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									26   Contract Management | October 2008
Contract Management | October 2008   27
     procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?




     In an unusual turn of events, the federal government                                             In addition, the American Indian tribe must
                                                                                                      be both socially and economically disadvan-
     is being criticized in some quarters for implementing a                                          taged. ANCs are considered by law to be both
                                                                                                      socially and economically disadvantaged, but
     program that has become too successful. Historically,
                                                                                                      the regulations state that, for the purposes
     large government contracts were rarely awarded to                                                of the 8(a) program, non-ANC American
                                                                                                      Indian tribes are considered only to be socially
     firms owned by American Indian tribes, Alaska Native                                             disadvantaged. Therefore, non-ANC American
                                                                                                      Indian tribes must demonstrate an economic
     corporations (ANCs), or individually by Native Americans.1
                                                                                                      disadvantage. This must be shown statistically
     Congress decided to rectify this, under representation                                           by such measures as unemployment rate, per
                                                                                                      capita income, percentage of members living
     in the marketplace, by granting small business concerns                                          below the poverty level, and access to capital,
                                                                                                      among other factors.
     owned by American Indian tribes or ANCs—hereinafter
     collectively referred to as tribally owned concerns—
                                                                                                      Concerns Owned and
     certain procurement preferences not available to other                                           Controlled by American
     small businesses.                                                                                Indian Tribes
                                                                                                      While an American Indian tribe must meet
                                                                                                      eligibility requirements in order to participate
     Primarily as a result of these preferences,    businesses owned by socially and economi-         in the 8(a) program, the American Indian tribe
     tribally owned concerns, especially those      cally disadvantaged individuals.3 Foremost        itself is not eligible to receive 8(a) contracts.
     owned by ANCs, have grown exponentially        among these advantages is that smaller            Rather, business concerns owned and
     and are being awarded an ever increasing       contracts can be awarded to 8(a) partici-         controlled by the tribe are the entities that
     percentage of federal procurement dollars.     pants without competition, and the compe-         may receive 8(a) contracts. Further, a business
     The problem, according to some critics, is     tition for larger contracts can be limited        concern owned by an 8(a)-eligible American
     that the success of tribally owned concerns    to only 8(a) participants. However, within        Indian tribe does not have to independently
     may be coming at the expense of other          the 8(a) program, tribally owned concerns         qualify as socially or economically disadvan-
     types of small businesses, while inappropri-   have additional advantages, primarily in          taged; the tribe’s status is automatically
     ately benefiting large businesses.             the areas of sole source contracts and size       attributed to any concerns owned by the tribe.
                                                    determination, as they relate to affiliates.      However, tribally owned concerns must meet
                                                                                                      certain other requirements in order to be
     Procurement                                                                                      eligible for receiving contracts under the 8(a)
     Preferences: The 8(a)                          Eligibility Requirements                          program. For the purposes of this article, the
     Program                                        An American Indian tribe, the definition of       most significant requirements include:
     The government has a long history of pro-      which includes Alaska Native communities,4
     viding procurement preferences for certain     must meet certain criteria to be eligible to      ƒ    The concern must be a for-profit organi-
     types of businesses. Currently, small, small   participate in the 8(a) program. Initially, the        zation capable of being sued,
     disadvantaged, and domestic businesses         tribe must be recognized as an American In-
     all enjoy procurement preferences of           dian tribe, band, nation, etc. by the federal     ƒ    The tribe must own a minimum of 51
     one type or another. Disabled Americans,       government or by the state in which the                percent of the voting stock and at least 51
     veterans, and inmates also benefit from        tribe resides.5 This requirement effectively           percent of the aggregate of all stock, and
     procurement preferences. The procurement       limits participation in the 8(a) program to le-
     preferences for tribally owned concerns        gitimate American Indian tribes, as opposed       ƒ    The management and daily business
     are part of the 8(a) program.2 The 8(a)        to an ad hoc group of citizens of American             operations of a concern must be con-
     program offers certain advantages to small     Indian descent.                                        trolled by the tribe.6


28   Contract Management | October 2008
     procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?




     Small Business Size                              for when such unlimited value sole source          tures consisting of at least one 8(a) firm, the
     Standards                                        awards are advisable, so the decision to           combined size of the parties can only exceed
     Normally, in order to receive a contract         do so is at the discretion of the agency’s         the size standard as long as both parties in-
     award under the 8(a) program, the 8(a)           procurement officials. The only caveat is          dependently qualify. However, the mentor-
     company, including all of its affiliates, must   that once a procurement has been accepted          protégé program11 offers an exception to
     meet the small business size standard North      by the Small Business Administration (SBA)         this rule. A joint venture between an 8(a)
     American Industry Classification System          for a competitive 8(a) award, it cannot then       protégé and its large business mentor will
     (NAICS) code7 assigned to that particular        be changed to a sole source award.                 qualify as a small business as long as the
     procurement. However, tribally owned                                                                8(a) protégé meets the size standard. This
     concerns have been granted an exception                                                             exception allows a large business to receive
     to this rule. The size of a tribally owned       8(a) Joint Ventures                                a substantial stake in a sole source award
     concern will be determined on a standalone       under the Mentor-                                  available only to tribally owned concerns.
     basis without regard to any other business       Protégé Program
     concerns that may be owned by the tribe.8        8(a) firms are allowed to form a joint             This analysis is not merely a hypothetical
     This exception enables a single American         venture with other non-8(a) firms for the          exercise in legal minutia, it is grounded in
     Indian tribe to own numerous small 8(a)          purpose of receiving and performing an             reality. In April 2006, the Government Ac-
     firms. The only limit is that one tribe may      8(a) contract. However, SBA must approve           countability Office (GAO) published a report
     not own more than one firm with the same         any such joint venture. SBA will provide           on the special 8(a) provisions available
     primary NAICS code.                              its approval when it is shown that the 8(a)        to ANCs. Of the 26 ANCs interviewed, 22
                                                      concern lacks the necessary capacity to per-       owned 8(a) subsidiaries that participated in
     Each tribally owned concern accepted             form the contract on its own and that the          57 joint ventures and 19 of the ANCs owned
     into the 8(a) program is required to have        agreement is fair and will be of substantial       a total of 24 subsidiaries that participated in
     a primary NAICS code because the tribe           benefit to the 8(a) concern. Theoretically,        mentor–protégé agreements.12
     must show that the firm has a chance to be       SBA will not approve the joint venture in
     successful in the industry represented by        cases where the 8(a) firms bring very little
     that NAICS code in order to be accepted into     to the relationship in terms of resources and      Subcontracts to Large
     the 8(a) program. However, once a tribally       expertise other than their 8(a) status.            Businesses
     owned firm is accepted into the program, it                                                         For 8(a) contracts awarded to mentor–
     can bid on contracts covered by any NAICS        To qualify for an 8(a) award, a joint venture      protégé joint ventures, the joint venture
     code. Of course, the tribally owned firm that    must meet numerous criteria. For the pur-          must (1) perform at least 50 percent of the
     is actually bidding on any given job must,       poses of this article, the most significant are:   labor and (2) the 8(a) partner must perform
     in and of itself, meet the applicable size                                                          a significant portion of the contract.13 This
     standard for that procurement.                   ƒ    The 8(a) concern must be the manag-           allows the joint venture to subcontract
                                                           ing venturer and an employee of the           as much as 49 percent of the work to the
                                                           managing venturer must be the project         large business mentor/partner. This ar-
     Sole Source 8(a)                                      manager for the contract, and                 rangement meets the first criterion since
     Awards                                                                                              the joint venture would be performing at
     In the 8(a) program, sole source awards for      ƒ    Not less than 51 percent of the joint         least 50 percent of the work. However, it is
     services are usually limited to $3 million or         venture’s net profits will be distributed     unclear whether this arrangement meets
     less, and any procurement for services with           to the 8(a) concern.10                        the second requirement that the 8(a) firm
     an estimated value greater than $3 million                                                          must perform a significant portion of the
     must be competitively awarded. However,          Assuming SBA provides approval, the joint          contract. Can the fact that the joint venture
     tribally owned concerns have been granted        venture must still qualify under the size          will perform 51 percent of the work be used
     an exception to this rule as well. Tribally      standard for the specific procurement. In          to meet both requirements of this regula-
     owned concerns may be awarded sole               non-8(a) joint ventures, the combined size         tion? Apparently, reasonable minds differ as
     source 8(a) contracts of unlimited value.9       of both parties must not exceed the size           to whether the joint venture can subcon-
     The regulations do not provide any guidance      standard for the procurement. In joint ven-        tract 49 percent of the work in this scenario,


30   Contract Management | October 2008
     procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?




     but it is clear that a substantial portion of     8(a) firms based on revenue. Tribally owned       number of 8(a) awards to tribally owned
     the work can be subcontracted to the large        concerns began appearing on the top 25            concerns is increasing, while the total
     business joint venture partner.                   list several years ago and the numbers have       dollars awarded through the 8(a) program
                                                       steadily increased ever since. In the most        are trending downward. This fact supports
                                                       recent ranking, tribally owned concerns           the position that the money now going
     Benefits to Large                                 captured 14 of the top 25 spots, up from 10       to tribally owned concerns is money that
     Businesses                                        in the previous top 25 list. Included with the    otherwise may have been available to
     Large businesses can and do enter into            current list was the following caption: “As       traditional 8(a) firms. According to Alford,
     mentor–protégé agreements with tribally           has been the trend of the past several years,     tribally owned concerns have, in effect,
     owned concerns. However, the problem lies         the top 25 8(a) list has been dominated by       “become predators on the minority busi-
     with whether or not these agreements inap-        companies owned by American Indian tribes         ness community.”17
     propriately benefit large businesses. Con-        or Alaskan Native corporations.”16
     sider the following hypothetical situation:                                                        The disproportionate success of tribally
                                                       However, the runaway success of tribally         owned concerns can be shown statisti-
     ƒ    A large business can take a 49 percent       owned concerns has not pleased everyone.         cally. Tribally owned concerns account for
          stake in a joint venture with a tribally     The most common criticisms may be sum-           less than two percent of all 8(a) firms, yet
          owned concern.                               marized as follows:                              they received approximately 13 percent of
                                                                                                        all the 8(a) dollars awarded in fiscal year
     ƒ    The large business could then convince       ƒ    The success of tribally owned concerns      2004.18 More recently, the House Home-
          an agency to award the joint venture a            has come at the expense of traditional      land Security Committee noted that the
          sole source contract of unlimited value           small businesses;                           Department of Homeland Security has
          via the 8(a) program.                                                                         awarded a disproportionate 28 percent of
                                                       ƒ    Contracting officers (COs) increasingly     its fiscal year 2007 procurement dollars
     ƒ    The joint venture could then subcon-              sole source contracts to tribally owned     earmarked for economically and socially
          tract up to 49 percent of the value of            concerns to avoid the time, effort, and     disadvantaged firms to tribally owned con-
          the contract to the large business.               possible protests inherent in large,        cerns and asked Secretary Michael Chertoff
                                                            complex competitions;                       to examine the disparity.19
     Collectively, these steps would result in a
     large business receiving up to 75 percent of      ƒ    Large sole source contracts do not          SBA is required to determine whether other
     the earnings of a very large contract awarded          result in best value or fair and reason-    small businesses are losing opportuni-
     on a sole source basis. Usually, this arrange-         able prices due to lack of competition;     ties due to preferences for tribally owned
     ment is perfectly acceptable, as long as it                                                        concerns. At the same time, SBA must
     doesn’t go too far by violating the ostensible    ƒ    Tribally owned concerns can serve as        also ascertain whether a tribally owned
     subcontractor rule.14                                  fronts for large businesses, especially     concern has, or is likely to obtain, an unfair
                                                            for large sole source awards; and           competitive advantage within the industry.
                                                                                                        Unfortunately, GAO found that SBA was
     Preferences—Fair or Foul?                         ƒ    Relatively few American Indians are         only superficially performing these tasks.20
     These preferences have been undeniably                 actually employed by the tribally
     successful. In 1988, only one ANC owned                owned concerns, and a disproportion-        Of the $1.1 billion 8(a) dollars awarded to
     an 8(a) firm. In 2005, 49 ANCs owned 154               ate amount of the benefits of these         tribally owned concerns in fiscal year 2004,
     8(a) firms. Also, in fiscal year 2000, ANCs re-        preferences are going to non-American       77 percent was awarded on a sole source
     ceived 8(a) awards valued at $265 million. In          Indian executives and large businesses.     basis.21 GAO found that many COs used
     fiscal year 2004, ANCs received $1.1 billion                                                       the sole source authority because it is a
     of 8(a) awards.15                                 Harry C. Alford, president and CEO of the        quick, easy way to legally award contracts
                                                       National Black Chamber of Commerce,              of any value. Such awards have the added
     Trade magazine Washington Technology              provided testimony before the House              bonus of helping the agencies meet their
     publishes an annual ranking of the top 25         Committee on Small Business that the             small business goals. These COs cited lack


32   Contract Management | October 2008
     procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?




     of resources or lack of time as factors that     by and large, many COs were confused             ally owned concern is, at least indirectly,
     made sole source awards to tribally owned        about whose responsibility it was to moni-       owned by the members of its community
     concerns such an attractive alternative. Rep.    tor the subcontracting percentage.23 The         or tribe, and has an obligation to provide
     Don Manzullo (R-IL), then chair of the House     Department of Commerce (DOC) inspector           for the social and economic needs of all of
     Committee on Small Business, was not             general also found that DOC COs were not         its community members. Therefore, the
     impressed by this argument. He questioned        monitoring ANCs for compliance with sub-         preferences are beneficial since American
     whether these agencies were interested in        contracting requirements at all.24               Indians have long been some of the most
     best value and stated that the growth in                                                          disenfranchised citizens, suffering from
     sole source awards to tribally owned con-        Of course, even effective monitoring would       poverty, unemployment, and poor health,
     cerns “partially reflects laziness on the part   not necessarily prohibit large firms from        among other things.
     of agency contracting officers.”22               substantively benefiting from sole source
                                                      awards. For instance, the mentor–protégé/        As for the argument that tribally owned
     GAO has also concluded that agencies have        joint venture scenario described earlier         concerns harm other small businesses, the
     been failing to ensure that the partnerships     would most likely withstand scrutiny, even       proponents of the preferences believe that
     between tribally owned concerns and large        if the COs involved were effectively monitor-    it is contract bundling that is harming
     businesses are functioning as stipulated by      ing the program. In essence, an agency can       small businesses, not tribally owned con-
     the regulations. GAO reviewed 16 procure-        use the procurement preferences to steer         cerns. In accordance with this view, they
     ment files and found “almost no evidence”        very large contracts to be substantially per-    claim that the large sole source awards
     that the agencies were properly monitoring       formed by favored large businesses. While        being made to tribally owned concerns
     compliance with regard to the limitations        this approach has the advantage of reducing      under the 8(a) program would never have
     on subcontracting. In fact, GAO found that,      the agency’s workload, it is not clear that it   been available to other small businesses.
                                                      results in the most advantageous contracts.      If the preferences did not exist, these
                                                                                                       large bundled contracts would have been
                                                      Critics of the preferences also point out that   awarded competitively to large businesses,
                                                      relatively few American Indians are actually     not to other small businesses.
                                                      employed by tribally owned concerns. This is
     “As has been the                                 understandable since most of the contracts       Tribally owned concerns also object to the
                                                      are not performed on or near American            belief that they are the only businesses
     trend of the past                                Indian reservations or Alaskan communities.      receiving sole source contracts, or that sole

     several years, the                               Of more concern is that many executive-
                                                      level management personnel are outside
                                                                                                       source contracts are inherently overpriced.
                                                                                                       No-bid contracts, as they have come to be
     top 25 8(a) list has                             hires, and, in many cases, include retired
                                                      military officers. Additionally, unlike tradi-
                                                                                                       known, are routinely awarded for a variety
                                                                                                       of reasons. For example, during the period
     been dominated by                                tional 8(a) firms, the individuals responsible   of 1998 through 2003, the top five defense
                                                      for the control and management of ANC-           contractors received $145 billion in sole
     companies owned                                  owned firms do not have to establish per-        source contracts.27 Further, COs are required
                                                      sonal social and economic disadvantage.25        to determine that the prices of all awards,
     by American Indian                                                                                including sole source awards, are fair and
                                                      On the other hand, defenders of the              reasonable. If the CO has any reason to
     tribes or Alaskan                                preferences point out that tribally owned        believe the best value will not be obtained

     Native corporations.”                            concerns are different than traditional 8(a)
                                                      firms. Initially, American Indian tribes are
                                                                                                       from a tribally owned concern, the agency is
                                                                                                       free to negotiate a better deal or to procure
     –Washington Technology                           constitutionally recognized as an entity         the services elsewhere.
                                                      unto themselves.26 No other group of U.S.
      magazine                                        citizens has a comparable relationship           Supporters of the preferences also object to
                                                      with the federal government. Unlike an           the idea that tribally owned concerns rou-
                                                      8(a) firm owned by an individual, a trib-        tinely serve as fronts for large businesses.


34   Contract Management | October 2008
     procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?




     Almost all of the small business preference     Direct employment of American Indians is        Conclusion
     programs recognize the reality that support     only one of the benefits. In 2004, the Native   Whether the procurement preferences
     from large businesses is essential for the      American Contractors Association stated         granted to tribally owned concerns represent
     success of small businesses. Unfortunately,     that ANCs employed 2,116 shareholders           good public policy is obviously a matter for
     some small businesses bend the rules and        in jobs related to government contracting       debate. Fortunately, it is not an all or nothing
     become “unusually reliant” upon their           and provided jobs to 7,747 Alaskans with        debate. One possible compromise would be to
     large business subcontractors or partners.      a payroll of $141 million, all attributable     allow tribally owned concerns to receive sole
     However, unusual reliance issues are not        to federal contracts. Many ANCs have            source 8(a) contracts under $10 million, and
     limited solely to tribally owned concerns.      also implemented management training            the competition for contracts valued over $10
     Traditional 8(a) and small business set-aside   programs so they can begin to develop their     million could be limited to tribally owned con-
     awards are equally susceptible to accusa-       own talent. Additional benefits include com-    cerns. This compromise, or something similar,
     tions that small businesses are fronting a      munity development activities, including        recognizes the unique interests and needs of
     large business subcontractor. Since the         scholarships, Internet service, internships,    Native American communities while mitigat-
     previously cited ostensible subcontractor       charities, subsidies, and many more. Last       ing at least some of the concerns raised by
     rule prohibits set-aside awards to small        but not least, many tribally owned concerns     critics of the preferences. However, there is
     businesses that are unusually reliant upon      pay dividends to their shareholders, who        one thing that is not subject to debate: the
     their large business subcontractors, better     are also members of their communities.          preferences, as currently written, are work-
     enforcement, not a change to the procure-       For instance, 15 ANCs paid $18 million in       ing very well. And unless these preferences
     ment preferences, is the answer.                dividends in 2003 and $27 million in 2004.28    are changed, tribally owned concerns will
                                                     From this perspective, the preferences are      continue to outperform their small business
     Finally, representatives of tribally owned      accomplishing exactly what they were            competitors. CM
     concerns believe that the preferences are       designed to accomplish and do not need to
     substantially benefiting their communities.     be changed.

                                                                                                     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 con-
                                                                                                     tacted at tmarcinko@aronsoncompany.com.


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                                                                                                     endnotes
                                                                                                     1.   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.




36   Contract Management | October 2008
                             procurement preferences for tribally owned concerns: deserved benefit or unfair advantage?




2.   Tribally owned concerns also have preferences       9.    As per 13 C.F.R. 124.506(b).                        19.   Brodsky, Robert, “Committee Accuses DHS of
     when they serve as subcontractors to large                                                                          Double-Counting Small Business Figures,” Gov-
                                                         10.   See 13 C.F.R. 124.513 for a complete list of
     businesses. Unfortunately, these subcontract-                                                                       ernment Executive, May 23, 2008.
                                                               qualification criteria.
     ing preferences are beyond the scope of this
                                                                                                                   20.   Ibid.
     article. See Federal Acquisition Regulation (FAR)   11.   For more information about the mentor–
     19.703(c).                                                protégé program, see 13 C.F.R. 124.520.             21.   GAO Report, see note 12.
3.   The 8(a) program refers to Section 8(a) of the      12.   GAO Report, GAO-06-399, “Contract Manage-           22.   As quoted within “House Committees Probe
     Small Business Act (15 U.S. Code 637(a)).                 ment: Increased Use of Alaska Native Corpora-             Alaska Native Contracting Program,” by Jenny
     Tribally owned concerns were first eligible for           tions’ Special 8(a) Provisions Calls for Tailored         Mandel, Government Executive, June 21, 2006.
     the 8(a) program in 1986. See FAR 19.800.                 Oversight,” April 2006.
                                                                                                                   23.   GAO Report, see note 12.
4.   Alaska Native communities were created in           13.   As per 13 C.F.R. 513(d).
                                                                                                                   24.   See, generally, Weigelt, Matthew, “Commerce
     1971 by the Alaska Native Claims Settlement         14.   See 13 C.F.R. 121.103(h)(4). Basically, to avoid          Delayed New Contracting Policies,” FCW.com,
     Act (Public Law 92-203). In essence, this law             application of the ostensible subcontractor               July 3, 2008.
     provided Alaska Natives with village and                  rule, the 8(a) firm would have to demonstrate
     regional corporate structures, rather than res-                                                               25.   See 13 C.F.R. 124.109(a)(4).
                                                               that it is not “unusually reliant” on the large
     ervations (as was done in the lower 48 states).           business subcontractor.                             26.   As per the U.S. Constitution; Article 1, Section
     Out of all tribally owned concerns, ANCs have                                                                       8, Paragraph 3.
     been the biggest users of the 8(a) preferences.     15.   GAO Report, see note 12.
                                                                                                                   27.   See Outsourcing the Pentagon, Center for
5.   As per 13 Code of Federal Regulations (C.F.R.)      16.   Washington Technology, August 17, 2007.
                                                                                                                         Public Integrity, November 2004.
     124.3.                                              17.   Alford, Harry C., testimony before the House
                                                                                                                   28.   Native American Contractors Association com-
6.   See 13 C.F.R. 124.109 for a complete list of the          Committees on Government Reform and Small
                                                                                                                         ments on GAO Report, noted within
     eligibility criteria.                                     Business, June 21, 2006.
                                                                                                                         GAO-06-399, see note 12.
7.   See FAR 19.102.                                     18.   GAO Report, see note 12.

8.   As per 13 C.F.R. 124.109(c)(2)(iii).




                                                                                                                                 Contract Management | October 2008         37

								
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