[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
CONTRACTING AND THE INDUSTRIAL BASE III:
REVERSE AUCTIONS, VERIFICATION AND THE
SBA'S ROLE IN RULEMAKING
=======================================================================
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 19, 2015
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-007
Available via the GPO Website: www.fdsys.gov
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93-733 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 VELAAZQUEZ, 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
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 Velaazquez............................................ 2
WITNESSES
Mr. Daniel I. Gordon, Senior Advisor, Government Procurement Law
Program, The George Washington University Law School,
Washington, DC................................................. 3
Ms. Amber Peebles, President, Athena Construction Group, Inc.,
Dumfries, VA, testifying on behalf of Women Impacting Public
Policy......................................................... 5
Mr. Davy G. Leghorn, Assistant Director, National Veterans
Employment & Education Division, The American Legion,
Washington, DC................................................. 7
Ms. Margot Dorfman, CEO, United States Women's Chamber of
Commerce, Washington, DC....................................... 9
APPENDIX
Prepared Statements:
Mr. Daniel I. Gordon, Senior Advisor, Government Procurement
Law Program, The George Washington University Law School,
Washington, DC............................................. 19
Ms. Amber Peebles, President, Athena Construction Group,
Inc., Dumfries, VA, testifying on behalf of Women Impacting
Public Policy.............................................. 25
Mr. Davy G. Leghorn, Assistant Director, National Veterans
Employment & Education Division, The American Legion,
Washington, DC............................................. 30
Ms. Margot Dorfman, CEO, United States Women's Chamber of
Commerce, Washington, DC................................... 39
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
CONTRACTING AND THE INDUSTRIAL BASE III: REVERSE AUCTIONS, VERIFICATION
AND THE SBA'S ROLE IN RULEMAKING
----------
THURSDAY, MARCH 19, 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, Hardy, Velaazquez, Chu,
Clark, Meng, and Lawrence.
Chairman HANNA. I will call this hearing to order. Welcome
to our third hearing looking at businesses and our industrial
base. Today we are going to focus on three important issues.
First, we will hear about ongoing issues with veterans and
Service disabled veterans' contracting programs. Second, we
will discuss reverse auctions. Last Congress, I introduced
legislation addressing reverse auctions for construction
service contractors.
However, today we are going to hear about the systemic
issues in reverse auctions. Finally, we will hear about
challenges to timely implementation of small business
contracting and legislation.
Each of these issues is important to inclusion of small
business in our industrial base. With a process for verifying
as a Service disabled veteran owned small business being overly
burdensome, legitimate veterans choose to be absent themselves
from the federal marketplace.
For example, having two different definitions of Service
disabled veterans' owned small businesses means we are forcing
our veterans to resolve the tensions that lawmakers and
regulators cannot solve or will not solve.
Likewise, when reverse auctions are used properly, they can
save taxpayers dollars. Unfortunately, some agencies have used
reverse auctions in a manner that evades vigorous competition
in contractor professions.
Finally, the SBA and its Federal Acquisition Council, when
they fail to act, it means contracting officers and small
businesses have two conflicting sets of rules. Consequently,
small businesses cannot plan and they often cannot compete for
work.
While the rulemaking process takes time, there is simply no
excuse for the fact that nearly five years after Congress
passed the Small Business Jobs Act, small business is still
waiting for regulation. Given the bureaucratic delay, it is no
surprise that many small businesses opt out.
I expect as a result of the testimony we receive today, the
Subcommittee will accurately pursue ways to increase
opportunities for small businesses to compete for contracts.
I look forward to hearing from each of you, and I want to
welcome our witnesses. I now yield to Ranking Member
Velaazquez, for her opening statement.
Ms. VELAAZQUEZ. Thank you, Mr. Chairman, for holding this
hearing. Today's discussion continues our ongoing work to help
more small businesses compete in the Federal marketplace.
Earlier this week, the Subcommittee examined small
companies' participation in Federal procurement. Today's
hearing examines another set of barriers that stop small and
disadvantaged companies from winning their fair share of
contracts.
One practice that this Committee had previously examined is
so-called ``reverse auctions,'' which are meant to pit
potential contractors against one another to lower prices.
Unfortunately, reverse auctions have in many cases failed to
introduce or enhance competition.
The Government Accountability Office, for instance, found
that in a single year, Federal agencies conducted 3,617 of
reverse auctions where only one vendor participated and
submitted bids. In this case, the Federal Government is
spending money on a process that does not lower prices or
increase the quality of goods and services.
Beyond reverse options, there are other areas that need
close scrutiny by the Committee if we are to grow small
business' role in the Federal marketplace. Congress has rightly
created a program of targeting projects to veteran owned small
businesses, especially those disabled during their time of
service. In addition to SBA's program, the VA launched an
initiative. However, there are serious concerns about how VA
verifies small businesses operated by eligible veterans. It is
important this program functions effectively.
With bad actors gaming the system, legitimate veteran owned
businesses lose out on contracting opportunities.
More generally, the Committee must examine how well SBA's
rulemaking process functions. Many of the rules the agency has
formulated will boost small business' ability to compete for
Federal contracts. Yet, previous acts of Congress and Executive
Orders have largely hamstringed the SBA's rulemaking process.
Mr. Chairman, this Committee has a long track record of
working in a bipartisan manner, particularly when it comes to
procurement issues. It is my hope we can continue that
tradition to further small business' role as Federal
contractors.
I thank the witnesses for being here today, and I yield
back the balance of my time.
Chairman HANNA. Thank you. Our first witness is Daniel
Gordon, Senior Advisor to the Government Procurement Law
Program at George Washington University Law School.
Mr. Gordon previously served as President Obama's
Administrator for Federal Procurement Policy. Prior to serving
at the Executive Branch, he worked 17 years in the Office of
General Counsel for the Government Accountability Office.
Sitting next to him is Amber Peebles, President of Athena
Construction Group, Inc. Athena Construction Group is a Service
disabled veteran owned HUBZone and woman owned small business
located in Dumfries, Virginia. She is a Marine Corps Service
disabled veteran, and we thank you for your service. She
testifies today on behalf of Women Impacting Public Policy.
Our third witness is Davy G. Leghorn, Assistant Director of
the National Veterans Employment & Education Division, The
American Legion. Mr. Leghorn served as a mortar infantryman in
the Army, and then as a civil affairs specialist. Thank you for
your service, sir.
I now yield to Ranking Member Velaazquez to introduce our
fourth witness.
Ms. VELAAZQUEZ. Thank you, Mr. Chairman. It is my pleasure
to introduce Ms. Margot Dorfman. Ms. Dorfman is the Founder and
CEO of the United States Women's Chamber of Commerce. The
Women's Chamber represents 500,000 members, three-quarters whom
are small business owners and Federal contractors. Through her
leadership, this organization has championed opportunities to
increase women's business careers.
In addition, Ms. Dorfman has an extensive background in
business, including over 10 years in executive positions with
General Mills and other Fortune 500 firms.
Welcome, Ms. Dorfman.
Chairman HANNA. Thank you. Mr. Gordon, you may begin.
STATEMENTS OF DANIEL I. GORDON, SENIOR ADVISOR, GOVERNMENT
PROCUREMENT LAW PROGRAM, THE GEORGE WASHINGTON UNIVERSITY LAW
SCHOOL; AMBER PEEBLES, PRESIDENT, ATHENA CONSTRUCTION GROUP,
INC.; DAVY LEGHORN, ASSISTANT DIRECTOR, NATIONAL VETERANS
EMPLOYMENT AND EDUCATION DIVISION, THE AMERICAN LEGION; MARGOT
DORFMAN, CEO, UNITED STATES WOMEN'S CHAMBER OF COMMERCE
STATEMENT OF DANIEL I. GORDON
Mr. GORDON. Thank you, Mr. Chairman, and Ranking Member
Velaazquez, members of the Committee, very much. It is an honor
to be here this morning.
My name is Daniel Gordon. I am the Senior Advisor to the
Government Procurement Law Program at The George Washington
University. As you probably know, G.W.'s Procurement Law
Program has for more than 50 years been the premier institution
granting degrees in procurement law.
I am going to talk about electronic reverse auctions this
morning. I have had the benefit of learning about them both in
the U.S. context and in a good number of countries overseas
that use reverse auctions frequently, from Russia, to Brazil,
to Bangladesh, to Macedonia.
In many ways, the best document about reverse auctions in
the U.S. is the one you mentioned, Ranking Member Velaazquez,
and that is the December 2013 GAO report. The report is full of
interesting information. For one, the report agrees that
reverse auctions save us money, but points out that we do not
really know how much money, and the data about the savings is
largely not in the hands of our Federal agencies.
Moreover, although small businesses win the majority of our
reverse auctions, GAO points out rightly that it is not clear
that the reverse auctions are increasing the amount of work
going to small businesses. That is to say what would have
happened if we had done it the old fashioned way, without
reverse auctions.
GAO also points out some of the challenges about reverse
auctions, and I would like to focus on them this morning, in
the next couple of minutes.
In my experience, the more you are dealing with commodity,
the more likely there is a good candidate for reverse auction,
but the more you are dealing with something that is a service
and not a commodity service, the more likely you are to be
running into trouble.
Related to that is the way you are going to pick the
winner. If all you care about is price, the reverse auction
probably makes sense. If you are worried about other things,
like performance, quality, staffing, a reverse auction can be a
very problematic way to proceed.
Moreover, GAO gave us good data that shows us important and
problematic developments. As Ranking Member Velaazquez pointed
out, in far too many cases that GAO found, there was no
competition. There was either only one bidder or even if there
was more than one bidder, each one of them submitted only one
bid. The Government was paying a fee to a private vendor even
though it really was not getting any benefit from the reverse
auction.
That brings me to my final significant point, which I wrote
about quite a bit in my written testimony, and that is the cost
and benefits of relying on a private sector company to run
electronic reverse auctions.
In fact, GAO said that one company, FedBid, ran more than
99 percent of the reverse auctions that GAO found on
FedBizOpps, the Government-wide portal. That is pretty darn
close to a monopoly, and it raises some questions. Not that
FedBid has not done a good job.
I have to tell you in my experience, FedBid has done an
excellent job. They have been efficient. They have been
helpful. They helped the Government get savings. They provided
a good platform that works well. They provided administrative
training support. FedBid has done an excellent job.
It is performing a function which is closely associated to
the inherently governmental one, that is to say award of
Federal contracts, and that raises issues. Not only that, in my
experience, FedBid has something of an organizational conflict
of interest. They control the data. They control the
information. They have a financial interest in having as many
reverse auctions as possible, regardless of whether the
procurement is suitable, regardless of whether there is real
competition. They get their fee. It is actually not a high fee,
and as I point out in my testimony, they sometimes waive the
fee.
It is still troubling that Federal agencies, according to
GAO, often do not know they are paying FedBid. That is not a
healthy situation. In my experience, we need to ensure that
these functions are under the control of Federal officials. We
need to have contracting officers with training in running
reverse auctions before they conduct one. They need to be
trained on what we need in reverse auctions, how to conduct a
reverse auction.
As I explained in my testimony, I am not sure that
statutory guidance is always necessary, but at the very least,
we need Government-like guidance, as GAO points out, so that
these reverse auctions, which can be an useful tool, are used
properly.
I would note that GSA now has a reverse auction at no fee
to the users. We need to explore that.
I want to thank you very much for your time this morning.
Obviously, if we have time, I will be delighted to answer
questions.
Chairman HANNA. Thank you very much. Ms. Peebles?
STATEMENT OF AMBER PEEBLES
Ms. PEEBLES. Good morning, Chairman Hanna, Ranking Member
Velaazquez, and distinguished members of the Subcommittee.
Thank you the opportunity to testify today.
My name is Amber Peebles. I am President of Athena
Construction Group, a Service disabled veteran/woman owned,
HUBZone, construction company based in Northern Virginia,
founded in 2003. I served eight years in the Marine Corps.
Last year, Federal contracts accounted for more than half
of Athena Construction Group's revenues. Currently, we have 42
employees.
I am also here today representing Women Impacting Public
Policy, where I serve on its Executive Advisory Board.
First, let me say thank you to the Subcommittee and staff
for improving the contracting rules and regulations pertaining
to small businesses. Under your leadership, the Congress has
enacted much needed changes, increasing access to Federal
contracts for all small businesses, but especially women.
Nonetheless, these hearings make clear more can be done,
including changes to help women meet their contracting goals
for the first time.
While construction related reverse auctions were the
subject of a previous hearing, I would like to briefly share
two experiences Athena Construction Group had with this
procurement process that raises concerns.
In one instance, after significant and costly preparation,
an auction was closed with only seconds remaining. The
contracting officer simply withdrew the requirement. While this
happens occasionally in normal procurements, the additional
costs of preparation for a reverse auction meant the loss was
greater for my company.
In another instance, several rounds of pricing for metals
were required. Not to be overly technical, but a formula is
used to address different price points for different times.
This is standard in the industry. The Web site could not
process the pricing structure accurately. Had this gone through
a normal procurement, the opportunity would not have been
wasted.
We have previously submitted concerns on reverse auctions
in testimony before this Committee, well cited in the GAO
report. We support additional requirements to prevent the
inappropriate use of reverse auctions. In fact, we believe
small business set-asides should not be eligible for reverse
auctions.
Legislation in the last Congress sponsored by Chairman
Hanna and Congresswoman Meng made these changes. We were
disappointed the changes did not make it into law. We encourage
you to reintroduce the bill and persist in its passage.
Many of WIPP's members, including myself, are veterans
running Service disabled veteran owned businesses. WIPP
supports the Federal contracting programs that assist veterans
in engaging in the Federal marketplace.
Given the strong presence of veterans' advocates here
today, WIPP defers to them on the specifics of improving
contracting opportunities for SDVOSBs and veteran owned small
businesses. WIPP encourages this Committee to work with them to
improve the contracting environment for veterans.
Let me take a few minutes to address an issue that
frustrates many WIPP members, the time that lapses between a
law passing and the FAR Council adopting the change in many
instances is too long. While we know the rulemaking process
takes time, it is just common sense that it should not take
years to put a contracting change in place. We should know.
WIPP spent 11 years getting the WOSB program implemented.
Another example is SBA's recent proposed rule on
subcontracting, which took two years to reach a proposed rule
stage. Many women contractors have been waiting for those
changes passed by this Committee because it would result in
additional subcontracting opportunities.
Even after final rules are promulgated by the agency, the
wait for FAR Council adoption could take months if not years.
While we are grateful the implementation of legislation to
remove dollar caps on awards in the Women Owned Small Business
Federal Contract Program was done quickly, it is not always the
case. Currently, women entrepreneurs stand to gain with a
speedy implementation of sole source authority in the WOSB
Program. Every day this policy cannot be utilized is another
day women business owners are disadvantaged by the contracting
process.
Members of Congress, along with the women's business
community have asked SBA to move expeditiously. It is our hope
that when the time comes, the FAR Council will do so as well.
WIPP has two recommendations. One, in our view, it is
logical that FAR Council adoption of a change should happen
concurrently with the promulgation of the SBA's final rule
implementing that change.
Two, SBA should be added to the FAR Council. It seems to us
appropriate that SBA charged with looking after small business
procurements be included in the Council.
Expanding beyond the scope of this contracting hearing, I
want to close with a contracting concern of WIPP. The increased
Federal strategic sourcing efforts in our view represents a
serious threat to the small business contracting community. In
a name, strategic sourcing sounds like a good idea, akin to
good governance. For small businesses, including WOSBs,
however, the trend is eroding the industrial base.
The efforts to maximize short term savings through large,
limited competition contract vehicles have pushed small
businesses out of competition and picked a select group of
winners.
One solution may be to revise how small business
participation is measured by the agencies. Currently, small
business goals only measure the dollars awarded to small
businesses. Equally important is how those dollars are
distributed among small businesses. SBA should consider
expanding its goal criteria to include a participation rate. In
doing so, it will help ensure that a diverse group of
businesses, including women, are engaged in the Federal
marketplace.
Thank you for holding this hearing today, and for making
the contracting environment better for women owned businesses.
I am happy to answer any questions.
Chairman HANNA. Thank you. As you can see, we have votes.
We will just adjourn for about 20 minutes. There are two votes.
Relax, and we will be right back. Thank you.
[Recess]
Chairman HANNA. Thank you. Mr. Leghorn?
STATEMENT OF DAVY LEGHORN
Mr. LEGHORN. Good morning, Chairman Hanna, Ranking Member
Velasquez, and members of the Subcommittee, on behalf of our
National Commander, Michael D. Helm, and the 2.3 million
members of The American Legion, we thank you for this
opportunity to testify today.
The American Legion identifies three main issues that pose
obstacles for veteran owned small businesses: reverse auctions,
differences between Small Business Administration and
Department of Veterans Affairs standards, and exclusion of
veterans from Disadvantaged Business Enterprise Programs in the
Department of Transportation.
On reverse auctions, the Government has a fiduciary
responsibility to treat small businesses fairly and not take
advantage of its buying power and become predatory.
The American Legion appreciates the goal of lowering
Federal expenditures through competitive contracting
initiatives, but we are concerned that misuse of non-
governmental platforms could put veteran small businesses at
risk and limit job creation.
The American Legion is also concerned that reverse auctions
will lead to decreased quality because these platforms
encourage vendors to provide the cheapest product and services
and only to maintain the smallest profit margins to stay
competitive.
The Government is therefore purchasing substandard products
and services because reverse auctions steer agencies to shop
for lowest pricing and not for best value.
These business models favor home based businesses that
primarily operate online with no customer support. Businesses
like these rely on Federal procurement as their sole source of
income and their tight profit margins do not incentivize job
creation.
When something is bad for small business, The American
Legion recommends simply doing away with it. The Federal
dollars spent in purchasing reverse auction services are better
utilized in hiring more contracting officers to do market
research to ensure that procurements are made at fair market
value. A reverse auction is a shortcut contracting officers
resort to because there simply are not enough of them.
On VA verification, the American Legion supports
verification. Contracting officers are risk adverse and they
prefer giving contracts to firms that have undergone third
party vetting, so we understand why contracting officers have
started asking SDVOSBs if they are CVE certified.
However, this has added to the confusion of having two
vetting processes for two agencies for relatively the same
purpose. To cut down on the confusion, we ask the Committee to
consider a single set of standards for all SDVOSBs who contract
with the Federal Government. We would defer to the Committee's
expertise in selecting the agency most capable of undertaking
this task.
The American Legion also believes that SBA and VA need to
work together to minimize inconsistencies in decisions being
made. The main challenge with VA verification is striking the
balance between the amount of intrusion necessary to
substantiate size, ownership, and control, and the requisite
amount of oversight to protect the integrity of the program.
Including SBA in the appeals process would ensure
consistency in the final decisions being made and provide
impartiality in not having the agency of original jurisdiction
review their previously denied applications.
Further, SBA has the legal expertise, experience, and ample
base of precedential case law that can be applied to a
formalized appeals process.
Lastly, regarding the Department of Transportation's DBE
Program. By law, the Federal Government is mandated to award no
less than three percent of all Federal contracts to SDVOSBs.
For a number of reasons, a few agencies have not met this goal.
One of the most egregious exclusions of veteran owned small
businesses occurs in the Department of Transportation's
Disadvantaged Business Enterprise Program, which mandates that
states receiving Federal dollars for infrastructure repairs
have to set aside 10 percent for preferred groups of small
businesses.
It is a misconception that this 10 percent is solely
relegated to road and infrastructure construction firms, and
there are a variety of industries involved, such as
engineering, landscaping, remediation, utilities, and
information technology. This is an issue that affects all
veteran owned small businesses.
The American Legion worked closely with Congressman Mike
Fitzpatrick from Pennsylvania to amend the current legislation
to add ``veteran owned small business concerns'' as a separate
line to the list of candidates eligible in the program, and
such an addition would not presume that veterans are socially
and economically disadvantaged, instead, VOSBs would be
considered independently eligible for participation in the DBE
Program.
In previous Congresses, Congressman Fitzpatrick has
introduced the Fairness to Veterans for Infrastructure
Investment Act that makes this change. The American Legion and
numerous other veteran service organizations support this bill
and will ask again for this Committee's support when Congress
reauthorizes the Federal Highway bill.
Thank you, and I look forward to any questions you may
have.
Chairman HANNA. Thank you. Ms. Dorfman?
STATEMENT OF MARGOT DORFMAN
Ms. DORFMAN. Chairman Hanna, Ranking Member Velaazquez, and
members of the Subcommittee, thank you for the opportunity to
provide testimony on behalf of our over 500,000 members of the
U.S. Women's Chamber of Commerce.
While reverse auctions have the potential to deliver
savings for the Government, we have concerns with the process
and outcomes.
Small business owners may be pushed to lower bids to their
own detriment. The complexity and risks involved in an auction
may drive down competition by causing potential bidders to not
participate. There is a risk of circumventing regulations
related to the small business requirements. In many instances,
it may be more efficient and cost effective to simply purchase
off a schedule.
Regarding verifications, our members are concerned about
the failure of the SBA to verify firms claiming to be small and
meeting the socioeconomic requirements. Congress established
programs to support our nation's efforts to reach full
productive capacity and assure a fair portion of Federal
contracts are placed with the full spectrum of small
businesses.
The SBA is charged with accurately identifying and
verifying eligible firms as small, veteran owned, women owned,
et cetera. Unfortunately, the Small Business Administration has
failed at the most basic requirement. For the last decade, the
Inspector General's annual report, Report on the Most Serious
Management and Performance Challenges, listed the top challenge
of the SBA as allowing large firms to obtain small business
contracts and allowing agencies to count these contracts toward
their small business goals.
The SBA's failure to verify small business and
socioeconomic claims became a major issue when the Service
Disabled Veteran Owned Small Business Set-Aside was created.
The SBA did not establish any eligibility verification for the
program, creating fraud and abuse as contracts went to
ineligible firms.
This issue became more complicated when the VA began their
own Vets First Contracting Program with its own certification.
The Vets First Contracting Program is only for specific
contracting opportunities within the VA, and has different
eligibility requirements from the SBA's SDVOSB Program.
Some members of Congress have suggested the VA's
verification for the Vets First Program should be moved to the
SBA and paid for by the VA. The idea stems from a lack of
understanding that the SDVOSB Program, which is under the SBA's
management and enforcement, has a different purpose and
different requirements from the VA's Vet First Program.
Since the SBA failed to create the verification process for
the SDVOSB, businesses and agencies are confused, and
legitimate Service disabled veteran owned firms have lost
hundreds of millions of dollars.
More recently due to the SBA's poor regulatory
implementation and enforcement of the Women Owned Set-Aside
Program, the Government Accountability Office found that more
than 40 percent of businesses securing women owned set-asides
were ineligible.
Thankfully, Congress and the President acted through recent
passage of the National Defense Authorization Act to remove
self certification from the Women Owned Set-Aside Program,
which when implemented, will elevate the verification for this
program.
We appreciate Congress stepping up to force the SBA to do
what it should have done all along, and ask this Committee to
hold the SBA accountable for the expedient creation of strong
regulations to improve verification.
As Congress passes legislation to achieve these goals, we
rely on the SBA to prepare and enforce regulations that
successfully fulfill your intent. In this area, the SBA has
failed woefully.
The regulations developed and enforced by the SBA for the
Women Owned Set-Aside Program were flawed from the start. The
SBA ignored stakeholder input on the inability of the processes
to ensure that only qualified women owned firms received set-
asides, created a grossly complex document management process,
and turned contracting officers into de facto certifiers,
driving down their desire to use the program.
We ask that the House Small Business Committee hold a full
Committee hearing with the SBA to understand how this plan will
be implemented.
The SBA failed to establish verification for the SDVOSB
Program, causing hundreds of millions of dollars to be lost,
fraud and abuse, and setting up confusion between SBA's program
and the VA's program.
The SBA has also failed to staff an appropriate number of
procurement center representatives, PCRs, to enforce the
requirement for small business set-asides in their regions, the
most crucial front line team to assure that a fair portion of
purchases are placed with small business concerns. It is not a
regulatory enforcement priority for the SBA.
We agree with the budget views of the Committee, the SBA
must allocate greater use of their funds to core
congressionally mandated activities, rather than funding the
SBA's extra layers of non-essential management and non-mandated
programs. We recommend funds be directed to regulatory
enforcement and direct small business services.
Thank you.
Chairman HANNA. Thank you. I will yield to Ranking Member
Velaazquez for our first questions.
Ms. VELAAZQUEZ. Thank you, Mr. Chairman. Ms. Dorfman, some
of the issues with self verification of veterans are also
present in the Women's Program due to the ability to self
certify. However, due to legislation I offered last year,
businesses would no longer be able to self certify their
eligibility for the Women's Program.
Yet, we know some damage has already been done. Can you
discuss some of the ramifications that the allowance of self
verification has done to these programs, the Women's Program,
in particular?
Ms. DORFMAN. Certainly. Thank you. As the GAO report
mentioned, it was 2012 or 2013, for both years, 40 percent of
the contracts awarded to ``women owned firms'' actually went to
ineligible firms. That is billions of dollars of lost
opportunities.
The U.S. Women's Chamber of Commerce is a third party
certifier. We did a similar quick review probably a year ago
where we found that out of all those applications that had come
in, we had denied 39 percent, and 53 percent of those ended up
self certifying, so they are receiving contracts, and there is
no way the SBA has been trying to--the SBA has not followed up
at this point to mitigate that situation.
Ms. VELAAZQUEZ. Thank you. Ms. Peebles?
Ms. PEEBLES. Speaking on behalf of WIPP, we are absolutely
against any fraud in any of these small business programs. I do
think a concern or a focus of ours would be to ensure the sole
source authority moves along, but not at the expense of the
certification process intervening with that.
Ms. VELAAZQUEZ. Thank you. As the SBA develops its own
verification process, what are some key factors you think the
agency should be focusing on to reduce instances of fraud in
the program? Ms. Dorfman?
Ms. DORFMAN. There certainly needs to be much more follow
up when they are actually doing the process to be able to
identify those that are truly women owned firms versus those
that are masquerading as women owned firms, and I think they
need to make sure that their regulations and their processes
are in compliance with their own regulations.
Ms. VELAAZQUEZ. Thank you. Mr. Gordon, since the use of
reverse auctions, they have been calls from various
stakeholders to ensure regulations and guidelines as to how and
when the reverse auctions should be used.
However, while there have been several rounds of data
collection, we have yet to see the issuance of any policies.
Why do you believe there is such hesitation to publish this
much needed guidance on regulations?
Mr. GORDON. As a former administrator, I would have some
sympathy for the workload that very small office has, they have
very few people, and they have an enormous responsibility.
I would say we need Government-wide guidance. I am not sure
we need statutes that go into any detail. I am not sure we need
an amendment to the Federal Acquisition Regulations. I worry
that technology changes very quickly, so I would say whatever
goes into a statute or the FAR should be at a very high level,
but you have basic principles, that you need training, et
cetera.
We absolutely need to get Government-wide guidance. Our
contracting officers across the Government do not know what
procurements are suitable for these. The training is critical.
Ms. VELAAZQUEZ. Training. Thank you, Mr. Gordon. Mr.
Leghorn, I am really happy to hear in your testimony that you
are stating there have been some improvements to VA's
verification process, including they have decreased the time it
takes for a business to receive its initial decision.
Also, you noted you have seen fewer requests for counseling
services in the verification process. Do you think this means
the VA has finally turned some things around for the
certification process?
Mr. LEGHORN. Thank you for your question. VA, yes, they are
coming around. I do not think they have completely turned the
corner yet. There is still some discrepancies in the quality of
the decisions that are being made, but by far, when it comes to
time alone, it has had success and done a really good job.
Ms. VELAAZQUEZ. How do you feel about a call made by some
to move the VA process to SBA completely?
Mr. LEGHORN. Again, as in our testimony, we do not have a
preference. We believe there needs to be certification agency-
wide, and we would rely on this Committee's expertise to tell
us whether that is going to be an agency or third party.
Ms. VELAAZQUEZ. Thank you. My time has expired. Thank you,
Mr. Chairman.
Chairman HANNA. Mr. Gordon, if you had the opportunity to
eliminate in its entirety reverse auctions except for
commodities versus us trying to figure out all the nuances and
dynamics of the different types of businesses, where would you
go?
Mr. GORDON. Mr. Chairman, I want to make sure I understand
the question. Eliminate reverse auctions for commodities?
Chairman HANNA. For everything but commodities. Would that
produce an outcome that is more desirable than trying to work
through what we have in front of us?
Mr. GORDON. It might make sense. Of course, defining
``commodities'' is not just a simple thing. I am very concerned
that (a) our people across the Government do not know how
problematic it is to do a reverse auction when you are focused
on quality and past performance, et cetera, and they do not
realize that buying services, especially professional services,
you do not want to be doing a reverse auction.
What happens, sir, is you can have situations where a
company wins the auction but does not get the contract. You are
driving down price even though price is not really your focus.
I often tell people if you want to do a reverse auction to
buy surgery services, make sure you do not particularly like
the patient, because you are going to be driving down the price
on something where you should be focused on other than price.
I think it would be a step forward, at least as a
cautionary move, to say do not use reverse auctions for non-
commodities.
Chairman HANNA. Take the time to define what we mean by
``commodities'' and throw the rest. What do you think, Ms.
Peebles?
Ms. PEEBLES. I think the Professor is fascinating. My
knowledge of reverse auctions is not as in-depth as the
Professor's. There are concerns that I as a private citizen and
as a business owner who has attempted to use FedBid have about
the process, and one of my concerns is the lag feature, which
if I am not mistaken, according to the GAO report, is an
arbitrary feature, meaning when you submit a price, it will
immediately show that you are lagging, indicating somebody else
is bidding against you.
Chairman HANNA. Which may not be the reality.
Ms. PEEBLES. Which may not be the case. If I may just speak
as a private citizen, as a taxpayer, and as a business owner,
if I used this feature and responded to that lag feature, I
have concerns because every time my company receives a prime
contract, I, as President, sign a document, Truth in
Negotiations Act, which has penalties if I have done that in
bad faith.
I, frankly, think we are a better country than that, to use
deception in a Federal procurement.
Chairman HANNA. Does anyone else want to weigh in?
I kind of agree with you. Weaving through this, what is
obvious is the very, very subjective nature and the complexity
of so many different types of products and outcomes we are
looking for, it defies reason that we would even use reverse
auctions.
I appreciate that, and I am going to yield to Ms. Chu for
five minutes. Thank you.
Ms. CHU. Mr. Leghorn, you testified that the American
Legion has found that instead of fostering positive partnership
relationships between Government and industry, the use of
reverse auctions has actually cultivated resentment between
buyers and sellers, ruining any potential for a constructive
relationship to be had.
Can you give us an example of a time when you have seen
this partnership deteriorate?
Mr. LEGHORN. I am not an expert on reverse auctions for the
American Legion. Can I take that one for the record and get a
specific example back to you at a later date?
Ms. CHU. Sure.
Mr. LEGHORN. Thanks.
Ms. CHU. Mr. Gordon, you brought up many points about
problems with reverse auctions, including something that I had
not heard of before, the use of a private company, FedBid, to
administer the data which could be a conflict of interest.
Can a reverse auction be fair, and if so, what would an
ideal reverse auction look like?
Mr. GORDON. Thank you for the question. Again, I want to
emphasize that FedBid does a very good job. The problem is
their situation creates, as you said, a conflict of interest.
If I can give you an example. If a company is bidding and
they bid $100 in a reverse auction, what shows up on the screen
for everybody, including the agency, is not the $100, it is
$103, because FedBid adds its bid automatically, and people do
not realize that the figure they are seeing on the screen is
not what the company is bidding. It is what they are bidding
plus the private company's fee.
What GAO found was when GAO asked the agencies are you
paying a fee to FedBid, there were agency personnel that said
no, we do not pay any fee to FedBid. It is extraordinary that
the data is completely under the control of FedBid.
I worked at GAO for 17 years. I do not recall ever seeing a
GAO report or when you go through it, every charge, every
graph, where they list a source, FedBid data, FedBid data. GAO
did not have access to agency data because the agencies do not
have the data.
You want to have a system where there is not a conflict of
interest, where the decision about whether to use a reverse
auction is based on what makes sense for the Government in that
procurement, unencumbered by some private company's corporate
interest, where they get a fee, regardless of whether it makes
sense to use a reverse auction, regardless of whether you have
competition, even if you only get one bid, they are going to
get their fee. You want to avoid any sort of conflict of
interest.
Ms. CHU. You are saying that our Federal Government does
not even have the data with which to make a sensible decision?
Mr. GORDON. As GAO pointed out, and I think they are right,
agencies cannot decide whether it makes sense to use a reverse
auction because they do not have the data. At the very least,
agencies need to be in control of the data, they need to have
the training, they need to realize they cannot advocate their
responsibility.
I think the reasons agencies let FedBid make the decisions
is because it is easier. It is not because FedBid is doing
anything wrong, on the contrary, they are so good that the
agencies say okay, FedBid says this is a good procurement for a
reverse auction, let's go for it.
That is our Federal officials advocating their
responsibility, and we need to avoid that.
Ms. CHU. Thank you for that. Switching gears, Ms. Peebles
and Ms. Dorfman, I have consternation constantly about the fact
that we never met the five percent goal for women owned
businesses, and in fact last year it was 3.6 percent. Once
again, we did not make it.
Finally, women owned businesses will get the designation
they deserve through the sole sourcing provision passed in last
year's NDAA. Do you believe that implementing this provision
for women owned small businesses is enough to rectify the lack
of access that female entrepreneurs have to Government
contracts?
Ms. DORFMAN. First off, it is actually the removal of the
self certification that will make it better for women owned
firms so they are competing against women owned firms. The sole
source is something the contracting officers need because in
some industries, there is only one woman owned firm that can
perform that work, so they need to have that.
I think that impacts the program a far less percentage than
the women owned small business certification being the SBA
having to do it or making sure it is done properly with a
follow up, however they are planning to implement it.
I am hoping that gets implemented very quickly. I do not
know that it will. I am looking toward this Committee to help
hold them accountable, to make sure that they do implement it
fairly speedily. Thank you.
Ms. CHU. Ms. Peebles?
Ms. PEEBLES. Thank you. We are very optimistic that the
five percent set-aside will certainly go a long way in helping
to eliminate these gaps in the percentages of meeting
procurement goals. Having said that, I think the additional
impact is that now, women owned businesses plan strategically
for their marketing and their procurement strategy now that
this is in place.
The way to make it most impactful is to get the regulations
in place quickly so that women owned businesses can start
utilizing it and taking advantage of it now.
Ms. CHU. Thank you. I yield back.
Chairman HANNA. Ms. Lawrence?
Ms. LAWRENCE. Thank you, Chairman, and Ranking Member, for
calling this hearing. The 2013 goals for awarding contracts to
Service disabled veteran owned businesses has surpassed the
three percent statutory goal. This is a positive development,
but the unemployment rate for veterans who served since 2001
currently is at nine percent. We have a long way to go.
Mr. Leghorn, the disparity in the verification systems for
veteran owned businesses at the SBA and the Department of
Veterans, the VA, I am concerned that it may lead to awarding
of contracts to some fraudulent parties. Do you believe veteran
owned businesses may have lost out on contracts that normally
would have been received, and this would be due to the lack of
clarity in the verification system? Answer that and then tell
me what do you recommend we do to correct it?
Mr. LEGHORN. Thank you for the question. With there being
two procurement policies in terms of how SDVOSBs participate in
Federal procurements, on the self certification side, you are
always going to find fraud, and on the verification side, if
you are a bad actor and you want to defraud the Government,
there is still a way around it because it is a very document
driven process.
My answer to the first part of the question is the
Government can only do so much to check up on people. If you
were somebody that is out there purposely trying to defraud the
Government, you are going to know the way around the system.
What can we do about it? SBA or VA, they need the resources
to do more onsite visits, that is one way to catch people in
the act. It is about moving the agencies to take reporting or
allegations when somebody is trying to defraud the Government,
to take those allegations seriously and look into it, in a
prompt manner.
Ms. LAWRENCE. I want to thank the Committee and those of
you who are testifying. The women owned and veteran owned
businesses and our commitment through the SBA is something that
I am very committed to, but we must find ways to validate and
eliminate as much fraud as we can. Unfortunately, enforcing the
research and the processes so we can identify fraud is the
first step, but also to have our systems and verifications in a
way that it rises to the top for the women's and veterans'
businesses.
I thank you for your expertise in this. I yield my time.
Chairman HANNA. Ms. Meng?
Ms. MENG. Thank you all for being here and for sharing your
experiences with us. First, I want to thank Congressman Hanna
for introducing his legislation to ban reverse auctions in
certain areas. I believe the legislation is a good step
forward, and I hope there will be even more we can do to
protect small businesses from the use of reverse auctions.
Although some will argue that reverse auctions benefit the
Government by offering lower prices, we have often been left
with junk bidders who provide subpar service.
My question is as a follow up to something that was
mentioned at Tuesday's Subcommittee hearing. Where do you see
contracting goals headed? Do you believe there has been too
much emphasis on dollars for our prime and subcontracting
goals, and not enough emphasis on the diversity and quantity of
businesses receiving these opportunities? Of course, any
recommendations. For anyone who wishes to answer.
Ms. DORFMAN. I will jump in. It has been a frustration that
there continues to be double counting within the socioeconomic
categories because what that does is the person with the most
certifications gets the contracts. It would be far better to
make sure that as the agencies are counting their goals, that
they are saying okay, if you are 8(a), HUBZone, Service
disabled veteran, woman owned, which one is that going to, so
that more small businesses have access to those contracts.
Thank you.
Chairman HANNA. Thank you. We are going to open it up for
another round of questions for anyone who may have any.
This is a screen shot from FedBizOpps, from the Federal Web
site where all Federal contracts are advertised. I am sure you
all have seen it. This lets you search by contracting office,
so if you wanted to do business with GSA in D.C., you can
choose that option.
However, what this screen shot does is show that the
Federal Government has classified FedBid--a private company--as
a contracting office of the Federal Government. I am just
curious if anyone thinks that is appropriate or inappropriate,
and if you think it leads to confusion.
Go ahead, Mr. Gordon.
Mr. GORDON. Mr. Chairman, it is a real problem. Again, it
is not that FedBid does not do a good job, they do a great job.
They are doing work that is closely associated with inherently
governmental work, and the line is getting blurred. You are
seeing mission creep. When you are looking on FedBizOpps, which
is a Federal Web site, you are looking for a Government office.
There is FedBid.
I think we need to think long and hard if we are going to
have a private company running these auctions, we have to have
adequate Federal supervision so you do not have this sort of
confusion.
If I can tell you one quick anecdote, other people when
they have a spring break at a law school go to like Florida,
Ft. Lauderdale or whatever, I spent my spring break a couple of
weeks ago in Macedonia, in Southeast Europe, learning about
procurement and speaking about procurement to government
officials there.
They do electronic reverse auctions in Macedonia, a small
country, not a rich or sophisticated one. I said to them do you
have a private company running your reverse auctions. They
looked at me like I was crazy. They said of course not, we have
our government officials who run the reverse auctions.
I thought a little point about maybe what the country of
Macedonia could do is maybe something the Committee may want to
reflect on.
Chairman HANNA. Who bids against FedBid?
Mr. GORDON. In theory, there are other sources of reverse
auctions, but I was not at all surprised when I saw in the GAO
report that more than 99 percent of the reverse auctions on
FedBizOpps that GAO found were done by FedBid.
Chairman HANNA. Do you happen to know anything about the
probability that a particular company that is listed is part of
the Army, incidentally?
Mr. GORDON. No.
Chairman HANNA. Thank you very much. Anything else? Ms.
Velaazquez?
Ms. VELAAZQUEZ. Yes. I just would like to ask the panel
about the reverse auction process. We have to be so very
careful that we do not cause harm and make the programs whole
and be effective, but we have found that the reverse auction
process may move too quickly for competitors to accurately
reassess their costs or the way they will actually do the work.
There have been reports where the buyer has to step in to
prevent a supplier from submitting a price that will harm the
company.
Do you believe contractors are actually able to perform the
contract at the price they bid or are some putting the
viability of the company at risk? Ms. Peebles?
Ms. PEEBLES. Thank you, Congresswoman Velaazquez. If I
understand the question correctly, it is basically how is a
company going to respond to this purchasing mechanism, and I
will speak as a business owner in this regard, for myself, and
not on behalf of WIPP with regard to this particular issue.
There are so many unknown's when submitting pricing to
FedBid as compared to a standard procurement process, that it
leads basically to a bifurcated decision.
One, if you are somewhat unsophisticated with the process
and you see the lag time hit, and you are like I want to win a
Federal contract, you see someone is competing against you, you
think okay, well, I can do it for less, because apparently that
is what the market will bear, without knowing everything
involved, you can bid so low and make a commitment, that you
are causing damage to your company financially.
The flip side is because there are so many unknown's, you
can inflate the price to cover against what you do not know,
and if you are the only bidder, you have not given the
Government a good price that you would have given under normal
channels.
Ms. VELAAZQUEZ. Mr. Gordon?
Mr. GORDON. It is interesting. I think it may be worth
pursuing this area one way or the other, and with some
hesitation because of the workload of GAO, that GAO might be
able to do a study about the impact of this low pricing on
small businesses.
That said, I have a lot of confidence in our small
businesses and their sophistication. I am a little bit
skeptical when people tell me companies are bidding so low that
they are putting their company at risk.
I understand that in an auction, people in a normal
auction, people sometimes bid higher than they should. I
appreciate that. I have actually gone down that path personally
without disclosing any details here.
I trust our companies, the fact is in a Federal procurement
of any sort--we had sealed bids in the procurements we have
been doing for more than 100 years, companies submit bids. Do
they sometimes submit bids that are foolishly low? Yes. I trust
their judgment. They are business people. I think we can trust
them to make judgments about how low they should or should not
bid.
Ms. VELAAZQUEZ. Thank you.
Chairman HANNA. What you are really describing is a race to
the bottom, an opportunity to bid virtually against yourself,
taking a risk that may be inappropriate in the moment.
Everybody wants to work. Contracting companies have overhead
they need to cover. Sometimes they do work below their costs,
they do not always do it on purpose. The other side is people
can actually bid at a much higher price, just randomly, taking
an opportunity.
To your point, I personally probably have bid on over 3,000
jobs, big and small, in my life, and believe me it is often the
case in a very competitive market that the low bidder is the
guy that never finishes the job, which is another issue having
to do with a lot of other things.
The goal is to get the product we want at a reasonable
price and let companies make money, and thrive, and take
advantage of all the opportunities the Government has for small
businesses.
It seems to me that a reverse auction is often antithetical
to the outcome, the pricing, and to competition.
With that, we have a couple of minutes if anyone wants to
say anything else that has not been said or that we have not
heard, go ahead. Anyone?
Ms. PEEBLES. Previously, I was asked a question regarding
meeting the woman owned small business goals, and if I could
just take a moment and elaborate on the answer. This is my
first time to testify, so I wanted to get my thoughts together.
Two points that I wanted to make and then I am done. Sole
source was a phenominally good law for women owned businesses.
It allows access to contracts for women in business and it is a
very good vehicle for contracting officers.
We do not want to raise the WOSB goal. We want to meet it
first. Thank you.
Ms. VELAAZQUEZ. If I can make a comment about that, it has
always been my position that the Federal Government struggled
for so many years, and this is why I initiated a Government-
wide report that I issued for almost 14 years, measuring
contracting goals and achievements for all the Federal
agencies, Government-wide.
What good does it do if we increase it if for the first
time this year, this year and last year, for the first time
Government-wide, yet there are those that claim that ineligible
firms were qualified as small businesses.
Let's do this right. Let's achieve those goals, and then we
will move from there to increase those goals. I agree with you.
Chairman HANNA. Thank you. I want to thank you all for
being here. You have done a marvelous job. These are not easy
questions, they are complicated, but you have helped us and
given us a lot of opportunity for direction, and I would ask
you to watch this Committee if you can and see what comes out
in some legislation shortly.
I will recommend to Chairman Chabot a full Committee markup
on legislation addressing verification and reverse auctions and
the process for implementing small business contracting
reforms.
I ask unanimous consent that members have five days to
submit statements and supporting materials for the record.
Without objection, so ordered.
This hearing is now adjourned. Thank you very much.
[Whereupon, at 10:55 a.m., the Subcommittee was adjourned.]
A P P E N D I X
STATEMENT OF THE HONORABLE DANIEL I. GORDON
SENIOR ADVISOR, GOVERNMENT PROCUREMENT LAW PROGRAM,
THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL
BEFORE THE HOUSE SMALL BUSINESS COMMITTEE
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
March 19, 2015
Chairman Hanna, Ranking Member Velaazquez, Chairman Chabot,
Members of the Committee, good morning. I am grateful for the
honor of being invited to testify before you today about
electronic reverse auctions and other important procurement
issues. I am the Senior Advisor to the Government Procurement
Law Program at the George Washington University Law School,
which has, for more than 50 years, been the premier venue for
the studying and teaching of procurement law in this country.
Let me begin by commending you for focusing on the
important topic of electronic reverse auctions, which are
essentially auctions run through the Internet in which bidders
offer successively lower prices. I have seen the importance of
these reverse auctions in both the U.S. acquisition system and
in procurement systems around the world in recent years,
including in countries as diverse as Bangladesh, Macedonia,
Brazil, and Russia.
In the U.S., perhaps the best report on the subject is the
Government Accountability Office's December 2013 report,
Reverse Auctions: Guidance Is Needed to Maximize Competition
and Achieve Cost Savings, GAO-14-108. In that report, GAO
looked at the use of reverse auctions in fiscal year 2012, and
found that more than $1 billion had been awarded in contracts
through use of reverse auctions during that year. GAO focused
on the five federal agencies that together used about 70
percent of the auctions in 2012: the Departments of the Army,
Homeland Security, Interior, and Veterans Affairs, and the
Defense Logistics Agency (DLA). Of those five, the first four
all used the same vendor to run the auctions, and GAO was able
to obtain detailed information on their use of auctions from
that vendor; the fifth agency, DLA, bought a license to run its
auctions without reliance on a vendor, but it lacked detailed
data for GAO to review.
Both from my review of the GAO report and from what I have
seen and heard, in the U.S. and abroad, I would suggest that
use of electronic reverse auctions has brought benefits in
three areas: savings, speed, and small businesses.
Savings: While GAO expressed concern that the exact
amount of savings obtained is uncertain, there is no
doubt that reverse auctions have led to a reduction in
the amount of taxpayer funds spent on the commodity
goods and services for which auctions were used. I have
been estimates of savings on the order of 10 to 20
percent, and sometimes higher, though GAO is right to
point out that the way savings are measured can be
problematic.
Speed: Reverse auctions can be conducted quickly, and
they have contributed to a substantial improvement in
efficiency in government procurement systems over the
past 10 years, both in the U.S. and abroad.
Small businesses: GAO reported that 86% of the
procurements in which reverse auctions were conducted
were won by U.S. small businesses, which translated to
80% of the dollar value of the procurements. In its
report, GAO notes this is consistent with the
presumptive set-aside for U.S. small businesses under
federal law for procurements under $150,000. While it
is thus not clear that use of reverse auctions
increased the percentage of these procurements that
would have otherwise been won by small businesses, the
fact is that the great majority of the procurements
went to U.S. small businesses.
In its report, GAO identified some challenges associated
with use of electronic reverse auctions, and my experience,
both in the U.S. and overseas, confirms that many users, or
potential users, of auctions have wrestled with these issues.
While I do not think that amending the Federal Acquisition
Regulation is needed (in part because technology moves faster
than the regulatory process), I very much concur with GAO's
recommendation that the Office of Management and Budget issue
guidance related to the issues discussed below (and in the GAO
report).
Identifying procurements suitable for use of reverse
auctions: Some users are tempted to conduct reverse auctions in
almost every procurement; most recognize, however, that some
procurements are suitable for auctions, while others are not.
In terms of what is being bought, most people agree that
auctions make the most sense when the government is buying
commodities. Thus, GAO found that reverse auctions were used
largely for commodity goods, in particular, information
technology (IT) and medical equipment and supplies. Use of
reverse auctions for the purchase of services is more
controversial. While GAO was told that their use for buying
services was increasing, in my view, auctions may not be a
sensible way to conduct a procurement for services unless the
services being bought are commodities, such as overnight
delivery of packages.
Another metric, in terms of which procurements are suitable
for auctions, is the dollar value of the procurement, but here
the picture is somewhat complicated. GAO found that the four
agencies for which it obtained detailed data were using
auctions primarily for procurements valued below $150,000--
while the guidance of the fifth agency, DLA, was to use
auctions for purchases above that level. My sense is, in terms
of whether a reverse auction is appropriate, that the question
of what is being bought is more important than the value of the
procurement.
Another metric, though, also needs to be considered. Some
people believe that electronic reverse auctions can be used
regardless of whether the government is focused on buying the
lowest-price acceptable good or service, or whether, instead,
the government wants to be able to conduct a tradeoff between
multiple award criteria, including price and another factor,
such as the bidder's past performance or the quality of its
product. In my experience, auctions make the most sense when
the government is focused on obtaining the lowest price--that
is why commodities are the best candidates. As soon as the
government is considering doing a tradeoff with a non-price
factors, such as quality or past performance, I believe that
the auction risks causing mischief. Where the government is
concerned about quality, rather than simply buying a commodity,
the auction's focus on price may run counter to the
government's goals. Especially when the government is buying
professional services, the auction's focus on low price may be
inconsistent with the government's interest. Moreover, if the
company that wins the price auction may lose the competition
for the contract, one needs to ask what the point of an auction
is.
Addressing limited competition in the auctions: In the
auctions that GAO reviewed for its report, and in procurement
systems that I have looked at overseas, concerns have arisen
due to limited competition in the auctions, which can call into
question the value of the auctions. GAO found that in more than
a third of the auctions it studied no competitive bidding took
place at all: in 27 percent of the auctions, there was only one
bidder, and in another 8 percent, while there was more than one
bidder, none of them submitted more than one bid. In all of
those cases, use of the Internet-based auction technique seems
to have provided no benefit beyond that of the ``sealed
bidding'' competition that the federal government has used for
more than 100 years. Similarly, I learned that in one European
country that I visited recently to discuss its procurement
system, a high percentage of reverse auctions obtain only one
bid. In my opinion, any competition for a government contract,
whether run electronically or ``the old fashioned way,'' that
gets only one bid should be considered a failure. If the
government is paying a fee to use an electronic reverse auction
and only one bid is received, the government is paying a fee
for that failed procurement. In that regard, GAO found that
agencies had paid $3.9 million in fees for reverse auctions in
which there was no competitive bidding.
Considering the costs and benefits of using a private firm
to run the auctions: Many U.S. agencies rely on a single
private firm to conduct electronic reverse auctions for them.
While in theory more than one company could provide that
service, my experience is consistent with what GAO found, which
is that one firm--FedBid, Inc.--conducted more than 99 percent
of the reverse auctions listed in the government-wide database,
FedBizOpps. FedBid has clearly brought benefits to the federal
government: not only does it provide a good, ready-to-use
platform for reverse auctions, but, as GAO notes, FedBid also
relieves agencies of various administrative duties and it
offers training and technical support. Overall, FedBid has
played a key role in helping agencies obtain the cost and
efficiency savings that reverse auctions can bring. Moreover,
the fee that FedBid charges for its services may be viewed as
quite reasonable: they are capped at three percent of the
contract value, and the company waives its fee entirely in
various situations.
The benefits that FedBid brings, however, need to be
compared to the risks of use of a private-sector company
playing a central role in a function that is closely associated
with an inherently governmental function, the award of federal
contracts. See Office of Federal Procurement Policy,
Performance of Inherently Governmental and Critical Functions,
Policy Letter 11-01 (Oct. 2011). As is often the case in
situations where contractors perform functions closely
associated with inherently governmental ones, the risks do not
arise because of any defect or flaw in the company. On the
contrary, the contractor--FedBid, in this case--may perform so
well that agencies tend to defer to it even when they should
not. Thus, FedBid correctly makes clear that the contracting
agencies make all key acquisition decisions, from whether to
use a reverse auction at all to what the award criteria are to
which company actually wins the contract. Yet that deference,
which is completely appropriate, is eroded when the company is
plainly the expert in this areas, and agency personnel are
inclined to defer to the company--indeed, I suspect that many
federal contracting officials consider that letting FedBid take
the lead is the whole point of using the company's services.
Put another way, FedBid does its job so well that federal
officials allow its role to expand into areas that should be
the federal officials' responsibility.
Examples of this pattern are identified in GAO's report.
For example, GAO found that agencies rely on FedBid to maintain
data related to their reverse auctions, so that even GAO had to
turn to FedBid to obtain the data that it needed for its
report. Similarly, while FedBid clearly knows how much it is
charging and who pays its fees, GAO found that agencies using
FedBid's services often did not know how much they were paying,
nor did they know, if some cases, that the agencies were paying
FedBid at all. GAO also identified situations where agencies
are paying two fees (one to FedBid, another to the agency that
awarded the overarching contract being used), but the agencies
were unaware of this.
These matters are not simply questions of confusion.
Instead, they raise concern that any private-sector vendor
fulfilling a function so closely associated with an inherently
governmental one may have an organizational conflict of
interest. FedBid, for example, has not corporate interest in
clarifying confusion about whether agencies or vendors are
paying its fees. Similarly, FedBid has a corporate interest in
claiming that its services lead to large savings--but GAO
questioned the accuracy of those claims. With regard to the
important questions, explained above, of deciding whether a
particular procurement is a good candidate for a reverse
auction, a company that obtains a fee only if a reverse auction
is conducted obviously has an interest in encouraging the use
of auctions. Moreover, while an auction that obtains only one
bid may be a failure for the competitive procurement system, it
may not be a failure for a private-sector auction provider that
obtains its fee, even in that flawed competition.
Regarding the reasonableness of FedBid's fee, agency
personnel's misunderstanding of the fee and fee structure
impedes their ability to judge whether the fee is reasonable.
In the language of GAO's report, agencies ``are not able to
independently assess the cost effectiveness of reverse
auctions.'' In this regard, I would point out that, while a fee
capped at 3 percent may seem very reasonable for an auction
that can lead to savings of 20 percent, those large savings are
for the first time the auction is conducted. Obviously, the
second time an auction is conducted for a particular item, it
is unlikely that the price paid will drop an additional 20
percent, so that the savings will drop--but FedBid's fee will
not, and paying 3 percent to obtain a much smaller amount of
savings may seem less reasonable.
GAO also found that other companies had concerned related
to FedBid's role in the federal acquisition process.
Specifically, GAO heard complaints from vendors that FedBid
``creates an additional layer between the vendor and the end
user that can inhibit [vendors'] efforts to clarify detailed in
the solicitation.'' Moreover, FedBid requires vendors that want
to participate in a reverse auction to register with FedBid,
and GAO heard that some vendors did not want to register with
another vendor. GAO noted that this issue could reduce
competition for federal contracts.
In my judgment, we would be well advised to re-visit the
role that a private-sector company should play in the conduct
of federal reverse auctions. I say that will full appreciation
for the excellent work that FedBid has performed for the
federal government for many years. The Committee may be
interested to know that in many other countries, large and
small, electronic reverse auctions for government contracts are
successfully conducted without reliance on a private-sector
company to run them. For example, I learned recently that the
small nation of Macedonia routinely conducts a large number of
reverse auctions each year, run solely by government staff.
Closer to home, I am pleased to see that GSA has now launched
its own reverse auctions program, within the context of the
Federal Supply Schedule. Notably, GSA has announced that user
agencies will not pay any additional fee for use of the reverse
auction platform.
If a private-sector company continues to conduct reverse
auctions for federal agencies, I believe that it is critical
that agencies ensure that their staff are properly trained and
equipped to supervise the private-sector provider. That
training must ensure that agency personnel do not abdicate
their responsibility for key decisions, such as deciding which
procurements are appropriate candidates for reverse auctions
and what the award criteria should be, as well as for
collecting and maintaining data. Agency personnel must also
ensure that they have the information needed to make informed
decisions about the cost and benefits of conducting reverse
auctions.
In conclusion, I would again commend the Committee for your
work in this important, but challenging area, and thank you for
the opportunity to appear before you today. I would be pleased
to respond to any questions you may have.
[GRAPHIC] [TIFF OMITTED] T3733.001
Good morning. Chairman Hanna, Ranking Member Meng and
distinguished Members of the Subcommittee, thank you for the
opportunity to testify.
My name is Amber Peebles. I am President of Athena
Construction Group, Inc. a service-disabl3ed veteran-owned,
HUBZone, and woman-owned small business based in northern
Virginia founded in 2003. I am a service-disabled veteran,
serving eight years in the United States Marine Corps. Last
year, federal contracts accounted for more than half of Athena
Construction Group's revenues. Currently, we have forty-two
employees.
I am also here today representing Women Impacting Public
Policy (WIPP) where I serve on its Executive Advisory Board.
WIPP is a national nonpartisan public policy organization
advocating on behalf of its coalition of 4.7 million business
women including 78 business organizations. WIPP plays a key
role in developing women-owned businesses into successful
federal government contractors through its Give Me 5 and
ChallengeHER programs.
First, let me say thank you to the Subcommittee and staff
for improving the contracting rules and regulations pertaining
to small businesses. Under your leadership, the Congress has
enacted much needed changes, increasing access to federal
contracts for all small businesses, but especially women.
Nonetheless, these hearings make clear more can be done. This
is underscored by the fact that twenty years after establishing
a five percent contracting goal for women-owned small
businesses, that goal has never been met. As this discussion
begins, we value the Congressional direction already given on
this issue in the Small Business Act (P.L. 85-536), which notes
that the government should:
Insure that a fair proportion of the total purchases
and contracts or subcontracts for property and services
for the Government be placed with small-business
enterprises...to the maximum extent practicable.\1\
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\1\ 15 U.S.C. Sec. 631
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Reverse Auctions
1. Withdrawal at close of auction. In one instance,
after significant and costly preparation, an auction
was closed with only seconds remaining. The contracting
officer simply withdrew the requirement. While this
happens occasionally in normal procurements, the
additional costs for my business of a reverse auction
meant that additional resources were wasted.
2. Auction site not suitable for complex bidding. In
another instance, several rounds of pricing for metals
were required. Not to be overly technical - but a
formula is used to address different price points for
different times. This is standard in our industry. The
website could not process the pricing structure. This
became a wasted opportunity that is normally handled
effectively through other procurement methods.
Beyond my experiences, WIPP has testified before this
Committee with concerns on reverse auctions that were well
cited in the GAO report.\2\ Additional requirements should be
added to prevent the inappropriate use of reverse auctions.
Similarly, as these auctions require resources from competing
companies, we believe small business set-asides, including set-
asides made through all the disadvantaged small business
contracting programs, should not be eligible for reverse
auctions.
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\2\ GAO-14-108.
Legislation in the last Congress, the Commonsense
Contracting Act of 2013, sponsored by Chair Hanna and Ranking
Member Meng, made these changes. While WIPP was excited to see
reverse auction education requirements added to the FY15 NDAA,
the removal of certain sections passed by the House means the
need for such legislation remains. We encourage you to
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reintroduce the bill.
SDVOSB Verification
Many of WIPP's members, including myself, are veterans
running service-disabled veteran-owned small businesses
(SDVOSBs). WIPP supports the federal contracting programs that
assist veterans in engaging the federal marketplace. Moreover,
as with many procurement issues, the procurement process should
be streamlined to ensure that companies could access the
federal market easily and effectively.
Given the strong presence of veterans' advocates
nationwide, and even at this hearing, WIPP defers to them on
the specifics of improving contracting opportunities for
SDVOSBs and veteran-owned small businesses. WIPP encourages
this Committee to work with them to improve the contracting
environment for veterans.
SBA's Role in Rulemaking
Turning to the largest focus of this testimony, WIPP
believes the delay in implementation of important small
business contracting provisions is an ongoing frustration of
women business owners. While we understand the rulemaking
process and do not expect implementation overnight, many of the
changes we seek are fixes that WIPP members who are contractors
have asked us to fix.
The timeline for implementing these changes can be lengthy.
For example, SBA's recent proposed rule on subcontracting
limitations took two years to reach a proposed rule stage.
The needed changes proposed in those rules - implementing
provisions authored, debated, and passed by this Committee -
should not require years of missed opportunities for small
businesses. That is simply unfair to the businesses burdened by
outdated, ineffective, or damaging policies Congress saw fit to
change.
Even after final rules are promulgated, the wait for actual
implementation may continue for months, if not years. That is
because of additional time required for Federal Acquisition
Regulation (FAR) adoption by the FAR Council. While the recent
implementation of legislation to remove dollar caps on awards
in the Women-Owned Small Business (WOSB) Federal Contract
Program is a good example of how SBA and the FAR Council can
move quickly, that is not always the case.
Currently, women entrepreneurs stand to gain with a speedy
implementation of sole source authority in the WOSB program.
Every day this policy cannot be utilized is another day women
business owners are disadvantaged by the contracting process.
Members of Congress, along with the women's business community
have asked SBA to move expeditiously. It is our hope that when
the time comes, the FAR Council will move in a similar manner.
WIPP has two recommendations with regards to the timeline
of SBA rule promulgation and FAR adoption. In our view, there
is no reason these cannot be done concurrently. Any diversions
between the proposed rules could be best addressed through
increased cooperation between SBA and the FAR Council. One
solution could be adding SBA to the FAR Council. WIPP supports
this option because it would also give small businesses an
advocate on the Council charged with maintaining acquisition
procedures.
Additional Recommendations to the Committee
Expanding beyond the scope of this contracting hearing, I
want to take this opportunity to raise a related concern of
WIPP. The increased federal ``strategic sourcing'' efforts, in
our view, represent a serious threat to the small business
contracting community. In a name, strategic sourcing sounds
like a good idea - akin to good governance. For small
businesses, included WOSBs, however, the trend is eroding the
industrial base this Committee seeks to protect.
These efforts to maximize short-term savings through large,
limited-competition contract vehicles have pushed small
businesses out of competition and picked a small group of
``winners.'' These efforts are happening across all agencies
and all industries and come at the direction of the Office of
Management and Budget (OMB).
This movement does not align with Congressional directives
to keep a diverse set of businesses in the procurement
community nor does it mirror the private sector strategic
sourcing practices. Examples include the increased, and at
times mandated use of IDIQ vehicles (e.g. EAGLE II), GWACs,
FSSI contracts, and recent GSA awards (e.g. OS3). Many
industries, including office products, technology, janitorial
and sanitation products, building maintenance and operations
and furniture, have already been subject to strategic sourcing
and face fewer awards and increased barriers to federal
business--ultimately hurting their bottom line.
To be sure, some small businesses will benefit in the
short-term. Many, however, at the end of these five-year
contracts will exceed their small business size, and no longer
be able to compete for small business contracts. They may not
have a separate revenue stream to continue at their size let
alone continue to grow. Instead they may collapse over the
longer term, to their detriment. Equally important, the limited
competition for these goods and services will, over time,
diminish any realized savings by the government.
One solution may be to revise how small business
participation is measured by the agencies. Currently small
business goals measure the dollars awarded to small businesses.
By adding a participation rate, i.e. the number of businesses
awarded prime contracts, will ensure that a diverse group of
businesses are engaged in the federal marketplace.
Thank you for holding this hearing today and for making the
contracting environment better for women-owned businesses. It
is our hope that our recommendations are helpful. I am happy to
answer any questions.
STATEMENT OF
DAVY LEGHORN, ASSISTANT DIRECTOR, VETERANS' EMPLOYMENT AND
EDUCATION DIVISION OF
THE AMERICAN LEGION
BEFORE THE
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
MARCH 19, 2015
Good morning Chairman Hanna, Ranking Member Velazquez and
members of the subcommittee. On behalf of our National
Commander, Michael D. Helm, and the 2.3 million members of The
American Legion, we thank you for this opportunity to testify
at this hearing on the challenges facing veteran owned small
businesses seeking federal contracts.
The American Legion identifies three main issues that poses
obstacles for veteran owned small businesses and service-
disabled veterans seeking federal contracts: reverse auctions,
differences between Small Business Administration (SBA) and
Department of Veterans Affairs (VA) procurement policy
standards, and exclusion of veterans from Disadvantaged
Business Enterprise (DBE) programs.
Reverse Auctions Reduce Quality:
The Small Business Act applies government wide, not just to
the Small Business Administration (SBA). Government has a
fiduciary responsibility and legal obligation to treat small
business fairly, and to not take advantage of its buying power
and become predatory.
The American Legion appreciates the goal of the government
contracting community to lower federal expenditure through
competitive contracting initiatives, but we are concerned that
misuse of non-governmental platforms that have not suffered the
scrutiny of the appropriations process, are putting veteran
owned small businesses at risk and could also be serving to
undermine the entire procurement process.
Reverse auctions end up giving a false valuation of fair
market product pricing, and will eventually create a disparity
between a thorough procurement vehicle processes, where value
is made part of the decision matrix, versus the reverse auction
- where value or added value is often omitted from bid
consideration. Further, reverse auctions appear to undermine
the Government Services Administration's (GSA) application
process that requires the government be offered the best
possible in the first place. If that is true, then how can GSA
contract holders consistently compete in the reverse auction
process at offers lower than their established GSA contract?
An example of added value would be a printer and copier
vendor that, through their negotiated license agreement with
the manufacturer, is required to provide training and technical
support on the products they sell. This added value increases
the market price of the product, but may not be reflected in
the automated environment of the reverse auction bid process.
Reverse auctions create a disproportionate disparity in the
federal procurement industry while American Legion resolution
321 \1\ specifically calls for equal parity in federal
procurement, and according to the Federal Acquisition
Regulation (FAR); `` `Fair market price' means a price based on
reasonable costs under normal competitive conditions and not on
lowest possible cost''.\2\ Further, Fair Market Price is
mentioned in nearly every part of the FAR and that exact term
can be found more than 30 times.
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\1\ Resolution No. 321: Support reasonable set-aside of federal
governments and contracts for business owned and operated by veterans,
American Legion. National Convention August 2012 http://
archive.legion.org/handle/123456789/2190
\2\ Federal Acquisition Regulation, March 2005, http://
www.acquisition.gov/far/current/pdf/FAR.pdf
FAR part 19 Sec. 807 gives a definition of Estimating Fair
---------------------------------------------------------------------------
Market Price;
``(c) In estimating a fair market price for a repeat
purchase, the contracting officer shall consider recent award
prices for the same items or work if there is comparability in
quantities, conditions, terms, and performance times. The
estimated price should be adjusted to reflect differences in
specifications, plans, transportation costs, packaging and
packing costs, and other circumstances. Price indices may be
used as guides to determine the changes in labor and material
costs. Comparison of commercial prices for similar items may
also be used.
FAR part 15 Sec. 404-1 discusses proper Proposal Analysis
Technique:
``(a) General. The objective of proposal analysis is to
ensure that the final agreed-to price is fair and
reasonable.''\3\
---------------------------------------------------------------------------
\3\ Ibid
Finally FAR part 19.1405 outlines Service-Disabled Veteran-
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Owned Small Business Set-Aside Procedures;
``(b)(2) Award will be made at a fair market price.'' \4\
---------------------------------------------------------------------------
\4\ Ibid
While reverse auctions may have a limited capacity place in
federal procurement, The American Legion believes that the
federal contracting office has the primary responsibility to
ensure that every product that the government spends tax payer
dollars on, is purchased at fair market value. This assurance
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protects the tax payer, the small business, and the market.
The American Legion is concerned that reverse auctions will
lead to decreased quality and decreased employment
opportunities for veterans, which is in direct violation of
American Legion resolution number 50 that supports more hiring
opportunities for veterans.\5\ Reverse auctions encourage
vendors to provide the cheapest products and services in order
to maintain the smallest possible profit margins in order to
maintain a competitive edge. Government will then be stuck
purchasing poor-quality products and services because reverse
auction platforms do not provide the ability for an agency to
shop for best value and relegate their decision solely on a
best price basis. These types of business models favor home-
based businesses that primarily operate online and have no
employees, aside from the owner, and no customer support.
Businesses of this type end up relying solely on federal
procurement as their only source of income. This type of
business model severely disadvantages other small businesses
and do not create jobs, because with employees there comes
increased overhead expenses.
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\5\ Resolution No. 50: Support legislation that bolsters the hiring
of veterans in the public and private sectors, American Legion,
National Convention, August 2012 http://archive.legion.org/bitstream/
handle/123456789/2212/2012N050.pdf?sequence=1
An article in Contract Management magazine points out a
case study, conducted by the Department of State, reveals
reverse auctions are already losing market share and have
dropped 30 percent between 2007 and 2010, despite an increase
in bid notifications of more than 225 percent.\6\
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\6\ Contract management Magazine, Reverse Auctions: Turning Winners
into Losers, October 2012 http://www.nxtbook.com/nxtbooks/ncma/
cm--201210/index.php#/4
There is a belief that use of reverse auctions by
government contracting officers will save billions of dollars.
However, The American Legion has not been able to find evidence
that this process contributes to business innovation, economic
growth, or positive partner relationships between government
and industry. Instead, we have found that reverse auctions
foster resentment between sellers and buyers and leave the
seller with an attitude counter to providing anything more than
exactly what was paid for, thus obliterating any harmonious
---------------------------------------------------------------------------
relationship that should be developed between buyer and seller.
The American Legion also learned that businesses answering
solicitations for services find that customers rarely, if ever,
include all necessary requirements in the original
solicitation. What is wanted versus what was asked for
continues to be a source of frustration between contractors and
vendors. The American Legion has received numerous complaints
from veteran business owners who routinely argue that their
customers are dissatisfied based not on the work that was
performed, but more importantly, based on the work that wasn't
performed because it wasn't specified in the original
solicitation.
When something is bad for small business, The American
Legion recommends simply doing away with it. The federal
dollars spent in purchasing this reverse auction services are
better utilized in hiring more contracting officers to do
market research to ensure that goods and services are purchased
at the fair market value. A reverse auction is a shortcut
contracting officers resort to because there simply aren't
enough of them.
However, if federal contracting officers are allowed the
continued use of reverse auctions, The American Legion
reiterates the recommendations we have provided in the past:
1. More outreach training for small veteran owned
businesses.
2. Eliminate the LEAD or LAG indicators. This creates
an unrealistic stressor for the seller and can be
extremely detrimental for the nascent business.
3. Collect fees directly from customer (buyer).
4. Build a fair market price list into the process
for commonly purchased items, and prevent sellers from
going below the established fair market price.
5. Make buyers attest that they have conducted proper
and adequate market research to determine fair market
price.
6. Eliminate the ability of the buyer to set a
minimally acceptable price, or clearly state to the
seller what the starting price is.
7. Requests for debrief, protests, and any other
dispute resulting between the seller and the federal
government needs to be handled directly by the federal
government, not handled through a civilian commercial
company who has no authority to represent the federal
government.
8. Exact match bids need to be more interactive.
Government has unique needs and requirements, and even
items under the same National Stock Numbers provide
variation that can cause end user difficulties.
9. Limit contracting officers' use reverse auctions
to contracts over $150,000 for supply contracts that
excluding services.
VA Center for Verification and Examination (CVE)
Verification:
Many veterans find VA's Veterans First Contracting Program
verification process to be overly burdensome, which is why The
American Legion passed a resolution titled: Support
Verification Improvements for Veterans' Businesses within the
Department of Veterans Affairs.\7\
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\7\ American Legion Resolution No. 108.
The American Legion believes that Public Law 106-50 made
all federal agencies stakeholders in supporting veterans'
entrepreneurship.\8\ A subsequent law passed in 2006 provides
VA with the authority in setting higher agency standards for
SDVOSB and VOSB set-asides.\9\ A new procurement hierarchy
within VA was created, which places the highest priority with
SDVOSBs followed by VOSBs. VA refers to this program as the
Veterans First Contracting Program (Veterans First).
---------------------------------------------------------------------------
\8\ The Veterans Entrepreneurship and Small Business Development
Act of 1999.
\9\ The Veterans Health Care, Benefits and Information Technology
Act of 2006; PL 109-461.
The process of verification involves a review of a
business' governance documentation and a determination as to
whether the documentation is in compliance with VA's Center for
Verification and Examination's (CVE) legal requirements for
admittance into the Veterans First Contracting Program.\10\ The
main challenge with the program is striking the appropriate
balance between the amount of government intrusion necessary to
verify a business and the amount of government oversight
necessary to protect the integrity of the program. This is not
an easy task and VA is still trying to find that balance.
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\10\ 38 CFR Sec. 74.
The American Legion has been involved with VA verification
since the program's inception. Most notably, The American
Legion is a participant in the Verification Assistance
Counseling Program and for the last two years, we have worked
with numerous small business owners who have received
verification status. The American Legion would be remiss if we
did not mention that CVE has significantly cut down the time it
takes for a small business owner to receive an initial decision
to less than 30 days. This is a stark contrast to the situation
in October 2012, when it took approximately 85 days for CVE to
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make a determination on an initial application.
In 2012 and 2013, The American Legion counseled nearly 50
small business owners with questions about the verification
process. In 2014 that number was halved, as less small business
owners sought counseling services. This could be an indicator
that CVE has implemented changes that have improved the process
and cut down on wait time. This trend could also be the product
of a combination of VA diminishing the backlog of applications
in the queue and extended the time a small business can remain
on verified status from one to two years.
SBA Involvement in Appeals:
The American Legion believes that SBA and VA need to work
closer together to minimize the inconsistencies in the
decisions being made. Currently, VA's Office of General Counsel
(OGC) makes the final determinations; OGC does not utilize
SBA's case laws in their decisions nor do they publish their
decision. SBA has the legal expertise, 60 years of long-
standing experience, and an ample base of precedential case law
that can be applied to future rulings. VA does not. Further,
SBA's Office of Hearings and Appeals (OHA) has a 15 day
turnover rate for final decisions on appellate claims and OHA
does so with substantially less resources. The American Legion
believes there is added value for VA to fall back on SBA's
expertise and case law.
Last year, VA submitted changes to 38 CFR Sec. 74 to make
it so that their case reviewers could reconcile requirements
for the growth of small businesses with the requirements for
proof of ownership and control. Having taken part in the
discussion of the final proposal of changes that went to VA
Office of General Counsel, The American Legion can attest that
these changes drastically differ from SBA's 13 CFR Sec. 125. If
these changes are adopted, it would defeat the purpose of
having appellate hearings conducted at SBA OHA as OHA judges
would then have to make adjudications based off a new set of
standards.
Further, the current funding mechanism proposed for the
appeals to be heard at SBA OHA should not be seen as one agency
funding a new program within another. Instead, it is a funding
mechanism that incentivizes VA to minimize their appeals and
make correct initial decisions. Under the proposed funding
mechanism, VA would pay SBA by the case load; therefore, VA
could potentially stop having to pay for appeals that go to SBA
OHA, when VOSB and SDVOSBs no longer have reasons to appeal.
There has been push-back for moving of appellate hearings
of VOSB and SDVOSB statuses to SBA out of concerns that this
would add VOSBs as a new set-aside program government wide. The
American Legion wants to be clear that this is absolutely not
the case and not our intention when we supported the bill last
year that proposed moving the appeals process from VA to SBA.
We believe that the language was clear that VOSB appellate
claims are merely being heard by SBA OHA as they pertain to
contracting within VA's Veterans First Contracting Program and
nowhere else.
The American Legion impresses upon the Committee that (1)
including SBA in the appellate process would ensure more
consistency in the final decisions being made and ensure
impartiality in not having the agency of original adjudication
review their previously denied claim and (2) moving appeals to
SBA does not create a new preference group within the federal
small business set-aside program.
Differences between Self Certification and CVE
Verification:
The American Legion supports verification. Government
contracting officers are busy, risk averse and they prefer
certifications. This is why within the realm of set-aside
procurement; there is a preference for 8(a) and women-owned
small businesses. When a contract is awarded, a contracting
officer can rest-assured knowing that the recipient of the
award has been vetted for ownership and control.
SBA's model and VA's model for verifying a small business
currently follows similar regulations, except where SBA allows
firms to self certify as SDVOSBs and VA does not. VA requires a
firm to enter a rigorous process on the front end, where every
issue that may arise from the present and the future would have
to be resolved before a firm is verified. SBA's process of self
certification policies itself through status protests from the
small business community once a contract has been awarded. SBA
would then subject the protested firm to rigorous scrutiny.
Whereas VA's rigorous verification is necessary for entry into
the Veterans First Contracting Program within VA, SBA's self
certification process is government wide.
The American Legion understands why contracting officers,
agency-wide, have started asking SDVOSBs if they are CVE
verified. However, this has added to the confusion of having
two types of vetting processes for two agencies for relatively
the same purpose. To cut down on the confusion, the Committee
should consider a single set of standards for all SDVOSBs to
contract with the federal government. The American Legion
recognizes the importance of having a single set of standards
and vetting practices, but we would defer to the Committee's
expertise in selecting the agency most capable of undertaking
this task. The American Legion asks the Committee to weigh past
performance, expertise and resources in determination which
verifying body would be best suited for this job.
Exclusion of Veterans from DOT DBE Program:
By law, the federal government is mandated to award no less
than three percent of all federal contracts to SDVOSBs. For a
number of reasons a few agencies have not met this goal. One
major reasons is because some contract funding streams exist
outside the realm of regular appropriations and therefore are
not susceptible to SBA's small business goal tracking.
One of the most egregious exclusion of veterans owned small
businesses occurs in the budget for the U.S. Department of
Transportation's Disadvantaged Business Enterprise (DBE)
program, which mandates that states receiving federal dollars
for highway infrastructure repairs have to set aside 10 percent
for preferred groups of small businesses through the Moving
Ahead for Progress in the 21st Century Act (MAP-21). It is a
misconception that this 10 percent is solely relegated to road
and infrastructure construction firms. There are a variety of
industries involved in infrastructure repairs, such as
engineering, landscaping, remediation, utilities and
information technology. This is an issue that affects all
veteran owned small businesses and not just those in
construction.
Section 1101(b) of MAP-21 currently provides that:
Except to the extent that the Secretary determines
otherwise, not less than 10 percent of the amounts made
available for any program under divisions A and B of
this Act and section 403 of title 23, United States
Code, shall be expended through small business concerns
owned and controlled by socially and economically
disadvantaged individuals.
Section 1101(b) adopts the definition of socially and
economically disadvantaged individuals given in Section 8(d) of
the Small Business Act and its implementing regulations, which,
in turn, establish a presumption that specific groups of
minorities are socially and economically disadvantaged. Section
1101(b) also establishes a presumption that women are socially
and economically disadvantaged individuals for purposes of the
DBE program. Since veterans are not explicitly listed in
Section 1101(b), they are excluded from the DEB program.
Recently, Congressman Mike Fitzpatrick from Pennsylvania
has successfully added an amendment to rail infrastructure
legislation which passed the House on March 4, 2015.
Fitzpatrick's amendment, passed as part of the Passenger Rail
Reform and Investment Act,\11\ directs the Secretary of
Transportation to conduct ``a nationwide disparity and
availability study on the availability and use of certain
classes of small businesses--including veteran-owned
businesses.''
---------------------------------------------------------------------------
\11\ H.R. 749
The American Legion believes that this is a crucial step in
leveling the playing field for our veteran small business
owners that are not currently eligible to go after these set-
---------------------------------------------------------------------------
asides.
The American Legion works closely with Congressman
Fitzpatrick to advocate for the amending of Section 1101(b) to
add ``veteran-owned small business concerns'' as a separate
line to the list of entities eligible. Such an addition would
not presume that veterans are ``socially and economically
disadvantaged.'' Instead, VOSBs would become independently
eligible for the DBE program by establishing two categories of
entities who count for purposes of the 10 percent goal: (1)
small businesses owned and controlled by presumed socially
disadvantaged individuals \12\, and (2) VOSBs.
---------------------------------------------------------------------------
\12\ Includes Women Owned Small Businesses.
In previous Congresses, Fitzpatrick has introduced the
bipartisan Fairness to Veterans for Infrastructure Investment
Act which seeks to add veterans as a separate category of small
businesses they can use to meet their 10 percent goal. The
American Legion and numerous other Veteran Service
Organizations support this bill and asks again for this
Committee's support this summer when Congress reauthorizes the
---------------------------------------------------------------------------
federal highway bill.
Conclusion:
The American Legion appreciates the opportunity to testify
today. Thank you again to Chairman Hanna, Ranking Member
Velazquez and members of the subcommittee for directing your
attention to this critical issue facing veterans. For
additional information regarding this testimony, please contact
Mr. Larry Provost at The American Legion's Legislative
Division, 202-263-5755 or [email protected].
BIOGRAPHY FOR
DAVY LEGHORN
ASSISTANT DIRECTOR
NATIONAL ECONOMIC COMMISSION
THE AMERICAN LEGION
Davy Leghorn was appointed to the position of Assistant
Director of the Economic Division of The American Legion in
January, 2012. Mr. Leghorn oversees veterans' employment and
small business issues and administers The American Legion's
National Veterans Hiring Initiative. He also represents The
American Legion on the Small Business Administration's Advisory
Committee on Veterans Business Affairs.
He previously worked as a National Appeals Representative
for The American Legion at the Department of Veterans Affairs'
Board of Veterans' Appeals, where he provided representation to
veterans, their spouses and dependents in appellate hearings
before the Veterans Law Judges.
Mr. Leghorn served as a mortar infantryman in the Army with
the 2/72 Armored Battalion, 4/7 Cavalry and 3/15 Infantry, then
as a Civil Affairs Specialist with 450th Civil Affairs
Battalion.
He currently serves as Second Vice Commander for George
Washington Post #1 in The American Legion Department of the
District of Columbia.
[GRAPHIC] [TIFF OMITTED] T3733.002
Chairman Hanna, Ranking Member Velaazquez and Members of
the Committee. Thank you for the opportunity to provide
testimony this morning on behalf of the over 500,000 members of
the U.S. Women's Chamber of Commerce, three-quarters of whom
are American small business owners and federal contractors.
Today, as the Committee discusses contracting and the
industrial base, I will address our views on the use of reverse
auctions, size and socio-economic verifications and the SBA's
role in rulemaking and enforcement.
Reverse Auctions
While reverse auctions have the potential to deliver
savings for the federal government when purchasing supplies,
commodities and other services, we have a number of concerns
with the reverse auction process and outcomes:
1. Given the complexity of pricing and delivery of
supplies and commodities, small business owners may be
pushed in the moment to lower bids to their own
detriment.
2. Low bidders may try to win a contract and then
seek to make up lost profits through price adjustments.
3. When procurements include a mix of products and/or
services, the variables may be too complex to be
adequately managed through the pressures of reverse
auction.
4. The complexity and risks involved in an auction
environment may actually drive down competition by
causing potential bidders to not participate.
5. There is a risk of circumventing regulations
related to the small business and socio-economic
requirements.
6. Past performance is not given consideration.
7. Due to the extreme focus on lowering pricing,
there is a risk that defective products or counterfeit
parts may be provided.
8. With the 3% fee to the reverse auction provider,
it may often be more efficient to simply purchase off a
schedule.
Verifications
Our members are very concerned about the failure of the
Small Business Administration to verify the veracity of firms
claiming to be small and meeting certain socio-economic
requirements for set-asides and other programs.
Congress has established a number of programs to assist
small businesses competing for federal contracts. These
programs support our nation's efforts to reach full productive
capacity and assuring that a fair portion of the total
purchases and contracts for property and services for
Government in each industry category are placed with small
business concerns. These focused programs require that the SBA
accurately identify and verify eligible firms. This
verification includes determining if the business is small, the
business is veteran-owned, women-owned, disadvantaged-owned, in
a HUBZone, etc.
Unfortunately, the SBA has failed at this most basic
requirement for more than a decade. For the last decade, the
SBA Inspector General's annual ``Report on the Most Serious
Management and Performance Challenges Facing the Small Business
Administration,'' has listed as SBA management's top challenge
- flaws in the procurement process allow large firms to obtain
small business awards, and allow agencies to count contracts
performed by large firms toward their small business goals.
Yes, a decade.
The SBA's failure to verify small business and socio-
economic claims became a major issue when the Service Disabled
Veteran-Owned Small Business set-aside was created. During the
process to create regulations, the SBA did not establish any
eligibility verification for the SDVOSB program. This
regulatory failure lead to hundreds of millions of dollars in
fraud and abuse as contract went to ineligible firms.
The veteran's contracting issue became more complicated
when the U.S. Department of Veterans Affairs began their own
Vets First Contracting Program with its own verification. The
Vets First Contracting Program is only for specific contracting
opportunities within the U.S. Department of Veterans Affairs.
It is wholly separate from the SBA and has different
eligibility requirements from the SBA's Service Disabled
Veteran Small Business program which is used all across the
federal government.
Now, we understand some members of Congress have suggested
the VA's verification of veteran-owned firms for the Vets First
Contracting Program should be moved to the SBA and paid for by
the VA. This idea comes from a lack of understanding that the
Service Disabled Veteran-Owned Small Business set-aside
program, which is under the SBA's management and enforcement,
has a different purpose and different requirements from the
VA's Vets First Contracting Program. Since the SBA failed to
create a verification program for the Service Disabled Veteran-
Owned Small Business set-aside program, businesses and agencies
are confused and hundreds of millions of dollars have been lost
to legitimate SDVOSB firms due to fraud and abuse.
Additionally, if the SBA took on the VA's verification for
the Vets First Contracting Program and the VA paid for this
program, what would happen when the VA runs into budgetary
challenges and doesn't want to pay for the services anymore?
More recently, due to the SBA's poor regulatory
implementation of the Women-Owned Small Business set-aside
program, the Government Accountability Office found that more
than forty-percent of businesses (that previously received
contracts) it examined for program eligibility should not have
attested they were WOSBs or EDWOSBs at the time of review.
Thankfully, Congress and the President acted together
through the recent passage of the FY15 National Defense
Authorization Act to remove self-certification from the Women-
Owned Small Business set-aside program which, when implemented,
will certainly elevate the scrutiny of verification for this
program. We appreciate Congress stepping up to force the SBA to
do what it should have done all along. We strongly implore this
committee to hold SBA accountable for the creation of strong
regulations to improve the verification and use of this
program.
SBA's role in the Rule Making Process
The SBA's role in the rule making process includes the
development and enforcement of regulations to enact federal
laws. Both steps are vitally important to our nation's goal to
reach full productive capacity and assure that a fair portion
of the total purchases and contracts are placed with small
business concerns.
So, as Congress passes legislation aiming to achieve these
goals, we must rely upon the SBA to prepare and enforce
regulations that successfully fulfill your intent. In this
area, the SBA has failed woefully.
1. The regulations developed and enforced by the SBA
for the implementation of the Women-Owned Small
Business set-aside program were flawed from the very
start. The SBA ignored the input from stakeholders on
the inability of the processes brought about through
the regulations to effectively insure that only
qualified women-owned firms received access to set-
asides. The SBA created a grossly complex method of
managing the documents secured from firms seeking
access to the program. The SBA turned contracting
officers into de facto certifiers - driving down their
desire to use the program. And, the SBA devoted very
limited resources and funding to the implementation of
the program, education of contracting officers and
oversight/enforcement of the regulations.
2. The SBA failed to create a verification program
for the Service Disabled Veteran-Owned Small Business
set-aside program. The consequence has been that
hundreds of millions of dollars have been lost to
legitimate SDVOSB firms due to fraud and abuse and
there is a great deal of confusion between the SBA's
SDVOSB and the VA's Vets First program.
3. We also see the failings of the SBA in the failure
of the agency to staff an appropriate number of
Procurement Center Representatives. PCR's work all
across the U.S. to enforce the requirement for small
business set-asides in their regions. The most crucial,
front-line teams that acts to assure that a fair
portion of the total purchases and contracts are placed
with small business concerns - is clearly not a
regulatory enforcement priority of the Small Business
Administration.
The U.S. Women's Chamber of Commerce agrees with the budget
views of this committee: the SBA must allocate greater use of
their funds to the core, Congressional mandated activities of
the agency. And, this Committee must provide strong oversight
and accountability. Rather than funding the SBA's extra layer
of non-essential national and regional management and non-
mandated programs - we recommend funds be directed to
regulatory enforcement and services provided directly to assist
and protect small business owners.
And, I ask you to help us assure that the SBA properly
implements the provisions in the FY15 National Defense
Authorization Act that will bring greater verification and
accountability to the Women-Owned Small Business set-aside
program.
Thank you for the opportunity to provide this input.
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