A new and independent report commissioned by the Small Business Administration’s Office of Advocacy advises a more nuanced approach in setting goals for federal small business contracting.

      The new approach should take into account the large disparities that exist in small business federal contracting by industry, the report recommends.

      For example, manufacturing made up about $197 billion in federal contracts in fiscal 2012, about 40% of all federal procurement. But the small business share was only $23 billion, or 12%, the report said. That is far short of the government’s overall 23% goal.

      Other industries in which small business is lagging in federal contracting are finance and insurance, 2.4%; utilities, 6%; management of companies and enterprises, 10%; and transportation and warehousing, 18%.

      On the other hand, small firms scored high in construction, winning about $16 billion (45%) in the $35 billion federal construction contracting industry.

      Small vendors also did well in federal contracting for agriculture, forestry, fishing and hunting, in which small firms won 70% of the contract dollars; arts, entertainment and recreation, 69%; mining, quarrying, and oil & gas extraction, 42%; retail trade, 41%; real estate rental and leasing, 32%; and health care and social assistance, 32%.

      Of the largest industry sectors in federal contracting, small firms did fairly well in Professional, Scientific & Technical Services, with a 23% share; Administration and Support, Waste Management and Remediation, 21%; and Wholesale Trade, 28%.

      The report was written by Henry Beale, principal economist of Microeconomic Applications Inc. in Washington. While the SBA and Pentagon provided input, the report was developed independently, without seeking or obtaining clearance from those agencies.

      The 103-page report was produced to comply with a provision of the National Defense Authorization Act of fiscal 2013.

      The author cautions that goal-setting for small business procurement is complex.

      Procurement goals are defined in both conceptual terms, as “maximum practicable opportunity,” and in quantitative terms (23% goal), and “the two definitions often do not coincide,” the report said. A single goal does not take into account the great variations in different industries.

      Furthermore, small business procurement will tend to rise just by raising the size standards; for that reason, the author recommends the SBA make no changes to size standards unless “changes are required to reflect market conditions.”

      The government’s establishment of an overall 23% goal is problematic, the author believes: “The government-wide small-business procurement goal was set and raised without apparent consideration of these complexities,” he wrote.

      But change could be on the way. According to the author, SBA has developed an “innovative methodology for estimating agency procurement goals based on breaking down agency procurement by industry, which addresses key issues.”

      Meanwhile, the author recommends not raising the overall 23% goal at this time. “An increase in the government-wide goal should not be considered until the current goal has been achieved more than once,” the author wrote.

      The House recently approved an amendment to the defense authorization bill to raise the small business goal to 25%.

      Overall, the report found:

• federal procurement is highly concentrated in a few industries, and the small business procurement rate is relatively low in some of these industries.
• Some industries with very low small-business procurement rates nonetheless have many small firms registered in those industries in SAM.gov.
• The most serious underutilization of small businesses is... “the relatively low levels of dollars awarded to small contractors.”
• While veteran-owned small businesses have above-average SAM registration rates in Transportation and Housing and in Information; those firms have below-average procurement rates in those industries.
• Similarly, while service-disabled veteran-owned small businesses have above-average SAM registration rates in Wholesale Trade and in Information, they have below-average procurement rates in these industries.

More information: SBA OHA report http://www.sba.gov/advocacy/7540/980311