When preference turns to privilege

The bulk of the news in this post comes from a report in the Washington Post, which was picked up by other MSM, too (e.g.).

WaPo's story is about a small corporation with no obvious direct experience which picked up a very large military contract. The small corporation was affiliated with a Alaskan Native Corporation, known as US2.

Before going to the WaPo item, it is worth going first to Alaska for some home-grown information about this company. This from the Alaska Dispatch:

Alaska Native subsidiary got $250 million Army contract

An Army contract worth as much as $250 million awarded to a subsidiary of Cape Fox Corp., an Alaska Native corporation in Southeast, is drawing attention two years later, according to The Washington Post. The newspaper, which has been reporting on special federal contracting privileges for Alaska Native corporations, says United Solutions and Services, known as US2 and co-owned by Cape Fox Corp., got the no-bid federal contract.

It's not the first time Cape Fox has come under scrutiny this year. Alaska Dispatch reported in May that Cape Fox and two companies it owns -- APM LLC and 1CI Inc. -- were suing two of APM's former CEOs and four of those men's companies for $27 million in damages.

Last fall, the Air Force expelled 20 contractors from its procurement list, citing an extensive scheme to exploit and deceive an award process designed to assist small and disadvantaged businesses -- businesses which, if Native-owned, are given preferential treatment. Six of the companies named had direct ties to Cape Fox. The rest had ties to former APM chief executive Townsend Jackson, his brother Craig Jackson, and other family members.

Cape Fox and other Alaska Native corporations have been under fire for benefiting from a special federal contracting program. Many Native corporations have created subsidiaries that are involved in what are called 8(a) contracts with the federal government. For years, critics have claimed Native corporations have received unfair advantages compared to other small businesses and that the Small Business Administrations 8(a) program lacks oversight.

The program creates preferences for economically disadvantaged small businesses. Alaska Native companies enjoy the lion's share. Native corporations can go after federal contracts without facing competition. They can also subcontract to larger companies that aren't Native-owned but have the expertise to fulfill the contracts.

Now from the Washington Post:

Little size or expertise, but a big contract

For its first three decades of existence, US2's parent, Cape Fox, was primarily a logging operation. But its forests became depleted, and ventures into tourism, real estate and other areas were unprofitable.

Company executives turned to federal contracting. In late 2004, Hadley launched US2. Cape Fox owned 51 percent of the new company, qualifying it under federal rules to receive the contracting benefits bestowed on Alaska native corporations.

Hadley has long lived in Delaware, but under the unique rules approved by Congress, ANC subsidiaries do not have to be run by native executives or operate in Alaska. US2 has no native employees.

Hadley spent much of his career at Delmarva Power & Light, working as a lineman, field supervisor, training supervisor and project manager. He has had management jobs with other firms, including another ANC subsidiary.

The year before, United Solutions and Services, known as US2, had just three employees and several small contracts for janitorial services and other work. It was based in a four-bedroom colonial, where the founder worked out of his living room.

But the firm had one quality the Army prized: It was co-owned by an Alaska native corporation (ANC) and therefore could receive federal contracts of any size without competition, under special set-aside exemptions granted by Congress to help impoverished Alaska natives.

On Sept. 2, 2008, US2 was granted a deal worth as much as $250 million - 3,000 times the $73,000 in revenue the firm claimed the year before. The contract enabled the Army to quickly fund a wide array of projects, including a global campaign to prevent sexual assault and harassment, without seeking outside bids.

US2 could not do the work by itself, though. With the Army's knowledge, the firm subcontracted the majority of it to more established companies, a Washington Post investigation has found.

Federal rules generally require prime contractors on set-aside deals to perform at least half of the work, something US2 did not do on more than $100 million worth of jobs, according to interviews with Army officials and an analysis of federal procurement data.

In response to The Post's findings, officials at the Department of the Interior, which managed the contract for the Army, said proper procedures were followed in the contract award. But they said in a statement that they have asked the department's inspector general to investigate.

Army officials acknowledged using the firm to avoid competition, saying they did not have enough time or contracting workers to seek other bids. "At some point, you don't have time to use the six-, nine-month sort of standard contracting route," said Andrew Jones, chief of budget integration for Army Manpower and Reserve Affairs. "Our internal contract office here, they can't always handle the surge of requirements."

Jones played down the company's lack of experience. "All that prior stuff is irrelevant," he said, because the firm has delivered solid results. [See my comments on the "no harm, no foul" defense, here and here.]

"This is one of the things that's going right with contracting," said Walter Wood, a contracting official for the Army.

Stephen Hadley, the nonnative chief executive operating out of his living room in Delaware, received $615,000 last year as 49 percent owner of US2. That amount does not include his salary, which he declined to disclose. William Walker, an attorney for US2 and Cape Fox, said Hadley's compensation agreements were approved by the Cape Fox board. Walker said US2's profits "played an integral part" in providing benefits to Cape Fox shareholders, contributing to a total of $5.2 million in dividends since 2001.

Hadley said he has worked hard to build US2.

"When I got into the 'federal world' and realized that I had a chance to be entrepreneurial, do public service and help out the Alaskan natives, I fell immediately for the challenge," he said. "I am very proud of what we have accomplished. All it took was a good plan, lots of luck, perseverance, people willing to take a chance and God's will to make it happen."

"Contrary to your misinformed view, this contract is an example of the way in which the government can solicit strong results on the part of federal contractors to ensure taxpayer interests are effectively represented," Walker said.

In April 2008, the firm's fortunes began to improve. It received a no-bid contract from the Army potentially worth more than $7 million for "professional, scientific and technical services." Three months later, the company received a $22 million construction contract without competition to build a 15,000-square-foot Army Experience Center, a high-tech facility in Philadelphia intended to support Army recruitment.

Walker said that job made US2's reputation inside the Pentagon. "As a result of US2's successful work on this project and other previous contract awards on behalf of the U.S. Army, the company earned a reputation as a quality, reliable contractor," he said.

At the time, the Army was under pressure to address the more than 2,400 reported sexual assaults each year in the military.

On Sept. 2, 2008, US2 received the contract for $250 million over five years to provide human resources and technical support to the Assistant Secretary for Manpower and Reserve Affairs.

Under the contract's broad terms, jobs quickly began flowing to the small firm, including the Sexual Harassment and Assault Response and Prevention Program (SHARP). In a few days at the end of September 2008 alone, the Army issued $42 million worth of task orders. Nearly all of the Army spending so far - 97 percent of about $143 million - has been approved in the last few days of the past three fiscal years, federal procurement records show.

The Army is using US2 so extensively that the ceiling on the contract was raised by 50 percent, to $375 million, documents show.

In 2009, US2 was asked to provide support to a program to identify 145,000 servicemen and -women, veterans and their beneficiaries who were eligible for special "stop-loss" pay for serving extended tours in Iraq and Afghanistan. This year, the Army has used US2 for programs that deal with drug and alcohol abuse, suicide prevention, traumatic brain injury and post-traumatic stress disorder, according to the Interior Department. US2 also provides support services for the U.S. Army Medical Command.

To perform all those jobs, US2 said it has relied on a constellation of subcontractors, including Summit Marketing Group, General Dynamics Information Technology, the nonprofit government contractor LMI and the public relations firm O'Keeffe and Co.

Hadley acknowledged that US2 does not have the experience in-house to do all the work. "We hire people to do that," he said.

Federal rules generally require that ANCs do at least 50 percent of the work on service contracts, but Army officials and Hadley said that US2 began meeting that threshold only in June.

Walker said no one expected the firm to do more than half the work immediately, because it is operating in a "business development program" at the Small Business Administration, which oversees the ANC program.

In a statement, the SBA said that under the type of contract US2 has with the Army, a firm "must have performed the applicable percentage of work (50%) with its own employees in the aggregate at any point in time."

"The fact that our use of subcontractors is diminishing and that by the end of the contract, we will have complied with all performance requirements shows that the program works as intended," Walker said.