Small firms 'stiffed' on subcontracts, survey says

Small professional services and IT companies often help prime contractors prepare contract bids but then not receive the expected benefits of business—a result that can come back to haunt agencies.

Nearly a third of 740 small firms said large prime contractors have “stiffed” them out of subcontracting opportunities even after they’ve been listed as a team member on a contract proposal, says an American Express OPEN survey. The survey, released June 19, asked about government subcontracting and teaming arrangements. This is the third of four summaries based on the second annual survey of small companies.

Dona Storey, American Express OPEN advisor on procurement, said agencies will notice the effects of overlooked subcontracts on their report cards. Each agency has a small-business report card, which ranks them on how closely they hit their contracting goals. While there are no consequences for missing the goals, it looks bad for the agency, for the agency’s leadership, and the agency’s Office of Small and Disadvantaged Business Utilization.

Small companies can help the lead company craft the proposal to meet an agency’s needs. In the proposal, the prime contractor lists its plans for subcontractors that can provide expertise and help with the work after award. Yet 29 percent of small businesses said it hasn’t panned out for them in the past.

Obviously, with more time in the field, the problem is bound to strike. Nearly one in four small companies with at least a decade of procurement experience has been stiffed in the past. For companies with three years or less of experience, 17 percent said they’ve missed out on business and 31 percent of companies with between four and nine years of experience has dealt with it.

More specifically, the survey found this likely to happen most into two industries. Forty percent of companies in the information industry, such as software and data processing, and 63 percent of companies in the professional/scientific/technical services, such as computer system design, engineering, and research fields, said they’ve been frozen out of anticipated business.

And it happens to everyone—no matter the ownership. There is no difference in the likelihood of it occurring by either gender or ethnicity.

“So women- and minority-owned firms are no more likely to be left holding the short end of the procurement stick,” the survey reports.

All the while, there may be a justifiable reason for opting against a subcontract. The prime contractor may be able to handle the work itself, having the expertise and resources in-house. The prime contractor might be able to do it faster than going through a subcontractor. It may even get it done less expensively—a benefit for today's cash-strapped agencies, said Ray Bjorklund, vice president and chief knowledge officer at Deltek.

At the same time, the agency may not be getting all that it negotiated for, if the small businesses on the lower tiers are overlooked, he said. Officials would have the perception that all the team members would play their part. The set-aside subcontracts can help in agencies’ efforts to support small, disadvantaged businesses.

“The government may not be getting what it bargained for,” Bjorklund said.

But responsibility rests on the agencies too, in that officials should be keeping an eye on subcontracts.

"Agencies have to monitor and track the prime contractor’s performance to make sure they adhere to their subcontracting plan. Although this may be a priority for agencies, their acquisition workforce is understaffed and may lack resources," Storey said. 

On a positive note in the survey, 22 percent of active small firm contractors said they have received other subcontracts after being recommended to a large prime contractor by another prime business partner they have worked with previously.

The survey found it more likely to happen to larger, more experienced small companies, as well as those in the information and professional/scientific/technical services industries.

However, companies are more likely to get stiffed on subcontracts than get referrals, the survey found.

American Express OPEN surveyed 740 small business owners in an online survey launched briefly in mid-August, then continued from Oct. 10, 2011 through Nov. 4, 2011.

Reader comments

Tue, Sep 4, 2012 DSO Maryland

The comment from the unnamed poster on June 21 reveals how misinformed the government staffs are to the reality of the “real” world and free enterprise. They don’t get how small business can bring innovation and money saving (equate to tax savings) to the forefront, not to mention outstanding customer service. Do they honestly believe the large prime contractor’s – often as sluggish and slow moving a bureaucracy as the government itself – can bring those capabilities to the table. They don’t seem to realize that often the Prime discourages innovation that might cause them to implement cost-cutting with their own staff. Often those organizations have only the top echelon making any money while staff scrambles to save their jobs. As far as putting a subcontractor on a proposal to get the award and then not use them. This is the equivalent of stealing, dishonesty, and if there is no consequence (never heard of one) then shame on the US government and the Prime. The victims here are the taxpayer’s and the small business. The real justification is so the Prime can add to its bottom-line and STEAL, yes I said steal equate to theft, by requesting a sub spend time (equate money) and resources they likely don’t have to obtain the privilege of being included on the bid. There should be oversight, if what is included in terms of staffing is not in place then yank the award. In other words contracting officials need to do their JOB! What my tax $ are paying for. Likely the customer (agency staff on the project) would rather have the sub who is attentive and wants to go the extra mile to ensure the job is done correctly without getting taken to the cleaner’s by self-serving Prime and government contracting staff who get a paycheck (include benefits and vacation, etc.) no matter what.

Fri, Jul 20, 2012 Papakoop DC

Like Bob, I did not participate in the survey and would like to add that unless the Contracting Officer(s) are held accountable for the contracts that they award and hold large businesses accountable for the Small Business Subcontracting Plan they told the USG & Selection Board/Committee as well as the Contracting Officer they will execute once awarded to them. I only wish more Contracting Officer(s) had some courage, a little moxie and backbone and not to mention a little guts and incorporate LIQUIDATED DAMAGES in each contract when a Subcontracting Plan is required by the FAR. This way when the large business does not meet their goals, BAM, Liquidated Damages are assessed. Then the CEO/President/SBLO/Program Managers of large businesses cannot complain especially after they told the USG that they "fully support the intent and impact of Public Laws 95-507, 99-661, 100-656, 100-180, 100-533, 103-355, 106-50 and 107-117, as amended by section 3003 of Public Law 107-206, as well as Federal Acquisition Regulation (FAR) Parts 19, 52.219-8, 52.219-9 and DFARS Parts 252.219-7003, and other laws and regulations designed to promote and facilitate effective subcontracting, especially for smaller companies that may need greater opportunities". In closing, I'm sorry, but "BEST EFFORT" isn't good enough any longer.

Sat, Jun 23, 2012 Jaime Gracia Washington, DC

The only legislation that matters, outside the Small Business bills floating around Congress as political window dressing during an election year, are ones that hold large firms accountable for enforcement of subcontracting plans. Everything else is nonsense, like raising the bar of 25% of contracts to small businesses. Please... I always speak about this very issue to many senior leaders during conferences around town, OSDBU reps, COs, etc. as they are not doing their jobs enforcing the rules. They all give lip service to "we have to do better," while raking in awards for small business opportunities? OccupyIT - Part of my consulting practice is helping agencies with their source selections, and I always recommend that small business subcontracting be part of the evaluation criteria. It is the enforcement that matters, but regretfully the current state of affairs is "write a fantasy plan but we don't care if you ever execute it," like you state. Accountability in this area would go a long way to ensuring success for small businesses. I won't hold my breath for change anytime soon.

Fri, Jun 22, 2012 OccupyIT

I have never seen a CO ever agree to consider the past performance of Small Business Plans by Large Businesses as an evaluative criteria. People do what you pay them to do and the clear message from the USG is, "write a fantasy plan but we don't care if you ever execute it". So that's what the LBs do. No amount of negotiating with the LB prime can protect a SB from an LB (just like its too expensive to protect yourself against the USG in court!). Glib words but not practical. Until SB Plans are part of Past Performance Reviews they will continue to be ignored. It is the USG's responsibility to implement and enforce SBU policy.

Thu, Jun 21, 2012

Why don't these subcontractors learn from their mistakes and do a better job of negotiating with the prime up front when the prime needs them? Too often the subcontractors expect the government to rectify their own mistakes because they did not protect their interests with the other company. There are many subcontracts that are not issued under a subcontracting plan at all. Do not make the government responsible for the relationships between private companyies - we need to spend our limited resources protecting taxpayers rather than private entities who are willing to accept the rewards of private enterprise but not the hard lessons that go with it.

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