An A for Effort?

A recurring theme in federal contracting policy is the important role that small businesses are expected to play.

Perhaps the biggest role for small businesses is their participation in "set asides." The federal government sets annual small-business goals and, consistent with achieving those goals, agencies will limit competition for some procurements to various small businesses. This means that a certain amount of federal prime contract dollars are earmarked for small businesses.

We've talked before about how the federal government is perhaps a little too ... exuberant about its performance in hitting those goals:

There's even an annual scorecard, and the government got an A with a score of 104.05%! Lest you think grade inflation is at play, dear reader, please understand that to get an A+, you must get more than 120%! Also, the government didn't hit all of its goals and there are fewer small businesses that got awards in FY2022 than did in FY2021. But the government still got an A and over 100%. Math is a funny thing.

Still, tracking prime contract spend to small businesses is a big deal in federal procurement policy.

But another important way that small businesses show up in the federal procurement mix is through small-business subcontracting.

By law, for certain contracts, large businesses are supposed to set goals for subcontracting to small businesses, develop plans for hitting those goals, and then report on their progress in a federal database called the Electronic Subcontracting Reporting System ("eSRS")[1]. Subcontracting is a big part of the federal ecosystem, driven largely by these legal obligations.

So, how are large businesses doing in hitting their small-business subcontracting goals? Well, there's this:

SBA data from eSRS on government-wide contracting show that contractors who submitted final [subcontracting reports] in fiscal year 2022 reported achieving only 63 percent of their overall small business subcontracting goals.

Ouch. Roughly one in three contractors are failing to meet their goals!

The story is a bit complicated because large businesses are not actually required to hit their subcontracting goals; they're only required to make a "good faith effort" to achieve the goals. There's a difference! Allow me to illustrate by way of extreme example.

I have a goal of hitting 1 million GovContrActually subscribers by the end of 2024. It's an ambitious goal, sure. And to achieve it, I plan to keep creating highly engaging #content, leading to organic #growth. And, like, maybe I'll go to NCMA World Congress and give away GovContrActually keychains? Maybe with QR codes? Maybe I'll make a TikTok?[2]

See what I did there?! I established a goal, and created a plan to hit those goals! I'm going to put in a good-faith effort to achieve those goals. Prove me wrong. (Not legal advice! Or proposal advice! Or any kind of advice at all, really!)

Because the law only requires good-faith efforts, failing to achieve a goal is not a compliance problem. (Seriously not legal advice!) And whatever good-faith efforts entail, proving the lack of a good-faith effort is a tough task for agencies:

Contracting officials said it is difficult to determine that a contractor has not made a good faith effort because doing so requires evidence that the contractor has acted willfully or intentionally in not complying with the subcontracting plan. Agency contracting officials from two agencies said it is difficult to assert a lack of good faith effort in any other than clear or extreme cases of violation. For example, one group of contracting officers said that in one case, a construction contractor did not achieve its subcontracting goals or demonstrate efforts to do so. However, the agency’s attorneys determined the agency could not prove the contractor did not make a good faith effort, including showing that there were capable subcontractors available with whom the contractor could have subcontracted. The agency decided not to pursue liquidated damages.

It's a pretty bad situation if a contractor doesn't even try to achieve its goals and the agency's lawyer tells the contracting officer: "yeah, ok, but prove it tho."

Making matters worse, GAO reports that many contracting officers do not have a lot of experience with evaluating the good-faith-effort standard and most of the training comes from on-the-job experience. And although it's true that large contractors can get negative CPARS ratings, even that is unlikely:

[S]ome contracting officials said such ratings are only used as a last resort because they may contribute to decisions about a contractor’s ability to obtain future federal contracts. Across 11 group interviews with Small Business Subcontracting contracting officers, only one contracting officer reported giving a contractor a below satisfactory CPARS rating for small business subcontracting performance.

Given the state of play, maybe it's actually impressive that contractors achieve their small-business subcontracting goals in 63% of the cases?

Still, the achievement gap here means that there is real money for small businesses left on the table:

In July 2023, SBA’s annual report Congress noted that if contractors had achieved their subcontracting plan goals on completed contracts, small businesses would have received an additional $2 billion in subcontracts. By also including subcontracting goal achievement information by agency in its annual report, SBA would ensure its compliance with the statutory requirement.

That's nothing to shrug at!

The annual SBA small business procurement scorecard has 20% of its government-wide score coming from "Subcontracting Achievement." And despite a 63% achievement rate for subcontracting goals, and over $2 billion in funds earmarked for small businesses not going to small businesses, the government still earned that A!

Hey, I guess you can get an A for good-faith effort!

[1] Why is the "e" in eSRS lowercase? I dunno! Seems like a weird relic of the mid-aughts, which is when eSRS was built. I guess it's consistent with GSA's other "e" properties: eBuy, eLibrary, eOffer, etc. Still, it's strange.

Apropos of nothing, I personally appreciate another weird relic that the eSRS homepage still mentions the company that first built it! That company was debarred by GSA because the CEO pleaded guilty of hacking into a competitor's network, but then a federal court overruled the debarment action. The CEO was eventually pardoned. Good times, right?

[2] Hahaha! Just Kidding! No TikTok! None of my subscribers could see it then!