The U.S. Small Business Administration (“SBA”) recently announced that, yet again, the federal government exceeded its small business contracting goal by awarding $145.7 billion dollars in federal prime contracts – 26.01% of the government’s total procurement spending – to small businesses last year, with at least an additional $82.8 billion in small business subcontracts. The SBA released statistics in its FY 2020 Small Business Procurement Scorecard, available here. Notably, while small business contracting increased $13 billion in prime contracts, small business subcontracting may have decreased by an estimated $7.9 billion. Other Scorecard highlights include that the U.S. government exceeded the service-disabled veteran-owned small business goal of 3% and far-exceeded the small disadvantaged business goal of 5%. The government failed, however, to meet the women-owned small business goal of 5% and the HUBZone goal of 3%.

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

The prime contract dollar value increased in every category from FY 2019 as a result of higher, total overall Government spending in FY 2020. But the spending increase masks the fact that the percentage of total contracting dollars actually decreased in all categories but one. The actual number of small businesses receiving prime contracts also decreased from FY 2019 – a trend that continues from FY 2018, as we discussed previously. There were 4,657 fewer small business government contractors in FY 2020 than FY 2019, seeming to indicate that those small businesses selling to the government are getting larger pieces of the pie (and potentially larger contracts), with fewer small businesses entering the market to compete for these opportunities. Looking at the FY 2019 and FY 2020 Scorecards, the rate of small businesses leaving the market has slowed (the number was nearly 11,000 last year), indicating that the government may not be fostering new small business contractors in the federal marketplace. The biggest decrease was in the most broad “small businesses” category, with other specialized small business numbers remaining fairly consistent from last year.

The Administration has stated that it wants to focus on increasing the percentage of contracts awarded to small disadvantaged businesses by 50 percent in the next five years. That could result in more than $10 billion annually for that category of small businesses, which would present a plethora of opportunities for new businesses to enter that market and for existing small disadvantaged businesses to grow.

Large Businesses Continue to Struggle to Meet Small Business Subcontracting Goals

As shown below, the U.S. government met its 29.43% small business subcontracting goal and 5% woman-owned small business goal, but – just as in FY 2019 – failed to meet its goals for small disadvantaged businesses, service-disabled veteran-owned small businesses, and HUBZone businesses. The government requires large businesses to subcontract to small businesses and submit a small business subcontracting plan outlining goals for involving small businesses the federal market. This may translate into prime contracting officers paying closer attention to small business subcontracting plans. Indeed, since last year there have been slight increases in all specialized small businesses, which may be the result of increased government pressure to meet subcontracting goals.

As we noted previously, it is difficult to make any definitive conclusions regarding subcontracting because the government does not always have full visibility into how prime contractors are buying from their subcontractors. 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, these subcontracting figures may be higher, although the government does not really have the data to confirm how much higher.

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

Becoming a Small Business Government Contractor: How to Get a Piece of the Pie

With $145.7 billion dollars in prime contracts and at least $82.8 billion in subcontracts, there certainly is money to be made for small businesses and small business subcontractors in the federal marketplace. But, new small businesses should approach federal contracting with appropriate caution. Contracting with the government is not like contracting in the commercial marketplace. The U.S. government imposes unique terms and conditions on its contractors, like the termination for convenience clause, where it can unilaterally end a contract without paying expectation damages. The government is also able to demand that small businesses and specialized small businesses meet certain specific, sometimes burdensome compliance requirements. In their haste to enter the federal marketplace, many small businesses check the required boxes without adequately understanding the requirements, which can result not only in hefty penalties, but also in being disqualified from federal contracting going forward. What this means is that small businesses must scrutinize the required qualifications and ensure that they meet all requirements. And, once they enter the market, small businesses need to remain diligent that they continue to qualify. Selling to Uncle Sam presents great opportunities for small business owners, but it also comes at great risk. To borrow from the old Latin phrase caveat emptor, the federal marketplace is best described as “Caveat Venditor, Let the seller beware.”