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Small Businesses Still Being Overlooked For Federal Contracts

Written by Tim Morral
Published: 6/5/2015

Since 1997, small businesses are supposed to receive approximately a quarter of government contract dollars. But according to the government's own reporting, that still isn't happening. Why not?

From the White House to Congress, government officials frequently tout the importance of small businesses in the U.S. economy. To support small businesses, the 1997 Small Business Reauthorization Act included a provision that 23 percent of federal contract expenditures go to small companies.

How Are Federal Contracts Allocated?

Nearly twenty years later, the actual percentage of contract dollars awarded to small business continues to fall far short of the prescribed 23 percent. What's going on? Is getting federal contracts really this difficult for small businesses?

Small Businesses and Government Contracts

According to a recent Small Business Contracting Report by the watchdog group, Public Citizen, U.S. policy calls for a percentage of federal procurement dollars (23 percent for prime contracts and 36 percent for subcontracts) to be allocated to small companies.

Although the government claims to have met or nearly met its small business procurement goal in 2013 and prior years, many of the government contracts included in the tally were actually awarded to large corporations.

In fact, 7 of the 10 largest federal contractors were awarded a contract that counted toward the government's small business procurement goal in 2013.

What was the government's rationale? The SBA said the discrepancy is due to an accounting loophole that allows small businesses acquired by large companies to retain their small business status for five years.

As a result, the government's small business procurement percentages are skewed -- the actual dollar value of the contracts awarded to small companies is nowhere near 23 percent.

Federal Contract Loophole Under Fire

The loophole that has allowed large corporations to benefit from federal dollars allocated to small business contracts has recently come under fire by several organizations. According to Public Citizen and other groups, the five-year grace period is inaccurate.

Here's why: a 2007 regulation requires acquired small business contractors to recertify their small business status with the government within 30 days. This means that contracts awarded to acquired companies that are no longer classified as small businesses should not count toward the achievement of the government's small business goals.

Another factor that works against the federal government's stated small business contract goals is that small businesses are only slated to receive 23 percent of contracting dollars for which small companies are eligible. In 2013, small companies were eligible for just $105 billion of the government's $460 billion contracting budget because many projects were deemed too large to be completed by smaller firms.

Federal contracts represent a significant piece of business for companies of all shapes and sizes. Although it's uncertain whether the government will ever be able to truly meet its goals for small business contracts, it seems clear that the system needs to be re-evaluated and reformed to give small companies a fairer shake.

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