The federal government awarded $154.2 billion to small businesses in fiscal 2021, up $8 billion from the previous year, according to Small Business Administration data released Tuesday.
That’s a record 27.2% of total federal funding for procurement, beating the government’s target of 23%.
“We’re pleased to see that more dollars and a larger percentage are going to small businesses,” said SBA Administrator Isabel Guzman, adding that some of the changes President Biden has announced since taking office are beginning to take hold. These efforts aim to level the playing field for small businesses competing for federal contracts, an area where many have struggled.
Still there is work to be done. The number of small companies winning top-tier contracts has fallen again in fiscal 2021, continuing a multi-year trend. The latest data shows that 71,441 small businesses received contracts, down 5.7% from 75,726 in fiscal 2020.
In contrast, about 125,000 small businesses signed contracts with the federal government in fiscal 2010, according to a National Equity Atlas report prepared by PolicyLink and the USC Equity Research Institute (ERI) using SBA data.
Small business advocates cite several reasons for the difficulties small businesses face in obtaining government contracts. Part of the problem is due to competition from larger, more established companies with more experience, said Shane McCall, an equity partner at Koprince McCall Pottroff, who works with small companies. There may also be procedural issues and legal requirements that prevent some companies from applying in the first place, he said.
In particular, federal government retention requirements tend to disproportionately impact disadvantaged companies, said Judith Dangerfield, senior fellow at PolicyLink, a national research and action institute focused on promoting economic and social justice. Those business owners need to overcome the same bias — the notion that race equals risk — that they face in banking and finance, she said. “As a result, bonding has been a barrier to participation for DBE firms for decades,” she said.
The best federal agencies for small business contracts
Guzman said she was encouraged by the positive developments over the past fiscal year. Notably, 21 of the 24 agencies monitored by the SBA received an “A+” or “A” rating on their scorecard.
The 11 agencies that received an A+ rating are: Department of Commerce, Department of Homeland Security, Department of Labor, Department of State, Department of Interior, Environmental Protection Agency, General Services Administration, The National Science Foundation, The Nuclear Regulatory Commission, The Office of Personnel Management, and The Small Business Administration.
Ten agencies received an “A” grade: The Agency for International Development, the Department of Agriculture, the Department of Defense, the Department of Education, the Department of Energy, the Department of Justice, the Department of Transportation, the Department of Veterans Affairs, the National Aeronautics and Space Administration, and the Social Security Administration.
Government targets for women and minority businesses not met
Still, it’s by no means a perfect system, especially for small, female-owned businesses and those located in historically underutilized business zones (HUBZones). The federal goal for women-owned small businesses has only been met twice since its inception in 1994, and HUBZone’s goal has never been met, Goldman Sachs CEO David Solomon wrote in a recent op-ed for CNBC expressing support for the Bank expressed its desire for the SBA’s first re-approval by Congress in more than two decades to give it more opportunities to support small businesses.
In 2021, women-owned small businesses received $26.2 billion in federal contracts, or 4.63% of total eligible dollars for fiscal 2021, the SBA said. The goal was 5%.
Meanwhile, HUBZone’s small businesses received $14.3 billion in historic contract awards, representing 2.53% of total eligible FY2021 dollars. That’s the highest level in about 10 years, Guzman said, but it still falls short of the government’s statutory target of 3%.
While the agency hasn’t met those goals, Guzman said, “they’re still on the horizon.”
For women-owned businesses, the SBA has increased the number of certified businesses from about 1,000 to nearly 6,000. It has also expanded the NAICS codes, the classification system used by the government for business categories for which women-led businesses can receive decommissioned awards. More than 92% of federal spending is covered by NAICS codes that are eligible for WOSB (Women Owned Small Businesses) decommissioning awards, according to the SBA.
The SBA also continues to work to help HUBZone companies compete for federal contracts. In 2020, the agency simplified the rules to help these companies compete more effectively. Guzman said the agency aims to “gain expanded reach and ensure more businesses are aware of the simplified rules.”
It was a goal of President Biden to help small businesses get more federal contracts. In particular, spending by disadvantaged small businesses hit 11% for the first time, according to the new SBA data. The aim is to achieve 15% of federal orders by 2025.
White House Reforms for Main Street
Late last year, the White House announced major reforms to encourage fairer purchasing practices. One example is the attempt to reform the federal government’s use of “category management,” which has helped consolidate contracting dollars, said Eliza McCullough, a staffer at PolicyLink. The practice allows federal agencies to purchase contracts as an organized entity rather than as thousands of independent buyers. This helps avoid redundant purchasing decisions, but an unintended result is that small, disadvantaged companies get a proportionately smaller share of orders, she said.
Reforms to mitigate the injustices include automatically giving category management “credits” to agencies for all awards given to small, disadvantaged businesses, and strengthening the voice for small business equality considerations in category management governance , McCullough said.
“Along with increased investment in historically black colleges and universities and other institutions that serve communities of color to nurture the next generation of black, Latinx and tribal-owned small businesses, these reforms are democratizing access to federal contracts and promoting inclusive business development,” said McCullough.