Contracting Trends Affecting Small Businesses

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Trends in Contracting Affecting Small Business

Today, we are going to review the trends affecting small businesses in Government Contracting.  We will review Federal Government contracting data for the last ten years and see what has happened.   Federal spending has increased by 7.15% over the last ten years however small business contract spending in the last two years has declined.  Small business contracting dollars is down over 19% the last two years.

Listen to our podcast Federal Contracting Made Easy as we discuss trends in contracting affecting small business

We are starting another series by reviewing government contracts’ historical information.  Today’s episode is on small business set-aside and government contracting overall.

Why Review the trends in Government Contracting?

I have noticed a decline in the number of 8(a) sole source and 8(a) competitive contracts in the State of Utah for several years.  Since I have been retired, I was curious if this trend has continued.  Therefore, I decided to perform research using USA Spending to determine if my suspensions were correct.   However, instead of limiting my research to the state of Utah, I decided to expand it nationally.

Parameters Used

I wanted to start my research using the same set of parameters.  Therefore, I only used contracts awarded within the United States and gathered contracting data over a period of ten years.  Why ten years?  I believe it would provide a good indication of what has happened in the last decade therefore the data should be consistent.  One of the reasons for my decision is based on politics.  I normally try to stay away from anything political but in government contracting the political party in control has a direct influence on government spending.  By going back ten years it would provide a good indication over both political parties.

Overall Procurement Strength

The Government has been steadily increasing its procurement spending since 2015.  In fact, the average increase is 5.34%.  The 2019 numbers have not been finalized yet but are only 2.34% below 2018 numbers.  I believe it will be either even with 2018 spending or slightly below at most. We can expect those numbers to be finalized in early February of 2020.

Total Contract Spending
Total Contract Spending

Figure 1

What Changed in 2018?

We can see from the figures that government spending has been above the $450 Billion except for the period of 2014 through 2016.  If we only looked at the last five years in this graph, we would see an upward trend.  However, by looking at the last ten years we can see that the spending has averaged $492 billion over the last ten years.  For those new to government contracting this is indicating that government spending is not consistent.  The decline period of 2014-2016 could have been a result of the government’s attempt to balance the budget.  Unfortunately, I was not able to verify those facts.  We can determine from this graph that government spending is consistently above $400 Billion. 

Now let’s look at how well small businesses did over the same time period.    

Small Business Set-aides

The U.S. Federal Government must set-aside 23% of its Prime Contracts to small businesses.  By reviewing the chart in Figure 2 we see that small business set-asides followed the same trend until 2017.  From 2017 on the contracting dollars awarded to small businesses had decreased and is not following the trend. See figure 2.   This is concerning to me and is not what is expected.  Why are the contracting dollars for small business set-asides declining? 

Contract Spending Vs. Small Business
Contract Spending Vs. Small Business

Figure 2

Did the Parameters Change?

I did go back to USA Spending a reran the numbers.  I thought maybe I selected something outside the parameters that I used originally.  No, the results were still the same.  I then remembered that the U.S. Small Business Administration does the goal-scoring card each year.  So, I went to their site.  However, I was unable to figure out the parameters that they use.  As a result, my numbers did not match theirs.  SBA states that the Government met its 23% goal.  

Why the Drop in 2018?

The last government shutdown lasted 35 days and happened in the government’s fiscal year 2019.  Obviously, that did not impact FY2018 numbers.  I keep asking myself why the significant drop in contracting dollars to small businesses?  I believe I know part of the reason, but it does not explain why these numbers dropped nearly in half.

I believe that part of the reason is that the government is bundling contracts into larger contracting vehicles which is impacting the number of contracts that small businesses can bid on.  I have seen this happening on the 8(a) side of the house since 2015. 

Over the last two years contracting dollars to small businesses dropped 19%.

Are Contracting Officers The Problem?

More and more contracting officers are looking for current contracting vehicles that they can utilize to achieve their goals.  As a result, many medium small businesses are growing into large businesses by winning task orders under these multiple-award contract vehicles.  This is great for those few small businesses that have mastered successful bidding techniques. But what about those small businesses just getting started in government contracting?  Well, it is making for an extremely competitive market and will end up pushing many small businesses out of the government contracting due to not being able to compete. 

More Importantly

As this cycle continues to grow it will have an impact on government contracting opportunities.  At some point, the government will realize the implications of utilizing these larger contract vehicles.  The number of small businesses that can compete in the market will dwindle.  Or worse, these small businesses will not want to waste their time competing on these contracts.  As a result, the Government will institute changes to make it easier for small businesses, but it will come at a cost.  It will cost the Government money in order to do this.  At some point, the Government will need to revamp its contracting system.  I believe it is past due for this.

Hidden Costs

Look at the costs involved in bidding on government contracts.  I read an article by American Express that states that it costs roughly $160,000 for a small business to bid on government contracts.    It costs money for proposal writing, bonding, joint ventures, teaming agreements, partnering efforts and more.   Here is a link to the article.

Many small businesses, especially those that are just starting out do not consider these costs.  I get phone calls stating that entrepreneurs want to start a business however they do not have any experience in government contracting or any working capital.  It makes it very difficult to win government contracts. 

Summary

Overall, government contracting is alive and well.  Over the last decade, government procurement has increased an average of 7.15%. However, the contracting dollars being awarded to small businesses is dwindling. It is down 19.27%. At some point, the government is going to have to get involved and figure out why.  When will that happen?  Your guess is as good as mine.  Maybe it is time that you reach out to SBA and ask why.

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