The U.S. government is the world’s largest single purchaser of goods and services but even it is not recession proof. Federal government contracting spending amounted to $461 billion in fiscal year 2011, down 14% from the previous year. When Uncle Sam tightens his budgets, how does it affect small business contractors?

A new survey of 740 active small business contractors -- "Trends in Federal Contracting for Small Businesses" -- examines how small businesses have fared in the wake of this reduction in spending. The findings are from the first of four summaries to be published as part of the second annual government contracting survey from American Express OPEN’s Victory in Procurement^SM (VIP) program.

I asked Julie Weeks, American Express OPEN Research Advisor, to share key findings from the report:

Small business owners who are active federal contractors ⁽¹⁾ are working harder for less return than they were a year ago.

• Small businesses are spending more pursuing federal contracts. Over the past year, the amount of time and money that active small business contractors have invested in seeking federal contracting opportunities has averaged $103,827, an increase of 21% over the previous year’s investment of $86,124.
• Small businesses are bidding on fewer contracts. Even as the average investment made in seeking federal contracts has risen over the past year, bidding activity has declined by nearly half – both in prime and subcontracting bidding activity. Further, the average success rates for active small business contractors in both prime and subcontracting have declined as well – indicating a more competitive environment.
• Fourth time is the charm. Active small business contractors reported that they had to submit an average of 4.4 bids before they won their first prime federal contract. Once small business contractors got their first taste of procurement success, they wasted little time before trying – and succeeding – again. Two-thirds of active small business contractors have performed on more than one federal contract, and, on average, it took them just under a year (11-1/2 months) after their first procurement victory to win their second contract.
• Experience pays off over the long run. Average success rates in prime contracting – 38% overall – are significantly higher among those with 10 or more years of contracting experience under their belts (53%) compared to those who have been seeking federal contracts for three years or less (20%).

Investment in seeking federal contracts rises with contracting experience – in tandem with their success rates, as noted above. Firms that have been engaged in federal contracting for 10 years or more invest over twice as much annually as do firms that have been in the federal marketplace for three years or less ($153,531 compared to $64,172).

The analysis also indicates that there is a law of diminishing returns when it comes to bidding. Success rates fall sharply as a business surpasses bidding on six or more contracts over a three-year period. Thus, it would appear that the most successful strategy a small firm could employ in the federal marketplace is to pare down and concentrate on just a few procurement opportunities and not submit more than two or three bids per year.

The survey was conducted in mid October through early November 2011, at the beginning of the government’s FY2012 spending year. Preliminary figures from FY2011 indicate that the U.S. government spent $476.8 billion in contract spending in FY11, down 12% from the previous year and down from a high of $541.8 billion in FY2008 ⁽²⁾.

This report is the first in a series of four reports that will be published from the survey. Other upcoming reports will focus on how women-owned and minority-owned firms in particular are faring in federal contracting, how strategies and outcomes change with level of procurement experience, and what lessons can be shared from firms that focus on subcontracting as a procurement strategy.

Download and read the entire 10-page report here [PDF].