Photo By: Priscilla Du Preez
Proposed changes to federal small-business size standards could give established contractors more room to grow—but some industry leaders warn the changes could make it harder for newer businesses to break into the federal market.
For federal contractors, growing beyond the government’s definition of “small business” can create an unexpected problem: success itself can mean losing access to the contracting programs that helped fuel that growth.
That “benefit cliff” is at the center of a debate over proposed changes to federal small-business size standards. Joanne M. Frederick, CEO of GMS, argues that giving growing contractors more time to develop is worthwhile—but policymakers need to be careful not to solve one problem by creating another.
“The jump from small-business set-asides to unrestricted competition often comes just as a contractor has built the workforce, systems, and experience needed to pursue larger programs,” Frederick said. The Small Business Administration has described this loss of eligibility as a “benefit cliff,” which can discourage companies from pursuing growth.
The proposed changes, however, would go considerably beyond a modest extension of that runway in some industries. For administrative and general management consulting under NAICS 5416, for example, the proposed size standard would increase from $24.5 million to $295 million.
Frederick views that as a fundamental change in the competitive landscape rather than simply an adjustment to account for inflation or changing market conditions.
“Raising the threshold from $24.5 million to $295 million is not an incremental adjustment,” she said. “It changes who will be competing in the small-business market and the relative scale of those competitors.”
That distinction matters because the label “small” can encompass businesses of dramatically different sizes. A $3 million contractor and a $295 million contractor may both qualify as small under the proposed standard, but their resources, proposal capabilities, customer relationships and ability to absorb costs can be vastly different.
According to the Small Business Administration’s analysis of the proposal, approximately 37,002 firms that already hold federal contracts could become newly eligible as small businesses. Those firms hold roughly 105,655 contracts worth more than $71 billion.
Frederick argues that the change could give established contractors valuable room to grow and build the capacity and capital needed to compete for larger federal programs. But she also worries that the same change could create an entry problem for businesses that are still trying to establish themselves.
The concern is particularly acute in federal contracting, where past performance can be critical to winning future work.
“A company cannot build federal past performance without winning federal work,” Frederick said, “but it increasingly cannot win federal work without already having past performance.”
Small-business set-asides are designed in part to address that Catch-22 by giving smaller companies opportunities to compete for federal prime contracts.
But the pool of businesses actually receiving federal work has already shown signs of contraction in some areas. A Government Accountability Office analysis found that the number of small businesses receiving Department of Defense contract awards fell from 42,723 in 2011 to 24,296 in 2020, a 43% decline. GAO also found that the number of new entrants declined, with new businesses receiving just 4.1% of DOD’s small-business obligations in 2020.
Frederick says the potential impact could extend beyond prime contracts. Small businesses frequently enter the federal market as subcontractors, using those opportunities to develop experience, relationships and past performance before pursuing work as prime contractors.
Federal acquisition rules require other-than-small prime contractors to provide small businesses the maximum practicable opportunity to participate and, when applicable, establish subcontracting goals.
If substantially larger companies qualify as small, Frederick argues, established firms could potentially capture opportunities that otherwise might have gone to newer businesses. The government could continue meeting its overall small-business contracting goals while the pipeline of genuinely small and emerging companies becomes narrower.
The policy challenge, then, is how to provide a longer runway for successful contractors without eliminating the on-ramp for new entrants.
Frederick suggests several potential approaches. Existing size standards could be adjusted gradually to reflect inflation and changing market conditions. Policymakers could also consider creating a separate midsized-business category that gives successful firms additional room to grow without requiring startups and very small contractors to compete directly against companies approaching $295 million in revenue.
Agencies could also use graduated acquisitions that allow companies to move from smaller projects, demonstrations or paid pilots into larger programs. Frederick says evaluations could place greater emphasis on demonstrated capability—including technical demonstrations, oral presentations, scenarios and work samples—rather than relying so heavily on whether a company has already performed a contract of comparable size.
The stakes extend beyond federal procurement.
Small businesses account for approximately 44% of U.S. economic output, nearly half of private-sector employment and roughly two-thirds of net new jobs. They are not simply a contracting category; they are part of the pipeline that produces future employers, innovators and mature federal contractors.
For Frederick, the question is not whether growing businesses deserve additional opportunities. It is how to provide those opportunities without closing the door on the companies that are just entering the market.
“The valuable runway for the current generation cannot come at the cost of eliminating the on-ramp for the next generation,” Frederick said.
