Budget battles, the sequester, and cuts to defense spending are taking their toll on small businesses.
The value of contracts awarded by the federal government in the 2013 fiscal year to small businesses dropped about eight percent, to $83 billion from $90 billion, according to a story today in The New York Times.
For many small businesses, government contracts are an important source of revenue. Most companies looking to work with the government begin as subcontractors to government contractors, but as government spending declines, some contractors (so-called prime contractors, or "primes") may instead choose to keep that work in-house.
In 2012, only 37 companies on the Inc. 500 list of the fastest-growing private companies were government contractors, compared to a high of 62 companies in 2010. But Boston's Initiative for a Competitive Inner City finds that over the past ten years, on average, about 30 percent of the business done by the fastest-growing inner city firms has come from government agencies. "That's pretty significant," says Kim Zeuli, senior vice president and director of the research and advisory practice at the not-for-profit. "And these are high-growth firms."
The hit to small-business spending was less severe than the decline in overall government spending, which sank by $58 billion, or about 11 percent. That's the steepest drop in at least a decade, according to the Times. Given the politics of the budget, government contracting is expected to decline further over the next few years. For 2013, the government awarded a total of $460 billion.
Most of the decline in spending came courtesy of the Defense Department, which is the biggest government agency in terms of spending and also the agency that awards the most contracts to small businesses. The Defense Department spent about $308 billion in fiscal year 2013, down $54 billion from 2012. While the Department's 2014 budget appropriation is essentially even with 2013's, experts expect small business' share to continue to decrease. The total budget number, of about $1.1 trillion, is also consistent with last year's.