Alaska native status gave tiny, inexperienced firm a $250 million Army contract

By Robert O'Harrow Jr.
Washington Post Staff Writer
Friday, November 26, 2010; 12:01 AM

In summer 2008, the U.S. military had a major problem. More than 2,400 service members had reported being sexually assaulted the previous year, and the number was rising. Congress wanted immediate action.

The Army responded by reaching out to a tiny firm in Delaware.

It was an unlikely choice for such a sensitive task. 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.

Alaska native corporations were created in 1971 to settle land claims and help improve life for tens of thousands of impoverished native people. Almost 300 subsidiaries have been created to pursue federal work, and they have received more than $29 billion over the past decade, most of it through contracts awarded without competition.

A Post investigation published in September and October found that those contracts often enriched nonnative executives and employees but sent relatively little money back to Alaska. The Post also found that small firms were passing on work to established contractors. Three of the firms highlighted in the series have been suspended from federal contracting work, and legislation curtailing Alaska native privileges has been introduced in the House of Representatives and Senate.

No competition

The US2 deal shows one way federal agencies have increasingly avoided contracting competitions, which specialists say generally get the best deals for taxpayers. And it underscores how small ANC subsidiaries run by nonnatives have benefitted from an unprecedented surge of outsourcing by the military at a time of war.

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.

Told about US2's contract, Rep. Henry A. Waxman (D-Calif.), who examined the ANC program four years ago, said: "It's a misuse of taxpayers' dollars. . . . This is an egregious example, but I fear there are many others."

The contract also illustrates the contrast between the money flowing to nonnative executives and subcontractors working for ANC subsidiaries in the lower 48 states and the profits that go back to Alaska.

US2's Alaska native corporation parent, Cape Fox, received $641,000 of the net income last year from US2, according to internal financial records provided to The Post. That represented 1 percent of US2's $61.7 million in revenue.

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."

Procurement specialists said arrangements in which prime contractors pass on a majority of the work to subcontractors typically add costs to taxpayers as each layer takes a share of the revenue. Costs can rise further if the contract is awarded without competing bids. US2 and Cape Fox officials said that is not the case for their work.

"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.

Army officials said the firm has done uniformly good work at a good price. But they declined to provide documentation.

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

Creation of a contractor

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.

US2 was registered to do business in Delaware, with its base at Hadley's home in Hockessin.

Federal records show that from 2005 to spring 2008, US2 had $33,000 in revenue, just under half for janitorial services. Hadley and Cape Fox officials said the amount is more than $100,000, but that figure is not reflected in the online Federal Procurement Data System.

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 work has included advising a reality television production about Army life, a video about Walter Reed Army Medical Center, diversity training and a technology help desk project worth tens of millions of dollars.

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.

Farming out the work

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

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.

O'Keeffe and Co. founder and principal Steve O'Keeffe devotes six to 20 employees to SHARP each month but declined to say how much his company is paid.

Documents obtained by The Post show that for the SHARP project, US2 and its subcontractors proposed charging between $55 and $309 an hour for labor.

Jobs included program manager, account supervisor and copywriter. In one document, US2 said it would cost the government $1.1 million for a subcontractor to produce 6,495 "public affairs kits," at $170 each. A video production was to cost $500,000.

Walker said the rates "have been audited by the Defense Contract Audit Agency (DCAA) to ensure they are fair and equitable for the U.S. government. Further, it would be inaccurate and inappropriate to estimate or project from these hourly rates any gross annual income received by US2 personnel."

Summit Marketing chief executive Daniel Renz said his firm has provided five to 15 employees on a variety of jobs, including SHARP, stop-loss and other programs.

Hadley said US2 had 18 employees at the time the $250 million deal was awarded. It now has about 96 employees who work at several military facilities, he said.

The company leases office space in Reston from Native American Management Services, another native contractor. Hadley said he works some days in his living room in Delaware and some days in Reston. US2's Web site says it maintains program offices in Paris, Tex., and Chambersburg, Pa.

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.

"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.

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."

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