The Benefits of Increased Equity in Federal Contracting
The U.S. Federal government is the largest purchaser of goods and services in the world. Federal government purchases—called procurement—can have a substantial impact on the success of small businesses, especially those owned by underrepresented people.
This issue brief analyzes disaggregated data, provided by the U.S. Small Business Administration (SBA), on current Federal government procurement practices. The new analysis of these data makes it possible to identify industries where diversity is more commonplace and where there is room for improvement. Three main findings emerge:
- People of color, women, and those from rural areas are underrepresented in their share of total Federal procurement dollars, even relative to their low rates of ownership in the general economy.
- Diversity is higher when particular attention is paid to procuring goods from small businesses.
- Programs like SBA’s 8(a) program, which offers contracting set-asides for small disadvantaged business as well as training and technical assistance, may help explain the greater level of diversity among small business contractors—including among Native American-owned small businesses.
Overview
The U.S. Federal government spent nearly $600 billion on goods and services in FY 2020. Such large-scale purchasing decisions can steer investment, as in the case of electric vehicle production, and spur innovation, as in the case of COVID-19 vaccine development. Importantly, they may also expand small business ownership among underrepresented communities.
To that end, the U.S. government sets goals for the share of Federal contract dollars going to certain classes of small businesses, including small disadvantaged businesses (SDBs). The current government target is that 5 percent of all procurement should go to SDBs—a category under Federal law for which firms owned by racial and ethnic minorities, economically disadvantaged persons, and people who can provide evidence of individual social disadvantage, are presumed to qualify. Actual procurement to these firms currently exceeds this goal, averaging 9.8 percent over the past five fiscal years, though this percentage still trails behind the firms’ share of total firms.
In contrast, the share of total Federal procurement dollars going to small, women-owned business is only 4.85 percent, slightly below the stated goal of 5 percent. The 3 percent government goal of contracting with businesses in Historically Underutilized Business Zones (HUBZones)—which include census tracts and rural counties with relatively low median incomes or high unemployment rates, and also lands within the boundaries of Indian reservations—has not been met in at least the last five fiscal years. These shortfalls signal areas where more progress can be made.
Reaching targets for equity in procurement can have positive ripple effects on the small business sector and the overall economy more generally. In an academic paper, Chatterji, Chay, and Fairlie (2014) show that local government set-aside programs of the 1980s, which were designed to address past discrimination and encourage business ownership in urban communities, led to a 35 to 40 percent reduction in the Black-white gap in self-employment, a measure used as a proxy for small business ownership. Closing the gap in business ownership between privileged and disadvantaged groups has the additional potential to reduce wealth inequality. Using data from the 2019 Survey of Consumer Finances, we find that closing the 12-percentage point gap in small business ownership rates between Black and white households could potentially close the gap in average net worth between these groups by $185,900, or 22 percent. Similarly, closing the 10-percentage point gap in ownership between Hispanic/Latino and white households could reduce the gap in net worth between these groups by $138,800, or 17 percent. [1],[2]
Recently, the Biden-Harris Administration has set a more ambitious goal of increasing the share of procurement dollars going to SDBs by half, from 10 percent to 15 percent, by FY 2025. The Administration has also put in place a process for reviewing goals for all underrepresented categories, including for women-owned small businesses and service-disabled veteran owned small businesses. In the past, reports on progress considered the SDB category as a whole. Those reports have not allowed for a more refined analysis of procurement data. Now, for the first time, the U.S. Federal government/SBA will publish disaggregated data. These data will allow for a closer examination of issues related to equity and contracting.
Patterns of business ownership by race, place, and gender
Census data on business ownership reveal general patterns of underrepresentation by race, gender, and region, which may feed into the make-up of Federal procurement spending. Figure 1 shows the share of all businesses owned by different demographic groups and provides, as a comparison, the share of the overall population comprised by each of the same groups. White and Asian business owners make up a greater proportion of business owners than their respective population shares. Meanwhile, Black, Hispanic, and American Indian and Native Alaskan (AIAN) business owners are underrepresented relative to their population share. Woman business owners and those in rural counties are likewise underrepresented. Figure 1 also features the share of employer businesses—that is, businesses with paid employees—owned by each group. Because these are the types of businesses most likely to contract with the U.S. Federal government, the drop-off in ownership for this type of business signifies another barrier for underrepresented groups: a lack of access to capital and other factors leave them disproportionately among the smallest firms. These patterns provide context and benchmarks against which the composition of Federal procurement contracts can be assessed.
Disaggregated data on Federal procurement and contracting
Procurement data provided by SBA are now available not just on the share of procurement dollars going to SDBs as a broad category; the data can now be disaggregated further into subgroups. These data allow analysis of how the share of procurement going to businesses owned by people of different races and genders, or from certain geographies, compares to the overall share of those businesses in the economy.
As shown in Figure 2, diversity in recipients of procurement spending is generally less than what one would expect if it matched the population share, the share of all businesses, or even the share of employer businesses owned by underrepresented groups. The share of procurement dollars going to Black-owned businesses is the lowest of the race/ethnicity groups, reflecting in part that Black employer business ownership lags well behind the Black population share and the Black share of all businesses. The difference between procurement spending and employer business ownership rates is more pronounced for Asian Americans and Pacific Islanders (AAPI), Hispanic, women, and business owners from rural regions. The evidence in Figure 1, of course, implies that the gaps in representation would be even more pronounced if population shares were instead used as the benchmark. [3] As an exception to these patterns, the share of procurement dollars received by Native American-owned firms exceeds the overall share of businesses owned by members of this group. As discussed below, this is likely due to access to special programs that target disadvantaged businesses.
In general, small business contractors tend to be more diverse than the general pool of contractors, which in part reflects the fact that in the overall economy, diversity notably decreases among the owners of the largest businesses. Therefore, when attention is instead focused on small businesses, as shown in Figure 3, the share of procurement spending going to underrepresented business owners increases dramatically. Notably, the share of small business procurement dollars going to women-owned businesses shoots up by a factor of more than three, nearly matching the overall employer business ownership share for women-owned businesses. Likewise, the share of dollars going to Native American-owned businesses well-surpasses Native Americans’ share of business owners, again likely owing to access to programs described below. While the rate of purchases among rural small businesses is higher at 2.5 percent, it is still well-below the overall rate in the population.
Further disaggregation of the data provides clues for where more attention could be paid regarding matters of equity. In Figure 4, there are industries where small businesses owned by disadvantaged racial groups are slightly underrepresented, such as transportation and warehousing. On the other hand, administration and support; waste management and remediation service; and professional, scientific, and technical service businesses perform particularly well across underrepresented racial categories. Construction and manufacturing also have high shares of small business dollars going to underrepresented business owners, relative to their representation in the overall economy.
Finally, there are higher rates of diversity among categories of procurement that qualify for the SBA 8(a) program. That program offers contracting set-asides for small, disadvantaged businesses, in addition to training and technical assistance. The higher rates of diversity are especially notable in the case of Native American-owned businesses, which include a category known as entity-owned businesses. These businesses, such as Alaska Native Corporations and tribal-owned entities, face fewer limitations in access to the 8(a) program. Furthermore, research shows that 8(a)-supported businesses see faster growth in employees and sales over a 6-year period as compared to non-recipients, though the two groups have similar rates of remaining open.
Data transparency is a first step
There is clearly still work to be done to lower barriers to entry and increase opportunities for underrepresented businesses to access Federal contracts. The current release of data shows that the share of Federal procurement dollars going to underrepresented businesses generally falls behind those firms’ representation in the overall economy. It also demonstrates that programs that target support to SDBs seem to work in promoting more equity.
Using the disaggregated data, agencies can see where they are doing particularly well and where they can improve. Working with the SBA, which led on the effort to publish these data and will continue to promote their annual publication moving forward, the agencies can also use the data to track their progress towards meeting President Biden’s goal of increasing the share of contracts awarded to SDBs by 50 percent by 2025. However, releasing data on its own will not allow the government to fully reach this goal. Therefore, the Biden-Harris Administration is taking further steps, including:
- Increasing the SDB contracting goals to 11 percent in FY 2022—working toward the 15 percent goal in FY 2025, and setting in place a process to raise contracting goals for the women-owned small businesses, service-disabled veteran owned small businesses, and HUBZone businesses.
- Updating category management policy, which encourages agencies to buy agencies commonly purchased goods and services as an organized entity in order to maximize incentives for officials to conduct more equitable buying practices.
- Adopting management practices that align incentives of management with equity goals, including ensuring that every agency small business office has direct access to their senior leadership.
- Tracking the number of new entrants to the Federal procurement marketplace.
Improving representation in Federal procurement practices can have benefits beyond the realm of contracting. As described above, increased representation can affect business ownership more generally, which might help to close the racial wealth gap. Given the magnitude of the Federal government’s purchasing power, improving procurement rules should have a notable impact on those often underrepresented in the marketplace.
[1] Data limitations prevent analogous inquiry into wealth disparities for members of the Asian American, Native Hawaiian, Pacific Islander, American Indian, or Alaska Native groups.
[2] To estimate this effect, we use a method known as a Kitigawa-Oaxaca-Blinder decomposition, applied in a manner similar to that of Menchik and Jianakoplos (1997). If we instead look at the gap in median net wealth, using the method of Rios-Avila (2020), closing small business ownership gaps leads to reduction of $16,500, or 10 percent, between Black and white households and $13,775, or 9 percent, for Hispanic and white households.
[3] Note: We do not list statistics for white-owned companies, as the procurement records do not ask for this form of self-identification. This leaves a residual set of respondents who have not indicated any of the other racial or ethnic categories. While this group is presumably white, it may also contain people who in general wish not to report any race.
