Association for Public Policy Analysis & Management

Inclusion policies in federal procurement that target specialized groups, such as small businesses, minority-owned, or women-owned firms create specialized markets to allow designated firms to compete for and win federal contracts. The current government-wide procurement goal stipulates that 23% of all prime contracting dollars should be awarded to small business. Despite the magnitude of purchasing through inclusion policies such as small business set asides, very little is known about the design or impact of these programs on purchasing agencies or the supplier market.

In this study, we examine whether mid-sized suppliers are disadvantaged in public procurement, particularly those firms at the lower revenue thresholds of the “middle market.” Small businesses benefit from set asides and other programs offered by the U.S. Small Business Administration. Alternatively, large companies have internal capacity, scale, and extensive past performance history to compete in the public procurement market bringing financial, personnel and political resources to bear to win and execute contracts. Mid-sized suppliers are essentially left out – they are too big to qualify for set asides, yet do not have parity with large firms against whom they are competing for procurements. However, there is a dearth of empirical evidence on the both the structural barriers that exist for mid-sized suppliers and the effects of their competitive disadvantage.

We suspect that there are unique drivers for firms that emerge into the middle market because the incentives are so strong to remain a small business, even if that means stymied growth. We examine small businesses that successfully transition to the middle market to identify the strategies they pursue to overcome the “benefit cliff” they encounter as they grow. We follow 1,000 randomly selected federal suppliers over a 10-year period (FY2005-FY2014). Contracts data is obtained from the Federal Procurement Data System-Next Generation (FPDS-NG) and firm-level data is acquired from Dun & Bradstreet. By tracking firm performance over time, we can analyze firm attributes to determine the factors that contribute to (or hinder) growth.

We conduct interviews of small and mid-sized suppliers to determine their strategies for success (as they define it, either growth into the middle market or stunted growth to remain a small business). We also interview federal government officials to obtain their perspectives on the small business set aside program and perceived benefit cliff for mid-sized suppliers. Ultimately, we provide practical policy recommendations to guide policy makers and public procurement professionals.