I recently spoke with a small business owner, let’s call him David, who is a subcontractor for a large defense firm. David has an IT firm with about 100 employees and is a veteran.

While the Prompt Payments Act ensures the prime David works for gets paid quickly, sometimes within 15 days, the same defense prime makes David wait 90 days. This three-month gap until payment costs David, back of the envelope, about $200,000 in annual financing — the equivalent of a highly skilled full-time employee with annual salary and benefits.

For David’s small business this constitutes a significant drain of resources.

A year ago, a Pentagon report called out this and other problems facing small businesses and extolled the innovation small business contractors like David bring. But clearly the federal government has not made much progress in lessening the burden on small business.

The proof is in the numbers: From fiscal 2011 to 2020 the number of small businesses receiving Defense Department contract awards decreased by 43%, despite obligations increasing by 15%.

From David’s point of view, while the 90-day payment plan is both irksome and expensive, he feels it is by no means his most significant barrier to growth.

Small business owners endure something akin to second-class citizenship in the federal marketplace, indentured either as subcontractors or shoved into joint ventures (JVs) or teaming arrangements, because they don’t have the recent past performance on large projects that would allow them to successfully win prime contracts.

With a thicket of regulations blocking their pathway — the current FAR is over 2,000 pages with additional policies on cyber and supply chain risk coming soon — industry giants just thunder past them. In short, “graduating” from small business contracts to “full and open” contract work is a David and Goliath contest.

Think about it from David’s point of view. He and other small government contractors (GovCon) like him are expected, with annual revenues of, say, $20M, to show they have performed work in the hundreds of millions of dollars as proof of competency, something Boeing, Lockheed, Raytheon and the rest can do with their eyes closed.

Another headache for these Davids: The government sets arbitrary deadlines for entry on very important vehicles so that if a small business does not quality by that date, they are closed out of competing for five or ten years.
Moreover, the government does not award contractor performance assessments to subcontractors, yet primes take credit for the work of their subs like David – performance that they then use to get even more prime work.

Because of these and other perverse rules, at the moment a small business picks up momentum and gets more awards under his or her belt, they “size out” of their North American industry classification system (NAICS) code.

This means smaller businesses are suddenly prohibited from obtaining small business contracts — the contracts they initially fed on. This is literally known, inside the small business GovCon world, as “the Valley of Death.”

Let’s be honest and accept an inconvenient truth. It is better to be a prime contractor than a David doing the sub work for one. Not only is it time to rethink many of the rules and regulations that govern small businesses serving the federal customer, but it’s also time to say out loud that this is an emergency.

Small business participation in the federal market has fallen approximately 50% between 2010 and 2022.

Everyone in and out of government agrees that small businesses are an engine of innovation. As Secretary of Defense Lloyd Austin III has said, “for far too long, it’s been far too hard for innovators and entrepreneurs to work with the department. And the barriers for entry into this effort to work with us in national security are often too steep — far too steep.”

According to Gallup, American have more confidence in small business than they do the police, public schools, the medical system, church or even our military.

If the Pentagon and the Biden Administration share that confidence, they must do more to bridge small businesses into mid-tier land, freed from their current second-class status and the significant shackles that come from only subbing to primes or teaming to get work.

Sharon B. Heaton is the CEO and founder of sbLiftOff, a national mergers and acquisitions advisory firm specializing in government contracting companies. She serves on the SBA’s Investment Capital Advisory Committee.

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