Number of Small Businesses Awarded Federal Government Contracts Has Dropped 12.7% in Four Years

The number of small businesses receiving government contracts dropped yet again in Fiscal Year 2020–and the four-year decline is 12.7%.

In its FY 2020 goaling scorecard, the SBA reported that 45,661 distinct small businesses received contracts in the top 100 NAICS codes. The previous fiscal year, 46,661 distinct small businesses received contracts. Four years ago, when SBA first started including this statistic in its annual reports, the number stood at 51,866. Clearly, the numbers are going in the wrong direction.

The latest data is just the latest bad news in a troubling downward trend in the number of small primes being awarded government contracts. In 2019, for instance, a Senate Committee reported that the number of small prime awardees had declined 32% between Fiscal Years 2009 and 2018. And in an 2018 report, the blue-ribbon Section 809 Panel wrote that at DoD, the number of small awardees had dropped a shocking 70% since 2011. (After identifying this major problem, the Section 809 Panel then proposed to do away with small business set-asides, which wouldn’t exactly have helped matters).

To me, this continued decline in the number of small business awardees is a crisis. But the government keeps receiving “A” grades for its small business contracting achievements, including in SBA’s most recent scorecard report! How can this be?

Simply put: it’s the rules of the game. The SBA’s grades are based on a formula, and that formula is tilted very strongly toward dollars awarded to small businesses, with much less emphasis placed on the number of small businesses receiving those dollars.

The formula calls for 50% of SBA’s grade to be based on the prime contract dollars awarded to small businesses, with 20% of the grade based on subcontracting dollars. In contrast, only about 10% of the government’s grade is related to the number of small businesses receiving prime contract awards. In other words, under the SBA’s formula, dollars are seven times more important than the number of distinct small businesses awarded contracts. (The remaining 20% of the formula involves requirements for the agencies’ Offices of Small and Disadvantaged Business Utilization).

On top of that, the scoring for the “distinct number” category is extremely generous, with essentially no way for an agency to fail no matter how far the number of awardees drops. Under the formula, a year-to-year “no change” in the numbers earns a nice, round “1.” A decrease of up to five percent is scored–wait for it–“0.9.” Yep, an agency can lose 4.9% of its small business awardees and suffer only a 0.1 score drop. Even a decrease of “10% of more” generates a score of “0.7.” There is no lower score possible, even if an agency loses 100% of its small business awardees.

Realistically, you can’t expect government procurement officials to care a whole heck of a lot about a metric that affects only 10% of the overall grade, particularly when a decrease in small business awardees barely moves the scoring needle anyway. These folks have a lot on their plates; many of them are going to be quite happy to take their dollars-based “A” grades and call it a day, regardless of how many distinct small businesses received contracts.

Where will the small business contracting landscape be in five years? Ten? Twenty? If the SBA scorecard remains focused on dollars and initiatives like category management remain in place, I think it’s a foregone conclusion that the numbers will continue to drop. It’s not hard (though a little terrifying) to predict a future in which 10,000 or fewer companies receive almost all of the government’s small business contracts.

Not everyone will think that’s a bad thing. Small businesses will still be getting contracts, after all–even if it’s the same handful of smalls over and over again.

But I think that the number of small businesses receiving federal contracts is every bit as important as the dollars. The federal government didn’t create the small business preferences on a whim. The small business programs exist to help grow a broad industrial base and give mom-and-pops on every Main Street in the country the chance to sell their goods and services to Uncle Sam. By focusing almost exclusively on the dollars and awarding “A” grades in the face of sharp declines in small business participation in the federal marketplace, the SBA’s goaling scorecards seem to ensure that the downward trend continues.

Don’t get me wrong–the goaling scorecard is an excellent idea in theory and can help hold federal agencies’ feet to the fire when it comes to small business contracting. But something is wrong with the SBA scorecard when the government can run around touting its “A” grades like a high school valedictorian while the number of small businesses actually selling goods and services to Uncle Sam continues to plummet precipitously.

If it’s wonky to say that we need to reform the way that the SBA scorecard grades are calculated, then count me as wonky. Because if the government keeps focusing almost exclusively on the dollars, mom and pop may not have much of a future in federal government contracting.

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