United States Small Business Administration
RS Number 132
January 1993
The effects of federal contracting extend beyond the resultant
purchase of supplies, equipment and services for the government.
Federal procurement is associated directly with the economic well-being
of firms, municipalities, cities and, in some cases, the welfare
of several states or a region of the United States. The purpose
of this study is to measure the differential impact of small businesses
with government contracts versus small businesses without government
contracts. Specifically, this study attempts to establish a correlation,
if any, of federal contract awards with the long-term growth and
viability of small firms and to compare these firms with the growth
and survivability of a comparable group (in terms of size and
industry) of firms that have never participated in federal government
contracting.
Scope and Methodology
The underlying approach to this research project involves comparing
a control group of small firms in the private sector with a study
group of similar firms that have been awarded federal contracts.
The control group mirrors the study group among several key factors,
such that differences in employment growth or survival among the
two groups are then attributable to the presence, or absence,
of federal contracts.
A study group (50,819 establishments and 286,133 contract awards) was formed from 1984 Federal Procurement Data Center files, stratified by Standard Industrial Classification (SIC) code groupings. The data from these firms were then matched with data from SBA's previously maintained U.S. Enterprise and Establishment Microdata (USEEM) file to establish a profile of the types of establishments receiving contract awards. A control group was then developed by excluding any sectors not reflected in the study group. Cohorts were then formed in 1984 and followed through 1988; accordingly, there are no new entrants into either cohort-only terminations are recorded. Comparisons of growth and survivability were then made on the basis of firm size categories. SICs and, where possible, by region.
Six separate groups were examined. The principal control group
(group #1) represents all small businesses in 1984 in procurement-intensive
industries-including those with and without federal government
contracts. The study groups are subsets of group #1, and are divided
as follows: (#2) single establishment small business firms; (#3)
small firms with one government contract; (#4) small firms with
two or more federal contracts; (#5) small minority contractors;
and (#6) small women-owned contractors.
Highlights
Winning federal government contracts greatly increases the chances
for a firm's survival. Winning multiple awards increases a firm's
chances significantly over firms winning a single award and firms
not participating in the federal contracting market. The dissolution
rate of small federal contractors is about half the rate of similar
firms in the economy. The exception in the study is the group
of federal contracting firms with a single award from 1984 to
1988: this group had a dissolution rate about one-third less than
that of the firms in the control group. The dissolution rates
decline as firm size increases for both government contractors
and firms without government contracts.
Among the industries identified under the SIC system, the highest
dissolution rate for firms having at least one government contract
in their lifetime is less than the lowest dissolution rate for
comparable firms that never participated in the federal contracting
markets. Among the various industrial categories, the largest
gap in firm dissolution rates between the study group and the
control group occurs in miscellaneous business services (SIC 70),
with a difference of 21.7 percentage points. The smallest spread
occurs in SIC 34, fabricated metal products. The highest dissolution
rate for both groups of firms is in SIC 152, residential construction;
however, contractors with government experience had a dissolution
rate 18 percentage points below their counterpart without federal
contracts.
Employment gains from 1984 through 1988 were higher among all
firms having federal contracting experience, regardless of size.
Overall, the study group experienced employment gains 14.5 percentage
points higher than the control group. Paralleling the pattern
in the dissolution rates, the most pronounced differences occur
in the smallest firm size category (1-9 employees) and decrease
as firm size increases. Employment growth of federal contractors
exceeded that for nonfederal contracting firms over the 1984-1988
period in all but two of the 34 SIC industries included in the
research analysis. The two exceptions are SIC 42, freight transportation,
and SIC 37, transportation equipment.
Minority contractors have higher dissolution rates than all federal
contractors, but still experience significantly lower dissolution
rates than all small firms in th economy. The dissolution rate
for minority-owned federal contractors is lower than that for
non-federal contracting firms by 15.2 percentage points, but higher
by 2.3 percentage points than the dissolution for all federal
contractors included in the study. The study group of minority
contractros has a lower dissolution rate in every employment size
category than their non-federal counterparts, except for two categories
in which the differences in dissolution rates were statistically
insignificant.
In terms of employment growth from 1984 to 1988, minority-owned
contractors outperformed all small federal contractors by 15 percentage
points and nonparticipating firms by 30 percentage points. Employment
growth for minority contractors exceeded that for every size category
of federal contractors and each of the size categories registered
by firms in the control group, except one. Minority contractors
were most heavily concentrated in SIC 89, miscellaneous services
(11.5 percent); SIC 154, non-residential construction (11.3 percent);
and SIC 700, business services (10.6 percent). Minority contractors
experienced their highest rates of employment growth in SIC 506,
wholesale electrical goods (157.2 percent); SIC 28, chemicals
and allied products (135.4 percent); and SIC 59, miscellaneous
retail goods (129.8 percent).
Women-owned small federal contractors do not match the performance
levels of all small federal contractors. However, women-owned
firms fare significantly better, on average, than the rate for
all small firms in the economy. Women-owned contractors experienced
a dissolution rate which, at 17.4 percent, is somewhat higher
than the 15.4 percent for all federal contractors, but is 15.5
percentage points below the 32.9 percent dissolution rate reported
for the control group. Women-owned contractors experienced a lower
dissolution rate for each firm size category of the study group;
however, only the dissolution rates for all women-owned contractors
and the two smallest size categories were statistically significant.
Employment growth in women-owned firms in the overall study group
outperformed the control group during the 1984-1988 period by
14.4 percentage points. Consistent with other federal versus non-federal
firm performances, the differences in employment growth between
women-owned firms with federal contracts and their control group
counterparts decreases as the size categories increase.
Barring the introduction of factors beyond the scope of this project,
the findings of this research strongly suggest that federal procurement
activity is associated with far greater firm employment growth
and survival rates. In virtually every group/control comparison,
the results are very clear, dissolution rates are significantly
lower and employment growth substantially higher among small federal
contractors than in all small firms in general.
Winning more than one contract is critical to survival for firms
of 10 or more employees. It is also paramount to a firm's employment
growth. While the same general results are observed for minority
and women-owned businesses, the level of minority-owned contractors
exceeded all groups included in the research, including the performance
of federal contractors overall.
Other factors may account for the measured differences in the
research findings, including: the influence of subcontracting
on the participants, since all data in the study reflect prime
contract awards only; superior firms winning federal contracts
rather than the federal contracting process creating superior
performance; and a systematic set of attributes in the study group
which may not be present in the control groups.
For more information, contact Advocacy's Office of Information
at (202) 205-6531.
Order Information
The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
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(800) 553-6847
Order number: PB93-144590
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*Verified as Current: QTR3 2002