Government Purchasing and Contract Vehicles: The Environment for Small Businesses

This post is the second in a series on understanding government contracting and maximizing opportunities to participate in government contracts. The first part of this series can be found here.

The reduction in federal government spending over the past few years has significantly impacted small business bidding activity.

A survey released in 2013 by the American Express OPEN for Government Contracts: Victory in Procurement (VIP) for Small  Business Program (AmEx OPEN) indicates that, on average, it takes a small business that is new to the federal procurement marketplace about two years (24 months) and 4.7 unsuccessful bids before winning that all-important first contract.

The findings of the AmEx OPEN survey confirm the need for companies to be persistent and to commit the appropriate resources to succeed as government contractors. The average success rate in prime contracting (38% overall) are significantly higher among those with more years of contracting experience (53% success rate) compared to  those who have been seeking federal contracts for three years or less (20% success rate). The cost of finding opportunities and competing for contracts has increased by 49% in recent years from an average of $86K in 2009 to an average of $128K in 2010.

However, contracting success rates for small businesses may be growing partially as a result of government support. The Small Business Administration (SBA) established in 1973 a small business goaling program to increase small business participation in federal government contracting. In addition to the small business goaling program, there are other programs that were created to meet the needs of specific groups, such as

  1. Small businesses that are owned and controlled by individuals within certain economic and social categories. In particular, companies that have been admitted to the US Small Business Administration 8(a) Business Development program.
  2. Small businesses that are located in areas considered Historically Underutilized Business Zones” (HUBZones).
  3. Women entrepreneurs.
  4. Service-disabled veteran entrepreneurs.

The government met its small-business spending goal (currently 23 percent) for the first time in 2013. In 2012, the federal agencies nearly met the mark as small businesses reported receipt of $89.8 billion (or 22.25 percent) of the total procurement expenses for the year. There are now some legislative initiatives to raise the target to 25 percent of all federal contracts.

Trends in Government Spending

The latest report by agencies from the Federal Procurement Data System (FPDS) was issued March 15, 2013 shows data for FY2102.  (This year’s report has been delayed by sequestration and unusual budget activity which has yet to be audited.)  The report shows that in almost all cases these federal government departments have met the statutory goals (as shown in the chart below).

small business contracts(click to enlarge)

The top six U.S. Government agencies listed above make up 90% of all government procurement with the Department of Defense spending the most overall on government procurement, especially in small business contracting. We can therefore predict general small business trends by observing trends in contracting in the Department of Defense. Because growth levels for defense spending are not mandated by legislation like entitlement programs such as Social Security and Medicare, the Congressional Budget Office (CBO) reports defense spending under the category of “discretionary spending.” As can be seen below, historical trends show the first decline in the growth rates of defense spending in a decade for the most recent years FY2012 and FY2013.

Discretionary outlays(click to enlarge)
Source: CBO

CBO projections show that this trend will continue through FY2105, after which there will be positive growth through FY2020. The details are shown in the table below. The areas highlighted in green show the percent change year over year using FY2013 as a base year. The area highlighted in blue uses the same calculations for defense spending only.

projected outlays(click to enlarge)
Source: CBO

What does this mean in dollar contracting values? The following table combines the data from the previous three to show the small business procurement dollars expected to be spent over the next six fiscal years (i.e. through 2020).

small biz procurement projections(click to enlarge)
Source: CBO

Using the top six agencies as before, which represent 90% of all government small business contracting, we see that the range in overall procurement value will likely increase from $66B to $74B by 2020. The most significant change within these projections will be related to the reduction in the size of the military personnel roster. Troop reductions are expected to be reduced by approximately 11% from FY2013 levels mostly by attrition and retirements. The Defense posture of the United States is expected to shift to a fully networked mobile force using beyond line-of-site technology. On a related note, as “e-Government” initiatives become standard policy, cloud infrastructure and cybersecurity related items are expected to experience significantly different growth rates than discretionary spending as a whole. These areas are expected to grow at a rate of 6-10% annually.

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