Photo By: Tim Mossholder
The federal government is trying to solve a real problem for growing small businesses: What happens when a company becomes too large to qualify as a small business?
For many federal contractors, reaching that point can be difficult. A company may successfully grow beyond the Small Business Administration’s size limits, only to find itself competing against companies that are much larger. Those larger companies often have more employees, more resources, more infrastructure and years of federal contracting experience.
Raising the size standards could give growing companies more time to prepare for that change. It could allow them to continue building their businesses before having to compete directly with the largest federal contractors.
But there could also be an unintended consequence. If the government expands the definition of a “small business,” companies that are much larger than today’s typical small businesses could suddenly compete for the same small-business contracts.
For example, a company with more than $20 million in annual revenue could find itself competing against a company with $3 million or $5 million in revenue. While both companies may technically qualify as small businesses under a new standard, they may have very different levels of experience and resources.
Past performance could make that difference even more important. Federal agencies often look at a contractor’s past performance when deciding who can successfully complete a contract. Companies with years of federal work may have a long record of completing similar projects. Smaller or newer companies may not have the same record simply because they have not had as many opportunities to win large contracts.
That could give larger companies an advantage when competing for small-business set-asides.
The issue becomes especially important for companies trying to move from smaller contracts to larger ones. A contractor may have the right employees, technical skills and ability to perform the work, but still struggle to compete if an agency requires experience on contracts of a similar size. In that situation, a company can be capable of doing the work but unable to demonstrate that capability because it has not previously been given the opportunity.
That is one of the challenges facing policymakers as they consider changes to the size standards. The question is not simply how many companies will qualify as small businesses. It is also what happens to the competition within that expanded group.
“There is a real problem here that deserves to be fixed, but we need to be careful that the fix isn’t worse than the symptom. Raising the size standards may help more mature companies make the transition to full-and-open competition, but without also examining past-performance requirements, we could make it significantly harder for newer businesses to ever get the opportunity to grow. You can’t build past performance if you can’t win the work in the first place,” said Joanne M. Frederick, CEO of Government Market Strategies.
That creates a difficult cycle for new businesses.
Small-business programs are designed to give companies a chance to enter the federal marketplace and grow. A company wins a contract, builds its experience, develops a record of past performance, hires more employees and invests in its capabilities. Over time, that company can take on larger contracts and eventually compete outside the small-business market.
But if newer companies have to compete against much more established businesses for those first opportunities, building that experience could become harder.
There is also a broader economic impact to consider. Federal contracts can provide businesses with the revenue they need to hire workers, purchase equipment, develop new technology and expand into new markets. For a small contractor, winning one contract can be an important step toward becoming a larger and more competitive company.
When access to those early contracts becomes more difficult, growth can slow. That does not mean every newer company should receive a contract or that established small businesses should be excluded. It does mean that policymakers may need to consider whether the rules create enough opportunities for companies at different stages of development.
The concern is not that larger companies should automatically be prevented from competing. Instead, the question is whether the government should also look at how past-performance requirements affect companies at different stages of growth.
Changing the size standards alone may not solve the larger problem.
The federal contracting system needs companies at every stage. It needs new businesses entering the market, growing small businesses expanding their capabilities and larger companies competing for major contracts.
Helping companies successfully move beyond small-business status is important. But that goal should be balanced with the need to make sure new businesses still have a realistic opportunity to win contracts and build the experience they need to grow.
Otherwise, the government could solve one problem while creating another: helping today’s growing businesses move up while making it harder for tomorrow’s small businesses to get started.
The debate over small-business size standards, therefore, is about more than a revenue limit. It is also about how the government creates a path for companies to enter the federal market, gain experience and grow.
A change to the size standards may give some businesses more room to succeed. But if the rules around past performance and experience do not evolve as well, the companies that need their first opportunity may have a harder time getting it.
The challenge for policymakers will be finding a balance between those competing needs. Giving established small businesses enough room to grow can strengthen the federal contractor base. At the same time, preserving opportunities for newer companies can help ensure that there are businesses ready to take their place in the next generation of federal contractors.
