Small businesses were having a harder time winning contracts even before sequestration


A new poll shows some scary trends for small business contractors. (Alex Brandon/AP)

Small contractors are finding it much more challenging to compete for work with the federal government — but that may not be the most noteworthy part of a new poll for the small business community.

Instead, it may be the timing.

American Express has released a new poll showing that small firms are competing for less government work and spending considerably more time and money to win the contracts they do go after. Researchers suggest the trends are largely the result of curbed government spending, which has driven up competition for work.

Here’s the kicker: The poll was conducted during the first few months of 2013, asking firms to look back on 2012.

The automatic budget cuts known as sequestration? Not included.

So, before officials cut this year’s spending by about $85 billion and put the government on pace to slice about $1.2 trillion over the next decade, small businesses were already pulling back their efforts to win awards.

“Small contractors just don’t have as much confidence anymore that the government is a strong market,” Daniel Gill, a consultant to many small contractors and a former small business procurement official at the Defense Department, said in an interview. “A lot of them have started looking for work in the commercial sector, instead.”

Between 2010 and 2012, small firms made an average of 5.5 bids for prime contracts and 3.6 bids for subcontracting opportunities, according to the poll. That was down from 19.5 bids for prime contracts and 3.6 bids for subcontracts between 2007 and 2009.

During that four-year period, federal spending on contracts decreased by about $6 billion per year — a tiny fraction of the cuts likely to hit in the coming decade, if sequestration holds.

“It’s only going to get tougher,” Gill said, adding that he expects the sequester to hit small firms particularly hard.

Related: Government small business contracting numbers questioned

Michael Sawyers, president of 7Delta, a small software development firm, says the effects of government spending cuts are already starting to take their toll, even though his primary customer, the Veterans Administration, is exempt from sequestration. That’s because many firms who have lost work with other agencies have shifted their attention to the VA, submitting extremely low bids in what has become an increasingly desperate market for work.

“Some of these companies are coming it at half the price of our bids, but they aren’t always qualified to do the work,” Sawyers said. “We’re finding it extremely difficult to be competitive in some cases.”

Meanwhile, the cost of competing for contracts is rising. Small contractors spent an average of $128,628 seeking contracts last year, up nearly 50 percent from $86,124 in 2010. Competing for construction and information services awards proved the most expensive, costing firms an average of $172,058 and $169,948, respectively.

On the other hand, the amount of revenue companies get from government work has been falling. Since 2009, the share of small firms’ revenue tied to federal contracts has slipped from 38 percent to 19 percent, according to the report, which polled 684 business owners.

Sawyers’ company is heading in the same direction. 7Delta recently submitted a bid to help set up a new health-insurance exchange (part of the health care reform law) in New York — the firm’s first attempt to secure work for a state government. Sawyers has also started for potential customers in the private sector.

“There’s more pressure right now to diversify our revenue streams,” he said.

Follow On Small Business and J.D. Harrison .

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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