SECTION: CAPITOL HILL HEARING TESTIMONY

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HEADLINE: TESTIMONY October 21, 1999 JAMES BALLENTINE ACTING ASSOCIATE DEPUTY ADMINISTRATOR GOVERNMENT CONTRACTING AND MINORITY ENTERPRISE DEVELOPMENT HOUSE SMALL BUSINESS EFFECT OF COMPLIANCE REGULATIONS ON SMALL BUSSINESSES

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STATEMENT OF JAMES BALLENTINE ACTING ASSOCIATE DEPUTY ADMINISTRATOR GOVERNMENT CONTRACTING AND MINORITY ENTERPRISE DEVELOPMENT U.S. SMALL BUSINESS ADMINISTRATION OCTOBER 21, 1999 Good Morning Mr. Chairman and members of the Committee. I am James Ballentine, Acting Associate Deputy Administrator for the Office of Government Contracting and Minority Enterprise Development at the U. S. Small Business Administration (SBA). I am appearing on behalf of SBA Administrator Aida Alvarez, whose schedule does not permit her to be with you today. It is a pleasure to testify before the Committee about SBA's Certificate of Competency (COC) Program as it relates to the proposed changes to Subpart 9.1 of the Federal Acquisition Regulation (FAR) effecting contractor responsibility. We understand the Committee's interest in this proposed regulation and its potential affect on America's small businesses. The proposed change to FAR Subpart 9.1 amends current coverage and gives examples of contractor responsibility considerations in the areas of integrity and business ethics. The proposed regulation also makes unallowable certain costs regarding unionization and legal expenses related to defense of specific judicial or administrative proceedings brought by the Federal Government. Specifically, I am here today to respond to the questions posed in Chairman Talent's invitation letter to Administrator Alvarez. Before responding to the questions, I would like to give a brief overview of the history of SBA's COC program. Long before the Small Business Administration was created, the Congress recognized the need to help small businesses receive Federal contracts. The Certificate of Competency (COC) program had its beginning during World War II as part of the Small Business Mobilization Act of 1942 (PL 77-603). This legislation established, among other things, the War Production Board with authority to review and certify the competency of a small business to perform a specific Government contract. After the war ended in 1945, the COC program was transferred between several agencies. In 1951, the program was placed in the Small Defense Plants Administration (SDPA), the precursor to the Small Business Administration. Two years later, the SDPA was recast into the SBA by the Small Business Act of 1953. The purpose of the COC program is to ensure that small businesses, especially those newly entering into the Federal marketplace, receive a fair share of Government contracts. This, in turn, helps the Government to supplement and diversify its sources of supplies and services. The COC program is authorized under section 8(b)(7) of the Small Business Act (15 U.S.C. 637(b)(7). It affords a small business the right to appeal a contracting officer's "nonresponsibility" determination. Where SBA issues a COC, the Small Business Act directs contracting officers to accept the certification as conclusive and precludes the contracting officer from requiring the firm to meet any other requirements of responsibility. At its inception, the COC program was limited to only those areas of "responsibility" dealing with capacity and credit. Capacity is a term of art in Government procurement and has been defined as the overall ability to meet quantity, quality and delivery requirements of a contract. Capacity also encompasses the company's ability to perform; their management and organization; their technical experience and expertise; their knowledge and skills; and their equipment and facilities. Credit is defined as the financial capability to perform a contract, plus other commitments. In 1977, Congress significantly enhanced the COC program by authorizing SBA to issue COCs with respect to all elements of responsibility including perseverance, integrity, and tenacity. These additional elements of responsibility were distinct from the original issues involving capacity and credit. In addition, Congress authorized SBA to review a small business's eligibility for award of a contract under the provisions of the Walsh-Healey Public Contracts Act. Walsh-Healey required that a contractor be either a manufacturer or regular dealer in the materials, supplies, or services it provides to the Government or uses during the performance of a Government contract. There was a perception in Congress that contracting officers were finding small businesses ineligible under Walsh-Healey to avoid awarding them contracts. However, the Federal Acquisition Streamlining Act of 1994 repealed the specific provision in Walsh-Healey dealing with eligibility as a manufacturer or regular dealer. In 1984, Congress further refined the COC Program by requiring Government contracting officers to refer and SBA to accept COC referrals regardless of the dollar value. Prior to 1984, COC referrals were not required for procurements below $ 1 0,000. A COC is a written instrument issued by SBA to a Government contracting officer, certifying that one or more named small business concerns possess the responsibility" to perform a specific Federal contract. The COC is conclusive and the contracting officer is prohibited from denying award of a contact on the basis of nonresponsibility. The COC program has evolved from an ad hoc wartime initiative to a cornerstone of the Government's specialized programs to assist small businesses. Mr. Chairman, I would now like to respond to the specific questions addressed as presented in your invitation letter. How does the current Certificate of Competency program work and to what extent does the program cover general legal compliance? Upon determining that the apparent successful small business offeror is non- responsible for award of a contract, the contracting officer is required to refer that firm to SBA for a COC determination. The contracting officer's COC referral consists of a copy of the solicitation, the proposal submitted by the small business, the abstract of bids or price negotiation memorandum, pre-award survey (where applicable), a written determination and finding of nonresponsibility and any other information used by the contracting officer to arrive at the nonresponsibility determination. Once SBA receives an acceptable COC referral, SBA contacts the small business (by telephone where practicable, by mail in all cases), apprises the firm of the reasons surrounding the referral, and offers the firm an opportunity to apply for a COC. This is usually the first time that the small business is apprised of the contracting officer's negative determination. SBA notifies the small business of the due date for submitting its COC application. SBA gives the small business 6 working days to submit its COC application, unless the contracting officer agrees to grant additional time. SBA also notifies the contracting officer of the date that SBA must make its COC decision. The small business's COC application is reviewed upon receipt and assigned to a COC Specialist to process. The COC application consists of written documentation and information to support its performance of the proposed contract, its adherence to the solicitation's requirements, and any other information the firm deems necessary to document its ability to perform the proposed contract. The COC Specialist reviews all the information supplied by the contracting officer and the small business and any other information developed during the course of the COC review. In addition, a Financial Specialist reviews the financial information to determine the applicant's financial capability to perform the proposed contract plus all other projected work over the contract period. Each specialist generates a written report that recommends issuance or denial of the COC. The reports are included in the COC case file that is sent to the COC Review Committee. The Committee is chaired by the COC Program Supervisor and consists of a COC Specialist, Financial Specialist and an Attorney. The committee reviews the case file and makes a recommendation to either issue or deny the COC. The Committee's recommendation must be accompanied by a supporting statement from the attorney that attests to the legal sufficiency of the committee's findings and the supporting information contained in the COC case file. The SBA Area Director for Government Contracting makes the actual decision to issue or deny a COC based on the COC Committee recommendations. Once SBA reaches a decision, the contracting officer is notified. Upon receipt of the SBA Area Office's decision to issue a COC, the contracting officer can, among other things, appeal the decision to SBA Headquarters. On appeal, SBA Headquarters can confirm or overturn an Area Director's decision to issue a COC. In response to whether or not the program covers compliance with legal requirements outside the procurement process, SBA has processed some COC referrals where violations of labor laws and tax laws are alleged. These labor law issues deal with violations pertaining to prevailing wage rates for certain trades under the Davis Bacon Act. In these cases, SBA would look to the totality of circumstances, court imposed fines or sentences, weigh the severity of violations and reach a decision to issue or deny the COC. Also, SBA receives and processes COC referrals based on nonresponsibility determinations where a small business is unable to meet regulatory requirements imposed by other agencies. For example, there is a service requirement that requires the transportation of materials over land by truck. The Department of Transportation requires that a truck driver take a break after so many hours of driving. If the small business can not meet this requirement, SBA can take no action to waive this requirement. However, SBA tries to determine whether the small business understands the requirement and more importantly, what action the small business is taking to comply. Again, SBA looks at all the circumstances involved in reaching its decision. Where a small business demonstrates prior to award of a contract that it has taken action to correct and prevent recurrence of the nonresponsibility issues, SBA would be inclined to issue a COC. More than 95 percent of all SBA certified contractors perform successfully and on time. Does the appeal process under the Certificate of Competency program dela the award of contracts? SBA regulations require SBA to process a COC referral within 15 working days after it is received, unless the contracting officer agrees to allow additional time. Typically, SBA meets this 15 working day requirement. Additional time may be incurred where a contracting officer appeals the SBA Area Director's decision to issue a COC to SBA Headquarters. We believe the time it takes to process a COC is necessary to ensure that a level playing field is maintained for small businesses in the Federal procurement arena. How many appeals does the SBA currently handle from contracting officers who find that a small business is not responsible? SBA uses the term "COC referral" to mean appeals received from contracting officers relating to non-responsibility of small businesses. From 1996 to 1998, SBA received 1257, 796, and 531 COC referrals respectively. This represents an insignificant portion, .006 percent, of all contract actions reported in the Federal Procurement Data System. Of those appeals identified in the preceding question, how many times does the SBA overturn the determination made by the contracting officer? SBA typically issues COCs on 25 percent of all COC referrals it receives. Of the 1257 COC referrals in 1996, SBA received 606 COC applications and issued 258 COCs. Of the 796 COC referrals in 1997, SBA received 404 COC applications and issued 203 COCs. Lastly, of the 531 COC referrals in 1998, SBA received 241 COC applications and issued 134 COCs. Does the SBA Certificate of Competency program have the staff and personnel to currently assess compliance with a host of laws unrelated to the performance of the contract? SBA believes that its existing staffing levels are sufficient to process the current number of COC referrals relating to this issue. The COC Program is administered through SBA's six Area Offices with 14 COC specialists distributed within these offices. In addition, each Area Office has an attorney and financial specialists that assist in the COC process. With these staff resources, SBA already processes some COC integrity referrals that are based on laws unrelated to contract performance. Examples include issues involving federal taxes, failure to pay the prevailing wage rates on past Federal contracts, allegations of fraud against the Government, Environmental Protection Agency violations and others. From 1996 to 1998, SBA received 16 COC referrals based on integrity. The COC program procedures contain guidelines for processing COC referrals relating to integrity issues. The procedures direct the COC Specialist to review the referral with the assistance of SBA's Counsel to determine if the referral contains sufficient information to process. The COC guidelines also discuss the type of information a contracting officer must submit to support a nonresponsibility determination based on a lack of integrity. SBA also provides policy guidance for dealing with debarments, suspensions, convictions and indictments as well as investigations pertaining to the referred small business. The COC case file must contain a written report from SBA's Counsel discussing the case from a legal standpoint and discussing any relevant litigation or ongoing investigations. SBA Counsel must give an opinion on the legal sufficiency of the evidence to support issuance or denial of the COC. Does the SBA expect that the expansion of the contractor responsibility determinations will increase the number of competency appeals and if so, what impact will that have on the system? SBA can not predict what affect the pending change to FAR Subpart 9.1 would have on the COC program. Data obtained from the General Services Administration, Federal Procurement Data System, reveals that approximately 45,000 individual small businesses received contracts valued over $25,000 in fiscal year 1998. If only 10 percent of those companies are effected by this proposed regulation, the COC workload could increase significantly. Although the full effect of the proposed rule cannot be estimated at this time, we believe the proposed change could result in an increase in the number of non-responsibility determinations for small businesses. This could impact our ability to et our regulatory mandate to process COCs in a timely manner at current staffing els. Mr. Chairman, in conclusion, I look forward to working with you to continue monitoring methods to expand opportunities for and protect the interest of small business the Federal procurement arena. I will be happy to answer any questions you may have.

LOAD-DATE: October 25, 1999