Our analysis of federal data shows that the number of small businesses contracting with the federal government shrank dramatically over the past decade and federal purchasing — and the economic opportunities it generates — is highly concentrated in just a few congressional districts.

By Sarah Treuhaft, Eliza McCullough, Michelle Huang, and Tracey Ross

The federal government is the nation’s largest purchaser of goods and services, spending more than half a trillion dollars on contracts every year. This buying power is a crucial catalyst for equitable economic development across the country, creating scores of opportunities for businesses along a vast supply chain. Recognizing the value of its purse, the federal government has an official policy to ensure that small businesses, as well as entrepreneurs who face systemic barriers to business development and growth, have “maximum practicable opportunity” to access these contracting opportunities. 

In 2020, the federal government spent 26 percent of its contracting budget on small businesses (a total of $145.7 billion), exceeding its goal of 23 percent. Yet, our review of federal data reveals that while the total dollar amount going to small businesses has increased, the number of small businesses doing business with the federal government has plummeted over the past decade. About forty percent fewer small businesses fulfilled federal contracts in 2020 compared with 2010, and every year, fewer and fewer small companies sell their goods and services to the federal government. 

This dramatic decline in contracting opportunities matters because of the outsized role that small businesses — and particularly small businesses owned by people of color — must play in an equitable recovery and economic future. Research has shown that in the face of chronic labor market discrimination, segregation, and disinvesment in communities of color, businesses owned by people of color are more likely to hire people of color than other firms and also generate increased economic activity in communities of color. Entrepreneurship can also help close the racial wealth gap. But while workers of color start businesses at above-average rates, persistent barriers to accessing capital, networks, and business support translate into lower revenue growth for entrepreneurs of color. Federal contracting is an important pathway for business expansion and growth that can have ripple effects in communities that bear the heaviest burdens of structural racism and were hit hardest by the pandemic.

Here are key findings from our review of the data.

There has been a dramatic decline in the number of small business doing business with the federal government over the past decade

In 2010, about 125,000 small businesses contracted with the federal government. That number has shrunk year after year and by 2020, just under 76,000 small businesses fulfilled federal contracts — a 39 percent decline. Although a larger share of federal contracts are going to small businesses, fewer small businesses — and fewer communities — are benefiting from these business opportunities.

In addition to the shrinking overall number of small businesses contracting with the federal government, fewer small businesses are newly entering into federal contracts. While the federal government contracted with 23,000 new small business vendors in 2012, in 2019 just 9,400 new small businesses entered the federal marketplace.

Less than 16 percent of total government procurement is from small businesses owned by people of color and women

Today, people of color are 39 percent of the population and own 29 percent of all American businesses, yet entrepreneurs of color receive less than 12 percent of federal government contracting dollars.* While this exceeds the official contracting goal of five percent, it is far from being proportionate and even further from proactively advancing racial equity in business ownership. And while women own 42 percent of American companies and women of color start businesses at the fastest rate of all racial/gender groups, the federal government fell shy of meeting its 5 percent contracting goal for small women-owned businesses in 2020.

Federal contracts with small businesses are highly concentrated in just a few communities — exacerbating spatial inequities

Examining the geographic spread of federal contracts to small businesses, we found that federal contracts are highly concentrated in just a few congressional districts. There are 17 congressional districts that each had more than $1 billion in small business contracts with the federal government in 2020 — 12 of them in Virginia and Maryland. While federal contracts do go to businesses located in every congressional district, these 17 districts — which are home to just four percent of the population — received 43 percent of small business procurement. As economic opportunity continues to concentrate in a smaller number of communities, achieving greater spatial equity in federal procurement is a critical strategy to foster shared prosperity and an inclusive recovery.

 

The Build Back Better Plan offers solutions to unlock contracting opportunities for small businesses and entrepreneurs of color

As Congress debates more than $4 trillion in spending on infrastructure and President Biden’s “Build Back Better” agenda, leveraging federal procurement to strengthen and rebuild local economies is a public and policy priority. One element of the proposed Build Back Better Plan is a set of programs through whic the Small Business Administration will partner with Historically Black Colleges and Universities (HBCUs) and other institutions that serve communities of color to uplift the next generation of Black-, Latinx-, and Tribal-owned small businesses through federal contracting. Together, these programs would invest $2.4 billion over ten years to establish business incubators and business development programs in underrepresented communities and support small businesses to meet evolving technological needs. 

A 2019 pilot conducted with the Bowie State University, an HBCU, shows that this type of support works: the University's accelerator program worked with 32 companies that went on to secure $26 million in government contracts. 

Given the clear trend of declining contracting opportunities, this plan to democratize access to federal contracts and foster inclusive business development is a timely intervention to ensure an equitable recovery and economic future.

 

*The federal government sets contracting goals for “small disadvantaged businesses” which are at least 51 percent owned by one or more people “who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities.”