Outside subcontractors get big share of no-bid Native contracts

Non-minority subcontractors often get bulk of federal 8(a) work.

January 31, 2011 

When Alutiiq Manufacturing Contractors won a $28 million stimulus contract to replace windows at a federal building in Boston, it wasn't just a win for Alutiiq Natives on Kodiak Island.

The company, which can obtain large government contracts without competition under a program meant to help Alaska Natives, took what's become a common step. It subcontracted out $23 million, or about 80 percent of the project, to a more experienced firm -- in Alabama.

Critics of Alaska Native corporations, or ANCs, say such pass-throughs increase costs for taxpayers and undermine the intent of the contracting privileges by diverting benefits to non-Native firms. ANCs respond that they are simply trying to build the most qualified team to do the government's work.

Alaska's Native corporations have been under fire by some members of Congress who want to strip them of the special advantages they have over other minority firms. But some key questions have been unanswered in the debate: How often do the Alaska companies use subcontractors? And who is getting a share of their business?

An analysis by ProPublica, drawing on detailed reports of federal stimulus projects, shows for the first time that ANCs turned to subcontractors at twice the rate of all other federal contractors and significantly more often than other small, minority-owned firms.

And at least some of this work has gone to large firms -- General Electric, Kiewit and Lockheed Martin -- the stimulus reports show, echoing government audits that have fueled the criticism of ANCs.

Through September, Native corporations had won stimulus contracts worth $823 million for 742 projects, according to the most recent government data. More than 350 projects, or nearly half, rely on subcontractors to do at least some of the work.

By comparison, all other stimulus contractors subcontracted more than 5,600 of nearly 26,000 stimulus projects, or 22 percent. Other minority-owned firms hired subcontractors on 33 percent of their projects.

ProPublica's analysis is based on government data compiled for our Recovery Tracker, an ongoing project to follow stimulus spending. The data offer a previously unavailable window into Native corporation activity because Congress specifically required stimulus recipients to report subcontractors to the public, unlike the rules governing other federal contracts.

CRITICS SEEK REFORMS

ANCs receive more than $5 billion in federal contracts each year, so the stimulus projects account for a significant share of their revenue. Because subcontracting data aren't available for other contracts, it's possible that the overall subcontracting ratio for ANC projects could be different.

After reviewing ProPublica's findings, Scott Amey, a contracting expert at the Project on Government Oversight, said the lack of complete subcontracting data is a barrier. At a minimum, Amey said, the analysis "raises a red flag with ANC contracts."

Sen. Claire McCaskill, D-Mo., released an investigation of Native corporations in 2009 as chairwoman of a Senate subcommittee that oversees federal contracting. She has said outside contractors and consultants are cashing in at the expense of Alaska Natives. McCaskill and Rep. Bennie Thompson, D-Miss., have introduced bills to roll back ANC privileges so they are no different from other small minority firms.

"Alaska Native Corporations are subcontracting huge amounts of their work, which is hindering the program's ability to help Alaska Natives," McCaskill said in a statement to ProPublica. "Alaskans deserve a program that will provide a leg up for individuals," she said, but the program "in its current form is not effectively achieving that goal."

ProPublica reported last month on the Cape Fox Corp. in Southeast Alaska, where outside consultants made millions in fees. While contract revenue skyrocketed over just a few years, Cape Fox's Native shareholders saw few jobs and no increase in their regular dividends as a result.

The Native American Contractors Association, which represents many tribal firms, says such cases are few and far between and that the program is working as intended.

The contracting program is "one of the only federal Indian programs that is working to improve the lives of Native people," Sarah Lukin, the association's executive director said in December. "Now is not the time to roll back the clock on years of socio-economic progress."

HELPED BY SPECIAL EXEMPTIONS

Congress created ANCs in 1971 to provide economic benefits, such as dividends and jobs, to Natives whose claim to ancient lands were blocking plans for the Alaska oil pipeline. Congress later allowed ANCs to participate in the U.S. Small Business Administration's business development program, which allows minority firms to receive no-bid contracts with a goal of eventually graduating to compete on their own.

In recent years, ANC subsidiaries have come to dominate the SBA program.

While other firms in the program have a limit of $3.5 million on contracts for services and $5.5 million on contracts for goods, Alaska Native corporations are exempt and have won awards exceeding $100 million.

The exemption makes ANCs a potentially lucrative partner for large firms acting as subcontractors. And government contracting officers turn to ANCs to avoid lengthy competitions and meet their small business contracting goals. ANCs also may compete for contracts.

The stimulus reports suggest that ANC subcontracting sends a substantial portion of revenue to outsiders. Of the $470 million in ANC stimulus projects that are at least halfway completed, Native corporations awarded about $200 million to other contractors, ProPublica found.

For example, Suulutaaq Inc., owned by Yup'ik Eskimos and Athabascan Indians in villages along the Kuskokwim River, won a $57 million contract to replace bridges on the flood-prone Napa River in California. It subcontracted two-thirds of the work, mostly to a division of Kiewit Corp., one of the largest construction firms in the world.

Facility Support Services LLC, owned by Natives in Juneau, won a $14 million contract to build a testing facility for energy-efficient appliances at the National Energy Technology Laboratory in Morgantown, W.Va. It subcontracted 75 percent to TJR Enterprises, a Hispanic-owned firm that has worked at the lab for several years but doesn't qualify for no-bid contracts anymore because it already completed the SBA program.

Under SBA rules, firms in the minority business development program cannot outsource more than 85 percent of construction contracts. The stimulus reports show that ANCs were above this limit in 40 construction projects. The largest ANC stimulus contractor, CCI Group, subcontracted 95 percent of some of its projects at the Army's Fort Wainwright near Fairbanks, according to reports it filed.

The SBA says that doesn't necessarily indicate a violation because the limit doesn't apply until a contract is complete, and one contract may contain hundreds of projects over several years.

ARE NATIVE COMPANIES DOING ENOUGH?

There's no rule specifying what type of work a prime contractor has to perform. Many, such as Alutiiq Manufacturing Contractors, mainly do back-office work managing the project. But at least some employees have to be doing construction, said SBA contracting official Calvin Jenkins.

Some larger ANCs have begun to question whether other ANCs are living up to the goals of the SBA's program if they perform only the bare minimum of work.

"The intent is to create these long-term successful businesses," said Aaron Schutt, chief operating officer of Doyon Ltd., an ANC that represents a vast area of central Alaska including Fairbanks. "One measure of success is how much you rely on subcontractors. There should in my opinion be a lessening of that reliance in your overall business as you mature in the program."

The Native contractors group says ANCs use subcontractors for the same reason other federal contractors do -- to assemble a qualified team to handle the work in a timely and cost-efficient manner.

Lukin said the government's stimulus reports provide only a snapshot of ANC contracts, making it impossible to discern whether firms are complying with the subcontracting limit. The only way to judge would be to examine the full contracts when they're completed, she said.

But such information isn't publicly available. Until the stimulus, federal agencies weren't required to report subcontractors. The government began reporting subcontractor data on large contracts last fall, but that information won't be available on most contracts until later this year.

BIG CONTRACTORS CASH IN

Past reports that large multinational corporations obtained work through ANC contracting preferences have helped drive the controversy over Native corporations.

Olgoonik Corp., based on the North Slope, received $225 million in military construction contracts but much of the work was done by Halliburton, according to a 2005 article in Mother Jones magazine.

In 2006, the Government Accountability Office reported that contracts to guard Army posts were awarded to Alutiiq LLC and Chenega Corp. but subcontracted to the giant security firms Wackenhut Services and Vance International.

Alutiiq's heavy use of subcontractors also came under fire in 2009 by McCaskill's subcommittee. The report used the Afognak Native Corp., which owns Alutiiq, as a case study. It noted that from 2000 to 2008, Afognak paid subcontractors more than half the revenue on 91 of its nearly 300 contracts.

In addition to Kiewit, other large contractors received stimulus subcontracts from ANCs, though for lesser amounts. Lockheed Martin received $1.4 million, or 17 percent, of a NASA spacecraft project from ASRC Aerospace, an ANC firm representing Natives on the North Slope. It also subcontracted 17 percent of another NASA project to GE Aviation Systems.

Alutiiq's project in Boston calls for replacing windows at the John F. Kennedy Federal Building to make it more energy efficient.

The subcontractor, Physical Security LLC, based in Bessemer, Ala., describes itself as one of a handful of companies that make blast-resistant windows. It has worked on the U.S. Embassy in Moscow, the new Oklahoma City federal building and the Pentagon after 9/11.

In contrast, according to federal procurement records, Alutiiq Manufacturing has four employees and says it specializes in producing modular buildings for offices and health clinics. The JFK Building contract is seven times larger than the annual revenue of $3.7 million it reported in 2010.

Afognak spokeswoman Jana Turvey said the subsidiary now has 45 employees and its parent company has prior experience with projects of similar size and complexity.

Unlike other minority businesses, Native corporations are allowed to cite the past performance and experience of other subsidiaries owned by their parent company when making the case for a contract.

Many federal agencies use no-bid minority contracts because they are quicker than soliciting and reviewing competitive bids. But GSA issued its first notice on the JFK project in May 2009 -- 10 months before giving the no-bid contract to Alutiiq Manufacturing in March.

With Afognak's reliance on subcontracting, it reported a profit margin of just 2 percent in 2009. But because Afognak has only 750 shareholders and had $733 million in contracts, it was still enough to pay the typical Native shareholder about $24,000 in dividends.

Such a large dividend is unusual, however. Most Native corporation shareholders receive less than $500 a year in dividends, according to an earlier ProPublica review of ANC financial documents.

PERPETUAL ACCESS TO CONTRACTS

The SBA program is meant to help minority-owned companies grow by giving them access to no-bid contracts for nine years or until they have the revenue and experience to graduate. But McCaskill and other critics say some ANCs have no intention of standing on their own.

Under SBA rules, minority business owners can participate in the program only once. But tribal corporations are exempt and can keep receiving no-bid contracts indefinitely.

Native corporations may have multiple subsidiaries in the program at one time, and once a subsidiary grows too large for the program, an ANC can simply create a new firm in the same industry to remain eligible.

One example of this occurred with CCI Group, the stimulus contractor that subcontracted 95 percent of some of its projects. The company is owned by the Bristol Bay Native Corp., which represents Yup'ik Eskimos and other Natives in Southwest Alaska.

According to the corporation's 2008 annual report, CCI Group was formed in 2008 after another Bristol Bay subsidiary, CCI Inc., graduated from the SBA program, making it ineligible for no-bid contracts. But that didn't mean Bristol Bay's access was shut off.

"CCI Group was formed during 2008 to pursue work that CCI Inc. will no longer be able to accept," the report said. Duncan Morrison, a top employee at CCI Inc., moved over to become president and chief executive of CCI Group. Morrison declined to comment and Bristol Bay did not return calls.

Under the stimulus, CCI Group has received $106 million in projects, more than any other ANC subsidiary. But much of that work has been subcontracted out, including 20 construction projects in which the subcontract exceeded 85 percent of the project cost.

The SBA hopes that after the agency invests government resources to help a firm, it will be successful, contracting official Jenkins said. But under the law, there's nothing the agency can do if a Native corporation starts a new firm to keep getting no-bid contracts. Congress allowed it to foster economic development in the Native communities and because some ANCs support thousands of Natives.

In November, McCaskill and Thompson introduced bills that would eliminate ANCs' ability to have more than one subsidiary in the SBA program and to subcontract to larger firms.

"We've seen that a very small portion of these companies' profits are reaching Native Alaskans," McCaskill said at the time, "so it's time to acknowledge the fact that this program is not effective for either Native Alaskans or taxpayers."

In December, McCaskill told the Tundra Drums newspaper, which is owned by an ANC, that she would be open to alternatives to help Alaska Natives, but not through "noncompetitive, huge multimillion dollar contracts."

The legislation hasn't received much attention in the new Congress yet and has been widely criticized by ANCs, Native groups and Alaska's congressional delegation.

"In Washington, we are forced to respond to attacks on your success in the 8(a) program," Sen. Lisa Murkowski, R-Alaska, told attendees at the 2010 annual convention of the Alaska Federation of Natives. "All of these unfortunate situations remind us that we must remain vigilant against those who would try to reverse the progress that's been made over the last 50 years."

See the original version of this story at propublica.org.

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