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Evaluation of the Small Business Procurement Goals Established in Section 15(g) of the Small Business Act:

A Report Pursuant to Section 1631(d) of the National Defense Authorization Act of 2013

Report without the Appendices

Report Appendices

Research Summary

June 2014                                               No. 423

Evaluation of the Small Business Procurement Goals Established
in Section 15(g) of the Small Business Act: A Report Pursuant to
Section 1631(d) of the National Defense Authorization Act of 2013


by Henry B. R. Beale, Microeconomic Applications, Inc., Washington, D.C., 20016.
Under contract SBA HQ-13-M-0102. 277 pages

Purpose

Each year, the U.S. Small Business Administration
(SBA) negotiates goals with each federal agency for
procurement from small businesses, as well as goals
for important socioeconomic groups or sub-classes:
women-owned small businesses, small disadvantaged
businesses, small businesses located in historically
underutilized business zones (HUBZones), and
service-disabled veteran-owned small businesses.

The National Defense Authorization Act of 2013
(NDAA) contained modifications to the Small
Business Act, and it called for an independent
assessment of small business procurement goals.
This assessment reports on:

• The industry, size, and socioeconomic makeup
of federal prime contractors, subcontractors, and all
domestic business concerns;

• The process of establishing specific procurement
goals;

• The quality and availability of data on prime
contracting and subcontracting; and

• Barriers within procurement practices that
inhibit the maximum practicable utilization of small
businesses and small business sub-classes in federal
procurement.

The NDAA called for, to the extent practicable, coordination with
the Department of Defense (DOD). While Advocacy did coordinate
with DOD as required by the legislation, it did not clear the report
with DOD, the SBA or any other agency, consistent with Advocacy’s
independence.


Overall Findings

• Procurement is highly concentrated in a few
industries, and the small business procurement rate
is relatively low in some of these industries (See
Table 1.)

• Procurement rates for socioeconomic sub-
classes of small business generally reflect patterns of
small-business procurement rates. However, variations
among industries and sub-classes make these
patterns too complex to summarize briefly.

• Many industries with very low small-business
procurement rates have an average share of potential
small business contractors as measured by businesses
registered in the System for Award Management
(SAM).

• Shortfalls of small-business procurement dollars
(relative to goals) tend to occur in industries with a
high level of procurement, a very low small-business
procurement rate, and a high concentration of procurement
dollars going to a small number of firms.

• Setting procurement goals is a complex process.
Procurement goals balance two criteria—a quantitative
target (23 percent for the government as a
whole) and a qualitative concept (maximum practicable
opportunity of using small contractors).

• The SBA has recently introduced a methodology
for estimating opportunity for expanding small-business
procurement. The methodology addresses the
difficulties of making direct inter-agency comparisons
by first breaking procurement down by industry
and agency office and then using national and
agency procurement rates as benchmarks to estimate
opportunities industry by industry. Table 2 shows the
top industries in which each federal agency procures
goods and services.

Highlights

• Over 80 percent of federal procurement is concentrated
in four sectors: Construction; Professional,
Scientific, and Technical Services; Administrative
and Support, Waste Management and Remediation
Services; and Manufacturing. The small-business
procurement rate for FY 2012 was below the national
goal of 23 percent in all but one of these sectors,
Construction. (See Table 1.) Because of their size,
increasing small-business procurement in these sectors
is essential to improving the overall small-business
procurement rate.

• The most serious underutilization of small businesses
is not so much in the number of small businesses
that are awarded contracts but in the relatively
low levels of dollars awarded to small contractors.

• Generally speaking, higher small-business procurement
rates tend to be associated with high registration
rates in the System for Award Management
(SAM, a national database of firms seeking to do
business with the government). An anomaly arises
when an industry has a high SAM registration rate
and a low procurement rate. For example, veteran-
owned small businesses have above-average SAM
registration rates in Transportation and Housing, and
Information; and service-disabled veteran-owned
small businesses have above-average SAM registration
rates in Wholesale Trade and Information.
However, both groups have below-average procurement
rates in these industries.

• The industries with the highest levels of procurement
often are the industries where large contractors
are most heavily concentrated and where the
small-business procurement rate is very low. This
concentration is a major factor in the failure to meet
procurement goals.

• Progress toward meeting small-business procurement
goals could be enhanced by an approach that
does three things:

1. Fully examines the total value of prime
contract awards, without exclusions. (Current
data collection practices exclude certain kinds
of procurement from the total on which the
small business share is calculated.)

2. Adequately understands and considers
inherent differences.

3. Refrains from adjusting size standards
unless changes are required to reflect market
conditions.

• The consolidation inherent in procurement today
is problematic. For example, eight six-digit NAICS
industries have average small-business shares of contractors
and account for 40.1 percent of procurement,
yet these industries have a collective small-business
procurement rate of 11.8 percent. This shortfall from
the national goal of 23 percent equates in dollar terms
to $22.8 billion during FY 2012.

• Industries with higher small-business procurement
rates tend to have more small-business contractors.
And those with high small-business procurement
rates are smaller markets, averaging less than two-
thirds the procurement of industries with low or intermediate
procurement rates.

• The majority of procurement dollars are in industries
with very low small-business procurement rates,
but the potential for expanding small business procurement
may lie in industries that are above the 23
percent goal. Market research is necessary to identify
fruitful opportunities and match small businesses with
them.

• Inadequate market research is a major barrier to
small-business procurement. Good market research is
essential to determine whether and where small business
capabilities match procurement requirements.
This is true for all industries, but the need is particularly
acute in industries with high concentrations of
procurements from large firms. The goal of market
research in these industries would be to analyze large
contracts and break off pieces that would be suitable
for small contractors to compete for.

• Subcontracting is another way for small businesses,
including those in socioeconomic sub-classes,
to participate in federal procurement. Small business
and sub-class procurement goals also extend to
subcontracting by large prime contractors. However,
industry data on small and sub-class business subcontractors
are not available. Collecting such data may
require new legislation.

• An increase in the government-wide goal should not be considered
until the current goal has been achieved more than once. (Advocacy
notes that any change in the government-wide goal would result in
SBA's re-examining individual goals for each agency.)


Methodology

The study relies on data from the Federal
Procurement Data System-Next Generation (FPDS-
NG) and the System for Award Management (SAM).
Data were transformed into measures (counts and
percentages) of the involvement of businesses that
are small or in socioeconomic sub-classes of small
businesses at different stages of procurement.

Subcontracting data from the electronic
Subcontracting Reporting System (eSRS) were examined,
but they do not include the necessary industry
data. The data sources used had several limitations.
FPDS-NG was the only data set with easy access
adequate for research, however these data contain
internal inconsistencies in their reporting detail. In
addition, the FPDS design makes it difficult to distinguish
individual small contracts from task orders on
multiple task or delivery order contracts.

Table 1

 

 

As a result of limitations on the data available for
the present study, the author made three recommendations
for improvement:

1. Consider adding a consistent contract identification
variable to FPDS-NG,

2. Authorize the collection of industry data
on subcontractors, and

3. Improve quality control of FPDS-NG data.

This report was peer-reviewed consistent
with Advocacy’s data quality guidelines. More
information on this process can be obtained by
contacting the director of economic research by
email at advocacy@sba.gov or by phone at (202)
205-6533.

Additional Information

This report is available on the Office of Advocacy’s
website at www.sba.gov/advocacy/7540. To receive
email notices of new Advocacy research, news
releases, regulatory communications, publications,
and the latest issue of The Small Business Advocate
newsletter, visit www.sba.gov/updates and subscribe
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Listservs.

This document is a summary of the report identified above,developed under
contract for the Small Business Administration, Office of Advocacy.
As stated in the report, the final conclusions of the full report do not necessarily
reflect the views of the Office of Advocacy. This summary may contain additional
information, analysis, and policy recommendations from the Office of Advocacy.
This document is a summary of the report identified above, developed under
contract for the Small Business Administration, Office of Advocacy. As stated in
the report, the final conclusions of the full report do not necessarily reflect the
views of the Office of Advocacy. This summary may contain additional
information, analysis, and policy recommendations from the Office of Advocacy.