July 15, 2005
As contracting officers direct more money toward tribally owned companies, Alaska Native corporations are forced to defend their advantage.
When Charles Wilson saw the U.S. Air Force Academy's request for help with a software system last summer, he jumped on it.
"I knew instantly that it was within our capabilities and would be a perfect complement to our existing contracts," he says in a slow Mississippi drawl. His company, San Antonio, Texas-based Rohmann Joint Venture, works on other technical projects for the academy, including some so secret he can't even discuss them.
His staff immediately got to work on a proposal and spent two weeks preparing a detailed explanation of RJV's past experience and capabilities. The academy had issued only an informal request for information, not a formal request for proposals, but Wilson wanted to be convincing. He wasn't the only one vying for the job. The academy received a stack of proposals two feet high from more than 50 companies, including behemoths such as Lockheed Martin Corp. and Northrop Grumman Corp.
The academy didn't like any of them. In December, it announced that instead of holding a competition, it had decided to award the $882,600 contract to TKC Technology Solutions, an Alaska Native corporation. Federal agencies are allowed to bypass competition through the Small Business Administration's 8(a) program for small and disadvantaged companies. Tribally owned companies have an extra advantage because they are exempt from the dollar limits that restrict all other contracts awarded through the 8(a) program.
"I got very ticked off. I expected a competition," says Wilson. Within a week, he fired off a protest letter alleging that the award violated federal acquisition policy. The military academy dismissed his protest a month later. Sherry Pittinger, director of small business programs at the academy, says she simply was following protocol. She always gives small and disadvantaged businesses priority when awarding contracts, and holds a full-blown competition only when the academy can't find any firms eligible to bypass competition. In terms of priority, she says, "8(a) companies are at the top of the list . . . and full and open [competition] is at the bottom of the list."
That attitude has helped companies owned by Native Americans flourish in recent years. Prior to 2000, the Defense Department spent less than $1 billion a year on contracts with tribally owned companies. In fiscal 2004, it spent $2.6 billion. Frank M. Ramos, director of Pentagon's Office of Small and Disadvantaged Business Utilization, attributes the shift to the wars in Iraq and Afghanistan. "Contracting officers had to ramp up [spending] and they grabbed whatever legitimate authority they had," he says.
The need to quickly establish many contracts led to some well-documented problems. A year ago, the Defense Contracting Command-Washington, a contracting arm of the Pentagon, paid an employee of a Native American contractor four times more than the Army lieutenant colonel who had previously done her job. The Defense inspector general said this situation was not unusual.
The explosion in popularity of contracts with tribally owned companies has revealed oversight weaknesses. No one, not Congress, not the Small Business Administration nor awarding agencies, collects data on how Native Americans benefit from the 8(a) program. Also unknown is the degree to which deals with tribally owned companies serve as conduits to large government contractors, which sometimes perform the work as subcontractors to the 8(a) firms. That lack of information, along with reports of potential misuse of contracts awarded to tribally owned firms, has led some members of Congress to wonder whether the government is wasting money on no-bid contracts and not achieving the intended goal of helping Native Americans.
Alaska Native corporations have been singled out for scrutiny since last fall, when The Los Angeles Times, The New York Times and The Washington Post reported that the Defense and Homeland Security departments awarded large contracts to Alaska Native firms, which then subcontracted sizable chunks of the work to other companies, many of them large federal contractors.
In March, Rep. Tom Davis, R-Va., chairman of the House Committee on Government Reform, joined ranking member Rep. Henry Waxman, D-Calif., in asking the Government Accountability Office to investigate. They also asked the Defense, State and Homeland Security departments to answer questions about how contracts were awarded to Alaska Native corporations. The committee is reviewing documents from the agencies and still is waiting for GAO's report.
In the meantime, Alaska Native corporations have started regulating themselves. They're collecting some of the missing data and distancing themselves from firms that are known to have violated contracting law. They're also trying to turn bitter competitors into friends. By collaborating with other minority groups, tribally owned companies hope to undo their reputation as the spoiled child of government contracting.
According to RJV's protest of the Air Force Academy contract, TKC planned to subcontract most of the work to a large software company. Wilson says he heard of the subcontracting plan "through the grapevine." TKC vigorously denies the claim. The complaint is familiar. Contractors that compete with Alaska Native corporations for government dollars frequently assert that tribally owned companies pass on their contracts to bigger companies. In 2004, the Pentagon's inspector general partially validated those concerns. An audit found that Capital City Pipes Inc., a defunct small company formerly in the 8(a) program, had passed on the entire value of seven contracts worth $1.5 million to JGB Enterprises Inc., a hose supplier based in Liverpool, N.Y.
Frank Lalumiere, SBA's deputy administrator for government contracts and business development, says the agency is looking for ways to stop potential abuse, but that agencies awarding contracts are responsible for tracking subcontracting agreements. SBA requires that 8(a) contractors perform at least 51 percent of the value of the contracts they are awarded. The Air Force Academy diligently tracks subcontractors, Pittinger says. "We want to know names," she says. She says her team checks in with companies every six months to make sure they are abiding by the subcontracting limits.
"The top myth is that ANCs aren't performing their own contracts," says Chris McNeil Jr., president and chief executive officer of Sealaska Corp. and chairman of the newly formed Native American Contracting Association. There's little comprehensive data available to prove or disprove McNeil's assertion. SBA doesn't collect the names of subcontractors or what portion of contracts they perform. Awarding agencies aren't required to track subcontractors or even ask their names. Contracting officers have leeway to decide when a contract warrants further investigation. "When there is some suspicion or evidence that the firm may not comply with regulations, the contracting officer increases oversight. They ratchet oversight up or down depending on the assessed risk," says SBA's Lalumiere.
The contracting officer also is responsible for determining whether an 8(a) company is capable of performing a contract. "If an agency says, 'We believe they can do it,' we're not going to question that," Lalumiere adds.
The Pentagon inspector general's 2004 report concluded that subcontracting abuse was caused by confusion over which agency is responsible for managing 8(a) contracts. It recommended that both the Small Business Administration and Defense Department beef up their oversight. Outside groups say that's a lot of responsibility for a workforce that's already overloaded. "I don't think anybody is trying to do anything evil or wrong . . . contracting officers are stretched thin," says Cathy Garman, senior vice president of public policy at the Contract Services Association of America, an industry group that counts several ANCs among its members. "If [an Alaska Native corporation] has a large business subcontractor, you don't necessarily follow up."
Concerned that one or two high-profile violations could hurt the reputation of the entire group, Alaska Native corporations have started policing themselves. The Alaska 8(a) Association, which represents more than 200 Alaskan companies, doesn't allow any companies that have been disbarred by the SBA to join. The Native American Contract Association is actively collecting subcontracting data from ANCs.
The idea behind Alaska Native corporations was simple: The 1971 Alaska Native Claims Settlement Act, written by Sen. Ted Stevens, R-Alaska, created 13 regions and more than 200 village corporations, each of which was incorporated. Natives of each region own the corporations' shares-if the company profits, then the Alaska Native shareholders reap the rewards. The legislation didn't require the companies to hire native employees or contribute to education funds; dividends from profits were seen as a large enough benefit to justify the program. "The intent is for the money to go back and benefit the shareholders," says Courtney Boone, Stevens' spokeswoman. Neither Congress nor SBA tracks the program's benefits to Alaska Natives.
Alaska Native corporations carefully track how much money goes back to their communities. Each of Sealaska's 17,500 shareholders has received $500 annually for the past several years. "It's not a bad return, but we have much higher expectations," says McNeil. In addition, Sealaska, which brings in about $150 million annually in revenues primarily through its commercial timber and plastics business, donates $500,000 a year to scholarship programs and runs the Sealaska Heritage Institute, which gives grants for native language and culture training. Sealaska shareholders come from three tribes in southeastern Alaska: Tlingit, Haida and Tsimshian. McNeil, who himself is Tlingit and Nisga'a, says most shareholders are poor.
Smaller subsidiaries of Alaska Native corporations also manage their own community programs: Eyak Technology, LLC, a 100-person subsidiary of ANC The Eyak Corp., recently donated 15,000 books to help stock libraries in Alaska Native communities, and will award about $10,000 in college scholarships to Alaska Natives this year.
The Native American Contracting Association surveyed all 13 Alaska Native regional corporations along with two village corporations. The survey revealed that shareholders received $27.14 million through dividends from federal contracts in 2004-an average of $283 per shareholder, which varies widely among corporations. One village corporation distributed $17,100 to each shareholder in 2004, while one regional corporation did not pay any shareholder dividends. ANCs donated $4.9 million to cultural and social programs for their local communities in 2004, and awarded $14.27 million in scholarships to Alaska Natives between 1999 and 2004, NACA reports.
McNeil says he wants to hire more Alaska Natives, but they aren't always willing to move to the lower 48, where Sealaska has many of its operations. About 44 percent of Sealaska employees also are Alaska Native shareholders. At headquarters in Juneau, 85 percent of the employees are Alaska Natives.
Jim Dunn, chief operating officer of Eyak Technology, launched an internship program in an attempt to groom Alaska Native employees. He is not Native American, but was drawn to the company partly because it seemed like a "great cause," he says. "We're doing everything we can to hire more Alaskan Natives. If you look at the kinds of things our company does-info technology, communications networks-we haven't been able to find lots of people with those skill sets."
When the companies are owned by Alaska Natives, it's more likely employees will come from local communities, says Henry Flood, vice president of the Foundation for the American Indian, which promotes Native American culture and economic well-being. "Just like in other cultures, there's an inherent tendency that you're going to seek to employ your own because the cultural gap is not as great," he says.
NACA's survey found that in 2004, Alaska Native corporations employed 7,747 Alaskans, 2,116 of whom were tribal shareholders, out of a total of 27,800 employees. NACA says these numbers probably underestimate the number of Alaska Native employees because they include only shareholders.
Ron Perry usually avoids anything that resembles a handout. As an undergraduate at Oregon State University, he refused to apply for grants reserved for minorities, even though he qualified as an Alaska Native. After running his own information technology firm for five years, a friend suggested that he apply for the 8(a) program. "I said that's great, but I don't need to. I'm doing just fine," he recalls. But after reflecting on the size of the government market, he changed his mind. Now, the outgoing, friendly 42-year-old counts the National Park Service, National Guard and Energy Department among his clients, and his company, Microware Computers Inc., generates $1.4 million in revenues annually. Perry, president of the Alaska 8(a) Association, is philosophical: "It's like taxes. You should take every advantage you can, if it's legal." Flood, of the Foundation for the American Indian, is more blunt: "White people and non-minorities would use the same rules to their advantage if they were available."
Companies owned by individual Native Americans, as opposed to Alaska Native corporations, must abide by the same rules as other minority-owned companies in the 8(a) program. They face the same $3 million limit on contracts awarded through the program ($5 million for manufacturing contracts), and must leave the program after nine years. Only companies owned by tribes-such as the 13 ANCs created in 1971-are exempt from the caps and can re-enter the program with newly created subsidiaries even after the nine-year limit.
The way Perry sees it, ANCs deserve those extra perks, because they're owned by thousands of shareholders. The other 8(a) participants are small by definition, and as a result, the caps make sense, he says. Tribally owned companies share the wealth they create with large communities of Native Americans, not just a handful of executives. Perry attributes complaints about fairness to envy at the success of tribally owned companies. "Any time you're the best dancer, or have the best-looking date, there's a certain amount of jealousy. That's a portion of it," he says.
Some federal officials are trying to stop the various 8(a) groups from treating each other like adversaries. At a recent contracting seminar for service-disabled veterans, the Defense Department's Ramos urged the audience to work together with other groups, including Alaska Native corporations. By forming joint ventures and subcontracting opportunities, small companies can compete for contracts against big ones, not just against each other, he said.
A few companies already have gotten the message. Bob Estes, director of consulting services for Comtech LLC, a woman-owned small business based in Herndon, Va., says he is happy to see the government using no-bid contracts, because it improves the chances that one of Comtech's partners, an Alaska Native corporation, will win them.
The councils responsible for the federal acquisition regulations are collecting comments on a proposed rule that would allow contractors to count subcontracts awarded to Alaska Native corporations among their small and disadvantaged business goals, which could encourage further cooperation between ANCs and other firms. Sealaska's McNeil says the Native American Contracting Association has been actively reaching out to potential partners in the contracting community, including other participants in the 8(a) program. He's been working with the Latino American Management Association, the National Small Business Association, the National Black Chamber of Commerce and others on opportunities for collaboration.
July 15, 2005