Federal Procurement: A System That Is Far From Perfect
Federal Procurement: A System That Is Far From PerfectIntroductionThe federal government is the single largest buyer in the world, with its spending contributing nearly 40% of US GDP each year (Yurkins, ). Yet despite its potent economic force, the procurement system is also marred with numerous issues that often go undiscussed among the broader public as well as among contractors themselves. This paper seeks to examine some of the key issues that the federal procurement system faces, as well as establish some basic steps towards reforming the system for the better.Issues with CompetitionOne key issue within the federal contracting space is the lack of participation of smaller, more innovative firms. Although the private sector has seen the rise of many disruptive technology startups over the past few decades, a comparable amount of dynamism does not seem to have reached the US federal government.There are several explanations for this lack of engagement from startups. One survey conducted by government contractor accelerator, Eastern Foundry, found that startups tend to prioritize four things: earning recurring revenue, raising capital, boosting valuations, and connecting with customers rapidly. While government contracts can satisfy many of these desires (for example, government contracts tend to be able to provide more long term recurring revenue compared to private sector business-to-business contracts), there are many drawbacks for startups that are built into the federal procurement system. Most sales cycles last two to four years when selling to the federal government, which already exceeds the typical amount of funding held by startups (12 to 18 months). Part of the slowness can be attributed to thegovernment’s poorly optimized systems for finding contract opportunities, as well as the difficult and lengthy process of responding to an opportunity once one is found. These factors, along with the belief that working for the government could damage one’s reputation and the belief that most contracts can only be won by well-connected incumbents, heavily discourage innovative startups from selling to the federal government (Orazem et. al).As a consequence, growing levels of market concentration are evident in major procurement areas like defense contracting. One economics study traced the growing levels of market concentration among a small group of major defense contractors since the 1990s. The study argued that there was a causal link between this increased market concentration within the defense industry and a reduction in competition for federal defense contracts. As defense contractors concentrated into larger conglomerates, the federal government increased its use of non-competitive and “cost plus” contracts over the use of more competitive and frugal “fixed price” contracts. Still, despite the increase in less competitive contracts, the study found that the US government did not suffer from a higher amount of procurement spending, likely because the government is the sole buyer for many of these contractors, and thus has a great deal of monopsony power to counter large contractor market concentration (Carril & Duggan). But even though the federal government does not seem to be financially burdened by a lack of competition, the lack of competition itself is nonetheless worrying.As smaller startups are pushed from the public sector by procurement system deficienciesthat mainly benefit established contractors, the US government misses out on much of the disruptive innovations enjoyed by the broader public. This could ultimately prove to be a long-term national security risk if the government is unable to effectively keep pace withmodernizing technology, and demonstrates the urgency of improving how the US government contracts out to the private sector.Issues with RepresentationAnother key issue with the federal procurement system is underrepresentation. The Small Business Association (SBA) has specifically designed programs targeted toward historically disadvantaged minority-owned small businesses, women-owned small businesses, small businesses in historically underutilized areas, and service-disabled verteran-owned small businesses. These programs are designed so that these groups and other small businesses can have the opportunity to win contracts without competing against established large prime contractors. However, while the SBA demonstrates that the federal government is meeting its target of 23% of small business eligible contracts going to these kinds of small businesses, the overall impact of the system on both women and minorities is much more murky (Dilger).For example, the US government has struggled to meet its goal having at least 5% of small business eligible contracts go to women-owned small businesses (Dilger). The current program of issuing gender-based certifications to help promote historically excluded female entrepreneurs has repeatedly been called into question. One paper evaluated whether the certification system had any positive effect on bid frequency and bid success for federal contracts. It argues that, compared to some European countries stronger mandates of directly allocating a set percentage of government procurement funds to women-owned businesses, the US government’s basic certification program is insufficient to resolve any of the systemic gender discrimination found in federal procurement. The current program seems to place an additional burden on businesses who pursue the certification, yet it may also be perceived by buyers as ameans of compensating for inferior products and services (Orser et. al). The government’s continued inability to reliably reach 5% representation of women-owned small business contractors demonstrates the underwhelming results of the SBA’s efforts so far, especially while estimated 30% of US businesses are women-owned (Orser et. al).Creating equitable outcomes for disadvantaged minorities has also been a challenge for the federal procurement system. Although the target of 5% of small business eligible contracts allocated to small disadvantaged businesses has been more reliably achieved, there are still systemic issues that plague the federal government’s treatment of minority businesses. For example, in addition to managing purchases by the federal government, several agencies such as the Chamber of Commerce’s Minority Business Development Agency (MDBA) also work to pressure state and local procurement to be more inclusive of minority entrepreneurs. According to one report, while the Trump administration proposed cutting the MDBA’s budget by 76%, many areas across the country saw a shrinking percentage of state and local contracts going to minority-owned businesses (Burrell). This report took place before the initial COVID-19 shutdowns in March, which most likely further exacerbated this issue. The various lockdown measures taken across states disproportionately concentrated much of the economic damage on Black- and Latino-owned small businesses (Leatherby). Using private sector contractors at the federal level can also have second-order consequences that harm both racial and gender representation within federal agencies. Contracting can cause “reductions in force” in the lower and middle pay grade levels of federal agencies, as some work can be outsourced to private contractors. Since Black, Hispanic, and female employees tend to be more represented in lower and middle pay grade levels rather than high pay grade levels, increases in agency budgetallocation seem to have a causal effect on the reduction of minority and female representation within an agency (Brown & Kellough).Thus, although agencies like the SBA actively work to make the federal contracting system more accessible to groups who have been historically disenfranchised, it often struggles to achieve equitable outcomes due to deficiencies in the system, defunding of relevant agencies, and the second-order effects of private-sector contracting itself.Issues with CorruptionThe US undeniably possesses strong economic and legal institutions that minimize the risk of corruption. However, many are increasingly calling the US’s reputation into question, as demonstrated by its recent receipt of its lowest rating on the Transparency International’s Corruption Perception Index in eight years (). Some of that perception of corruption can be attributed to systemic issues within the federal contracting system, which sometimes make procurement efforts worryingly susceptible to political and monetary influences. Economic research points to some of the corruption risks inherent in government contracting. One study demonstrates that contractors’ partisan political donations can increase risks that future contracting outcomes are determined by favoritism. The paper also demonstrates that donating contractors tend to be subject to less scrutiny by political appointees (Fazekas et. al).One concrete example of the issue of corruption can be seen in the case of Atlantic Diving Supply (ADS), a government contracting firm located in Virginia Beach. The company is accused of using fraudulent practices to declare itself a small business in order to access contracts set-aside for small businesses and Paycheck Protection Program loans for itself and fortwo pass-through businesses that allegedly funnel money back to ADS. It is also accused of colluding with former Virginia State Delegate Ron Villaneuva, who was arrested for organizing a nine year plot to defraud the state government. ADS notably contributed tens of thousands of dollars to Villaneuva’s reelection and its CEO originally introduced Villaneuva to the individuals who would eventually become co-conspirators in his fraud plot. ADS is the 24th largest federal contractor and typically earns billions of dollars of revenue each year, although whistleblowers claim it only makes this much money because it lies about its employee numbers so that the SBA still considers it a “small business” and gives it access to contracts that protect small businesses from being crushed by larger incumbent contractors. And even though the company was fined for its actions through a 2017 SBA lawsuit, ADS was only required to pay a $36 million fine out of its billions in revenue. It was also able to maintain its ability to continue to compete for small business contracts and later receive a small business PPP loan (Schwellenbach & Szakonyi).Three things are evident from this case. First, regulators like the SBA tend to besignificantly outgunned when trying to limit the power of billion dollar contractors like ADS. Second, ADS was able to leverage substantial political influence on a local level using its large stock of funds. Third, companies like ADS are enabled by more systemic cases of potential corruption; its ability to use two pass-through companies to collect even more PPP loans was permitted by last-minute lobbying during the writing of the CARES Act which removed restrictions of this practice (Schwellenbach & Szakonyi).Examples like ADS provide a concrete example of the issues of corruption that the federal procurement system continues to struggle with.Hope for the far future?This paper has demonstrated that there are numerous issues that the federal procurement system struggles with including competition, minority and female representation, and corruption. Each of these issues pose unique challenges, and each are increasingly more difficult to solve.Increasing startup participation to boost competition is the most straightforward problem to overcome. Mobile applications like Federal Foundry’s FedScout are constantly being developed to ease startups into the federal contracting world. New initiatives like the Department of Defense’s Defense Innovation Unit, the National Geospatial-Intelligence Agency’s Outpost Valley, and Homeland Security’s Silicon Valley Innovation Program have also begun funding programs that are geared more towards the needs of modern day startups in terms of time commitments and funding (Meyer). These efforts can help reduce the cost and stigma that often dissuades startups from introducing more competition in the government contracting world.Solving issues of racial and gender equity in procurement is more difficult, but also feasible. Research demonstrates that representation in government positions helps reduce institutional biases against contractors. For example, one paper demonstrates that increases in female US House Representatives may have a positive causal effect on the probability of government contracts being awarded to female entrepreneurs (Gerasimova & Rohrer). Another study also demonstrates that having more minority representation among decision-making bodies government contracting offices is positively correlated with the number of government contracts that go to minority-owned businesses (Brunjes & Kellough). Pushing for more representation in positions of political power thus seems to be a concrete and viable way of reducing institutional biases against women and minority-owned businesses.Finally, the question of corruption has no easy answer. Regulating monetary influence on policy might seem to be an easy answer, but after nearly a century of various attempts to regulate lobbying down to a publicly acceptable level, the US political system still struggles with institutional loopholes (Straus). Any movement to catalyze democratic action against corruption ultimately requires a well-informed public, so it is primarily up to watchdog groups like the Project On Government Oversight and the Center for Responsive Politics to continue to reveal monetary influence for public scrutiny.In conclusion, the federal procurement system is incredibly complex and deals with a broad range of issues. Although some may be easier for individuals to solve, most will require collective efforts and activism to see meaningful changes and reforms that can make government contracting more competitive, equitable, and transparent.Works CitedBrown, Lawrence A., and J. Edward Kellough. "Contracting and the bureaucratic representation of minorities and women: Examining evidence from federal agencies." Review of Public Personnel Administration 40.3 (2020): 447-467.Brunjes, Benjamin M., and J. Edward Kellough. "Representative bureaucracy and government contracting: A further examination of evidence from federal agencies." Journal of Public Administration Research and Theory 28.4 (2018): 519-534.Burrell, Chris. “Disparities In Government Contracting Hurt Minority-Owned Businesses.” NPR, NPR, 20 Feb. 2020,2020/02/20/807126443/disparities-in-government-contracting-hurt-minority-o wned-businesses.Carril, Rodrigo, and Mark Duggan. "The impact of industry consolidation on government procurement: Evidence from department of defense contracting." Journal of Public Economics 184 (2020): 104141.Dilger, Robert Jay. “An Overview of Small Business Contracting.” Federation of American Scientists, 14 Aug. 2020, sgp/crs/misc/R45576.pdf.Fazekas, Mihály, Romain Ferrali, and Johannes Wachs. Institutional quality, campaign contributions, and favouritism in US federal government contracting. Working Paper series: GTI-WP/2018: 01. Government Transparency Institute, 2018.Gerasimova, Nataliya, and Maximilian Rohrer. "Is Government Contracting Fair? Estimating the Value of Female Politicians for Women-Owned Firms." Estimating the Value of Female Politicians for Women-Owned Firms (June 11, 2020) (2020).Leatherby, Lauren. Coronavirus Is Hitting Black Business Owners Hardest. 18 June 2020, interactive/2020/06/18/us/coronavirus-black-owned-small-business.html.Meyer, Joel T. “Startups Should Love Government Work.” Defense One, Government Executive Media Group, 8 Feb. 2019,ideas/2019/02/startups-should-love-government-work/154722/.Orazem, Geoff, et al. “Why Startups Don't Bid on Government Contracts.” BCG Global, BCG Global, 22 Aug. 2017,publications/2017/public-sector-agency-transformation-why-startups-dont-bid-government-contracts.Orser, Barbara, Allan Riding, and Julie Weeks. "The efficacy of gender-based federal procurement policies in the United States." Small Business Economics 53.2 (2019): 491-515.Schwellenbach, Nick, and David Szakonyi. “Whistleblowers Said This Company Is a Fake Small Business. It Got a PPP Loan.” Project On Government Oversight, 3 Aug. 2020, investigation/2020/08/whistleblowers-said-this-company-is-a-fake-small-busi ness-it-got-a-ppp-loan/.Straus, Jacob. “The Lobbying Disclosure Act at 20: Analysis and Issues for Congress.”Federation of American Scientists, 1 Dec. 2015, sgp/crs/misc/R44292.pdf.“U.S. Hits New Low in Global Corruption Index - Press.” , 23 Jan. 2020, en/press/2019-cpi-us-hits-new-low.“United States Government Spending To GDP 1970-2018 Data: 2019-2020 Forecast.” United States Government Spending To GDP | 1970-2018 Data | 2019-2020 Forecast, united-states/government-spending-to-gdp.Yukins, Christopher R. "The US Federal Procurement System: An Introduction." Christopher R. Yukins, The US Federal Procurement System: An Introduction (2017). ................
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