Leveling the Playing Field for Small Businesses in Government Contracting

According to a 2023 report, the federal government spent $694 billion on contracts, but only $163 billion of this budget was awarded to small businesses.

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While the government exceeded its contracting goals of 23% for small, disadvantaged, and service-disabled veteran-owned businesses, it remains difficult for small businesses to navigate the complex federal contracting landscape and secure a portion of the set-aside dollars. Despite the growth in actual contracting dollars spent with small businesses, the number of small businesses participating is declining, demonstrating the shrinking industrial base of new and emerging businesses.

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Small organizations significantly contribute to the nation’s economic activity and play a key role in innovation. Companies with five to nine employees received more patents per employee than any other type of organization, nearly double the patents received by large businesses in 2016. Without them, the government loses access to unique perspectives and emerging technology.

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The government attempts to encourage small business participation through SMB-specific governmentwide acquisition contracts (GWACs). However, there remains a disconnect in the acquisition process. In 2023, the GAO reported that the Small Business Administration approved 80% of the submitted waiver requests to allow larger manufacturers to supply a product over a small business.

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This lack of focus on small business diversity within GWACs and outdated small business requirements leads business leaders to withdraw from the market or be acquired by large businesses. Consequently, small business participation in the industrial defense base has declined by 40% in the past decade.

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One significant reason for this decrease is the lack of incentives for small businesses to succeed in the market. Small businesses often aim to increase headcount and revenue to compete with larger companies. However, the North American Industry Classification System (NAICS) codes are too broad and, in areas like information technology, possibly outdated. This leaves small businesses overlooked and unable to compete equitably during the bidding process against larger corporations in the same code.

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To support and encourage small business participation, the government must provide adequate support and resources. Actions such as creating better-defined NAICS codes, supporting small business participation, and enhancing contract support will encourage small businesses to continue participating in federal contract bidding.

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To better support the nation’s small businesses, the government can expand the number of contracting dollars allotted to small organizations, continue providing tools such as the SBA Mentor-Protégé and veteran contracting assistance programs, and ensure the successful implementation of new guidance and technical assistance, such as those outlined in the White House’s January 2024 fact sheet. Additionally, to help small businesses scale within the marketplace, redefining requirements such as NAICS codes will ensure no business is left unsure of its status and there are enough codes to account for incremental growth.

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Current NAICS codes leave a wide gap between tiers, with no bridging system to help increase small business participation. Without an accessible tiering system, small businesses will disappear and be absorbed into larger vendors due to gaps in the system and the inability to compete. To better support such businesses, smaller, more precise NAICS codes will provide a bridged approach from tier to tier, ensuring all organizations are recognized for their respective contributions and understand what it takes to grow within the landscape.

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Seeking out partnerships with channel and industry partners is another step small businesses can take to help facilitate new opportunities and seek the expertise and resources needed to pursue contracts. Small businesses often lack resources in comparison to corporations, but with the guidance of large partners, they can learn to transform their products to fit specific government needs, enhancing operations without taking on additional overhead.

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Choosing a partner with vast government experience and customized support is pivotal—with trusted collaboration, industry partners can promote small businesses’ abilities and generate new leads to solidify their reputation.

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Small businesses are critical to federal innovation. They provide unique products and services and strong partnership capabilities that stimulate economic development when nurtured properly. Ingram Micro is one of many leading distributors helping these businesses and advocating for diverse supply chains. Whether through supplier diversity, financial support, or contract assistance programs, there is work to be done to create better and fairer opportunities for small businesses to participate in the federal marketplace.