The U.S. Small Business Administration (“SBA”) recently released its annual Procurement Scorecard, demonstrating the federal government’s continued prioritization of small business contracting and subcontracting. In 2021, the government awarded $154.2 billion dollars in federal prime contracts – an increase of $8.5 billion over the prior year – with at least an additional $72 billion in small business subcontracts – a decrease of $10.8 billion from the prior year. These subcontracting figures continue the trend from prior years, which may lead to increased scrutiny of small business subcontracting plans to reverse the perceived decline. (In 2020, small business subcontracting decreased by an estimated $7.9 billion). Overall, the government yet again exceeded the service-disabled veteran-owned small business goal of 3%, and more than doubled the small disadvantaged business goal of 5%, but continued to struggle to meet the 5% women-owned small business and 3% HUBZone small business goals. The SBA released these figures in its FY 2021 Small Business Procurement Scorecard, available here.

Federal Government Small Business Contracting Goals v. Results: Prime Contracts

The prime contract dollar value increased from FY 2020 figures in every category except women-owned small businesses, largely due to the higher, total overall Government spending in FY 2021. The actual number of small businesses receiving prime contracts also decreased from FY 2020 – a trend that continues from FY 2019, as we discussed previously. There were 4,062 fewer small business government contractors in FY 2021 than FY 2020 (and 8,719 fewer than FY 2019), seeming to indicate that small business government contractors are growing and/or consolidating, but new small businesses are not entering the marketplace to replace those that leave (for a variety of reasons, including sizing out, mergers and acquisitions, and businesses shuttering their doors).

Notably, the government increased the percentage of contracts awarded to small disadvantaged businesses, a stated priority we discussed last year that was formalized via Executive Order 13985 on January 20, 2021. For the first time ever, the government awarded more than 11% of prime contracts to small disadvantaged businesses, a $3.4 billion increase in spending since FY 2020, reaching the Administration’s goal one year earlier than expected. Opportunities should continue to increase in this sector – the President set a 15% goal by FY 2025 – but it remains to be seen whether they will go to existing small disadvantaged businesses, or if new businesses will be motivated to pursue federal opportunities. In response to a July 2021 Office of Management and Budget (“OMB”) report to the President identifying difficulties small businesses face entering and navigating the federal marketplace, an OMB memorandum provided Government-wide steps to address those challenges. These include new entrant management tools, strengthened procurement forecasting capabilities, improved data management, increased transparency for Federal agencies and interested businesses, as well as encouragement for the agency equity teams for procurement established under the Executive Order to pursue additional agency-specific strategies.

The Government Continues to Grapple with Small Business Subcontracting Goals

As shown below, the U.S. government met its 29.36% small business subcontracting goal (which, interestingly, decreased from the FY 2020 goal) and 5% woman-owned small business goal, but – just as in FY 2019 and FY 2020 – failed to meet its subcontracting goals for small disadvantaged businesses, service-disabled veteran-owned small businesses, and HUBZone businesses. The government generally requires large businesses to subcontract to small businesses and submit a small business subcontracting plan outlining the businesses’ subcontracting goals in each category. But we have not seen increased pressure from the government on large business primes to focus on specialized small business subcontracting, notwithstanding the goals being missed year after year.

As we discussed previously, it is difficult to make concrete conclusions regarding subcontracting, because the government does not always have full visibility into how prime contractors are subcontracting. The subcontracting data generally is drawn from eSRS.gov, the government’s Electronic Subcontracting Reporting System, which only captures some (but not all) subcontract spending. Thus, in reality, the subcontracting numbers may be higher, but there is no way to know for sure.

Still, here are the subcontracting percentages reported in the federal Scorecard:

 Small Business Government Contracting – Proceed with Appropriate Caution

With $154.2 billion dollars in prime contracts and at least $72 billion in subcontracts, the federal marketplace provides a plethora of opportunities for small business vendors. But small business government contracting – particularly specialized small business contracting like service-disabled veteran-owned and women-owned – comes with a complex web of regulatory requirements unparalleled in the commercial marketplace. Specialty small businesses must be vigilant in setting up and maintaining permissible ownership and control structures. This may mean, for example, that a small business must ensure its corporate documents and management structure comply with the regulations and do not cede improper ownership or control to a non-qualifying person or entity. Or, it could mean that a potential acquisition will affect the small business’s status – potentially occurring even before a deal is closed. Depending on its terms, a letter of intent could be considered an agreement in principle that is given present effect – making the entities affiliates and/or conveying improper ownership or control to a third party in contravention of the small business regulations.

And, as small businesses appear to be consolidating and increasing their federal sales, this may result in more size and status protests in an attempt to further decrease competition for set-asides. But small businesses may have to be careful not to be too successful at eliminating competitors, because many small business set aside opportunities require that there be at least two qualifying small businesses that can offer the goods or services at a fair price (commonly known as the “Rule of Two”). If a single small business is the only one left standing, the procurement may be transitioned to full and open competition or set-aside for another type of small business.

Ultimately, the federal marketplace offers small businesses access to vast opportunities, but those opportunities come with many strings attached. Small business government contractors must remain attentive to federal requirements and be aware of the impact potential growth may have on their ability to qualify for lucrative set-asides.