COFPAES Administrator John Palatiello testified before the House Small Business Committee on June 18 on the issue of sending white-collar jobs offshore. The hearing was broadcast live on national cable television on C-SPAN.
The hearing was broadcast live on national cable television on C-SPAN. View the C-SPAN web cast of the entire hearing. Mr. Palatiello's statement can be found 45 minutes into the hearing.
However, upon researching this issue, it has come to our attention that there is a loophole in the SCA and its regulations that not only permits this practice, but indeed may provide an incentive. The Act and its regulations apply only to contracts performed in the United States. Thus if Firm A is submitting a proposal to a Federal agency and it will perform the work domestically, it is subject to the SCA wages. If Firm B is submitting a proposal, and it will perform the work through an offshore subcontractor, it is exempt from SCA.
This clearly undermines the intent of the law. It also disadvantages workers in firms that propose to perform domestically. And it puts those firms at a competitive disadvantage.
The following is from the Department of Labor’s web site section on : Frequently Asked Questions about the SCA
Does the SCA apply to all government contract work?
No, the SCA does not apply to: 1) contracts for construction, alteration and/or repair, including painting and decorating of public buildings or public works; 2) work covered by the Walsh-Healey Public Contracts Act; 3) contracts for the carriage of freight or personnel by vessel, airplane, bus, truck, express, railway line, or oil or gas pipeline where published tariff rates are in effect; 4) contracts for the furnishing of services by radio, telephone, telegraph, or cable companies, subject to the Communications Act of 1934; 5) contracts for public utility services, including electric light and power, water, steam, and gas; 6) contracts for direct services to a Federal agency by an individual or individuals; 7) contracts for the operation of postal contract stations; and 8) services performed outside of the geographical scope. For additional exemptions, see Title 29, Part 4 of the Code of Federal Regulations, Section 4.123(d).
What geographical areas are covered under the SCA?
The SCA applies to all work performed within the United States. For purposes of the SCA, the term "United States" includes any State, the District of Columbia, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands as defined in the Outer Continental Shelf Lands Act, American Samoa, Guam, Wake Island, Johnston Island, and the Commonwealth of the Northern Mariana Islands. The SCA does not apply to work performed in any other territory under the jurisdiction of the United States or any United States base or possession within a foreign country. Also, the SCA does not apply to work performed on ships operating in international or foreign waters. If a portion of the contract services is performed within the United States and a portion is performed outside the United States, the SCA applies to the portion performed in the United States. (Emphasis added)
The specific exemption for work performed outside the United States is in 29 CFR 4.112.
The SCA only applies to work performed in the United States. On a Federal contract, to send work off-shore is technically not a SCA violation. Given the nature of our economy when the SCA was enacted, it is apparent that Congress did not anticipate offshore subcontracting. This is a loophole Congress did not consider, which should be closed. A number of state have laws regarding prevailing wages on state service contracts. At least four state legislatures, Connecticut, New Jersey, Maryland and Washington State have before them this year legislative proposals to prohibit offshore subcontracting. We respectfully urge the Committee to investigate this loophole in the SCA and assist in a regulatory or legislative solution.
Professionals in architecture, engineering and surveying are licensed by the states. In most cases, state law or regulation requires work, defined in state law as the practice of architecture, engineering or surveying, to be performed under the direct supervision of the licensed profession, and that the licensed professional be in “responsible charge” of such work. A question should be raised as to whether sending A/E work offshore meets the licensing law intent on direct supervision and responsible charge.
COFPAES is also concerned about work going offshore because of the predatory nature of Federal Prison Industries (FPI). As the Small Business Committee knows from its hearing held last November, FPI is rapidly moving into the services sector of our economy. Prison industries are looking to enter the commercial market for services, claiming a 1930s ban on interstate commerce for prison made products does not apply to services. FPI is targeting for domestic prison labor performance those commercial services that are going offshore. FPI’s own documents show it is "broadening its prime contractor role ... in the areas of ... digitization of maps for GIS applications, digitization of engineering and facilities management drawings (am/fm), scanning and digitizing, CALS conversions." Thus, COFPAES is concerned that the trend toward offshore performance of architecture, engineering and mapping activities will result in a double-whammy for U.S. small business A/E firms – low wage competition from off-shore sources as well as from prison industries.
The recent trend toward offshore subcontracting is particularly troubling to small A/E firms. They are not as able as large firms to set up offshore subsidiaries or to negotiate teaming agreements with firms outside the United States.
Our greatest concern, is the fact that when one looks at what has happened in the manufacturing sector, one realizes that once an activity goes offshore, it does not come back home. We are concerned about the long term impact offshore subcontracting will have on the A/E profession and the U.S. economy.
We generally support free trade policies. We are generally resistant to government intrusion in the business affairs of our profession and our members business practices. It should be noted that for obvious anti-trust reasons, private firms or trade associations cannot enforce ethical policies that in any way limit sending work offshore. While this is an area where only government action can affect this activity, we urge caution by Congress and regulatory agencies. We appreciate the Committee’s careful attention to this important matter and commend you, Mr. Chairman, for holding this important hearing.
Hearing on Sending White-Collar Jobs Offshore
June 18, 2003
Testimony of John M. Palatiello
Council on Federal Procurement of Architectural & Engineer Services (COFPAES)
House Committee on Small Business Committee
Mr. Chairman, members of the Committee, I am John Palatiello, Administrator of the Council on Federal Procurement of Architectural & Engineer Services (COFPAES), a coalition of the Nation’s leading trade associations and professional societies in the architecture, engineering, surveying and mapping field. Our members are the American Congress on Surveying and Mapping (ACSM), American Institute of Architects (AIA), American Society of Civil Engineers (ASCE), National Society of Professional Engineers (NSPE) and the Management Association for Private Photogrammetric Surveyors (MAPPS). Our coalition represents more than 500,000 practicing architects, engineers, surveyors and mapping professionals.
COFPAES was formed in 1966 to speak for the design professional community with a unified voice on Federal procurement issues. Paramount to the council is the qualifications based selection (QBS) process for government procurement of architect-engineer (A-E) services, which is codified in 40 USC 541 and part 36 of the Federal Acquisition Regulation. This process has also been enacted in more than 35 states and is endorsed in the American Bar Association Model Procurement Code for State and Local Government.
For some time, the architecture, engineering, surveying and mapping (A/E) community has been concerned about the practice of sending production work offshore. U.S. firms send drafting, data conversion, scanning, digitizing, and other work related to design and mapping to subcontractors outside the United States.
Before September 11, there was discussion in the A/E community about the practice of sending certain work offshore for subcontractor performance. That discussion focused on whether this was a good business practice and whether this was an ethical activity.
Like many other aspects of American life, things changed on September 11, 2001. In his State of the Union address in January, 2002, President Bush said, "Our discoveries in Afghanistan confirmed our worst fears … We have found diagrams of American nuclear power plants and public water facilities, detailed instructions for making chemical weapons, surveillance maps of American cities, and thorough descriptions of landmarks in America and throughout the world. What we have found in Afghanistan confirms that, far from ending there, our war against terror is only beginning."
Access to A/E drawings, mapping data and other work products of the design community can be used for nefarious and destructive purposes if in the wrong hands. Since the September 11 attacks, there has been increased concern about this issue.
For example, after September 11, GSA announced its new policy regarding access to A/E drawing of Federal buildings. GSA, along with the American Institute of Architects (AIA) and the National Society of Professional Engineers (NSPE) issued a joint statement on dealing with unusual requests for building plans.
A number of Federal agencies revised public web sites and removed maps, drawings and other data about our critical infrastructure. For example, the U.S. Department of Transportation’s web site on the National Pipeline Mapping System, which provided location data on interstate gas and petroleum transmission lines, was shut down.
While these may have been prudent and necessary steps, they could in some respects be tantamount to shutting the barn door after the horse has escaped.
There are instances in which U.S. firms send conversion work, mapping and other geographic and design information work offshore, to India, Pakistan, China, the Philippines, and other countries with lower labor costs. This practice raises issues regarding access to data about the location of power plants, buildings, pipelines, water supply systems, underground utilities and other critical infrastructure by individuals in foreign countries who have not been through any degree of security clearance and where control of access to data simply does not exist.
While the Federal “Buy America Act” (40 USC 10a) generally does not apply to services, for a Federal Government contractor to send work off-shore could be illegal and potentially dangerous. The only reason a firm would send work offshore would be to take advantage of lower labor costs. If a firm were to send Federal contract work offshore, take advantage of the lower labor costs, fail to pay the prevailing wage required by the contract, and pocket the difference, it could be in violation of contract clauses and subject the firm to fraud, personnel to criminal penalties, and possible Federal contracting debarment. We would urge the Committee’s investigation of the legality of such a practice.
Federal A/E contracts and subcontracts are subject to the prevailing wage requirements of the Service Contract Act of 1965 (41 U.S.C. 351 et seq.). Many state and local governments have similar prevailing wage laws. Some would quickly assume that with regard to Federal contracts, this practice could not be taking place, due to the requirement that the prevailing wage be paid to prime contractors’ workers and subcontractors’ workers pursuant to the Service Contract Act of 1965 (41 U.S.C. 351 et seq. and 29 CFR 4.101 et. seq.) (“SCA”).