Do Minority-Owned Businesses Get a Fair Share of Government Contracts?

Author(s): Maria E. Enchautegui, Michael E. Fix, Pamela J. Loprest, Sarah C. von der Lippe, Douglas A. Wissoker

Posted to Web: December 01, 1997

Permanent Link: http://www.urban.org/url.cfm?ID=307416

This research was funded by the Rockefeller Foundation and the United States Department of Justice. Any opinions expressed herein are those of the authors and do not necessarily reflect the views of The Urban Institute or its funders.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Executive Summary

Debates over affirmative action have concentrated on the relative success of minorities in three principal areas: employment, education, and government contracting. Of the three, government contracting is perhaps the least studied, despite its importance for minority economic progress. To provide a national picture of how minority-owned firms are doing in the area of government contracting, the Urban Institute carried out a study of the extent to which minority-owned firms receive a representative share of state and local government contract dollars. The purpose of the study was to provide information bearing on the need for programs that assist minority-owned firms including affirmative action in procurement.

The Urban Institute analysis reveals substantial disparities between the share of contract dollars received by minority-owned firms and the share of all firms that they represent. Based on their number, minority-owned firms received only 57 cents for every dollar they would be expected to receive.

The Policy Context

Importance of Government Contracting

Procurement—like public employment—provides governments with a potentially powerful tool for promoting minority opportunities and counteracting discrimination. In 1990, procurement at all levels of government represented approximately $450 billion, or almost 10 percent of GNP. State and local government spending accounted for more than half of all procurement—approximately $250 billion. In a time of government downsizing, the share of total government spending that goes to contracting (versus government employment) is likely to rise. Indeed, in 1995, federal spending on contracting exceeded spending for federal employment.

Barriers Encountered by Minority Firms

There are two types of barriers faced by minority firms: (1) barriers to firm formation and growth and (2) barriers to participation in the government contracting process itself. It is important to distinguish between the two for policy purposes because policies that may increase the number or size of minority firms may not necessarily increase those firms' participation in the procurement process.

Barriers to the formation and growth of minority firms

In general, minority-owned firms are smaller in size and fewer in number than majority-owned firms. Major barriers to the formation and development of minority-owned businesses include:

• Lack of financial capital: minorities have lower incomes, fewer assets, and diminished access to business loans.
• Lack of social capital: minorities' access to business networks is limited, and their own family networks may be smaller or less valuable than those of their majority counterparts.
• Lower human capital endowments: minorities have less education and professional training, and their access to union and other apprenticeship programs is more limited.
• Minorities' access to lucrative, nonminority consumer markets is comparatively limited, due in part to historical patterns of residential segregation.

Each of these barriers has been produced and perpetuated, at least in part, by discrimination.

Barriers to minority participation in the government contracting process

Minority firms may turn to government contracts to offset some of the limitations imposed by the private market. But barriers embedded in the contracting process itself can impede minority firms from winning government contracts. These barriers include:

• Failure of government to break large contracts down into smaller projects so that minority firms, which tend to be smaller, can compete.
• Extensive granting of waivers from minority subcontracting requirements to majority contractors.
• Ineffective screening for false minority fronts.
• Limited notice of contract competitions.
• Bid shopping on the part of majority prime contractors, who disclose minority firms' subcontracting bids to their majority competitors so they can be underbid.

Affirmative Action Policies in Contracting

Federal, state, and local governments have addressed these barriers with a wide range of affirmative action programs. These programs fall into two broad categories. One uses race as a factor in the award of contracts. Examples include the use of sole source contracts, set-asides, price or evaluation advantages, and the use of goals for prime or subcontracting. These policies are intended to directly increase the number of contract and subcontract awards received by minority firms.

A second category of procurement-related policies seeks to expand the number of minority-owned firms contracting with government by increasing their financial, social, or human capital. These initiatives are sometimes referred to as affirmative action programs and sometimes as race-neutral policies. The goal is to put minority firms in a better position to compete as either prime contractors or subcontractors. These policies include lending and bonding help, technical assistance programs, expanded notice requirements, and imposing prompt payment directives on government agencies. In general, these policies are intended to enlarge the pool of potential minority bidders for public contracts. They do not, however, directly affect outcomes in the contractor selection process.

Affirmative action programs in contracting have been directed primarily at assisting minority-owned businesses and not, for the most part, at increasing minority employment.

Shifting Legal Requirements for
Affirmative Action Programs in Contracting

The future of affirmative action is being defined in large measure by the rulings of the Supreme Court in two cases that deal with government contracting.

In a 1989 case, City of Richmond v. J. A. Croson Co., the Supreme Court held that state and local preference programs would be subject to the Court's rigorous "strict scrutiny standard." Under this standard of review, racial classifications must serve a "compelling interest" and be "narrowly tailored" to suit that purpose. It was in response to Croson that many state and local governments commissioned the "disparity studies" analyzed by the Urban Institute for this report. The disparity studies document differences between the share of all firms that minorities own and the share of government contracts they receive. In addition, they often document the role that state and local governments and the private sector have played in perpetuating historical patterns of discrimination through their contracting practices.

In June 1995, the Supreme Court decided Adarand Constructors v. Pena, apparently making all federal race-conscious, affirmative action programs subject to the same strict scrutiny standard announced in Croson. The impact of applying strict scrutiny to affirmative action programs is profound: Proponents of race-based policies intended to help minorities must meet the same high standard of proof required for proponents of race-based practices that disadvantage minorities.

Method

This study examines whether there is disparity in the receipt of state and local government contract dollars between minority-owned and majority-owned businesses. After screening 95 state and local disparity studies for basic levels of consistency and reliability, the Urban Institute researchers combined the results of 58 studies. Aggregating individual study results provides a national picture of disparity in contracting and more reliable estimates than any individual study.

After the Supreme Court decision in the Croson case, the percentage of all government contract dollars received by minority-owned businesses was then compared to the percentage of all businesses "ready, willing, and able" to carry out government contracts that are minority-owned. Where these percentages are similar, there is no disparity in government contracting. For example, if 5 percent of all "ready, willing, and able" firms are minority-owned and 5 percent of government contracting dollars are awarded to minority-owned firms, there is no disparity. If only 2 percent of government dollars went to minority-owned firms, there would be a disparity.

Findings

We find substantial disparity in government contracting. That is, minority-owned businesses receive far fewer government contract dollars than would be expected based on their availability. Minority-owned businesses as a group receive only 57 cents of each dollar they would be expected to receive based on the percentage of all "ready, willing, and able" firms that are minority-owned ( figure 1).

Further, there is substantial disparity in government contracting for each minority population group (figure 2). African American-, Latino-, Asian-, Native American-, and women-owned businesses all receive a substantially lower proportion of government contracting dollars than would be expected, given their availability. African American-owned businesses receive only 49 percent of the dollars that would be expected. Latino-, Asian-, and Native American-owned businesses receive 44 percent, 39 percent, and 18 percent, respectively. Women-owned businesses fare especially poorly, receiving only 29 percent of the expected dollars.

Disparity exists in every industry group studied as well. After separating contracts and businesses by broad industry group—construction, goods, professional services, and services other than professional—we find disparity for all minority groups (figure 3). The only exception is in construction subcontracting, where very little disparity is found.

These findings do not differentiate between jurisdictions that had in place state and local affirmative action programs for procurement and those that did not. If these programs are effective, it is expected that disparity levels in jurisdictions with such programs would be lower than in places where no program exists. Therefore, a separate examination was conducted of jurisdictions that had no program in place. This led to an examination of jurisdictions during time periods before a program went into effect and where a goals program was never adopted.

For the purposes of our analysis, a "program" was considered to be in place if there were mandatory or voluntary goals for minority- or women-owned business participation. Because other types of programs, both race-based and non-race-based, can affect disparity ratios and because it is not possible to determine to what degree goals programs are actually enforced, this is not a perfect measure. This analysis reveals that disparity is greater in jurisdictions where no goals program is in place. Awards to minority-owned businesses fall from 57 percent of the dollars that would be expected based on availability to 45 percent where no program is in place. While this is not conclusive evidence of what would happen to minority contractors in a particular area if a program were removed, this finding indicates that, overall, affirmative action programs may reduce disparity.

Issues of Interpretation

How does the quality of disparity studies affect our results?

Press accounts and court opinions have questioned the quality of individual disparity studies. The methods used by the Urban Institute researchers seek to limit any potential bias and overcome data deficiencies of the underlying studies. They do so in several ways:

First, the findings are based only on the statistical data contained in the disparity studies—data that we use for conducting new quantitative analysis. The results are, thus, less likely to be affected by the bias of the disparity studies' authors. Second, the analysis does not take into account any of the qualitative information, such as hearing testimony and historical analysis, presented in the disparity studies—information that may have led the studies' authors to different conclusions than those warranted by the disparity numbers alone. Third, the methods used by the disparity study authors in their quantitative analyses are remarkably consistent. Although there are differences across studies in the sources of data used and in the definition of available firms, each study reports on the same outcomes (i.e., the percentage of government contract dollars awarded to minority-owned firms compared to the percentage of all available firms that are minority-owned). While this consistency does not ensure against bias, it does make it less likely.

Finally, by aggregating the findings of all the individual disparity studies, stronger estimates of disparity can be derived than from an individual study. An individual study may have data limitations (it may be based on a small number of contracts, for example) that make its results comparatively unreliable. In this case, cumulating findings across many studies increases the accuracy of the results.

Are our results nationally representative?

The findings provide the best evidence to date on the extent to which state and local governments nationwide contract with minority firms. They include data from some of the largest city and state governments in the country. Findings are included from large state governments such as New York and Texas, large cities such as New York, and smaller jurisdictions such as Asheville, North Carolina. The 58 studies analyzed represent jurisdictions in 18 states and the District of Columbia. They include a variety of governmental units including cities, counties, states, and special districts such as schools, transportation agencies, and water resource authorities.

The studies screened were collected as part of the most comprehensive effort yet undertaken to find and analyze all existing disparity studies. The effort, which was carried out by the Department of Justice, employed existing lists of studies, references found in court cases, articles, other disparity studies, and requests to research firms known to have conducted multiple studies. The studies reviewed, however, were not selected to constitute a nationally representative sample. Because Urban Institute researchers reviewed all studies made available by a certain date, there is no reason to believe that the selection process biased the results in any way.

One difficulty in generalizing these findings to all state and local governments is that it is unclear whether disparities found in jurisdictions that commission studies differ from those that do not. Answering this question would require additional data collection in places that did not commission disparity studies.

Does disparity result from discrimination?

The large disparities documented here in government contract awards can result from government or private discrimination or can be the product of minority-owned firms being, on average, less qualified to win government contracts than majority-owned firms. In the latter case, being less qualified (e.g., having less experience, fewer employees, or lacking access to bonding) may or may not result from past or present discrimination. Due to data limitations, it is not possible to determine the degree to which the findings of disparity result from discrimination.

The problem of linking disparity to discrimination is one that has been, and is being, grappled with by the courts. In the Croson case Justice Sandra Day O'Connor noted that "gross statistical disparities" constitute "prima facie proof of a pattern or practice of discrimination" in the employment context. However, it remains to be seen what the courts will accept as adequate proof of statistical disparities in the procurement context.

Policy Implications

Several straightforward conclusions flow from the results of the analysis. First and most important, the results indicate that minority firms are less successful than their majority counterparts in obtaining procurement dollars at the state and local government levels. The wide disparities presented here do not necessarily translate into proof of discrimination on the part of state and local governments. At a minimum, these findings suggest that barriers remain to minority firms' participation in the government contracting process.

Second, wide disparities indicate that adoption of affirmative action and other programs designed to assist minority firms has not led to broad displacement of majority firms in the award of government contracts. That is, the results do not support claims of widespread reverse discrimination in contracting at the state and local government levels.

Third, the results indicate that disparities are greater in those areas where no affirmative action program is in place. While a causal relationship between these facts cannot be established on the basis of this examination alone, the results may indicate that affirmative action programs help to reduce disparities.

The lack of knowledge about the effectiveness of affirmative action programs, coupled with the wide disparities documented in this report, suggest that there is not enough empirical evidence to justify the elimination of public policies that promote minority participation in government contracting. Repealing affirmative action policies would limit the tools available to government to rectify these disparities.

Our findings strongly suggest that the knowledge base that informs the use of race-conscious policies in government contracting needs to be expanded. It is particularly important to evaluate the effectiveness of different race-conscious and race-neutral programs that may expand minority participation in procurement. Such evaluations are routinely conducted in other areas of public policy, such as job training. Along similar lines, policymakers need a better, more empirically based understanding of the pervasiveness and relative importance of the barriers that minority firms face. In particular, data are needed to assess the fairness of business lending practices and the success of minority firms as both prime and subcontractors. Data on both winning and losing bids could also help explain the source of the wide disparities documented in this report.

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.