Incentives Needed to Spur Federal Agencies to Meet Small-Business Contracting Goals (Opinion) The SBA reports that it has tried to increase the share of federal dollars going to small businesses by implementing new contracting provisions. Unfortunately, it doesn't appear to be working.

By Scott Shane

Opinions expressed by Entrepreneur contributors are their own.

Policymakers need to establish stronger incentives to ensure that federal agencies meet their small-business contracting goals. For the 11th year in a row, the government failed to achieve its objective of awarding 23 percent of federal contracting funds to small businesses, coming in at 21.7 percent, a recent Small Business Administration (SBA) report reveals.

Such targets are intended to ensure that small businesses receive a fair share of federal contracting dollars, which otherwise would go primarily to large companies with stronger connections to government administrators. Moreover, given their druthers, federal agencies would prefer the ease of managing a few contracts with a handful of giant corporations to juggling a multitude of contracts with tiny businesses.

The SBA, which is charged by Congress with ensuring that federal agencies meet small-business contracting targets, reports that it has tried to increase the share of federal dollars going to small businesses by implementing new contracting provisions, getting senior agency executives to commit to use small businesses as contractors, training small businesses to win federal contracts, undertaking outreach events to introduce small businesses to federal buyers, and promoting partnerships with big businesses to give small businesses access to their supply chains. Unfortunately, these actions have done little to ensure that small businesses get their targeted share of federal contracting dollars. In fact, the small business share of contracting dollars declined in the most recent fiscal year from 22.7 percent in 2010.

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Lawmakers are searching for solutions to the failure to meet small-business contracting targets. Of course, finding the right answer depends on identifying the cause of the problem. Many explanations have been offered, from failure of Congress to approve spending bills in a timely manner to the end of stimulus money to large corporations' acquisitions of small companies that have obtained federal contracts. But another reason stands out for the clear economic theory behind it: Federal agencies don't meet their small-business contracting targets because they and their senior executives don't face any penalties for falling short.

That's a problem. As any first year economics student will tell you, making desired goals optional is not an effective way of motivating people to achieve them. If you want people to achieve something, you need to either reward them for reaching the goal or punish them for failing to do so.

Federal officials know this. They don't give Americans a "goal" for the percentage of their income that they should pay in taxes and then leave it up to them to decide how much to pay. Rather, they establish penalties to punish those Americans who fail to pay the taxes they owe.

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A few members of Congress from both parties understand the basic economics of incentives and would like to use them to ensure that small businesses get their fair share of federal contracting money. Sam Graves of Missouri, the Republican chair of the House Small Business Committee, introduced the Government Efficiency Through Small Business Contracting Act (HR 3850), which would deny bonuses and sabbaticals to senior executives of the agencies that fail to meet their goals. Benjamin Cardin, a Maryland Democrat, introduced a companion bill in the Senate.

Unfortunately, in a deadlocked Congress focused on political posturing for the November election, even legislation with bipartisan support is unlikely to go anywhere. Therefore, my bet is that federal agencies will once again fail to meet their small-business contracting targets in the current fiscal year.

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

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