The U.S. Small Business Administration (“SBA”) recently released its annual procurement scorecard, indicating that the federal government continues to prioritize small business contracting and subcontracting. In 2021, the government awarded $154.2 billion in federal primary contracts — an increase of $8.5 billion from the previous year — and at least an additional $72 billion in small business subcontracts — a decrease of $10.8 billion from the previous year . These subcontracting figures continue a trend from previous years, which could lead to increased scrutiny of small business subcontracting programs to reverse the expected decline. (In 2020, small business subcontracting decreased by an estimated $7.9 billion). Overall, the government once again exceeded the 3% goal of serving disabled veterans-owned small businesses and more than doubled the 5% target for disadvantaged small businesses, but continued efforts to achieve 5% female-owned small businesses and 3% % HUBZone Small Business Target. The SBA released the data in its FY 2021 Small Business Procurement Scorecard, available here.
Federal Government Small Business Contracting Targets v.Result: Main Contract
Major contract dollar values in each category, except women-owned small businesses, increased from fiscal 2020, primarily due to higher total government spending in fiscal 2021. The actual number of small businesses awarded major contracts was also lower than in fiscal 2020 — a trend that continued from fiscal 2019, as we discussed earlier. There were 4,062 fewer small business government contractors in FY 2021 compared to FY 2020 (8,719 fewer than in FY 2019), which seems to indicate that small business government contractors are growing and/or consolidating, but new small business Businesses did not enter the market to replace those leaving (for various reasons, including scaling up, mergers and acquisitions, and business closures).
Notably, the administration has increased the percentage of contracts awarded to disadvantaged small businesses, a clear priority we discussed last year and formalized on January 20, 2021, through Executive Order 13985. For the first time ever, the government awarded more than 11 percent concessions to contracts with small disadvantaged businesses, increasing spending by $3.4 billion since fiscal 2020, hitting the government’s target a year earlier than expected. Opportunities in the industry should continue to increase — the president has set a target of 15 percent by fiscal 2025 — but it remains to be seen whether they will flow to existing disadvantaged small businesses or if they will incentivize new businesses to pursue federal opportunities . In response to the July 2021 Office of Management and Budget (“OMB”) report to the President identifying the difficulties small businesses face in accessing and navigating federal markets, the OMB memorandum provides government-wide steps to address these challenges . These include new entrant management tools, enhanced procurement forecasting capabilities, improved data management, increased transparency for federal agencies and interested businesses, and incentives for additional agency-specific strategies by procurement agency equity teams established under the executive order.
Government continues efforts to meet small business subcontracting targets
As you can see in the chart below, the U.S. government achieved its 29.36% small business subcontracting target (interestingly lower than the FY 2020 target) and 5% female-owned small business target, but – just like in FY 2019 As in FY 2020 – missed meeting its subcontracting goals for disadvantaged small businesses, small businesses serving disabled veterans, and HUBZone businesses. The government generally requires large businesses to subcontract to small businesses and to submit a small business subcontracting plan outlining the business’s subcontracting goals in each category. However, despite failing to meet targets year after year, we are not seeing increasing pressure from the government on large businesses to focus on specialized small business subcontracting.
As we’ve discussed before, it’s difficult to draw specific conclusions about subcontracting because the government doesn’t always have a complete picture of how general contractors are subcontracting. Subcontracting data typically comes from the government’s electronic subcontract reporting system, eSRS.gov, which records only some, but not all, of subcontracting expenditures. So, in reality, the number of subcontracting could be higher, but it’s impossible to say for sure.
Nonetheless, here are the percentages of subcontracting reported in the federal scorecard:
Small Business Government Contracts – Proceed with Caution
With $154.2 billion in primary contracts and at least $72 billion in subcontracts, the federal market offers a wealth of opportunity for small business vendors. But small business government contracts—especially those that serve disabled veterans and professional small business contracts owned by women—come with a web of complex regulatory requirements unmatched in the commercial marketplace. Professional small businesses must be vigilant in establishing and maintaining allowable ownership and control structures. For example, this could mean that small businesses must ensure that their corporate documents and management structures comply with regulations and do not cede improper ownership or control to unqualified individuals or entities. Or, it could mean that a potential acquisition will affect the status of a small business — perhaps even before the deal closes. Under its terms, a letter of intent could in principle be viewed as an agreement in its current form—a breach of small business statutes by making an entity an affiliate and/or transferring improper ownership or control to a third party.
And, if small businesses appear to be consolidating and increasing their federal sales, that could lead to more protests of size and status in an attempt to further reduce competition for reserved space. But small businesses may have to be careful not to be too successful at weeding out competitors, as many leave the opportunity to require at least two eligible small businesses that can provide goods or services at a fair price (often referred to as a “duo” ). If there is only one small business left, procurement may shift to full and open competition, or be reserved for another type of small business.
Ultimately, the federal market offers solid opportunities for small businesses, but those opportunities come with a number of conditions. Small business government contractors must continue to monitor federal requirements and be aware of the impact potential growth could have on their eligibility for the lucrative set aside funds.