Subs complain prime contractors break their promises

Small-business subcontractors say primes "stiff" them out of business. How common is the problem?

Small professional services and IT companies often help prime contractors prepare contract bids but then never receive the expected benefits of business.

Nearly a third of 740 small firms said large prime contractors have “stiffed” them out of subcontracting opportunities even after they’ve been listed as a team member on a contract proposal, says an American Express OPEN survey. The survey, released June 19, asked about government subcontracting and teaming arrangements. This is the third of four summaries based on the second annual survey of small companies.

Small firms can help primes craft the proposal to meet an agency’s needs. In the proposal, the prime contractor lists its plans for subcontractors that can provide expertise and help with the work . Yet 29 percent of small businesses said it hasn’t panned out for them in the past.

Nearly 40 percent of small companies with at least a decade of procurement experience has been stiffed in the past. For companies with three years or less of experience, 17 percent said they’ve missed out on business and 31 percent of companies with between four and nine years of experience has dealt with it.

The survey found this likely to happen most into two industries. Forty percent of companies in the IT industry, such as software and data processing, and 63 percent of companies in the professional/scientific/technical services, such as computer system design, engineering, and research fields, said they’ve been frozen out of anticipated business.

And it happens to everyone—no matter the ownership. There is no difference in the likelihood of it occurring by either gender or ethnicity.

“So women- and minority-owned firms are no more likely to be left holding the short end of the procurement stick,” the survey reports.

All the while, there may be a justifiable reason for opting against a subcontract. The prime contractor may be able to handle the work itself, having the expertise and resources in-house. The prime contractor might be able to do it faster than going through a subcontractor. It may even get it done less expensively—a benefit for today's cash-strapped agencies, said Ray Bjorklund, vice president and chief knowledge officer at Deltek.

At the same time, the agency may not get all that it's expecting, if the small businesses on the lower tiers are overlooked, he said. Officials would have the perception that all the team members would play their part. The set-aside subcontracts can help in agencies’ efforts to support small, disadvantaged businesses.

“The government may not be getting what it bargained for,” Bjorklund said.

But responsibility rests on the agencies too, in that officials should be keeping an eye on subcontracts.

“Agencies have to monitor and track the prime contractor’s performance to make sure they adhere to their subcontracting plan. Although this may be a priority for agencies, their acquisition workforce is understaffed and may lack resources,” said Dona Storey, American Express OPEN advisor on procurement.

On a positive note in the survey, 22 percent of active small firm contractors said they have received other subcontracts after being recommended to a large prime contractor by another prime business partner they have worked with previously.

The survey found it more likely to happen to larger, more experienced small companies, as well as those in the information and professional/scientific/technical services industries.

However, companies are more likely to get stiffed on subcontracts than get referrals, the survey found.

American Express OPEN surveyed 740 small business owners in an online survey launched briefly in mid-August, then continued from Oct. 10, 2011 through Nov. 4, 2011.