Audit: 35% of Federal Small-Business Contract Dollars Went to Minority-Owned Firms

By Terence P. Jeffrey | October 4, 2012 | 4:16 PM EDT

Acting Commerce Secretary Rebecca Blank (AP Photo/Paul Sancya)

( - More than a third of all tax dollars paid in 2011 to federal contractors that were small businesses went to minority-owned firms, according to an analysis by the Government Accountability Office.

"In fiscal year 2011, federal agencies obligated a total of around $537 billion in government contracts to businesses," said GAO. "About $104 billion was obligated to small businesses (19 percent) and of this amount, just over one-third ($36 billion) was obligated to small businesses that identified themselves as minority-owned according to data from the Federal Procurement Data System-Next Generation (FPDS-NG)."

GAO explained that directing federal tax dollars to minority-owned businesses was a legislative priority set by Congress more than three decades ago.

"The federal government has a long-standing policy of maximizing procurement opportunities for small businesses owned and controlled by socially and economically disadvantaged individuals (small disadvantaged businesses)," said GAO. "In 1978, Congress amended the Small Business Act to require federal agencies to, among other things, negotiate annually in good faith with the Small Business Administration (SBA) to establish prime and subcontracting goals for these businesses, which include businesses owned and controlled by various minority groups."

"Small disadvantaged businesses must be owned and controlled by socially and economically disadvantaged individuals--such as African Americans, Hispanic Americans, Asian Pacific Americans, Subcontinent Asian Americans, or Native Americans--or by an economically disadvantaged Indian tribe or Native Hawaiian organization," GAO explained. "These owners must have at least a 51 percent stake in the business."

GAO said that the number of minority-owned businesses is now growing more rapidly than non-minority-owned businesses.

"U.S. Census data show that minority-owned businesses are among the fastest growing businesses in the U.S.," said GAO. "According to the 2007 Survey of Business Owners—the most recent survey data available—minority-owned businesses numbered 5.8 million, an increase of 45.5 percent over the 5 years prior to the survey and more than double the 17.9 percent rate for all U.S. businesses over the same time period."

Accordiong to the GAO, federal law requires that all federal agencies that do contracting must have a special office to reach out to disadvantaged businesses.

"To foster participation by small disadvantaged and minority-owned small businesses in federal contracting, federal agencies administer a number of programs and conduct outreach activities for them," said GAO. "For example, SBA administers programs that are designed to develop small businesses—including minority-owned businesses—and help them navigate the federal contracting process. Federal agencies also participate in outreach activities such as matchmaking events—one-on-one meetings—that bring together agency contracting officials and businesses seeking contracts. Further, all federal agencies with procurement authority are required by law to have an Office of Small and Disadvantaged Business Utilization (OSDBU) that works specifically on contracting issues for these businesses."

The GAO noted in its report that "generally do not use the term minority-owned business."

"Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities," said the report. "Economically disadvantaged individuals are those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities compared with others in the same business area who are not socially disadvantaged. 15 U.S.C.A. § 637(a)(5),(6). Federal agencies generally do not use the term minority-owned business or refer to the racial classification of the business owner. In Adarand Constructors, Inc. v. Pena, the Supreme Court held that all federal programs—including those concerning federal contracting—that use racial classifications are subject to strict judicial scrutiny. To meet this standard, a program must be shown to meet a compelling governmental interest and must be narrowly tailored to meet that interest."

The GAO's analysis was entitled: "Federal Efforts to Assist Small Minority-Owned Businesses."

In a written response to the GAO's report, the U.S. Commerce Department said that the report did not take note of all of the government's efforts to support minority-owned businesses through federal contracting.

"First, while the draft report represents a good start at capturing the Federal Government's effort to support small minority-owned businesses, the review is narrow and does not include all federal programs that support contracting with minority-owned businesses," wrote Acting Secretary of Commerce Rebecca M. Blank.

"For example," wrote Blank, "the U.S. Departments of Agriculture, Transportation, and Housing and Urban Development have programs geared toward increasing federal contracts with minority-owned firms, independent of the Office of Small and Disadvantaged Business Utilization. Likewise, the Offices of Minority and Women Inclusion, recently established at all financial regulatory agencies, were not discussed in the draft report. As such, GAO missed an opportunity to provide a more comprehensive picture of the Federal Government's efforts in support of federal contracting for small minority-owned firms."