Minority-owned firms face ‘crisis’ as affirmative action programs fall

Minority- and women-owned businesses are bracing for the end of affirmative action in federal contracting—and the potential loss of contracts worth at least $70 billion a year—as government programs for “disadvantaged” firms have fallen to legal attack over the past year.

In a seismic shift, a series of court rulings have held that some of the federal government’s largest diversity programs violate the Constitution’s guarantee of equal protection, often citing the Supreme Court’s 2023 decision to overturn race-conscious college admissions.

As a result, key agencies have dropped race and gender preferences born in the civil rights era and intended to level the playing field by setting aside billions each year in contracting dollars for minority- and women-owned firms.

“A reality has set in that it’s a different game,” said Tony Franco, managing partner at PilieroMazza, which represents numerous minority contractors. How the government tries to achieve equality “is going to require much more thinking through of how to get to disadvantaged communities of all races.”

Since the Supreme Court last year ruled against race-based admissions at Harvard University and the University of North Carolina at Chapel Hill, several contracting programs, including a Small Business Administration program that funnels billions in federal contracts to disadvantaged firms, have faced adverse rulings.

Franco said the Biden administration’s decision not to appeal that SBA ruling signaled a major turning point, indicating that the administration agreed the process needed to be changed to comply with the Constitution. As a result, any programs that similarly presume minorities are disadvantaged may be subject to revamping, he said.

Last week’s election victory of Donald Trump—an ardent foe of affirmative action programs—is heightening fears that race-based programs could be further undone. Meanwhile, another major program is primed for a similar outcome: In September, a federal judge in Kentucky partially blocked the Transportation Department’s Disadvantaged Business Enterprise program, which has been operating for more than four decades on the presumption that minorities and women are socially disadvantaged. In his opinion, Judge Gregory F. Van Tatenhove, a George W. Bush appointee, indicated that he would block the entire program from awarding contracts based on those presumptions.

The program has 49,000 participants. Some say such a ruling would be catastrophic, affecting their access not only to federal contracts but also to the many state and local programs structured the same way.

“It would be a minority business crisis if this program went away,” said Shon Harris, owner of a Chicago-based electrical services firm.

Harris, who founded his business in 2006, said it could be decimated. Though only about 10% of his company’s $19 million in revenue last year came from the federal program, much of the remaining income came from contracts won through the “minority businesses enterprise” program run by the state of Illinois, which Harris predicted would be the next to topple.

“From an African American contracting standpoint, it’s pretty scary to think that these programs won’t be around,” Harris said. “And to try to prepare for them is not necessarily all in our hands. … It’s not like the problems with bias and racism won’t exist anymore.”

Created in the 1960s and ’70s, federal affirmative action programs were adopted to address pervasive race and gender discrimination in the private and contracting sectors. Backlash soon followed from White and male business owners, who said the programs discriminated against them.

A series of Supreme Court decisions in the 1980s narrowed the circumstances in which race and gender preferences were justified. And beginning in the late 1990s, several states took up ballot measures to outlaw affirmative action. It’s now prohibited in nine states: Arizona, California, Florida, Idaho, Michigan, Nebraska, New Hampshire, Oklahoma and Washington.

California, the first state to pass a prohibition, is often held up as an example of what lies ahead if the federal government drops its core race-conscious programs. The passage of Proposition 209 in 1996 ended the use of racial and gender considerations in government, including the awarding of state and local contracts.

As a result, minority- and women-owned firms secured fewer government contracts, wiping out $1 billion of their annual revenue, according to a 2015 report by the Equal Justice Society. More than 80% of that lost business—$823 million—was tied to state contracts, while municipalities such as San Francisco accounted for much of the rest.

“There were many businesses that had to close their doors because the entrenched business networks—the old boys networks that exist throughout the economy—were allowed to flourish after Proposition 209 went into effect,” said Oren Sellstrom, litigation director at Lawyers for Civil Rights in Boston, who worked as an attorney in San Francisco when the California affirmative action ban was passed. “That is a predictor in some ways of what could happen if a similar situation unfolded at the federal level.”

But taxpayers may have also saved. According to a 2009 study published in the Review of Economics and Statistics, the price of state-funded contracts in California fell 5.6% after the affirmative action ban, relative to federally funded contracts, which were not affected by the law. The state collectively saved $64 billion in 1998 and 1999, according to the study, which attributed the drop to fewer restrictions on selecting contractors.

Kendra Perkins Norwood, a partner and government contractors attorney at ReedSmith, is trying to prepare her clients for what to expect. She predicts contracting preferences across the board will no longer rely on race or gender alone. Instead, she said, qualification will come down to an individual’s ability to document their struggles with discrimination.

Norwood said all minority and women contractors should be preparing written narratives to prove their disadvantage. Doing so became a crucial part of the application process after a court blocked the use of racial preferences in the Small Business Administration’s 8(a) program. Participants in the Transportation Department’s DBE program should be preparing for a similar requirement, Norwood said, though the program has not yet adopted it.

“You’re going to have to certainly be prepared to meet a higher standard to demonstrate why you deserve to have access to these programs, and it’ll become more competitive,” said Norwood, who represents disadvantaged businesses in both programs.

Procurement at all levels of government contributes significantly to the U.S. economy, typically comprising about 10% of the country’s gross domestic product.

In fiscal 2023, the federal government committed about $759 billion in contracts, according to the Government Accountability Office. About $76 billion went to minority-owned businesses through SBA programs, such as the 8(a) program. In addition, businesses in the Transportation Department program have received almost $34 billion through federal transportation contracts in the past five budget years, according to data provided by the Transportation Department.

The federal government still requires most government contractors to take “affirmative action” to ensure equal opportunity for their employees, meaning they are legally obligated to ensure their workforces are diverse. That requirement comes via a 1965 executive order issued under Lyndon B. Johnson, which has remained in place ever since—despite an effort by Ronald Reagan to roll it back in 1984.

In a sweeping policy proposal for the incoming Trump administration, conservative policy advocates recommend that Trump rescind the Johnson order—a move that would eliminate contractors’ affirmative action obligations and the office that enforces them. Though Trump has not indicated he would do so, he issued an executive order in 2020 that effectively barred contractors from implementing diversity training—which President Joe Biden subsequently reversed.

Federal programs are not the only ones facing legal challenges. In one highly watched case concerning a minority contract set-aside program in Houston, two landscaping companies run by White plaintiffs sued the city, alleging discrimination under the equal protection clause. A federal judge is set to decide whether to block the program.

Colette Holt, a San Antonio-based attorney who has developed and defended such programs for three decades, said judges have typically upheld minority contracting programs “based on accepted statistical analyses and qualitative evidence,” such as studies that measure disparities between the number of minority firms available versus those awarded government contracts.

Since the Supreme Court’s college admissions ruling, however, “the federal courts are now rejecting these studies and seem to be changing the law to make it much more difficult to justify systemic, tailored remedies for race and sex discrimination in public contracting,” Holt said in an email.

Linda Moen, head of an engineering firm in the St. Louis area, said the Transportation Department program now under threat helped her business after she enrolled in 1998. Although she said her firm is now strong enough without the program’s contracts, they still comprise 30% of her company’s $12 million in annual revenue.

“I think we’ll take a large hit,” Moen said. But “who it’s really going to hurt is the people who are just starting into the industry.”