3
The Federal Small Business Contracting Process

Amarket-based supply and demand conceptual framework can be helpful in understanding the position of women-owned small businesses in the federal contracting process. If the federal contract market were perfectly efficient, there would be no barriers to firms bidding on contracts for which they were qualified, and federal agencies would award contracts to the firms offering the best value to the government among all qualified bidders. Barriers, however, can impede the competitiveness of women-owned small businesses in securing contract awards and thereby contribute to observed disparities. Barriers may be of two types. They can come from the business supply side, in that women-owned small businesses may lack experience or other attributes that are needed for success in the contracting market. Barriers can also come from the government demand side, in that aspects of the contracting process may make it harder for women-owned small businesses to obtain contracts for which they are qualified.

This chapter provides background on the federal contracting process. It begins with an overview of the current status of women-owned small businesses in the federal contracting market. It then reviews the steps in the procurement process in a major agency, types of preferential contracting mechanisms, and data on contracting outcomes.



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Analyzing Information on Women-Owned Small Businesses in Federal Contracting 3 The Federal Small Business Contracting Process Amarket-based supply and demand conceptual framework can be helpful in understanding the position of women-owned small businesses in the federal contracting process. If the federal contract market were perfectly efficient, there would be no barriers to firms bidding on contracts for which they were qualified, and federal agencies would award contracts to the firms offering the best value to the government among all qualified bidders. Barriers, however, can impede the competitiveness of women-owned small businesses in securing contract awards and thereby contribute to observed disparities. Barriers may be of two types. They can come from the business supply side, in that women-owned small businesses may lack experience or other attributes that are needed for success in the contracting market. Barriers can also come from the government demand side, in that aspects of the contracting process may make it harder for women-owned small businesses to obtain contracts for which they are qualified. This chapter provides background on the federal contracting process. It begins with an overview of the current status of women-owned small businesses in the federal contracting market. It then reviews the steps in the procurement process in a major agency, types of preferential contracting mechanisms, and data on contracting outcomes.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting WOMEN-OWNED SMALL BUSINESSES IN THE FEDERAL CONTRACT MARKET Congress has voiced concern that women-owned small businesses are not receiving an appropriate share of federal contracts. The goal set by Congress for that share is at least 5 percent of the value of contract dollars awarded, separately for prime contracts and subcontracts. Aggregate estimates suggest that this concern may be warranted. The estimates are suggestive, not definitive, because of limitations in the publicly available data (see “Limited Data on Outcomes,” below, and Chapter 4). In 1997, women-owned small businesses were estimated to be 26 percent of the total number of 20.8 million U.S. businesses with at least $1,000 in gross receipts (including corporations, partnerships, and individual proprietorships). They were estimated to be 16 percent of the 5.3 million businesses with one or more paid employees (and at least $1,000 in gross receipts). Based on revenues, however, women-owned small businesses were estimated to account for only 4.4 percent of total dollar gross receipts of businesses with at least $1,000 in gross receipts (www.census.gov/epcd/mwb97.us/us.html [December 2004]). In fiscal year 1998, women-owned small businesses received only 2.2 percent of the value of total federal prime contract awards of $181.7 billion in fiscal year 1998—less than one-half the congressional goal. By fiscal year 2003, the share of federal prime contract awards going to women-owned small businesses had increased to 3 percent of the total amount of $277.5 billion (Federal Procurement Report FY 2003, p. ix, https://www.fpds.gov [December 2004]).1 More recent Census Bureau data that would indicate whether women-owned businesses had increased their share of total businesses or total business gross receipts are not yet available. Both business supply-side and government demand-side barriers may impair market efficiency, leading to aggregate disparities and disparities among industries in the share of women-owned businesses receiving federal contracts. An example of a business supply-side barrier would be if women entrepreneurs experienced greater difficulties in obtaining sources of startup and working capital compared with other businesses, so that fewer women-owned small businesses were large enough to be credible bidders on federal contracts. An example of a government demand-side barrier would be if federal contracting officers were less active in networking with women than with men entrepreneurs or engaged in other possibly discriminatory practices and behaviors. 1   Data are not available about subcontract awards.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting At the request of Congress, the U.S. General Accounting Office—now the Government Accountability Office (GAO)—conducted a study to identify trends and obstacles in contracting with women-owned small businesses. GAO interviews with federal contracting officers suggested that two government demand-side barriers—the numerous and complex federal contracting programs for small businesses, and the absence of a specific program targeted to women-owned small businesses—were important obstacles (U.S. General Accounting Office, 2001). Other possible demand-side barriers identified in the study include the practice of contract consolidation (bundling), which could reduce contracting opportunities for all small businesses; a lack of accountability for federal officials not meeting contracting goals; and resource constraints that limited efforts to monitor and enforce the plans submitted by prime contractors to subcontract with small businesses. Business supply-side barriers suggested by federal officials include lack of access for women-owned small businesses to working capital and lack of qualified women-owned small businesses in specific areas and industries. THE CONTRACTING PROCESS—A CASE STUDY Although governed by the same large, complex body of regulations, namely, the Federal Acquisition Regulations or FAR (48 CFR Chapter 1—see www.arnet.gov/far/ [December 2004]), the face of federal contracting varies across agency cultures, industry classifications, and geographic localities. Four agencies—the Department of Defense (DoD), the Department of Energy (DOE), the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA)—do 80 percent of federal contracting. In the period 2000 to 2003, DoD alone was responsible for approximately 65 percent of total federal contracting expenditures in any given year. In fiscal year 2003, DoD awarded only 2.5 percent of its contract dollars to women-owned small businesses, yet those dollars ($4.9 billion) represented 59 percent of total dollars awarded to women-owned small businesses (see Table 3-1). Hence, the committee chose to examine DoD contracting to understand the basic process. Resource restrictions on our study precluded a more wide-ranging investigation of other agencies. DoD’s contracting is highly decentralized. There are contracting officers located all over the United States and around the world. The DoD Small and Disadvantaged Business Utilization Office has over 800 small business specialists distributed among contracting offices to help maximize opportunities for small businesses. A basic description of DoD contracting is available at www.acq.osd.mil/sadbu [December 2004].

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting TABLE 3-1 Federal Prime Contracting Actions and Dollar Awards for Women-Owned Small Businesses, Agencies with $2 Billion or More in Total Contract Awards, Fiscal Year 2003   Women-Owned Small Business Prime Contract Actions   Number of Actions Percentage of Agency Total Dollars Awarded (thousands) Percentage of Agency Total Total (all agencies) 595,051 5.3 8,277,298 3.0 Department of Agriculture 8,987 5.1 214,811 5.2 Department of Defense 272,976 4.8 4,851,860 2.5 Department of Energy 1,998 14.6 106,402 0.5 Department of Health and Human Services 9,212 3.9 314,375 4.8 Department of Homeland Security 2,465 4.6 140,411 5.6 Department of the Interior 4,917 5.6 267,375 7.3 Department of Justice 11,228 4.1 166,135 4.2 Department of State 3,936 2.6 123,111 5.2 Department of Transportation 1,328 3.0 75,405 3.7 Department of Veterans Affairs 202,675 5.5 315,225 3.7 General Services Administration 57,959 9.8 519,527 6.5 National Aeronautics and Space Administration 1,279 6.0 283,467 2.4 NOTE: Total federal prime contract actions (new awards, modifications, etc.) included in the goaling achievement report in fiscal year 2003 amounted to 11.3 million; total dollars awarded amounted to $277.5 billion. These totals include actions reported on SF-279 and SF-281 (see text); they exclude 190 thousand actions and $28 billion (see Table 3-2). Target goals for the percentage of dollars awarded to women-owned small businesses negotiated with the SBA for fiscal year 2003 were 5 percent government-wide and 5 percent for most agencies shown; for the Departments of Commerce, Housing and Urban Development, and Labor, the goals were 6.28 percent, 10 percent, and 5.2 percent, respectively. No fiscal year 2003 goals were set for the Department of Homeland Security (www.sba.gov/GC/goals/). SOURCE: Federal Procurement Report, FY 2003, Report on Annual Procurement Preference Goaling Achievements, Actions Reported on SF-279 and SF-281 by Agency, p. ix (https://www.fpds.gov).

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting Acquisition Team Procurement begins with program planners, managers, and other DoD staff specifying an acquisition need or set of needs for the department. Once a need is defined, then an integrated product/service acquisition team is formed that may include technicians, a lawyer, procurement specialists, small business specialists, and others. This team develops an acquisition strategy. The acquisition team needs intelligence on what firms exist that can supply what the department requires. It has a responsibility to maximize small business participation at the prime contract and subcontract levels. In this regard, the department, like other federal agencies, has department-wide goals to meet by the end of the year, which are determined by negotiation with the Small Business Administration (SBA) (see www.sba.gov/GC/goals/ [December 2004]). Information, Marketing, and Facilitation An important demand-side limitation on contracting with women-owned or other types of small businesses is the ability of the DoD acquisition team to learn about available small businesses. It is largely the responsibility of the small business specialist to do market research for the procurement. The specialist will look at previous suppliers and bidders, check the Central Contractor Registration (CCR) at www.ccr.gov [December 2004], check for responses to procurements of more than $25,000 that are advertised on FedBizOpps at www.fedbizopps.gov [December 2004], and check GSA schedules, as appropriate (see www.gsa.gov [December 2004]). Historically, the CCR was the main database of information about vendors for DoD, NASA, the Department of Transportation, and the Treasury Department. As of October 1, 2003, vendors—and would-be vendors—for all federal agencies are required to register with the CCR. As of January 1, 2004, the SBA PRO-Net database of small businesses certified as eligible for various preferential contracting programs was integrated into the CCR, which is now a one-stop source of information about vendors for the federal government, including small businesses eligible for preferential contracting opportunities. FedBizOpps is an electronic point of entry for all federal contracting opportunities of more than $25,000—vendors can search for solicitations posted by contracting agencies, and agencies can search for vendors that register to receive information about particular types of procurements or specific solicitations.2 GSA schedules list preapproved vendors for supply 2   As of January 1, 2002, FedBizOpps replaced the Commerce Business Daily as the vehicle for publishing notices of all federal procurements of more than $25,000.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting of specified items. In addition, SBA Procurement Center representatives are stationed at major contracting venues to help procurement officials identify small businesses capable of carrying out specific procurement requirements. The small business specialist on the acquisition team may also use a variety of informal methods to gather information about potential small business suppliers. These informal methods include going to conferences, saving business cards collected at business events, following up marketing contacts initiated by small businesses, and attending meetings held for small business specialists. The small business specialists are fully trained and experienced government contract officers who are focused on small businesses. If the small business specialist determines for a planned procurement that only a very small number of businesses appear able to furnish the required goods or services, the specialist may hold a presolicitation meeting to gather information. In such a meeting the specialist would seek to find out which firms are interested in selling to the government and whether they can handle the order (e.g., whether they have sufficient plant capacity). Small businesses must be on the CCR to sell to DoD (or other federal agencies), and the specialist may have to encourage capable firms to go through the registration process. The specialist has a great deal of discretionary power in this process. The thoroughness of the resulting list of vendors is the result of the specialist’s skills and initiative. The department evaluates specialists primarily on the results of their searches rather than on the methods used to identify willing and capable small businesses. From the business supply side, one question is how a small business finds out about opportunities to bid as a prime contractor or as a subcontractor. The formal options are limited. In order of increasing investment by the small business in time and resources, businesses can keep an eye on the FedBizOpps web site, which is updated daily and lists all federal government procurement opportunities over $25,000; follow guidelines on the SBA web site at www.sba.gov [December 2004]; follow the 10 recommended steps for becoming a federal contractor on the DoD Small Business site at www.acq.osd.mil/sadbu/doing_business/index.htm [December 2004], which include getting registered on the CCR; and establish formal subcontractor relationships with larger companies. Informal methods, which require further investment, include getting to know the SBA or agency small business specialists, contacting agencies about contracting opportunities under $25,000, making the business’s capabilities known to large businesses, and attending conferences and professional events to network about opportunities. Subcontracting opportunities are more difficult to identify than are prime contracting opportunities over $25,000.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting Qualification Process To win and execute contracts successfully, at DoD or another agency, small businesses must be qualified. Required qualifications are both technical and statutory. Technical qualifications include an array of such factors as ability, availability, and location, among others. These factors are evaluated during the bidding process when a firm formally presents its qualifications. They are also sometimes evaluated by small business specialists during prebid market research. In addition, firms must meet a number of statutory qualifications to be considered eligible small businesses. In this process, they may also qualify as women-owned, service-disabled veteran-owned, or economically and socially disadvantaged small businesses. The definition of “small” varies by type of business and industry (refer back to Box 2-2 in Chapter 2). Formal government evaluation and certification must be obtained for status as a small disadvantaged business or socially and economically disadvantaged small business. Women-owned small businesses may be certified in these categories; they are allowed, at present, to self-certify their status as women-owned. Selection Process Small businesses are given an opportunity to bid on projects for which they are qualified. The specialist will note the number of small businesses (in total or of a certain type, such as service-disabled veteran) available to bid on a particular procurement so that a set-aside may be created if there are two or more qualified firms that are eligible for set-aside participation. (Currently, there are no set-asides for small disadvantaged businesses other than through the Section 8(a) program—see Chapter 2.) If no small businesses are identified to bid on a procurement, then DoD has a process for every contract over $10,000 whereby the contract officer must produce a small business coordination record. This record outlines how the contracting will proceed. For example, it may be unrestricted by size of business, it may have a 10 percent small disadvantaged business price evaluation or bid-credit (explained below), or it may take another form. Both the DoD small business specialist on the procurement team and a representative from the SBA must sign off on the plan before it can be executed. When decisions are made regarding sole or single-source awards, those given to large companies will often contain requirements that a percentage of the contract must be subcontracted out to small businesses generally or particular types of small businesses.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting Role of the SBA The SBA negotiates annual goals with the DoD, as well as other federal agencies, regarding the percentage of contract funding that should go to small businesses in various classes (see www.sba.gov/GC/goals/ [December 2004]). Goals always play a role in the DoD acquisition process. Acquisition teams have a requirement to maximize small business participation at the contractor and subcontractor levels. They also have specific goals that are measured at the end of a fiscal year. Administered this way, there are informal pressures to meet these goals, although agencies are not supposed to treat the goals as quotas that could change procurement behavior toward the end of the year. The SBA small business representatives and the DoD small business specialists facilitate small business awards throughout the procurement year. Some awards are counted as “two-fers.” A two-fer is a contract awarded to a firm that can count against more than one of the agency’s goals, for example, toward small disadvantaged business contracting and toward women-owned small business contracting (U.S. General Accounting Office, 2001:9). TYPES OF RESTRICTED COMPETITION There are several major types of restricted or preferential competition used in the federal contracting process. Socially and economically disadvantaged small businesses that are certified by the SBA as eligible for the Section 8(a) program may receive noncompetitive, sole-source contracts (including options) up to $3 million for goods and services and $5 million for manufacturing. (Economically disadvantaged women-owned firms may qualify for this program if they are minority-owned or if they are deemed socially disadvantaged on an individual basis.) Many restricted competitions are conducted using set-asides, in which particular procurement opportunities are set aside to be bid on only by selected classes of small businesses. Another concept that has been used at some agencies is a price evaluation adjustment (PEA,) or bid-credit, competition, which may be used for contracts over $100,000 involving designated industries. Briefly, selected classes of small businesses are given an economic advantage in the competition. For example, technically qualified small disadvantaged businesses or HUBZone small businesses may be given up to a 10 percent price evaluation adjustment, or bid-credit, in a particular competition. In broad terms, the 10 percent credit works as follows: if a technically qualified large business has the potential winning bid of, say, $160,000, then the small business bid would be accepted over the large business bid if it does not exceed $176,000.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting A similar mechanism, termed an evaluation credit or factor, has been used in some competitions to give an advantage to prime contractors that propose to subcontract with small disadvantaged businesses or other types of small businesses. In this instance, large company bidders with acceptable subcontracting plans may be given an evaluation credit of a specified percentage of the designated evaluation points for the contract. Small disadvantaged businesses that subcontract with other small businesses may also be eligible for an evaluation credit. Finally, contracting officers may offer a monetary incentive to prime contractors if they exceed the small disadvantaged business subcontracting goal for the procurement. The committee at its workshop heard a presentation from R. Preston McAfee about the advantages and disadvantages of various contracting mechanisms to encourage the use of small business contractors without unduly harming other bidders (see Appendix A). In particular, McAfee argued that the use of bid-credits offers a number of advantages compared with set-asides. Bid-credits are flexible, maintain competitive pressure among bidders, and may be adjusted in size and frequency of use to address a perceived lack of opportunities for small business contractors. Indeed, situations that appear to require larger or more numerous bid-credits to achieve contracting goals for women-owned or other types of small businesses will draw attention to the reasonableness of the goals, the accuracy of the information on availability, and the possible existence of barriers to participation in the contracting process. In contrast, set-asides are equivalent to granting an infinite bid preference to the target class. They eliminate competition from outside that class and represent an all-or-nothing type of preferential contracting program. Federal agencies have successfully used bid-credits, for example, in allocating the telecommunications spectrum. LIMITED DATA ON OUTCOMES Our brief review of the federal small business contracting process in the Department of Defense made clear the considerable latitude that is afforded acquisition teams and small business specialists in determining acquisition and information-gathering strategies. It is likely that considerable variation also exists in contracting practices across departments and agencies, which, in turn, may have differential effects on the outcomes of the process for small businesses of different types. Yet few regularly issued reports on contracting outcomes are accessible, so we know little about small business contracting trends and variations across agencies, industries, regions, time periods, and types of small businesses. Some yearly reports are available on the Internet from the SBA and from the Federal Procurement Data System (FPDS)—refer back to Table 3-1 for basic statistics on women-owned small businesses. The SBA provides

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting tables of percentage goals for small business contracting dollars for each fiscal year, separately for prime contracts and subcontracts, by agency for all small businesses, 8(a)-certified small businesses, other small disadvantaged businesses, women-owned small businesses, and service-disabled veteran-owned small businesses (see www.sba.gov/GC/goals/ [December 2004]). Beginning for fiscal year 2000, the FPDS (https://www.fpds.gov [December 2004]) provides tables of prime contract actions and dollars awarded by agency, by industry, and by state (these attributes are not cross-classified). In addition, the FPDS provides tables of prime contract actions and dollars for small businesses by type. By agency, the system provides tables of small business and small disadvantaged business contracting by type of competition (noncompetitive, restricted competition, unrestricted competition). Other tables by agency report prime contract actions and dollars by type of preference program (e.g., small disadvantaged business price evaluation adjustment). The FPDS is built primarily on the GSA individual contract action report (ICAR) database, containing records of individual contract actions provided by federal contracting officers on SF-279 forms (the civilian agency standard form for reporting individual contract actions, typically involving contracts of over $25,000) and DD-350 forms (the equivalent defense agency form). Small purchases reported on SF-281 forms (the standard form used to report purchases of less than $25,000, which may be combined on one form) and credit card purchases are excluded from the ICAR database, although some FPDS reports provide aggregate SF-281 data, and there is a standard report for aggregate credit card purchases. In addition, a few agencies are not required to report any contracting actions to GSA; they include Congress, the GAO, the federal courts, the Federal Aviation Administration, the Tennessee Valley Authority, the Federal Deposit Insurance Corporation, the Central Intelligence Agency, and the National Security Agency (see Eagle Eye Publishers, Inc., 2004b:3-4). Finally, ICAR does not contain information on subcontracts. There are at least three major problems with the standard FPDS reports, which, at present, preclude their use in providing an informative year-by-year picture of federal contracting outcomes. First, although easy to access on the Internet, the tables are poorly documented, which handicaps those not exceptionally well versed in federal contracting from being able to readily interpret the numbers. For example, it is easy to misinterpret reported numbers of contract actions to mean contract awards, when a single contract may have multiple actions, such as the original award and modifications or additional task orders. No table entries are provided for numbers of individual awards. As another example, there is no indication in the report by agency on SF-281 purchases of whether the separate line

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting for “small business set-aside” is a subset of the line for “small business concerns.” Second, the data content of the regular FPDS reports is very limited. There are no tabulations of contract actions or dollar amounts of awards cross-tabulated for, say, federal agencies by industry. As noted above, because of the lack of information, there are no reports for subcontracts. There is also not a complete picture of small business contract outcomes, either in total or by type of small business. Useful tables would include not only awards by type of competition, but also procurements in which small businesses submitted offers but did not win and procurements in which no small businesses submitted an offer. Third, tables are not consistent in their coverage of contracts, and no information is provided that would permit reconciliation across tables. Thus, some tables include information for contracts reported on SF-279 from the ICAR database, while others aggregate information for contracts reported on SF-279 and SF-281. In addition, tables for small business “goaling achievements,” showing percentages of total actions and dollars awarded by type of small business, exclude some contract actions that are reported in other tables on small businesses (see Table 3-2 for an illustration of consistency problems in the standard reported data for small businesses). Given our study’s limited resources, although we make a general recommendation that more informative and regularly generated reports of federal contracting outcomes need to be issued (see Chapter 6), we do not specify their specific contents. Generating more informative reports, particularly when individual action records must be assembled into records for contracts, will not be easy. The difficulties of working with the individual SF-279 micro records and other sources to produce consistent, detailed tabulations and analyses are well described in a recent study of veteran-owned small businesses in federal contracting that was commissioned by the SBA (Eagle Eye Publishers, Inc., 2004b). The benefits of having more informative reports produced on a regular basis, however, could be substantial for the SBA, federal contracting agencies, Congress, business owners, and their trade associations, researchers, and other stakeholders. We urge the SBA to consult with major contracting agencies, stakeholder groups, and researchers to design a system of informative, carefully documented reports from the FPDS on contracting outcomes by type of small business, agency, and industry. If data are systematically collected on subcontracting outcomes, as we recommend (see Chapter 6), then regular reports on subcontracting actions should be developed as well.

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Analyzing Information on Women-Owned Small Businesses in Federal Contracting TABLE 3-2 Different Reports of Federal Contracting, for Selected Types of Businesses, Fiscal Year 2003 Contract actions Number Percentage of Total Women-owned small businesses Report on Annual Procurement Preference Goaling Achievements 595,051 5.3 Total federal snapshot (aggregating SF-279 and SF-281 actions) 595,315 5.2 Small businesses, total Report on Annual Procurement Preference Goaling Achievements 6,081,080 53.7 Total federal snapshot (aggregating SF-279 and SF-281 actions) 6,083,267 52.8 Total businesses Report on Annual Procurement Preference Goaling Achievements 11,330,377 100.0 Total federal snapshot (aggregating SF-279 and SF-281 actions) 11,520,433 100.0 Dollar amount of contract awards Thousands of dollars Percentage of Total Women-owned small businesses Report on Annual Procurement Preference Goaling Achievements 8,227,298 3.0 Total federal snapshot (aggregating SF-279 and SF-281 actions) 8,303,604 2.7 Small businesses, total Report on Annual Procurement Preference Goaling Achievements 65,505,924 23.6 Total federal snapshot (aggregating SF-279 and SF-281 actions) 65,781,170 21.5 Total businesses Report on Annual Procurement Preference Goaling Achievements 277,477,716 100.0 Total federal snapshot (aggregating SF-279 and SF-281 actions) 305,495,128 100.0 NOTE: Although the total federal snapshot is inclusive, the goaling achievements report excludes some contract actions (see Table 3-1). SOURCE: Federal Procurement Report FY 2003: pp. viii-ix for goaling achievements; pp. 74-75 for federal snapshot (https://www.fpds.gov).