The Hidden Cost of Contracting Preferences: A Barrier to Long-Term Growth

Why We're Missing the Bigger Picture

When we talk about contracting preferences in government procurement, we're usually thinking of something very specific: how public contracts are awarded to local or minority-owned businesses. But what if the real issue isn't about who gets the contract — but how that process stifles innovation and long-term growth?

"In my experience, the most impactful business decisions don't always come from policy experts or economists," I've often said to colleagues, "but from those who are actually building something every day."

I've spent a good part of my career covering how government spending influences everything from tech startups to sports franchises. And in recent months, I've been seeing a troubling pattern: when we remove local or minority preferences in public contracting, the effects ripple far beyond what's immediately visible.

What's at Stake

Contracting preferences — often seen as affirmative action for businesses — have been a staple of U.S. government procurement policy since the 1960s. They're meant to level the playing field, especially for underrepresented groups in the economy. But there's an unintended consequence that's growing harder to ignore: these policies may be inadvertently creating a system that is less efficient and less adaptable.

In Chicago — a city known for its complex economic ecosystem — we've seen this tension play out in stark ways. From the bustling corridors of tech innovation in the Loop to the industrial hubs of the South Side, local contractors are being pushed to compete with companies from outside the city, often at a disadvantage. It's not that they can't win — it's just that the bar is set higher, and the path is longer.

Businesses Are Staying Small

Let's face it: small businesses are the lifeblood of our economy. But in many cases, contracting preferences have created a kind of artificial ecosystem where growth is limited by policy rather than market forces. The result? A cycle where local firms struggle to scale up, often because they lack access to capital or experience working with large clients.

When the government decides that a particular contract should go to a local business — which is great in theory — there's a hidden cost: that business must prove it can deliver at a level that rivals companies that may not even be based in the same state. That's where the rubber meets the road.

But here's what's interesting — and sometimes frustrating — about this whole dynamic: when you strip away those preferences, the competition gets real. And the winners are often bigger, more established players who have the financial muscle and the operational scale to take on large-scale contracts. What we're seeing is that some of these businesses may be better positioned for long-term growth, but at the cost of local vibrancy.

The Real Risk: Stagnation

There's a subtle danger in this setup. If you're constantly supporting small or minority-owned businesses through preferences, you risk locking them into a niche — a kind of economic comfort zone. Over time, this can lead to a lack of innovation, less competition, and ultimately, a stagnant economy.

I've seen it in the media world as well — when networks try to promote diversity by requiring that a certain percentage of content creators be from underrepresented groups, it often leads to tokenism rather than genuine growth. It's not that we don't want to support these voices — it's that the system sometimes pushes them into roles where they can't fully expand.

Breaking Down the Myths

There are two major myths floating around when it comes to contracting preferences. First, that these policies always benefit underrepresented groups — but the data tells a different story. Some of the most successful minority-owned firms in Chicago, for example, have grown not because of government support, but by leveraging partnerships and innovation.

The second myth is that eliminating preferences will hurt small businesses. While it's true that some may struggle initially, this is often a sign that they've been shielded from real market pressures — which is ultimately more harmful in the long run.

A Balanced Approach

What we need isn't just to get rid of contracting preferences, but to reframe how we think about supporting businesses. A better system would emphasize merit-based selection while still providing pathways for smaller firms to compete — like offering mentorship programs, access to capital, or training in public procurement.

In fact, I've noticed that some cities across the U.S. are already doing this. Places like Austin and Seattle have started integrating business development support with their contracting processes. They're seeing better outcomes — not just for the companies involved, but for the broader economic health of the city.

It's not about abandoning support for underrepresented groups — it's about creating a system that empowers them to grow, not just survive.

The Future Is in Balance

As we continue to navigate post-pandemic economic recovery and evolving workforce needs, one thing is clear: the policies we design today will shape how businesses operate tomorrow. Contracting preferences are part of that story — but they shouldn't be the whole story.

By striking a better balance between support and market competition, we can create an economy that's more resilient, more innovative, and more equitable. And that's something worth fighting for — not just for businesses, but for all of us who depend on a thriving local economy.