Small Business Contract Discrimination

Procurement and access to financing are two barriers that minority owners face

Reviewed by JeFreda R. Brown

Small business contract discrimination refers to the notable disparity in the number of government contracts that go to minority- and women-owned businesses compared with other small businesses.

Government contracts represent a significant source of income for small businesses. The U.S. government has made it a priority to send federal contracts to small businesses since the second half of the 20th century. And the amount of money spent on government contracts is increasing.

Reports have suggested that differences in contracts received can be attributed to outright discrimination or structural access to capital that aids some firms over others in competing for these contracts. The government has attempted to decrease these disparities through affirmative action programs, but it is unclear how successful the programs have been, and court rulings have narrowed their scope.

Transparency has also been an issue. It wasn’t until 2021 that the U.S. government started disclosing racial and ethnic breakdowns of the business owners who win contract awards. And the large companies that win the big government contracts continue to not disclose the smaller firms they call upon to help them out.

Key Takeaways

• In the United States, federal, state, and local governments represent significant sources of procurement contracts for small businesses, especially since the second half of the 20th century.
• Some studies have suggested that minority-owned businesses have received a smaller proportion of those contracts than one would expect.
• Barriers that affect small business discrimination include the actual procurement of contracts and limited access to financing.

Federal Contracts

When the government purchases goods and services from private businesses, it is called procurement. In the United States, this type of contract spending is increasing.

In fiscal year 2023, the federal government spent about $759 billion on contracts, an increase of about $33 billion from fiscal year 2022 after adjusting for inflation and a big jump on the $586 billion spent in fiscal year 2019, according to figures from the U.S. Government Accountability Office (GAO). Of that sum, $171.5 billion went to small businesses.

It is an explicit goal of the government to move a portion of its expenditures into small businesses. The federal government, for example, automatically sets aside most contracts under $150,000 for small businesses. Moreover, since the end of the 20th century, much of government expenditure has been spent on contractors rather than on employees. Consequently, a significant chunk of governmental budgetary expenses goes to small businesses.

However, a disproportionately smaller percentage of this federal money finds its way to minority-owned businesses. According to the U.S. Small Business Administration and government, about 10% of all annual federal contracting dollars go to small disadvantaged businesses. Until recently, the government had a target of 5%. In other words, minority-owned businesses receive a smaller share of government contracts than the proportion of the population that they represent.

The government is trying to address this issue, with the Biden administration claiming to prioritize giving more contracts to small disadvantaged businesses. However, it still has a long way to go to meet its 2025 target.

50%

The share of contracts the government wants to go to small disadvantaged businesses by 2025.

Shortly after former President Joe Biden issued an executive order on advancing equity, the federal government revealed just over 1.6% of the budget allocated to federal contracts for small businesses was awarded to Black-owned small businesses and just under 1.8% to Latino- or Hispanic-owned small businesses.

State and Local Contracts

State and local governments also represent a significant source of contracting money for small businesses. In 1990, for instance, procurement at all government levels was at $450 billion, or 10% of the U.S. gross national product (GNP). State and local government made up about $250 billion of that total.

Localities are also subject to allegations of discrimination. In December 2020, for instance, the Civil Rights Division of the U.S. Department of Justice opened an investigation to determine whether procurement practices in Kansas City, Missouri, were discriminatory and violated the Civil Rights Act.

In Boston, Massachusetts, a 2021 study commissioned by Mayor Martin J. Walsh’s office showed that only 1.2% of the city’s $2.2 billion in procurements from 2014 to 2019 went to Black- or Latinx-owned businesses, triggering federal civil rights complaints. Note that in fiscal year 2023, Boston had awarded 14% of their contracts (in dollars) to these demographics – a 133% increase in the amount of awards from when the study has originally been procured. For certain demographics, Boston further increased contracting with minority demographics in fiscal year 2024.

D.C. government agencies have also been accused of discrimination. Research spanning several years showed they have been allocating funds to person of color- and woman-owned businesses. However, those funds weren’t distributed fairly and went to a relatively small number of firms.

Research shows that state and local discrimination in procurement is long-standing. A 1997 Urban Institute study found that members of minority groups received a disproportionately small share of government contracts.

The study, which looked at rates among local and state contracts, concluded that disparities existed for Black-, Latinx-, Asian-, Native American-, and women-owned firms across all industries that the study examined—construction, goods, professional services, and other services, with the exception of construction subcontracting, which showed a relatively small disparity.

The study revealed that minority-owned firms received just 57 cents out of every dollar in government contracts they would have expected to see.

1.2%

Since the very discouraging report about diversity contracting, Boston implemented a comprehensive strategy to boost minority- and women-owned business participation in city contracts. ,This included streamlining procurement processes, reserving specific contracts, and launching a business accelerator program..

Federal Regulations

Government contracting is subject to the anti-discriminatory laws that apply to private contracts, and federal contracting is also regulated heavily by Congress.

The U.S. Congress has made investing in small businesses a priority since the 20th century. Shortages during World War II and the Korean War led to the creation of the current regulatory framework.

In 1953, during the Dwight D. Eisenhower administration, Congress passed the Small Business Act, which led to the creation of the Small Business Administration (SBA). To promote free trade, Congress set out to give a “fair proportion” of federal contracts and subcontracts to small businesses in the United States. There is generally bipartisan support for this sort of program.

Congress also created the Small Disadvantaged Business and the Women-Owned Small Business programs to encourage fair contracting across race and gender. And the Small Business Reauthorization Act of 2000 created an Office of Advocacy in the SBA, which looked to strengthen minority- and women-owned businesses and guarantee limited small business loans.

According to the SBA, the federal government’s goal is to award at least 5% of all federal contracting dollars to women-owned small businesses (WOSB) each year. Small disadvantaged businesses (SDBs) can also get a better shot at winning contracts. To qualify:

• The business must be 51% or more owned and controlled by one or more disadvantaged persons.
• The disadvantaged person or people must be socially disadvantaged and economically disadvantaged.
• The firm must be small, according to the SBA’s size standards.

Businesses that sign up will be identified as SDBs or WOSBs, which, according to the SBA, increases their chance of winning contracts.

Important

Certain federal contracts are allocated specifically to small businesses owned by minorities or women in a bid to try and level the playing field.

Affirmative Action

Local, state, and federal governments have attempted to correct disparities through affirmative action programs.

Affirmative action dates back to the John F. Kennedy administration’s Executive Order 10925, which tried to free projects connected to federal funds from racial discrimination. That executive order established the President’s Committee on Equal Employment Opportunity. Since the 1964 Civil Rights Act, discrimination based on race and sex has been illegal.

A 1965 order from the Lyndon B. Johnson administration, Executive Order 11246, required federal contractors to document steps to encourage hiring equality. It was expanded in 1967 to include gender-based equality. Johnson’s order took the question out of committees and handed it to the secretary of labor, giving it to a Cabinet-level official with the authority to enforce equal opportunity, which led to the creation of the Office of Federal Contract Compliance.

President Barack Obama’s 2014 amendments to the order sought to make gender pay disparities easier to spot by increasing wage transparency and to include lesbian, gay, bisexual, and transgender employees under the order’s protections.

President Biden pledged to adopt a broad “racial equity agenda” and expand opportunities for minorities to win more government contracts. However, these efforts have been coming under attack.

For example, in 2024. a judge in Texas ordered a federal agency created to help minority-owned businesses to open its doors to all races. This ruling suggests Blacks, Latinos, and other minorities shouldn’t be presumed disadvantaged and marked another defeat for affirmative action, which has been coming under increasing pressure from conservative groups.

Important

Affirmative action has become an area of heated controversy, involving multiple high-profile court cases and executive actions.

Since Johnson’s time, the scope of affirmative action programs has been limited by court cases, including Regents of the University of California v. Bakke (1978) and the City of Richmond v. Croson (1989), which labeled affirmative action a “highly suspect tool” in combating disparity in state- and local-run programs.

The 1997 Urban Institute study mentioned above suggested that, where present, affirmative action has reduced but not eliminated disparities in contract awards.

Continuing Sources of Discrimination

Discrimination has historically fallen into two broad categories: that which affects the growth or formation of a firm, and that which affects the ability of those firms to participate in the government contracting process.

Businesses owned by women and minorities have less access to capital that can be used to finance or grow a firm. Minority-owned businesses, for instance, have had less access to loans.

In a 2010 congressional hearing, Chair for the Subcommittee on Government Management, Organization, and Procurement Diane E. Watson identified three main sources of discrimination in these processes.

Minority-owned businesses face “ongoing and persistent” discrimination in contract awards, she said. They also face structural barriers, such as access to financing, bonding, and resistance from trade unions. Finally, court decisions that restrict the scope and purpose of minority contracting harm the ability of these firms to compete for contracts.

What Is Discrimination?

Discrimination is treating a person or group of people unfairly because of their race, gender, age, sexual orientation, religion, social background, and so forth.

What Is the U.S. Government Agency That Assists the Small Business?

The Small Business Administration (SBA) was created in 1953 to help small businesses grow.

What Is Considered a Small Business by the U.S. Government?

The SBA defines small businesses by revenue (from $1 million to over $40 million) and the number of employees it has (from 100 to over 1,500). Thresholds vary depending on the industry.

The Bottom Line

Governments have been pledging for years to level the playing field of federal contracts, giving small businesses a bigger chance of winning them and particularly those small businesses owned by minorities and women. However, despite notable progress, many of these businesses are still being marginalized and struggling to compete, partly because of limited access to capital and structural discrimination.