is aggressive enough in challenging bundled
contracts. Given how few contracts have been unbundled, the
answer to both these questions would appear to be no.
Today's hearing will also touch on the jurisdiction of the
SBA's Office of Hearing and Appeals. This office has been
integral to ensuring only legitimate firms receive small
business contracts. However, the office, like many other parts
of the agency, remains understaffed, and it is unclear how this
will affect their caseload.
Mr. Chairman, with overall government expenditures
declining, the pool of contracts for small businesses to bid on
will only further shrink in coming years. Given this
phenomenon, it is all the more critical that this committee and
the SBA work to remove barriers that prevent small firms from
bidding on federal contracts.
I look forward to hearing the witnesses' perspectives on
how we can best accomplish that task. I yield back the balance
of my time, but first I would like to take a moment to say to
all of you, thank you for being here.
Chairman HANNA. Our first witness today is Joe Wynn, the
president of VETS Group, a nonprofit organization that provides
entrepreneurial education, federal procurement training,
employment assistance, and other supportive services primarily
for veterans, people with disabilities, and people with limited
means. He is testifying on behalf of the Veterans Entrepreneurs
Task Force, also known as VET-Force, which is composed of over
200 organizations and affiliates representing thousands of
veterans throughout the United States and which monitor the
impact of legislation on the veterans' procurement programs.
Sitting next to him is Rob Burton, a partner with Venable,
LLP. Mr. Burton is a former deputy administrator for federal
procurement property policy. He has also spent over 20 years as
senior acquisition attorney with the Department of Defense.
Our third witness is Alan Chvotkin, executive vice
president and counsel for the Professional Services Council.
Mr. Chvotkin previously served as counsel and staff director to
the Senate Small Business Committee and counsel to the Senate
Armed Services Committee.
I yield to Ranking Member Velazquez to introduce our fourth
witness.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
It is my pleasure to introduce to the committee Mr. Damien
Specht. He is a partner at Jenner and Block, LLP, here in
Washington, D.C., where he represents clients in all facets of
government contracting matters and is the co-chair of the
firm's Government Contracts Corporate Transactions Group.
Additionally, he serves as a co-chair of the ABA's Small
Business and Other Social Economic Programs Committee and has
been a speaker and an author on numerous small business topics.
He was also named a Washington, D.C. Super Lawyer Rising Star
for Government Contracts in 2014. Thank you for being here.
Chairman HANNA. Mr. Wynn, five minutes. We want to hear
what you have to say, so we will be lenient, but you know how
it works, so go ahead. Thank you.
STATEMENTS OF JOE WYNN, PRESIDENT, VETS GROUP, INC.; ROBERT
BURTON, PARTNER, VENABLE, LLP; ALAN CHVOTKIN, EXECUTIVE VICE
PRESIDENT AND COUNSEL, PROFESSIONAL SERVICES COUNCIL; DAMIEN
SPECHT, PARTNER, JENNER & BLOCK
STATEMENT OF JOE WYNN
Mr. WYNN. Thank you. Good morning, Chairman Hanna, Ranking
Member Velazquez. On behalf of VET-Force, VVA, and myself as an
Air Force veteran, I want to thank you for the opportunity to
appear before you here today.
Over the years, VET-Force has been voluntarily conducting
oversight of the legislation regulations policies programs
intended to improve and increase the contract opportunities for
veteran-owned businesses. When we come to know what is not
working, we do not hesitate to bring that to the attention of
the military departments, federal agencies, or to you, the
members of Congress. Through VET-Force, we have also come to
know that the federal small business procurement process is not
only unkind to businesses owned by veterans, but is negatively
impacting all small business groups--8(a), HUBZone, women-owned
as well.
In my testimony here today, I will highlight the impact of
federal contract bundling and consolidation through the use of
federal strategic sourcing initiatives on veteran and other
small businesses.
Many small businesses are struggling in the federal
marketplace. New U.S. trade policies and changes in how
contracts are competed and awarded have made it more difficult
for small businesses to compete against and work with large
prime contractors. In recent years, the government has been
actively promoting the use of federal strategic sourcing
initiatives in an effort to consolidate procurements. However,
to us, the small business owner, federal strategic sourcing
initiatives is just a more clever way of contracted bundling.
VET-Force is concerned that by relying so heavily on a few
large prime contractors, our country makes itself vulnerable to
a catastrophic interruption in services and a lack of
competitiveness, innovation, and imagination that small
businesses provide. All federal agencies are supposed to
identify if a contract is bundled or consolidated. There is a
dollar threshold per agency, and certain criteria used to make
this determination, and achieving reductions in administrative
or personnel costs alone is not enough.
In addition, there should be an assessment done to
determine the impact on small businesses, but who within the
procurement process actually makes this determination, and once
determined, what happens? Agencies are required to provide the
SBA's procurement center representative (PCR) and the agencies'
own OSDBU with a statement explaining why the procurement has
to be bundled. If the PCR objects to the agency's rationale,
the PCR can delay the procurement while SBA and the agency
negotiate, although the agency will ultimately make the
decision whether to move forward with the procurement as is or
change the requirements. This process of checking the
requirements by the PCR is not only flawed but by the mere fact
that SBA has decreased the number of PCRs to about 50, it is
highly unlikely that these few persons will be able to review
thousands of procurements throughout the entire federal
government.
For years, administrations have attempted to streamline its
policies in an effort to reduce costs and save taxpayer
dollars. Reducing government employees has been one method that
has been used a lot. In the 1990s, an estimated 15,000
government procurement positions were eliminated.
So where then are we headed with federal strategic sourcing
initiatives? While the policy may be endorsed and promoted by
OMB and this and previous administrations, what has been and
will continue to be the adverse impact on small businesses?
GSA, for example, has several strategic sourcing vehicles
that it uses. It awarded in one the janitorial sanitation
supply vehicle, 18 companies, 15 of which were very small
businesses. However, these services were previously provided by
609 companies, 540 of which were small businesses. So that
means that 525 small businesses will no longer be allowed to
compete for federal contracts for janitorial services and
supplies. They have other contracts that work similarly in
fashion and are displacing many, many small businesses.
Finally, small business competing for government contracts
find themselves at a disadvantage in the federal marketplace
and appear to be losing ground all the time. Large contractors
have been awarded most of the bundled contracts with little to
no repercussions for not including small companies in their
subcontracting plans, and under federal strategic sourcing
initiatives, yeah, a few small businesses will no doubt grow
and prosper if they are one of the lucky few selected, but it
is clear to see just from the math that there is definitely an
adverse impact to far more small businesses. What about really
cutting costs and boosting growth among the majority of our
nation's small business taxpayers and their families and not
just for a few in this entity called the government. Let us
secure our industrial base and the future of America.
This concludes my statement, and I hope that I can answer
any questions that you may have.
Chairman HANNA. Thank you, Mr. Wynn.
Mr. Burton, you may begin.
STATEMENT OF ROBERT BURTON
Mr. BURTON. Chairman Hanna, Ranking Member Velazquez, and
members of the Subcommittee, I appreciate the opportunity to
testify today and discuss the growing decline of small business
participation and federal procurements. Specifically, I would
like to address the need to strengthen the federal contract
consolidation and bundling regulations and provide several
other recommendations for protecting small business interests
and federal procurements.
First, let me turn to the consolidation and bundling
regulations. These regulations were designed to protect small
businesses, but in practice, agencies have failed to fully
implement and comply with these important regulations. For
example, agencies are required to (1) provide a written
determination that the use of a bundled or consolidated
contract is justified, (2) report to SBA on the usage of
bundled contracts, and (3) publicize or post the justifications
for bundled procurements in a timely fashion.
Unfortunately, in the wake of a significant increase in
consolidated and bundled contracts in the U.S. government,
agencies have routinely failed to follow these basic
requirements. Moreover, there are currently no regulatory
requirements to post the written justifications for
consolidated contracts or report data on consolidated
contracts. The posting and reporting requirements are limited
to only bundled contracts.
Consequently, in my opinion, agencies are inclined to use
consolidated contracts and are reluctant to ever categorize a
consolidated procurement as a bundled contract, which is
defined by the Small Business Act as a type of consolidated
contract that is likely to be unsuitable for award to a small
business. Consolidated contracts are generally suitable for
award to small businesses, but there is little transparency
into the growing number of these procurements. For example, on
several occasions, I have submitted a Freedom of Information
Act request on behalf of small business clients for the written
justification supporting the use of consolidated contracts,
only to find that the justifications do not exist. It is
imperative that agencies comply with the requirement for
written justifications, and that the justifications be
publicized and posted on agency websites. Offerors, including
small businesses, need advance notice of a contract that will
be bundled or consolidated. This is critical because an offeror
may only challenge and justify bundling and consolidation at
the GAO prior to contract award. Therefore, agencies should
post their justifications for both bundled and consolidated
contracts concurrent with or prior to the release of the
solicitations. Simply put, an agency's failure to timely
publicize the written justifications preclude small businesses
from challenging consolidated procurements.
To further strengthen small business participation in
federal procurements, I recommend that SBA reports more
thoroughly on the impact bundling and consolidation on the
small business industrial base by aligning SBA's scorecard
methodology with the types of goaling provided for in the Small
Business Act. Thus, instead of just reporting on agency
procurement dollars going to small businesses, SBA should
report on agency success in meeting: (1) industrial goals,
which ensure the participation of small businesses from each
industry category in agency contracts and subcontracts, and (2)
utilization goals, which ensure that each type of small
business, such as a woman-owned or service-disabled veteran-
owned small business has the maximum practical opportunity to
participate in the performance of agency contracts and
subcontracts. These two small business goals--the industrial
and utilization goals--recognize that simply looking at the
dollars awarded to small businesses does not by itself ensure
that small businesses are fairly represented in federal
procurement.
Turning now to organizational changes that could strengthen
small business participation, I recommend that Congress
consider establishing the Small Business Administration Office
of Hearings and Appeals (OHA) in statute and giving it total
independence from SBA. Currently, OHA reviews certain SBA
program decisions, such as 8(a) and size determinations;
however, if Congress established OHA as a totally independent
body, it could also give it review authority over SBA's
establishment and modification of size standards. Such
authority for OHA would be particularly beneficial for small
businesses who are currently unable to challenge the size
standards except by filing a lawsuit in federal court, which is
extraordinarily expensive and simply an unrealistic option.
Finally, I recommend that Congress consider adding the
Small Business Administration to the Federal Acquisition
Regulatory Council, referred to as the FAR Council. The FAR
Council has yet to implement several provisions of the Small
Business Jobs Act of 2010, which are designed to increase small
business participation. I think the addition of SBA to the FAR
Council could streamline and expedite the implementation
process, allow for better coordination between SBA and the
current agency members of the FAR Council, and perhaps
facilitate concurrent rulemaking.
I recall when I chaired the FAR Council, it was extremely
difficult to coordinate the FAR and SBA rulemaking processes.
In many cases, the FAR and SBA regulations cover the same
procurement topics and have government-wide impact.
Consequently, the need for close coordination and communication
between the two rule-making bodies is critical, and SBA's
membership on the FAR Council would certainly facilitate the
needed communication.
In summary, it is critical for Congress to strengthen the
consolidation and bundling regulations and ensure agency
compliance with these regulations. In addition, Congress can
expand the role of OHA and develop more meaningful and robust
small business goals for the federal agencies. These
legislative actions will undoubtedly protect small business
interests and the future of the small business industrial base.
Mr. Chairman, that concludes my statement. I will be
pleased to answer any questions that you or the members of the
Subcommittee may have.
Chairman HANNA. Thank you very much, Mr. Burton.
Just by way of information, Grace Meng had an amendment to
the NDAA that passed the House last year that did at least part
of what you are requesting. It requires agencies to publish
justification with the solicitation. So those are the kinds of
things we are talking about going forward with.
Mr. Chvotkin, you may begin.
STATEMENET OF ALAN CHVOTKIN
Mr. CHVOTKIN. Chairman Hanna, Ms. Velazquez, members of the
Subcommittee, thank you for the invitation to appear today.
PSC is a strong supporter of a balanced federal policy on
small business. In my testimony, I address four important
issues. First, on strategic sourcing.
Strategic sourcing is not suitable for all of the
government's acquisitions. Our association is a strong
proponent of well-designed strategic sourcing programs, as well
as establishing and maintaining a strong industrial base, not
just for small businesses but for businesses of all size. When
considering the Federal Government's move towards strategic
sourcing and its interrelationship with small business
contracting goals, it is clear that there are disconnects
driven largely by how the Federal Government measures small
business performance in the federal market, and the desire to
foster a strong industrial base.
In 2013, PSA president and CEO Stan Soloway testified
before this Subcommittee about strategic sourcing and its
impact on the industrial base. Then, as now, our view of
strategic sourcing is centered on supporting an environment of
robust competition, high performance, agility, innovation, and
balanced opportunities for companies of all sizes. We
recommended then and again today that the Federal Government
must better align the number of small business providers and
the total dollar value expended via small businesses as part of
its overall strategic sourcing strategy. But it is also clear
that improved data collection and analysis is necessary to
improve future decision-making. The data today fails to
consider whether there is an equitable distribution among small
businesses and a balanced reliance on small business for
certain categories of work.
With respect to the imbalance in goal setting and small
business attainment, as you well know, the SBA negotiates
biannually with the federal agencies on their small business
attainment goals for both prime contract awards from the
federal agencies and for subcontracting goals to be achieved by
federal prime contractors.
While SBA is agnostic on how an agency achieves its goals,
we have seen how agencies have skewered their performance to
focus on some of the low-hanging fruit within their business
opportunities and not looked across their entire enterprise for
meaningful small business participation. As a result, agencies
are in effect picking winners and losers in the small business
market and in the agency's larger industrial-based market
through the small business goal-attainment decisions.
Therefore, in the goal-setting process, SBA and the
agencies must evaluate not only top-line small business goals,
but also analyze and comment on changes in the agency's
business base and addressable market. Consideration should be
given to setting goals for services and commodities to be sure
that one segment of an agency's market is not drawing a
disproportionate share of the agency's attainment efforts.
With respect to data quality, in order to make informed
decisions about federal small business contracting, better data
that captures the full participation across the federal
marketplace is necessary. While federal small business prime
contracting expenditures in the aggregate are fairly accurate
to the same level that any other data is accurate in the
federal marketplace, there is significantly less visibility in
the small business participation at the subcontracting level.
PSA strongly believes that without meaningful data that can be
used to provide an accurate picture of total small business
participation, government risks making ill-informed small
business contracting decisions that could place significant
risk on small business contractors and could damage the larger
industrial base.
Finally, it has been a challenge to understand the impact
of all of the regulatory actions on federal acquisition and on
small businesses when the private sector is forced to comment
on rules in piecemeal fashion. These rules and regulatory
issuances create a challenge for analysis and commentary on the
impact of any single rule on the overall regulatory scheme and
how they will affect the market. Notwithstanding congressional
interest and sometimes direction that implementing rules be
issued within a reasonable period of time. As Mr. Burton said,
we are still waiting for some final rules for key provisions of
the 2010 Small Business Jobs Act, and that is unacceptable.
We therefore make the following recommendations. First,
more needs to be done to improve the data reporting to track
federal prime and subcontract data. This is a significant
challenge that will require close coordination between industry
and government.
Second, in the goal-setting process, SBA and the agencies
must evaluate not only top-line small business goals but also
analyze and comment on changes in the agency's business base
and addressable market. Consideration should be given to
setting target goals for services and commodities to be sure
that no one segment of an agency's market is drawing a
disproportionate share of the agency's attainment.
Third, agencies must fully implement and then comply with
both the bundling and the consolidation reporting requirements
that have been enacted.
And finally, the viability of conducting past-performance
assessments of first-year subcontractors should be thoroughly
explored.
Thank you again for the invitation. We look forward to
continuing our longstanding work with this Committee, and I
would be pleased to answer any questions you may have.
Chairman HANNA. Thank you.
Mr. Specht?
STATEMENT OF DAMIEN SPECHT
Mr. SPECHT. Chairman Hanna, Ranking Member Velazquez,
members of the Subcommittee, thank you for the invitation to
appear today. In my testimony, I will address how consolidated
contracting necessarily limits the number of small businesses
in the federal marketplace. I will also briefly discuss the
SBA's rating methodology, and as a litigator who appears before
the SBA Office of Hearings and Appeals, share some thoughts on
that forum.
From tool manufacturers to those working in support of our
intelligence agencies, I have heard that bundling is a problem.
However, because we largely rely on self-reporting, the
government has little reliable data on where bundling is
occurring and how many small businesses are being hurt by this
practice. As a result, I join Mr. Burton in encouraging this
Committee to require agencies to require bundling
justifications along with solicitations. This will allow small
businesses to understand the agency's rationale and, if
necessary, timely protest the bundled requirement.
I will note, however, that bundling protests are rarely
successful. In fact, it appears the primary way for an agency
to lose a bundling protest is to fail to perform any analysis
at all. As a result, in addition to increasing transparency,
this Committee should consider raising the bar for justifying
these decisions, which can currently be based on as little as 5
percent cost savings.
In addition to bundling, this Committee should be highly
skeptical of strategic sourcing initiatives. Strategic sourcing
proponents have worked to maximize small business
participation. That effort is commendable, but the problem is
not one of intent or lack of effort. The problem is that
strategic sourcing, at least when accomplished through large
contract vehicles, is necessarily bad for the diversity of
small contractors in the industrial base.
This is the case for a few reasons. First, the large number
of items be provided on each of these contracts makes it
impossible for many businesses to bid. As demonstrated by the
FFSI office supplies contract, it is often necessary for
hundreds of small businesses to team together to fulfill the
requirements of a single contract.
A second negative consequence of strategic sourcing is that
those businesses that do not receive awards will receive other
contract opportunities disappear. To drive volume discounts,
purchasing from strategic sourcing vehicles must be highly
encouraged. That means that sales that would have gone to
hundreds of small businesses are now focused on a dozen. This
concentration of awards has a real impact. In fact, one of my
small business clients recently told me that their sales volume
has decreased by two-thirds since they were not chosen for a
strategic sourcing award.
A third problem with strategic sourcing is that it reduces
the importance of federal supply schedule contracts.
Traditionally, GSA's FFS programs provided an access point for
aspiring contractors. If we choose to shift the government's
purchases to strategic sourcing contracts and away from the
remaining FFS holders, this entry point will be less attractive
and we would lose a significant number of future contractors.
Ironically, the award of a strategic sourcing contract is
not always a benefit to the winners. This is the case because
large awards can set up a hill and valley problem. A small
business that receives millions in strategic sourcing awards is
likely to expand its infrastructure to meet those needs.
However, that firm's dependence on a single contract will
backfire if it loses the next competition. In the past, this
concern was mitigated because businesses received more regular,
but smaller, awards.
In summary, there is nothing wrong with strategic sourcing;
however, this Committee needs to look beneath the surface to
judge whether these actions are consistent with building a
diverse small business base.
Despite the impact of bundling and consolidation, the
Federal Government met its overall small business goals in
2013, and apparently, 2014. These are not minor achievements.
This accomplishment is tempered by concerns that large
contractors are being counted toward small business goals.
Although this may be the result of honest mistakes, continued
training of contracting officers and explanation of the
complicated small business rules to the contracting community
will be helpful in confirming that the proper numbers are being
reported.
Further, this Committee should be concerned that SBA
assigned an A or A+ rating to 20 agencies when none met all
their small business goals. One of those agencies, the
Department of the Treasury, was assigned an A rating, despite a
small business subcontracting rate of 6.8 percent. As this
grade inflation demonstrates, this Committee should continue to
closely examine the basis for SBA's grades to determine where
agency performance can be improved.
Shifting to my role as a small business litigator, I would
like to address some of the issues related to SBA's Office of
Hearings and Appeals (OHA). Although I do not agree with every
OHA decision, it has proven to be an efficient alternative to
federal court. As a result, I support making OHA permanent
through statute. Any such statute should, of course, recognize
that small businesses may appeal OHA decisions to federal court
if they so choose.
This Committee should also act to eliminate the redundancy
in the Small Business Act. Specifically, although OHA's
administrative judges have significant expertise, the Small
Business Act assigns certain appeals to administrative law
judges, of which OHA has none. This has led ALJs at other
agencies to hear small business cases on behalf of OHA.
Although I have no doubt this arrangement is effective, it
makes more sense to centralize small business decisions in OHA
as a statutory entity.
Thank you for the opportunity to appear today, and I look
forward to your questions.
Chairman HANNA. Thank you.
And I yield to Ranking Member Velazquez for the first
question.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Mr. Wynn, despite the numerous safeguards in place, we
continue to see the bundling and consolidation of contracts. In
your opinion, what is it going to take to let these agencies
know that the consolidation or bundling of contracts is not to
be used to ease administrative burden?
Mr. WYNN. Thank you for that question.
As was noted and mentioned in my comments, one of the
mechanisms that is being used right now through SBA is use of
the PCR. Over the years, we have previously testified and made
recommendations as for SBA to increase their budget to be able
to employ more persons in this position. Yet, over the years,
the number of people in this position has decreased. So we
cannot quite understand how in the world they are going to
possibly police all of these types of transactions and make
recommendations to stop the procurement before it goes through.
The other part of that is, as I understand it, once they
are able to identify a procurement as being bundled and they
want to question it, that discussion is had with the agency's
senior official or the acquisition chief of that agency, there
seems to be still no real power from the PCR to actually stop
the procurement completely. If the agency negotiates, has a
discussion and justifies in their view why they feel it should
go forward, it seems to continue to go forward. I think that,
you know, more--there needs to be more teeth in the legislation
to provide SBA more authority to actually stop these types of
procurements. And also, they have got to increase the number of
persons or we create some additional, some new position or
persons to police these actions.
Ms. VELAZQUEZ. Sure. Well, you know, sequestration and
budget cuts come to mind. And both of them have consequences.
I would like to ask the rest of the panel to comment. We
have seen that enforcement actions are rare, and there is a
need for defining realistic enforcement triggers. What would
you recommend to be a sufficient trigger? Any of you.
Mr. CHVOTKIN. May I ask, enforcement actions regarding
unbundling and consolidation?
Ms. VELAZQUEZ. Yes.
Mr. CHVOTKIN. I will start, Ms. Velazquez.
I think we start with a clear set of standards, and right
now agencies have a lot of flexibility in determining--in
making those determinations. Secondly, transparency will go a
long way towards accountability. Without the real
understanding, the marketplace will substantially police the
federal agencies' behaviors if they know what is going on in
that marketplace, and today, most companies do not have that
visibility. And so the competitive marketplace, particularly as
contract spending is declining, will be a very powerful force.
That competition drive will be a very powerful force in helping
to police the agencies.
Finally, I would suggest that we need a dependable and
reliable place to challenge those actions, and OHA may very
well be a good place to do that.
Ms. VELAZQUEZ. Okay. Thank you.
Mr. Specht, we have heard from numerous small businesses
about the problem of contract bundling, and each one of you
made reference. As a result of that practice, subcontracting
and teaming has become the best option for small businesses
that are unable to perform the entirety of these massive
contracts. Yet, we also heard that this process is fraught with
additional costs and dangers to all parties involved. I would
like to ask you, do you believe that this is fair, that small
businesses should be relegated to dispositions as a result of
bundling?
Mr. SPECHT. Thank you for the question.
No, it is not fair, and it is not ideal for the federal
marketplace. It is okay for small businesses to start out as
subcontractors and start getting work that way because they can
learn from the prime. But at some point, for their growth, it
is necessary that they have direct customer contact and that
they be doing work directly with the customer agency so that
they can expand and learn and grow.
Ms. VELAZQUEZ. So do you think that there is a fear that
these contracts will get so large that even the subcontracts
will be out of reach to small businesses?
Mr. SPECHT. Absolutely. I think that these contracts get
large and the items required get so diverse that you may have
small businesses that are now second or third tier
subcontractors. And it is just the truth of the matter that the
further away you are from the federal customer, the less
accountability there is and the easier it is to squeeze those
small businesses when you are at a higher tier level.
Ms. VELAZQUEZ. Thank you.
Thank you, Mr. Chairman. I will have some other questions
in the second round. Thank you.
Chairman HANNA. Mr. Burton, Mr. Specht, there are two
tracks here that I see both of them mildly conflicting but
interesting to me in terms of you wanting to keep a viable
supply chain, and when we want to multiply or add more small
businesses and do less bundling, and how do you maintain a
viable supply chain, and things that we regard as necessary,
say to the national defense, and under these circumstances we
are eliminating a lot of that. And also, we are not doing what
we are supposed to be doing, which is promoting small
businesses, inviting them, helping them grow, helping them
diversify, and we are allowing bundling to happen which
probably sends more profit to the prime ultimately, and putting
them in a position where they get beat up frankly for lack of a
better term. My question is, how do you maintain a viable
supply chain without some kind of rules, and what kind of
danger does that present? If that is a fair question.
Mr. Burton?
Mr. BURTON. Well, I think the rules are very important. I
mean, the government operates on a whole collection of rules.
And that is why I think Congress has an opportunity here to
actually improve those rules with respect to consolidated
contracts in particular. There is no transparency. There is no
compliance. And until that is seriously taken by the agencies,
I think that the industrial basis is going to be weakened. As a
matter of fact, we already see that happening right now with
respect to janitorial services. Hundreds of companies have
disappeared off the federal marketplace and more to come. And
so it is a serious threat, and I am not sure the public fully
understands how serious this is. And you do not hear much about
these small businesses that are actually going out of business
because of the consolidated procurements and strategic
sourcing, which on its face sounds so good, and yet it is
clearly putting small businesses----
Chairman HANNA. It is almost antithetical, is it not?
Mr. BURTON. Absolutely. Absolutely.
Chairman HANNA. Mr. Specht?
Mr. SPECHT. So I agree with those comments. I think one of
the interesting things about strategic sourcing is that we see
headlines that, you know, 14 of 15 awardees are small
businesses, or 86 percent of orders go to small businesses and
are some of these FFSI strategic sourcing contracts. But what
we are not focused on is exactly as you said or Mr. Burton
said, that you are focusing your industrial base on those 14 or
15 winners. And everybody else gets nothing. And so I think we
need to understand that strategic sourcing can be part of the
solution, but we need to have diverse orders through the supply
schedules or through other ordering means that are smaller
orders that can go to small businesses, that can maintain these
businesses, even if they do not get a strategic sourcing award.
Chairman HANNA. Mr. Wynn?
Mr. WYNN. Thank you.
You know, we continue to hear that I guess the rationale
for strategic sourcing, bundling, is supposed to save the
government money. Save ultimately us, the taxpayer, money. Make
our, you know, efficiencies, you know, make the procurement
process more efficient. But when you have hundreds of small
businesses who are factored out of the process, who is
measuring the total loss to those businesses, their families,
and the community who they, themselves, are the taxpayers. So
who is it that we are really trying to support here? Is it this
government entity? Is it this large corporation? Or are we
really about, you know, the benefit of the people?
Now, it sounds like, you know, in essence, you know, from
the outside looking in, the government continues to function.
The most we are hearing in days now is that, you know, need for
budget cuts, sequestration, you know, this kind of thing. And
so some folks probably will feel that if there is a
consolidation of services, that this is a practical use of the
government's time and efforts. But I do not, just like the
gentleman Mr. Specht just said, I do not think we are
emphasizing and letting the public know how many businesses are
being negatively impacted by this type of process.
The other thing, too, is the rules and regulations that
govern these actions need to be strengthened in such a way that
there is a stronger mechanism to review this process prior to
the contract being awarded.
Chairman HANNA. I take it everyone would agree with that.
I am going to yield to Grace Meng for questions. Thank you.
Ms. MENG. Thank you for being with us today. We appreciate
all your expert insight on these issues important to our small
businesses.
Over the last decade, in Queens, New York, nearly 65.6
percent of the borough's new business growth was from companies
with less than five employees. In 2013, there were over 32,000
businesses with less than five employees. These small
businesses, especially the ones recently created, have the
potential for growth, and I want to ensure that we have
policies in place to help these businesses that want to grow to
reach their potential and continue contributing to our
economies.
In my district especially, to be blunt, goaling is very
important. These goals have afforded businesses in my district
opportunities that they may otherwise have not received.
Although goals are usually unenforceable targets, do you have
any insight into how we can hold the SBA and other agencies
more accountable to their goals?
Mr. BURTON. I do think that the goals are extraordinarily
important, and there is too much emphasis on dollars to small
businesses. This, I think, is a serious problem, and the
government needs to deemphasize the dollars and start looking
at the participation rate. You know, the objective of the Small
Business Act was not just to get dollars to a few small
businesses; it was to ensure maximum participation of the small
businesses in the federal procurement system. That is simply in
jeopardy now because of strategic sourcing and budget cuts and
a ray of factors. But until the OMB, my former home, until OMB
really at that level indicates how important it is for SBA and
the other agencies to really look at more than just dollars, I
think we are going to be handicapped. And I think that this is
where Congress can really play a beneficial role in getting
agencies to focus on different goals besides just dollars. The
participation rate in my view is key; how many small businesses
are participating in federal procurement.
Mr. SPECHT. I would second all of that and add that
pressure from this Committee is obviously important in focusing
higher-level folk at the agencies on these small business
goals. And I also think that the SBA ratings, when an agency
gets an A and does not hit all of its small business goals,
that is sending the wrong message. The message here is hit your
goals, get the A. Do not hit your goals, you do not get the A
and you are going to get additional pressure. I think that that
makes a lot of sense.
Mr. BURTON. Just as a follow-up, I think that is one reason
probably for the A, is that SBA was so pleased that the
government as a whole made the 23 percent with respect to the
dollars going to small businesses and said, ``This is
fantastic. We are going to give everybody an A across the
board, even to the folk that are not doing so well.'' So,
again, that strengthens my point that there is too much
emphasis on the dollar goal.
Ms. MENG. And although not the specific topic of this
hearing, I am also interested in your views on increasing the
current 20 percent goal at the Export-Import Bank. Do you
believe that an increase in this goal would help small
businesses? Also, do you believe including indirect support in
the 20 percent goal would be detrimental to small businesses
that are already receiving assistance?
Mr. CHVOTKIN. I do not have enough experience with the Ex-
Im Bank to have an answer for you, Ms. Meng.
Mr. WYNN. I do not have a lot of experience on the
specifics regarding the Export Bank, but increasing the goals,
whether it is for exports or just the goals in general, we have
made recommendations previously to increase the small business
goals beyond the 23 percent level. And also, to emphasize that
that is a floor. That percentage goal is a floor and not a
ceiling. A lot of agencies tend to have the view that once we
hit that 23 percent, we are there. We are great. And again, SBA
then gives the agency a rating of an A. But perhaps that should
be a C rating when you hit the 23 percent, and an A would be 50
percent, you know, where you have really shown and demonstrated
that you have exceeded the floor of the goal. Thank you.
Ms. MENG. Thank you. I yield back.
Chairman HANNA. Mr. Curbelo?
Mr. CURBELO. Thank you very much, Mr. Chairman. And I thank
the witnesses for their testimony here today.
My question has to do with subcontracting. The 36 percent
goal for subcontracts set in 2009 has continuously failed to be
met. In fact, over the past several years, it has declined from
35.4 percent in Fiscal Year 2010 to 34 percent in Fiscal Year
2013.
Mr. Chvotkin, I am concerned that the percentage of dollars
subcontracted to small business has dropped by about 3 percent
since 2010. I am also concerned that by holding only senior
executive accountable for prime contracting goals we have sent
the message that subcontracting perhaps is not all that
important. What are your thoughts on this issue?
Mr. CHVOTKIN. Mr. Curbelo, thank you.
Our view is subcontracting matters, and it is very
important. It is a good business strategy for small businesses.
We talked about that today. Along with finding prime
contracting opportunities. But the data and the collective
insight into that small business subcontracting is sorely
lacking as well. That is an area that we have to work on before
we can--we need to be cautious in looking at root causes and
then designing solutions.
You may be aware, the new executive branch subcontract
reporting system could launch next quarter, and I am hopeful
that it will be an improvement over the current one; it has to
be, although more may need to be done there. But while agencies
often dictate subcontracting percentages to prime contractors,
the prime contractors' choices of implementation are really
part of its own technical solution that the agencies evaluate,
and its business decision-making is outside the purview of
federal agencies and senior executives. So I am concerned about
imposing requirements that either cannot be effectively
influenced, or that if they can be influenced, that influence
risk politicizing the acquisition process. So I would welcome
the opportunity to discuss that with you further after this
hearing. But subcontracts matter, and we have to find a better
way of identifying the right data across all of the tiers of
small businesses and making sure that we are capturing that
data and holding both the agencies, as well as the prime
contractors accountable.
Mr. CURBELO. Thank you.
Mr. Burton, maybe you want to weigh in, too. In 2010, $74
billion in subcontracted dollars went to small businesses, a
substantial amount of money. What can we do to make sure that
our agencies pay attention to this issue?
Mr. BURTON. Well, I think what you are suggesting is that
agencies comply with the current rules, and I think that is
absolutely critical. We are going to see more dollars going
through subcontracts than previously to small businesses
because of the nature of things, because of the fact that the
prime contracting base is going to shrink and more small
businesses are going to be eager to get subcontracting
opportunities. The government is encouraging joint ventures,
teaming. You are going to see more of this. And so therefore, I
think it is absolutely imperative for agencies--SBA and OMB in
particular--to start emphasizing compliance with the
subcontracting goals. Not just meeting the subcontracting goals
but the subcontracting goals as well. There has been virtually
no emphasis on meeting subcontracting goals under the theory
that small businesses would prefer to have prime contracts. But
the reality is they also like to have subcontracts. And in this
environment, it is critical for them to get subcontracts.
I think in short answer to your question, agency senior
executives have to be held accountable for both achievement of
prime contracting goals and subcontracting goals. Quite
frankly, some senior folks in the government do not even know
that there are subcontracting goals that they have to comply
with, and so this is very important to have from the top
leadership down, emphasis on agencies meeting subcontracting
goals.
Mr. CURBELO. Thank you.
I have about a minute left. Does anyone else want to weigh
in on this issue?
Mr. WYNN. I would like to make a quick comment. On
subcontracting, you know, there are some obvious conflicts with
regard to the process and the evaluation. It looks like, you
know, even when we talked about the scorecard process, more
emphasis is placed on the prime contracting than on the
subcontracting. And what happens to an agency if they do not
meet their subcontracting goals? We will just not meet them
again next year, perhaps.
The other thing, too, though, is that with the more and
more bundling and consolidation, there are fewer opportunities
that are going to be had by small businesses to subcontract if
more and more agencies are encouraged to use these contract
vehicles. So we would like to see more subcontracting
businesses. Small businesses want to make money. And it is the
only way they are going to be able to grow and expand is that
they get a contract, whether it is a subcontract or a prime. So
more of that needs to be had, but the rules need to be
strengthened to give them the opportunity to do so.
Mr. CURBELO. Thank you. My time has expired.
Thank you, Mr. Chairman.
Chairman HANNA. Thank you.
Ms. Chu?
Ms. CHU. Yes.
Mr. Wynn, as I understand, federal agencies are required to
provide the SBA's statement explaining why contract bundling is
necessary if it knowingly proposes a bundled acquisition. These
explanations are reviewed by SBA procurement center
representatives and can be appealed if the PCR believes that
bundling is not justified. However, data shows that only 28
appeals were filed in 2012, and only six resulted in the
unbundling of contracts.
Can you explain why these numbers are so low considering
that there are millions of contracting actions that take place
in a year and that many of them are bundled?
Mr. WYNN. Well, I think it is partially due to the fact
that it is such a few number of persons as I mentioned that are
responsible or designated to intervene into these particular
contract actions. Of the ones that I do again, it is my
understanding that negotiations, discussions take place within
the agency, and a decision is made on some cases. The contract
may be pulled back. It may be changed in some way and then
relet. And so you have fewer people challenging the award later
on. But again, I just think it needs to be more people. The
process needs to be strengthened for reviewing these type of
actions.
Ms. CHU. Thank you.
Mr. Burton, you state in your testimony that it is common
for agencies not to publish timely justifications for why they
are choosing to consolidate or bundle a contract, and you
attribute this to the lack of regulations requiring
justifications to be released on a specific timetable. And you
said that SBA therefore has no recourse to protest a bundled
contract after the contract is awarded. How does this lack of
authority impact the bundling review process?
Mr. BURTON. Well, you know, terminology here is so very
important, and we tend to speak in terms of bundled
procurements. But in fact, most of the procurements that we are
seeing are consolidated procurements. And the distinction is
that a bundled procurement, there has to be a determination
that it is unsuitable for small businesses. Well, quite
frankly, small businesses can perform almost everything,
especially in today's world where what the government is
procuring are primarily services, not big weapon systems. And
so more than likely, most procurements are suitable for small
businesses, which means there is not going to be a bundled
procurement. Which I think goes to your question, why are we
seeing so few bundled procurements be challenged? Because there
are not that many bundled procurements. They are consolidated
procurements, which is simply the combination of contracts,
which small businesses can compete for. There is no
transparency. There is no requirement, except for a written
justification that is stuck in the file somewhere. There is no
requirement for any posting of justifications for consolidated
procurements. There is no reporting requirement for
consolidated procurements.
So if you are an agency official, you are going to want to
make sure that we are doing consolidated procurements. I mean,
it is somewhat of a cynical view, but I think it is true that
if you decide that it is a bundled procurement, there is more
regulation and more red tape. And I think quite frankly, most
procurements are consolidated. I think they are justifiably
categorized as such. That is why I think it is so important for
Congress to start having those transparency requirements
imposed on consolidated contracts. And maybe we should even
quit using the word ``bundled,'' because there is just not much
in that category. It is consolidated procurements, and there is
no transparency or regulatory requirements except for a mere
written justification, and which I testified that when we have
submitted FOIA requests to agencies to take a look at those
written justifications, they are not to be found, and in my
view, they were never done. And so I think it is absolutely
critical that Congress, OMB, SBA, start saying it is very
important that we have transparency and to consolidate the
procurements.
Ms. CHU. Such a good point.
Mr. Specht, the SBA weighs 80 percent of its scorecard
grade on prime contracting dollars, yet only 10 percent on
subcontracting achievements. Do you believe the disparity
between the weight of these two types of contracts should be
this drastic?
Mr. SPECHT. Absolutely not. As Mr. Wynn pointed out, small
businesses want to make money. And it is probably for the best
that they be prime contractors. It is probably the best
circumstance for them, but it is not eight times better than
being a subcontractor. And so, no, I do not think that that
weighting makes sense. I think that more weight should be
placed on subcontracting. And in addition, I think this point
has been made that our transparency into the actual percentages
that get subcontracted to small businesses is not very good, so
we should put those two together. More weight in the scorecard
on small business subcontracting, but also more transparency so
we know that it is actually getting done.
Ms. CHU. Thank you. I yield back.
Chairman HANNA. Ms. Lawrence?
Ms. LAWRENCE. Thank you, Chair, for holding this hearing.
In Michigan, the state of Michigan, we are home to over 800
and 500 small businesses and we employ over 1.7 million. In the
first quarter of 2014 alone, over 11,000 small new businesses
were established, and it is my sincere hope that all of them
stay in business and grow.
I hear a lot from the panel today about transparency and
that there is a need for transparency. So I have two questions.
What are some of the major challenges that these new small
businesses will face when they compete against the more
established small businesses with a history of consolidating
and bundling? And then I want to hear from you as experts, what
does transparency look like? You use that word as if it defines
something, and I would just like for you to state what would
transparency and what would the areas be that would give us the
transparency that you feel we would need?
And Mr. Burton, if you could start.
Mr. BURTON. Well, small businesses do have an opportunity
to challenge certain actions. They can challenge certain things
before OHA, for example. They can challenge at the GAO. They do
have recourse. But they simply have no recourse if there is no
transparency or view into the government decision-making
process.
A perfect example was recently I had a small business
client who felt like they should have won an award, and we had
a debriefing by the agency and the debriefing said, ``You were
great. There was no deficiencies. Your price was reasonable,
realistic.'' And so they thought, ``Well, I guess I should have
gotten the award.'' So they filed a protest, only to find out
when we looked behind the curtain and looked at the government
decision-making process, we find out that that particular
contractor's price was way high. It was off the charts. Had the
agency communicated that basic fact that your price was not
really reasonable or realistic, there would not have been a big
protest. Small businesses have thirst for information, and that
is just one example where the agency, for whatever reason, just
does not want to share that information.
With respect to the decision-making process on why an
agency consolidates a procurement, when they consolidate a
procurement, they are supposed to go through a decision-making
process. Will this negatively impact small business if I
consolidate this procurement? In many instances, it will. But
there is no analysis. Even though it is required, there is no
analysis, no documentation regarding that. If there is not even
documentation regarding it, we never get to transparency
because there is nothing to look at. But transparency into the
decision-making process, there has to be a document that we can
take a look at and small businesses can actually challenge.
That is so critical for the health of the small business
industrial base.
Ms. LAWRENCE. Other panelists? Mr. Chvotkin?
Mr. CHVOTKIN. Thank you, Ms. Lawrence.
First of all, I say all too often that the only thing worse
than not having a government contract is having a government
contract, because the compliance burdens, particularly for
small businesses, are significant, and very, very different
than what they experience in the commercial marketplace. And
for many, it is a real wake-up call and a real business risk
because the government does look at and challenge the
compliance capabilities of firms. So even for small businesses,
even selling commercial items, even on a fixed-price basis, the
rules that are imposed on prime contractors and often flow down
to subcontractors can be significant and very atypical for what
they are used to in the normal marketplace.
And I think on the question of transparency, what does it
look like? I think it looks like three things. First of all,
clear documentation about what an agency's decision-making is.
Secondly, compliance with the existing rules. Many times we
find that the agencies are ignoring or skirting those existing
rules, so as Mr. Burton said, they never get to the
documentation. And finally, senior level accountability for
those activities. I think with those three piece parts
together, there will be lots of attention in the marketplace,
and the competitive marketplace will help drive compliance
because the companies themselves or advocates on their behalf
will be watching how agencies are performing.
Mr. SPECHT. And I will just add, as someone who represents
small businesses in your state, that one of the primary
challenges those businesses face is knowing about these
opportunities, knowing how to get into the government
contracting marketplace, and finding contracts of the size that
they can handle at an early stage so that they can grow and
they can build up the compliance regime and all the rest.
Mr. WYNN. And just a quick follow-up on the transparency
and small businesses succeeding in the federal marketplace, the
transparency needs to be readily available for those of us out
here to be able to see it. So whatever the decision-making
process that they use, if they would make it readily available
so that we can see it.
There was an executive order at one time with regard to the
increased opportunities for service-disabled vets that every
agency would post on its website what the opportunities were,
what the plan was to how they were going to increase
opportunities for this group of businesses. That went well for
a couple of years and then we ended up into the scorecard thing
where now it is less transparent. So, thank you.
Ms. LAWRENCE. Thank you. I yield my time.
Chairman HANNA. Thank you.
I am going to open another round of questioning if no one
minds. I will start myself with some interesting and bad news.
The SBA gave a buy-out to many of its procurement center
representatives, which tells us that they are moving away from
what we want, not towards it; right? The other thing is I think
all of you are much kinder than you need to be over this. What
is obvious from listening to you is that what we have here is a
small war or maybe a large war of attrition that the difficulty
associated with doing what we want people to do is high. And
the ease of bundling and consolidation is just that, easy, in
that it requires a great deal of effort to do what we are
asking and expecting and have a right to expect some of these
agencies to do. And they act with impunity. There are no
consequences. Apparently, the appeal process is all but
nonexistent. Our ability to monitor and understand is
obfuscated by the fact that there are no reporting
requirements, which my friend, Grace Meng, is trying to
address. So knowing some contracting officers as I do in my
past life, it does not necessarily have to be insidious, but
the outcome is the same.
Do you agree with that? I am making kind of a blanket
statement about the agencies and the personalities and the
people that run them, but I welcome you pushing back or just
your kind of personal opinion. A lot of this boils down to
personalities and people and the workload they have or do not
have and their willingness to look at something like this and
say, ``Oh, this is a bunch of baloney. I am not going to go
through with it. And by the way, nobody is going to do anything
to me for doing it.''
You are shaking your head there, Mr. Chvotkin. Go ahead.
Mr. CHVOTKIN. Well, I have a couple of comments, Mr.
Chairman.
First of all, I think it is important to understand that
the primary goal for the acquisition professionals at the
agency is to acquire the goods and services they need to
fulfill their agency mission. The acquisition system, the
procurement process is an enabler. It is not an end-state in
and of itself. So many of these requirements, in fact, inhibit
from the agency's view, their ability to in a timely manner get
the goods and services they need. When you couple that with
little clear regulations and little oversight, it is very easy
to divert attention from these set of compliance rules and
focus attention on----
Chairman HANNA. Yeah, but you have to agree that the loss
of 100,000 businesses in such a small period of time suggests
that it is a crisis, not just----
Mr. CHVOTKIN. Except that the agencies are still, by and
large, still getting what they need from the marketplace, but
not from those small businesses. That is why the comment
earlier from all of us was it is important to focus not just on
the dollars but on the whole industrial base. The repetitive
ability of the agencies to get goods and services from a
diverse capability, rather than just from a limited number that
are achieving the dollars. Couple that with workforce
challenges in the federal marketplace, the skills of the
current acquisition workforce, and the drive towards low price,
all of these things end up having an impact on who is able to
be a supplier to the Federal Government and how the government
approaches that marketplace.
Chairman HANNA. So you think there is some basic flaw in
the process that could be dealt with? I mean, what you are
saying is they are trying to do their job and all these
requirements, quotas, goals, of the small business SBA are
actually kind of counterintuitive to them.
Mr. CHVOTKIN. No, that is not my point. I think these goals
have a value to the agencies. They draw attention, and there is
every reason to continue to support a robust small business
program. Unfortunately, I think as we alluded to in my
testimony, and maybe I said it more explicitly in my written
testimony, the focus has been only on dollar achievement, and
many agencies are using those goals as a way of establishing an
industrial policy, picking winners and losers in the
marketplace without regard to long-term impact of the
industrial base. Reporting will help. Greater visibility into
the entire supply chain as you suggested will be a help. But we
just need to remember that the purpose of the acquisition
system is to acquire those goods and services for the agencies.
Chairman HANNA. But it is not the only purpose.
Mr. CHVOTKIN. It is not the only purpose.
Chairman HANNA. Anyone else?
Mr. SPECHT. Well, I guess my perspective on it is that, you
know, we are all talking about the stick, but maybe there is
some carrot to be had, which is to say that what you could do
is make sure that small business participation is one of the
most important factors in a best value tradeoff in procurements
going forward so that you incentivize large contractors to go
out and find small businesses and find diverse small businesses
to meet those needs. And so that is not a perfect solution, but
it is a way to sort of push them to incentivize them to do
that.
I think the other perspective is that I think many in the
agency see the small business goals as a hassle, as something
that is extraneous to their day job, which is buying things for
the Federal Government. And the solution to that is to continue
to evangelize about how small businesses not only add jobs and
add value to the country, but also can offer unique needs, can
offer better customer service, and can be a great asset for a
buyer.
Mr. WYNN. I would just add that let us not overlook the
realities of the everyday working citizen, particularly within
the federal marketplace, and that is that I want to do not as
much as I can do, but only what I am required or have to do for
real. And that means that if we have got fewer and fewer
procurement officials, contracting officers, and where now the
workload on me to get the same amount of goods and services
requirements done for my agency still exists but there are
fewer people to do them, if there is a way that I can
consolidate these requirements and do fewer actions, I mean,
for real. That is what the office is going to do. But, see,
they are only doing that because they are allowed to do it. It
is justified under the current state regulations. If the
regulations, the laws, rules change, then they could not do
that because they would be in violation.
So it is incumbent upon you, upon Congress, that we really
look at ways to change the way that they actually do what they
do.
Chairman HANNA. The appeal process that we are talking
about here today, and transparency that we are talking about,
and the requirement of explanations in advance in concurrent
with awards and decisions and procurement, just those two items
alone would go a long way.
Mr. WYNN. Would go a long way.
Mr. BURTON. And Mr. Chairman, I think it is important to
note that priorities are important. The workforce is
overburdened. It is shrinking. Forty percent of the federal
workforce has less than five years experience. There is no
question that there is huge challenges that may never be
overcome in that area. But that is even why it is more
important for Congress and others in leadership positions to
clarify what is most important. And I do believe with respect
to the goaling that we have a misplaced emphasis really on the
dollars going to small business and a greater emphasis should
be placed on actually how many small businesses are
participating in the federal procurement process, and how
strong is our small business industrial base? I think the
emphasis needs to be more now on participation rate than actual
dollars.
And I know when I worked at the Office of Federal
Procurement Policy, we were very focused on the dollars because
we thought that was what was important to Congress and to the
administration. And so consequently, that is the message that
we sent to the agencies, to focus on the dollars. That message
can change and the emphasis can change through leadership and
through rules.
Chairman HANNA. Sure. But that is so subjective. I mean,
what supply chain is more important than another supply chain?
Who makes that decision, and how do you talk about it? And how
do you protect it and how do you justify spending more when
maybe you could spend less? Because a dollar is the only thing
that is truly measurable for most of us.
Mr. BURTON. Well, and the number of small businesses
participating. I mean, I think that is measurable as well.
Chairman HANNA. That would be one thing. Certainly.
Anyone else? I took a little liberty. I am the last guy
here.
Go ahead.
Mr. SPECHT. Well, I will just second Mr. Burton's point in
terms of diversity. And I do think that is measurable in terms
of not only the subcategory goals but the numbers of businesses
because eventually what is going to happen, if we keep
consolidating contracts like this, is that only the large
smalls will survive. They will be acquired by large businesses
that want access to those contracts, and you are going to see
an even more steep drop off in the number of small businesses
participants. And those that you have will be stuck in second,
third tier subcontract roles, and that is a significant problem
that I think partially can be addressed by forcing
justifications to be published, not only for bundling, but I
think, as Mr. Burton said, for consolidated contracts, because
consolidated contracts do not require the same justifications,
and they are just easier. You have one small business that gets
the work now on a multiple award contract as opposed to the
dozens that used to have them, and you do not have to publish
justification. And the publication will allow, to some extent,
the private bar to step in and try to be private attorneys
general, right, and try to enforce these things. The downside
of that is, as I mentioned in my testimony, that those protests
do not go anywhere. And I think one of the reasons why you see
so few bundling appeals, even internally, is that the bundling
standards are not very high. If I can demonstrate a 5 percent
savings, I can bundle. Well, the Congress needs to decide is 5
percent the right number? At what cost are industrial based?
And if the number is 5 percent, that is great. But if it is
not, we need to increase that. We may need to increase the cost
of bundling contracts.
Chairman HANNA. But also the 5 percent has to be justified
by itself, so that would help. Just having the ability to look
at that number and question the veracity of it would go a long
way, which we do not have, as everyone has pointed out.
I would ask that you watch the work of this Committee over
the next few weeks, couple of weeks. These are the issues that
we are dealing with. We have work that we are proposing that we
would ask, if you can, to take a look at, give us some
feedback. Some of it has already been written.
I want to thank you for being here. You have all done a
great job of explaining your case.
I ask unanimous consent that members have five legislative
days to submit their supporting materials for the record.
Without objection, so ordered.
This hearing is now adjourned. And again, thank you.
[Whereupon, at 11:18 a.m., the Subcommittee was adjourned.]
A P P E N D I X
[GRAPHIC] [TIFF OMITTED] T3731.001
Good morning, Chairman Hanna, Ranking member and other
members of this subcommittee. On behalf of VET-Force, VVA
National President John Rowan and all of our officers and
members we thank you for the opportunity for Vietnam Veterans
of America (VVA) to appear before you today to share our views
on the ``Contracting & Industrial Base II: Bundling, Goaling,
and the Office of Hearings and Appeals.'' I ask that you enter
our full statement in the record, and I will briefly summarize
the most important points of our statement.
Though my time of service was many years ago, as a veteran
of the US Air Force with the 66th Strategic Missile Squadron, I
still have very vivid memories of my military experience. I've
served on the Executive Committee of the Veterans
Entrepreneurship Task Force (VET-Force) since the passage of PL
106-50, the Veterans Entrepreneurship & Small Business
Development Act of 1999. And having served as an Advisor to the
Vietnam Veterans of America and Legislative Liaison for the
National Association for Black Veterans also during that time,
I am well aware of the challenges faced by many Veterans and
especially Veteran Business Owners trying to do business in the
federal marketplace.
VET-Force members are of military service from all across
the United States. They own businesses in every industrial
sector. The members reflect the ethnic diversity of the country
itself. The members are concerned for our free market system
and believe that there hasn't been a more important time to
stand up for it and all it represents. We want the American
military to successfully complete the missions that the
Congress may ask of them and to make sure the American men and
women in the service of our country are well trained and
equipped and are able to come home safe when the mission is
finished.
Over the years, our organization, VET-Force, has been
voluntarily conducting oversight of the legislation,
regulations, policies, and programs intended to improve and
increase the contracting opportunities for veteran and service
disabled veteran owned businesses. When we come to know what's
not working, we do not hesitate to bring that to the attention
of the Military Departments, Federal Agencies, or to you, the
members of Congress. Just last year, I testified before this
Committee about the VA's overly burdensome verification process
by the Center for Veterans Enterprise of veteran business
owners who are seeking to participate in the VA's Veterans
First Contracting Program. For that issue, we supported the
recommendation to move that process to the SBA, who we know is
more uniquely qualified for such tasks.
Through VET-Force, we've also come to know that the Federal
small business procurement process is not only unkind to
businesses owned by veterans but is negatively impacting all
small business groups--8a, Hubzone, Women owned, as well. A few
years ago, we conducted research and prepared a report
entitled: `Breakdown! National Security Crisis in a Small
Business World' which basically showed that the Federal small
business procurement process is in a state of breakdown and
collapse, in conflict with U.S. law and policy.
In my testimony here today, I will draw from that report
and evidence of federal policies and practices being used
today, to highlight the impact of federal contract bundling and
consolidation through the use of Federal Strategic Sourcing
Initiatives on veteran and other small businesses.
Many Small Businesses are struggling in the federal
marketplace. New U.S. trade policies and changes in how
contracts are competed and awarded have made it much more
difficult for small businesses to compete against and work with
large prime contractors. For example, many government
requirements that could be set aside for small businesses are
bundled together with other contract requirements and awarded
to large companies. Only large companies can hope to win these
contracts as the prime contractor due to the increased amount
and varied scope of the work. As a result, small companies must
work within the contract environment almost entirely at the
discretion and advantage of the large corporation.
In recent years, the government has been actively promoting
the use of Federal Strategic Sourcing Initiatives (FSSI) among
federal agencies in an effort to consolidate procurements in
such a manner that reduces the costs of goods and services.
However, to us, the small business owner, FSSI is just a more
clever way of contract bundling.
Under the Small Business Act, contract bundling is defined
as consolidating 2 or more procurement requirements for goods
or services previously provided or performed under separate
smaller contracts into one large contract. This often results
in the contract not being eligible for any one small business
due to the size, scope and specialized requirements of the
contract. While consolidation is defined a little differently,
it still amounts to 2 or more contracts being combined into one
new contract which may or may not be suitable for a small
business.
We know that the House Small Business Committee has heard
the issue of contract bundling from small business owners
before. And many legislators have agreed that there have been
many instances wherein these policies and practices have
limited the opportunities for many small businesses. But things
aren't getting any better, many small businesses find they are
shut out of the contract process and eventually stop wasting
time and money in the Department of Defense (DOD) procurement
market and the country is the weaker for it. In a world crying
out for a new diplomatic formula, Small Businesses are once
again being left out. Real security begins in the grassroots
with the kind of economic and political sanctuary provided by
small business development.
VET-Force is concerned that by relying so heavily on a few
large prime contractors, our country makes itself vulnerable to
a catastrophic interruption in services and a lack of
competitiveness, innovation and imagination for our military
that small businesses provide. New technologies combined with
new trade laws create new supply chains and new models of
efficiency to meet customer expectations for quality and `on
time' deliveries. Innovative ideas to produce cost efficiencies
in government can conflict with valid economic and national
security policies. Sometimes these efficiencies, as in bundled
contracts, work better on paper than in actual practice.
All federal agencies are supposed to identify if a contract
is bundled or consolidated. There is a dollar threshold per
agency and certain criteria used to make this determination;
and achieving reductions in administrative or personnel costs
alone is not enough. Measurable cost savings; quality
improvements; reduction in acquisition cycle times; better
terms and conditions; and other benefits must evident to
justify the need to bundle or consolidate a procurement. In
addition, there should be an assessment done to determine the
impact on small businesses. But who within the procurement
process actually makes this determination. And once determined,
then what happens.
As agencies continue to increase the use of these
practices, it becomes more challenging to get an outside
objective analysis of these types of procurements in a timely
manner. Agencies are required to provide the SBA's Procurement
Center Representative (PCR) and the agency's own Office of
Small and Disadvantaged Business Utilization (OSDBU) with a
statement explaining why the procurement has to be bundled. If
the PCR objects to the agency's rationale, the PCR can delay
the procurement while SBA and the agency negotiate, although
the agency will ultimately make the decision whether to move
forward with the procurement as is or change the requirements.
This process of checking the requirements by the PCR is not
only flawed, but by the mere fact that SBA has decreased the
number of PCRs to about 50, its highly unlikely that these few
persons will be able to review 1000s of procurements throughout
the entire federal government. In recent years, SBA has
reported that they will collect more data on the number of
contracts bundled and measure the impact on small businesses.
However, without be directed by a specific legal requirement,
their efforts to do so have been less than adequate. VET-Force
has previously recommended that SBA increase its budget to
include the hiring of more persons to serve as PCRs. We ask now
that Congress approve legislation to ensure that SBA carries
out these vital functions.
The enduring policy of the United States has been to
support the small business sector of the American economy for
important economic and national security reasons. The
Congressional goal is to ensure a high quality, competitive,
innovative, efficient and diversified sources of goods and
services in the marketplace, public and private. The Congress
also has an interest in a geographically diverse marketplace,
one that doesn't concentrate economic and political power in
any one region of the United States.
For years Administrations have attempted to streamline its
policies in an effort to reduce costs and save the tax payer
dollars. Reducing government employees as been one method that
has been used a lot. In the 1990's, an estimated 15,000
government procurement positions were eliminated over a decade.
One of the negative results has been contract bundling.
Bundling many small contracts into one contract vehicle may
have been designed as well-meaning way to make government
contracting more efficient and cost effective. Instead,
contract bundling has proven to be inefficient and in direct
conflict with U.S. policy for small business and national
security.
So where then are we headed with Federal Strategic Sourcing
Initiatives? While the policy may be endorsed and promoted by
OMB in this and previous Administrations, what has been and
will continue to be the adverse impact on small businesses. The
government claims that there is a definite improvement in
procurement efficiencies and cost savings by using strategic
sourcing procurement vehicles. However, it appears that the
more these types of procurement vehicles are used, the larger
the number of small businesses that are not used.
GSA uses a number of strategic sourcing vehicles. Under the
Janitorial-Sanitation Supply contract vehicle (JanSan), GSA
awarded blanket purchase agreements (BPAs) to 18 companies, 15
of which were small businesses. However, these services were
previously being provided by 609 companies, 540 of which were
small businesses. So that means that 525 small businesses will
no longer be allowed to compete for federal contracts for
janitorial services and supplies. Under GSA's Maintenance,
Repair and Operations (MRO) contract vehicle, 418 small
businesses and 39 service disabled veteran owned small
businesses were displaced. And yes 10 of the 11 BPAs awarded
were to small businesses. And while GSA projects that there
will be a 12% savings by using this method of contracting,
there are no projections on the percentage loss by the 418
small businesses that were displaced.
GSA has other contract vehicles of these types that are
having the same consequences on hundreds of small businesses--
Oasis and Oasis SB, intended to provide integrated,
multidisciplinary professional services and ancillary services;
and MOBIS, Mission Oriented Business Integrated Services. In
2014, under this contract vehicle, 1270 small businesses were
not allowed to compete on various task orders.
And there is another issue. If a company is awarded a GSA
contract while that company is a small business, and that
company subsequently becomes a large business, that company may
still compete (via their GSA contract) as a small business for
the remaining life of their GSA contract. VET-Force learned of
a recent contract where, a New England business, lost to a
large business on a small business set aside contract
solicitation under these exact circumstances.
Finally, small businesses competing for government
contracts find themselves at a disadvantage in the federal
marketplace and appear to be losing ground all the time. The
large Prime contractors have been awarded most of the bundled
contracts with little to no repercussions for not including
small companies in their subcontracting plans. However, under
FSSI that use consolidation strategies, a few small businesses
will no doubt grow and prosper if they are one of the lucky few
selected, but it's clear to see just from the math that there
is definitely an adverse impact to far more small businesses.
VIETMAN VETERANS OF AMERICA
Funding Statement
March 16, 2015
The national organization Vietnam Veterans of America (VVA)
is a non-profit veterans' membership organization registered as
a 501(c)(19) with the Internal Revenue Service. VVA is also
appropriately registered with the Secretary of the Senate and
the Clerk of the House of Representatives in compliance with
the Lobbying Disclosure Act of 1995.
VVA is not currently in receipt of any federal grant or
contract, other than the routine allocation of office space and
associated resources in VA Regional Offices for outreach and
direct services through its Veterans Benefits Program (Service
Representatives). This is also true of the previous two fiscal
years.
For Further Information Contact:
Executive Director for Policy and Government Affairs
(301) 585-4000 extension 127
[GRAPHIC] [TIFF OMITTED]
Testimony of
Damien Specht
Partner
Jenner & Block, LLP
Co-Chair, Government Contracts Corporate Transactions Practice Group
BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES
COMMITTEE ON SMALL BUSINESS
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
Regarding ``Contracting and Industrial Base II: Bundling, Goaling, and
the Office of Hearings and Appeals''
March 17, 2015
Chairman Hanna, Ranking Member Velazquez and Members of the
Subcommittee, thank you for the invitation to appear today. It
is a privilege to share my views on the ways we can maintain a
strong industrial base of small business government
contractors. My name is Damien Specht, and I am a government
contracts partner with the law firm of Jenner & Block here in
Washington, D.C. Before I begin, let me state that my comments
are my own, and I am not speaking on behalf of my law firm or
any specific client.
I serve as Co-Chair of the firm's Government Contracts
Corporate Transactions Practice Group and as a Co-Chair of the
American Bar Association's Section of Public Contract Law Small
Business & Other Socioeconomic Programs committee. In each of
these roles, I work with small government contractors and
entrepreneurs as they enter the federal market, navigate size
protests, and, through hard work, develop thriving mid-size
businesses. I also assist small businesses in corporate
transactions with large contractors and investors.
In my testimony, I will address how consolidated
contracting, whether through bundling or strategic sourcing,
reduces competition and necessarily limits the number of small
businesses in the federal marketplace. I would also like to
briefly discuss the Small Business Administration's scorecard
rating methodology and, as a litigator who regular appears
before the Small Business Administration Office of Hearings and
Appeals, share some thoughts on that forum.
Bundling Reform
Anecdotally, I have heard from many of my small business
clients that bundling is a problem. For example, facilities
operation contractors have complained that general maintenance
services have been bundled with logistics and food services and
hardware contractors have been excluded from competitions when
a series of additional items were added to the contract
requirements. However, because we largely rely on self-
reporting, the government has little reliable data on where
bundling is occurring, how many contractors are being affected
by bundling, and the impact that bundling and consolidation are
having on the small business community.
As a result, I support the efforts of this subcommittee to
increase transparency and reporting of data related to
bundling. In particular, I support the idea that agencies
should be required to publish bundling justification along with
issued solicitations. In other circumstances where agencies
limit competition, such as sole-source awards, we require
publication of a justification; bundled requirements, which can
eliminate small business opportunities, should be no different.
This added transparency will allow small businesses to
understand the agency's rationale and, if necessary, to protest
the consolidated requirement.
I will note, however, that bundling protests are rarely
successful. I have reviewed dozens of protest decisions by the
Government Accountability Office that include bundling
allegations and could only find a small handful that were
sustained on that basis. This is the case because the GAO gives
agencies significant deference and only requires ``a reasonable
basis for its contentions that bundling is necessary.'' \1\
This is not a high bar and, as result, it appears that the
primary way for an agency to lose a bundling protest is to fail
to perform the statutorily required bundling analysis at
all.\2\ As a result, in addition to increasing transparency
surrounding bundling, this committee should consider raising
the bar for justifying these decisions, which can currently be
based on as little as a five percent cost savings.\3\
---------------------------------------------------------------------------
\1\ B.H. Aircraft Company, Inc., B-295399.2, July 25, 2005, 2005
CPD para. 138.
\2\ Sigmatech, Inc., B-296401 Aug. 10, 2005, 2005 CPD para. 156
(sustaining a protest ``where agency failed to perform bundling
analysis'').
\3\ Currently, FAR 7.107 provides that bundling may be permissible
if it results in ``cost savings or price reduction, quality
improvements that will save time or improve or enhance performance or
efficiency, reduction in acquisition cycle times, better terms and
conditions, and any other benefits.'' Cost savings must be
substantially equivalent to ``(1) Ten percent of the estimated contract
or order value (including options) if the value is $94 million or less;
or (2) Five percent of the estimated contract or order value (including
options) or $9.4 million, whichever is greater, if the value exceeds
$94 million.'' Id.
---------------------------------------------------------------------------
The Downside of Strategic Sourcing
Although strategic sourcing is technically consolidation
and not bundling, it can have the same effect of weakening the
small business government contracting base.
Strategic sourcing means many things to many people, but
the basic process includes identifying needs across government
agencies and consolidating purchases through industry or item-
focused contract vehicles to achieve cost savings. The public
record is clear that proponents of strategic sourcing have
worked with small business stakeholders to maximize small
business participation on these contracts. In fact, most of the
awardees under the GSA's Federal Strategic Sourcing Initiative
(FSSI) program are small businesses. That effort is
commendable, but the problem with strategic sourcing is not one
of intent or lack of effort to include the small business
industrial base. The problem is that strategic sourcing, at
least when accomplished through large contract vehicles, is
necessarily bad for enhancing the diversity of small government
contractors in the industrial base. This is the case for a few
reasons:
First, the number of offerors that can compete for
strategic sourcing contracts is limited. As a result, it is not
at all clear that the Government is getting the best pricing on
each item or that it is honoring its commitment to full and
open competition. When the government's solicitation requires
offerors to provide hundreds of different items in significant
bulk, as it must to gain the benefits of a strategic sourcing
contract, that contract structure all but eliminates offerors
who provide some of the required items but cannot deliver in
the tremendous quantities required for a government-wide
purchasing vehicle. As demonstrated by the FSSI Office Supplies
contract, it is often necessary for hundreds of small
businesses to team together to fulfill the requirements of
these large contracts. As you might imagine, these broad
coalitions among competitors are rare and result in significant
administrative challenges. This is a real barrier to entry for
small businesses that could provide some, but not all, items or
lack the immediate infrastructure to deliver hundreds of
thousands of items. These same small businesses could fulfill
the government's needs if smaller, more focused contracts were
opened for competition among the full breadth of the small
business base.
Second, those businesses that do not receive strategically
sourced awards may find other contract opportunities disappear.
To drive real volume discounts, purchasing from strategic
sourcing vehicles, like the FSSI contracts, must be mandatory
or, at least, highly encouraged. That means that there are a
small number of significant winners and a far larger number of
losers.
For example, in June 2010, GSA awarded the previous
generation of its FSSI Office Supply blanket purchase agreement
to 15 companies. Although there were 15 awardees, most of which
were small businesses, those awardees must be balanced against
the thousands of possible firms that could have met the
Government's needs had these requirements been solicitated in
less volume. This number includes 569 holders of GSA Schedule
for Office Solutions that could have met the Government's needs
through a simple Federal Supply Schedule order. All of those
other businesses, large and small, became holders of an
essentially useless supply schedule contract.
As this example demonstrates, small bushiness participation
percentages reported as part of strategic sourcing do not
report the whole story. For example, GSA has reported that
small business participation on its office supply contracts
increased from 67 percent to 76 percent of spending in fiscal
year 2014. If the goal of small business programs were simply
to achieve certain metrics, these numbers would show clear and
convincing progress. However, I believe that the purpose of
small business programs is to create a vibrant and diverse base
of small businesses that can offer innovation and creativity to
the federal marketplace while creating jobs in communities
across the country. Judged by that standard, a higher
percentage of spending that is isolated within a smaller number
of firms is not a step in the right direction.
Third, because strategic sourcing contracts are likely to
reduce the number of sales available to Federal Supply Schedule
holders, these large contracts may also dissuade small business
from becoming federal contractors. Traditionally, GSA's Federal
Supply Schedule program has provided a low barrier to entry
access point for aspiring government contractors. In fact, the
overwhelming majority of my small business clients hold at
least one Federal Supply Schedule contract. The appeal of these
contracts is obvious: Instead of putting together RFP responses
for specific procurements and expending significant bid and
proposal costs, a small contractor looking to enter the federal
space can put together a single schedule proposal and place its
entire catalog online. If this low-cost entry is successful,
the firm can then expand its offerings and compete for other
federal contracts. If we choose to shift the Government's
purchases to strategic sourcing contracts and away from the
rest of Federal Supply Schedule holders, as appears to be the
case, this small business entry point will be less attractive,
and we will lose a significant number of possible federal
contractors.
Fourth, the award of a strategic sourcing contract is not
always a benefit to the winners. This is the case because large
awards can set up a ``hill and valley'' problem for small
contractors. A small business that receives millions in
strategic sourcing awards over the contract term is likely to
expand its infrastructure and employee base to meet those
needs. However, a firm that remains dependent on a single
contract for a large portion of its revenue may be unable to
maintain that infrastructure if it is unable to win the next
iteration of that contract. As a result, there is the real risk
that today's winners will face significant difficulties in a
few years when these large awards have expired, while a
business that receives regular, but smaller, awards under a
traditional contracting model will not face the same
challenges.
In summary, there is nothing inherently wrong with
strategic sourcing or purchasing in bulk through large
multiple-award contracts. However, this committee needs to look
beneath the surface of overall small business participation
numbers and judge whether these actions are consistent with
stated small business policy goals, such as building a diverse
small business base.
Agency Scorecards
Despite the impact of bundling and consolidation, the
Federal Government met its overall small business goals (and
many subcategory goals) in fiscal year 2013. It appears that
feat was repeated in 2014. These are not minor achievements.
For years, many of us in the private bar assumed that the
failure to meet small business goals was going to be the status
quo. Now, we are hopefully at the beginning of a new normal
where these goals are achieved on a regular basis.
This accomplishment is tempered by persistent concerns that
large contractors are receiving set-aside awards and being
counted toward small business goals. In my time working in this
area, I have seen instances where public records indicated a
set-aside award to a contractor that may not have been a small
business during the relevant period. Although these may have
been honest mistakes or data entry errors, continued training
of contracting officers and explanation of the complicated
small business rules to the contracting community will be
helpful in confirming that the proper numbers are being
reported.
Further, although achievement of the overall small business
goal is unquestionably good news, there is still room for
improvement on an agency by agency basis. As a result, it is
somewhat misleading for SBA to assign an ``A'' or ``A+'' rating
to 20 of the 24 agencies reviewed. This is particularly
troubling when no agency hit all of its goals. For example,
eight agencies received an overall ``A'' grade while failing to
meet their overall small business subcontracting goal.\4\ One
of those agencies, the Department of the Treasury, was assigned
an ``A'' rating despite subcontracting to small business at
only a 6.8% rate. The SBA's underweighting of small business
subcontracting goals is not a mistake. SBA's stated grading
formula weights prime contract goals achievement as eight times
more important than subcontracting goals. Although I agree that
prime contract opportunities may be more beneficial to small
businesses, it is not clear why the weighting disparity should
be this significant.
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\4\ Each of the Department of Veterans Affairs, State Department,
Department of Treasury, Small Business Administration, Department of
Homeland Security, Agency for International Development, Department of
Education and Department of Health and Human Services received an
overall ``A'' grade while missing their overall small business
subcontracting goal.
Despite the details of SBA's weighting formula, agencies
should be congratulated for their efforts in meeting the
government's overall small business goal. However, this
committee should continue to closely examine the basis for
those grades to determine where this performance can be
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improved.
Office of Hearings and Appeals
Shifting to my role as a small business litigator, I would
like to address a couple of issues related to SBA's Office of
Hearings and Appeals (OHA) that are important to small
contractors.
Although I certainly do not agree with every decision
issued by OHA, there is no doubt that it has proven to be an
efficient alternative to full-scale litigation in federal
court. As a result, I support making OHA permanent through
statute. Any such statute should, of course, recognize that
small businesses may appeal OHA decisions to federal court if
they so choose.
Action to formalize the existence of OHA should also
eliminate an unnecessary redundancy in the Small Business Act.
Specifically, although OHA's administrative judges have
developed significant small business expertise, the Small
Business Act assigns certain appeals, including those related
to 8(a) program admission and termination, to Administrative
Law Judges (ALJs), of which OHA currently has none.\5\ This has
led to a peculiar arrangement where, pursuant to tan
Interagency Agreement in effect beginning October 1, 2012, ALJs
at the U.S. Department of Housing and Urban Development hear
these cases on behalf of SBA. Although I have no doubt that
this arrangement is effective, it makes more sense to
centralize small business decisions in OHA as a free-standing
statutory entity.
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\5\ See 15 U.S.C. Sec. 637(a)(9)(A).
I also understand that the committee is considering
expanding OHA's jurisdiction to include pre-solicitation
requests from the contracting officer that OHA assign an
appropriate NAICS code. This would be a significant change from
OHA's current rule, which allows NAICS code appeals only after
a solicitation has been issued. An expansion of OHA's
jurisdiction in this manner raises a number of concerns that
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should be addressed.
It is my belief that the contracting officer is in the best
position to understand the nature of a given procurement beyond
the text of the solicitation. As a result, the contracting
officer should be charged with assigning the correct NAICS code
to a solicitation in the first instance and should not be
allowed to delegate that decision to OHA.
Further, allowing such a delegation could create a scenario
where contracting officers may seek to ``protest-proof'' each
solicitation by running it through OHA. This would, of course,
overwhelm OHA with unnecessary cases.
Finally, I believe that the NAICS code appeal process
benefits from the input of small business contractors. This
process could be undercut by a pre-solicitation process
initiated by the contracting officer. Whether they are
protestors or intervenors, small businesses must be allowed to
review the text of a final solicitation to raise different
perspectives and applicable NAICS codes to OHA. In fact, it may
be beneficial to expand the filing deadline for NAICS appeals,
which currently stands at 10 days after issuance of a
solicitation, to allow small businesses to become aware of and
review the extensive solicitations that support modern
procurements.
Conclusion
In conclusion, I would like to commend this committee for
going beyond small business metrics to focus on the diversity
of a healthy small business subcontracting base. I look forward
to your questions.
[GRAPHIC] [TIFF OMITTED] T3731.024
Chairman Hanna, Ranking Member Velazquez, and members of
the Subcommittee, I am Rod Manson, President of the National
Office Products Alliance (NOPA), and owner of Office Advantage,
a small office supply company located in Poway, California.
The National Office Products Alliance (NOPA) is a not-for-
profit trade association established in 1904 that represents
and serves more than 1,000 small independent commercial dealers
throughout the United States, along with their key suppliers.
I appreciate the opportunity to offer this statement for
the record today about the need to ensure that small businesses
in our industry have fair, ongoing access to opportunities in
the federal market. There have been a number of developments
since 2010 with respect to management of the GSA Schedule 75
program in general, and implementation of the ``third-
generation'' Federal Strategic Sourcing Initiative (FSSI) for
office supplies in particular that have broadly impacted our
members and what we consider to be the new contract bundling. I
will highlight these developments in my statement today.
First and foremost, NOPA is greatly concerned about the
abrupt and widespread impact on small businesses in our
industry due to the General Services Administration's (GSA)
implementation of the current FSSI program for office supplies.
We acknowledge that the FSSI program has generated new
opportunities for some small businesses in our industry,
including some of our very capable members. At the same time,
there are many other members who have invested with government
encouragement in obtaining their own Schedule 75 contracts,
only to see their current opportunities eliminated as a result
of the near-mandatory, government-wide implementation of FSSI
(or contract bundling 2.0).
Given the government-wide scope of this FSSI and the large
number of small businesses that were participating in this
market in FY2010, NOPA was surprised that GSA did not undertake
a small business impact study before launching its second and
third generation FSSI's for office supplies. It then went a
step further and--without any such study as required under the
Regulatory Flexibility Act--published a proposed rule in June
2011 that called for creation of a special preference for
federal strategic sourcing initiatives within the FAR.
As an association, we have worked to find the ``middle
ground'' within our membership on this issue. We do not wish to
impair the new opportunities of members who competed for and
were awarded FSSI blanket purchase agreements (BPAs). At the
same time, we would be remiss if we did not highlight our
concerns about how FSSI has been implemented.
After monitoring FSSI implementation of OS2 and seeing its
far-ranging impacts, we agreed within the NOPA Board to urge
GSA and the Administration as a whole to issue a Statement of
Administration Policy (SAP) to clarify to federal agencies what
our industry has been told by GSA and the Administration just
prior to the bid process: that FSSI would be implemented on a
non-mandatory basis, allowing non-awarded GSA Schedule 75
holders to continue to compete for federal business.
Since that time, it has become clear that FSSI volume and
its share of total federal spending on office supplies would
continue to grow as more and more major agencies issued
guidance to buyers that FSSI use was mandatory except in
unusual situations.
NOPA has maintained a dialogue with GSA and the Office of
Federal Procurement Policy (OFPP) on FSSI implementation since
2010 and I am here today to urge this Committee, the full
Congress and the Administration to acknowledge and address the
impact of strategic sourcing (or contract bundling 2.0) has had
on our industry in a forthright way. The solution is simple and
relies on allowing more competition and flexibility in
purchasing as ways to achieve FSSI's goals and reduce job loss
pressures in our industry.
First, the Administration needs to issue a very clear
Statement of Administration Policy (SAP) that restores full
competition within the federal market for our industry's
products. This approach, if communicated and implemented
broadly, will help ensure genuine ongoing choice of procurement
vehicles for agencies and will help the Administration achieve
the overall budgetary savings it hopes to achieve through the
FSSI program.
Mandatory implementation of FSSI on a government-wide basis
represents a massive form of ``contract bundling'' which has
and will continue to reduce the opportunities and the ultimate
level of small business participation and healthy, long-term
competition in federal markets.
Second, there needs to be more flexibility to allow
individual dealers with their own GSA Schedules to participate
in FSSI as ``Consortia''. Consortia should be subject to
reasonable ground rules, but this should not mean they must
give up their rights to compete for non-FSSI federal business
opportunities using their regular GSA schedule contracts. This
is essential, since Consortia will need to bear significant
administrative fees from GSA and their chosen FSSI BPA holder
partners, as well as normal costs associated with properly
servicing federal accounts.
NOPA had numerous meetings and conversations with GSA
regarding the Consortia model and we ask this Committee to
strongly encourage them to work toward an expeditious and
balanced conclusion.
We hope that this Committee will reflect on the history of
FSSI implementation in our industry and consider how the small
business impacts can be mitigated in the future. At the end of
FY 2010, there were 550, most small, companies and a few
dealer-based organizations competing for federal business with
one or more departments and agencies under the regular GSA
Schedule 75 contract program and/or using individual agency
blanket purchase agreements (BPAs). Today those numbers have
and continue to shrink at an alarming rate.
However, with the rapid, GSA/OFPP-orchestrated push for use
of FSSI on a government-wide basis using just 1 large (and I
must point out that with the recent merger of Office Depot and
Staples there will be only 1 large corporate company in this
industry thus meaning they will almost automatically be given
an FSSI award in the future if the past OS solutions are any
indicators), 22 small vendors, and 1 Consortia, the economic
fallout has been swift and dramatic for most of the remaining
Schedule 75 contract holders.
With more competition, GSA and all Federal agencies can
enjoy better pricing and faster, more customized service in
local areas throughout the country where they operate. If
additional qualified dealer consortia with experienced vendor
members are able to participate in the next FSSI program, our
industry will be able to provide more reasons for agencies to
utilize the FSSI program on a broader scale, as well as
improvements in overall program efficiencies. In short, there
will be more qualified small businesses with a vested interest
in the FSSI program's long-term success.
In today's budget-constrained and fast-paced environment,
GSA and other federal agencies seek to minimize the number of
separate prime contractors with which they work, while
maximizing the quality and local responsiveness of delivery and
other services received. NOPA believes that dealer consortia--
consisting of small business dealers, many who meet defined
socio-economic criteria--offer an ideal solution for many
federal agencies, particularly those with facilities and
employees operating in different parts of the country.
The industry needs a clear and concise statement from GSA
that they do not plan to cancel or eliminate Schedule 75 as
indicated by GSA to industry officials. In fact, GSA needs to
reopen Schedule 75 so new small businesses can have access to
the government market.
Early GSA communication and guidance to GSA Schedule 75
contractors and others in the industry with respect to the
FSSI-OS3 bid process and required technical qualifications is
an essential part of expanding qualified small business
competition in the next-generation acquisition. GSA has
maintained a moratorium on acceptance of new Schedule 75 offers
since October 2010 and there are at least a few individual
dealers and at least one major dealer consortia that NOPA
believes are likely to apply for a Schedule 75 contract if the
opportunity is provided.
Based on our industry's experience, the Schedule 75
application process has required several months to complete.
For this reason, NOPA suggested to GSA that they provide
advance notice as soon as possible of the expected timing and
requirements of any planned lifting of the moratorium on
acceptance of Schedule 75 applications. Advance notice of GSA's
plans will allow non-schedule holders (whether individual
companies or dealer consortia) to determine whether they are
qualified to become Schedule 75 contractors and, if so, to
begin the process of preparing and filing Schedule 75 contract
applications.
To continue to grow the FSSI program's cost savings and
federal agency participation, NOPA believes the most qualified
small business participants should be in a position to bid. To
ensure GSA and federal agencies have access to the most
qualified, competitive and committed small businesses--many of
which are now members of three established dealer consortia in
the office products industry--it is appropriate to maintain a
high standard of technical and performance requirements that
broadly meet federal government agencies' needs. Those outlined
for the FSSI-OS3 bid process offer a logical starting point,
but we anticipate that GSA and OFPP also will review more
recent experiences agencies have had during the first three
years of the FSSI-OS3 BPA program and incorporate new ideas
into the requirements.
To make this type of solution widely available and as
competitive as possible, NOPA encourages GSA and OFPP to
consider establishment of a separate ``bid pool'' in which
qualified dealer consortia could compete for multiple BPA
awards in the FSSI acquisition process.
By NOPA's definition, a qualified ``dealer consortia'' has
the following characteristics:
The consortia is self-formed among small
business members for the explicit purpose of providing
national account services effectively to large and
geographically dispersed customers, whether
governmental, institutional and/or commercial;
Provides a strong administrative and
technical infrastructure, including a centralized,
integrated customer-facing website and a comprehensive
ordering, fulfillment, billing and customer service
interface with national/regional customers; and
Has a systematic training and compliance
program in place to ensure its small business members
consistently understand and meet all customer technical
and service performance requirements.
This three-part profile and strong infrastructure
distinguish a qualified ``dealer consortia'' from other small
dealer groups that may not have all of those elements fully in
place, and/or which may have been formed to pursue a single
federal or other bidding opportunity. While such dealer groups
may be competitive, they may lack the performance discipline
and administrative/technical infrastructure of dealer consortia
whose national account purpose is more broadly developed and/or
whose members have long-standing relationships that foster
positive operating synergies benefitting their customers.
Ironically, this situation is occurring in a commodity area
where small businesses owned and operated by women, minorities,
service-disabled veterans and second- and third-generations of
entrepreneurial families have been well represented and highly
successful against much larger national competitors.
GSA Should Not be in the Business of Dictating Price
As vendors we are asked by the government to provide them
with our best prices. During the bid process we do just that.
When deciding on awards we assume GSA looks at those vendors
who are prepared to offer the government the best price. Once
binds are awarded and contracts signed, GSA should be required
to live up to the terms of those contracts. Under the current
practice, GSA has been going back to vendors and requiring them
to lower their price. Shouldn't GSA be asking that during the
selection process and not after they award and sign contracts
with vendors? We are concerned that GSA in a sense is fixing
prices and not allowing for competition to dictate prices. GSA
should not be in the business of using a generic formula to
decide what is the average price of a product. That is what the
market is for. If GSA doesn't like a vendors pricing it should
not have selected that vendor and signed a contract with them.
We are asked to give the government the best prices we offer
our top commercial clients. When we do that and GSA signs a
contract to buy items at those prices they should not after the
fact be able to pressure or threaten to take our contracts away
if we do not lower our prices to a threshold they deem
reasonable.
We do not believe that this result--a net economic loss for
small business--is what Congress or the Administration intended
or is what our Nation needs as our economy is showing uneven
signs of recovery. More competition--not less--is the solution
and can be readily restored in the federal market for office
products by making the FSSI program truly one option, rather
than a mandatory or quasi-mandatory option, among those that
have been in place and working effectively for some time.
Thank you again for allowing me to submit this statement
for the record on behalf of NOPA and our industry.
[all]