[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

[H.A.S.C. No. 112-94]

DOING BUSINESS WITH DOD: UNIQUE CHALLENGES FACED BY SMALL AND MID-SIZED
BUSINESSES

__________

HEARING

BEFORE THE

PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY

OF THE

COMMITTEE ON ARMED SERVICES

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

HEARING HELD

JANUARY 17, 2012

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PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY

BILL SHUSTER, Pennsylvania, Chairman
BOBBY SCHILLING, Illinois RICK LARSEN, Washington
JON RUNYAN, New Jersey BETTY SUTTON, Ohio
ALLEN B. WEST, Florida COLLEEN HANABUSA, Hawaii
Lynn Williams, Professional Staff Member
Timothy McClees, Professional Staff Member
Catherine Sendak, Research Assistant

C O N T E N T S

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CHRONOLOGICAL LIST OF HEARINGS
2012

Page

Hearing:

Tuesday, January 17, 2012, Doing Business with DOD: Unique
Challenges Faced by Small and Mid-Sized Businesses............. 1

Appendix:

Tuesday, January 17, 2012........................................ 27
----------

TUESDAY, JANUARY 17, 2012
DOING BUSINESS WITH DOD: UNIQUE CHALLENGES FACED BY SMALL AND MID-SIZED
BUSINESSES
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Larsen, Hon. Rick, a Representative from Washington, Ranking
Member, Panel on Business Challenges within the Defense
Industry....................................................... 8
Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman,
Panel on Business Challenges within the Defense Industry....... 1

WITNESSES

Hillmer, Linda, Chair, Small Business Division, National Defense
Industrial Association......................................... 4
Schubert, Lynn M., President, The Surety & Fidelity Association
of America..................................................... 6
Shoraka, A. John, Acting Associate Administrator for Government
Contracting and Business Development, U.S. Small Business
Administration................................................. 2

APPENDIX

Prepared Statements:

Hillmer, Linda............................................... 41
Larsen, Hon. Rick............................................ 33
Schubert, Lynn M............................................. 48
Shoraka, A. John............................................. 35
Shuster, Hon. Bill........................................... 31

Documents Submitted for the Record:

[There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

[There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

[There were no Questions submitted post hearing.]
DOING BUSINESS WITH DOD: UNIQUE CHALLENGES FACED BY SMALL AND MID-SIZED
BUSINESSES

----------

House of Representatives,
Committee on Armed Services,
Panel on Business Challenges within
the Defense Industry,
Washington, DC, Tuesday, January 17, 2012.
The panel met, pursuant to call, at 3:04 p.m., in room
2118, Rayburn House Office Building, Hon. Bill Shuster
(chairman of the panel) presiding.

OPENING STATEMENT OF HON. BILL SHUSTER, A REPRESENTATIVE FROM
PENNSYLVANIA, CHAIRMAN, PANEL ON BUSINESS CHALLENGES WITHIN THE
DEFENSE INDUSTRY

Mr. Shuster. We are going to get started. Mr. Larsen is en
route. We had a very hectic schedule last week; we traveled to
the west coast and to Hawaii. So maybe Mr. Larsen is still jet
lagged or, like me, is not sure where he is. We had to get up
every day and say, ``What State are we in?''
But we will go ahead and get started. The hearing will come
to order.
I want to welcome our panelists today. I look forward to
hearing your testimony.
The Armed Services Committee Panel on Business Challenges
in the Defense Industry is meeting today to continue our
dialogue regarding the health and future of our Nation's
defense industrial base. And today we specifically look at the
unique challenges that small and medium-sized businesses face
in trying to do business with the Department of Defense [DOD].
Members of the panel, as I said, just returned on Friday
morning from meeting with businesses in southern California and
Honolulu. And as I have said before, these roundtable
discussions have been extremely valuable to the panel. And
meetings we had last week provided us with a great deal of
insight into many of the challenges that they face in the
defense industry. We were honored to have a hearing in Chairman
McKeon's district in Santa Clarita, and we also had a meeting
in San Diego with Congressman Duncan Hunter and Susan Davis,
who both serve on the Armed Services Committee.
In addition to the three industry roundtables, we also had
an opportunity to meet with Admiral Willard, the Commander of
the U.S. Pacific Command, and we toured many of the DOD
industrial facilities that support our Navy in the Pacific.
While we were in Hawaii, one of the small business owners
commented that DOD takes the view that small businesses should
take a small role. In reality, small businesses are the
backbone of this economy. And, according to the Small Business
Administration [SBA], small businesses play a leading role as
the driver of economic growth and job creation in the national
economy and that more than half of working Americans own or
work for a small business and that small businesses are
responsible for two of every three net new private sector jobs
created in recent years. We also heard from some of the large
companies out there how important small business is in the
defense industrial base and what they make up.
There is no doubt that the DOD acquisition community is
very risk-averse, and we have to find ways to meter that risk-
aversion and reduce the bureaucracy and leverage this critical
sector of our economy to meet our national security
requirements.
We have three terrific witnesses today, and they are with
us today to explore this topic and assist us in trying to
understand this paradigm.
We have with us Mr. John Shoraka, Acting Associate
Administrator for Government Contracting and Business
Development for the Small Business Administration.
Ms. Linda Hillmer is the chair of the Small Business
Division of the NDIA [National Defense Industrial Association].
And Ms. Lynn Schubert is president of The Surety & Fidelity
Association of America.
While Ms. Hillmer and her organization are very familiar
with HASC [House Armed Services Committee], I know that Mr.
Shoraka and Ms. Schubert are probably a bit out of their
comfort zones. It is not often that someone from the SBA or the
world of surety bonding comes to testify before the defense
committees. However, your experience and insight and
recommendations are going to be very important to us, and we
are honored you are here with us today.
I also would like to thank Mr. Dan Else and the rest of his
team at the Congressional Research Service [CRS] for their
assistance in preparations for today's hearing. I am looking
forward to the discussion.
And, with that, I was going to turn to Mr. Larsen, but he
is still probably on another time zone. So what we will do is
once Mr. Larsen--and we will go through your testimony first,
and then when Mr. Larsen arrives maybe he will have some
opening remarks to make.
So, with that, we will proceed. Mr. Shoraka, if you want to
go first, you have 5 minutes. And proceed, please.
[The prepared statement of Mr. Shuster can be found in the
Appendix on page 31.]

STATEMENT OF A. JOHN SHORAKA, ACTING ASSOCIATE ADMINISTRATOR
FOR GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL
BUSINESS ADMINISTRATION

Mr. Shoraka. Thank you, Chairman Shuster and members of the
House Armed Services Committee. Thank you for inviting me to
testify today.
Our top priority at the SBA is to maximize opportunities
for small businesses and ensure that the benefits of our
programs flow to the intended recipients. My office works each
day to get Federal contracting dollars into the hands of small
and disadvantaged businesses.
Contracting with small business is a win-win. Small
businesses, who are drivers of the American economy, get the
revenue they need to grow and create jobs. Meanwhile, the
Federal Government has the opportunity to work with the most
innovative and responsive companies in the country.
My office's primary objective is to ensure that eligible
small businesses receive their fair share of Federal prime and
subcontracting dollars. One way we do that is through our
oversight of the Federal Government's efforts to meet the
statutorily mandated small business goals, which include prime
contracting dollars, awarding 23 percent to small businesses.
Over the last 2 years, the Federal Government has made
significant improvements in contracting to small businesses.
For example, in fiscal year 2010, small businesses won nearly
$100 billion, or 22.7 percent, of Federal prime contracting
dollars. This marks the second consecutive year of percentage
and dollar increases after 3 consecutive years of decline and
was the largest 2-year increase in over a decade.
Small businesses also won $74 billion, or 35.4 percent, of
subcontracting dollars.
Throughout the fiscal year, we at the SBA track and monitor
Federal agencies' small business contracting performance
closely and publish the annual ``Small Business Procurement
Scorecard.'' In fiscal year 2010, DOD achieved a grade of
``B,'' reaching 95.8 percent of its small business contracting
goals.
The Department awarded 20.94 percent, or $61 billion, of
its Federal contracts to small businesses. The Department
awarded $10.4 billion in prime contracts to women-owned small
businesses; $20.7 billion to small disadvantaged businesses;
$5.3 billion to service-disabled veteran-owned small
businesses; and $8.7 billion to Historically Underutilized
Business Zones, or HUBZones. It also significantly exceeded
overall subcontracting goals of 31.7 percent to small
businesses, awarding 37.3 percent.
DOD submitted a fully responsive plan to increase small
business contracting within its procurement. The Department was
fully receptive to SBA during the reporting period and
demonstrated its procurement data was fully and accurately
reported.
Congress took a major step toward helping small businesses
engage in the Federal marketplace with the passage of the Small
Business Jobs Act of 2010. Since its enactment, we continue to
roll out many benefits to small businesses, specifically the 19
contracting provisions contained in the Jobs Act that will help
redirect billions of contracting dollars into the hands of
small business.
Among changes already enacted include: making it harder to
bundle contracts, a practice that makes it more difficult for
small businesses to compete; holding large prime contractors
more accountable to their own subcontracting plans; and
strengthening the skills of Federal acquisition workforces by
implementing mandatory small business training, revising
existing core certifications, and requiring training on small
business contracting.
While the Jobs Act has made marked improvement to the
Federal procurement environment for small businesses,
contracting with a large and complex agency like the Department
of Defense naturally comes with unique challenges. My office
works regularly with all branches of the DOD and their small
business communities conducting outreach and training events
and finding new ways to support small businesses and help DOD
hit and/or exceed its small business contracting goals.
Because of the significant amount of contracts coming from
the Department of Defense, my office is in constant contact
with the DOD's Office of Small Business Programs and Office of
Small Business and Disadvantaged Business Utilization [OSDBU]
to track and monitor DOD's small business contracting goals.
Monthly, the SBA chairs the Small Business Procurement Advisory
Council, a meeting where we collaborate with OSDBUs from across
the Federal Government to find out how we can best support
agencies and address any issues they have with their small
business contracting goals.
DOD has continued to work to increase small business
contracting opportunities for small businesses demonstrating
unprecedented top-level commitment to small business
procurement. As an example, in August of 2011, Secretary of
Defense Leon Panetta issued a memorandum urging the
Department's acquisition workforce to identify opportunities to
increase contracting with small businesses. In addition to
Secretary Panetta, the Assistant Secretaries of each component
of the Department of Defense issued detailed memoranda to their
respective acquisition teams and program buyers to encourage
the increased use of small businesses.
The SBA remains committed to working with Federal agencies
to get even more contracts and subcontracts into the hands of
small businesses in the coming years.
I want to thank you for allowing me to share SBA's views
and initiatives with you today, and I will be happy to answer
any questions you may have.
[The prepared statement of Mr. Shoraka can be found in the
Appendix on page 35.]
Mr. Shuster. Thank you very much.
And, Mr. Larsen, when they get done with testimony, if you
have an opening statement.
Mr. Larsen. That is fine. Thank you.
Mr. Shuster. Okay. Thanks.
Ms. Hillmer.

STATEMENT OF LINDA HILLMER, CHAIR, SMALL BUSINESS DIVISION,
NATIONAL DEFENSE INDUSTRIAL ASSOCIATION

Ms. Hillmer. Thank you.
Good afternoon, Chairman Shuster, Ranking Member Larsen,
and other distinguished members of the committee. My name is
Linda Hillmer, and I am the chair of the Small Business
Division of America's leading defense industrial association
promoting national security. NDIA has 95,000 members worldwide,
more than 1,700 corporate members, and nearly 900 Small
Business Division members.
In addition to volunteering as the chair of the NDIA Small
Business Division, I am a small business owner whose company
has supported DOD since 2001. I am also a former Federal
Government contracts professional, which means I am kind of
bilingual; I speak English and I speak Federal acquisition.
In fiscal year 2010, DOD awarded over $61 billion in prime
contracts to small businesses. I am here today to talk about
some of the challenges that small businesses face in doing
business with DOD.
One of those challenges is bundling. We know why DOD
bundles contracts. There was a war on two fronts, increasing
budgets and a stretched acquisition staff. Bundling appeared to
be a logical answer to meeting the wartime requirements. We are
now in a different time, however, and different solutions are
required.
DOD is very concerned, and rightly so, with avoiding what
it calls a ``hollow force'' inside the military. I believe the
Department ought to also be concerned about a hollow small
business industrial base. One of the acquisition approaches
bringing about this hollow small business industrial base is
the increased use of bundling.
Let me give you an example of how bundling hurts small
business. Bundling puts small businesses in a dependent
subcontracting role, well-hidden from government
decisionmakers. It keeps us at arm's length from the government
program managers who set the requirements. It also means that
the government contracting leaders who make all the acquisition
strategy decisions do not see the small businesses who are
performing the work under the primes.
But bundling contracts not only hurts small business, it
hurts DOD. Bundling means the government pays twice on
overhead; it pays for the prime and again for the sub. But more
important than dollars, bundling hurts the government by
attacking quality. As DOD is awarding more and more IDIQ
[Indefinite Delivery, Indefinite Quantity] task orders based on
the lowest price, the large primes are putting the squeeze on
small businesses. This may mean lower costs for DOD, but at
what ultimate cost? Don't get me wrong, lower prices are not
bad, but where are the cuts coming from? Are they coming from
the prime's profit or from the small businesses?
In an effort to stay alive, small businesses will generally
cut quality or leave the defense industrial base entirely. Both
decisions ultimately result in lower-quality products and
services in support of the warfighter.
Bundling is an acquisition approach, and it is a symptom of
a much larger issue at DOD, and that is the perception of small
business within the Department. It is an issue that requires
the meaningful inclusion of small business in all funded
requirements. It needs to be the responsibility of three
players: the requirements community, which has the need and the
money and forecast requirement; the acquisition community,
which commits the funding and sets the acquisition strategy;
and the small business directors, who have the responsibility
to meet the Federal small business goals.
Through deliberate organizational approaches and strategic
cultural changes, DOD can ensure maximum small business
participation, smartly stretching limited budgets to meet our
Nation's defense and security needs.
Thank you again for the opportunity to speak, and I am
happy to take any questions.
[The prepared statement of Ms. Hillmer can be found in the
Appendix on page 41.]
Mr. Shuster. Thank you.
And, with that, Ms. Schubert, you are recognized.

STATEMENT OF LYNN M. SCHUBERT, PRESIDENT, THE SURETY & FIDELITY
ASSOCIATION OF AMERICA

Ms. Schubert. Thank you, Chairman Shuster and the
committee, for inviting us here to testify on this critical
issue.
The Surety & Fidelity Association [SFA] is a trade
association of more than 450 insurance companies who write
surety bonds. They write the vast majority of surety bonds
written here in the United States, as well on core projects
around the world. We also are a rating agency and licensed by
each insurance department across the country. We work closely
with Federal agencies on surety issues and particularly well
with the Corps of Engineers.
One of the many requirements for performing construction
projects for the DOD, as well as other Federal agencies, is to
provide surety bonds to protect the taxpayers and workers,
subcontractors, and suppliers on construction projects. For
small and medium-sized contractors, this requirement provides
both protections and challenges.
There is good public policy for the universal requirement
of surety bonds on public construction projects. These
performance and payment bonds guarantee that the project will
be completed and that the subcontractor suppliers and laborers
on the job will be paid. Contractors on DOD projects over
$150,000 must be able to provide these required bonds. If the
contractor defaults and additional funds are needed for
completion and to pay the subcontractors and workers, the
surety pays the excess costs.
There is a direct connection between a contractor's
capability and its bond ability. There are a number of things
DOD can do to increase both that capability and the bond
ability.
If a contractor is bidding for a job that is too large for
its business to perform, it will have difficulty in obtaining
the surety bonds that were required. Over recent years, the
size and dollar value of contracts being let by DOD has
increased, and, almost by definition, small and medium-sized
contractors cannot perform those large contracts. Therefore,
many of the contracts from the DOD are just simply too large.
Also, as you have already heard, bundling is a tremendous
problem with DOD projects. While this may assist in
administration of the contract for the DOD, it directly impacts
the ability of small and mid-sized contractors to perform the
contract and, consequently, to get the required surety bonds.
To address the needs of small businesses, Federal
procurement rules should contain both mandates and incentives
to break construction contracts into smaller parts.
First, Federal construction contracts need to be subject to
the current anti-bundling regulations. Unfortunately, there is
a recent case that holds that construction contracts are not
even subject to the existing anti-bundling regulations, and
that needs to be changed by legislation.
SFA also recommends that a Federal agency letting
construction contracts should let 5 percent of its total budget
in contracts of no more than $5 million.
Third, the projects that are set aside for small businesses
need to be of a size that small businesses can perform.
And, fourth, the Joint Venture and Mentor-Protege Programs
must be allowed to work more effectively. The current Federal
regulations lack clarity and standardization among the
procuring agencies as to what arrangements are acceptable. In
addition, the regulations present a disincentive for smaller
contractors to participate in Federal construction projects
with larger contractors as joint ventures or with the Mentor-
Protege Program. SFA suggests that small businesses should not
lose their status and be disqualified from bidding on small
business opportunities because of their participation in these
programs or because surety bonds were issued based on the
strength of the larger contractor joint venture program. The
larger contractor's indemnity to the surety for losses under
the bond should not threaten the small contractor's status.
What happens is you have the partnership, and if a surety
is allowed to use the financial status of the larger contractor
to begin to develop a relationship with the smaller contractor,
ultimately they will develop a surety relationship for that
smaller contractor, who will be able to bid individually
without a joint venture or as part of the Protege Program.
We also urge Congress to look at improvements to the SBA
Surety Bond Guarantee Program. We have worked very closely with
the SBA over the years on improvements that are necessary, and
quite recently as well. And I believe legislation will be
introduced, and we urge you to support that legislation.
If you are interested, we work very closely with the
Department of Transportation and other agencies on programs to
assist small, emerging contractors in getting surety bonds. We
would be more than happy to roll out a program with the DOD for
DOD contractors as well.
Last two other points. There is an automatic increase in
the Miller Act threshold, which is the threshold below which
bonds are not required, that has been put in place, and it has
exemptions in there for certain statutes. The Miller Act needs
to be added to that exemption. And all of the details on that
are in our written testimony.
And last, there is a bill pending in Congress, H.R. 3534,
called the ``Security in Bonding Act of 2011'' that would
ensure that the small and mid-sized contractors who are
adversely impacted by fraudulent sureties would no longer have
to face that. And I urge you to look at that bill and consider
it when it comes to the House.
Thank you very much.
[The prepared statement of Ms. Schubert can be found in the
Appendix on page 48.]
Mr. Shuster. Thank you very much.
With that, Mr. Larsen, if you have an opening statement.

STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE FROM
WASHINGTON, RANKING MEMBER, PANEL ON BUSINESS CHALLENGES WITHIN
THE DEFENSE INDUSTRY

Mr. Larsen. Thank you, Mr. Chairman. And we had a great
CODEL [congressional delegation], and I appreciate your
leadership on that CODEL. And it was good to see several of the
Members be able to attend all or part of it and really provide
good further insight for us out in the field about what our
small businesses are facing as part of their contracting with
the DOD.
I have a statement I will enter for the record, but I just
want to make a few key points.
A key message that has been shared by a lot of the
stakeholders that we have met with is the importance of the
defense industrial base to our Nation's security and how
important that base is to ensuring our women and men in the
Armed Forces have the best weapons, the best services, the best
products to do their job, and this defense industrial base is a
force multiplier for our military.
But, as we are even hearing today and we have heard over
this last week as part of the CODEL and in other hearings, this
defense industrial base is a force multiplier but not a
monolithic entity. It has many faces to it. It has large,
multinational corporations; small companies that provide
important subsystems and parts to major weapons programs, as
well as services. And we are even hearing some of the concerns
today expressed that we have heard as part of the trip we just
had.
But I just want to be sure that we continue to focus the
panel on what we feel the key elements hindering small and mid-
sized businesses are in their ability to contract with the DOD
and what steps we can take to open up opportunities with the
Department of Defense.
With that, Mr. Chairman, I will just enter the rest of the
statement into the record, without objection, if that is
possible.
Mr. Shuster. Without objection, so ordered.
Mr. Larsen. Thank you.
[The prepared statement of Mr. Larsen can be found in the
Appendix on page 33.]
Mr. Shuster. Thank you, Mr. Larsen.
And, with that, we will go to questions. I am going to
start off first.
Mr. Shoraka, you said that for 3 years running, prior to
this year, or I guess it would be 2011 where your numbers came
from 22.7 [percent]? Is that from 2011 or 2010?
Mr. Shoraka. 2010.
Mr. Shuster. Okay. Prior to that, you said, for 3 years
straight there was a decline in the percent. What was the
reason for that? Did it have to do with we were at war and
getting contracts out quick, or was there some other reason
that you feel that that was on a decline?
Mr. Shoraka. The numbers for 2009 and 2010 showed 2
consecutive years of increases.
Mr. Shuster. Right.
Mr. Shoraka. Before that, there was 3 years of declines.
I would say that, in the last several years, there has been
a high priority given from the Administration to small business
contracting, from the President and his advisor, Valerie
Jarrett, having quarterly meetings with Deputy Secretaries from
each of the agencies. And I think that has had a significant
positive impact on the agencies meeting their goals.
Mr. Shuster. Right. And who were those business meetings
with you said?
Mr. Shoraka. The quarterly meetings are White House
initiatives with all the Deputy Secretaries from each of the
CFO [chief financial officers] agencies, the 24 agencies.
Mr. Shuster. Okay.
And, Ms. Hillmer, you said that the government is paying
twice from a prime to a sub. Can you sort of explain why you
think they are paying twice?
Ms. Hillmer. Sure.
The prime contractor has the main contract, and they have
their own overhead structure and the profits requirements that
they need to meet. Small businesses who are the subs to these
primes, we have our own overhead as well. So you are paying--or
DOD is paying for our overhead as well as the prime's overhead.
Whereas if they came to us directly and contracted, it would be
one overhead----
Mr. Shuster. Right.
Ms. Hillmer [continuing]. But it requires more
administration on their part.
Mr. Shuster. Right. And you don't feel--I mean, I think the
idea behind subbing it out is you lower your overhead because
you are going out to a subcontractor, but you don't feel that
is happening there. Their overhead is their overhead; they are
going to--they are subbing it out because it is a way for them
to increase their profit as well.
Ms. Hillmer. That is exactly correct.
Mr. Shuster. Okay.
And as we are moving forward with this panel, we see that
when the Office of the Secretary of Defense [OSD] focuses on--
we look at the MRAPs [Mine Resistant Ambush Protected vehicles]
and some of the other products that had to get out there
quickly, do you believe that the Office of the Secretary of
Defense, that Small Business Programs, is focused enough on
working with the small businesses?
You mentioned there were some, here, White House
initiatives. But at OSD, is there enough focus on small
business, do you believe?
Any one of you can all comment on that if you care to.
Mr. Shoraka. If I may first?
Mr. Shuster. Sure.
Mr. Shoraka. I think certainly when we talk about the last
fiscal year and looking at the continuing resolutions at the
end of the fiscal year, some challenges obviously--that
presented some challenges. But there was very close
collaboration between our agency as the SBA along with the
Department of Defense, along with their Office of Small
Business as well as their OSDBUs. And I think, moving forward,
we have identified opportunities to continue where we left off
last quarter of last year and adding additional identification
of opportunities.
As an example, we talk about our procurement center
representatives, which are SBA officials who sit at the most
active buying activities that the DOD has. So the procurement
center representatives identify opportunities where small
businesses should be participating. And if they don't go small
business set-aside, they can object to that.
Mr. Shuster. And what happens if they object?
Mr. Shoraka. They can object, and there have been cases
where the contracting officer has turned around and made a
portion of it small set-aside. If the procurement agency does
not agree, we can file for an appeal, which raises it up to a
higher level.
Mr. Shuster. Okay.
Ms. Hillmer.
Ms. Hillmer. It has been interesting watching the OSD Small
Business Office, having been in DOD for quite a few years. You
know, that office sat vacant for 2 years, and during that time
it really hurt small business. Now they have put a director in
there, and he has worked very hard and made a lot of progress.
He is working very closely with NDIA. They have put a lot of
policies in place. Yet to see how those policies are going to
affect small business per se. But the focus that I have seen at
DOD on small business has been more serious than what I have
seen in a number of years.
Mr. Shuster. Just in the past couple years.
Ms. Hillmer. Yes.
Mr. Shuster. Ms. Schubert, do you have a comment?
Ms. Schubert. We have not worked directly with that office.
We have for a number of other agencies but not with DOD.
Mr. Shuster. And just so I am clear, on surety bonds the
contracting is just on construction?
Ms. Schubert. There are other requirements, there are other
Federal requirements for surety bonds for a particular service:
contracts--there are hundreds of them.
Mr. Shuster. Right.
Ms. Schubert. Construction is the one that is most impacted
by this.
Mr. Shuster. But building a component for a bigger system,
are you required to have a surety bond for that? If one of the
small companies is building, you know, an engine for a Humvee,
does that require a surety bond?
Ms. Schubert. I don't believe so.
Mr. Shuster. Okay.
Ms. Schubert. But I will get back to you with the answer on
that.
Mr. Shuster. Okay.
All right. With that, we go to Mr. Larsen for questions.
Mr. Larsen. First, for Ms. Schubert, can you just explain
again to me on the Mentor-Protege Program, does the protege,
for the sake of definition, become subsumed in the definition
of a larger contractor, and therefore they can lose their
ability to get a surety bond? Is that kind of what you are
saying?
Ms. Schubert. Yes, that is what I am saying. And one of the
major problems is that it is handled differently throughout the
various agencies. There is no one way that it is acceptable or
unacceptable. And what we would love to see is one standard
that, ``This is what is acceptable.''
Not only do they get subsumed, but even if they don't, if
the surety looks to the larger contractor for the bond, then
there is a----
Mr. Larsen. It applies to the protege?
Ms. Schubert. Yes. Exactly.
Mr. Larsen. Only in the DOD?
Ms. Schubert. No. It is a problem throughout the Federal--
all the Federal agencies.
Mr. Larsen. Okay. And then how would you specifically fix
that?
Ms. Schubert. Well, we would suggest that it not make the
smaller contractor lose out on its small contractor status.
What happens is they lose out on their status and then they no
longer can qualify for the set-aside program.
Mr. Larsen. Yeah. To do your bonding, do you need to have a
certain--does the contractor need to have a certain size
contract to do surety----
Ms. Schubert. Well, in the Federal Government, the size
contract where bonding is required is $150,000----
Mr. Larsen. Oh, okay.
Ms. Schubert [continuing]. And above. In States, some of
them are $50,000. Local municipalities, some of them are
$10,000, $20,000.
Mr. Larsen. So those are relatively small?
Ms. Schubert. It is.
Mr. Larsen. Relatively.
Ms. Schubert. It is--no, it is definitely relatively small.
Mr. Larsen. Yeah. Yeah.
Ms. Schubert. And what happens is you have contractors who
are starting to get bonding at $100,000 or $150,000, and then
the project they want to bid on is a $5 million project, and
they don't have the capability to perform the project, and now
they need a surety bond, and therefore they can't get that
bond.
Mr. Larsen. Yeah. Are these largely construction?
Ms. Schubert. Yes.
Mr. Larsen. Yeah. Yeah. Okay.
Ms. Schubert. And there is plenty of that in DOD.
Mr. Larsen. Yeah. And we always want more.
Ms. Schubert. Yes. So do we.
Mr. Larsen. And if we ever get a transportation bill, we
will have more.
Ms. Hillmer, in your written testimony on page 3 and your
oral testimony, you talked about the longer-term cultural and
organizational shift necessary. How can that happen, and how
could we write that into legislation? Give me something to grab
on to here.
Ms. Hillmer. I love it. Thank you for asking.
It really needs to start from the top, as with any cultural
change. If there is any way that Congress can put teeth to the
small business goals, that would be a huge step in the right
direction. Right now, if DOD or any agency doesn't meet its
small business goals, they get hauled before Congress and get
their wrist slapped. But there is no--there is no price to pay
literally.
Ms. Hillmer. So if there were some teeth to those goals,
that would help.
Just having the Secretaries of the services understand the
importance of the small business industrial base and embrace
that and push that down through their services I think would
make a huge difference. The program managers themselves, the
requirers, have to understand the importance of small business
and the role that small business plays.
I believe you mentioned before that the DOD culture is
risk-averse. Nobody gets fired for hiring IBM, right? But for a
small business, there is some risk there. And so they are not
as embracing of small business as they could be. And if the
requirements community were perhaps held accountable for
including small business, they might be a little bit more open
to doing that.
Mr. Larsen. One of the issues we heard about last week--and
we may have heard about it before, and it may have been stated
a different way--had to do with--and I want to see if I can get
this right, and the staff could help me remember this
correctly--it is a difference between, you know, being allowed
to compete and then actually being qualified to compete or
qualified to do the job.
Is that--you are nodding your head, for the record, as if
you understand what I am talking about. So maybe you could help
me out with the problem and what you think the solution is.
Ms. Hillmer. I do understand the problem. And that is
actually something that the OSD Office of Small Business has
been looking into in their market research surveys, to their
credit.
When a commercial company wants to do business with a small
business, they do a lot of research on that small business, and
they make sure that they are not only qualified, they are
viable, they are able to perform. And that is the type of
information that is missing from the market research that is
available to PMs [program managers] and small business
specialists and contracting officers right now.
Mr. Larsen. Okay. All right.
Is it ``Shoraka,'' Mr. Shoraka?
Mr. Shoraka. That is correct.
Mr. Larsen. Can you discuss briefly your view about the
teeth or lack of teeth in enforcing the small business goal,
the goal of achieving the small business contracting goals?
Mr. Shoraka. Sure. I think there are several, I guess,
different layers of that.
As mentioned earlier, there is an emphasis on small
business goals from the White House on down. The
Administration, through Valerie Jarrett, has made it very clear
to each agency that the goals are very important to meet. Our
agency, Karen Mills, holds regular conversations with each of
the agencies to make sure that the goals are met.
Our Deputy Administrator, beginning as soon as the goals
were released this year, has held calls with each of the Deputy
Secretaries, emphasizing, one, the importance of the goals,
but, also, what are the tools to meeting those goals. As I
mentioned, the Small Business Jobs Act gave us some additional
tools. So what are the tools under there? Like, we talk about
bundling and the restrictions on bundling now. We talk about
indefinite quantity contracts and how those can now be set
aside. So what are the tools?
Another thing that I would point out is that, from the
White House initiative, all SESes [Senior Executive Service]
that have in their program procurement activity are now under
their performance metrics graded on understanding the small
business and meeting the small business goals. So that is one
thing we have worked with agencies, to make sure that the
program officers are now also aware of and are rated on the
goals.
Mr. Larsen. Are they rated individually, or are they rated
as an agency and then their budget requests reflect the
achievement?
Mr. Shoraka. With regards to the goals for the agency,
obviously it is rated as an agency. But supervisors, then, that
are doing reviews on SESes, as an example, can rate them
individually.
Mr. Larsen. Uh-huh. Yeah. Thank you.
Thank you, Mr. Chairman.
Mr. Shuster. With that, Mr. Schilling is recognized for
questions.
Mr. Schilling. Thank you, Chairman.
Welcome. Happy New Year. It is good to be back.
I would like to start out with Mr. Shoraka. I am going to
be, here soon, going to be introducing a small business bill
that will address the Mentor-Protege programs. Its main goal is
to allow the SBA to either create a new program for a
qualifying small business or to participate to open up a
current program for them. Anyway, it would also streamline--and
I think that is one of the things that we are getting at.
And I got to say I am very impressed with what is going on
here. I mean, I think we are really getting a good grip here. I
am a small business owner. I kind of jump ahead of myself all
the time.
But it will streamline and make the process easier for
small businesses to participate by setting standard regulations
for each department. Specifically, it will put SBA in charge of
overseeing and setting standard rules, and the department would
implement regulations for all of the programs. This bill would
also require SBA to present data to Congress about the progress
of the programs with regard to how successful proteges are in
general and in terms of obtaining and retaining Federal
contracts.
Currently, 13 departments sponsor programs, which differ in
eligibility and incentives to participate, but each program
exists to pair new businesses with businesses that are more
experienced with Federal contracting. However, success among
departments varies widely.
Do you think something like this would help the small
businesses? And then, in what ways?
Mr. Shoraka. I think we hear about the Mentor-Protege
Program at the Department of Defense oftentimes, and we often
hear that that is one way of engaging mentors along with the
proteges and bringing them on board either as a subcontractor
or on a prime contract relationship. And that has been very
successful.
Different agencies have different models, certainly. At the
SBA, our Mentor-Protege Program as it stands focuses on our
8(a) portfolio, our 8(a) portfolio being disadvantaged firms.
This provides an opportunity for a protege to team up with a
mentor and submit for a joint venture application. Under that
joint venture application, that entity now is considered an
8(a), so they can actually pursue, even though they are joined
together now, a set-aside project. This is an incentive, I
think, for the large business because now they can pursue small
businesses, but it is an incentive for the small business
because now they can be mentored and pursue larger projects.
I think there are different models that work at different
agencies in certain respects, and they have been modeled after
what works at their own agency. I know the Small Business Jobs
Act allowed for the SBA to roll out the Mentor-Protege Program
to our other set-aside programs, and that is something that we
are working on currently.
Mr. Schilling. Very good.
My next question will go to Mrs. Hillmer. DOD has been used
as an example of successful mentor-protege programs, which is
basically why my bill gives them the option to remain separate
if they want to in the program.
Can you speak on your experiences with the DOD's mentor-
protege programs and why they are so successful?
Ms. Hillmer. I have no personal experience with it.
However, I do know other small businesses that do participate.
And it is true, DOD has a very good Mentor-Protege Program in
place. It is well structured, and it is implemented well. So I
think it would serve as a very good example. And I have known
several small businesses that have found it to be very useful
and it has helped them.
Mr. Schilling. Very good.
Ms. Schubert, in reference to the unbundling, can you
give--I mean, we have got some ideas as to why we should
unbundle, but what would be some of the adverse things, some of
the reasons why we shouldn't unbundle? Are there any reasons
why not to unbundle, I guess?
Ms. Schubert. Well, what we hear from the Federal
Government is the ease of administration. They want to see one
contract, one place, one sense of responsibility. And,
unfortunately, that eliminates vast numbers of small businesses
when you do that. And it also does double bill overhead, there
is no question about that.
Unbundling would make a lot more small businesses eligible
for surety bonding, which would allow them to then participate
as general contractors and not just subcontractors on the jobs.
Mr. Schilling. Very good.
Thank you very much.
Mr. Shuster. I recognize Ms. Hanabusa for questions.
Ms. Hanabusa. Thank you, Mr. Chair.
Ms. Hillmer, I understand the theory behind why we
shouldn't bundle, and I agree with you. However, if it is not
one company that is doing it and bundling, then who takes that
role? In other words, say you have one project, you have to
have these different components, and now we have it bundled.
Does it then mean that we increase the government acquisition
staff so they then become responsible, where before we kind of
pushed it onto the prime?
Ms. Hillmer. I have been with DOD a while now, so I am
watching this come full circle. It used to be where DOD did
have program integration, and those program integrators were
responsible for, yes, hiring scores of contractors to do
various types of work under the bigger programs.
So, yes, it does result in more work for the Department of
Defense, quote, unquote. But I just think that the importance
of maintaining a strong industrial base and the small
businesses in that industrial base outweighs that.
Ms. Hanabusa. So that would be the cost that would have to
be paid if we decide that small business is the priority. And
we have decided that. But to implement it--in other words, to
put our money where our mouth is--we would need to then realize
that maybe the unintended intended consequence of that action
is going to be that we are going to have to increase the
acquisition force within DOD so that they would now be
overseeing the contracts in a different manner.
Ms. Hillmer. The short answer is yes. DOD has been
increasing its acquisition workforce, as you know. So I say,
why not?
Ms. Hanabusa. But they are still bundling?
Ms. Hillmer. They are still bundling.
Ms. Hanabusa. It takes a while to refocus.
Ms. Hillmer. Right. It takes a while to turn the ship
around.
Ms. Hanabusa. Thank you.
Ms. Schubert, I understand a lot about surety bonds. And
the interesting part about surety bonds in the construction
context is that it really has been the mechanism by which we
have kept smaller contractors out of large construction
projects, because they just can't bond it. I think one of the
issues that people do not realize is small businesses, when
they actually go out for those bonds, really put a lot of their
personal assets on the line because that bond has got to be
backed by someone's assets. And if you are a big corporation,
you have assets, but usually a small business is an individual.
So that is why, for many of them, they not only do not have the
capabilities of getting the bonds, but they also may not want
to put their home, for example, on the line.
So, having said that, as the consequence of that, is there
an alternative for that surety requirement to keep the small
business contractor being able to bid and to be competitive?
Because for a lot of them one bad project could wipe them out
forever.
Ms. Schubert. Well, that is actually our concern. One bad
project could wipe a subcontractor out forever, as well. So if
you don't have the performance and the payment bonds in place,
then the other people, the other small businesses are
definitely impacted because that protection is not there. In
fact, there is some excellent testimony from a number of years
ago by subcontractors who said they just would not participate
on Federal contracts any longer until the size of the payment
bond was made equal with the size of the performance bond. So
you have both sides of the story.
We represent sureties who write a tremendous number of
bonds for small contractors. We actually have some statistics
that I would be happy to provide for you at a later date in
writing about the number of small contractors that have
bonding.
It is extraordinarily rare that a surety company is
interested in taking somebody's house as collateral,
particularly in this economy, but even in previous economies it
just isn't something that a surety wants to do. They have to
have the capital, but, more importantly, they have to have the
capacity to do the work.
And if you look at--what Ms. Hillmer was talking about is
analyzing the capability and the qualifications of the
contractor. That is what a surety bond does, that is what the
surety does, is they evaluate the contractors to make sure that
they can do the work.
We have a number of excellent programs that actually help
small contractors get their first bond.
Ms. Hanabusa. So you are acting like a pre-qualifier for
the government as well, is what you are saying, by having that
contract?
Ms. Schubert. Correct. And that is why the requirement was
put in place in the first place, was contractors not
performing----
Ms. Hanabusa. But most of the big contracts, like, for
example, in Hawaii, they have to be able to bond a 50-year
project.
Ms. Schubert. A 50-year project?
Ms. Hanabusa. Fifty. That is the way military construction
works in Hawaii. The housing is built on a 50-year project. So
there are very few companies who are able to bond a 50-year
housing project.
Ms. Schubert. That is correct. I would recommend that you
change the requirement--because you are not going to get
contractors to bond 50 years.
Ms. Hanabusa. Congress did it well. I wasn't here, but they
did it well. And there are few who qualify for that.
Ms. Schubert. We would be happy to help with that.
Ms. Hanabusa. Thank you.
Ms. Schubert. The direct answer to your question is there
are alternatives. You are allowed to post letters of credit,
you are allowed to post assets. And those assets have to be
pledged to the Federal Government, and they are put in a
federally insured financial institution.
It is much more difficult to do that for a contractor than
it is to get a surety bond. That is why we like working through
the mentor-protege programs and joint ventures to try and
assist those contractors.
Ms. Hanabusa. Thank you very much.
Thank you, Mr. Chair.
Mr. Shuster. Mr. Runyan is recognized for questions.
Mr. Runyan. Thank you, Mr. Chairman.
And, Ms. Hillmer, as we go through this, in talking,
obviously, you say the double charge on bundling--and we get
that, because it is a redundant overhead on both sides. But
with your experience with acquisitions and contracting
officers, as we have been through many of these hearings, a lot
of time, and you mentioned it too, that there is no history, no
research, and they are afraid to take that step and give them
that contract. Therefore, a lot of the subs actually have to go
through the primes to even get their foot in the door.
And a lot of times--and we experienced this out in
California--a lot of times the subs will just get bought up by
the primes, and their intellectual property [IP] and everything
will just disappear, and it is not getting to the DOD.
How do we deal with the lack of background and the lack of
the acquisition or the contracting officer being out there and
being exposed also? There has to be a way we can help that
process.
Ms. Hillmer. That is a very good question, and it is a
difficult one to answer. I mean, I have been wrapping my brain
around it, the division has been wrapping their brains around
it. We are trying to come up with the answer to that.
Part of it is about market research. Right now, DOD--none
of the military services have really sufficient market research
tools. How to get the small businesses to--how to get DOD to
take that chance on a small business, that is part of the SBIR
[Small Business Innovation Research] program, too, SBIR--which,
by the way, thank you very much for reauthorizing that. It has
made a huge difference to our members, and we are really
appreciative. So SBIR is a good way to get some of the new
technology into DOD.
How to get new services and approaches and get DOD program
managers to take that chance? Maybe it is part of the culture
and rewarding them for taking chances and bringing in small
business and creating a different kind of incentive program.
You know, those are all things we have been thinking about.
There is no clear-cut answer. It is a tough one. It is a tough,
tough nut to crack.
Mr. Runyan. I agree. And you hear it at every field hearing
we have, and that is a frustrating aspect. And it is a big
reason why this panel was put together.
Ms. Hillmer. And I can tell you, with the bundling issue
and IDIQs, the increasing use of IDIQs, you are not getting
those small businesses involved who haven't had past
performance with DOD. None of those companies are invited to
the table. So you are missing out on an entire possible
industrial base there.
Mr. Shuster. Which companies are not invited did you say?
Ms. Hillmer. Small businesses who don't have any experience
in doing business with DOD. Because the primes who are going
after these large IDIQs, the small businesses they want on
their teams, just like everybody, they want them to have
experience and past performance that they can use to win the
work. And if you don't have past performance with DOD, you
don't get invited to the party.
Mr. Runyan. Thanks.
I yield back, Chairman.
Mr. Shuster. Ms. Sutton.
Ms. Sutton. Thank you very much, Mr. Chairman. I was sorry
I had to miss the field hearings. I know that they were
tremendously informative, and I am looking forward to
gathering----
Mr. Shuster. If you will yield for 1 second?
Ms. Sutton. Certainly.
Mr. Shuster. We brought up, you know, one of the topics--I
think we brought up a number of times the topics we learned
about corrosion. And, in fact, we brought it up to the
chairman, and he looked at us and said, ``How much?''
Ms. Sutton. I know. I am telling you, I am so proud. Thank
you so much for doing that. There is a lot of money to be saved
and progress to be made by mitigating and preventing corrosion.
But I digress. This has been very informative, as well, and
I appreciate it.
And I just want to clarify, Ms. Hillmer, I think that you
said a few moments ago that you notice that the focus on small
business in the past couple of years has been better, has been
notably better. Is that correct?
Ms. Hillmer. Within DOD, since they have the new director,
there is a focus. And they have actually elevated him, directly
reporting to the AT&L [Acquisition, Technology and Logistics].
Ms. Sutton. Well, I appreciate hearing that. That is always
the kind of news we want to know.
There were some things that were discussed already that I
would just like a little more clarification.
Ms. Hillmer, let me ask you, on page 3 of your testimony,
you talk about how the whole, the IDIQ contracts based on
lowest price, the large primes are putting the squeeze on their
smaller subcontractors. I would just like to explore that a
little bit more. You talk about how that may reduce the quality
or leave the defense market--they may leave the defense market
space entirely.
But could you just give me, without naming names, some sort
of example of how quality might be at risk and anything else
you want to talk about along these lines?
Ms. Hillmer. Actually, I would like to give you a personal
example of my own company, if I could.
Ms. Sutton. Certainly.
Ms. Hillmer. We spent $8,000 to participate in a proposal,
an IDIQ proposal. And the large prime won, and as soon as they
won, the first thing they did was come back to us and say, ``We
need to slash your rates.''
My company prides itself on the quality of the products and
services that we provide to DOD. It is very different than some
of the large contractors. We are very focused on what we do and
very much personally involved and very creative. Doing low-
quality work doesn't interest us, and, quite frankly, I think
it hurts the Department of Defense.
Ms. Sutton. Sure.
Ms. Hillmer. And in order for us to continue with that
contract, we would have had to cut our salaries, cut
everything, and hire people who are not as creative and
talented as the people that we have. And so we simply removed
ourselves from the contract. So we will not be participating
and providing our services under that contract to the Air
Force.
Ms. Sutton. I appreciate that. Does anyone else have a
comment on that? Okay.
Sir, you were talking about the ratings when goals aren't
met, and Ms. Hillmer, you were also talking about the need to
change, it starts at the top, and the need to sort of implement
effective measures to make sure that those goals are met. Can
you tell me how the ratings translate? I guess part of being an
incentive or disincentive for certain behavior, so if a goal
isn't met, what is the result? What happens?
Mr. Shoraka. Well, first of all, I should say that since
there is emphasis on this from higher, from the White House
down, there is a huge incentive, I think, for the agencies to
meet the goals. But having said that, the score cards are
published. If the goal is not met, their grade reflects that.
However, the agency is also required to develop a plan, which
we negotiate and which we agree to, on how they will meet their
goals moving forward. In other words, we didn't meet our goals
last year; this is why, and this is how we are going to meet
them next year. And that plan is developed in consultation with
us.
One point that I would add with regards to the
subcontracting, I just wanted to add that under the Small
Business Jobs Act, it does provide four additional provisions
for prime contractors to meet their subcontracting goals, so
there is more teeth for prime contractors to meet their own
subcontracting goals that they present in their proposals.
Ms. Sutton. Would you like to add anything, Ms. Hillmer?
Ms. Hillmer. I think your question was, what are the
ramifications if they don't meet?
Ms. Sutton. Right.
Ms. Hillmer. And what I am hearing is that the
ramifications are you have to report back and come back with a
plan. I think that money talks, and if you affect a budget,
they will feel it.
Ms. Sutton. Thank you.
Mr. Shuster. Thank you.
With that, Mr. West is recognized for questions.
Mr. West. Thank you, Mr. Chairman, and also Ranking Member,
thanks to the panel for being here.
You know, one of the important things you brought up was
the invite to the table. I did, you know, 22 years with a fun
organization called the Army. You know, when you go to the
Association, the United States Army trade show, if you want to
call it that, one of the things that I think we need to focus
on, you don't see a lot of the small businesses there, you
know.
Do we have something or can we start something like this
AUSA [Association of the United States Army] that you see up in
Washington, DC, or down in Fort Lauderdale, that can go around
regionally, and we can start--instead of focusing on the big
contracts, can we focus on, you know, small businesses, and we
can highlight them, and especially some small businesses that
don't have the experience so they can get that invite to the
table; is that something that we are looking at doing with some
of these trade organizations?
Mr. Shoraka. Thank you.
If I just may add, with regards to sort of matchmaking
events, et cetera, we are working with the Department of
Defense to ensure that we increase matchmaking events. As has
been mentioned, they have a new Office of Small Business
Programs director. I should also mention that the
Administration has asked that senior level officials, Senate-
confirmed officials participate in at least two small business
matchmaking events from each agency, so that should increase
the opportunities for small businesses to participate. And I
think that level of commitment from the agency would encourage
small businesses, would encourage program buyers at the agency
to be present, but it would encourage small businesses to
participate as well.
Mr. West. Well, the AUSA winter symposium is coming up for
Fort Lauderdale, which happens to be our district. Is there any
kind of way that we can say to AUSA, you need to earmark out,
you know, ``X'' amount of space on that floor for some of these
local small businesses that do DOD type of contracts? I can
name about 10 off the top of my head. But is that something
that we can go to them and, you know, try to get them to do?
Mr. Shoraka. I wouldn't know the answer to that right off
the top of my head, but I can certainly work on that when I get
back to the office and get an answer to you.
Mr. West. Ms. Hillmer.
Ms. Hillmer. Well, I can speak from NDIA's perspective.
Actually, what we are doing this year, because NDIA has an
annual small business conference, we are actually making it
more regionalized, so we do attract the regional small
businesses.
Speaking from a small business point of view, the reason
you don't see those small businesses at these bigger events is
because of the cost. When I first started my business, I spent
a lot of money attending a lot of events, a lot of matchmaking,
things like that. Didn't result in any business.
So I think what we have to do, and to the Department's
credit, Department of Defense, they are actually looking at
this as well, how do you make these events a return on
investment for small businesses who participate? How do you
measure that? And, quite frankly, just ask them, did you get
any business out of this, a year later, 2 years later, things
like that?
Regarding your specific question, can you ask an
association to set aside some space or some time for small
businesses? I say, try it. Let's see what happens.
Mr. West. Okay. You guys try that, and I will try it on my
end.
The other question I have real quickly, a good friend of
mine, Colonel Pete Newell, started a great organization with
the Army, called the Rapid Force Initiative, where they go over
into these combat theaters of operation, they find out
immediately the type of things that the men and women on the
ground need. And they come back, and they go looking for small
businesses that can provide those type of goods and services
right off the shelf. What are we doing to try to, you know, use
that type of small business innovation to cut down on this
procurement and acquisition process that we have that, you
know, can go from, you know, until ad infinitum, ad nauseam, so
is there something we can do with that to take what Colonel
Newell has with the Army and extend that out for the other
branches of service or maybe make that a DOD type of, you know,
agency?
Mr. Shoraka. If I can answer, with regards to the SBA, we
have several cluster initiatives where we have some of them
focused on the Department of Defense, which provides incentives
for identifying opportunities, as you have mentioned. Also, as
was mentioned earlier, the SBIR and STTR [Small Business
Technology Transfer Program] initiatives, and with the 6-year
extension that provides, you know, a level of comfort for small
businesses and certainty. I think that encourages them to
participate in the program, and I would say that with the
increase in the grants, that should also encourage them to
participate in the program.
Ms. Hillmer. I believe DOD has something called a Rapid
Innovation Fund [RIF], where they are specifically targeting
some small businesses and helping them get through--they have
really neat products and services--and helping them get through
the procurement process without having to jump through all the
hoops. But I like your idea very much, and I think we should
try to do it.
Mr. West. Very well.
Thank you, Mr. Chairman. I yield back.
Mr. Shuster. Thank you.
As we talked a little bit about here, I said in my opening
statement and a couple other members mentioned about the
Department of Defense, the project, the program managers being
risk-averse, something was said, put some teeth into the
mandates. I always get a little concerned when we are more
forcing things down, sometimes you force bad decisions, and I
think somebody was talking a little, how do you reward taking
those risks? And in Washington, DC, everybody is concerned
about taking a risk because The Washington Post or the Los
Angeles Times or one of these newspapers pile on and say how
terrible it was that this program manager or this Member of
Congress or this company took a risk to try to do something,
and obviously, it didn't succeed. So as I am going through this
process, and I will just try to throw this idea out there. You
know, we have heard about, today we talked a lot about not
enough market research out there, you know, DOD has to, they
want to deal with somebody they have got experience with
because they have experience and they know they can perform
something. We have heard a lot about the DCAA [Defense Contract
Audit Agency] and their auditing and how difficult that is, and
so as I am thinking about this and trying to think a little bit
outside the box, is it possible that--there are industries in
America that self-regulate, the financial services industry,
FINRA [Financial Industry Regulatory Authority] is self-
regulatory, CPAs [Certified Public Accountants]; even, God
forbid, the lawyers I think self-regulate to a certain degree.
Is it possible to have an organization that is funded by
industry that, you know, for one thing maybe certifies a
company? Because a lot of the work when you go into--in Hawaii,
we went into, and the arsenal and other places, we have gone
into where a lot of the work they do, they are machine shops,
and you are machining things, but industry all across America,
not Department of Defense, they get things machined and built
all the time that isn't specialized to the Department of
Defense. And sometimes we try to make it that, oh, it has got
to be machined exactly this way or it is not going to fit where
if you are manufacturing any kind of high-performance vehicle
or item, it has got to be machined properly. So is it possible
in your minds to set up an organization that maybe certifies
companies and says, yeah, this company can machine or this
company can manufacture this? Is it possible in that
organization to sort of self-regulate and go in and do the
audits on smaller businesses? And of course, you would still
have--for instance, FINRA has the SEC [Security and Exchanges
Commission] over top of it, and when FINRA goes in, the SEC
sometimes goes in behind and says, no, not good enough or you
need to change.
And I think we do two things, you know, I am saying this
and across the street, if people hear me saying this, you know,
we are going to eliminate a lot of DCAA employees, but push
them out into the private sector, let them self-regulate. I
believe they are going to have a better understanding of small
businesses and, again, funded by, but FINRA's been working for
70 years very well, as well as some of these other agencies, so
when you talk about changing the culture over there, when you
talk about how do we look at this differently, does that--when
I say this thing to you, though not fully created in my mind,
but is it completely out of the box, it is too crazy, or is
that something that you see as potentially workable?
Ms. Hillmer. It is an interesting thought. I hadn't thought
about self-regulation. The biggest negative I could see to that
would be competition. Once you start regulating, giving the
seal of approval, then those companies that don't have that or
don't know how to get it or can't afford it because there will
be a price associated with it, then you kind of maybe knock
them out.
Mr. Shuster. But we are doing that already, aren't we, if
you don't know how to get into DOD? And this is, you know, when
I look at the FINRA model, I keep coming back to the industry,
you want to be a financial broker in this country, you have got
to go through the process and get certified by FINRA, and then
you can sell the various products, where same thing,
especially--you know, I am not concerned about the Boeings and
the Lockheeds of the world, they have got it figured out. But
it is very difficult for, and I have got small businesses come
to me in my district all the time, how do I get business with
DOD? And they think there is some magic, but it is get in there
and pound away and go through the process, and it may take 3
years, 5 years, you know, 10 years to get business.
Mr. Shoraka. The only comment that I would make is, you
know, my concern would be an additional layer of work for the
small business. I mean, we hear about small businesses and
getting on a schedule or small businesses and getting into the
8(a) program, as an example. Another layer of certification I
would maybe be concerned about that or costs associated
thereof.
Another thing, just with my perspective, I come out of the
small business government contracting world myself before I was
appointed to the SBA, and I know, as a small business that was
a government contractor, I know that the DCAA oftentimes gets
thrown under the bus, but they are for--and, you know, this is
the perspective of the SBA, they are, you know, stewards of the
taxpayer dollars, and I do know that the DCAA has certain
restrictions that don't necessarily always apply to small
businesses under contracts, from contract-to-contract
provisions, but as stewards of the taxpayer dollars, they are
sort of tasked with doing that work, but again, with the
comment with regards to a certification process, that is the
only thing I think that I would add.
Mr. Shuster. Ms. Schubert.
And with that, I believe Ms. Hanabusa has further
questions.
Ms. Hanabusa. I just had a follow-up for Ms. Schubert.
Ms. Schubert, is there like a percentage that is the cost
of a surety bond on a project?
Ms. Schubert. There is. A premium on a surety bond is
somewhere about 1 percent of the contract price or below.
Ms. Hanabusa. So according to your testimony, you know, you
were taking issue with the fact that the council went from
$100,000 to $150,000, and you felt that it was going to leave
unprotected any sub [subcontractor] that was doing work, I
guess, on a $150,000 contract, am I reading that correctly?
Ms. Schubert. Yes, that is correct.
Ms. Hanabusa. That would be a sub to a contractor is a
$150,000 contract?
Ms. Schubert. Right.
Ms. Hanabusa. So what if we were to go to a situation where
we unbundled and they all became general contractors, then
wouldn't a lot of the smaller guys also have to come up, if
they were all about $150,000, that they would then all have to
come with their own surety bond and payment bonds attached to
them versus a general contractor who we assume would have that?
Though I do know some generals who actually require certain
large subs to carry subcontracting bonds as well, and the ones
I was referring to are really the smaller subcontractors who,
under the terms of their contract with the general, have to
also carry surety and payment bond requirements, but if we were
to, quote, unbundle it, wouldn't we result with more surety
bonds out there, too?
Ms. Schubert. There wouldn't be more surety bonds, you
would just have different contractors who had the contracts up
to the 150, you are talking about the $150,000.
Ms. Hanabusa. Right, but if they were in this normal
structure, you probably would have one large contractor who
would have a surety bond, and the subs, probably depending on
how their general felt, may or may not be required to carry the
bonds, correct?
Ms. Schubert. Right. And you could end up actually, as
backwards as it sounds, you could end up with more surety bond
requirements that way. The bond requirement covers the entire
contract price, so say you have a $500,000--make something
easy, a million dollar contract, you have one surety bond, and
it is based on a million dollars. You divide it up into
$150,000 contracts, you would still have the same overall value
of surety bonds out there, it is just they would be provided by
smaller contractors.
Ms. Hanabusa. Different?
Ms. Schubert. From different people, yes.
Ms. Hanabusa. Do you know what the percentage rate on the
call on those bonds are, from your industry standpoint?
Military construction, for example, what is the failure rate
that we are looking at that has called upon the bonds?
Ms. Schubert. I can provide those statistics for you. That
is one of the things our organization does, and one of the
things to keep in mind is the point of--there are two points to
the bond. One is the prequalification, as you described it very
accurately.
Ms. Hanabusa. Right.
Ms. Schubert. And then the second is to pay if, in fact,
the surety is wrong with their prequalification, they then turn
around and pay, so I can provide the loss ratios for you.
Ms. Hanabusa. Yes.
Ms. Schubert. And the premium volume, and we can--the way
it is divided up is Federal versus non-Federal. I don't believe
that we have statistics specifically on military, but I can get
you as much detail as we have.
Ms. Hanabusa. Do you by any chance have statistics--this
has been a curious thing for me. When they were in Hawaii, they
got to see our example of corrosion, which was the stadium. And
having been part of that litigation, I can tell you the
litigation costs on many of it--I had a surety company--on the
surety issues far exceeded the actual original construction
costs, so do you have statistics that when we start to do all
of this, at what point is it, you know--did all--everything
associated with the bond exceed the actual benefit that we
receive? In other words, did government ever have to step in,
finish the project anyway? Do you have any statistics like
that?
Ms. Schubert. No. We have plenty of cases, I am sure, going
both ways on that, and I would be happy to sit down and talk
with you about that.
Ms. Hanabusa. Sure, I would appreciate it. Thank you.
Thank you, Mr. Chair.
Ms. Schubert. Could I also--one suggestion that might
address not these questions but the earlier question, the SBA
surety bond guarantee program is a very useful tool for small
contractors to get the bonds, so we work very closely with SBA
on that, and if you would like, we could also sit down with you
about the changes that are necessary so we can help increase
the number of contractors who can get the benefit of the bond
guarantee program.
Ms. Hanabusa. I would appreciate that. Thank you.
Ms. Schubert. You are welcome.
Mr. Shuster. Thank you, Mrs. Hanabusa, and thank you for
hosting us out there in Hawaii.
And also, Ms. Sutton, we also saw examples of corrosion in
Palmdale with some of our Air Force fighters, and they are
telling us that coming in from Hawaii from Hickam Air Force
Base, F-22s are going to come in, and because of the climate
there, as well as some other places in the country, corrosion
is a huge problem, so you were on our mind.
No, I think of solving problems, and that is a big problem
to solve.
Mr. Larsen. No, we don't have problems like that in the
Northwest also, if anybody wants to send the stuff there, it is
fine.
Ms. Sutton. It is good because we can actually--we do it in
the United States.
Mr. Shuster. Absolutely, absolutely.
Well, again, I want to thank all of our panelists for being
here. Appreciate you taking the time and providing us with your
insights. And again, we are going to continue to do our work
here. We are charged with coming up with some concrete language
for legislation to help improve the environment for the folks
that are working in the defense industrial base. And it is my
thought that this--we were set up for 6 months. It is my
thought this is going to take more than 6 months to really get
at the core because when we talk about things like changing the
culture and how do you get people to not be risk-averse, it is
a difficult challenge. But it is something I think we are going
to need to do, especially facing the kind of budget constraints
we are going to have for the foreseeable future and also the
need to continue to come up with new and better ways to defend
our country, to give our warfighters the tools they need to
keep America safe and secure.
So, again, thank you for being here today. Appreciate your
time.
And the hearing is adjourned.
[Whereupon, at 4:17 p.m., the panel was adjourned.]
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