Legislative requirements may hinder small contractors, study says

A new University of Maryland's School of Public Policy study says that legislative requirements for small business may actual hinder those business from growing...

Bill Lucyshyn of the University of Maryland's School of Public Policy on Federal Drive with Tom Temin
Bill Lucyshyn
Bill Lucyshyn

The Pentagon has spent more than half a century refining the ways it buys from small business. In recent years, the Defense Department has met its statutory goal of awarding 23 percent of its contracting dollars to small and disadvantaged concerns. But that emphasis has come at a cost and not necessarily in dollars.

“The Small Business Administration and the small business legislation starts out with the best of intentions,” said Bill Lucyshyn, a former research director at the Defense Advanced Research Projects Agency (DARPA) and now director at the Center for Public Policy and Private Enterprise at the University of Maryland’s School of Public Policy. “But whenever you try to regulate a complex system, you always have unintended consequences.”

Lucyshyn joined Federal Drive with Tom Temin Nov. 17, to talk about a recently released study on the Pentagon’s relationship with small business — Unintended Outcomes of Small Business Legislation and Policy: Opportunities for Improvement.

“If we look at the small business programs, some of them work very, very well,” he said, pointing to successes found in Small Business Research Initiative, Small Business Technology Transfer and Small Business Innovation Research programs. “We see that those are extremely successful. They’ve created more than 21,000 new companies. A large percentage of those, about 9 percent of those, are female owned and a significant percentage are owned by minorities.”

These types of successes are not found in other small business set-aside programs.

“If you look at the Pentagon spending, for example, about 52 percent of the procurement dollars are spent on manufacturing and small business plays a small role in that, but not a significant role,” Lucyshyn said. “It’s well below the required prime contracting goal for small business. So, you see a major shift of the small business goal being achieved in selected segments of contracting, for example, professional services and professional engineering services. A lot of the contracts in those areas are given to small businesses.”

While this allows small businesses to create a niche for themselves, it can also hinder their ability to grow.

“We really want to encourage small businesses to grow, so what that means is in each sector there ought to be enough full and open competition so when small businesses graduate, they have a place to go to and grow into,” he said. “Often now, we see some of these large contracts being set for businesses and when they win the contract, they become large and then they’re ineligible to compete for that same contract as a follow on and there’s no place for them to move on to.”

One of the findings of the UMD study is that small agency goals are arbitrarily set and don’t measure the true impact on small business. So, the 23 percent requirement may not be a useful goal.

“We couldn’t find anybody that could explain to use where those numbers came from,” Lucyshyn said. “So, apparently, they’re negotiated between the departments and the Small Business Administration. But, they’re not necessarily based on any kind of logic to see that they’re achievable or even make sense.”

Another of the study’s findings is that a goal exists for subcontracting as well as prime contracts, but it’s difficult to obtain that data.

“In fact, the Small Business Administration said they can’t get all the data on how much DoD or any federal agency spends on subcontracting,” he said. “So we don’t really know the true impact of federal dollars on small business because we can’t collect that data from small contracts. Because the way the scorecards are evaluated for the agencies, an excessive amount of emphasis is placed on the prime contract goal and not so much on the subcontracting goal. And so, we don’t really know how much impact all those dollars have on small business.”

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