October 29, 2007

ACCESS TO FEDERAL CONTRACTS: HOW TO LEVEL THE PLAYING FIELD

Good afternoon and welcome.   I want to thank all our witnesses for being here today to discuss the issues that minority and women owned small businesses face in contracting with the federal government.   All of us seated here are interested in one thing - and one thing only - finding solutions to the persistent problems that minority and women owned businesses confront in their efforts to contract with the federal government.

 

Small business is the engine that drives our economy and sustains our technological lead in the global marketplace, producing one-third of all new patents issued.   Furthermore, over 60 percent of all new jobs created each year are the direct result of small business entrepreneurs stepping into the turbulent waters of business and creating opportunities for themselves and others. Government has a responsibility and interest in fostering and promoting a business climate that supports such growth.  Small business plays a vital role in the federal contracting system by ensuring competition and supplying the federal government with a constant supply of new entrants who bring new ideas and novel approaches for doing the job at hand and supplying services at a competitive rate.  

 

However, it has become all too common during the past six years for the federal government not to meet its small business contracting goal and this year is no exception.   Figures recently released by the SBA reveal that the Administration failed to meet any of the small business contracting goals for 2006, including goals for women and minorities which fell well below the five percent objective. According to Eagle Eye Publishers, an independent source for federal contracting statistics, the federal government spent more than $412 billion dollars in 2006 on federal procurement.   Of these funds, 23 percent are required to be used for small business assistance.   However, only 20 percent actually wound up there.   This failure by federal departments and agencies in their small business contracting goal represents $12 billion dollars in lost opportunities and revenues for the nation's small businesses.  

Contributing to such failure is the common practice of consolidating contracts, or "contract bundling", which limits small businesses from competing for procurement contracts that would otherwise be divided and performed by small businesses.   Such bundling reduces competition and ultimately hurts the taxpayer. In 2004, the GAO released a report entitled "Impact of Strategy to Mitigate Effects of Contract Bundling on Small Business is Uncertain" and recommended that the SBA disseminate best practices to maximize small business contracting opportunities.   We are anxious to hear what steps the SBA and the other agencies testifying today have taken to address this perennial problem and to hear how they have responded to GAO's recommendations.  

 

Furthermore, in a recent analysis by this Committee, it was revealed that at least 6 of the top 30 small business vendors doing business with the federal government in 2005 were actually large corporations.   Allowing large businesses such as General Dynamics, Lockheed Martin, Northrop Grumman and other Fortune 500 companies to receive or maintain small business contracts for a period of five years makes a mockery of the very definition of small business.   Last year our colleagues on the House side discovered that $12 billion in contracts that agencies claimed went to small businesses actually were held by Fortune 500 companies.   This must stop.  

 

The Small Business Administration is tasked with the responsibility of protecting the interests of small business concerns, preserving free competitive enterprise and maintaining and strengthening the overall economy of our nation. The success of any government agency depends on the resources that are allocated to that agency that allow it to fulfill its mission.   In order for the SBA to properly do its job, the Administration must fund the SBA at a level that allows it to manage, monitor and maintain its core programs.  

 

The 8(a) program is a good barometer of the Administration's funding commitment to small business.    The 8(a) program was established in the late 1960s and remains the primary gateway for minority and women owned small businesses to enter the federal marketplace.   The Administration's 2008 fiscal year budget request of 35 million dollars for operating this program is over a million less than the 2007 fiscal year request, despite the fact that in the last five years, the 8(a) program has witnessed a near doubling of new participants accepted into the program.   This has led the SBA's Inspector General to list the 8(a) program as one of the SBA's Top Ten Most Critical Management Challenges for the last 7 years, citing various problems that require the Administrator's attention and that remain unresolved.   The current funding level is simply insufficient to manage the steady growth of the 8(a) program and address such critical problems as oversight and contract awards. The SBA's 2008 fiscal budget proposal does little to address these problems and the resources that are provided are insufficient to address the management challenges raised by GAO and the SBA's Inspector General Office.   I hope that we will get into some of these issues today.

 

I am also concerned about the complaints I receive regarding subcontractors being victimized by powerful prime contractors.  First let me say this, there should be more prime contracts awarded to minority owned small businesses.   All too often, a subcontractor will spend hundreds and in some cases thousands of dollars preparing a proposal that the prime incorporates into its successful bid proposal - only to learn later that the prime contractor has selected another subcontractor or elected to perform the work in-house.   In either case, the prime contractor is still credited competitively in the selection process with having employed a small business and may have been awarded the contract based on such false representations.   There are also numerous complaints about the subcontractors not being paid on time, paid less then agreed upon or not paid at all.   Many subcontractors fearing that they will be shut out if they complain simply chalk the loss up as the cost of doing business and accept the abuse.   This conduct is unconscionable and prime contractors that are found to engage in such practices should be banned from competing for federal contracts.

 

It was not by coincidence that we chose to have this field hearing in Prince Georges County.   By any measure, the African American community here is regarded in studies and surveys as leading the nation in business ownership, start-ups, educational attainment, homeownership and capital formation.   While some communities may have one chamber of commerce or business association, Prince Georges has several.   This fact underscores the vitality, diversity and prosperity that exist in this fertile business environment.   In short, when you combine all the assets that I have described, you have the ingredients and setting for the growth and emergence of an entrepreneurial class and that is what we have gathered here today.

When you juxtapose this vibrant entrepreneurial class next to the seat of the federal government you should have a recipe or formula for success.   But this has not been the case.   African American, Hispanic and women owned small businesses have had to battle the federal bureaucracy to get their fair share and provide essential services and products to the American public.   The Committee on Small Business and Entrepreneurship, chaired by my distinguished colleague, Senator John Kerry of Massachusetts, hopes to change that and I and others serving on the Committee are working with him to accomplish this goal.   Chairman Kerry and I are working together on legislation that will address a number of issues that will be discussed today.  First, we're working on legislation that limits the practice of bundling contracts that could and should go to minority and women owned small businesses.  Second, we're going to look at ways to protect small businesses engaged in subcontracting from the various abuses prime contractors get away with - such as not paying subs on a timely basis.  Third, we want to update the net worth threshold for the 8(a) program.  And last, we're working on a number of provisions that will bring some accountability and transparency to the procurement process.     

 

  With the Base Realignment and Closure (BRAC) Commission recommendations, we now have in our backyard a tremendous opportunity to change and redefine the way the federal government deals with small and minority business contractors for the better not only here but nationally.   Our region is uniquely poised to benefit from the billions of dollars that will be deposited here in the form of construction, service and product procurement contracts that will fuel BRAC's expansion.   This reality will provide an excellent opportunity for the Defense Department and the military services to reach out and work with the various chambers within Maryland and the region.   It also provides DOD's procurement office with an excellent opportunity to create an innovative platform for working with small businesses that can become a model for the nation.   The stakes here are high and we want DOD to succeed.   I and other members of the Maryland congressional delegation, as well as the Senate's Small Business Committee, will be closely monitoring DOD's efforts over the next few years.  

 

I would also like to note that Maryland and Prince Georges County' cost per square foot for commercial space is among the lowest in the region.   Prince George's county offers proximity and easy access to Washington via mass transit and excellent roadways, so locating federal facilities here would not only reduce congestion in Washington but save tax payers money as well.     

 

While some of my comments paint a bleak picture of the SBA's performance up to this point, I wish to recognize Administrator Steven Preston, who in his short tenure has demonstrated a willingness to tackle difficult issues.   In particular, I wish to note his efforts in creating a scorecard that shine a light on those agencies that have failed to meet their small business goals.   However, even a scorecard that holds a department up to public scrutiny is no substitute for enforcement powers that would allow the SBA or some other agency to compel compliance and impose sanctions.   This is a legislative option that must be considered.  

 

In the SBA's recently released scorecard report, GSA received a "Red" designation which is equivalent to an "F" on a report card.    While a "Green" designation means that an agency is meeting most of its goals and a "Yellow" means that agency needs improvement but is putting programs and methodologies in place to achieve compliance, a "Red" means that agency has failed.   GSA plays too important a role in the overall federal contracting scheme to fail.

 

 It is the only agency that other federal agencies look to in addressing fast track contracting and procurement needs that cannot wait to be bid out.    For this reason, GSA must have minority and women owned small businesses listed on their GSA schedule in sufficient numbers to comply with fast track contracting demands.   However, I see no urgency on the part of GSA to do this.    The GSA Schedule is one of the most exclusive clubs one can hope to join in Washington and this must stop.   I want to hear today how GSA plans to open up the doors to competition and allow such business in.   

 

The testimony and evidence that will be entered into the record here and the various other hearings we have held during the course of this legislative session will help the Committee recommend congressional action to encourage more business opportunities for minority and women owned small businesses.