Native American DNA tests are on everyone’s mind in your nation’s capital. Daily Intel doesn’t cover domestic politics (really, it’s for the best), but I do cover government contracting. So today is a good day to write an explainer on the various contracting programs that benefit both the government and various Native American, Alaskan, and Hawaiian tribes and organizations around the country.
In the interest of (almost) full disclosure, in my day job, I am employed as a defense contractor by a tribally-owned company. But because I sometimes express controversial opinions here, I will not reveal that company. I’d like to keep that job if it’s all the same to everyone.
Congress decided long ago that it was in the best interest of the industrial base to have small businesses represented among government contract awardees. The big guys can’t get all the contracts, after all. Congress sets goals for the Executive Branch each year, and contracting officers are heavily encouraged to set-aside a certain amount of their awards for small businesses. For Fiscal Year 2018, the overall small business goal was 23% across the government. As of now, it looks as though the goal has been met. $92.5 Billion of the $393.2 Billion in federal contracts awarded in the last FY, 24.22% went to small businesses.
What is a small business?
Each election year, a conversation starts around the question of “what is a small business?” The answer, not surprisingly for anyone who has dealt with the government for more than a few minutes: “It depends.”
The government categorizes businesses based on their primary product or service. No matter what a company does, there is a six-digit North American Industrial Classification System, or NAICS (pronounced “nayks”), code to piegonhole it. The government created NAICS codes in 1997 and shares the responsibility of administering the system with Mexico and Canada.
For each NAICS code, the Small Business Administration sets a “size standard” that specifies which companies are small businesses and which are not. For example, sometimes it’s “fewer than 500 employees.” Sometimes it’s “annual revenue of less than $5 million.” And sometimes, it is a business that qualifies under Section 8(a) of the Small Business Act.
Section 8(a) is the part of the law dealing with “socially and economically disadvantaged small business concerns.” The law is designed to encourage minorities to start businesses and compete for government contracts. Unlike other small business categories, the government may award contracts to 8(a) companies on a “sole-source” basis, meaning they don’t have to open the opportunity to other competitors.
Tribally-owned companies, Alaska Native Corporations (ANC), and Native Hawaiian Organizations (NHO) qualify under section 8(a), even though they may be part of a larger conglomerate. Often, a tribe will maintain a large corporate headquarters that runs “shared services” for its subsidiary small businesses. This allows the corporate parent to consolidate human resources, payroll, accounts receivable and accounts payable in one place, while keeping the subsidiaries small.
While this may seem like it is “gaming the system,” the benefit is ultimately for the tribes that own the companies. Companies like Chenega Corporation, which bills itself as “the most successful Alaska Native Village Corporation,” or Cherokee Nation Businesses, run by the largest tribal government in the U.S., funnel millions of dollars in profits back into their tribes’ education, housing, and healthcare programs. Economic prospects on many Indian reservations are not always great, so the profits from these 8(a) companies benefit everyone.
A rebate program for the big guys
Separately, within the Department of Defense, Congress appropriates $15 Million annually for the Indian Incentive Program (IIP). Prime contractors (other than small businesses) have an obligation to allocate a certain percentage of their subcontracts to small businesses. Under the IIP, when a prime contractor selects a tribally-owned company, ANC, or NHO for a subcontract, it can apply for a rebate of 5% of the subcontract’s value.
So if Lockheed Martin were to select a tribally-owned company for a subcontract worth $20 Million, it could potentially receive a rebate from the government of $1 Million. The $15 Million available annually (for which the DoD receives more applications than it has funds to cover) represents $300 Million in subcontracts.
While some charge this is little more than corporate welfare, I have always believed it is just a smart use of government funds to encourage contracting in regions the government has determined to be in need. It’s little different from the kinds of incentives Alexander Hamilton envisioned when he submitted his “Report on Manufactures” to Congress in 1791. Hamilton’s report covered “the means of promoting such [programs] as will tend to render the United States, independent on foreign nations, for military and other essential supplies.”
The 8(a) program and the IIP are just two methods the government uses to encourage the development of businesses where they are most needed, or at least for the benefit of those most in need. And at the end of the day, that is far more important than any of today’s tabloid headlines.
