Navigating the Set-Aside Shift in Federal Government Contracting

A significant shift is being observed in the landscape of federal government contracting, with an increasing number of service contracts traditionally handled by large businesses being set aside for Small Businesses (SDVOSB, 8(a)/SDB, HUBZone, Women-Owned). This trend sparks both applause from small business champions as well as mounting concern by federal government program stakeholders as this shift progresses.

The economic benefits of utilizing small businesses is evident Small businesses accounted for 44% of all economic activity in the United States (as of 2019) and 62% of all new jobs (from 1999-2020).[1] Given these benefits, small business champions and recent White House Administrations, continue to advocate for more federal procurement dollars to go to small and disadvantaged businesses (SDB). Case in point, the Biden-Harris Administration introduced a new initiative to boost federal contracting opportunities for SDBs, increasing the spending goal from 9.8% to 15% by FY2025, which represents an additional $100 billion to SDB’s over the next five years.[2] Congress recently signed the NDAA executing a spending goal increase for SDVOSBs from 3% to 5%, representing billions of dollars. In 2022 alone, small businesses were awarded a record $159 billion in federal government contracts which represented over 23% of all (disclosed) federal procurement dollars, an increase from a decade prior of $90 billion and less than 20% of federal procurement dollars.[3] There are also benefits at the programmatic level through both competitive pricing (indirect costs are much lower with small businesses) and increased innovation, which is known to thrive within strong small businesses based on speed and efficiencies (less red tape).

Despite the economic benefit of this shift, there are legitimate concerns federal agencies face when program requirements, traditionally performed by mature large businesses, are set-aside for small business. Government officials, already burdened by other inherent risks and challenges (budgets, staffing, outdated systems, etc), are now being asked to partner with small businesses they might not know or trust to meet their programmatic goals and objectives.. After a decade in business, we have seen small businesses come and go, many failing from poor business decisions that impact contract performance. We too have suffered through some of the same challenges, but have made it to the other side, which gives us a unique perspective on what program offices should consider when choosing the right small business.

Below, are some points for Government stakeholders to consider when evaluating which small businesses can provide them with the benefits they seek without the added risks. While these recommendations generally foster relationships with the right small businesses, they are primarily based on contracts over $5 million and of the size, scope, and complexity that large businesses supported in years past.

Guidelines for Selecting the Right Small Business:

1.       Defined Organization - Look for stability and experience in leadership and assess the infrastructure supporting the contract's size, scope, and complexity, including in-house departments and certifications such as ISOs, CMMIs, and CMMC.

2.       Focused Mission/Vision - Prioritize small businesses with a clear mission and vision, indicating a focused approach and commitment to providing excellent support. We’ve seen many clients suffer from the fast-growing small businesses that lack focus and chase all the shiny objects and opportunities. While more dollars are being allocating to small businesses, there is also a decline in the number of small businesses registered to do business with the federal government. This phenomenon can make it easy for a small business to lose focus and get distracted by opportunities not really in their wheelhouse.

3.       Proven Past Performance - Consider a small business with a proven track record as a prime contractor, ideally with more than 5 years in business. According to the Bureau of Labor and Statistics (BLS), 45% of small businesses fail in the first 5 years and 65% in the first 10 years.[4]

4.       Balanced & Sustainable Cost Structure - Evaluate reasonable cost structure that ensures sustainability in contract performance. Avoid Low Price Technically Acceptable (LPTA) scenarios for professional services/technology solutions. While low-price offers may initially perform, the risk of outpricing themselves and jeopardizing future performance increases when compliance with regulations and in-sourcing functions like HR and finance are required. A healthy GSA schedule rate card is a good indicator (even if GSA is not utilized for award), especially considering price reasonableness is determined as part of being awarded a GSA schedule.

5.      Strong Teaming Partners - Assess the legitimacy and reputation of the contractor’s teaming partners, with preference given to those with Fortune 500 or Big 4 teaming relationships when it comes to contracts of larger size, scope, and complexity. A history of successful collaboration between teaming partners is also a great indicator.

While the growth of small business set-asides raises concerns among government program offices, we urge program offices to recognize the agility and innovation inherent in small businesses while mitigating risks through careful selection based on proven performance. As more agencies acknowledge and leverage the advantages of small businesses, maintaining a balanced approach and remaining vigilant in their selection process will ensure successful partnerships that benefit both parties and our nation.

[1] "How Small Businesses Drive the American Economy." Forbes Business Council, Forbes, https://www.forbes.com/sites/forbesbusinesscouncil/2022/03/25/how-small-businesses-drive-the-american-economy/?sh=2fe376f84169. Accessed 4 Jan. 2024.

[2] "Biden-Harris Administration Launch New Initiative to Increase Federal Contracting for Small Disadvantaged." Small Business Administration, U.S. Small Business Administration, https://www.sba.gov/article/2023/05/25/biden-harris-administration-launch-new-initiative-increase-federal-contracting-small-disadvantaged. Accessed 21 Dec. 2023.

[3] "Small Business Trends 2022." HigherGov, HigherGov, https://www.highergov.com/reports/small-business-trends-2022/. Accessed 21 Dec. 2023.

[4] "U.S. Business Employment Dynamics by Age of Establishment, Not Seasonally Adjusted." Bureau of Labor Statistics, U.S. Department of Labor, https://www.bls.gov/bdm/us_age_naics_00_table7.txt. Accessed 4 Jan. 2024.