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procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?
In an unusual turn of events, the federal government is being criticized in some quarters for implementing a program that has become too successful. Historically, large government contracts were rarely awarded to firms owned by American Indian tribes, Alaska Native corporations (ANCs), or individually by Native Americans.1 Congress decided to rectify this, under representation in the marketplace, by granting small business concerns owned by American Indian tribes or ANCs—hereinafter collectively referred to as tribally owned concerns— certain procurement preferences not available to other small businesses. Primarily as a result of these preferences, tribally owned concerns, especially those owned by ANCs, have grown exponentially and are being awarded an ever increasing percentage of federal procurement dollars. The problem, according to some critics, is that the success of tribally owned concerns may be coming at the expense of other types of small businesses, while inappropriately benefiting large businesses.
Procurement Preferences: The 8(a) Program
The government has a long history of providing procurement preferences for certain types of businesses. Currently, small, small disadvantaged, and domestic businesses all enjoy procurement preferences of one type or another. Disabled Americans, veterans, and inmates also benefit from procurement preferences. The procurement preferences for tribally owned concerns are part of the 8(a) program.2 The 8(a) program offers certain advantages to small
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businesses owned by socially and economically disadvantaged individuals.3 Foremost among these advantages is that smaller contracts can be awarded to 8(a) participants without competition, and the competition for larger contracts can be limited to only 8(a) participants. However, within the 8(a) program, tribally owned concerns have additional advantages, primarily in the areas of sole source contracts and size determination, as they relate to affiliates.
Eligibility Requirements
An American Indian tribe, the definition of which includes Alaska Native communities,4 must meet certain criteria to be eligible to participate in the 8(a) program. Initially, the tribe must be recognized as an American Indian tribe, band, nation, etc. by the federal government or by the state in which the tribe resides.5 This requirement effectively limits participation in the 8(a) program to legitimate American Indian tribes, as opposed to an ad hoc group of citizens of American Indian descent.
In addition, the American Indian tribe must be both socially and economically disadvantaged. ANCs are considered by law to be both socially and economically disadvantaged, but the regulations state that, for the purposes of the 8(a) program, non-ANC American Indian tribes are considered only to be socially disadvantaged. Therefore, non-ANC American Indian tribes must demonstrate an economic disadvantage. This must be shown statistically by such measures as unemployment rate, per capita income, percentage of members living below the poverty level, and access to capital, among other factors.
Concerns Owned and Controlled by American Indian Tribes
While an American Indian tribe must meet eligibility requirements in order to participate in the 8(a) program, the American Indian tribe itself is not eligible to receive 8(a) contracts. Rather, business concerns owned and controlled by the tribe are the entities that may receive 8(a) contracts. Further, a business concern owned by an 8(a)-eligible American Indian tribe does not have to independently qualify as socially or economically disadvantaged; the tribe’s status is automatically attributed to any concerns owned by the tribe. However, tribally owned concerns must meet certain other requirements in order to be eligible for receiving contracts under the 8(a) program. For the purposes of this article, the most significant requirements include:
The concern must be a for-profit organization capable of being sued,
The tribe must own a minimum of 51 percent of the voting stock and at least 51 percent of the aggregate of all stock, and
The management and daily business operations of a concern must be controlled by the tribe.6
procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?
Small Business Size Standards
Normally, in order to receive a contract award under the 8(a) program, the 8(a) company, including all of its affiliates, must meet the small business size standard North American Industry Classification System (NAICS) code7 assigned to that particular procurement. However, tribally owned concerns have been granted an exception to this rule. The size of a tribally owned concern will be determined on a standalone basis without regard to any other business concerns that may be owned by the tribe.8 This exception enables a single American Indian tribe to own numerous small 8(a) firms. The only limit is that one tribe may not own more than one firm with the same primary NAICS code. Each tribally owned concern accepted into the 8(a) program is required to have a primary NAICS code because the tribe must show that the firm has a chance to be successful in the industry represented by that NAICS code in order to be accepted into the 8(a) program. However, once a tribally owned firm is accepted into the program, it can bid on contracts covered by any NAICS code. Of course, the tribally owned firm that is actually bidding on any given job must, in and of itself, meet the applicable size standard for that procurement.
Sole Source 8(a) Awards
In the 8(a) program, sole source awards for services are usually limited to $3 million or less, and any procurement for services with an estimated value greater than $3 million must be competitively awarded. However, tribally owned concerns have been granted an exception to this rule as well. Tribally owned concerns may be awarded sole source 8(a) contracts of unlimited value.9 The regulations do not provide any guidance
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for when such unlimited value sole source awards are advisable, so the decision to do so is at the discretion of the agency’s procurement officials. The only caveat is that once a procurement has been accepted by the Small Business Administration (SBA) for a competitive 8(a) award, it cannot then be changed to a sole source award.
8(a) Joint Ventures under the MentorProtégé Program
8(a) firms are allowed to form a joint venture with other non-8(a) firms for the purpose of receiving and performing an 8(a) contract. However, SBA must approve any such joint venture. SBA will provide its approval when it is shown that the 8(a) concern lacks the necessary capacity to perform the contract on its own and that the agreement is fair and will be of substantial benefit to the 8(a) concern. Theoretically, SBA will not approve the joint venture in cases where the 8(a) firms bring very little to the relationship in terms of resources and expertise other than their 8(a) status.
To qualify for an 8(a) award, a joint venture must meet numerous criteria. For the purposes of this article, the most significant are:
The 8(a) concern must be the managing venturer and an employee of the managing venturer must be the project manager for the contract, and
Not less than 51 percent of the joint venture’s net profits will be distributed to the 8(a) concern.10
Assuming SBA provides approval, the joint venture must still qualify under the size standard for the specific procurement. In non-8(a) joint ventures, the combined size of both parties must not exceed the size standard for the procurement. In joint ven-
tures consisting of at least one 8(a) firm, the combined size of the parties can only exceed the size standard as long as both parties independently qualify. However, the mentorprotégé program11 offers an exception to this rule. A joint venture between an 8(a) protégé and its large business mentor will qualify as a small business as long as the 8(a) protégé meets the size standard. This exception allows a large business to receive a substantial stake in a sole source award available only to tribally owned concerns. This analysis is not merely a hypothetical exercise in legal minutia, it is grounded in reality. In April 2006, the Government Accountability Office (GAO) published a report on the special 8(a) provisions available to ANCs. Of the 26 ANCs interviewed, 22 owned 8(a) subsidiaries that participated in 57 joint ventures and 19 of the ANCs owned a total of 24 subsidiaries that participated in mentor–protégé agreements.12
Subcontracts to Large Businesses
For 8(a) contracts awarded to mentor– protégé joint ventures, the joint venture must (1) perform at least 50 percent of the labor and (2) the 8(a) partner must perform a significant portion of the contract.13 This allows the joint venture to subcontract as much as 49 percent of the work to the large business mentor/partner. This arrangement meets the first criterion since the joint venture would be performing at least 50 percent of the work. However, it is unclear whether this arrangement meets the second requirement that the 8(a) firm must perform a significant portion of the contract. Can the fact that the joint venture will perform 51 percent of the work be used to meet both requirements of this regulation? Apparently, reasonable minds differ as to whether the joint venture can subcontract 49 percent of the work in this scenario,
procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?
but it is clear that a substantial portion of the work can be subcontracted to the large business joint venture partner.
Benefits to Large Businesses
Large businesses can and do enter into mentor–protégé agreements with tribally owned concerns. However, the problem lies with whether or not these agreements inappropriately benefit large businesses. Consider the following hypothetical situation:
A large business can take a 49 percent stake in a joint venture with a tribally owned concern.
The large business could then convince an agency to award the joint venture a sole source contract of unlimited value via the 8(a) program.
The joint venture could then subcontract up to 49 percent of the value of the contract to the large business.
Collectively, these steps would result in a large business receiving up to 75 percent of the earnings of a very large contract awarded on a sole source basis. Usually, this arrangement is perfectly acceptable, as long as it doesn’t go too far by violating the ostensible subcontractor rule.14
Preferences—Fair or Foul? These preferences have been undeniably successful. In 1988, only one ANC owned an 8(a) firm. In 2005, 49 ANCs owned 154 8(a) firms. Also, in fiscal year 2000, ANCs received 8(a) awards valued at $265 million. In fiscal year 2004, ANCs received $1.1 billion of 8(a) awards.15
Trade magazine Washington Technology publishes an annual ranking of the top 25
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8(a) firms based on revenue. Tribally owned concerns began appearing on the top 25 list several years ago and the numbers have steadily increased ever since. In the most recent ranking, tribally owned concerns captured 14 of the top 25 spots, up from 10 in the previous top 25 list. Included with the current list was the following caption: “As has been the trend of the past several years, the top 25 8(a) list has been dominated by companies owned by American Indian tribes or Alaskan Native corporations.”16 However, the runaway success of tribally owned concerns has not pleased everyone. The most common criticisms may be summarized as follows:
The success of tribally owned concerns has come at the expense of traditional small businesses;
Contracting officers (COs) increasingly sole source contracts to tribally owned concerns to avoid the time, effort, and possible protests inherent in large, complex competitions;
Large sole source contracts do not result in best value or fair and reasonable prices due to lack of competition;
Tribally owned concerns can serve as fronts for large businesses, especially for large sole source awards; and
Relatively few American Indians are actually employed by the tribally owned concerns, and a disproportionate amount of the benefits of these preferences are going to non-American Indian executives and large businesses.
Harry C. Alford, president and CEO of the National Black Chamber of Commerce, provided testimony before the House Committee on Small Business that the
number of 8(a) awards to tribally owned concerns is increasing, while the total dollars awarded through the 8(a) program are trending downward. This fact supports the position that the money now going to tribally owned concerns is money that otherwise may have been available to traditional 8(a) firms. According to Alford, tribally owned concerns have, in effect, “become predators on the minority business community.”17 The disproportionate success of tribally owned concerns can be shown statistically. Tribally owned concerns account for less than two percent of all 8(a) firms, yet they received approximately 13 percent of all the 8(a) dollars awarded in fiscal year 2004.18 More recently, the House Homeland Security Committee noted that the Department of Homeland Security has awarded a disproportionate 28 percent of its fiscal year 2007 procurement dollars earmarked for economically and socially disadvantaged firms to tribally owned concerns and asked Secretary Michael Chertoff to examine the disparity.19 SBA is required to determine whether other small businesses are losing opportunities due to preferences for tribally owned concerns. At the same time, SBA must also ascertain whether a tribally owned concern has, or is likely to obtain, an unfair competitive advantage within the industry. Unfortunately, GAO found that SBA was only superficially performing these tasks.20 Of the $1.1 billion 8(a) dollars awarded to tribally owned concerns in fiscal year 2004, 77 percent was awarded on a sole source basis.21 GAO found that many COs used the sole source authority because it is a quick, easy way to legally award contracts of any value. Such awards have the added bonus of helping the agencies meet their small business goals. These COs cited lack
procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?
of resources or lack of time as factors that made sole source awards to tribally owned concerns such an attractive alternative. Rep. Don Manzullo (R-IL), then chair of the House Committee on Small Business, was not impressed by this argument. He questioned whether these agencies were interested in best value and stated that the growth in sole source awards to tribally owned concerns “partially reflects laziness on the part of agency contracting officers.”22 GAO has also concluded that agencies have been failing to ensure that the partnerships between tribally owned concerns and large businesses are functioning as stipulated by the regulations. GAO reviewed 16 procurement files and found “almost no evidence” that the agencies were properly monitoring compliance with regard to the limitations on subcontracting. In fact, GAO found that,
“As has been the trend of the past several years, the top 25 8(a) list has been dominated by companies owned by American Indian tribes or Alaskan Native corporations.” –Washington Technology magazine
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by and large, many COs were confused about whose responsibility it was to monitor the subcontracting percentage.23 The Department of Commerce (DOC) inspector general also found that DOC COs were not monitoring ANCs for compliance with subcontracting requirements at all.24 Of course, even effective monitoring would not necessarily prohibit large firms from substantively benefiting from sole source awards. For instance, the mentor–protégé/ joint venture scenario described earlier would most likely withstand scrutiny, even if the COs involved were effectively monitoring the program. In essence, an agency can use the procurement preferences to steer very large contracts to be substantially performed by favored large businesses. While this approach has the advantage of reducing the agency’s workload, it is not clear that it results in the most advantageous contracts. Critics of the preferences also point out that relatively few American Indians are actually employed by tribally owned concerns. This is understandable since most of the contracts are not performed on or near American Indian reservations or Alaskan communities. Of more concern is that many executivelevel management personnel are outside hires, and, in many cases, include retired military officers. Additionally, unlike traditional 8(a) firms, the individuals responsible for the control and management of ANCowned firms do not have to establish personal social and economic disadvantage.25 On the other hand, defenders of the preferences point out that tribally owned concerns are different than traditional 8(a) firms. Initially, American Indian tribes are constitutionally recognized as an entity unto themselves.26 No other group of U.S. citizens has a comparable relationship with the federal government. Unlike an 8(a) firm owned by an individual, a trib-
ally owned concern is, at least indirectly, owned by the members of its community or tribe, and has an obligation to provide for the social and economic needs of all of its community members. Therefore, the preferences are beneficial since American Indians have long been some of the most disenfranchised citizens, suffering from poverty, unemployment, and poor health, among other things. As for the argument that tribally owned concerns harm other small businesses, the proponents of the preferences believe that it is contract bundling that is harming small businesses, not tribally owned concerns. In accordance with this view, they claim that the large sole source awards being made to tribally owned concerns under the 8(a) program would never have been available to other small businesses. If the preferences did not exist, these large bundled contracts would have been awarded competitively to large businesses, not to other small businesses. Tribally owned concerns also object to the belief that they are the only businesses receiving sole source contracts, or that sole source contracts are inherently overpriced. No-bid contracts, as they have come to be known, are routinely awarded for a variety of reasons. For example, during the period of 1998 through 2003, the top five defense contractors received $145 billion in sole source contracts.27 Further, COs are required to determine that the prices of all awards, including sole source awards, are fair and reasonable. If the CO has any reason to believe the best value will not be obtained from a tribally owned concern, the agency is free to negotiate a better deal or to procure the services elsewhere. Supporters of the preferences also object to the idea that tribally owned concerns routinely serve as fronts for large businesses.
procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?
Almost all of the small business preference programs recognize the reality that support from large businesses is essential for the success of small businesses. Unfortunately, some small businesses bend the rules and become “unusually reliant” upon their large business subcontractors or partners. However, unusual reliance issues are not limited solely to tribally owned concerns. Traditional 8(a) and small business set-aside awards are equally susceptible to accusations that small businesses are fronting a large business subcontractor. Since the previously cited ostensible subcontractor rule prohibits set-aside awards to small businesses that are unusually reliant upon their large business subcontractors, better enforcement, not a change to the procurement preferences, is the answer. Finally, representatives of tribally owned concerns believe that the preferences are substantially benefiting their communities.
Direct employment of American Indians is only one of the benefits. In 2004, the Native American Contractors Association stated that ANCs employed 2,116 shareholders in jobs related to government contracting and provided jobs to 7,747 Alaskans with a payroll of $141 million, all attributable to federal contracts. Many ANCs have also implemented management training programs so they can begin to develop their own talent. Additional benefits include community development activities, including scholarships, Internet service, internships, charities, subsidies, and many more. Last but not least, many tribally owned concerns pay dividends to their shareholders, who are also members of their communities. For instance, 15 ANCs paid $18 million in dividends in 2003 and $27 million in 2004.28 From this perspective, the preferences are accomplishing exactly what they were designed to accomplish and do not need to be changed.
Conclusion
Whether the procurement preferences granted to tribally owned concerns represent good public policy is obviously a matter for debate. Fortunately, it is not an all or nothing debate. One possible compromise would be to allow tribally owned concerns to receive sole source 8(a) contracts under $10 million, and the competition for contracts valued over $10 million could be limited to tribally owned concerns. This compromise, or something similar, recognizes the unique interests and needs of Native American communities while mitigating at least some of the concerns raised by critics of the preferences. However, there is one thing that is not subject to debate: the preferences, as currently written, are working very well. And unless these preferences are changed, tribally owned concerns will continue to outperform their small business competitors. CM
About the Author THOMAS A. MARCINKO is a senior consultant with Aronson & Company in its Government Contract Solutions Practice. He is a member of the Florida Bar and NCMA’s Potomac Chapter. Mr. Marcinko can be contacted at
[email protected].
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Endnotes 1.
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It should be noted that, by definition, ANCs are considered to be firms owned by American Indian tribes, but ANCs are listed separately here because while all ANCs are considered to be firms owned by American Indian tribes, not all firms owned by American Indian tribes are ANCs.
procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?
2.
Tribally owned concerns also have preferences when they serve as subcontractors to large businesses. Unfortunately, these subcontracting preferences are beyond the scope of this article. See Federal Acquisition Regulation (FAR) 19.703(c).
9.
As per 13 C.F.R. 124.506(b).
10.
See 13 C.F.R. 124.513 for a complete list of qualification criteria.
11.
For more information about the mentor– protégé program, see 13 C.F.R. 124.520.
3.
The 8(a) program refers to Section 8(a) of the Small Business Act (15 U.S. Code 637(a)). Tribally owned concerns were first eligible for the 8(a) program in 1986. See FAR 19.800.
12.
GAO Report, GAO-06-399, “Contract Management: Increased Use of Alaska Native Corporations’ Special 8(a) Provisions Calls for Tailored Oversight,” April 2006.
4.
Alaska Native communities were created in 1971 by the Alaska Native Claims Settlement Act (Public Law 92-203). In essence, this law provided Alaska Natives with village and regional corporate structures, rather than reservations (as was done in the lower 48 states). Out of all tribally owned concerns, ANCs have been the biggest users of the 8(a) preferences.
13.
As per 13 C.F.R. 513(d).
14.
See 13 C.F.R. 121.103(h)(4). Basically, to avoid application of the ostensible subcontractor rule, the 8(a) firm would have to demonstrate that it is not “unusually reliant” on the large business subcontractor.
5.
As per 13 Code of Federal Regulations (C.F.R.) 124.3.
6.
See 13 C.F.R. 124.109 for a complete list of the eligibility criteria.
7.
See FAR 19.102.
8.
As per 13 C.F.R. 124.109(c)(2)(iii).
15.
GAO Report, see note 12.
16.
Washington Technology, August 17, 2007.
17.
Alford, Harry C., testimony before the House Committees on Government Reform and Small Business, June 21, 2006.
18.
GAO Report, see note 12.
19.
Brodsky, Robert, “Committee Accuses DHS of Double-Counting Small Business Figures,” Government Executive, May 23, 2008.
20.
Ibid.
21.
GAO Report, see note 12.
22.
As quoted within “House Committees Probe Alaska Native Contracting Program,” by Jenny Mandel, Government Executive, June 21, 2006.
23.
GAO Report, see note 12.
24.
See, generally, Weigelt, Matthew, “Commerce Delayed New Contracting Policies,” FCW.com, July 3, 2008.
25.
See 13 C.F.R. 124.109(a)(4).
26.
As per the U.S. Constitution; Article 1, Section 8, Paragraph 3.
27.
See Outsourcing the Pentagon, Center for Public Integrity, November 2004.
28.
Native American Contractors Association comments on GAO Report, noted within GAO-06-399, see note 12.
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