Federal Advertising: Contracting with Small Disadvantaged Businesses and Those Owned by Minorities and Women Has Increased in Recent Years
Released: 2018-07-17T00:00:00

Letter

Background

Federal statutes and a number of executive orders reflect the federal government’s policy to encourage the participation of small businesses, including those owned and controlled by socially and economically disadvantaged individuals, in federal contracting. One key statute is the Small Business Act, which established SBA and directed it to aid, counsel, assist, and protect the interests of small business concerns, among other things. The Small Business Act, as amended over the years, as well as executive orders, emphasize the government’s policies on contracting with SDBs and businesses owned by women and minorities.

The Small Business Act sets a minimum government-wide goal for small business participation of not less than 23 percent of the total value of all prime contracts for each fiscal year and makes SBA responsible for reporting annually to the President and Congress on agencies’ progress in meeting this goal, and making this information available on a public website. SBA reported that the federal government reached this goal for the fifth consecutive year in fiscal year 2017, awarding about 24 percent of total federal contract dollars to small businesses. SBA also negotiates specific goals with agencies to ensure the government-wide goal is met.

Each agency’s progress toward meeting its goals is generally based on the percentage of obligations on contracts with small businesses.

Categories of Specified Businesses

The three categories of businesses we examined for this report are small disadvantaged, minority-owned, and women-owned.

Small disadvantaged business. Because SBA’s 8(a) business development program and SDB criteria are similar, in this report we use the term “small disadvantaged business” or “SDB” to refer to both categories of businesses. Section 8(a) of the Small Business Act established the 8(a) business development program, which authorizes the SBA to enter into contracts with other agencies and award subcontracts for performing those contracts to firms eligible for program participation. To be certified under the 8(a) program, a business must, in general, satisfy requirements for size, be at least 51 percent unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are U.S. citizens, and demonstrate potential for success. Similar to the 8(a) program, SDBs are defined as those that are primarily owned and controlled by one or more socially and economically disadvantaged individuals, though there are some differences in criteria for the 8(a) program and SDB classification. For example, businesses in the 8(a) program must demonstrate the potential for success and business principals must demonstrate good character, but the requirements to demonstrate these do not apply to SDB classification. A business’s self-identification as SDB in the federal government’s System for Award Management does not automatically lead to acceptance into SBA’s 8(a) business development program.

Minority-owned business. Businesses of all sizes that are at least 51 percent owned by one or more members of a minority group may self- identify as minority-owned businesses in the federal government’s System for Award Management. Minority-owned businesses are further broken down into businesses owned by Asian-Pacific-, Subcontinent- Asian-, Black-, Hispanic-, Native-Americans, and other.

Women-owned business. Businesses of all sizes that are at least 51 percent owned by one or more women and whose management and daily business operations are controlled by one or more women may self- identify as a women-owned business in the System for Award Management.

These three categories of specified businesses overlap. For example, an SDB may be women-owned and therefore be counted in FPDS-NG as both an SDB and a women-owned business. To avoid double-counting when presenting consolidated data, we counted obligations and businesses classified under more than one category only once.

Federal Advertising Activities

As we have previously reported, there are several types of activities that are supported by federal advertising contracts. Table 1 provides descriptions and examples of some of these activities.

Federal Agencies Have on Average Directed 13 Percent of Advertising Contract Obligations to Specified Businesses over the Past 5 Years

Specified Businesses Generally Received an Increasing Share of Advertising Dollars

Over the past 5 fiscal years (2013 through 2017), federal agencies have obligated on average about $870 million annually for advertising contracts, with about 13 percent (approximately $114 million annually) of these obligations going to specified businesses. This share of advertising contract obligations going to these businesses over fiscal years 2013 through 2017 was consistent with the share of total federal contracting obligations going to these businesses (also on average 13 percent over this period).

Advertising contract obligations to specified businesses and the number of these businesses receiving advertising contract obligations have both generally increased over fiscal years 2013 through 2017. The amount of advertising contract obligations going to these businesses nearly doubled from fiscal year 2013 to 2017 (from $75 million to $147 million) and also increased as a percent of total advertising contract obligations (from 9 percent of these obligations to 16 percent). Specified businesses also represented an increasing share of businesses receiving advertising contract obligations, from 30 percent (194 businesses) in fiscal year 2013 to 39 percent (250 businesses) in fiscal year 2017. Figure 1 shows advertising contract obligations to specified businesses and the number of these businesses receiving these obligations over fiscal years 2013 through 2017.

In the 5 years from fiscal year 2013 through 2017, a relatively small number of specified businesses received a relatively large amount of federal advertising contract obligations. For example, the top five businesses received about 40 percent of annual advertising contract obligations to specified businesses over the 5-year period. Consistent with findings from our previous work, obligations were also concentrated among a relatively small number of contracts. Figure 2 shows the distribution of advertising contract obligations among specified businesses, with amounts going to the five largest businesses (in terms of advertising contract obligations received) and all others.

Federal advertising contract obligations to all three categories of specified businesses generally increased between fiscal years 2013 and 2017, although some years showed decreases. (The amount going to women- owned businesses declined between fiscal years 2014 and 2015 and the amounts going to minority-owned businesses and SDBs declined between fiscal years 2016 and 2017.) The most notable increase over the 5-year timeframe, both in dollars and percentage terms, was in the women-owned category, which increased by $56 million, or 93 percent. Figure 3 shows the amounts obligated to each specified business category, and to the three categories combined. Table 2 in appendix II shows the amounts obligated to each specified business category, in dollars and as a percentage of federal advertising contract obligations, in each of the 5 years.

SBA officials we interviewed told us that a program they started in 2011, the Women-Owned Small Business Federal Contracting Program, may have accounted for some of the increase in contracting rates with women- owned businesses over the past 5 years. This is because the program aims to help women-owned small businesses have an equal opportunity to participate in federal contracting and to assist agencies in achieving their goals for contracting with women-owned small businesses. The program generally allows women-owned small businesses to compete for set-aside contracts or receive sole source awards in industries where these businesses are underrepresented or substantially underrepresented.

Changes in advertising contract obligations to specified businesses were in some cases associated with a small number of contracts. For example, the $29 million increase in advertising contract obligations to women- owned businesses between fiscal years 2016 and 2017 was due in large part to two contracts with an advertising agency with combined obligations of about $22 million in fiscal year 2017. In addition, two contracts that had each been classified under both the SDB and minority- owned categories contributed to the decrease in these two categories between fiscal years 2016 and 2017. Obligations to these two contracts declined by about $16 million over this period, a substantial portion of the overall declines in these two categories. (Obligations to SDBs declined by about $23 million; those to minority-owned businesses declined by about $21 million.) Although obligations to the SDB and minority-owned categories decreased from fiscal year 2016 to 2017, the numbers of these businesses receiving advertising contract obligations both increased. The number of SDBs receiving these obligations went from 123 to 134; the number of minority-owned businesses went from 95 to 98.

Federal agencies are also required to set-aside procurements exclusively for small businesses or businesses in the 8(a) program under certain circumstances, and specific authorities exist to allow award of a contract on a sole source basis to a business in the 8(a) program. However, these authorities were in place prior to fiscal year 2013 and therefore, according to SBA officials, it is unlikely they would have caused a change in contracting activity over the past 5 years.

As mentioned above, businesses may be classified as more than one category, and thus there is overlap in obligations and contracts among specified business categories. For example, about one-quarter ($147 million) of the $570 million in advertising contract obligations directed to specified businesses over the 5-year period went to businesses classified under all three categories. Figure 4 shows the amount of advertising contract obligations going to each business category and combination of categories.

Over Half of Federal Advertising Contract Obligations to Minority- Owned Businesses Went to Those Owned by Hispanic-Americans

Among the different types of minority-owned businesses, those classified as being owned by Hispanic-Americans received the most obligations (just over half) from federal advertising contracts over fiscal years 2013 through 2017. Figure 5 shows the breakdown of amounts obligated over these fiscal years to minority-owned businesses.

As with the other specified business categories, advertising obligations to specific minority groups were concentrated among a relatively small number of businesses. For example, advertising contract obligations to one particular Native-American-owned business—for graphic design, print, and other communications services—represented 34 percent of all obligations to Native-American-owned businesses. See table 3 in appendix II for additional details on each business category’s contracts.

DOD, DHS, and HHS Directed the Most Advertising Contract Obligations to Specified Businesses, though Other Agencies Directed Greater Percentages of These Obligations to the Businesses

DOD, DHS, and HHS Were Responsible for Nearly Three-Fourths of Federal Advertising Obligations to Specified Businesses

The departments of Defense (DOD), Homeland Security (DHS), and Health and Human Service (HHS) were responsible for 73 percent of the $570 million of federal advertising contract obligations that went to specified businesses over fiscal years 2013 through 2017. Thirty four other agencies were responsible for the remaining 27 percent of these obligations. Figure 6 shows the breakdown of total federal advertising contract obligations, with the amount of obligations going to specified businesses, and amounts obligated by DOD, HHS, DHS, and all other agencies.

For each of the 5 years we reviewed, DOD, HHS, and DHS were consistently the top three agencies in terms of the amount of advertising contract obligations they directed to specified businesses. Additionally, all three generally increased the amounts they obligated to these businesses. For example, in fiscal year 2013, these three agencies obligated over 60 percent of all federal advertising contract obligations to specified businesses; in 2017 they accounted for more than 80 percent of these obligations. Figure 7 shows breakdowns of these and all other agencies’ advertising contract obligations to specified businesses.

Much of the increase in these obligations from year to year is associated with increases in obligations by DOD, DHS, and HHS. For example, advertising contract obligations to these businesses increased by about $37 million between fiscal years 2015 and 2016, with these three agencies responsible for about $22 million, or 60 percent, of the increase.

DOD, DHS, and HHS are also among the agencies that obligated the most to advertising contracts overall. Together they obligated about $3.4 billion for these types of contracts over the 5-year period, which represents 79 percent of the federal government’s obligations. DOD obligated the most—over $2.6 billion—to advertising contracts over the 5- year period, which accounted for over 60 percent of these obligations over fiscal years 2013 through 2017. Table 4 in appendix II provides more details on the agencies that obligated the most overall for advertising contracts and those that directed the most to specified businesses.

In our prior report on advertising contract obligations going to small disadvantaged and minority-owned businesses, we highlighted annual obligations data for five agencies. As an update to that analysis, we examined annual advertising contract obligations to the five agencies that obligated the most on advertising contracts over the past 5 years – DOD, DHS, HHS, and the departments of Transportation (DOT) and Veterans Affairs (VA). Figure 8 illustrates these agencies’ advertising contract obligations and the percent going to specified businesses in each year.

As shown in the figure above, top-spending agencies’ obligations to specified businesses fluctuated over fiscal years 2013 through 2017.

DOD. DOD’s obligations to specified businesses increased for most of the fiscal years over the 5-year period, regardless of whether its total advertising obligations increased or decreased. For example, in fiscal year 2016, DOD’s total advertising obligations declined by over $100 million; however, its obligations to specified business categories increased. In fiscal year 2017, DOD obligated the most of any agency to specified businesses.

HHS. Similarly, HHS, which obligated approximately $151 million to specified businesses, the most of any agency over the 5-year period, also increased its obligations to those businesses regardless of its overall advertising obligations from year to year. For example, from fiscal years 2016 to 2017 HHS’ advertising contract obligations to specified businesses increased from $35 to $37 million, even though they declined as a percentage of its overall advertising contract obligations, going from 65 percent to 57 percent.

DOT. DOT generally increased its total advertising obligations during the 5-year period from approximately $46 million in 2013 to $57 million in 2017. However, during this time DOT’s obligations to specified businesses generally decreased, from approximately $1.8 million in 2013 to approximately $560,000 in fiscal year 2017.

DHS. DHS generally increased its total advertising obligations each year of the 5-year period and generally increased its obligations to specified businesses. DHS obligated the third largest amount of money (behind HHS and DOD) to these businesses from fiscal years 2013 through 2017.

VA. VA has generally decreased its total advertising obligations from approximately $63 million in fiscal year 2013 to approximately $15 million in fiscal year 2017, and its obligations to specified businesses, from approximately $8 million in fiscal year 2013 to approximately $1.3 million in fiscal year 2017.

Table 5 in appendix II shows the 20 agencies that have obligated the most for advertising contracts over fiscal years 2013 through 2017 and the amounts they directed to specified businesses.

Agencies with Greater Percentages of Advertising Contract Obligations Going to Specified Businesses Generally Obligated Lower Amounts Overall

In several cases agencies directed more than half of their advertising contract obligations to specified businesses, though these agencies in general obligated less to advertising contracts than top-spending agencies. Ten agencies with advertising contract obligations of at least $1 million over fiscal years 2013 through 2017, such as the departments of Justice and Energy, directed at least half of their obligations to specified businesses. With the exception of DHS, which obligated about $200 million for advertising contracts over the 5-year period, these agencies all obligated less than $25 million for advertising contracts over this timeframe. In contrast, DOD directed a relatively small share (5 percent) of its advertising contract obligations to specified businesses, making it 29th out of 37 agencies when ranked according to the percentage of advertising contract obligations going to these businesses. However, because the department obligated a large amount for advertising contracts ($2.6 billion over the 5-year period), it ranked second in terms of the amount obligated to specified businesses.

Some agencies directed all or nearly all of their advertising contract obligations to specified businesses, but because these agencies’ advertising contract obligations were relatively low, the amounts they directed to these businesses were also relatively low. For example, the Nuclear Regulatory Commission directed all of its federal advertising contract obligations—totaling approximately $1 million—to specified businesses from fiscal years 2013 through 2017. Additionally, the National Aeronautics and Space Administration directed 98 percent of its approximately $21 million in advertising contract obligations to these businesses from 2013 through 2017. Table 6 in appendix II shows the top 20 agencies in terms of share of advertising contract obligations going to these businesses.

Agency Comments

We provided a draft of this report to the SBA Administrator for comment. SBA provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional committees, SBA, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-6806 or nguyentt@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to identify and analyze (1) the amount federal agencies have obligated on advertising contracts over the 5 most recent fiscal years (2013 through 2017) and the amount going to small disadvantaged businesses (SDB) and those owned by minorities and women; and (2) the agencies that have directed the most advertising contract obligations to these businesses and how this has changed over time.

To address both objectives, we analyzed data from the Federal Procurement Data System-Next Generation (FPDS-NG) database for fiscal years 2013 through 2017. This database captures information on the federal government’s contract awards and obligations and includes data for most federal contract actions that have an estimated value of more than $3,500. We reviewed obligations data for contracts coded under the “support – management: advertising” or “support – management: public relations” product service codes. For reporting purposes, we refer to these two contract types collectively as “advertising contracts.” Every contract action reported in FPDS-NG is categorized by a product service code to indicate what was purchased. Additionally, contracts reported in FPDS-NG are categorized by a North American Industry Classification System (NAICS) code, which indicates the industry within which the product or service falls. For purposes of this report, we used the product service codes mentioned above to identify advertising contracts because product service codes are assigned at the individual contract or order level. The Small Business Administration (SBA) uses NAICS codes to identify the predominant service or supply on a contract. NAICS codes are an integral element of size standards and the determination whether the business receiving the contract award is a small business.

In addition to analyzing FPDS-NG data, we interviewed SBA officials responsible for assessing government-wide and agency contracting with small and other business categories about their perspectives on trends in federal contracting.

We assessed the reliability of these data by considering known strengths and weaknesses of FPDS-NG data, based on our past work and looking for obvious errors and inconsistencies in the data we used for our analysis. We also interviewed SBA officials, who use FPDS-NG data in assessing federal contracting, about the database’s reliability. Based on these steps, we concluded that the data were sufficiently reliable for our purposes.

We focused our analysis of FPDS-NG data on those advertising contracts categorized as being awarded to (1) SDBs, 8(a) businesses, or both; (2) business owned by minorities and/ or (3) businesses owned by women. SDBs, minority-owned, and women-owned businesses may self-identify in the government’s System for Award Management as these types of businesses. For purposes of this report, we refer to the three categories of businesses we examined as “specified businesses.” Criteria for certification as an 8(a) business are similar to those for SDB classification, including that businesses be primarily owned by a person or people who are socially and economically disadvantaged. In addition, 8(a) businesses must also demonstrate the potential for success and business principals must demonstrate good character. Because of these similarities, for analysis and reporting purposes we combined 8(a) businesses and SDBs into one group, which we refer to in this report as “small disadvantaged businesses” or “SDBs.” We interviewed SBA officials to obtain their perspectives on the changes, but did not attempt to identify root causes for changes over the past 5 years, as it was beyond our scope.

We analyzed FPDS-NG data at the government-wide level to identify overall trends in obligations for advertising contracts and the amounts going to specified business categories. We focused on the amount of advertising contract obligations going to these business categories individually and combined, and examined how these amounts had changed over the past 5 fiscal years. Within the minority-owned business category, we also analyzed the amounts of obligations going to businesses owned by Asian-Pacific-, Subcontinent-Asian-, Black-, Hispanic-, and Native-Americans, and “other minority” owned businesses. Businesses self-identify as these categories in the federal government’s System for Award Management. We also examined data on the number of contracts and businesses receiving obligations through advertising contracts.

There is overlap among the three specified business categories—SDBs and those owned by minorities and women. For example, a business may be classified as both an SDB and a women-owned business. We accounted for this overlap when calculating and presenting data on the amount of advertising contract obligations going to the three business categories combined so that we did not double or triple count obligations.

We also analyzed FPDS-NG data on specific agencies’ obligations for advertising contract obligations and the amounts they obligated to specified businesses. We used these data to identify the agencies that ranked highest (in dollars and as a percentage of total advertising contract obligations) in advertising contract obligations to specified businesses. We also examined how agency obligations to these businesses have changed over the past 5 years.

We conducted this performance audit from October 2017 to July 2018 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Agencies’ Advertising Obligations to Specified Businesses

Table 2 shows the amounts of advertising contract obligations that went to specified businesses over fiscal years 2013 through 2017. As shown, the amounts directed to these business categories generally increased both in dollars and as a percentage of total advertising obligations.

Specified business categories each received at least $300 million in obligations over fiscal years 2013 through 2017. There were variations in the number of businesses receiving obligations and the concentration of obligations among contractors. Table 3 provides additional details on these characteristics.

Table 4 below shows the agencies that obligated the most for advertising contracts overall, and those that obligated the most through these contracts to specified businesses.

Specified businesses are those classified as small disadvantaged businesses (including those that self-identify as small disadvantaged businesses and those that are certified by SBA for the 8(a) business development program); minority-owned businesses; and women-owned businesses. Minority-owned businesses include those categorized as being owned by Asian-Pacific-, Sub-continent-Asian-, Black-, Hispanic-, and Native-Americans, as well as “other minorities.”

Table 5 shows the 20 agencies that obligated the most for federal advertising contracts over fiscal years 2013 through 2017, with the percentages of these obligations going to specified businesses.

Specified businesses are those classified as small disadvantaged businesses (including those that self-identify as small disadvantaged businesses, and those that are certified by SBA for the 8(a) business development program); minority-owned businesses; and women-owned businesses. Minority-owned businesses include those categorized as being owned by Asian-Pacific-, Sub-continent-Asian-, Black-, Hispanic-, and Native-Americans, as well as “other minorities.”

Table 6 shows the 20 agencies that directed the greatest share of these obligations to specified businesses.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

Other GAO staff who made contributions to this report include Carol Henn (Assistant Director); Ann Marie Cortez; Jenny Chanley; Kristine Hassinger; Julia Kennon; Kathleen Padulchick; and Erik Shive.