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It's hard for rural small businesses to do work with the government - but why?


Over the course of the last month, my team and I have been on the ground in rural northern Pennsylvania aiding local organizations, and the state of Pennsylvania, in understanding how Department of Defense funding affects businesses in the area.

Naturally, our discussions with businesses connected to DoD dollars flowed into other federal contracting opportunities. We heard some incredible stories, some powerful anecdotes, and some common threads across everyone we have spoken with thus far. Most noticeably, many small businesses - especially those in rural communities - opt to not work with the government at all, even if they’ve had several successful bids on projects in the past.

Small businesses very frequently shy away from federal work both directly and indirectly. Unless a firm is designed specifically to work with the government, it can be daunting to even break into the marketplace. Small businesses often have limited visibility into what they are or could be supporting, and struggle to plan for the many shifts in federal spending. They view contracting as a big-business game and take what shreds of federal work they can get without planning. All of this happens despite steps taken to open doors to contracting for small businesses, as fundamental challenges are either completely unknown to policymakers or are simply not addressed in favor of more politically expedient policies and objectives.

Overhead

Unless a company has built itself with the management structure to handle contracts, they often find it too costly to pursue government opportunities. Every step of the contracting process requires a tremendous amount of capital, both human and financial, for a small business.

Over the last few weeks we’ve heard some astonishing stories on managing government work. One firm, specializing in construction tools, attempted to respond to a quote request for a small saw blade for a US-located military installation, only to be met with over 30 pages of required documentation. As that firm attempted to respond to the request, they found that the specifications asked for in the project were impossible to meet- but could only see that after plowing through pages of legalese and unnecessary technical information. Another firm outright told us they could not afford to hire on a full-time staffer with the sole job of digging through and responding to government requests; this was common across several businesses, even ones that had successfully bid on projects in the past.

We also heard from multiple executives in companies that deliverables for their government projects- whether that deliverable was a small piece of hardware, a component, or some type of intellectual property- were frequently repetitive and often required so much documentation that they had to hire staff members purely to manage the paperwork involved with their projects.

The overhead requirements for government work often make responding to and winning projects so expensive that they become unprofitable, and for what purpose? The expense of doing government work is pushing otherwise highly qualified small businesses out of the market and depriving the government of potentially highly successful relationships.

Planning

Massive shifts in spending priorities and political turmoil make planning for government work nearly impossible for small businesses. In fields where the primary product is intellectual, fluctuations can be managed and handled a bit easier, since overhead is lower.

The problem truly rears its head with firms that are creating a product for the government. In our work in Pennsylvania, most of the firms we talk to are manufacturing or machining parts for the Department of Defense. Manufacturing processes require careful resource planning, ordering of raw materials or parts, maintenance time, and tremendous overhead. Fluctuations can be fatal.

Take, for instance, a story we heard from a small manufacturer that produces a specialized, required component for a weapon system used by a branch of the military. In 2008, in the beginning waves of the recession, orders through one of their purchase agreements completely stopped with no word, warning, or explanation from anyone. That firm, overnight, lost around 40% of its business and has fallen from 68 employees then to 15 employees today.

In another case, a small production firm built a part for a vital weapon system. This firm opted into a set-aside program that would reward military contractors that operated green facilities and production practices. This small business- with only one competitor capable of producing the same part- chose to act on a government-created market force to gain competitive advantage and invested hundreds of thousands of dollars in greenifying their facility. With limited warning, in the late 2000s, the Obama Administration pulled the plug on the program that had started under President Bush. This firm had forecasted an increase in sales to help pay off their investment and had been encouraged to continue their investment by members of the Obama DoD all the way up until the program was shelved. To make matters worse, this cash issue was compounded by the outsourcing of one of the elements the firm manufactured to Turkey; the company had, in its mid-2000s heyday, almost 100 employees; today it has 3.

There are many problems that become noticeable with these stories. Big businesses can easily absorb or acquire their way past unpredictability. Small firms, however, have no choice but to cut their losses and fully absorb the blow. In most cases, they lose the expertise and capability to produce very specific parts at any sort of scale, and when the government must turn back to American suppliers they find none available. These businesses often also end up financially crippled and end up completely losing trust for government clients. Even if the government wants to spend with their firm, these businesses decide not to do business with government clients again to avoid the headache and instability.

The Government’s Current Solutions

To be fair, the government has attempted several solutions to help firms diversify out of depending on government work, and some agencies have made efforts to cut down on overhead and overbearing deliverables. Set-aside programs have, to some extent, enabled small businesses to compete with other small businesses and given some priority to firms locating in areas in need of economic development.

Still, much of this isn’t enough. In dealing with set-asides, the most common challenge we hear from small businesses is that the definition of ‘small business’ is incredibly misguided. While size standards can vary, the Small Business Administration defines ‘small businesses’ as ‘…500 employees for most manufacturing and mining industries and $7.5 million in average annual receipts for many nonmanufacturing industries’. In rural America, firms with more than 100 employees are frequently large enough to dominate an entire rural region; $7.5 million in revenue is almost unheard of.

Micro-sized firms (as in your local 5-25-employee production operation with a highly engaged single owner or partner structure), despite being able to offer high-quality services to the government, are completely unable to compete on opportunities because they’re facing off against ‘small’ businesses with incredible capacity to manage the overhead of contracting. While the intent for the small business set aside is a nice gesture, it’s time to acknowledge that, for most of America, the small business size standard simply does not apply.

There are multiple solutions to these challenges, and none are 100% correct. Solutions range the spectrum from affordable and quick, such as aiding businesses in developing diversification strategies; to slower and more challenging, such as working directly with government agencies to tweak set-aside categories.

At the end of the day, however, it may do us all better to listen to the people affected a little more. Follow the example of the DoD’s Office of Economic Adjustment, and organizations like Dr. Stephan Brady's (www.linkedin.com/in/stephanbrady/) Covation Center in Williamsport, PA- our current partners on the economic development project in north central Pennsylvania. They have gotten away from simply scouring databases and hiring consultants that sit in offices to make assessments and moved out on the ground into the rural industrial base. Only by directly and personally diagnosing the issues can impactful and meaningful improvement occur.