Evaluating the Impact of Small Business Set-Asides on Acquisition Efficiency

Abstract

The Federal Government spent over $470 billion on procurement in FY 2016 which creates opportunities for implementing selected national policies. Current law requires that low-cost acquisitions be reserved exclusively for small business concerns, with qualifying businesses assuming the role of prime contractor. However, the pursuit of admirable social goals may not always be rational from an economic or technical standpoint. This report analyzes the distribution of small business procurement across industry sectors using data from the Federal Procurement Data System (FPDS). It shows that a relatively small number of large firms dominate the federal contracting landscape in certain sectors, such as defense. Accordingly, set-aside policy has a disparate impact on the remainder of the spending, concentrating it into certain industry sectors where there are greater opportunities for small businesses, limiting free and open competition, and creating a series of unintended consequences for government (e.g. contracting and economic inefficiency) and small businesses (e.g. uneven and unsustainable growth and barriers to entry into the federal contracting space). A series of recommendations are made.