[House Hearing, 108 Congress]
[From the U.S. Government Printing Office]

                                                   S. Hrg. 102-000 deg.




                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION


                      WASHINGTON, DC, MAY 7, 2003


                           Serial No. 108-12


         Printed for the use of the Committee on Small Business

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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director


                            C O N T E N T S



Styles, Angela B., Office of Federal Procurement Policy..........     4
Chapman, Lloyd, Microcomputer Industry Suppliers Association.....    13
Armendariz, Fred C., Small Business Administration...............    15
Mendoza, Felipe, U.S. General Services Administration............    17
Robinson, Kenneth W., KENROB & Associates, Inc...................    19
Schooner, Steven, George Washington University Law School........    20
Cooper, David E., U.S. General Accounting Office.................    23


Opening statements:
    Manzullo, Hon. Donald A......................................    39
    Velazquez, Hon. Nydia M......................................    41
Prepared statements:
    Styles, Angela B.............................................    43
    Chapman, Lloyd...............................................    51
    Armendariz, Fred C...........................................    75
    Mendoza, Felipe..............................................    83
    Robinson, Kenneth W..........................................    90
    Schooner, Steven.............................................    94
    Cooper, David E..............................................   104
    InfoPro Group, Inc...........................................   118
    Capuano, Joseph A., Jr., U.S. Department of Transportation...   120




                         WEDNESDAY, MAY 7, 2003

                  House of Representatives,
                        Committee on Small Business
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:02 p.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
    Present: Representatives Manzullo, Velazquez, Bartlett, 
Graves, Schrock, Akin, Shuster, Musgrave, Ballance, Napolitano, 
Case, Majette, Sanchez, and Miller.
    Also Present: Representative Lynn Woolsey.
    Chairman Manzullo. Good afternoon and welcome to this 
hearing on the Committee on Small Business, and a special 
welcome to those who have come some distance to participate and 
to attend.
    Is there a scandal going on in the federal procurement 
arena? Are big businesses being awarded contracts that were 
intended to be awarded to small businesses? A recent article in 
the L.A. Times would indicate that this is the case. The 
article states that ``large companies are improperly getting 
billions of dollars in government contracts meant for small 
    It is imperative that this Committee look into what is 
going on and investigate the truth of these allegations. We 
have asked GAO to investigate this matter, and they have agreed 
to testify here today.
    To answer these allegations, we have invited as witnesses 
the highest official in the administration responsible for 
federal procurement policy, the investigative arm of Congress, 
the United States General Accounting Office, persons in the 
private sector, and members of the Executive Branch responsible 
for seeing that small businesses are fairly treated in the 
federal procurement process.
    At the end of this hearing, it is my hope that we will have 
an answer to this question: Are big businesses receiving 
contracts intended for small businesses? It is my understanding 
that some agencies have already taken steps to correct the 
situation, and we will find out today.
    One recommendation is that small businesses be required to 
certify their size annually. The Committee is willing to work 
with the SBA and propose regulations to that effect and changes 
to statutory law, if necessary, and obviously we welcome SBA's 
input on that.
    The bottom line is that this Committee is very much 
concerned with faulty information that results in an agency 
awarding to a big business a contract intended for a small 
business. This Committee is equally concerned with the accuracy 
of the data by which Congress evaluates agencies' performance 
against established, small business procurement goals. This 
Committee intends that the benefits of small business laws go 
to real-life, small business owners and employees, not to large 
    Sometime in the fall, this Committee intends to revisit 
this issue to evaluate the conclusion raised in the GAO's final 
    As a matter of procedure here, the Honorable Angela Styles 
will be able to stay for a part of the questioning, but then 
she has to run off to another meeting. So, obviously, you would 
be excused whenever you have to leave, and we appreciate your 
coming here.
    I now yield for an opening statement by my good friend and 
colleague, the Ranking Member, Ms. Velazquez of New York.
    [Mr. Manzullo's statement may be found in the appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Chairman, I 
would like to take two seconds to introduce our newest member, 
Mr. Brad Miller from North Carolina's 13th Congressional 
District. In his short tenure in Congress, he has already 
demonstrated a dedication to improving the economic environment 
of our nation's small businesses. He also serves on the 
Committee on Financial Services. I know that Mr. Miller will 
quickly become an active member of this Committee.
    Chairman Manzullo. Welcome to our Committee. Glad to have 
you here.
    Ms. Velazquez. Thank you, Mr. Chairman. With the economy in 
a slump, small businesses need all the help they can get. A 
good way for small businesses to grow is to have the federal 
government as a customer. What small businesses may not realize 
is their biggest marketplace is not overseas but right here in 
their own back yard.
    The federal government spends approximately $220 billion on 
goods and services each year, from food and uniforms to 
airplanes and artillery, yet this billion-dollar marketplace 
remains largely closed to small businesses. Even though the 
United States Government is the largest customer in the world, 
small businesses find they have no luck when making sales calls 
to federal agencies. In fact, for the last two years, our 
government has failed to meet its small business goals, costing 
small firms an estimated $12.4 billion in lost opportunities.
    To make matters worse, today, we find yet another reason 
why federal agencies are unable to meet their small business 
goal. If contract bundling, poor oversight, and lack of 
accountability weren't big enough obstacles, now small 
businesses are losing out on even more contracts intended for 
them because they are going to large businesses instead. This 
is yet another example of how the federal procurement system is 
fraught with inequities.
    Shortly after these allegations were brought to our 
attention, this Committee directed the GAO to investigate the 
situation. During this hearing, we will learn the findings of 
the General Accounting Office report and what actions federal 
agencies with oversight responsibilities are doing to address 
this issue.
    Not only is it wrong and unfair that large businesses win 
small business contracts, but it also inflates the federal 
government's track record for achieving its small business 
goals. In 2001, the most recent year data was available on 
contracts awarded, the federal government missed its small 
business goal of 23 percent. Now, with the latest General 
Accounting Office findings, we will learn that the government 
didn't just miss the small business mark, but it missed it by 
more than what we had originally thought since, the large 
business contracts were miscounted and misrepresented as small 
    The truth is, large businesses receiving contracts intended 
for small businesses is just part of a larger, more prevalent 
problem. What we have here is a federal procurement system that 
is fatally flawed. It is riddled with practices of contract 
bundling, weak oversight, no real appeal process, and little 
commitment to small businesses from top agency heads and other 
    Small businesses lose out, but so do the American taxpayers 
because, in effect, what the government buys may not be the 
best quality at the best price. Even the president acknowledges 
that there is a problem. More than a year ago, President Bush 
unveiled his five-point small business agenda. Along with 
health care, tax incentives, and regulatory relief, opening 
opportunities in federal contracting for small businesses 
topped his list.
    The rhetoric coming out of the White House is definitely 
pro-small business, but the reality is that little action has 
been taken to deliver on the promises made to help this 
nation's entrepreneurs. The administration did outline its 
contracting strategy last fall, but it was just like the 
rhetoric: empty. Unfortunately, it will become clear today that 
it will take more than the minor regulatory changes and 
increased reporting requirements contained in the 
administration proposal to bring about any real change.
    I can tell you what we need to bring about some real 
change: a complete and comprehensive overhaul of the entire 
federal procurement system. We need to start with strengthening 
the appeals process and empowering small businesses to fight 
and actually win when they are treated unfairly. We need to put 
in place a regulatory body that can truly police federal 
agencies. We need to hold these agencies accountable. It is 
only then that we will see small businesses get their fair 
shake and their fair piece of the $220 billion procurement pie.
    The General Accounting Office report is yet another symptom 
of our ailing federal procurement process. Small businesses all 
over this nation can provide the federal government with 
quality goods and services at competitive prices. Agencies need 
to understand and embrace this. If they refuse to, which is 
usually the case, then safeguards will have to be put in place 
to protect small businesses, and more power will have to be 
given to those responsible for enforcing the law, which 
mandates that the federal government work with small 
    It is the American way, and small businesses are the 
backbone of this economy. They deserve fairness and equity, 
especially from their own government. Thank you, Mr. Chairman.
    [Ms. Velazquez's statement may be found in the appendix.]
    Chairman Manzullo. Thank you for that excellent statement.
    Our first witness is the Honorable Angela Styles, 
administrator, Office of Federal Procurement Policy. We have a 
clock right there. When it gets to yellow, you have got a 
minute, and when it gets to red, you are supposed to stop. And 
if you could pull the microphone as close to your mouth as 
possible, we would appreciate it. I look forward to your 

                       PROCUREMENT POLICY

    Ms. Styles. Thank you, Chairman Manzullo and Congresswoman 
Velazquez and members of the Committee. I am pleased to be here 
today to discuss why the large businesses are improperly 
receiving contracting opportunities intended for small 
businesses. This issue is of great concern, particularly at a 
time when this administration is working hard to create an 
environment where small business can flourish.
    We share your interest in making sure that small businesses 
do, in fact, have access to federal contracting opportunities. 
When small businesses are excluded from federal opportunities, 
our agencies, small businesses, and the taxpayers lose. With 
this in mind, the administration is taking steps to ensure that 
large businesses are not improperly receiving contracting 
opportunities intended for small businesses.
    We have heard of instances where large businesses are 
taking advantage of contracting opportunities intended for 
small businesses. While we do not have hard evidence that this 
is happening, we want to make sure that the various actions the 
administration is taking do, in fact, increase small business 
access to contracting opportunities. We are particularly 
concerned about larger contractors masquerading as small 
businesses in large, long-term contracts, thus depriving small 
businesses of significant opportunities to compete against 
their peers.
    We welcome SBA's recent issuance of a proposed rule to 
amend its regulations on small business size status. SBA has 
proposed amendments to make sure that large businesses do not 
take advantage of opportunities intended for small businesses. 
This action should help protect against misrepresentation of 
small business status.
    In the meantime, there are other protective measures we can 
and should take. I understand that GAO has found that in some 
cases agencies are relying on inaccurate or misleading data to 
make decisions about small business contract awards. If that is 
the case, we need to take corrective action.
    We want to make sure that small businesses do, in fact, 
have access to contracting opportunities intended for their 
benefit. In particular, my office is taking steps to prevent 
misrepresentations under government-wide acquisition contracts 
for information technology, known by their acronym as 
``GWACs.'' GWACs are awarded by executive agents designed by 
OMB under the Clinger-Cohen Act. Typically structured as 
multiple-award contracts, GWACs are popular vehicles for 
satisfying agency needs, in large part because they provide 
quick access to the marketplace and can save customers the cost 
and burden of establishing their own separate contracts.
    Today, four agencies serve as executive agents: the General 
Services Administration, the Department of Commerce, the 
National Aeronautics and Space Administration, and the National 
Institutes of Health. These agencies maintain a total of 15 
GWACs: GSA has 10, NIH has three, and the other two agencies 
have one each.
    On February 11th of this year, we advised our four 
executive agents, whose designations were up for renewal in 
April, of our intention to require that they obtain annual 
certifications from their contractors regarding small business 
status. We believe GWACs, like other multiple-award contracts, 
and GSA's supply schedules may be vulnerable to 
misrepresentation because they are typically large and long 
term. Their structure allows a prequalified contractor to 
receive sizable work orders from agencies over the course of 
many years, often in millions and occasionally even in hundreds 
of millions. For this reason, we use the OMB executive agent 
renewal process to provide temporary protection from possible 
misrepresentation of small business status.
    Under OMB's designations, the executive agents are required 
to develop schedules identifying when their small business GWAC 
contractors will begin annual certification of their size 
status. Our intent is not to disrupt contract performance by 
requiring termination of contracts with businesses who are 
small but became large during contract performance. Also, we 
want to be flexible in considering ways to implement the 
certification requirement prospectively so that we do not have 
unintended consequences.
    However, we expect our executive agents and their customer 
agencies to identify this change in business status in the 
normal course of their reporting to the Federal Procurement 
Data System. For example, after a change of status from 
``small'' to ``other than small'' occurs and is reflected in 
the change in an annual certification, agencies are expected to 
report that orders under the GWACs were awarded to a large 
rather than a small business. Departments and agencies can then 
use this information to more accurately account for their small 
business contracting activities and make appropriate 
adjustments to their contracting practices to ensure small 
businesses have access to contracting opportunities.
    Our office will continue to work closely with SBA, this 
Committee, and major procuring agencies to increase small 
business access to contracting and subcontracting opportunities 
and to help guard against instances where small businesses are 
excluded from federal opportunities by fraud, 
misrepresentation, or otherwise. By doing so, we are helping to 
ensure that our citizens reap the full benefit of a robust 
supplier base.
    This concludes my prepared remarks, but I am happy to 
answer any questions you may have.
    [Ms. Styles' statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much. Our next witness, 
Lloyd Chapman, will be introduced by his member. What we are 
going to do is I am going to have Congresswoman Woolsey 
introduce her witness, and then I am going to allow the members 
of the Committee to ask questions of Angela Styles so she will 
have time to answer those questions.
    Ms. Styles. Mr. Chairman, it is perfectly all right with me 
to wait.
    Chairman Manzullo. No. What I would suggest, Lynn, is that 
you go ahead and introduce Mr. Chapman----
    Ms. Woolsey. All right.
    Chairman Manzullo [continuing]. And then we will go to Ms. 
Styles. And then he will be able to testify. Please go ahead.
    Ms. Woolsey. Thank you for the honor of being able to do 
    Chairman Manzullo. We welcome you to our Committee. We are 
glad to see you here.
    Ms. Woolsey. You are talking about things that don't make 
sense to me, actually. And thank you, Ranking Member Velazquez, 
for letting me do this.
    It is an honor to join you today to introduce one of my 
favorite constituents from Novato, California, Lloyd Chapman, 
and I am confident that Mr. Chapman's testimony will prove 
insightful. He has been an outspoken advocate for small 
business people in our North Bay community--we are right across 
the Golden Gate Bridge from San Francisco--and he has been an 
advocate for small business people throughout the country for 
over 17 years.
    He founded and is currently president of the Microcomputer 
Industry Suppliers Association, MISA, which represents the 
interests of microcomputer and technology suppliers.
    Lloyd's tireless efforts have led government purchasing 
agencies to review their small business-certification processes 
to ensure that contract set-asides for small businesses truly 
go to small businesses. There is no doubt that Mr. Chapman 
shares this Committee's commitment to the mission and goals of 
the Small Business Act, and I am pleased that he will be able 
to share his experiences with you today. With that, I am 
pleased to welcome Lloyd Chapman to Capitol Hill.
    Chairman Manzullo. Thank you very much. Ms. Velazquez, you 
have questions of Ms. Styles.
    Ms. Velazquez. Thank you, Mr. Chairman. Ms. Styles, thank 
you for your testimony.
    In your written testimony, more than half of it is on the 
President's bundling contract. Here, we are today to discuss 
and comment on the General Accounting Office report. I don't 
think you did that. But I would like to pursue your discuss 
regarding the President's bundling plan.
    It seems to me that what is missing in the President's 
bundling plan is accountability. The report includes the word, 
``accountability,'' seven times and the word, 
``responsibility,'' 12 times but doesn't include any true 
measures of accountability.
    The first quarterly status report, which barely half of the 
agencies responded to on time, speaks volumes regarding the 
commitment to the President's plan. Worse, what you asked for 
in this status report isn't going to provide one indicator as 
to whether opportunities for small businesses have increased.
    Why didn't you ask agencies to provide you with the number 
of bundled contracts reviews? How are you going to know if you 
have reduced the effect of contract bundling on small 
businesses if you are not even asking agencies to provide you 
with the impact of their bundled contracts on small businesses. 
And did you ask agencies to provide you with the number of 
small businesses that benefited from agencies' action to 
    Ms. Styles. We actually do recognize that accountability is 
a key piece of this. I think, when we went to talk to small 
businesses in this arena, trying to implement what the 
President wanted, the one thing we heard was what was needed 
was accountability and leadership. More than changes in the 
regulation, which we have proposed, and we did propose on time, 
more than statutory changes is what they were looking for was 
accountability and leadership.
    We came out with the proposed regulations on time. We have 
gone to the agencies, first, in December with a draft report, 
quarterly report, which included a great deal of data elements. 
For the first report, based on our discussions with the 
agencies, we realized it was almost impossible for them to be 
able to collect the data for the first report. We will be going 
out with a very extensive data call in the next report. We are 
working actively with GAO to make sure that it is a data call 
that we will be able to measure success or if it is not 
successful. So we do recognize that we need that data in order 
to measure where we are, where we are going, and whether the 
course that we are taking is successful or not.
    Ms. Velazquez. Ms. Styles, can you please answer to me why 
didn't you ask agencies to provide you with the number of 
bundled contracts reviews?
    Ms. Styles. We are asking for that information, and the 
first one we went out to, we believed it was almost impossible, 
in the two-week period we gave them to get back to us, to 
actually be able to collect the information.
    Ms. Velazquez. So in the next report, you are going to be 
asking the question for the agency because the only way we can 
measure whether or not people are unbundling contracts is if 
they review those contracts.
    Ms. Styles. Yes, yes. We are asking for detailed 
information on the number of reviews, the dollar value, et 
cetera, and we are working with GAO to try and make sure that 
we are asking the right questions. We don't want to just rely 
on our ability to ask the right questions. We want to work with 
you. We want to work with other people. We are very happy to 
share what we are asking with you, with the Senate, to make 
sure that we are getting the data and we are getting the 
    So I am very happy to work with you to make sure that we 
understand what are the right questions, what data you want, 
what data we want, so we can understand exactly where we are 
and exactly where we are going.
    Ms. Velazquez. In the proposed bundling rule, small 
business specialists are required to notify ASDABUs if an 
agency's contract strategy involves contract bundling that is 
unnecessary or unjustified. My question to you is, what will 
the ASDABU be able to do? They have no authority.
    Ms. Styles. They are required to notify both, I believe, 
the ASDABU and the procurement center representatives, both of 
whom--certainly the procurement center representatives should 
have authority to stop the contract, is my understanding, and I 
think the ASDABUs, in their position with the agencies, should 
be able to work with the agency to work through the issues. 
That is why they are embedded within the agency.
    Ms. Velazquez. Can you explain that to me again? I don't 
think that they have the authority to stop the contract.
    Ms. Styles. I do not believe they have the authority to 
stop the contract, but they are within the agencies, and it may 
be useful to ask some of the ASDABUs here, to help the agency 
understand the issues in a facilitated environment before you 
get to a controversial environment, or one that is more like 
litigation with a procurement center representative.
    Ms. Velazquez. Would you support ASDABU having the 
authority to stop a contract that did not include adequate 
small business participation?
    Ms. Styles. I think you have to ask the ASDABUs that. If 
the ASDABUs say that that authority is required for them to do 
their job, I would certainly be willing to consider it. I can't 
say that I know enough about their day-to-day activities to be 
able to make that determination right now.
    Chairman Manzullo. Let me go to Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman. Let me lock arms with 
what Mrs. Velazquez said. I know that the subject of contract 
bundling is a touchy one. I represent the Second Congressional 
District of Virginia, which includes eight major military bases 
and 385 military commands, and there is a lot of construction, 
and there is a lot of business that goes on there, and I have 
contractors, I have small businesses in that district who could 
do the job perfectly, but because they bundle it, may go to 
somebody in another state, and then they subcontract it to the 
guy that is going to do it anyhow, and that is not right.
    I think, you know, if all of us have people in the 
districts that can do it, it should go to them. I look at 
contract bundling as just the lazy way out, do one contract and 
let somebody else do the rest of the work, and I don't agree 
with that. I think that is wrong, and I think, as Mrs. 
Velazquez says, that is really sticking it to small business, 
and that is not a good thing.
    And one thing I think that Mrs. Velazquez said, that the 
administration has said these things that they want to do to 
support small businesses, but it is only words, it is only 
rhetoric, and I am getting to the point, I agree with that. You 
know, you said there is accountability. Who is holding these 
agencies accountable?
    Ms. Styles. The President's management council and the 
President himself. The accountability is through the deputy 
secretaries of each agency. That is why we set it up to go 
through the leadership of these agencies. I have met with the 
President's management council at least three times in the past 
six months to discuss contract bundling, to discuss how 
important this is to the President, and to make sure people 
understand that.
    I believe our political leadership does understand it, but 
it takes a while to make cultural changes, and our contracting 
people don't have a lot of resources at this point. We really 
have to make some fundamental changes and make sure people from 
the top down recognize how important this issue is.
    Mr. Schrock. I know things take a long time, but I am 
getting old, and I don't have much time, and I want to see some 
of this stuff before I leave Congress one of these days, and if 
it is typical government, they will out-wait me. When I was in 
the military, they could out-wait me because they knew I would 
get transferred somewhere. It is the same thing here. We have 
got to get this thing working because our small businesses are 
the ones that are suffering, and I agree with Mrs. Velazquez 
that we just need to hold somebody's feet to the fire to get 
this done and get it done quickly.
    I understand what you are saying, that things move slowly. 
That is no excuse. Just because it has always been done that 
way, I, frankly, don't think that is the way it should be done. 
I didn't come here to do business as usual. If that is the 
case, my constituents need to send me home. So we just really 
need to work on this.
    Ms. Styles. I agree with you. I think we all need to work 
on it. I think our agencies, with the help of this Committee, 
need to understand how important this issue is, and it is hard 
to move a bureaucracy, but I certainly am committed to trying 
to make it move.
    Mr. Schrock. Great. I appreciate that. Thank you, Mr. 
    Chairman Manzullo. We are also joined by Mrs. Sanchez. 
Welcome to our Committee. Glad to have you here.
    Ms. Sanchez. Thank you.
    Chairman Manzullo. Mr. Miller, do you have any questions?
    Mr. Miller. Just one or two, Mr. Chairman.
    I think all of the questioning so far has been about 
bundling to get above the ceiling of the Small Business Act. 
There is also evidence, apparently, of unbundling or 
disaggregating purchases to fall below the floor. What, if 
anything, is your agency doing about that? How can that be 
    Ms. Styles. We have taken a very hard look at purchase card 
practices. You are talking about the floor generally being the 
micro-purchase threshold of $2,500. It certainly has been a 
concern to us that we don't have proper management controls at 
the agencies in place, whether that is to prevent fraud and 
abuse, or whether that is to make sure that there are 
appropriate opportunities available for small businesses.
    We have been pushing both the agencies and the credit card 
companies to make more data available so we can measure what is 
going to small businesses below that micro-purchase threshold 
because I think it hampers our ability to make assessments of 
whether $2,500 is too high or too low if we don't know how much 
of that is going to small businesses or not.
    Mr. Miller. One additional question. I understand there are 
also subcontracting requirements, and either the statute or 
contracts provide for liquidated damages as an enforcement 
mechanism. Can you cite instances in which liquidated damages 
have been used?
    Ms. Styles. I know of no instance where that has been used, 
although I do think the subcontracting environment is one that 
has been ignored and is difficult for small businesses as well 
as prime contractors. We are working on putting together a 
small, interagency group to assess many of the subcontracting 
issues, whether it is forms, whether it is understanding 
whether a company is certified for one procurement but not for 
another as a small business, to really make the subcontracting 
environment better and more attractive for companies. I think 
we recognize that there are a lot of issues that have just been 
ignored in subcontracting for a while.
    Mr. Miller. Why has the enforcement mechanism of liquidated 
damages not been used, and do you intend to use that more in 
the future?
    Ms. Styles. I will have to answer that question for the 
record for you because I don't know much about liquidated-
damages provisions in subcontracting arrangements.
    Chairman Manzullo. Mr. Bartlett?
    Mr. Bartlett. Thank you very much. I am now involved with a 
constituent in a problem. This is a small business that 
responded to an RFP that was a set-aside, as I understand it, 
for small businesses. When the contract award was made, it was 
made to a business that they say is clearly not a small 
business. By no measure are they a small business. They have 
far more than the 500 employees and so forth.
    They have taken what they felt was the only course of 
action available to them. They have filed a protest. So now, 
with that in adjudication, we can't talk about that. So what I 
want to talk about is a generic situation. Are there 
circumstances under which a business which is clearly today not 
a small business, are there circumstances under which they 
could compete for a small business contract and be within our 
regulations, and if that is true, what can we do about that?
    Ms. Styles. I think that is the situation, and I think my 
office, over the contracts that I have control over, and the 
Small Business Administration are both taking steps to change 
    Mr. Bartlett. What are the circumstances under which they 
could clearly not be a small business and still compete for a 
small business contract?
    Ms. Styles. We have a system that allows people to 
prequalify on a contract, whether it is a GSA schedule or 
another type of multiple-award contract. So you essentially get 
a hunting license. You are a contractor. You get on to this 
contract. That doesn't mean you are going to get any business. 
At the time, Year 1, when you get onto that contract, you are a 
small business. These can be contracts as long as 20 years. In 
Year 2, maybe they become a large business. For the next 18 
years under our rules, that person will continue to be counted 
as a small business.
    Mr. Bartlett. Is Bill Gates' Microsoft still a small 
business? I think he was 20 years ago, wasn't he?
    Ms. Styles. We recognize that there is a problem here. GSA 
has taken steps, the SBA has taken steps, and my office----.
    Mr. Bartlett. What are you going to do about it?
    Ms. Styles. We have a couple of options here. We have a 
rule. SBA has a rule out right now that is looking at several 
of the options. They run the gamut from at option year renewal, 
which would be about every five years--I, personally, think 
that is too long to wait--we have an option of recertifying 
when your size changes. We have an option of annual 
recertification, or you have an option of every task or 
delivery order. So you could have a 20-year contract, and once 
an agency has a need and goes to buy, then the recertification 
has to take place at that point in time.
    The question is, what is the best for our agencies, and 
what is the best for small business? A lot of small businesses 
don't want it to be one year. They want a little bit more of a 
cushion because they can be up and down on that margin of what 
is small in a several month period, and so on Day 5, you could 
be small, but the next day you are not. So we do need a little 
bit of smoothing in there, and the question is, is that a year? 
Is that two years? Is that three years? Is it every task and 
delivery order?
    Mr. Bartlett. What will be your proposal?
    Ms. Styles. My office has taken the position that annual 
recertification is appropriate, but we have heard from a lot of 
small businesses that think that that might be too frequent for 
some of the businesses, that they might need a little more 
leveling from year to year. There are some small businesses 
that have come in and asked us to look at two or three years or 
when size status changes, which is why you saw the SBA rule go 
out with one option identified in the rule but seeking comments 
on several of the other options, so we understand what the 
effect on small business is.
    We don't want a small business, because they hire one more 
employee one day and then fir them the next, to be up and down 
on our scale. I think that could have some unintended 
    Mr. Bartlett. For people who are now caught in this, there 
is no recourse?
    Ms. Styles. No. An agency can ask, on a task- or delivery-
order basis, for a particular business to recertify, is my 
    Mr. Bartlett. Okay. Could that happen under a protest?
    Ms. Styles. I don't know the answer to that question. I 
don't know, but I can find out for you.
    Mr. Bartlett. I appreciate that. Thank you very much. Thank 
you, Mr. Chairman.
    Chairman Manzullo. Mrs. Sanchez?
    Ms. Sanchez. Thank you, Mr. Chairman. I don't have any 
questions at this time.
    Chairman Manzullo. Let us see. Ms. Majette, do you have any 
    Ms. Majette. No.
    Chairman Manzullo. Okay. Anybody else? Okay. I would yield 
the balance of my time to Mrs. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Mendoza?
    Mr. Mendoza. Yes.
    Ms. Velazquez. Thank you. Ms. Styles said that if ASDABUs 
wanted the authority to be able to be able to stop a contract 
that did not have adequate small business protection, she will 
consider supporting this. Do you think providing that authority 
is a good idea?
    Mr. Mendoza. I think so, Madam Velazquez. Yes, ma'am, I do.
    Ms. Velazquez. Would you support it?
    Ms. Styles. I would like to talk to all of the ASDABUs. I 
think the vehicle for that is the new, SBA Small Business 
Procurement Advisory Council, but I am very happy to follow 
through with them. I think they are meeting June 1st or second, 
and I would be very happy to follow through with them and get 
their ideas on this, particularly since we are in the middle of 
a rulemaking right now, and we are assessing the comments. We 
have got a draft rule. We will be coming out with a final. If 
this is something that needs to be taken into consideration, we 
will talk to them and consider it.
    Ms. Velazquez. Thank you. Ms. Styles, in the President's 
bundling plan, you create significant new requirements for the 
SBA's procurement center representatives. They will now be 
required to review contracts not set aside for small businesses 
and identify alternative strategies to increase small business 
participation, review a position within 30 days of the agency 
issuing the solicitation, work with agencies' small business 
specialists, review agency position strategies and analyses, 
review agencies' oversight of agency subcontracting programs, 
review agencies' assessment of contractor compliance with 
subcontracting plans, and revise agency acquisition strategies 
to increase small business teaming.
    This is in addition to their other duties of working 
directly with small business to counsel them on the federal 
marketplace, identifying agency sources for small business 
products and services, now conducting agency surveillance 
reviews, acting as part-time commercial marketing 
representatives. However, no additional resources are provided, 
either in the form of travel dollars or money to hire 
additional staff.
    This is exactly the same strategy used by the 
administration for the SEC: tough talk about enforcement but 
not dollars to address the problem. How do you think that they 
could do their job? How could you think they could do a good 
job without the resources that they need?
    Ms. Styles. I think you have fairly identified one of the 
most difficult parts of the report. I think we recognize the 
need for procurement center representatives, as well as our 
ASDABUs, to do more with less in an environment of limited 
resources. I think we have asked them to do a lot without 
allocating additional resources.
    I do think you have identified a very difficult point. I 
would certainly ask you to talk to SBA as well on their 
allocation of resources for PCRs. We certainly try to increase 
the responsibilities for ASDABUs where we think there is a 
little bit more capacity to reallocate resources to look at 
things, but I do agree with you that there is an issue there.
    Ms. Velazquez. And I guess that you are aware that there is 
not even one PCR per state.
    Ms. Styles. It is less than 50, yes.
    Ms. Velazquez. So would you support doubling that?
    Ms. Styles. Pardon?
    Ms. Velazquez. Would you support doubling the number of 
    Ms. Styles. I am not from the budget side of the house, but 
OMB does not support doubling those resources.
    Ms. Velazquez. Ms. Styles, I think that if we are honest 
and serious about tackling the problem of small businesses 
through contract bundling, we have to put the numbers and the 
resources that we need in order for them to do their job; 
otherwise, it is empty rhetoric.
    Thank you, Mr. Chairman.
    Chairman Manzullo. We have got a series of votes. Did 
somebody hear five votes? Is that what it said? Wonderful.
    Ms. Styles, you are excused. We are going to be back. It 
could be as long as 45 minutes. Does anybody here have an 
airplane that they have to catch to get back home? Okay.
    Ms. Velazquez. Mr. Chairman, I would like to ask a request 
for Ms. Styles.
    Chairman Manzullo. Sure.
    Ms. Velazquez. If you could please provide within the next 
10 days a list of the top 25 buying activities and of those 
which have a PCR covering them exclusively and which don't.
    Ms. Styles. Okay. I think I can work with SBA to get that 
information. They are SBA's people, so I will certainly work 
with them to get that information.
    Ms. Velazquez. Thank you.
    Chairman Manzullo. Okay. Fine. Well, let us go vote, guys.
    [Whereupon, at 2:37 p.m., a brief recess was taken.]
    Chairman Manzullo. Well, we are back at it again, folks, 
after an exciting series of half-a-dozen votes, including the 
use of the Capitol grounds for the soap box derby. That was a 
tough vote, wasn't it, Ms. Velazquez? Okay. You think are they 
necessary, aren't they?
    Ms. Velazquez. I don't know, but I am not in control.
    Chairman Manzullo. Okay. We look forward to, Mr. Chapman, 
your testimony. I am glad I encouraged your member of Congress 
to introduce you way back then. Okay? I look forward to your 
testimony. You know the story on the lights. When it gets to 
yellow, you have one minute, and when it gets to red, you 
should stop. Okay?
    Mr. Chapman. All right.
    Chairman Manzullo. The written testimony of all of the 
witnesses and any members of Congress will be made part of the 
official record without objection, and anybody else in the 
audience that wants to submit a written statement, not to 
exceed two pages, no attachments, of a type that is not less 
than 12 point, single spaced; you got that? You are welcome to 
do that. You have 10 days to get that in to Mr. Crouther. Mr. 


    Mr. Chapman. I want to thank Chairman Manzullo and Ranking 
Member Velazquez and the distinguished members of the Committee 
for their attention to this critically important problem to 
small businesses.
    According to information available from the SBA, 
approximately $85 billion in prime contracts and subcontracts 
are being shown as awards to small businesses. I believe, 
during the course of the hearing, you will find that number is 
dramatically overstated. The billions of dollars in federal 
small business contracts and subcontracts that are going to 
large businesses are the direct result of policies, regulations 
specifically written historically by the SBA, OMB, and GSA.
    If we want to find out who is responsible for this problem, 
we simply have to ask ourselves, who created contract bundling? 
Who wrote federal policies that allowed large businesses to 
receive small business contracts for up to 20 years? Who 
created small business size standards up to 3,000 percent 
higher than the average small business?
    I am concerned that the SBA and OMB and GSA will attempt to 
convince this Committee that the staggering deficiencies in 
small business contracting and subcontracting are mainly the 
result of bad data and out-of-date information.
    In August of 2002, I will begin to compare the information 
that companies have posted on PRO-Net and CCR against the 
information on our Web sites. I found dozens of examples where 
firms had blatantly misrepresented their number of employees, 
NAICS codes, and their affiliations with large businesses. 
Subsidiaries of Fortune 1000 companies in international firms 
were common. Some of the firms had up to 44,000 employees and 
annual revenues of up to $12 billion. In 2001, a Dutch firm 
with 26,000 employees received over $60 million in small 
business contracts through two subsidiaries. Although still 
listed on PRO-Net, a major government supplier of IT products 
reported in their 1999 annual report to stockholders that they 
no longer qualified as a small business after February of 1998.
    Based on the information that I began providing the SBA in 
2002, the SBA has acknowledged removing over 600 firms from 
PRO-Net after determining that they were large businesses. 
Since the SBA has declined MISA's request that the SBA notify 
agents of these findings, it is my understanding that these 600 
firms can continue to receive small business contracts and 
    Regulation 16(d) of the Small Business Act states that 
misrepresenting a firm as a small business is punishable by 
cancellation of contracts, debarment, fines of up to $500,000, 
and imprisonment up to 10 years. The SBA Office of the 
Inspector General has indicated no firm has been penalized 
during the last 15 years for misrepresenting themselves as a 
small business.
    Based upon the magnitude of the discrepancies in small 
business contracting numbers, I have to question the 
effectiveness of current protest procedures the SBA has in 
place. The SBA has acknowledged dismissing hundreds of small 
business protests in recent years by claiming the acquisitions 
in question were no small business set-asides. The SBA's 
apparent policy of dismissing non-set-aside protests is 
inconsistent with Regulation 16(d) that makes no 
differentiation between misrepresentations or set-asides, non-
set-asides, prime contractor subcontracts. Some of these 
dismissed protests were filed against the very companies that 
the SBA has ultimately removed from PRO-Net.
    When the Small Business Act was passed more than 50 years 
ago, it called for a fair portion of government contracts be 
awarded to small businesses. This is obviously not happening. I 
believe the Small Business Act was a win/win, economic-stimulus 
package designed to direct federal contracts and subcontracts 
to the small businesses that account for 98 percent of U.S. 
firms and over 50 percent of the American work force.
    To achieve this goal, I would like to see a GAO 
investigation into the accuracy of subcontracting reports. 
Current policies allowing large businesses to receive small 
business contracts should be modified or eliminated. In 
addition, more effective protest procedures are needed, with 
the strict enforcement of Regulation 16(d) regarding small 
business misrepresentation. A full and accurate implementation 
of the Small Business Act will have a powerful impact on our 
nation's economy and the millions of American small businesses.
    This concludes my remarks, and I will be glad to answer any 
questions that you may have at this time.
    [Mr. Chapman's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much. Our next witness is 
Fred Armendariz, associate deputy administrator of the SBA. I 
look forward to your testimony.


    Mr. Armendariz. Good afternoon, Chairman Manzullo and 
Ranking Member Velazquez and distinguished members of this 
Committee. Thank you for inviting me here today to discuss 
concerns regarding large businesses obtaining federal contracts 
intended for small businesses and the accuracy of the small 
business information contained in databases maintained by the 
U.S. Small Business Administration (SBA) and the General 
Services Administration (GSA).
    Part of this concern is related to a number of large 
businesses inappropriately included in the Procurement 
Marketing and Access Network, or PRO-Net, a small business 
database administered by the SBA. The SBA developed PRO-Net as 
a self-certified database of small businesses. Presently, PRO-
Net holds records of more than 150,000 small businesses. In 
December of 2002, the SBA partnered with the Department of 
Defense to integrate PRO-Net and the Central Contractor 
Registration, or CCR, systems to create a single point of 
vendor registration.
    PRO-Net is a marketing tool that is designed to assist 
small businesses with presenting their capabilities to federal 
agencies and other organizations as a potential source of goods 
and services. It is not intended or designed to validate the 
small business eligibility of a registrant, except for firms 
certified by SBA under the 8(a) Business Development, HUBZone, 
and small disadvantaged business programs.
    For each federal procurement solicitation, a bidder must 
represent in good faith that it is a small business at the time 
it submits its initial bid. A contracting officer shall accept 
a bidder's small business representation unless a size protest 
is received from other bidders or if other information causes 
the contracting officer to question the bidder's small business 
representation. A contracting officer cannot assume, nor is 
their guidance that suggests, that a business listed on PRO-Net 
is an eligible small business for a specific procurement.
    The SBA has a well-established process for resolving 
questions concerning the small business eligibility of a bidder 
on a federal procurement. In most cases, the SBA makes a 
decision within 10 working days. If a business is determined to 
be other than small, a contracting officer cannot award the 
contract to that business. A business determined to be other 
than small as a result of a formal size determination is 
notified that it cannot represent itself as a small business on 
future procurements which specify a size standard at or below 
the size standard cited in the determination.
    In addition, the business is notified that the Small 
Business Act prescribes severe penalties for misrepresenting 
itself as small.
    In Fiscal Year 2003, the SBA received 193 size protests. Of 
these, 68 businesses were determined not to be small. During 
Fiscal Year 2002, the SBA received 383 size protests. Of these, 
110 were dismissed on procedural grounds. Of the cases accepted 
for review, 85 firms were found to be other than small.
    In cases where SBA has evidence that a business knowingly 
misrepresents itself as a small business, the SBA refers the 
case to the Office of the Inspector General. Because of the 
burden of proof required by law in establishing fraudulent 
intent, a relatively few number of cases have been referred to 
the OIG.
    The SBA takes very seriously its responsibility for 
ensuring that only small businesses obtain federal contracts 
and other federal assistance intended for small businesses. Our 
responsibility is one of providing a sound process to review 
protests, not to police small business representations. In 
federal contracting, the SBA must rely on contracting officers 
and other interested parties to bring these challenges to SBA 
for resolution.
    We are aware that some businesses previously listed on PRO-
Net do not meet the SBA criteria for small business status. As 
described in my written testimony, the SBA is undertaking a 
number of actions to identify and remove large businesses from 
PRO-Net. Over the past six months, more than 600 businesses 
have been removed from PRO-Net because they are other than 
    A major source of complaints involves awards made through 
GSA Multiple Award Schedule (MAS) program, including Federal 
Supply Schedule (FSS) or other multiple-award and Government-
wide Acquisition Contracts (GWACs). Under the SBA regulations, 
a business that obtains a contract as a small business remains 
classified as a small business for the duration of the 
contract. On MAS and other multiple-award, GWAC contracts, this 
can last anywhere from five to 20 years.
    The SBA, GSA, and the Office of Management and Budget have 
been working together to develop a new policy which will 
require recertification of small business status during the 
term of MAS, FSS, and GWAC contracts. On April 25, 2003, the 
SBA published a proposed rule to require annual recertification 
of small business status on these types of contracts. We 
encourage the Committee and the public to assist us by 
reviewing the proposed rule and providing us with comments on 
the feasibility of the proposed and alternative approaches.
    The SBA is committed to the President's small business 
agenda and his proposals to create jobs and growth through the 
small business sector. We must ensure that small businesses 
receive their fair share of contract opportunities. Since small 
businesses are the engine that drives the economy, increased 
opportunities for these small businesses will result in savings 
to the taxpayer, a stronger economy, and a stronger America.
    This concludes my remarks, and I will be able to answer any 
questions you may have.
    [Mr. Armendariz's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much. Our next witness is 
Felipe Mendoza, associate administrator of the General Services 
Administration. We look forward to your testimony.


    Mr. Mendoza. Thank you, Mr. Chairman. Good afternoon, 
Chairman Manzullo and Ranking Member Velazquez, members of the 
Committee. Thank you for inviting me to appear before you today 
to discuss a matter of great concern to all of us: businesses 
classified as ``other than small'' obtaining federal contracts 
intended for small businesses and the accuracy of the data 
contained in the Federal Procurement Data System that 
specifically identifies or verifies the size status of a 
    Before I begin my testimony, I would like to introduce a 
distinguished member of the General Services Administration 
acquisition team who is here with me today, Mr. Dave Drabkin, 
who is sitting right behind me. He is the deputy associate 
administrator for acquisition policy and GSA's senior 
procurement executive.
    In GSA, we know that small businesses are the engine of our 
national economy and that they, more often than not, bring to 
the market new and innovative solutions to vexing government 
    Let me begin by stating that GSA is aware of and shares 
your concern that contracts intended for small businesses are 
sometimes winding up with larger firms. I will explain what we 
are doing to address this situation in just a moment.
    Increasing procurement opportunities for small businesses 
is a major initiative of the Bush administration, and it is an 
issue to which I have devoted a majority of my time and energy 
since joining GSA last year, seven months ago.
    As you are aware, the government-wide goal for contracting 
with small businesses is 23 percent. GSA's goal for the past 
several years has been 40 percent. The preliminary figures for 
Fiscal Year 2002 indicate that GSA spent $13.1 billion in 
procurement goods and services. Of that amount, a full 40.6 
percent, almost $5.3 billion, went to small businesses. Nearly 
$900 million of that was awarded to small, disadvantaged 
businesses. In addition, GSA did nearly $650 million in 
contracting with women-owned, small businesses in 2002. GSA 
aims high in its goals and achievements because we want 
everyone in the agency to know that we recognize the 
statutorily mandated goals to be the floor and not the ceiling.
    In addition to our agency-specific procurement 
opportunities, GSA manages the Federal Supply Schedules 
program. The schedules program is a simplified procurement 
process whereby contracts are established with commercial firms 
for commonly used supplies and services. Of the 11,000 
scheduled contracts issued to date, three-quarters have been 
awarded to small businesses.
    I would like to address the issue of small business re-
representation; that is, where small businesses are required to 
reconfirm their status as small businesses. GSA realizes that a 
major source of complaints pertaining to large businesses 
receiving federal contracts intended for small businesses 
involve awards made through multiple-award-type vehicles such 
as the schedules program and the Government-wide Acquisition 
contracts, or GWAC. Under these vehicles, a contract's entire 
term, including the initial contract, as stated by Mr. Fred 
Armendariz, periods and subsequent options can range from five 
to 20 years. Because the SBA regulations state that businesses 
that obtain contracts as small businesses will remain 
classified as such for the duration of the contract, some 
medium-to-large businesses are classified as small businesses 
for FPDS purposes.
    G.S.A. was the first agency to step forward and take 
aggressive measures to close the loophole regarding this re-
representation. We acted as soon as possible once it became 
apparent that current procurement policy was hindering 
opportunities for small businesses. We contacted SBA and worked 
with the Office of Federal Procurement Policy to come up with a 
solution that made sense and complied with the spirit, as well 
as the letter, of the Small Business Act.
    On March 1, 2003, we implemented a new policy throughout 
GSA that requires re-representation of business status at 
contract renewal, i.e., prior to exercise of the contract 
option period.
    Let me make our policy clear. For multiple-award schedule 
contracts and other multiple-award contracts that contain 
option periods, GSA contracting officers must require 
contractors to re-represent their size status prior to 
exercising an option period.
    One final point I would like to make with regard to the 
General Accounting Office's preliminary report that is at the 
center of today's hearing and pertains to the FPDS system. The 
FPDS is not a reliable source for determining a contractor's 
size. FPDS is a central repository of statistical information 
on federal contracting opportunities that identifies detailed 
information on contract actions. Contracting officers should 
not check FPDS to determine the size status of a contractor. 
For this reason, FPDS is not used as a source of information as 
to whether a company is small today, but, rather, it is used to 
determine whether, at the time of the award, we awarded the 
contract to a small business.
    As this Committee knows, GSA recently ran a competition for 
a replacement for FPDS. After a full and open competition, a 
contract was awarded to a small business, Global Computer 
Enterprises of Maryland. FPDS-Next Generation, ``NG'' as we 
call it, will give us more accurate and timely information.
    In closing, I would like to state that the General Services 
Administration is fully committed to the President's small 
business agenda and his efforts to strengthen the 
sustainability of the 25 million small businesses in America.
    This concludes my remarks, and I will be happy to respond 
to any questions that you may have. Thank you.
    [Mr. Mendoza's statement may be found in the appendix.]
    Chairman Manzullo. Well, thank you very much. Our next 
witness is Kenneth W. Robinson, president and CEO of KENROB and 
Associates out of Leesburg, Virginia. I look forward to your 
testimony, Mr. Robinson.

                  KENROB AND ASSOCIATES, INC.

    Mr. Robinson. Thank you. Mr. Chairman, Congressman 
Velazquez, and other honorable members, I wish to first say I 
view my participation here today as a privilege and an 
opportunity to share my personal opinion and experience 
relative to many of the problems and critical issues 
surrounding small business equity within the federal contract 
    There is a failure by government program and procurement 
officials to grasp the magnitude of the problems relative to 
the plight of small business vying for federal contract 
dollars. The procurement system, especially relative to small 
business, is severely ``broken'' and must be quickly fixed. 
Accountability, compliance, and enforcement of existing rules, 
policies, and regulations pertaining to small business 
utilization are being ignored and, in many instances, carefully 
circumvented by both government and large business.
    In general, the entire concept of small business 
participation and sharing in federal contract dollars is a 
well-managed system of omission and deception, which is 
carefully camouflaged with misinformation and cooked numbers 
and statistics. This environment thrives only because there 
exists no viable federal government system of enforcement 
vested with the appropriate authority and mandated to enforce 
compliance and accountability by government procurement 
officials and large business contract management.
    Stronger measures are required to force government 
procurement officials and large, government prime contractors 
into compliance. Prime contractors and government procurement 
managers are not committed to compliance or enforcing rules and 
regulations that currently exist. Particularly, when there is 
no anticipated consequence of substance or penalty for 
noncompliance, it is unreasonable to expect that retrofitted 
rules that are currently being developed will result in 
significant change in current practice without also inclusion 
of strict accountability and penalties for noncompliance.
    Over the years, I have observed large business and 
procurement officials, in every way imaginable, undermine small 
business in the government-contract arena. Loopholes and 
practices by which small businesses get shortchanged by both 
large business and government must be eliminated.
    I have teamed with large businesses on major contract 
initiatives as the mandatory, small business participant, only 
to be denied the work share promised me after the contract was 
    Concepts such as contract bundling and evergreen contracts 
are killing off small business. I wish to repeat: killing off 
small business. This is a huge problem, with wide-ranging 
dynamics. Multiple agencies, be it GSA, SBA, and others, are 
each focused on different aspects of the problem. I implore 
this Committee to take the leadership and initiative to 
influence measures that will lead to comprehensive, effective, 
procurement reform. Again, we need small business contractor 
utilization enforcement with teeth. We need rules and 
regulations that are enforceable and cannot be ignored by large 
business and government procurement managers.
    Much attention has been given to bundling and size 
classification. The issues surrounding bundling and annual size 
certification are obviously at the top of the list of reform 
priorities. However, they only represent a tip of the small 
business iceberg of problems and inequities which prohibit the 
so-called ``level playing field'' in the small business 
government-contracting arena.
    Speaking as a small business owner who has fought the 
equity battle for 20 years, I encourage meaningful procurement 
reform that effectively addresses the plight of small business 
and includes mandated rules and enforcement provisions that 
assure small business participation and equity.
    In closing, the following represent areas of concern that I 
feel must thoroughly be considered with regard to the impact of 
small business on any significant reform. All future 
procurement-reform initiatives must be comprehensively and 
thoroughly thought out and crafted prior to implementation. 
Part of the existing problems exist because that hasn't been 
    Accountability and compliance regarding small business 
utilization should be mandated and enforced at all levels of 
government procurement. Penalties should be leveled for breach 
of teaming agreements and subcontract terms and conditions by 
large businesses when subcontracting to small businesses.
    Eliminating the practice of large business prime 
contractors of limiting small business subcontractors to low-
tech services and ``body shop'' providers. Level-of-effort caps 
should be placed on large businesses performing as a 
subcontractor to small businesses where procurements is a small 
business set-aside. Disallowing small business utilization 
credits achieved through mentor-protege arrangements that are 
primarily used by large businesses to win contracts but do not 
result in actual mentorship of the small business.
    Mandatory flow-down provisions of contract clauses that 
mandate utilization of small business subcontractors; and, 
finally, a revisiting of the size-standard definition for small 
businesses and mid-sized businesses. Currently there exists 
much confusion between revenue level versus head-count levels.
    I thank you for allowing me to share with you some of the 
critical small business issues that I feel must be dealt with 
effectively if any meaningful federal procurement reform is to 
come about. In closing, I encourage this Committee to 
vigorously support small business equity in the federal 
government contracts arena. I thank you. I will entertain any 
questions, as appropriate.
    [Mr. Robinson's statement may be found in the appendix.]
    Chairman Manzullo. Thank you. Our next witness is Professor 
Steven Schooner from the George Washington University Law 
School. We look forward to your testimony.


    Mr. Schooner. Chairman Manzullo, Ranking Member Velazquez, 
and members of the Committee, I appreciate the opportunity to 
discuss small business participation in the federal procurement 
    I will address four issues. First, small business continues 
to thrive in the federal government marketplace. Second, as the 
government turns its attention to management and control of the 
purchase card program, the small business community must not 
squander this window of opportunity. Third, while I encourage 
efforts to better manage small business awards under multiple-
award contracts, I urge caution in imposing remedial measures. 
And, finally, I will attempt to interject a dose of pragmatism 
into the bundling debate.
    First, the outlook for small businesses pursuing federal 
government contracts is bright. Despite isolated problems, the 
small business share of federal procurement dollars remains 
remarkably high. As the chart in my statement demonstrates, 
Fiscal Year 2001 was a terrific year for small business. Small 
businesses received an additional $5.3 billion in contract 
awards, an increase of more than 12 percent. While the rather 
recent, 23 percent goal has not been met for the last two 
years, the small business share has remained above the 
longstanding 20 percent threshold.
    Returning to the chart, let me draw your attention to the 
purchase card statistics, where the picture looks less rosy for 
small business. Purchase card transactions now exceed five 
percent of procurement spending. As the government's purchase 
card use has grown, small businesses have struggled to maintain 
their ability to sell to the government below the $2,500 micro-
purchase threshold.
    For nearly 25 million transactions, law, policy, and 
practice all too often permit purchase card users to ignore 
normal procurement rules and procedures. To the extent that 
regulations may require efforts to rotate purchases among 
vendors or encourage the use of small business, this guidance 
is routinely ignored. Anecdotal evidence suggests that buyers 
frequently disaggregate their requirements to take advantage of 
the streamlined, micro-purchasing regime.
    Recent attention, however, from GAO, the Congress, OMB, and 
the IG community has altered the trend and sparked initiatives 
to rein in irresponsible purchase card usage, insufficient 
purchase card management and oversight, and inadequate 
purchaser training. The small business community can ill afford 
to relax during this window of opportunity. The time is now to 
demand insight into purchase card usage trends and appropriate 
controls on their use.
    One of the concerns that animates this hearing derives from 
reports that certain small business opportunities end up in the 
hands of large businesses, formerly small businesses that have 
graduated, or small businesses that, during the course of 
contract performance, grew out of their previously certified 
size status.
    The worst aspects of this problem are avoidable. 
Contractors that fraudulently certify their size status should 
be prosecuted. For multi-year, multiple-award, task order or 
delivery contracts, where individual tasks or delivery awards 
are, in effect, new contracting actions, it seems eminently 
reasonable to require annual recertification of size status, 
but caution is appropriate. Size standards are, at best, 
artificial and, at worst, arbitrary. It is disingenuous to 
bemoan advantages bestowed upon contractors that recently 
pierced these arbitrary thresholds. Obsessive compliance could 
elevate form over substance.
    In a vibrant marketplace, some small firms will merge or 
acquire other small firms. They will be acquired by large 
firms, or they will quickly develop business that will 
disqualify them from future small business opportunities. None 
of that is inherently nefarious, nor should it interrupt the 
government's contractual relationships.
    Changing the longstanding policy which treats companies as 
small for the duration of contract performance would be 
unnecessarily chaotic. Accordingly, a high degree of precision, 
coupled with carefully calibrated flexibility, is required in 
any legislative solution.
    Turning to bundling, while I am sympathetic to the 
antibundling movement, I remain troubled by the disconnect 
between aspiration and reality. There are costs associated with 
unbundling, and the current debate fails to acknowledge them. 
Quite simply, demanding that an overworked, acquisition work 
force aggressively unbundled its contracts is akin to trying to 
squeeze blood from a stone. If the government wants its 
contracts unbundled, we must have a meaningful discussion about 
how to pay for the additional effort. Any unbundling initiative 
otherwise is an unfunded mandate, burdening and already 
strained acquisition process.
    More contracts are bundled today because our acquisition 
personnel must buy more goods and services with ever-decreasing 
acquisition resources. Let us be frank. There are simply not 
enough qualified professionals left in the federal government 
to conduct appropriate market resource, properly plan 
acquisitions, maximize competition, comply with a plethora of 
congressionally imposed social policies, administer contracts 
to assure quality control and guarantee contract compliance, 
resolve pending protests and disputes, and close out contracts.
    Moreover, due to the administration's emphasis on 
competitive sourcing, we will continue to see growth in service 
contracting. Service contracts are difficult to draft, and they 
require significant resources to administer. Asking the current 
work force, without additional resources, to unbundle 
requirements is unrealistic and fiscally irresponsible.
    Demanding that buyers do more with less is good theater, 
but it is not responsible leadership. No matter how well 
intended OFPP's recently proposed, antibundling rules will 
increase burdens on procurement managers, but no investment 
will be made to facilitate the efforts.
    At the same time, I applaud OFPP's initiative to mitigate 
the effects of bundling by strengthening compliance with 
subcontracting plans. In today's environment, it makes sense to 
shift to the private sector responsibilities and functions that 
the government is unable or unwilling to support with its own 
resources. If the government is unwilling to devote resources 
to identification, nurturing, selection, and management of 
small businesses through prime contracts, the government can 
more aggressively enlist its larger prime contractors to help 
achieve the same ends.
    Increasing subcontracting plan compliance will require 
answers to difficult questions, specifically, what personnel 
will be deemed responsible for monitoring contract compliance 
with subcontracting----.
    Chairman Manzullo. How are you doing, Professor? You are 
    Mr. Schooner. I am done. That concludes my testimony. Thank 
you for the opportunity to share this information. I would be 
pleased to answer any questions.
    [Mr. Schooner's statement may be found in the appendix.]
    Chairman Manzullo. I wonder if you were really done.
    Mr. Schooner. Was I done?
    Chairman Manzullo. Okay. All right. That is fine. Thank 
    Our last witness is David E. Cooper, contracting issues 
director at the U.S. General Accounting Office. I look forward 
to your testimony.


    Mr. Cooper. Thank you. Chairman Manzullo, Ranking Member 
Velazquez, and members of the Committee, it is a pleasure to be 
here again before your Committee to discuss a very important 
topic. At your request and a similar request from the Senate 
Small Business Committee, we reviewed contracts placed with 
large companies to determine why contracting officers were 
treating those awards as going to small companies, small 
businesses, and reported in the Federal Procurement Data System 
as such.
    According to the Federal Procurement Data System, the five 
companies that we looked at received federal contracts totaling 
almost $1.1 billion in Fiscal Year 2001. Four hundred and sixty 
million dollars of that amount was reported as small business 
awards in the FPDS.
    To understand why contracting officers were reporting 
awards like that, we selected 131 individual contract actions 
and went to four buying activities, four federal buying 
activities, where we talked to contracting officials that 
placed those orders. We found that the primary reason for the 
misreporting of small business achievements is that the federal 
regulations currently permit a company to be considered small 
over the life of the contract they have won, even if the 
company grows into a large business, mergers with another 
company, or is acquired by a large company.
    Given that the term of a contract in today's federal 
acquisition environment can extend for many years, and we have 
heard several witnesses talk about up to 20 years, it is not 
surprising to see some companies grow from being a small 
business and, therefore, no longer qualified to enjoy the 
benefits that a small business enjoys. However, despite changes 
in their sizes, contracting officials continued to report those 
contracts as if they were small business contracts. One hundred 
and fourteen of the contract actions we reviewed were 
misreported for that reason. The other 17 actions that we 
looked at were misreported because contracting officials relied 
on data systems that contain conflicting and incorrect 
information about the size of the companies.
    Page seven of my statement shows what can happen when 
contracting officials rely on bad data. In the situation that 
is described on page seven, an order was placed on a NASA, 
government-wide-acquisition contract. The company receiving the 
order had clearly certified itself as a large business. 
However, when reporting the order to FPDS, the contracting 
official used information in its own agency's database that 
showed the company was a small business. Therefore, it was 
reported incorrectly and inflates the achievements reported 
annually by the FPDS.
    While our results cannot be projected to all contract 
actions reported in FPDS, they raise serious questions about 
relying on the systems data to measure federal agency efforts 
to meet the government's 23 percent annual goal. The General 
Services Administration, the Office of Federal Procurement 
Policy, and the Small Business Administration, as you have 
heard already, have undertaken a number of actions or proposed 
actions to address this problem.
    Generally, the actions would require small businesses 
holding long-term government contracts to recertify annually 
that they are, in fact, small businesses. When the proposed 
changes are implemented, companies will no longer be permitted 
to retain their small business status. Considering the duration 
of current federal contracts, we believe it is reasonable to 
require a recertification.
    On April 25th, the Small Business Administration published 
proposed rules in the Federal Register for comment. Comments 
are due to SBA by June 24th. In addition to the recertification 
issue, we believe further efforts are needed to ensure federal 
databases contain accurate and reliable information so that 
contracting officials know the size of the company they are 
doing business with.
    That concludes my statement. I will be glad to answer any 
    [Mr. Cooper's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much. With regard to 
these databases, I am a little bit confused. On page two of Mr. 
Armendariz's statement, it says: ``PRO-Net is not designed or 
intended to validate the small business eligibility of a 
registrant.'' And then on page five of Mr. Mendoza's statement, 
it says: ``Contracting officers do not check FPDS to determine 
the size status of a contractor.'' But in the last testimony of 
Mr. Cooper, even though a company had self-certified itself as 
a large corporation on one database, that agency checked its 
internal database and found out that it was small. And then on 
page four of Mr. Chapman's testimony--you guys didn't think I 
was listening, did you?
    Chairman Manzullo. It states that he had sent a letter to 
the SBA. MISA attorneys--what is ``MISA''?
    Mr. Schooner. The Microcomputer Industry Suppliers 
    Chairman Manzullo. Your association, okay, sent a letter to 
the SBA asking that they notify all federal agencies and prime 
contractors of the firms that have been removed from PRO-Net 
CCR. In the SBA's March 21, 2000 response to MISA's attorneys, 
the SBA refused to notify agencies and prime contractors that 
the firms had been removed.
    My first question is, does the SBA have any obligation to 
notify any agencies or prime contractors that the firms have 
been removed as a small business?
    Mr. Armendariz. The SBA conducts informal size 
determinations and, therefore, doesn't report that data to the 
    Chairman Manzullo. Well, why not?
    Mr. Armendariz. There are no grounds for it because it is 
an informal review. Only if there is a protest, and the protest 
determines that that company is and, in fact, through a formal 
size determination, other than small we report that back to the 
    Chairman Manzullo. Well, then this is former Congresswoman 
Helen Bentley's problem, where a company that she is trying to 
help out, Rayloid--this is what is involved in a protest. You 
have to hire a law firm to file these formal court documents.
    I would think this is pretty simple, to determine whether 
or not somebody is large or small, and I don't understand the 
complexity--before the Office of Appeals of the U.S. Small 
Business Administration. These little guys are literally thrown 
into court against these big guys, and this stuff goes on and 
on. Your answer probably is that Congress is the one that 
mandated this appeals process. Would that be correct, Mr. 
Armendariz? Is this part of a federal review process?
    Mr. Armendariz. The initial size determination is done at 
the staff level, and then from there, what you are discussing 
here is an appeal of that determination.
    Chairman Manzullo. There is an appeal level on it?
    Mr. Armendariz. Yes.
    Chairman Manzullo. Okay. Then how long does the appeal 
level take? Any clue? Is it three months? six months? a year? 
Does anybody----.
    Mr. Armendariz. They are relatively quick. We do the 
initial ones typically within 10 to 15 days.
    Chairman Manzullo. You mean the in-house.
    Mr. Armendariz. Correct.
    Chairman Manzullo. And then the appeals?
    Mr. Armendariz. It depends on the complexity of the issue.
    To back up even further, I think one of the main problems 
in regards to why there is so much confusion is the size-
standard system itself. You know, currently, we have 32 
different size standards. Some of them are employee based, some 
of them are revenue based.
    Chairman Manzullo. Well, we are going to address all of 
those. This thing is getting to the point where, in the 
reauthorization of the SBA, we might just make a determination 
ourselves and say that is it. You have three people on staff 
that do size determinations, and I know they wrestle with it on 
a continuous basis.
    Mr. Armendariz. And I wrestle with it personally. People 
ask me, ``I do X for a living. Am I small?'' and I literally 
have to go to the NAISC codes and figure out exactly what they 
do to understand if they are small. I go back to my own 
personal business experience when I was a small business person 
in California, and I found out afterwards, I was not a small 
business because I had one too many employees.
    Chairman Manzullo. What I would like, if there is anything 
that you think can be done in the reauthorization that would 
simplify this, and I would address this to all interested 
parties, too, let Mr. Crouther know, again, not to exceed two 
pages, single spaced, 12-point type, sufficient margins to make 
notes on each side. But we are really interested in trying to 
make that an easier standard on that. I would appreciate that.
    Mr. Armendariz. We currently have a task force that has met 
now three times in the past month that is working on this issue 
exclusively, and the contributing parties are DoD, OMB, and 
SBA. So we, too, would love to gather information and input 
from the general public as well as the Committee.
    Chairman Manzullo. The related question on there is, an 
agency, a federal agency, would go to PRO-Net or would go to--
Mr. Mendoza, what is the name of your----.
    Mr. Mendoza. The Federal Procurement Data System.
    Chairman Manzullo. Okay. Both of you state that what is 
stated in there is not to be a statement of the agency as to 
the verification of the size. Is that correct? Is that correct?
    Mr. Armendariz. Well, FPDS is not a database that the SBA 
manages. We manage the PRO-Net database, and the PRO-Net 
database was established primarily with a focus of a tool that 
small business could utilize to market themselves to agencies. 
The only aspects of that that are filtered through our 
processing in our office for approval in regards to which 
certifications they hold are the 8(a) certification, the 
HUBZone certification, and the SDB certification.
    Chairman Manzullo. Those are the ones that you monitor 
before they go up on the PRO-Net.
    Mr. Armendariz. We trigger those ourselves. All of the 
certifications are self-certified, and we also make sure that 
the agencies understand that. We go over that time and time 
again, that the agencies must do the verification at the time 
of the award.
    Chairman Manzullo. Mr. Mendoza, your answer would be the 
same. Is that correct?
    Mr. Mendoza. That is correct.
    Chairman Manzullo. Well, then where does the agency go to 
determine the size? Mr. Cooper, could you help?
    Mr. Cooper. Yes. Can I elaborate on that? First, I want to 
make one thing clear. When we talk about databases, we are not 
talking about the FPDS. The FPDS is a collection system. It is 
not a system you go to to check a small business size. The 
systems I am talking about are PRO-Net, the Central Contractor 
Registration System that is now being expanded to include not 
just Department of Defense contractors but all federal 
contractors, and I am talking about the individual agency 
systems that have grown up over time and are being used by the 
people placing these orders.
    And the problem that we identified, again, going back to 
that page seven, when that contracting official went and placed 
that order on that NASA GWAC, clearly the company they placed 
the order with had self-certified when they got the GWAC that 
it was a large company. It wasn't trying to misrepresent itself 
or anything else. But when the contracting official entered the 
information into the form that goes to FPDS, its agency system 
is set up and had recognized that company as a small business.
    Chairman Manzullo. That didn't raise a red flag with that 
    Mr. Cooper. Not a bit.
    Chairman Manzullo. Wonderful.
    Mr. Cooper. And that is the problem of a lot of different 
databases being used. Sometimes contracting officers just using 
their knowledge of the size of the company----.
    Chairman Manzullo. One of the things that I am going to 
suggest--in fact, we might put it into the reauthorization--is 
that any company that certifies itself as a small business and 
gets a contract and gets money from that will result in a 
forfeiture of every dime that they have received as a result of 
misstating the size----.
    Mr. Cooper. I think that is the way the regulations are 
written today, Mr. Chairman.
    Chairman Manzullo. Has that ever happened?
    Mr. Cooper. Yes.
    Chairman Manzullo. It has?
    Mr. Cooper. Yes.
    Chairman Manzullo. Does anyone want to elaborate on that?
    Mr. Cooper. We did a protest on the size of a company 
probably in the last four months, and we sustained the protest 
because the company was a large company and should not have 
gotten the award, and they didn't get the award.
    Chairman Manzullo. But that was before the award was given.
    Mr. Cooper. During the process of the award.
    Chairman Manzullo. Professor?
    Mr. Schooner. Historically, if you factor in the False 
Claims Act and the fact that the small business certifies its 
size status, once they receive the contract, if they submit 
invoices, which they do in order to become paid, they have 
falsely certified, and so every invoice, for purposes of the 
False Claims Act, is counted against them. There are monetary 
penalties and, ultimately, criminal penalties.
    One reported decision that would be an interesting one to 
look at historically is the Jets case, where you had a small 
business that had falsely certified its size status. There were 
criminal prosecutions, staggering penalties. It is a very, very 
risky approach for a large business to take, and the 
government's arsenal to fight that, if it is identified, is a 
powerful one.
    Chairman Manzullo. Yes, but they are doing it all the time.
    Mr. Schooner. But if I could respond, Mr. Chairman.
    Chairman Manzullo. Yes.
    Mr. Schooner. The problem still comes down to resources and 
enforcement. As I suggested in my written testimony, this is a 
classic case where there aren't enough government employees--
    Chairman Manzullo. There are 28,000 procurement officers in 
the Department of Defense. How many more do we need?
    Mr. Schooner. You need significantly more, Mr. Chairman, 
because they were cut dramatically during the 1990's. There was 
no empirical evidence whatsoever to justify the cuts. There is 
a terrific report out by the General Accounting Office, just in 
the last couple of weeks, talking about the dramatic cuts that 
were made for purposes of just literally arbitrary downsizing. 
And so the problem still comes down to who is going to enforce.
    This is a classic situation where third-party oversight is 
appropriate, the key TAM provisions that empower competitors. 
The competitor is in the best situation to know when an other 
than small business gets a small business contract. So let us 
empower these people and have the enforcement mechanisms work.
    Chairman Manzullo. So that would allow somebody who had 
been bumped the right to sue in court.
    Mr. Schooner. Indeed.
    Chairman Manzullo. Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Armendariz, you 
said in your testimony that over the past six months more than 
600 businesses have been removed from PRO-Net because they are 
not small businesses, according to the SBA size standards. Are 
you now convinced that there are no large businesses in PRO-
    Mr. Armendariz. Absolutely not. I believe that, at any 
given time, that we can identify businesses that either are 
erroneously or mistakenly placed on PRO-Net or purposely placed 
on PRO-Net.
    Ms. Velazquez. Well, as far as I can tell you, the PRO-Net 
still lacks integrity. You also state in your testimony that 
the SBA will request a registrant in PRO-Net to verify the 
accuracy of the submitted business-size information and 
acknowledge that it understand the penalties associated with 
falsely certifying as a small business on government contracts 
and subcontracts.
    What about false statements, as far as PRO-Net regulation? 
Will you be including certifications in PRO-Net to ensure 
information submitted for regulation in PRO-Net is true and 
    Mr. Armendariz. I am not sure if I understand the question, 
    Ms. Velazquez. Don't you recall that there was a 
recommendation from your inspector general to include false 
statement, as far as PRO-Net regulation?
    Mr. Armendariz. Yes, ma'am.
    Ms. Velazquez. Why you didn't include it?
    Mr. Armendariz. We are working on that as we speak. We are 
fully implementing all of the IG's recommendations in regards 
to PRO-Net.
    Ms. Velazquez. Will you be including regulations on 
penalties in making false statements in all PRO-Net 
    Mr. Armendariz. We refer all irregularities to the IG.
    Ms. Velazquez. Will you please answer me, yes or not? I am 
asking you if you are going to be including regulations on 
penalties in making false statements in all PRO-Net.
    Okay. So let us make it short and sweet. For the record, 
are you going to implement your inspector general's 
    Mr. Armendariz. Yes.
    Ms. Velazquez. Okay. Let us move to the next question.
    Mr. Cooper, shortly, the administration will come out with 
data that is supposed to tell us what the small business share 
of federal contracting is. Will the contract awards to large 
businesses coded as small business awards cause an inflation in 
the numbers reported for small business awards?
    Mr. Cooper. As I stated in my testimony, we have serious 
concerns about relying on any of that data to measure small 
business achievements.
    Ms. Velazquez. In your opinion, does this bring the 
credibility of these numbers into question?
    Mr. Cooper. Yes. Based on the work we have done and the 
reporting that we have seen, it is not right.
    Ms. Velazquez. Are there adequate measures of 
accountability in the President's bundling plan?
    Mr. Cooper. I testified on March 18th over on the Senate 
side, and I raised questions at that point about whether there 
would be good data to measure whether, in fact, the strategy 
will achieve the outcomes, that is, more opportunities for 
small businesses.
    Ms. Styles mentioned today, we are going to be working with 
them to try to come up with some real, statistical measures so 
that we can see. There are a number of provisions like actions 
taken to mitigate the consequences of bundling, teaming of 
small businesses, and we are going to be trying to come up with 
some measures in order to be able to measure whether those 
things are, in fact, happening or not.
    Ms. Velazquez. In your opinion, will the President's 
bundling plan cause a significant change in the current federal 
procurement environment for small businesses?
    Mr. Cooper. I think that remains to be seen.
    Ms. Velazquez. Thank you. Mr. Schooner, would you agree 
with Mr. Cooper that the administration's bundling plan 
includes no accountability measurements?
    Mr. Schooner. Yes.
    Ms. Velazquez. Would you agree that without resources and 
accountability--I think that you answered the question before, 
but I just want to be on record asking you the question--would 
you agree that without resources and accountability, the 
President's plan will not succeed?
    Mr. Schooner. Yes. I think the only real target of 
opportunity in the President's plan as stated is with regard to 
the subcontracting plans and basically shifting the 
responsibility for identifying subcontractors to the large, 
prime contractors.
    Ms. Velazquez. Mr. Cooper, in regulations proposed on April 
25th, the SBA suggests that an annual certification of all 
small businesses seems to be the answer. That seems to be very 
burdensome on small companies. In fact, the SBA's own analysis 
suggests that only six to 12 businesses will be impacted. 
Doesn't it make sense to have only those small businesses whose 
business changed from small to other than small provide notice 
to relevant agencies that their size has changed?
    Mr. Cooper. I think the SBA, when it sits down and looks at 
all of the comments it is going to receive, I would be highly 
surprised if it doesn't get that issue. And I think instead of 
burdening 6,000 small businesses--I think that was the number 
they had in that regulation--maybe we need to deal with the 
exceptions, and if it is only six to 12, that is a lot of 
burden that you are not going to place on a lot of companies, 
so that could be a very reasonable approach to take.
    Ms. Velazquez. Thank you. Mr. Armendariz, we do not expect 
Ms. Styles' office, the GSA, or any other agency to ensure that 
small businesses are treated fairly. That is the job of the 
    What concerns me is when small businesses' own advocate 
sells them out. Time and time again, rather than assuming your 
role, which can, in some cases, be adversarial because you are 
supposed to be holding people accountable, the SBA caves in, to 
the detriment of small businesses. You have yet to break up any 
big contracts, and I would like to bring up a case in point 
that highlights SBA's outrageous actions.
    On the GSA FPDS-NG contract, small businesses objected and 
went to the SBA to let you know that they had been shut out. 
Your own PCR said the same thing. At that time, you told this 
Committee that GSA said there were not small businesses to 
perform this contract, and you believed GSA over the concerns 
of small businesses and your own employee. Those two factors 
should have caused you to support an appeal action to the 
agency on this contract, but you didn't. Instead, you took the 
easy way out and did exactly what the agency wanted.
    It turns out that the small businesses and your PCR were 
right. Out of 27 bidders, 20 were small, far more than the two 
required to restrict this project to only small businesses, as 
Congress intended. With all of this, do you think you pursued 
the correct course of action?
    Mr. Armendariz. Well, in retrospect, there obviously was a 
small business that was able to handle this procurement. At the 
time, we consulted with GSA quite extensively, over a course of 
many meetings, and it was our opinion at the time, and we stand 
by that opinion, that it was the prudent thing to do, to allow 
GSA to offer that full and open.
    I will applaud the small business community, though, and 
the specific contractor that was awarded this contract. It just 
proves to us and proves to the balance of the agencies that 
small business can compete full and open when it has to, but we 
would have liked to have seen it gone as a small business set-
aside, and at the time----.
    Ms. Velazquez. I can tell you that your actions on this 
specific contract really impacted the credibility of SBA 
regarding increasing opportunities for small businesses. You 
know, a small business got the contract in spite of what you 
did, in spite of your actions.
    Chairman Manzullo. Mrs. Napolitano?
    Ms. Napolitano. Thank you, Mr. Chairman. There are a number 
of questions, and I am not quite sure where to start.
    The SBA office in my area has been very helpful to some of 
my businesses, but there still, nonetheless, remains the fact 
that a lot of the small businesses that I have have contacted 
me, and I visit one at least every weekend that I get home, and 
have made it quite clear to me that they are not able to crack 
the SBA nut, so to speak. And it kind of bothers me because we 
have been on contract bundling for how long now? At least, I 
have been here four years, four and a half, whatever. But there 
seems to be an issue with you stating you have 33 definitions 
for small business.
    Mr. Armendariz. Yes, ma'am.
    Ms. Napolitano. How do we put it in balance so that we are 
able to identify the truly small businesses and the ones that 
are really giving our economy the boost it needs and not the 
major contractors that can afford to be able to do the major 
contracting? That is a very, very troubling question for me.
    Mr. Mendoza, does the GSA keep track of the awards made to 
schedule contract holders, and, if so, would you please provide 
this Committee, within the next 10 days, if possible, of the 
awards made to schedule holders for the past five years, 
separated out by small, small disadvantaged business, women-
owned business, and the 8(a) firms, including both number and 
dollar of task orders?
    The reason for that, for me, is to individually determine 
whether or not we are really getting small businesses, the 
disadvantaged, the women-owned, if they are being successful 
and how successful the 8(a) firms are in being able to get 
    The second question would be, does the GSA get small 
business gold credit for the schedule contract holders, or do 
individual agencies, or both of them, get credit for this? It 
is my understanding that GSA codes all of its schedule holders 
into the FPDS. Part of the problem for the DEERs is that when 
an award is made to one of these companies, the system defaults 
to the size that the firm was for purposes of the GSA schedule, 
thereby showing an award to a small business when the award was 
actually to a larger business. Will the FPDS-NG correct this 
error? Would you reply?
    Mr. Mendoza. Yes, ma'am. Let me refer that question, the 
answer, to Mr. Dave Drabkin, who is my senior procurement 
analyst at GSA. He has been there the longest, and he is the 
senior procurement specialist. He can answer that question for 
    Chairman Manzullo. Do you want to scoot up to the table, 
please? Why don't you come over to the end over here, and if 
you could state your name into the record and spell the last, 
please. Thank you.
    Mr. Drabkin. My name is David Drabkin, D-R-A-B-K-I-N. I am 
the senior procurement executive at GSA.
    Chairman Manzullo. You have to talk into the mike. Thank 
    Mr. Drabkin. All contract awards above $25,000 are reported 
individually into the Federal Procurement Data Center, 
regardless of where they are made, by whom they are made, or 
against what vehicle they are made. So every time a schedule 
order with a value of $25,000 or more is placed, it is recorded 
in the database. The database gives credit for the small 
business category to the agency that places the award. We have 
that for small businesses generally. We have that now for 
women-owned businesses, I believe, and we are working on 8(a) 
and HUBZone businesses as well. So the agency that actually is 
buying the work gets the credit for their contract dollars.
    It is true that the schedules are placed into the FPDS 
database, and at the time of the award, their size status is 
determined. That is based upon a rule from the Small Business 
Administration, which, at the time the rule was made, it kind 
of made sense. At the time the rule was made, many years ago, 
the average government contract was for one year and had four 
one-year options, and it really didn't make sense to interrupt 
that relationship, particularly since small businesses have a 
habit of growing and sometimes contracting.
    Of course, we like them to grow; that is the whole purpose 
of the program. And it wouldn't make sense that a small 
business that might grow one year because it gets a little 
extra business and then contract the next year would go into a 
category one year of other than small and the next year as 
small again.
    However, our rules changed on the schedules in the mid-
1990's, and we created something called the Evergreen program, 
which essentially created a 20-year contract: a five-year base 
period with three five-year options for the schedule contracts 
themselves. At the time we changed our rules, we did go talk to 
SBA because we realized that that didn't make sense anymore. 
Five years might make sense for keeping a small business small 
for reporting purposes, but going to 20 years just didn't make 
any sense, and it took us a number of years to work that out.
    We had to make a decision because we were about to award 
two new GWAC contracts, one for 8(a)'s and one for HUBZones, 
and we wanted to make sure that at the time we awarded those 
contracts that the rules were clear that we would, at least at 
the end of the option period, require a re-representation of 
the size status of the company.
    I didn't write down your whole question. Have I answered it 
    Ms. Napolitano. You answered part of it, I believe. What 
about the 8(a) firms?
    Mr. Drabkin. We keep all of the statistics. I don't believe 
we give 8(a) credit for schedule awards to the agency that 
placed the order. I believe, right now, that is reported as a 
GSA credit, but I can clear that up when we submit the written 
answers to your questions.
    Ms. Napolitano. Well, okay, then. How do you determine if 
that business that you had--I am sorry, Mr. Manzullo, if I may 
finish the trend--if the company, as you say, has started off 
small business has gone and become a large business because of 
the order and then comes back down, if that company goes out of 
that small business slot, how do you determine it? Do they have 
to reapply? Do you make the determination based on what?
    Mr. Drabkin. Under the current SBA rule, the rule in 
effect, the rule says that you remain whatever size you are on 
the day we award you the contract for the length of the 
contract. Like I said, at the time the rule was made, it was a 
great rule, but times have changed, and how we manage 
procurements has changed.
    So the answer to your question is, under our rules, except 
for in GSA, where I issued a deviation to the SBA rule so I 
could change that rule for our GWACs, under the other rules 
that exist in the government, the size you are on the day you 
sign the contract until the day that the contract closes, no 
matter how long the contract is, and no matter what happens to 
your size status or your other small business status, but that 
is a rule. I mean, that is not a factor of anybody doing 
anything nefarious. That is a rule that is in place.
    Ms. Napolitano. One more question. How many GSA employees 
are charged with marketing the schedules program?
    Mr. Drabkin. We will have to send you the number. I don't 
    Ms. Napolitano. Okay.
    Mr. Drabkin. I am in charge of the procurement people. I 
can tell you how many there are.
    Ms. Napolitano. Okay, because apparently small businesses 
have experienced consolidation of the contracts into schedule 
programs, and it would be nice to know, and, if so, does GSA 
encourage this?
    Mr. Drabkin. I am sorry. Encourage what, ma'am?
    Ms. Napolitano. Well, the experienced consolidation of the 
contracts into schedule programs, and is GSA encouraging this 
    Mr. Drabkin. There is something called the Corporate 
Contracting Initiative, which is an effort to get companies 
that are on multiple schedules into a single contract to reduce 
the cost of administration to the company and the cost of 
administration to the government. The program is in its 
infancy. It began about two years ago. It is not receiving a 
lot of support from the private sector. There are small and 
large businesses who are participating in that program, mostly 
large because they tend to have multiple contracts in multiple, 
different areas because they tend to have different types of 
    Ms. Napolitano. Thank you, Mr. Chair.
    Chairman Manzullo. Mr. Case?
    Mr. Case. Thank you, Mr. Chair. I am trying to sort this 
through myself, and listening to the panel, it strikes me that 
there is one person on the panel that has been in the field, 
and that is you, Mr. Robinson. You have a nice poker face, but 
a lot has to be going through your head.
    I want to give you kind of the floor here. I want to listen 
to what you think about the other testimony because I am sure 
that is what is running through your mind is, well, that is 
true, and that is not true, and that is not really how it works 
when you are out in the field, and it is nice to talk about it 
in principle, but that is not really what is going on, and 
maybe they don't know what is really going on.
    Tell me what you thought about what you heard. Where are 
the problems in the field, on the front lines, where you live?
    Mr. Robinson. Well, I think that the problem is far greater 
than it has been represented here, generally. A lot of the 
focus here has been on the process of small business evolving 
into big business. That is only the tip of the iceberg, as I 
said earlier. A lot of this whole concern with respect to small 
business equity deals with big business that unwillingly share 
and, in many instances, mistreat small business, and I don't 
think that is being addressed to a great extent here. We are 
concerned with those instances that have gotten a lot of press 
recently where small business has received awards, and, in 
fact, they have grown into big business.
    So I think the breadth of the problems that exist here is 
far greater than bundling and size classification. There are 
many, many other issues that need to be addressed across the 
global terrain here.
    Mr. Chase. Mr. Chapman gave us a list of 10--I think there 
were 10--areas, fairly specific. You heard his testimony.
    Mr. Robinson. Yes.
    Mr. Chase. Do you agree with his testimony?
    Mr. Robinson. Absolutely.
    Mr. Chase. How much of the tip of the iceberg is that? Are 
we down to half of the iceberg yet?
    Mr. Robinson. It is a big chunk. It is a big chunk of it.
    Mr. Chase. Were there any things that were left off of his 
list that you thought, oh, you should have put that on the 
    Mr. Robinson. Well, I am sure he did not cover all of the 
concerns that not only I have but many other of my fellow small 
businesses have. I think there has to be greater dialogue. 
Earlier today--I can't recall now--maybe it was Administrator 
Styles indicated that there had been an effort to open dialogue 
with small businesses. I really wish I had been included.
    I am not certain how that group of small businesses were 
identified or who participated, but I don't think that the full 
breadth of the problem was conveyed, and I think that there 
needs to be more of that sort of thing, more dialogue with 
small businesses, with companies such as myself, who are down 
there in the trenches and who experience the kinds of 
misrepresentation of the fact.
    I have had tremendously bad experiences with teaming with 
big businesses, for instance. We participate very eagerly and 
energetically in assisting big businesses to win huge 
contracts. They usually come to us because we represent a slice 
of the technology or a small area of expertise that they cannot 
support out of their own arenas. However, there seems to be a 
systematic way that, when it is all said and done, we, the 
small business, end up being shortchanged, either with work or 
promises of work that eventually is kept in house for the large 
business or sent offshore or whatever. This is a growing, 
growing problem that no one seems to be addressing, at least, 
in my opinion.
    Mr. Case. Mr. Chapman, any observations as well from the 
testimony you have heard? Are we getting to the bottom of 
anything here?
    Mr. Chapman. I don't think so. I would like to make a 
couple of points.
    When the gentlemen here that work for the government talk 
about small businesses, here is one of them, AT&T Wireless--it 
is on PRO-Net, updated about four or five days ago--with 20,000 
employees and $5 billion in sales. That is on PRO-Net right now 
while we are sitting here.
    Mr. Cooper talked about the survey that they did, and I am 
assuming that their survey was fairly representative, and based 
on my calculations here, it sounds like it was about 45 percent 
of the awards that they showed that were going to small 
business that were actually large businesses. If you look at 
the SBA's number of $85 billion and apply Mr. Cooper's numbers, 
that is $35 billion a year, and these guys are talking like it 
is a little, minor, bookkeeping problem. That is $35 million a 
    I saw on the news the other day that 1.9 million Americans 
have been out of work for six months or more, and 40,000 people 
lost their jobs in April. That is a big deal. Thirty-five 
billion dollars a year is amazing. I don't know this gentleman, 
but he said something that just blew me away. He said, at one 
point in time, we realized that letting people keep small 
business contracts for 20 years wasn't a good idea.
    When was that a good idea? When was that ever a good idea, 
to let someone keep a small business contract for 20 years? And 
what concerns me is those are the people that we are looking to 
for solutions, the people who thought that was a good idea to 
let some small business keep that for 20 years.
    One gentleman said small businesses are thriving. Remember, 
they are talking about, you know, billion-dollar companies. 
They are talking about the biggest companies in the world. 
Today, as we sit here, you know, some of the biggest companies 
that are household names that any 10-year-old kid would 
understand are on PRO-Net, and I am just completely floored, 
you know, that they don't think that is a problem.
    But, again, I would like to ask one thing of the Committee. 
Can we get rid of the term, ``other than small''? When they 
abbreviate it, it shows ``OTHR small business,'' and people 
think it means ``other small business.'' That is like calling 
people that are dead ``other than alive.'' There is large, and 
there is small, and I personally think that the concept, 
``other than small,'' is indicative of the type of terminology 
that you see----.
    Chairman Manzullo. Mr. Case, would you yield on that?
    Mr. Case. Yes.
    Chairman Manzullo. Would anybody here like to answer that 
question as to why ``other than small'' appears?
    Mr. Armendariz. Well, I would like to answer several of the 
statements that Mr. Chapman made, and I think he misheard what 
you said earlier, if I may. I believe what GSA said was that 
when the regulation was in place, we never envisioned having 
20-year contracts. At that time, the regulation made sense. 
Times have changed. We need to change regulations, and we have 
got a proposed regulation right now out to the public. So that 
is issue number one.
    Issue number two is that companies like AT&T--I fully agree 
that AT&T should not be listed in PRO-Net, but there is a 
reason. We researched how AT&T got placed on PRO-Net. When we 
merged CCR and PRO-Net several months ago, about six months 
ago, there were several large companies that leaked on. I 
guarantee you that there is not an executive over at AT&T that 
went on and put themselves on PRO-Net. It happened via the 
    So we are concerned. This is a huge issue for us. We live 
and breathe this issue every single day. The small business 
community is the reason we came to the SBA. We believe it, deep 
down in our soul, and we are coming up with creative and 
innovative solutions to address the problems. We commend Mr. 
Chapman. We need more Mr. Chapmans out there because he is 
helping us solve the problem, but we can do it together, not 
    Mr. Case. Thank you.
    Chairman Manzullo. You know, there is something wrong here, 
and we are going to get to the bottom of this thing, if I have 
to spend an entire day issuing subpoenas to bring large 
companies before this Committee, and I will examine them 
personally to see if they are large or small, and I will raise 
so much Cain doing that, that they will pull themselves out of 
the system.
    Let me tell you what happened in Los Alamos. We were 
invited to go down there by Congressman Tom Udall, who is a 
member of our Committee, and he said, You would not believe 
what is happening down there to the local Indian tribes and 
others, the Los Alamoses, you know. What a mess down there. And 
we went down there, and almost had to issue subpoenas to bring 
in officials from the lab, and held a field hearing down there.
    This is some of the crap that was taking place. I guess I 
did say that word. An Hispanic was given a contract as a 
minority, and Los Alamos put out a press release that said that 
so-and-so was given an award of up to $100,000 for computer 
repair. And that young man--do you remember that nonsense?--he 
said he had gotten not one nickel of work from Los Alamos. Now, 
some clown down there was taking credit for engaging a minority 
firm that did absolutely nothing.
    Then I asked the classic question: Where do you buy your 
pens and pencils? And the answer was, Well, we have just 
entered into a five-year contract with a ma-and-pa small 
business store to fulfill all of the--Mr. Cooper knows what 
happened, and somebody should go to prison over that--to 
fulfill all of the stationery requirements, an office supplier 
for Los Alamos. Now, Los Alamos has what, two to 3,000 
employees down there, something like that?
    That was the answer that came from the official there. 
Right after the hearing, someone came up to me and said, Did 
you know that just after that contract was signed that Boise-
Cascade bought that store? Now, that is the type of stuff that 
Mr. Robinson and Mr. Chapman have been living in that 
    And I am going to serve notice right here. If any of those 
big companies think they are going to get away with this stuff, 
they are going to have to come before this Committee, and I 
will put them under oath, and if they take the Fifth Amendment, 
I am going to request the SBA to remove them and the GSA, and 
those companies will have no further set-asides. I want to deal 
with them, one on one, if necessary, because somebody has to 
set an example. But the first thing we have got to do is get 
rid of the lobbying efforts that go into determine the size of 
these companies.
    Let me give you an example. If you are regular 
manufacturing, you are 500 employees. If you are aerospace, you 
are 1,500. Now, nobody can defend, nobody can defend, that 
discrepancy in sizes of companies except maybe somebody wanted 
to come in and say, Well, aerospace should be treated 
differently. Is it Mr. Williams who is in charge, the gentleman 
at SBA? Fred, what is his name, the fellow that has the 
terrible task of determining size at SBA?
    Mr. Armendariz. Gary Jackson.
    Chairman Manzullo. Mr. Jackson. That is correct. Sorry. Mr. 
Jackson, and we had him testify, and, I mean, you just pulled 
your hair out when you had to go through this thing. But here 
is the fallacy in the size standards, and this is what Mrs. 
Velazquez and I found out and why we had to have a horrible 
hearing where we almost had to lock the doors to get something 
done when it came the time for those emergency loans for the 
travel agencies. I think it is irrelevant of the issue to 
determine market penetration as to whether or not a company is 
large or small. Okay? This is where you get into the problem 
with it.
    As it turned out, all of the travel agencies mostly were 
excluded. You have got things where if you are a law firm, it 
is $5 million in gross sales, if you are an accounting firm, I 
think it is $6 million, and I think what has happened is that 
the system of classification has become so complicated that the 
big boys are conning the system. That is exactly what is going 
to happen.
    So I am going to put into the reauthorization one size 
standard for manufacturing, and no one knows manufacturing more 
than I do in this Congress. We are going to put it at 500. It 
is going to be an arbitrary thing. We are going to put it at 
500. We are going to try to go through some other things. 
Congress is going to take that decision away and make life a 
little bit easier for Mr. Jackson. Some of these areas that are 
causing a lot of heartburn, and I think manufacturing--Mr. 
Chapman, Mr. Robinson, is that a big area in there where the 
size standards are being tossed all over the place?
    Mr. Robinson. Well, I think one of the recommendations that 
I made at the closing of my statement involved the need to 
review this whole concept of size standards.
    Chairman Manzullo. They are doing that. The SBA and the GSA 
are doing that.
    Mr. Robinson. A case in point: My organization is an 
information and technology support services company. Typically, 
the size standard that determines large and small is $21 
million for three consecutive years of revenue. I have recently 
participated in procurements where so-called ``small 
business,'' with up to 1,500 employee head count, has been 
allowed to effectively bid on opportunities that----.
    Chairman Manzullo. In IT?
    Mr. Robinson. Absolutely.
    Chairman Manzullo. Okay, okay. Well, that is the whole 
problem, and the market-penetration approach does not work in 
all cases because in the travel agency no one qualified. They 
had a $1 million size standard on that, and it took eight 
months in order to increase that size standard to be eligible 
for the loans on it. But the size standards; these are also 
used for getting the 7(a) and the 504's. Is that correct?
    Mr. Robinson. Yes, sir.
    Chairman Manzullo. Maybe we shouldn't have a one-size-fits-
all. Maybe there should be a different standard for a small 
business loan as opposed to qualifying for a set-aside. We are 
willing to take a look at all of this stuff. We are going to 
try to reauthorize this bill at the end of June, and I really 
want to see a tremendous amount of input and would like Mr. 
Armendariz to continue working with our staff on it.
    We need to come to a solution on this thing, and perhaps it 
might not be done by the time we go into the House, and perhaps 
it will have to done in time for a conference on it. But I 
think this is what is causing all of the angst, and there are 
only three people in that size department. Is that correct? 
There are four people in that size department----
    Mr. Armendariz. Including myself.
    Chairman Manzullo [continuing]. Including yourself, and you 
continue to wrestle with that all of the time.
    Well, listen, this has been good. Every witness has been 
exquisitely prepared. I really appreciate that.
    Ms. Velazquez. Mr. Chairman.
    Chairman Manzullo. Yes, Mrs. Velazquez?
    Ms. Velazquez. I have one last question.
    Chairman Manzullo. Yes.
    Ms. Velazquez. I just want to take the opportunity that Mr. 
Armendariz is here. When are you going to get the women's 
procurement program up and running?
    Mr. Armendariz. Well, the women's procurement program is up 
and running. We have our CAWBO (Office of Federal Contract 
Assistance for Women Business Owners) office. It has been in 
place for about 18, 24 months now.
    Ms. Velazquez. Is that the Restrictive Competition program?
    Mr. Armendariz. Are you talking about the set-aside 
    Ms. Velazquez. Yes.
    Mr. Armendariz. Currently, we have commissioned a company 
to look at the study we had done so it will stand up to 
judicial muster.
    Ms. Velazquez. But I have been hearing the same excuse for 
the last year. Can you give me, like, a more concrete answer? 
Is it going to take 30 days, 60 days, or never?
    Mr. Armendariz. Well, we didn't have a budget until just 
recently. Once we received our budget, we let the contract out 
for competition. We have a company that now has the contract--
it just was recently awarded--and they have told us it will 
take 90 to 180 days to review the study and tell us where we 
are deficient and where we need to shore up.
    Ms. Velazquez. It shows our commitment to women-owned 
    Chairman Manzullo. Thank you very much. This hearing is 
    [Whereupon, at 5:08 p.m., the Committee was adjourned.]

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