I'm surprised it took this long. This is the Senate notice.

On July 16, 2009, the Subcommittee on Contracting Oversight will hold a hearing entitled, ?Contracting Preferences for Alaska Native Corporations.? The purpose of the hearing is to examine concerns relating to the award of contracts to Alaska Native Corporations (ANCs) through the Small Business Administration?s 8(a) program. The preference given to Alaska Native Corporations in federal procurement was intended to provide economic opportunities for impoverished Alaskan communities. In recent years, however, critics have identified these preferences as a vehicle for avoiding competition and passing work through to large, non-Native contractors.

As one part of the Subcommittee?s review of preferences provided to Alaska Native Corporations under the Small Business Administration?s 8(a) program, the Subcommittee will examine the growth of ANCs within the 8(a) program over the last nine years.

In preparation for the hearing, Subcommittee majority staff reviewed publicly available data about contracts awarded to ANCs from 2000-2008. The data show that contract awards to Alaska Native Corporations increased by 916%, from $508.4 million in 2000 to $5.2 billion in 2008. In 2008, approximately 80% of the contract dollars awarded to ANCs was performed outside of Alaska. In 2004, 2006, 2007, and 2008, more contracts were performed in Virginia than Alaska.

New Data About ANC Contracts

Over the last nine years, ANC spending has increased dramatically.1 Between 2000 and 2008, contract awards to Alaska Native Corporations increased by $4.7 billion, from $508.4 million to $5.2 billion.

In percentage terms, ANC contract spending increased 916% from 2000 to 2008, an average increase of 33.6% per year. In total, ANCs received $23.7 billion in federal contracts between 2000 and 2008.2

ANC spending has increased faster than overall federal contract spending. Between 2000 and 2008, ANC contract spending increased at a rate six times greater than that of overall federal contract spending. Overall federal contract spending increased 149% between 2000 and 2008, while ANCs have increased by 916% during the same period.

The Department of Defense is by far the largest user of ANC contracts. In total, the Department of Defense spent $16.9 billion on contracts with ANCs from 2000 to 2008, more than 70% of ANC spending overall. The agencies with the next highest proportion of ANC contracts are the Department of the Interior ($1 billion or 4.4%) and the Department of Homeland Security ($980 million or 4.1%).

The Subcommittee?s investigation has shown that most contracts with Alaska Native Corporations are performed outside Alaska. Between 2000 and 2008, only 21% of all contract dollars awarded to ANCs ($5 billion) were performed in the state of Alaska. The state with the next highest percentage of contract dollars is Virginia ($4.4 billion or 19%), followed by Maryland ($1.6 billion or 6.7%), Florida ($1.4 billion or 5.7%), and California ($1.1 billion or 4.7%). In 2004, 2006, 2007, and 2008, more ANC contract dollars were performed in Virginia than in Alaska. See Figure 2.

Figure 2: States with More Than $100 Million in ANC Contracts in 2008 State 2008 Spending Number of Contract Awards Virginia

$1,136,850,593.91

3,575 Alaska

$1,008,654,385.95

2,395 Maryland

$303,097,042.15

1,830 Texas

$

well, this never would have happened if a certain Senator was still in office.

well, this never would have happened if a certain Senator was still in office.

What never would have happened - the implied overuse of ANCs under the 8(a) program or the uncovering of the implied overuse?

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Leo,

the idea of letting ANC's create unlimited daughter corporations that were treated as independent for the purpose of evaluating size was the work of the Alaska Congressional delegation. As I recall, Theodore Stevens defended the scam as a way to pay the 14 ANC's back for expropriation of their land by the federal government.

The problem that other 8(a) firms have with this ANC loophole, that has since been expanded to Native Hawaiian Corporations and Tribally owned enterprises, is that none of these ANC's are small businesses anymore, but awards to them are counted as being to small businesses.

Want an eye-opening statistic ? Look at what percentage of supposedly 8(a) awards go to firms that have annual turnover of more than $1 billion.

I've dealt with ANC's, and have been occasionally surprised when I saw an actual Alaska native person involved in the operation. Mostly they aren't. And the level of payback to the native shareholders, $6,500 per individual per year, is pathetic when viewed in light of the overpayment inherent in any noncompetitive situation.

Most people working for the NGA are ANC employees. Entire operations centers are handed over to them without thorough assessment of the costs of avoiding competition. So why would an agency go ANC ? To avoid having to conduct a competition, or to ensure the sole source contractor hired the correct former agency employees.

What would never have happened if Stevens was still a Senator is the scrutiny of this boondoggle.

I don't have a problem with "implied overuse." But I have a problem with sole source awards to billion-dollar companies counting as awards to small business.

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What would never have happened if Stevens was still a Senator is the scrutiny of this boondoggle.

I don't have a problem with "implied overuse." But I have a problem with sole source awards to billion-dollar companies counting as awards to small business.

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Brian - Thanks for the clarification.

brian,

What do you mean by "the overpayment inherent in any noncompetitive situation"?

No point in getting mad at the ANC's and Ted Stevens. This would not have gone as far as it has if outfits like DOD weren't eager to take advantage for their own purposes.

I'm going to have to agree with both Brian and Vern, here.

I have observed that the Gov't contracts with ANC's for convenience.

We have statistics which "indicate" that the same or similar facility, when contracted with an ANC, is costing more per square foot under similar design criteria and general market conditions than one contracted through "free and open competition.".

Our Districts have information about recent acquisitions for standardized facility types at the same location. You can tell that the ANC costs are higher than for unrestricted competitions.

This trend isn't limited to ANC's. From 1989 to 1997, the section that I supervised was responsible for all negotiated sole source and competitive construction acquisitions for a USACE District. We knew that competitive acquisitions acheived better pricing than non-competitive ones.

Look, subcontractors and material suppliers provide better pricing to firms that are in competition and such prime contractors are more aggressive at "buying out" their subcontracts than smaller firms or firms that obtaine a sole source contract. There are a myriad of reasons but this is the way it is in the construction business. .

The fact that ANC's contracts are sole source shouldn't affect the pricing. I'll defer to Joel's expertise in the construction arena but ANC is involved in a whole lot more than construction. Some of their largest contracts are for facility management, O&M support, major system development, and logistics. Those contracts have prices a good deal higher than going market prices.

Thorough price/cost analysis and negotiation aren't just done. There's usually a push to get to contract award that overides getting a good price. Often the program office is satisfied when the contract amount is within their budget.

I think people are just kidding themselves when they think competition is the panacea to drives prices down. Today most procurements are done with technical/cost "best value" tradeoffs. Companies usually don't come in with their best price, especially with price/cost often is the least important factor. Agencies also often like to make award without discussions. Even when discussions are held, they often don't involve lengthy and detailed focus on price/costs.

formerfed,

Competition may not always result in savings, but I disagree with that conclusion in the majority of purchases made by the government. In the average purchase (below $100K), competion is averaging about 10%-20% lower pricing than the market research indicates the price should be. That is based on more than 50 purchases made in the last three months in my office. I just awarded an order today using competitive procedures that resulted in a 26% savings over the listed catalog price.

Perhaps that is a function of today's economy. That competion will not result in lower costs may be true for highly complex acquisitions where few contractors really compete for the work. I experienced that in ship construction and overhaul contracts. In that area of contracting there were only a few contractors doing that work, and all we really did in our competition process is decide which contractor was the prime and who was the subcontractor. In that situation, the real price was so far off of all the proposed prices that any conclusion about savings is like counting sand at the beach.

Still, a blanket statement that competion does not result in cost savings is not correct.

The relationship between the use of competitive procedures and price is one thing. The relationship between the use of competitive procedures and total cost to the government is something else.

Economic theory about the relationship between competition and price assumes many things that are not true of government contracting. For one thing, as formerfed has pointed out, the government usually announces that price is the least important of its concerns, whereas in economic theory based on perfect competition, price is the only consideration. In economic theory, the seller specifies the product and does not make it to order, while the buyer only chooses among available products. In the larger government buys, the buyer specifies the product and the seller makes it to order. Finally, economic theory assumes that buying and selling are perfectly transactional--a sale is made and carried out instantaneously, after which the parties have nothing more to do with one another. But in the largest segment of government buying, services, buying and selling are relational. The sale is just the beginning of the relationship, which is subject to noncompetitive quality, delivery, and price adjustment throughout the life of the contract and over the course of many years.

I think that the use of competitive procedures probably induces many firm to offer lower prices and lower estimated costs and proposed fees than they otherwise would in most cases. I doubt that the use of competitive procedures drives prices down the way that economic theory predicts, and I do not think that there is much evidence that the use of competitive procedures invariably produces lower total costs and better quality and delivery outcomes than well-negotiated sole source buys.

The better argument for the use of competitive procedures is that it reduces, but in no way eliminates, opportunities for favoritism and blatant, money-under-the-table, baksheesh-style corruption.

Many purchases at or below $100,000 are not competitive in the sense of head-to-head bidding. They are what I call "investigative buying." The buyer calls around and checks prices and takes a price that is at the lower end of the discovered range. The sellers are not necessarily aware of each other in terms of the specific transaction. In such cases the buyer is taking advantage of market competition. The problem with such market competition is that unless the goods are commodities, they are not perfectly comparable either in terms of functionality, design, or quality. If the buyer is not careful, lower price will not mean better value.

" ...I just awarded an order today using competitive procedures that resulted in a 26% savings over the listed catalog price."

"...Still, a blanket statement that competion does not result in cost savings is not correct."

dwergard, I don't know what type of product or catalog price you were dealing with. I don't put much stock in a lot of catalog prices for parts, equipment, materials, furniture furniture systems, etc. I've seen discounts of 60-80% offered in some cases, so I don't know whether "26%" is a good deal or not.

I do agree with your second statement.

We have some direct comparisons for standardized facility types at the same location in near same time periods between ANC sole source and competed acquisitions. And in the competed acquisitions, we stated that cost was the least important factor, as long as it was within the stated cost cost limitation. The square foot cost for the same facility was lower through competition. Sitework CLIN's were separately tracked and differed in scope, so no direct comparisons were made.

In addition, when I was responsible for sole source and negotiated construction acquisitions in a Corps District, we occasionally couldn't reach agreement on a sole-source set-aside, then opened it up to competition. We almost always were able to award within budget using competition, below the best attempts of the sole source contractor to get its costs down and its subcontractors' and suppliers' prices down.

Our customers all have the data to back up their long time complaints that the USACE's and NAVFAC's sole sourced construction set-asides cost more than full and open competition.

I don't dispute the assertion that competition will guarantee lower pricing, either.

We have some direct comparisons for standardized facility types at the same location in near same time periods between ANC sole source and competed acquisitions... The square foot cost for the same facility was lower through competition.

Is that comparison based on the square foot cost at the time of bidding, i.e., bid prices, or is that the square foot cost at the time of completion, i.e., actual costs to the government?

Is that comparison based on the square foot cost at the time of bidding, i.e., bid prices, or is that the square foot cost at the time of completion, i.e., actual costs to the government?

Vern, the direct square foot comparison was based upon cost at completion. It was data submitted to help evaluate lessons learned and effectiveness of a large program.

Vern, the direct square foot comparison was based upon cost at completion. It was data submitted to help evaluate lessons learned and effectiveness of a large program.

Joel:

In making your comparisons, did you take into account differences in contract modifications, if any?

Joel:

In making your comparisons, did you take into account differences in contract modifications, if any?

Vern, we didn't look at the differences in mods between the ANC projects and the competitive RFP projects within the bottomline cost comparison. They were all design-build. I am assuming that mods were very minor in overall scope or cost impact. Nobody mentioned any particular cost growth problems with the projects.

dwergard, I don't know what type of product or catalog price you were dealing with. I don't put much stock in a lot of catalog prices for parts, equipment, materials, furniture furniture systems, etc. I've seen discounts of 60-80% offered in some cases, so I don't know whether "26%" is a good deal or not.

I do agree with your second statement.

We have some direct comparisons for standardized facility types at the same location in near same time periods between ANC sole source and competed acquisitions. And in the competed acquisitions, we stated that cost was the least important factor, as long as it was within the stated cost cost limitation. The square foot cost for the same facility was lower through competition. Sitework CLIN's were separately tracked and differed in scope, so no direct comparisons were made.

In addition, when I was responsible for sole source and negotiated construction acquisitions in a Corps District, we occasionally couldn't reach agreement on a sole-source set-aside, then opened it up to competition. We almost always were able to award within budget using competition, below the best attempts of the sole source contractor to get its costs down and its subcontractors' and suppliers' prices down.

Our customers all have the data to back up their long time complaints that the USACE's and NAVFAC's sole sourced construction set-asides cost more than full and open competition.

I don't dispute the assertion that competition will guarantee lower pricing, either.

The catalog prices are those published for products such as digital cameras (which is where I obtained the 26% discount), law enforcement equipment such as weapons lockers, body armor and specialized equipment and other items such as commercial fitness products like treadmills.

As far as the 26% goes, that is not a bad number for a single camera purchase. If I was purchasing more than 1 or 2, I would expect the discount percentage to go up for quantity discounts. When I purchased over 100 GPS units for one of my clients, the discount was in the 50% range over a single purchase catalog price.

I am about to leave this office for a new job with the US Army, so my days of small purchases will be ending for the 2nd time. The office I am going to deals with significantly more complex contracts, so I am looking forward to a grown up job that will be more interesting. I did small purchasing as a GS-7, it is not as much fun now that I am a GS-13! Such is life in a civilian agency.