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is, but the program of set-asides with reference to small business, especially in the depressed areas, in the awarding of contracts has been discussed. That could involve a considerable sum of money. In such cases, General, I understand they have abandoned the requirement of the law that we should accept the lowest bid.
There is a possibility that it would not only interfere with our legitimate plan of handling these things at the lowest cost, but that it will involve some tremendous extra expenditures. We would like to know something about that. In the first place, what is this program of set-asides for small business in depressed areas? What do you propose to do about it? What would be the cost of it, and what do you recommend?
General CassIDY. At the present time, all construction contracts under $500,000 are considered to be automatic set-asides.
Mr. Cannon. Has that always been true, or is that a new interpretation?
General Cassidy. This is a fairly new change in the limitation. It has been raised. I believe it was in the order of $200,000, but it has been increased to $500,000. It means that we will only accept small business as bidders on contracts under $500,000.
Mr. CANNON. You will not as heretofore, as required by law, award to the lowest bidder, where all bidders are entitled to participate?
General CASSIDY. Yes, sir. We do not permit a large business to bid for a small business set-aside contract.
Mr. Cannon. Is there any authorization for that?
Mr. TABER. Supposing the small business fellow bids lower than the big fellow?
Mr. RABAUT. The big fellow does not bid at all.
Mr. TABER. I know the rule there, but supposing you got a block of contracts and there was $500,000 set-aside for the "small bidder" bids, and there was $10 million in that contract that was left to the open field, that is, for those outside of small businesses, and the small business fellows were lower than the big fellow. Then what would you do?
General Cassidy. In an open bid, where anyone is bidding, we would take the lowest bidder, regardless of whether he is small or large business. In the set-aside program
Mr. RABAUT. He has to have character, doesn't he?
General Cassidy. He has to be capable of doing the work. As far as small business is concerned, the Small Business Administration will certify as to whether or not he is capable, and we accept their certification. In the set-aside program, of course, we throw out or do not accept the bids of large business. In addition to the $500,000 limitation, which is considered an automatic set-aside, we must consider all contracts to be let above $500,000, to see whether or not they can be set aside for small business. The Small Business Administration itself can request us to set them aside, or the contracting officer, by a unilateral determination can set them aside.
We are being urged to follow that procedure wherever possible to make the set-asides above $500,000, so that only small business can bid on them.
Mr. JENSEN. Mr. Chairman.
Mr. JENSEN. Do we have a law which provides for such rules and regulations, or is this simply a regulation which has been decided on by the Department?
General Cassidy. This is by law, sir. It is the Small Business Act.
Now, without a doubt, that sort of a regulation creates quite some problems, does it not, in determining just who is small business? Does the Small Business Administration determine who is small business and who is big business?
General CASSIDY. In any question we have, sir, we ask the Small Business Administration and their determination is final to us.
Mr. JENSEN. The bids which you receive on these set-asides, are they generally pretty much in line with each other, or is there quite a differential in bids?
General Cassidy. In our experience under this new program, which has just been in force since last fall, which is, of course, our slack construction season, we do not have enough experience to make a judgment as to whether the bids are generally higher than what we might have expected. We have been getting good bids over the past few months so we do not have the experience yet to say whether or not this will increase costs.
Mr. JENSEN. Has there been much of a differential in the bids so far?
General Cassidy. Not that we can see, sir. Since December we have made 157 awards, 123 to small business and 34 to large business; as far as dollars go, $22,700,000 to small business and $16,200,000 to large business.
Mr. JENSEN. The reason why I asked that question is this: I remember in the early 1930's, when the NRA was established the administration demanded that all bids be the same; that is, that all prices be the same. I was in the lumber business at that time and I remember that before NRA went into effect, I sold lumber shingles per square for $4.50 a square. Mr. Cannon. I wish we could get them now at that rate.
Mr. JENSEN. And the others went, as I remember it, for about $40 a thousand. The NRI said you must get at least $50 a thousand. Every business in the country was told that they must get together and formulate a price that would have to be comparable. The bids had to be comparable to each other, and everything had to be governed. All prices had to be about the same.
Well, the businesses all over the country complied religiously with that, until it was finally thrown out the window by the courts. Now, if companies conspire to bid about the same as other companies, the officers of those companies are imprisoned. It's a funny old world we live in when they teach us one thing one year and another thing another year. The Government of the United States at one time demanded that we fix the prices one year, and then the next year they put people in jail for collusion on prices with respect to goods, just as is going on now. As I say, there is no doubt that there has been collusion in bidding on Government projects and private projects, but now we had better caution these companies that if their bids are pretty close together that the heads of these contracting firms are likely to find themselves back of the bars. That should bring about a group of bids that will have quite a big differential in them. I was wondering if that differential was great enough so that these contractors could prove that they were not in collusion, and not be put back of the bars. General CAssidy. The construction business is highly competitive. In our experience we have not seen—in my own experience I have not seen any evidence that would lead me to think that there had been agreements among the bidders. We have high ones and low ones, and they really fight for the jobs. Mr. CANNoN. Do you ever break up a large contract into small contracts in order to reach the same result, General Cassidy? General CASSIDY. We have been directed to consider that in our future bidding, sir. Mr. CANNoN. Would that be just as effective? General CAssidy. Generally I would say that it would be slightly more costly to do that, because if more than one contractor were involved we would be paying additional mobilization expenses. However, on the other side you can say that the contractor on site has a greater advantage in the bidding because he has his people there and is ready to go to work. Mr. EviNs. Will the gentleman yield? Mr. CANNoN. The gentleman from Tennessee. Mr. EviNs. Isn't the theory of that provision in the Small Business Act to see that the Government, while spending billions of dollars, enormous sums of money, through the Army, and the Atomic Energy Commission, and other agencies, in letting contracts, and instead of letting one contract or two, or a few contractors getting the lion's share, or a monopoly of all the Government business, the theory is to set aside a certain portion of procurement for the small business economy of the Nation. Small businesses pay taxes and employ people, and they are a very important segment of our economy. This provision of the law has not been very much used to date, but I read something in the press that the President called on the Defense Department to use the set-aside provisions to the maximum possible, so that small business could have a proportionate share of Government contracts, instead of letting the contracts go to just a few. Of course, it would be much easier, to let them to one contractor and say, “You take all of the business and take it off our shoulders.” A big contractor will gladly do it, but it requires a little more imagination and a little more work to sort of apportion contracts out among the smaller contractors—to broaden the base. Is that the theory behind the law? General CAssidy. That is basically the theory. If you are going to buy 100 of a certain item, instead of letting it as a contract for 100 you can let 10 contracts for 10 each and try to spread it that way. The construction contract is a little more difficult to break up. We are not buying multiple items. Mr. CANNoN. Principally it would cost more money. You will agree that it would cost more money? Also, you abandon the rule of letting to the lowest bidder, which would completely disjoint our governmental system of contracts. We have gone through a lot of experience with cost-plus contracts, and other systems, all of which have been largely cured by the requirement that it be let to the lowest bidder. It strikes me as a very dangerous procedure as far as costs are concerned. It adds materially to your overhead, your supervision and other difficulties. Incidentally, a firm which is capable of handling a $500,000 contract does not seem to be a very small concern. General CAssidy. The definition of a small business is one which has had earnings over the past 3 years averaging less than $5 million a year. So they are fairly large concerns. Mr. Eviss. General, what you have done, as I understand it, is just raised the ante from $200,000 to $500,000? General CAssidy. That is correct. With an increased consideration of contracts over $500,000 for unilateral set-asides. Mr. PILLION. Will the gentleman yield : Mr. CANNoN. Mr. Pillion. Mr. PILLION. When vou talk about earnings, are you talking about net earnings of $5 million, or gross income, or is it the total amount of business? General CAssidy. The small business concern is a concern that is independently owned and operated and is not dominant in its field of operation, and the average annual receipts of the concern and its affiliates for the preceding 3 years are $5 million or less; or, if the concern qualifies as a labor surplus area concern, $6,250,000 or less. Mr. PILLION. That is gross income, I would assume. General CAssidy. Annual receipts. Mr. CANNoN. Then it is not necessarily a local concern ? General CAssidy. No, sir. Mr. CANNoN. They may come in from anywhere from the outside? General CAssidy. Yes, sir. Mr. CANNoN. If they conform to your definition of a small business they may come in from any State outside, or any place outside, and make a bid and receive a contract General CAssidy. That is correct, with the exception, as I recall it, that from a labor surplus area then they have a $6,250,000 limitation instead of $5 million. In other words, there is a 25 percent increase in the requirements if the firms come from a labor surplus area. Mr. JENsex. Mr. Chairman. Mr. CANNoN. Mr. Jensen. Mr. JENsen. Contracting work is the most hazardous business in the world. There are more people who go broke in the contracting business than in any other business. You will always find a concern that will start out small and keep growing. Finally they bid on a project with which they are unfamiliar. They will total all their costs-material costs and labor costs—and then they will say, “Well, now, we need this work and we will just add 5 or 6 percent profit to the actual cost of the material and labor.” Then something will happen. The weather will be bad, or they will have some mishaps in construction work, and the first thing you know they don't have the resources to stand the loss. So they go out of existence. They go broke.
Then new concerns of the same type I have just explained come into being, and they stay in business for 3 or 4 years and then they go broke. Then another outfit decides, “Well, I am smarter than they and I will underbid everybody and get this work. I need it. I have a lot of men that need the work, and I have the machinery and tools, so we'll just drive the work to its final end, and we'll be smarter than the rest of these fellows who go broke."
But invariably a great percentage of them do go broke. Is that not right, General ?
General Cassidy. In the contracting business a very large percentage go broke.
Mr. JENSEN. I do not care what line it is. Whether it is in the building of homes, or construction building of every type. You have a greater percentage of fellows in the contracting business going broke than in any other business. Mr. CANNON. Off the record.
(Discussion off the record.) Mr. Cannon. On the record.
Are there any advantages offered to contractors from labor surplus areas? That is, could a contractor come in from a labor surplus area and make a higher bid and be accepted ?
General CASSIDY. If he is a small business. In other words, there is the increased size standard for the small business concern from a labor surplus area.
Mr. Cannon. You would take that into consideration ?
General Cassidy. Yes, sir. The Small Business Administration will make a determination.
Mr. Cannon. In the awarding of the contract, General Cassidy, would you give this contractor, who is in here from a labor surplus area—would you give him a higher percentage, or a higher fee?
General Cassidy. No, sir; he is in competition with the other small businesses. He could be just larger than they are.
Mr. CANNON. The fact that he represents surplus labör does not give him additional privileges ?
General Cassidy. Not as far as the bidding is concerned; no, sir.
Mr. RABAUT. General Cassidy, there are some subcontractors in these bids, are there not?
General CASSIDY. That is correct, sir.
Mr. RABAUT. Suppose some of the subcontractors came from excess labor areas? Does that affect the total bid ?
General CASSIDY. No, sir.