Understanding Native-entity enterprises’ subcontracting relationships

Native entities provide billions of dollars in services to the government annually through federal contracts.

Defined as Alaska Native Corporations, Native Hawaiian Organizations, or federally recognized tribes, these entities generated $202 billion in revenues from prime contracts—that is, contracts made directly with the U.S. government—and subcontracting revenues from 1981 through 2021.

Part of this revenue goes to Native entities for the economic development of Native communities. But some of this money flows to small businesses—Native-owned or non-Native-owned—that serve as subcontractors on projects where Native-entity-owned businesses, which we refer to as Native-entity enterprises, are the prime contractors. Subcontracting can reduce the entry hurdle for small businesses seeking federal procurement opportunities. Subcontracting can also help build a stronger network of specialized businesses to collaborate on complex projects.

To better understand the scope of Native entities’ involvement in federal contracting, the Center for Indian Country Development (CICD) examined USAspending.gov prime contract and subcontract data with action dates from October 1, 2015, to October 31, 2023. Our research finds that 92.9 percent of the small business subcontractors engaged by Native-entity enterprises are not registered as Native-individual-owned or are not Native-entity enterprises themselves. Additionally, we find that Native-entity-owned prime contractors often engage small business subcontractors that are local to the place where the contracted work is performed. Since the contracted work may be performed outside of Indian Country, this suggests that Native-entity-enterprise prime contracts may provide subcontracting opportunities for non-Native-owned small businesses.

This analysis is part of CICD’s ongoing efforts to build data capacity for Native Nations and Indigenous communities to support informed decision-making. We hope this research will help Native Nations and policymakers better understand how federal contracting and its subcontracting relationships strengthen both Native economies and their neighboring economies.

Collaboration between Native-entity contractors and subcontractors

We estimate that in 2022, 7.1 percent of the total obligated amount of the prime contracts performed by Native-entity enterprises was spent on small business subcontracting.¹ By this estimate, out of the $16.6 billion spent on Native-entity-enterprise prime contracting, $1.2 billion went to small business subcontracts in 2022.²

Looking at business sectors, Professional and Business Services has the highest amount of prime and subcontracted spending. In 2022, about $9.9 billion was spent on prime contracting for Native-entity enterprises in the Professional and Business Services sector, with about $707.8 million going toward small business subcontracting. The next-largest sectors for Native-entity enterprises are Construction and Manufacturing, where we estimate small business subcontractors earned $358.5 million and $71.9 million, respectively, from Native-entity-enterprise prime contracts.

Native-entity-enterprise contractors have several reasons to work with subcontractors. One reason is to take on more complex projects without having to develop specialized expertise in-house. Native-entity enterprises often qualify as small businesses themselves under the U.S. Small Business Administration (SBA’s) 8(a) Business Development program. That is, they meet the SBA’s threshold for employee numbers or gross receipts for their primary industry, which may vary significantly across industries and contrast with the SBA’s standard, non-contracting small business definition of having 500 or fewer employees. By hiring other small businesses as subcontractors to complete niche tasks, Native-entity enterprises can focus the bulk of their resources on completing work tied to their own specialization.

Native-entity-enterprise subcontracts may introduce opportunities for other small businesses in a government contracting market that has become difficult to access. In 2013, the Government Accountability Office (GAO) found that contract consolidation—the practice of combining individual projects into a single, large contract to save the federal government time and money during its procurement process—created barriers for small businesses to win large and complex contracts. For many Native-entity enterprises, the largest consolidated contracts remain out of reach. However, some Native-entity enterprises with decades of federal contracting experience compete for consolidated contracts and then subcontract portions to small businesses.

Who the subcontractors are and where they operate

Native economies are connected to the economies of their surrounding communities. CICD research into Native-entity enterprises and federal contracting has found that contracted work is performed in many different locations, and not solely on reservations and in Native communities. Many non-Native-owned small businesses subcontract for Native-entity-enterprise-owned prime contracts. We find that 95.2 percent of Native-entity-owned small business subcontracts are with non-Native-entity enterprises. When we include Native-individual-owned businesses performing as prime contractors, 92.9 percent of these small business subcontracts are awarded to non-Native-individual-owned and non-Native-entity enterprises.

Figure 1 shows how many small business subcontracts for Native-entity-enterprise prime contracts are awarded to different types of small businesses, as categorized under the SBA’s 8(a) program and its subprograms, including the 8(a) HUBZone program and the Small Disadvantaged Business Program. Each program provides opportunities for small, rural, or otherwise disadvantaged businesses to compete in the federal contracting marketplace. All other types of small businesses are included in the “All other small businesses” category. A business can be counted in multiple categories unless it is one of the “All other small businesses.” For example, a business can be simultaneously women-owned and Native-individual-owned. The “All other small businesses” received 61.6 percent of the small business subcontracts. Small Disadvantaged Businesses, which the SBA defines as a company 51 percent owned and controlled by someone who can show they are socially and economically disadvantaged, received the second-largest amount, with 23.3 percent of small business subcontracts.

Native-entity enterprises contract in many different locations, but these entities often hire small business subcontractors local to the contract’s place of performance, an industry term for the geographic location where the contracted work is performed. Out of all Native-entity-enterprise-owned prime contracts with at least one small business subcontractor, 56.3 percent have at least one small business subcontractor located in the same state as the place of performance, and 68.0 percent have at least one small business subcontractor 250 miles or less from the city where the subcontracted work is performed.

Figure 2 shows the distance between the place of performance and the subcontractor’s address³ for the three primary industries for Native-entity enterprises—Professional and Business Services, Construction, and Manufacturing. In this article, subcontractors are considered local if they are 250 miles or less from the place of performance. We define local based loosely upon the bona fide place of business rule adopted by the SBA to implement a geographic preference in the Small Business Act for certain contracts awarded to certified 8(a) businesses.⁴ This rule instructs federal agencies to award construction contracts to 8(a)-certified businesses with a bona fide place of business in the county or state where the work is to be performed.

Looking at subcontractors of the three primary Native-entity-enterprise contracting sectors, we find that Construction subcontractors are most likely to be local to the place of performance, at a total of 75.9 percent. Meanwhile, about half of Native-entity enterprise Professional and Business Services prime contracts have local subcontractors, and just under a quarter of subcontractors for Native-entity-enterprise Manufacturing contracts are local.

Bridging the gap between Native-entity enterprises and subcontractors

Every year, Native-entity enterprises give contracting opportunities to small businesses that may not otherwise have access to federal contracts. This is especially important as contract consolidation increases, creating contracts whose dollar values are above the 8(a) program’s sole-source thresholds, or moving contracts to the largest contractors because of complexity and scale. We find that the businesses Native-entity enterprises have prime contracts with tend to subcontract out infrequently to 8(a)-certified Native-individual-owned businesses, but commonly to other small businesses.

While we’re confident in our analysis of the impact of Native-entity-enterprise federal contracts, data on subcontracting activity have substantial limitations that make it difficult to assess the full picture. Not all prime contractors reliably report subcontracting data, for example. Subcontracting transactions may be duplicated,⁵ never reported, or reported with unrealistically high amounts spent on subcontracting. In extreme cases, subcontracting awards may be reported as exceeding the prime contract award by over 1,000 percent. We consulted with experts in federal contracting to guide our work with subcontracting data, and we will continue our efforts to use contracting data to provide realistic and valuable information. But improvements in these data will be critical for better understanding the role of federal contracting activity in Native economies and in the local communities where contracts are executed.

Appendix: About the data

Small businesses are defined by the qualifying federal procurement programs and certifications designated by the U.S. government. These include Women-Owned Small Business, Service-Disabled Veteran-Owned Small Business, Small Disadvantaged Business, Historically Underutilized Business Zone (HUBZone), and the 8(a) program.⁶ The 8(a) program includes demographic information about the business owner’s race. We also include other businesses not included as a part of a separate SBA program but approved by the SBA or self-certified as a small business. These businesses must meet size requirements to qualify as small businesses.

Our analysis relies on USAspending.gov to obtain data on prime contracts and subcontracts that have action dates from October 1, 2015, through October 31, 2023. There are known issues with the completeness and reliability of federal contracting data, as discussed in particular by RAND and the GAO. Subcontracting data pose even more substantial issues.

Since 2007, prime contractors have had the option to report subcontracts to the federal government, but minimal data have been reported. In 2015, the SBA implemented a rule clarifying that certain SBA contracts now require prime contractors to report subcontracting activities; this change was made to increase oversight and compliance with subcontracting plans. When evaluating the subcontracting data, we scrutinized the reported information and explored how sensitive our estimates are to different assumptions about measurement error.

Endnotes

1 Our estimate is on the low end of a range of 7.1 percent to 9.4 percent. This range reflects considerable uncertainty in the underlying contracting data. In particular, subcontract values in the data are sometimes clearly falsely high. Our preferred approach, which yields a low estimate, is to adjust values that are inaccurately high by the annual average share of prime contract revenue spent on small business subcontracts. Our secondary approach, which yields the higher estimate, adjusts values that are above 100 percent of the prime contract to equal 100 percent of the prime contract.

2 Total obligated amount and subcontracting amounts are both adjusted to October 2023 dollars.

3 Subcontractor’s primary city and state and place of performance are determined through an Open Street Map geocoder.

4 On June 11, 2024, the SBA extended a COVID-19 era moratorium on the application of the bona fide place of business rule until September 30, 2025.

5 In order to address subaward duplication, we removed transactions that had the same contract award number, subaward number, total obligated amount, subaward amount, subaward action date, and subawardee ZIP Code as another transaction. All prime contracts that have subawards adding up to more than 100 percent of the prime award’s total obligated amount were identified after duplicate subawards were removed.

6 We looked specifically at subcontractors with their address in the United States. The selected categories as listed at USAspending.gov are: Minority Owned Business, Self Certified Small Disadvantaged Business, 8a Program Participant, American Indian Owned Business, Tribally Owned Firm, Asian Pacific American Owned Business, SBA Certified 8a Joint Venture, Other Minority Owned Business, Native American Owned Business, Service Disabled Veteran Owned Business, Women Owned Small Business, Alaskan Native Corporation Owned Firm, Joint Venture Women Owned Small Business, Subcontinent Asian Indian American Owned Business, Woman Owned Business, Small Business, Black American Owned Business, Veteran Owned Business, Joint Venture Economically Disadvantaged Women Owned Small Business, Economically Disadvantaged Women Owned Small Business, Native Hawaiian Organization Owned Firm, and Hispanic American Owned Business.