Create a preference/discount for local businesses in the City’s procurement process and a separate program for MWBEs. Connect local businesses to technical assistance so that they can scale and successfully compete for contracts.
In this way, you will build local supply chain capacity, build pathways to wealth creation, and keep money local.
Local Business Enterprise Program – San Francisco, CA
The City of San Francisco implemented a local business enterprise preference program that is designed to increase the number of government contracts going to local small businesses in the city.
It was carefully enacted to comply with state and federal contracting laws and accompanied by strong technical assistance. (It was created following a ruling that the previous local business preference program had violated a local ordinance prohibiting discrimination on the basis of race.)
Each year, the Mayor sets a goal for the City, and the City provides bid discounts, set-asides, and subcontracting opportunities to make it easier for
local businesses to win contracts. The program also created a Human Rights Commission, which seeks to grow minority-business engagement.
Local businesses can receive a 10% discount on government contract bids. (This discount was chosen following a disparity study, which analyzed the lower prices that could be provided by larger corporations.) They must:
- Have average gross annual receipts during the previous three years that do not exceed several set limits: (1) public works/construction — $14 million; (2) specialty construction contractors — $7 million; (3) goods/materials/equipment and general services — $7 million; (4) professional services and architect/engineering — $2.5 million; and (5) trucking — $3.5 million.
- Maintain their principal place of business in the city and have a majority of principals based in that office
- Pay at least 51% of their payroll taxes to the City
- Become certified with the program
The City provides significant technical assistance and facilitates connections to other entrepreneurs during the certification process. In this way, it seeks to ensure that certified businesses are able to compete successfully and win business.
Local businesses may also be able to benefit from the City’s Surety Bonds program, which was included in the Equitable Recovery Tactical Guide.
City of Chicago procurement services. Also see here.
How to Adapt This Approach:
- Decide the type of preference you want to provide (discount vs. set-aside)
- How you do this may be dictated by state law. Some states forbid specific set-asides for local contracts. If your state has strict rules, you should consult your City attorney. To be compliant, you may need to frame this action as a preference for “familiarity with the local environment”
- Assess the current value of government contracts and set a target for how much spend should be prioritized for local small businesses
- Discuss the proposed program with local business leaders to get feedback
- Establish a clear definition of a local small business (e.g., size/revenue limit, majority of employees/ principals live in the city)
- Create strong enforcement mechanisms to hold companies accountable to any requirements regarding subcontractors. These should include fines and the ability to terminate contracts
- Review the proposals/language with the City attorney, administrator, and council; as well as local business leaders and other key stakeholders
- Identify and recruit nonprofit, corporate, and other partners that can provide technical assistance to certified businesses
- Secure buy in from City/county/transit authority/ board of education/other procurement teams to:
- Create and publish rolling lists of bid opportunities; and
- Assess each organization’s procurement practices, to see how barriers can be removed and/or contracts can be divided up
- Launch an outreach effort to familiarize local businesses as well as partners, which can support and provide technical assistance to local businesses
- Track metrics on program performance with biannual sharing of data (value of contracts won)
COVID-19 Economic Response and Recovery
Give Preference to Local Businesses for City Contracts
Local businesses in particular have been devastated by COVID-19. One in four small businesses have considered closing due to the pandemic, and many others are facing significant challenges, unlike anything they’ve experienced. City contracting is a powerful tool for driving local demand but small businesses are often unable to compete for contracts because of a lack of awareness about the contracts or the bid process, insufficient funds to compete, and/or concerns about reporting requirements.
The City should provide a preference and/or discount for local contractors in its procurement process. By increasing the amount of purchasing at local firms, this action will help maximize the local multiplier effect which is critical, particularly during the deepest parts of the recession. A similar but distinct program should be created for minority-owned businesses, given the persistent disparities. However, this action will only be successful if it is done in conjunction with several others included here, including creating a more entrepreneurial ecosystem, providing funding to help scale, and actively reaching out to prospective local businesses.
San Francisco, CA: Local Business Enterprise Program
The City of San Francisco has implemented a local business enterprise (LBE) preference program that is designed to increase the number of government contracts going to local small businesses in the city. The program — enacted carefully to be in accordance with state and federal contracting laws — enables local small businesses to compete for contracts. The local business enterprise preference program was accompanied by strong technical assistance. It was implemented after a 2004 State Superior Court decision ruled that the previous local business preference program had violated Proposition 209, a local ordinance prohibiting discrimination based on race.
The new local business preference program was formed with this context in mind and focuses on goals for engaging local businesses. The Mayor sets a goal for the City every year and the City provides bid discounts, set-asides, and subcontracting opportunities to make it easier for local businesses to win contracts. There is also a Human Rights Commission which is focused on increasing minority-business engagement.
San Francisco created a free LBE certification process to determine eligible businesses. The city provides a 10% discount on bids for government contracts. The 10% threshold was chosen after the city conducted a disparity study to determine an appropriate rate to counteract lower prices that larger corporations may be able to provide.
To be certified, a business must maintain their principal place of business within City limits and have a majority of principals based in that office. They must also pay at least 51% of their payroll taxes to the City to demonstrate that a majority of their employees are based in their city. The City defines eligible businesses as local small businesses if their average gross annual receipts in the previous three years do not exceed several set limits: (1) public works/construction – $14,000,000; (2) specialty construction contractors – $7,000,000; (3) goods/materials/equipment and general services – $7,000,000; (4) professional services and architect/engineering – $2,500,000; and (5) trucking – $3,500,000. A City office has been given responsibility for review and enforcement and review of these limits. The City has also linked this initiative with its Surety Bonds program to enable small businesses to have a better chance of winning government contracts (this action is included later in the toolkit).
One of the biggest challenges that the City has encountered is ensuring that small businesses are able to complete contracts. Some business owners have never applied for a government contract, nor completed a large-scale project. To address this, the City provides significant technical assistance during the certification process and facilitates connections to other entrepreneurs who can provide insights into this work.
Chicago also has several programs to support local businesses and advantage them during government procurement processes. The Mid-Sized Business Initiative (MBI) is designed to enhance procurement opportunities for midsize businesses to work with Chicago. The program sets aside certain construction contracts to be made exclusively available to qualified, midsize, local businesses. There are two tiers of contracts: MBI-1 projects with an estimated value of between $10 and $20 million and MBI-2 which are $3 and $10 million in size. To qualify, a business must meet several requirements, including qualifying as a midsize business. This program focuses on construction, but the city has also created a non-construction version, the Non-Construction Mid-Sized Business Initiative (NMBI).
How To Adapt this Approach:
- Determine the type of preference your city wants to provide (e.g., discount in scoring vs. actual set-aside in terms of % of contract)
- Assess the percentage of current business (in terms of contracting dollars) that goes to government contracts and set a target for how much spend should be prioritized for local small businesses.
- How your city does this may be dictated by state law. Some states forbid specific set-asides for local contracts. If your state has strict rules, you should consult your city’s attorneys. Some cities may need to frame this action as a preference for “familiarity with local environment” to be compliant with state regulations.
- Discuss with local business leaders to get feedback on the proposed program
- Draft administrative code language for local preference program (See template in resources section)
- Be sure to review with the city’s attorney and other officials
- Have strong enforcement mechanisms to hold companies accountable to requirements regarding subcontractors. This should include fines and the ability to end the contract.
- Establish parameters for the definition of a local business (e.g., majority of employees/principals based in the city). Determine which businesses are eligible based on size, revenue limit by industry, etc. These limits will vary according to local circumstances.
- Review the language with city council, city administrators, local business leaders, and other key stakeholders to confirm that it is satisfactory
- After passing, launch an outreach effort to familiarize local businesses and support them in their application process
- Reach out to relevant businesses and launch a communications effort to notify businesses of the program
- Establish a procedure to actively contact businesses about contracts that may be suitable for them
- Assign responsibility to government officials – and hire if necessary to augment existing staff – to provide technical assistance
- Track metrics on program performance with biannual sharing of data. (See template in resources section)
- Raises concerns among larger businesses that compete with small and local businesses
- Needs to be accompanied by proper technical assistance for local businesses (e.g., access to capital, technical expertise) to ensure they are able to fully leverage opportunities
- Can cause problems for businesses looking to compete in surrounding communities (if all implement this)
- Could lead to higher cost of goods and services due to preferences which may mean more expensive suppliers, wages, etc.
- Keeps government spending local, reducing leakage and increasing overall economic activity in the city
- Supports local businesses and enables them to compete for government contracts
- Provides structured mechanisms for local businesses to obtain a reasonable advantage in contracting
Implementation time: Medium
Cost: Low. The preference program itself is not expensive, although it may require several FTE to provide technical assistance and oversight.
COVID-19 Economic Response and Recovery
Establish a Midsize Business Support Program (e.g., up to $250k loan)
Many communities offer programs to start businesses, but less support is given to businesses looking to expand. Access to credit can be difficult, and many large contracts require surety bonds or other guarantees. Yet, businesses with 5-99 employees are critical to the US economy. They account for 29% of all jobs and are often the bedrock of US cities. Supporting these businesses enables them to scale and meet more of the community’s needs. In turn, this expansion creates more jobs and keeps more spending local. Given the growing concerns of the plight of small businesses and the associated economic and employment risks, providing support to help them maintain and expand operations will be critical. This will also help address unemployment and should be done in conjunction with reskilling programs.
Cities should provide loans through a government-backed fund to help midsize businesses expand and be able to compete for larger government and enterprise contracts. Additional access to capital should be provided as part of a broader program that offers guidance for businesses (e.g., through an entrepreneurial ecosystem).
San Francisco, CA: Surety Bonds Program
San Francisco created a surety bond program to enable local businesses to compete effectively for government contracts. For local businesses that need funds to compete for government contracts, the city government will guarantee up to 40 percent of the face amount of the bond, or $750,000. Launched in the mid-1990s, the city started the surety bond program as a pilot program for their international airport expansion project. Based on the positive feedback and success from the pilot, the city established the broader surety bonds program.
The Surety Bonds program was established as a complement to the local business preference program and enables small businesses to compete for government contracts. As long as a business has been deemed eligible, they can apply for the surety bond. All city departments contribute a certain amount of their contracting budget to provide the guarantee for the bonds. Despite concerns about the potential cost of the government having to guarantee loans, only 2 projects with a surety bond have defaulted in the 20+ year history of the program.
Part of this success is due to the associated technical assistance. Most businesses that are receiving support are required to attend the bonding assistance training program. This programming includes assistance for completing bond applications and the pre-bond surety profile, help developing financial statements and establishing internal financial control systems, and how to implement accurate financial reporting tools.
Note: Although the program does not have defined metrics, the attached document highlights what should be considered with implementation. This includes tracking the # of businesses that apply for the program, the number of businesses awarded surety bonds, how many successfully win contracts, and long-term benefits (e.g., if a business is able to compete for other large contracts in the future).
While the San Francisco program focuses on city procurement and government contracting, cities should design programs that assist businesses in contracts with anchor institutions and other large corporations based in your city. Programs can be launched with a focus on government contracting – which may be easier to set parameters for – but with a goal of expanding for all larger contracts in the community.
How To Adapt this Approach:
- Meet with local businesses to understand the existing markets and landscape, and identify opportunities for growth.
- Discuss barriers to growth (e.g., why they are not competing for larger contracts, what they would need to be successful)
- Design program parameters (e.g., maximum loan amount, whether for all government contracts, etc.)
- The program design will vary by local circumstances. Elements to consider include:
- Maximum loan amount: in some cities, a $50K loan cap will be sufficient to enable businesses to expand and compete for larger contracts. For other places, this may be closer to $250K. During discussions with local businesses, review what would be necessary. Loan terms should be long-term, with low-interest (e.g., 2% over 10+ years)
- Government vs. private sector contracts: it may be easier to start with government contracting, but ideally this program would also help the businesses to compete for private-sector contracts.
- Determine the eligibility of businesses (easier if linked to a small business preference program)
- Raise funds to cover surety bond guarantees (for public sector contracts). Surety bonds are often required for public sector projects as a promise that the work will be performed. Getting a bond can be challenging for growing or newer companies as it is often contingent on previously performing projects of a similar size. Cities can raise funds for surety bond guarantees by requiring a certain percentage of each department’s contracting budget to go towards this.
- The program design will vary by local circumstances. Elements to consider include:
- Build oversight and technical assistance capacity (which can be added on to existing technical assistance services). As businesses take out loans, it will be necessary to support them, while ensuring the funds are being used correctly.
- Some businesses may not have applied for any significant loan or financing before. Walking them through this process, and ensuring compliance, will be key.
- This office should also help with bond applications, basic financial controls, and reporting requirements.
- This office does not need to be housed within your city’s economic development agency. It may be better housed within an existing city department.
- Draft program language and propose it to city council and other key stakeholders. (See template in resources section)
- Pilot a small version of the program. The full program could be expensive and will require considerable oversight.
- Collect learnings from the pilot and launch the broader program.
- Ensure that businesses are paid on-time and that there is sufficient oversight. Some cities require local businesses to be paid within 30 days of contracts.
- Track action progress and success, and revise as necessary. (See template in resources section)
- Enables local businesses to access funds and expand faster
- Offers flexibility for businesses, particularly if they are applying for larger government or commercial contracts
- Investments in growing local businesses can provide significant job growth for local communities
- Assume financial risk of supporting loans
- Can be problematic if offered without support programs (e.g., financial counseling, entrepreneurial culture)
Implementation time: Medium (pilot), Low (full program)
Cost: High. Although the actual cost of the program may be lower (e.g., issuing loans and receiving payback) it will seem high because it requires expenditures each year, even though it will be repaid. If offering loans between $50K – $250K, and assuming several FTE to run the program, it could cost over a million a year even for a smaller program.
COVID-19 Economic Response and Recovery
Drive Anchor Procurement to Local Businesses
Seek a commitment from local universities and hospitals (“eds and meds”) to procure more goods and services from local, target, small businesses; and help them to identify and engage qualified firms. Tie the program to a small business capacity-building technical assistance program.
In this way, you will support local businesses through the recession, grow your local supply chain’s capacity, and keep more money local.
DC Community Anchor Partnership – Washington, D.C.
Despite 47% of businesses in the District of Columbia being owned by entrepreneurs of color, MBEs only receive 3% of the region’s $205bn private-sector economy.
The DC Community Anchor Partnership was created by the Coalition for Nonprofit Housing and Economic Development (CNHED), a Washington DC nonprofit. CNHED worked closely with the Office of the Deputy Mayor for Planning and Economic Development.
The Partnership comprises:
- 4 anchor members (1x university and 3x hospitals)
- 3 community partners (1x municipal department’s technical assistance center, 1x Latino development center, and 1x community investment fund) and
- 6 founders (1x government, 1x nonprofit and 4x corporates).
It is staffed by 2 FTEs and has three main functions:
- Connecting anchor institutions to share best practices
- Analyzing the procurement needs of each anchor institution
- Identifying which goods and services currently being outsourced to regional or national suppliers, could be replaced by local MBEs.
The Partnership’s staff include former corporate procurement officers, who analyze the anchor’s procurement practices, encourage them to change practices, and match them with local MBEs. Their engagements are focused on the anchors’ executives, government affairs, and procurement offices. They create individual action plans, with specific goals and timelines, for each anchor.
The Partnership’s staff have also created a database of approximately 5,500 local MBEs, which they use to identify, screen and match against anchor procurement opportunities. They also connect the MBEs with technical assistance to get them ready to compete for contracts and successfully deliver them. Where a contract is too large for any one local MBE, the staff work with the anchor to split the bid between two or more providers.
In response to COVID-19, the partnership shared with its anchors a pre-vetted list of goods and services offered by MBEs, including masks, gowns, gloves, and cleaning and catering services.
In 2017, the 4 anchors procured $5.1 million from local MBEs with the help of the Partnership. Through DCAP, that number had grown to $15.3 million in 2019.
How to Adapt This Approach:
- Identify a strong, local nonprofit with a mission to support MWBEs, or galvanize the creation of a consortium
- Allocate dedicated nonprofit and City staff and/or seed funding
- Identify, convene local universities, colleges, hospitals, and other anchor institutions with significant, permanent locations in the city
- Prepare persuasive messaging and data about both the problem and the difference that the institutions could make
- With the support of your Mayor, reach out to at least 3 leaders from these institutions (CEO, finance officer, and government affairs officer). Make sure the leaders are aligned on a common agenda and understand any barriers to the institutions working together
- Convene the institutions’ leaders, encourage them to make commitments to procure local, and to instruct their organizations to cooperate. Encourage them to make these commitments public in due course
- Consider possible incentives, including around land development, and/or tax breaks.
- Go out and pitch for corporate and philanthropic funding, which can be used to recruit staff, purchase data, run events, provide TA, etc.
- Conduct an assessment of each anchor institution’s procurement practices. Develop an individualized action plan and procurement goals with timelines for each institution. Encourage anchors to publish a rolling forward plan of their procurement needs
- Work with local/ethnic chambers, business organizations, and private sector data companies to identify and develop a list of MWBE providers. It is critical that this list is verified and that providers are vetted before being forwarded to anchors. In particular, create a repository of vetted MWBEs through requests for information and market surveys, which evaluate providers’:
– Products and Services: price, quality, industry experience
– Management Capacity: RFP development and response, account support
– Operational Efficiency: staffing, accounting, technology
– Financial Capacity: revenue growth, bonding
– External Presence: online presence, community impact, references
- Refer MWBEs, which are found not to be competitive to business support organizations and technical assistance so they can become competitive in the future
- Establish a data-tracking system to capture key metrics to measure success of the program