Federal Contracting: Awards to Mid-Sized Businesses and Options for Increasing Their Opportunities

Small businesses that receive federal contracts set aside for them may outgrow the size standards the Small Business Administration (SBA) uses to define small businesses. (Size standards vary by industry and generally are based on employees or revenue.) Questions have been raised about the extent to which mid-sized businesses can compete with large businesses for federal contracts.

GAO was asked to provide information on federal contracting opportunities for mid-sized businesses. This report analyzes, among other objectives, (1) the extent to which small businesses grew to mid-sized and continued to receive federal contracts and (2) options for increasing contracting opportunities for mid-sized businesses.

GAO analyzed federal contracting data for fiscal years 2008–2017 (most recent and complete). In the absence of legal definitions of “mid-sized” and “large,” GAO multiplied relevant size standards for small businesses to arrive at parameters for mid-sized and large businesses for its analysis. GAO reviewed literature to identify options for increasing contracting opportunities and interviewed SBA officials and a nongeneralizable selection of 11 stakeholders—trade association representatives, researchers, and small business directors at three agencies with large obligations for small business contracts in fiscal year 2017—to obtain views on the options. SBA provided comments, which we addressed as appropriate.

From fiscal year 2008 through 2017, very few small businesses that were awarded limited competition (set-aside) contracts grew to be mid-sized and continued to receive contracts. (GAO defined mid-sized businesses as having revenue or employees up to five times above the small business size standard.)

Of the 5,339 small businesses awarded set-aside contracts in fiscal year 2008 and awarded any sort of federal contract (including set-aside or competed) in 2013, 104 became mid-sized by fiscal year 2013.

Of those 104 businesses, 23 remained mid-sized through 2017 and won 75 contracts. Another three businesses became large and won six contracts.

Options for increasing federal contracting opportunities for mid-sized businesses that GAO identified in its review include establishing a separate set-aside category, changing consideration of past contracting performance, and modifying size standards. Stakeholders told GAO some options would help mid-sized businesses more than others.

While a set-aside category for mid-sized businesses would increase opportunities for mid-sized businesses, stakeholders generally believed it could decrease opportunities for small businesses and increase agency burden (time and costs to implement the set-aside).

Requiring agencies to consider businesses' past performance as subcontractors or as part of a team would help both mid-sized and growing small businesses by making them more competitive for contracts.

Stakeholders said raising size standards based on revenue would allow a limited number of mid-sized businesses to be eligible for set-asides again, but not help the vast majority of mid-sized businesses.

Federal contracts can be an important revenue source for small  businesses, according to the Small Business Administration (SBA). Of the  more than $482 billion in contracts for goods and services the federal  government awarded in fiscal year 2018, more than $120 billion was  awarded to small businesses. To help ensure small businesses receive a  share of federal procurement dollars, in 1997 Congress set an annual  government-wide goal of awarding at least 23 percent of prime federal  contracts to small businesses. Contracting officers have the authority to  set aside contracts for small businesses (that is, limit competition) to help  expand their participation in federal procurement.

Some businesses have outgrown small business size standards (which  vary by industry and are generally expressed as the number of  employees or amount of revenue) and become mid-sized businesses.  Although under federal procurement law businesses are either “small” or  “other than small,” researchers and trade associations informally have  defined mid-sized businesses as those that recently outgrew their  applicable small size standards and are too large to benefit from small  business set-asides, but may be too small to compete with the largest  firms.

At a roundtable of the House Committee on Small Business in November  2017, business and industry leaders raised questions about the extent to  which businesses that grew to be mid-sized experienced a decline in  federal contracting opportunities. At a House hearing in April 2018, it was  noted that minimal data were available on what happens to firms after  exceeding their small business size standards. You asked us to provide  information on contracting opportunities for mid-sized businesses and any  options for increasing such opportunities.

This report analyzes (1) the extent to which small businesses grew to be  mid-sized and continued to receive federal contracts; (2) instances in  which mid-sized businesses can perform work on contracts set aside for  small businesses; and (3) options for increasing federal contracting  opportunities for mid-sized businesses and views on the strengths and  limitations of the options.

For the first objective, we analyzed data from the Federal Procurement  Data System-Next Generation (FPDS-NG) for fiscal years 2008 through  2017 (the most recent complete data available when we began our  review). Because there is no statutory or regulatory definition of a mid- sized or large business, we applied multipliers to SBA’s size standards.  We considered businesses with revenue or employees up to five times  above the SBA small size standard as mid-sized and businesses with  revenue or employees of more than five times the small size standard as  large. We used five times the small size standard to distinguish between  mid-sized and large businesses based on the distribution of contracts and  obligations among businesses in these two groups. We discussed this  approach and methodology with SBA officials and officials at three federal  agencies that had large obligations for small business contracts in fiscal  year 2017. These officials did not raise any questions about our  approach, and some reiterated that there was no legal definition of mid- sized businesses. To determine whether businesses that grew to be mid- sized continued to secure contracts, we used FPDS-NG data to  determine the number of businesses awarded set-aside contracts in 2008  that became mid-sized by 2013 and the extent to which they were  awarded any sort of contract (including competed contracts) in fiscal  years 2014 through 2017. We also determined the percentage of  competed contracts awarded to small, mid-sized, and large businesses in  fiscal year 2017. We assessed the reliability of the FPDS-NG data we  used by performing electronic testing and reviewing information about the  system. We determined that these data were sufficiently reliable for the  purposes of determining the extent to which small businesses that grew  to be mid-sized continued to secure contracts and the size of businesses  awarded contracts during a specific time period.

For the second objective, we reviewed the Federal Acquisition Regulation  (FAR)—the principal set of regulations governing the federal acquisition  process—and small business laws and regulations to identify provisions  that allow small businesses that grow into mid-sized businesses to  continue providing services and goods on contracts set aside for small  businesses. We also reviewed SBA documents related to its mentor- protégé programs, one way that mid-sized businesses can provide  services and goods under set-aside contracts. Using FPDS-NG and SBA  data on mentor-protégé joint ventures, we determined the number of mid- sized businesses that were awarded set-aside contracts by forming joint  ventures with small business protégés.

For the third objective, we reviewed literature such as trade association  reports, congressional testimonies, and research reports. To gather  feedback on strengths and limitations of proposed options to increase  contracting opportunities for mid-sized businesses, we selected a  nongeneralizable sample of 11 individuals or organizations representing  three types of stakeholders (trade associations, researchers, and federal  agencies). More specifically, we interviewed representatives from five  trade associations for small and mid-sized businesses, three researchers  who published on this topic, and directors of the Office of Small and  Disadvantaged Business Utilization (OSDBU) at the same three agencies  previously mentioned. Because we selected a nongeneralizable sample  of stakeholders to interview, their views are not generalizable to other  stakeholders who have knowledge about options for increasing  contracting opportunities for mid-sized businesses, but their views offered  important perspectives. For more information on our scope and  methodology, see appendix I. See appendix II for information on contracts  awarded to small, mid-sized, and large businesses in fiscal year 2017.

We conducted this performance audit from April 2018 to August 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

SBA oversees a number of programs designed to provide small  businesses with resources and tools, including access to capital, help  with federal contracting opportunities, and entrepreneurial counseling and  training.

SBA’s Size Standards and Industry Classification Codes

Federal procurement regulations generally define a small business as  one that is independently owned and operated and not dominant in its  field and that meets the size and criteria or standards established by  SBA. The Small Business Act of 1953 authorized SBA to establish size  standards for determining eligibility for all procurement programs in which  small business status is required or advantageous. SBA uses the North  American Industry Classification System (NAICS) as the basis for its size  standards. The standards vary by industry and are generally expressed  as the average number of employees over a 12-month period or average  annual receipts in the previous 3 years. As of August 2019, employee- based size standards for federal procurement purposes ranged from 100  to 1,500, and revenue-based size standards ranged from $1.0 million to  $41.5 million. The number of employees or average annual receipts  indicates the maximum size allowed for a business and its affiliates to be  considered small.

The Small Business Jobs Act of 2010 required SBA to review at least  one-third of all size standards during every 18-month period from the date  of its enactment and all size standards at least once every 5 years  thereafter. SBA completed the first 5-year review in 2016. According to  SBA’s size standard methodology, the agency assesses industry  structure and the overall degree of competitiveness of an industry and of  firms in the industry when establishing size standards. To assess industry  structure, SBA analyzes four primary factors: average firm size, degree of  competition in an industry, start-up costs and entry barriers, and  distribution of firms by size. SBA also considers the ability of small  businesses to compete for contracting opportunities under the current  size standards. According to SBA officials, for industries with $20 million  or more in federal contracting annually, SBA also examines the small  business share of federal contract dollars relative to the small business  share of total industry receipts.

Small Business Goals and Set-Aside Contracts for Small Businesses

Each year, SBA negotiates small business prime contracting goals with  federal agencies that have procurement authority so that, in the  aggregate, the federal government meets its goal of awarding 23 percent  of prime contract dollars to small businesses. In September 2018, we  reported that SBA considers prior-year achievement and other factors in  setting annual agency goals. SBA’s procurement center representatives  and OSDBUs assist agencies in meeting small business goals.

Agency contracting officers have the authority to enter into, administer, or  terminate contracts and are responsible for helping agencies meet small  businesses goals, including by setting aside contracts for small  businesses. One of the first steps in the federal acquisition process is assignment of the NAICS code that best describes the principal purpose  of the acquisition and corresponding size standard (see fig. 1). Generally,  the FAR states that if the contract is valued under the simplified  acquisition threshold, the contracting officer must set it aside for small  businesses. If valued above the simplified acquisition threshold, the  contracting officer conducts market research to determine whether a  contract should be set aside for small businesses. For contracts not set  aside for small businesses, contracting officers generally must include  specific small business subcontracting goals for the prime contractor to  meet.

The FAR requires agencies to evaluate price or cost to the government in  every source selection and evaluate the quality of the product or service  in the acquisition by considering one or more noncost factors, such as  past performance.

Contracting officers generally have discretion under the FAR to choose  evaluation factors and their relative weights, rating systems, and the past  performance they will consider. For example, a contracting officer could  consider technical excellence, past performance (including relevance),  and price.

To select a firm for contract award, agency officials evaluate offers  against the criteria specified in the solicitation. According to the FAR, if an  offeror has no record of relevant past performance, the offeror cannot be  evaluated favorably or unfavorably on past performance. Contracting  officers use the Contractor Performance Assessment Reporting System  to enter and review evaluations of past performance. The FAR generally  requires agencies to document contractor performance on contracts or  orders that exceed certain dollar thresholds. Once a project is complete,  the assessing official rates the contractor on elements such as quality of  the product or service, schedule, cost control, management, and small  business utilization. This information then becomes available to other  agencies for making source selection decisions.

Indefinite Delivery/Indefinite Quantity Contracts

Indefinite delivery/indefinite quantity (ID/IQ) contracts provide flexibility  when an agency cannot specify the quantities or timing of a product or  service. Contracting officers may issue ID/IQ contracts as single-award or  multiple-award contracts. Single-award refers to a situation in which one  contract is awarded under a solicitation.

The FAR establishes a preference for awarding multiple-award ID/IQ  contracts—instances in which more than one prime contractor is awarded  a task-order contract (for services) or delivery-order contract (for supplies)  under a single solicitation. Once agencies determine their specific  needs, such contracts allow agencies to establish a pool of qualified  contractors to compete for future orders under streamlined procedures.  Contractors compete to be in the pool and generally compete again for  task or delivery orders. Multiple-award ID/IQ contracts can be unrestricted  (open competition for businesses of all sizes) or restricted to small  businesses. They also can have one pool of contractors with separate  “tracks” for small and nonsmall businesses to ensure contract  opportunities for small businesses (that is, some orders are set aside for  small businesses).

After a multiple-award ID/IQ contract has been awarded, an agency  places delivery or task orders, generally using the fair opportunities  process. An order, which is placed when a specific need arises,  obligates funds and authorizes work. Orders must be within the scope,  issued within the period of performance, and be within maximum value or  quantities agreed to in the contract. For multiple-award ID/IQ contracts,  the FAR requires that each awardee be given a fair opportunity to  compete for subsequent orders. In April 2017, we found that in fiscal  years 2011–2015, federal agencies obligated more than $130 billion  annually through ID/IQ contracts. We also found that contracting officers  said it was easier and faster to place an order under an existing ID/IQ  contract than to award a separate contract when a specific need arose.

A mentor-protégé program is an arrangement in which mentors—typically  experienced prime contractors—provide technical, managerial, and other  business development assistance to eligible small businesses, or  protégés. SBA established the 8(a) Mentor-Protégé Program in 1998 for  mentors to partner with 8(a) socially and economically disadvantaged  businesses to improve the ability of 8(a) businesses to compete for prime  contracts and subcontracts. The Small Business Jobs Act of 2010 and  National Defense Authorization Act for fiscal year 2013 authorized SBA to  establish a government-wide mentor-protégé program for all small  businesses, which SBA named the All Small Mentor-Protégé Program.  Small businesses that have a mentor-protégé relationship through either  program can form a joint venture with a mentor (which can be a mid-sized  or large business) and compete for set-aside contracts as long as the  protégé is a small business with at least a 51 percent interest in the joint  venture.

Contractor team arrangements take two forms: two or more companies  form a partnership or joint venture to act as a prime contractor or a prime  contractor agrees with one or more companies to have them act as its  subcontractors under a specified federal contract or acquisition program.  Companies generally form a contractor team arrangement before  submitting an offer. Businesses of all sizes can form joint ventures to  compete for contracts. Joint ventures generally have to consist only of  small businesses to compete for small business set-aside contracts—the  exception being small and nonsmall businesses entered in a mentor- protégé agreement under one of SBA’s programs.

A Very Small Percentage of Small Businesses Grew to Be Mid-Sized and Continued to Receive Federal Contracts during Fiscal Years 2008–2017

Most Small Businesses Awarded Set-Aside Contracts in 2017 Were Well Below SBA Size Standards

Most small businesses awarded set-aside contracts in fiscal year 2017  did not appear poised to outgrow their size standard. According to  FPDS-NG data, about 86 percent of the 121,604 set-aside contracts  awarded in that year were to small businesses with revenue or  employees at or below 25 percent of the size standard for their industry  (see fig. 2). These businesses received about 64 percent of the dollar  obligations for set-aside contracts in fiscal year 2017. The small  businesses closest to their SBA standards (above 75 percent of the size  standard) were awarded about 2 percent of the set-aside contracts and  about 7 percent of the contract dollar obligations in fiscal year 2017. We  performed the same analysis for fiscal years 2013–2016, and the results  across the four quartiles were generally the same throughout the time  period.

A Very Small Percentage of Small Businesses Awarded Set-Aside Contracts in Fiscal Year 2008 Grew to Mid-Sized by 2013 and Continued to Obtain Contracts

Based on our review, a very small percentage of the small businesses  that were awarded set-aside contracts in fiscal year 2008 grew to mid- sized in subsequent years and continued to receive any type of  contract. As shown in table 1, more than 93 percent of the businesses  that were awarded only set-aside contracts in fiscal year 2008 and  received any federal contract (including a set-aside or competed contract)  in fiscal year 2017 remained small. About 2.5 percent of such businesses  had become mid-sized by fiscal year 2017.

In addition, we analyzed the extent to which small businesses that grew  to be mid-sized in 2013 continued to receive any type of contract in fiscal  years 2014–2017. Of the 5,339 small businesses awarded only set- aside contracts in fiscal year 2008 and awarded any sort of federal  contract in fiscal year 2013, 104 grew to mid-sized by fiscal year 2013.  Of those 104 mid-sized businesses, 23 remained mid-sized in  subsequent years and were awarded 75 contracts, and three grew to  large and were awarded six contracts (see table 2). Seventeen of the 104  mid-sized businesses became small again. Thirty-seven of the 104 mid- sized businesses were awarded 306 contracts and were categorized as  small, mid-sized, or large depending on the NAICS code listed in the  contract. That is, businesses can be awarded contracts under several  NAICS codes, each with a different size standard. Of the 24 mid-sized  businesses not awarded any contracts in 2014–2017, nine were no longer  registered in the System for Award Management, a central registration  system for federal contractors.

Mid-Sized Businesses Can Provide Services and Goods on Contracts Set Aside for Small Businesses under Certain Circumstances

Businesses Can Keep Contracts If They Exceed Size Standards during the Life of a Set-Aside Contract

Federal regulations generally allow a small business with a contract to  continue performing under its contract if it outgrows the size standard that  it met in its initial offer. If a business qualified as small and was awarded a  single-award contract under a small business set-aside, it generally would  be considered small for contracting purposes for the life of that contract.  The business can continue providing the service or product. Additionally,  the agency can continue counting the contract towards its small business  goals unless the business is required to recertify, whether through a  regulatory or contractual requirement, and in doing so is deemed other  than small. Once the contract ends, the follow-on or renewal contract is  a new contract; size is determined as of the date the business bids on the  new contract.

The regulations are applied similarly to multiple-award contracts. Some  multiple-award contracts are set aside for small businesses only. If a  business qualified as small at the time of its initial offer, it is generally  small for each order issued against the contract for the life of the contract  even if it outgrows the size standard. Multiple-award contract orders  awarded to businesses that have grown to be other than small during the  course of the set-aside contract generally still may be counted toward  agency small business goals. They would not be counted if the contractor  were required to recertify, whether by a regulatory or contractual  requirement, and in doing so was deemed other than small.

There are a few instances in which a business must recertify its size  status after its initial offer. In the case of an awarded multiple-award, set- aside contract, this would make the concern ineligible for the placement  of orders or exercise of options. For example:

SBA has stated that mergers and acquisitions create an exception to  the general rule that a firm’s size and status is determined at the time  of the initial award. Generally, if a business becomes other than small  pursuant to a merger or acquisition after its initial offer, the business  must recertify its size.

Certain requirements for recertification become effective just before  the end of the fifth year on a multiple-award contract. A multiple-award  contract that runs for more than 5 years, including options, requires  each business to recertify size within 120 days before the end of the  fifth year and 120 days before exercising options thereafter. The  determination of small or other than small is based on the size  standard at the time of the recertification. Size determinations are not  permanent; a business can recertify later as small if it meets the size  standard.

A contracting officer may require a business to recertify its size status  in response to a solicitation for an order. An SBA recertification  determination is based on the size as of the date the business  submits its response to the order.

The rules are different for agreements, including blanket purchase  agreements. A blanket purchase agreement is a simplified method of  filling anticipated repetitive needs for supplies or services that functions  as a “charge account” with qualified sources of supply. Where the  agreement is a set-aside or a reserve award to any type of small  business, a business must qualify as small both at the time of the offer  and at the time of the order to be considered for the order. The agency  may count the business toward its small business goal if the business is  small at the time of the order.

Businesses That Form Joint Ventures under SBA Mentor-Protégé Programs Generally Can Access Set-Aside Contracts

Both SBA’s 8(a) and All Small Mentor-Protégé programs allow the mentor  (including those that are mid-sized businesses) and the protégé to form a  joint venture and bid on set-aside contracts based on the protégé’s status  as a small business. Once a protégé no longer qualifies as small, the  mentor-protégé joint venture will no longer be eligible to bid for new small  business set-asides. But, a change in protégé size generally does not  affect contracts previously awarded to a joint venture between the  protégé and the mentor.

The mentor-protégé joint venture may seek any small business contract  for which the protégé would qualify. Therefore, the size of the mentor  generally does not affect whether a mentor-protégé joint venture can bid  for a small business contract. According to SBA officials, the agency does  not track the size of mentors. As of September 2018, there were 106 joint  ventures formed under the All Small Mentor-Protégé program and 171  joint ventures under the 8(a) Mentor-Protégé program (see table 3).

We analyzed FPDS-NG and SBA data to determine the size of the  mentors participating in joint ventures under SBA’s All Small Program that  were awarded set-aside contracts in fiscal years 2016–2018. Of the 29  joint ventures awarded set-aside contracts during these years, 13 of the  26 mentors were mid-sized businesses.

Options Proposed by Stakeholders for Assisting Mid-Sized Businesses Vary in Terms of Their Potential Benefits and Involve Tradeoffs

We reviewed options proposed in literature to enhance contracting  opportunities for mid-sized businesses and asked stakeholders for their  perspectives on potential benefits and drawbacks.

Some options for increasing federal contracting opportunities for mid- sized businesses identified in our literature review would help mid-sized  businesses more than others, according to stakeholders. They noted that  establishing a set-aside for mid-sized businesses—the option designed to  help mid-sized businesses most directly—also would pose challenges for  small businesses and agencies. In contrast, some options primarily would  help small businesses that were growing (revenue or employees  approaching the size standards). This, in turn, could offset any of the  advantages that mid-sized businesses would derive. For instance,  benefiting small businesses could increase competition and result in  fewer awards to mid-sized businesses.

As shown in table 4, we grouped the options into four categories: (1)  establishing a set-aside for mid-sized businesses, (2) modifying the rules  for multiple-award contracts, (3) changing how past performance is  considered when evaluating bid proposals, and (4) modifying SBA’s size  standards.

A Mid-Sized Set-Aside Could Increase Contracting Opportunities but Affect Other Businesses and Agencies

Several stakeholders told us that establishing a separate set-aside  category for mid-sized businesses would increase contracting  opportunities for mid-sized businesses, but others expressed concerns  that the potential threat to small businesses and administrative burden on  agencies might outweigh this benefit. Some literature suggests that when  businesses outgrow their size standards they struggle to compete against  much larger, established businesses for contracts. Also, literature we  reviewed suggested small business goals motivate agencies to set aside  more and larger contracts for small businesses, resulting in a scarcity of  smaller contract solicitations for mid-sized businesses. Members of  Congress have proposed establishing pilot programs that would help mid- sized businesses, either defined by business or contract size.

Several stakeholders commented directly on separate set-asides and  contracting opportunities for mid-sized businesses. An OSDBU director  noted former small businesses (those that outgrew their size standard)  would benefit from an opportunity to compete with firms of similar size for  prime contracts. However, some stakeholders believed the set-aside  would not increase opportunities for mid-sized businesses. Specifically,  one trade association executive noted that this option continues to shelter  small businesses that become mid-sized businesses from competition  with larger businesses. The stakeholder added that a set-aside would not  address the ability of mid-sized businesses to compete against large  businesses on an unrestricted basis. Another trade association executive  said there still would be a need to help mid-sized firms develop expertise  and encourage competition.

Some stakeholders believed the option would have a limited impact or  was not necessary. Specifically, one trade association executive said that  its members want a good path to growth for small businesses, not a set- aside. Another trade association executive similarly believed mid-sized  businesses want to open up contract opportunities, not restrict them by  creating more set-asides. One stakeholder also argued that the option  could create incentives for large businesses to split their companies to fit  new set-aside size standards.

Most stakeholders believed the set-aside for mid-sized businesses would  take away opportunities from small businesses, with several noting that  contracts that normally would be set aside for small businesses might be  set aside for mid-sized businesses instead. SBA officials stated that a set- aside would have a negative effect on all small business programs and  support the use of larger contracts, resulting in fewer contract awards to  small businesses. However, one trade association representative said the  set-aside could be structured so that small businesses still could compete  for the mid-sized set-aside contracts. An OSDBU director told us  contracting officers could limit the effect on small businesses by  considering small businesses first, mid-sized businesses second, and  large businesses last. In this scenario, it would be large businesses that  would be most affected by a set-aside for mid-sized businesses.

Stakeholders cited more limitations than benefits for agencies if this  option were implemented. Most stakeholders told us a mid-sized business  set-aside would increase agency burden, including additional time and  cost to define and implement the new set-aside and additional tracking  and reporting costs. SBA officials noted that it would create an additional  burden for contracting officers and that further study would be needed  before implementing a mid-sized set-aside. Some stakeholders also  noted the potential burden on agencies of complying with additional  contracting goals, with one OSDBU director saying that agencies do not  have the resources to meet current small business contracting goals, let  alone meet mid-sized contracting goals. Another OSDBU director  believed that mid-sized business set-asides likely would violate the World  Trade Organization’s Government Procurement Agreement because the  United States negotiated exclusions for small businesses in the  agreement, but not for mid-sized businesses. Some stakeholders  believed it would be very difficult for agencies to define a mid-sized  business. One OSDBU director told us that contracting officers would  have to perform new market research for mid-sized set-asides and abide  by a new layer of requirements. Several stakeholders questioned which  agency actually would administer the new set-aside program.

Stakeholders identified a few benefits for agencies. Two stakeholders told  us agencies could benefit from having a larger supplier base and more  choices for services. One OSDBU director said agencies might benefit  from retaining former small business contractors for a longer time, and a  researcher said agencies might gain access to talent and value they  might not get from large businesses.

Modifying Rules for Multiple-Award Contracts Could Help Mid-Sized Businesses

Stakeholders told us that allowing small businesses that grow beyond  their size standards to move to the unrestricted version of multiple-award  contracts could help mid-sized businesses. As discussed previously,  multiple-award contracts can be unrestricted or restricted to small  businesses or have separate tracks for small and nonsmall businesses  (such as by using set-aside orders). This option proposes that small  businesses on the restricted track of a multiple-award contract that  outgrow the contract’s small business size standard be moved to the  unrestricted track. This practice can be referred to as “on-ramping.”  According to the stakeholder proposing this option, if a small business  contractor grew to mid-sized, but could not transition to the unrestricted  track, all the effort the business put into winning the contract would be  wasted simply because it grew.

Some multiple-award contracts allow small businesses that outgrow the  size standard to move to the unrestricted track of the multiple-award  contract, but this is not always the case. Agencies have discretion when  making this determination. If a business is allowed to move to the  unrestricted track of such a contract, it would be able to place bids on  additional orders resulting from the contract. In cases in which a business  cannot move to the unrestricted track, it has to leave the contract after  completing any ongoing orders. For example, the General Services  Administration’s One Acquisition Solution for Integrated Services allows  businesses that have outgrown their size standards to move to the  unrestricted track, while EAGLE II does not.

Most stakeholders we interviewed said this option could increase  contracting opportunities for growing small or mid-sized businesses. An  OSDBU director said the option would let businesses that grew to be mid- sized move to the unrestricted pool of the multiple-award contract so they  could keep their existing contract. A researcher said the option gives  more time for small and mid-sized businesses to prepare for full and open  competition. But two stakeholders noted that mid-sized businesses  already in the unrestricted pool may be negatively affected by increased  competition from additional contractors placed in the pool for task orders.

Stakeholders offered differing opinions on how this option would affect  agencies. Several stakeholders said that agencies would benefit from  being able to retain contractors even if the contractors outgrew their size  standard. For example, a trade association executive said it would be less  disruptive for the agency if the business could continue its contract. Two  stakeholders thought that moving a business to the unrestricted pool  would reduce agency time and paperwork (compared to re-competing the  contract and performing additional evaluations). However, several  stakeholders told us that allowing small businesses that grew beyond the  size standards to “on-ramp” might increase administrative burden on  agencies. For example, it might take longer for an agency to evaluate  proposals for unrestricted task order competitions if the pool of  competitors grew. SBA officials expressed concern that if task order  competitions grew too large, businesses in the unrestricted pool that  objected to the increased competition from new contractors might pursue  litigation.

Changing Past Performance Requirements Could Increase Contracting Opportunities for Mid- Sized and Small Businesses but May Increase Risk for Agencies

Stakeholders told us that changing past performance requirements could  increase prime contracting opportunities for mid-sized and small  businesses, but might increase risk for agencies. Some of the literature  we reviewed considered requirements based on the size or number of  past contracts (“quantitative past performance requirements”) as a barrier  to entry for mid-sized businesses. Options have been proposed that  would regulate what types of past performance contracting officers  consider and how they establish solicitation requirements.

Lower or Eliminate Quantitative Requirements for Past Performance

This option proposes lowering (for example, limiting their use or making  their terms more flexible) or eliminating quantitative requirements for past  performance.

Nearly all the stakeholders we interviewed said that lowering quantitative  requirements would increase contracting opportunities for mid-sized  businesses, small businesses, or both. For example, one researcher said  that mid-sized and small businesses would benefit because the barriers  to entry on some large contracts would be lowered. Similarly, an OSDBU  director said that smaller mid-sized businesses and small businesses get  shut out of contract competitions because they cannot meet the past  performance requirements, and lower past performance requirements  would give them a chance to compete. One trade association executive  also pointed out that this option could help mid-sized and small  businesses develop a performance record for future solicitations.

More than half of the stakeholders told us that eliminating quantitative  past performance requirements entirely also would increase contracting  opportunities for mid-sized businesses, small businesses, or both.  Specifically, two stakeholders said eliminating these quantitative  requirements would enable mid-sized and small businesses without  records of past performance to substantiate their qualifications in other  non-quantitative ways.

Stakeholders noted trade-offs for agencies. Some stakeholders believed  lowering past performance requirements would benefit agencies because  more contractors would be eligible to bid. For example, one OSDBU  director said agencies might receive proposals from businesses that  could not have met quantitative requirements but have enough expertise  to submit a high-quality proposal. However, some stakeholders said  lowering quantitative requirements may increase agency burden, citing a  longer evaluation period due to a larger pool of bidders. More than half of  the stakeholders said eliminating requirements entirely would increase  the burden on agencies, for various reasons. One researcher said  agencies might not have staff with the technical expertise to assess bids  based on a strictly qualitative evaluation. Additionally, several  stakeholders noted challenges for agencies in obtaining qualitative  performance information using the Contractor Performance Assessment  Rating System, citing rating subjectivity and verification difficulties.

Several stakeholders said lowering or eliminating quantitative  requirements for past performance would increase the risk to the agency  of awarding contracts to firms that cannot successfully complete the  project. For example, one OSDBU director pointed out that “conventional  wisdom” for contracting officers is that a project’s success rate is higher  when a company can meet higher past performance requirements.  Another OSDBU director said that qualitative forms of evaluation, such as  testimony from another agency, are not sufficient and could put the  agency’s project at risk for lack of an objective measure of a contractor’s  capabilities. In contrast, the third OSDBU director said that quantitative  requirements do not lower the risk to the agency because completing a  certain number of contracts is not a guarantee of satisfactory future  performance.

Require Agencies to Consider Past Performance of Each Company in Team Arrangements

This option proposes that contracting agencies be required to consider  the past performance of individual companies in team arrangements as  opposed to evaluating only the aggregate past performance of  contractors in team arrangements. The literature suggested that  requiring agencies to consider each team member’s past performance  would provide incentives to mid-sized businesses to work together to  compete for contracts with past performance requirements that each  would not be able to meet individually. According to SBA officials, the  Small Business Act already requires agencies to consider the past  performance of each participant in a joint venture or team for bundled  contracts and multiple-award contracts above a certain dollar threshold.  Also, agencies generally consider the relevant past performance  information of individual members of a team arrangement in certain  situations if they will perform major or critical aspects of the requirement.  However, there are other situations—such as when the contract is not  specifically for a small business but instead is bid on by a joint venture  that includes a small business—in which agencies are not required to  consider each team member’s past performance.

Stakeholders identified some benefits to a more flexible consideration of  past performance for mid-sized businesses. More than half of the  stakeholders believed this option would increase contracting opportunities  for mid-sized businesses. For example, a trade association executive said  mid-sized businesses currently struggle to fulfill past performance  requirements, and this would allow them to combine their past  performance with another business to qualify for new and larger contract opportunities. However, some stakeholders noted that mid-sized  companies probably have won prime contracts. Therefore, they already  might have the requisite past performance to bid on a contract.

Nearly all the stakeholders we interviewed thought this option would  increase contracting opportunities for growing small businesses because  they would be able to team with a small or nonsmall business to bid on  contracts for which they otherwise would not have the past performance  to qualify. One researcher described a dilemma for small businesses:  they cannot compete for contracts without past performance, but they  cannot get past performance without winning contracts. SBA officials said  that businesses prefer that the past performance of each member be  considered instead of the past performance of the joint venture, which  could be minimal, especially if it was a new joint venture.

Stakeholders identified trade-offs for agencies. More than half of  stakeholders said considering past performance of both members in a  team arrangement would benefit agencies because more contractors  could meet requirements to bid. One OSDBU director said that this option  also might allow agencies to benefit from the enhanced capacity and  innovative solutions offered by mid-sized businesses. However, several  stakeholders cautioned that this option could increase risk for an agency.  For example, one trade association representative believed that because  team arrangements are the companies’ creation and the government has  no involvement in administering them, there is more risk to the agency  that the contracting team might not be able to complete the contract.

Consider Subcontracting Past Performance in Contract Evaluation

This option proposes that agencies should consider subcontracting past  performance when evaluating bid proposals. It has been suggested that  this could be done in two ways. First, agencies could be required to  consider a business’s past performance as a subcontractor—a route for  many small businesses to gain access to federal contracts—when  competing for prime contracts. Second, agencies could be required to  count the past experience of both the prime contractor and its significant  subcontractors towards a solicitation’s past performance requirements.

Stakeholders had differing opinions on whether this option would help  mid-sized businesses. Several stakeholders believed that allowing mid- sized businesses to leverage their subcontracting experience to meet  requirements would increase contracting opportunities for these firms.  Furthermore, one researcher thought mid-sized businesses could secure  more subcontracting opportunities because large firms might be more  willing to team with them. However, some stakeholders believed this  option would not increase contracting opportunities for mid-sized  businesses, with two stating that this option is less important for them  because they likely outgrew their size standard by winning set-aside  prime contracts. An OSDBU director thought it also might increase  competition from smaller firms.

Nearly all of the stakeholders we interviewed said this option could  increase prime contracting opportunities for growing small businesses.  For example, one OSDBU director said that considering subcontracting  as past performance would help small businesses compete for prime  contracts, grow, and move forward. A researcher noted this could help  small businesses transition to mid-sized. SBA officials similarly stated that  small businesses want agencies to consider their subcontracting past  performance so they can access contracts for which they would not  normally qualify. In May 2019, SBA officials said they were working on  implementing legislation that requires SBA to create a pilot program to  provide past performance ratings for small business subcontractors.

Similar to previous options, stakeholders contrasted the benefits and  drawbacks of increased competition for agencies. Several stakeholders  thought this option would expand the pool of bidders, making contracts  more competitive and bringing more value to agencies. However, four  stakeholders noted that verifying prime and subcontracting experience  could create more work for agencies. Specifically, two of the four noted  that it could be difficult for agencies to determine subcontracting past  performance because the ratings in the Contractor Performance  Assessment Rating System are tied to the prime contractors.

Some stakeholders also noted this option could increase the risk to  agencies that projects would not be completed successfully. Specifically,  because subcontracting agreements are between the subcontractor and  prime contractor, and therefore are not enforceable by agencies, a prime  contractor might not use a subcontractor whose past performance was  considered during the evaluation process. For example, a researcher  pointed out that a prime contractor could use the subcontractor’s  experience to win a contract, but then not use the subcontractor for any of  the work.

Modifying SBA’s Size Standards Could Help Some Small Businesses Transition to Mid-Sized

Several stakeholders noted that modifying SBA’s size standards would  not help mid-sized businesses as such; rather, the modifications could  allow a few mid-sized businesses to become eligible for small business  set-aside contracts again and help growing small businesses prepare for  the transition to mid-sized. It has been noted that agencies increasingly  use large, multiple-award contracts that can cause small businesses to  outgrow their size standard before they build the capacity (financial  resources, business infrastructure, or past performance records) they  need to successfully compete for contracts. To address such issues,  options have been proposed to modify SBA’s size standards.

Change the Calculation for Revenue-Based Size Standards

This option would change the number of years of revenue considered  when applying revenue-based size standards. SBA would allow  businesses to consider their past 5 years of revenue, pick the lowest 3  years in that period, and average them to determine if they met revenue- based size standards. In a December 2018 amendment to the Small  Business Act, Congress extended the number of years of revenue that  service businesses use to calculate their size from 3 to 5 years but  included no provision related to selecting lowest-revenue years.

Stakeholders expressed reservations regarding this option for mid-sized  businesses. Some stakeholders said that this option may not increase  opportunities for mid-sized businesses because they already had  outgrown their size standard. Several stakeholders also said the option  offered only a temporary solution. One noted that this option would delay  “graduation” from the size standard, but would not address the issue that  mid-sized businesses need to continue to grow to secure additional  federal contracts. An OSDBU director told us it is critical that small  businesses develop and execute a marketing and business plan to  transition from small to successful mid-size.

Nearly all the stakeholders we interviewed noted that allowing businesses  to choose their lowest 3 years of revenue in a 5-year period could prevent  an outlier revenue year from causing a small business to prematurely  outgrow its size standard. For example, an OSDBU director said that a  large, 1-year award is not indicative of a business’s revenue over the long  term. Nearly all of stakeholders also said that enabling businesses to  choose the lowest 3 years of revenue would help ease the transition to  mid-sized. For instance, an OSDBU director said businesses could stay  below the size standards for longer and establish a performance record to  help secure future contracts.

However, several stakeholders expressed concern that very small  businesses might lose contracting opportunities due to increased  competition (that is, more and larger-sized firms would remain under the  size standards). Finally, SBA officials pointed out that this option could be  perceived as unfair because it would not benefit businesses in industries  with employee-based size standards.

Subtract Research and Development Expenses

This option proposes that businesses be able to subtract research and  development expenses from their total revenue when calculating their  eligibility for small business status. The stakeholder proposing this option  said that businesses close to the size standard have to focus their  revenue on pursuing contracts that will support their company as they  transition to full and open competition, and so cannot spare money to  further invest in researching and developing new products or processes  that might improve their business. In addition to encouraging more  investment in research and development, subtracting these expenses  would lower revenue and allow some mid-sized businesses to be  classified as small again.

One researcher told us this was a strong option for mid-sized businesses,  particularly information technology businesses, because research and  development investment is such a large part of their expenses. However,  some stakeholders said this option would not increase contracting  opportunities for mid-sized businesses. For example, one OSBDU  director believed this option would not benefit mid-sized businesses  because it did not help these businesses to compete with larger  businesses.

More than half of the stakeholders we interviewed said that this option  might encourage small businesses to invest in research and  development. However, several stakeholders noted that this option only  would help the small percentage of small businesses that perform  research and development. SBA officials pointed out that this option could  be perceived as unfair because not all businesses have research and  development expenses. They also pointed out that modifying revenue  calculations would not benefit manufacturing businesses, which invest  more in research and development than other sectors but primarily use  employee-based size standards.

Stakeholders also noted potential trade-offs for agencies. Several  stakeholders told us this option would benefit the government by  encouraging investment in research and development with one  stakeholder stating that it might result in higher-quality bids. However,  several stakeholders and SBA officials also told us that allowing small  businesses to subtract research and development expenses would  increase the administrative burden on agencies or add too much  complexity. For example, two OSDBU directors said it would be difficult  for an agency to verify that research and development expenses were  correctly claimed and subtracted from revenue. SBA officials noted that  there were no industry-by-industry data on research and development  expenses. Some stakeholders observed this option could lead to an  increase in fraud or manipulation, with one trade association executive  saying the option would not increase innovation, just claimed expenses.

This option proposes increasing SBA’s revenue-based size standards.  The trade association representative who proposed the option believed  that small business size standards should be raised so that high revenue- generating small businesses that still are not dominant in their field would  not be shut out of set-asides.

Increasing revenue-based size standards would benefit some mid-sized  businesses by making them eligible again for small business set-asides.  However, more than half of the stakeholders told us the option would  have a limited impact—it would apply only to the mid-sized businesses  small enough to fall under the newly raised standard—or no impact at all  (for most other mid-sized businesses). To illustrate the limited impact, one  OSDBU director used the example of management consulting services  (NAICS 541611), which has a size standard of $15 million (revenue). If  the standard were increased to $17 million, it might not affect many  businesses. Rather, it would help only the $16 million company to  compete for set-asides again, the director said. Furthermore, one  researcher said that the increase would not address the systemic  disadvantage that mid-sized businesses face in competing with large  businesses.

Stakeholders identified tradeoffs for small businesses related to this  option. Nearly all stakeholders said that raising revenue-based size  standards could help growing small businesses better prepare to  transition to mid-sized while remaining eligible for set-asides. One  OSDBU director said small businesses could add to their performance  record and have more time to become competitive with larger businesses.  One researcher said that small businesses could get additional time to  diversify contract portfolios and fund professional certifications. However,  some stakeholders cautioned the option could harm very small  businesses because as one stakeholder explained, there would be more  competitors for small business set-asides. As noted previously, we found  that most small businesses awarded set-aside contracts in 2017 were  well below the size standards.

Stakeholders also identified trade-offs for federal agencies. Several  stakeholders said agencies would benefit from the increased competition.  For example, one OSDBU director said agencies might have more  bidders, which could lower pricing. Some stakeholders said the option  could help agencies reach small business goals more easily because  more businesses would be considered small. However, a stakeholder  advised that agencies also might need more time and resources to  evaluate an increased number of bids.

SBA officials explained to us that they comprehensively review all the size  standards every 5 years, looking at factors, such as industry trends and  small business market share. They contended that if contracts became  larger to the detriment of small businesses, small businesses then would  have a decreased market share. If small businesses were losing market  share, that would be captured by the SBA size standard methodology and  the size standards would be adjusted accordingly. They also noted that  revenue-based size standards were getting higher and higher as a result  of adjustments during SBA’s reviews and adjustments for inflation and  that further increases might allow firms that were dominant in their  industry to be small, which is contrary to statute. Finally, they stated that  just raising size standards without taking into account industry structure  and market conditions would enable more experienced businesses to  qualify as small and hurt small businesses that need federal assistance  the most, especially in competing for set-aside contracts.

We provided a draft of this report to the Department of Homeland  Security, Department of Defense, General Services Administration, and  SBA for their review and comment. The Department of Homeland  Security provided technical comments, which we incorporated where  appropriate. In emails, the OSBDU director at the Department of Defense  and an audit liaison at the General Services Administration stated that the  agencies did not have any comments.

SBA provided technical comments in an email from the GAO Liaison,  which we incorporated as appropriate. We considered a number of these  comments to be more than technical in nature and therefore, summarize  them here:

SBA offered new views on three specific options for increasing federal  contracting opportunities for mid-sized businesses presented in the  report, which we incorporated where appropriate. SBA also made the  larger point that they believe any option to help mid-sized businesses  would hurt small businesses. In discussing the various options in the  report, we present the views of various stakeholders and SBA on how  the options would affect small businesses.

SBA stated that we created our own methodology for determining a  mid-sized business by multiplying the current size standards and that  a formal study should be performed to establish a baseline definition  of a mid-sized business. Our goal was not to establish a baseline  definition of a mid-sized business. As we note in the report, there is no  statutory or regulatory definition of a mid-sized or large business.  We applied multipliers to SBA’s size standards only for the purposes  of our analysis—specifically, to identify businesses that had outgrown  small business size standards and continued to receive federal  contracts.

SBA stated that we multiplied size standards by a factor of five to  define mid-sized businesses in all industries and cited analysis that it  had done that indicated that more than 95 percent of businesses are  at or below SBA’s size standards. The agency concluded that this  means that in some industries, almost all firms would be considered  mid-sized under our definition of mid-sized. However, only those firms  with revenue or employees up to five times above the SBA small size  standard would be considered mid-sized in our analysis. We counted  any businesses with revenue or employees at or below the small size  standard as small.

SBA stated that considering a factor of two or three times the SBA  size standards to identify mid-sized businesses would improve our  results. We considered a number of different factors when developing  our methodology. As noted in the report, we used five times the small  size standard to distinguish between mid-sized and large businesses  based on the distribution of contracts and obligations among  businesses in these two groups.

SBA stated that (1) the report should explain the basis and method for  selecting the sample of 5,339 businesses awarded set-aside contracts  in 2008 and (2) a sample of 104 out of 5,339 firms over that period of  time was too small to be generalizeable. The 5,339 businesses  awarded set-aside contracts in 2008 and awarded any sort of federal  contract in 2013 were not a sample; rather, they were all the  businesses that met these criteria. Therefore, we did not generalize to  the population based on a sample. Our analysis showed that only 104  of these 5,339 businesses grew to mid-sized by 2013.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretary of Defense, the Acting Secretary of Homeland Security, the  Administrator of the General Services Administration, and the Acting  Administrator of SBA. In addition, the report is available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact William B. Shear at (202) 512-8678 or shearw@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Major contributors to this report  are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report analyzes (1) the extent to which small businesses grew to be  mid-sized and continued to receive federal contracts; (2) instances in  which mid-sized businesses can perform work on contracts set aside for  small businesses; and (3) options for increasing federal contracting  opportunities for mid-sized businesses and views on the strengths and  limitations of the options. We present information on contracts awarded to  small, mid-sized, and large businesses in fiscal year 2017 in appendix II.

For the first objective, we analyzed data from the Federal Procurement  Data System-Next Generation (FPDS-NG) for fiscal years 2008 through  2017 (the most recent complete data available when we began our  review). For a consistent set of data across the 10-year period, we  selected all contracts awarded above the micro-purchase threshold. To  determine the relevant contract size standard, we matched the size  standards data from the Small Business Administration (SBA) to the  contract awards data from FPDS-NG based on the year of award and the  contract’s North American Industry Classification System (NAICS) code.  We then compared the businesses’ annual revenue or number of  employees to SBA size standards. We assessed the reliability of the  FPDS-NG data we used by performing electronic testing of selected data  elements and reviewing existing information about FPDS-NG and the  data the system produces. We determined that these data were  sufficiently reliable for the purposes of determining the extent to which  small businesses that grew into mid-sized businesses continued to  receive federal contracts and the size of businesses awarded contracts  during a specific time period.

To determine the extent to which contracts were set aside for small  businesses, we calculated the percentage of new contracts awarded in  fiscal year 2017 that were small business set-asides. To determine the  size of the small businesses awarded these set-aside contracts, we  divided SBA’s size standards into four segments for each NAICS code— below or at one-fourth of the size standard, above one-fourth to one-half  of the size standard, above one-half to three-fourths of the size standard,  and above three fourths of the size standard—and determined the  number and obligations of set-aside contracts awarded to small  businesses in each quartile for fiscal year 2017. We completed this same  analysis for fiscal years 2013 through 2016 to see if the results were  similar.

To determine the extent to which small businesses grew to be mid-sized  and continued to receive federal contracts, we used FPDS-NG data from  fiscal years 2008 through 2017. Because there is no statutory or  regulatory definition of a mid-sized or large business, we applied a  number of multipliers to determine size. Businesses with revenues or  employees at or below the SBA small size standards were small. We  considered businesses with revenue or employees up to five times above  the SBA size standard as mid-sized businesses. We considered  businesses with revenue or employees more than five times the size  standard as large businesses. We used five times the small size  standard to distinguish between mid-sized and large businesses based  on the distribution of contracts and obligations among businesses in  these two groups. We discussed this approach and methodology with  SBA officials and officials at three federal agencies that had large  obligations for small business contracts in fiscal year 2017. These officials  did not raise any questions about our approach, and some reiterated that  there was no legal definition of mid-sized businesses.

Using these definitions, we selected businesses awarded only small  business set-aside contracts in fiscal year 2008 and determined whether  these businesses also were awarded any type of federal contract in fiscal  year 2017 and if they were in the same or different size category in fiscal  year 2017. We then determined the number of businesses awarded set- aside contracts in fiscal year 2008 and awarded any sort of federal  contract in 2013 that had become mid-sized in fiscal year 2013 and the  extent to which those businesses were awarded any contracts in  subsequent years.

We also determined the percentage of competed contracts awarded to  small, mid-sized, and large businesses in fiscal year 2017. For purposes  of this report, competed contracts are those competed using (1) full and  open competition, (2) full and open competition after exclusion of sources,  and (3) simplified acquisition procedures. To determine the industry  sectors with the largest number of set-aside and competed contracts in  fiscal year 2017, we collected and analyzed FPDS data for each of the  two-digit NAICS industry sectors. See appendix II for more information.

For our second objective, we reviewed the Federal Acquisition Regulation  and small business laws and regulations to identify provisions that allow  small businesses that grow into mid-sized businesses to continue  providing services and goods on contracts set aside for small businesses.  We reviewed SBA documentation related to its 8(a) and All Small Mentor- Protégé programs because forming joint ventures with small businesses  under these programs is one way that mid-sized businesses can provide  services and goods under set-aside contracts. We analyzed lists from  SBA of the businesses that entered into mentor-protégé agreements as of  July 2018 and the mentor-protégé agreements that had formed joint  ventures as of September 2018.

Using FPDS-NG data, we determined the number of joint ventures  formed under the All Small Mentor-Protégé program that had been  awarded set-aside contracts from fiscal years 2016 through 2018. We  began with 2016 to allow time after the program was created in 2013 for  businesses to enter into agreements and form joint ventures. We ended  with 2018 because it was the most recent complete year of data available  when we conducted this analysis. Using the same multiplier methodology  designed for our first objective, we determined the number of mentors  awarded set-aside contracts as part of a joint venture that were mid-sized  businesses. We assessed the reliability of the SBA and FPDS-NG data  we used by interviewing SBA officials about their data and performing  electronic testing. We determined that these data were sufficiently reliable  for determining the number of mentors awarded set-aside contracts as  part of a joint venture that also were mid-sized businesses. We were not  able to perform a similar analysis for joint ventures formed under SBA’s  8(a) Mentor-Protégé program because SBA does not maintain a Data  Universal Numbering System number for mentors participating in that  program. This number is needed to determine the size of the mentor.

To identify stakeholder views on options for increasing federal contracting  opportunities for mid-sized businesses, we identified a number of  proposed options by reviewing literature, including sources identified  during our background research and initial interviews. We also conducted  a literature search. We used ProQuest to search 13 databases—including  Business Premium Collection, EconLit, Global Newsstream, Policy File  Index, and ProQuest Dissertations and Theses Global Research Library.  We also conducted searches using Lexis Advanced, EBSCO Business  Source Corporate Plus, Dialog, DTIC, Scopus, and HeinOnline. The  search was limited to 11 years (2008–2018) and to scholarly, trade, think- tank, and government publications.

For the searches, we used keywords such as “advanced small  businesses,” “federal contracting,” “mid-tier/mid-sized small businesses,”  “middle market,” “IDIQ,” “challenges,” and “opportunities.” Our searches  yielded 199 sources. To select relevant sources, an analyst reviewed the  titles and abstracts and selected 21 as likely to propose options for  increasing federal contracting opportunities for mid-sized businesses. A  second analyst reviewed the first analyst’s selection for concurrence. The  21 sources we selected included trade association reports, congressional  testimonies, and research reports.

One analyst read the 21 sources and identified any specific options  discussed. We eliminated suggestions or recommendations that were  unclear, duplicative, or unconnected to mid-sized businesses. A second  analyst read the same sources and verified that the first analyst had  correctly identified all the options pertaining to increased contracting  opportunities for mid-sized businesses. From this analysis, we compiled a  final list of 14 options for which we would obtain stakeholder views. The  options selected were grouped into four categories. The list of options  included in the report is not exhaustive; the options are intended only to  be illustrative of potential approaches to enhancing contracting  opportunities for mid-sized businesses.

To obtain stakeholders’ views regarding the strengths and limitations of  these options, we selected three categories—trade associations,  researchers, and federal agencies—from which to develop a  nongeneralizable sample of individuals to interview. To identify trade  associations, we compiled a list of 20 trade associations that represented  small and mid-sized businesses from the literature search and previous  GAO work on small business contracting. We searched each  organization’s website for any publications the organization may have  published on small and mid-sized businesses and federal contracting. We  used search terms such as “federal contracting,” “mid-size,” and “size  standards.” We identified six trade associations using this process.  Because one did not respond to our request, our sample included  representatives of the remaining five associations.

We also selected three researchers who published on mid-sized  businesses and federal contracting. In addition, we selected the directors  of the Offices of Small and Disadvantaged Business Utilization (OSDBU)  at three federal agencies—Department of Defense, Department of  Homeland Security, and General Services Administration—that were  among the top five agencies in terms of total dollar obligations for small  business contracts in fiscal year 2017.

We then interviewed the 11 stakeholders. For each interview, we asked  them to provide their views on the strengths and limitations of each option  in relation to small, mid-sized, and large businesses and for federal  agencies.

We performed a content analysis to analyze the responses. First, we  created preliminary codes that represented key themes across the  interviews of the strengths and limitations of the 14 options, such as  “would increase administrative burden on agencies” or “would increase  contracting opportunities for mid-sized businesses.” A methodologist  reviewed the coding system to ensure it was logical. We pre-tested the  coding of responses from three interviews to ensure the appropriateness  of the codes. One analyst coded each response to a particular strength or  limitation of an option and a second analyst reviewed the coding. If a  response did not align with a strength and limitation, the response was  coded as “unclassified.” The team discussed the results of the initial  coding analysis and made some adjustments to the codes. Once the  coding scheme was finalized and the responses from the remaining eight  interviews were coded by an analyst, a second analyst reviewed the  coding. If the second analyst disagreed with the coding of a particular  response, the two analysts spoke and achieved concurrence. After  response coding was completed, we tabulated the responses based on  the codes. A second person verified the calculation of the stakeholders’  response totals.

Because we selected a nongeneralizable sample of stakeholders to  interview, their views are not generalizable to other stakeholders who  have knowledge about options for increasing contracting opportunities for  mid-sized businesses, but their views offered important perspectives. To  characterize the number of stakeholders who offered the same opinion,  we used “nearly all” for nine or 10 stakeholders, “most” for seven or eight  stakeholders, “more than half” for six stakeholders, “several” for four or  five stakeholders, and “some” for three stakeholders. We also interviewed  SBA officials to obtain their views on how the options might affect small  businesses, as well as to gather information related to our other two  objectives.

We conducted this performance audit from April 2018 to August 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Information on Contracts Awarded to Small, Mid-Sized, and Large Businesses in Fiscal Year 2017

In this appendix, we provide information on contracts awarded to small,  mid-sized, and large businesses in fiscal year 2017. Because there is no  statutory or regulatory definition of a mid-sized or large business, we  applied multipliers to the Small Business Administration’s (SBA) size  standards. Small businesses were those with revenue or employees at or  below the size standard for their industry. We considered mid-sized  businesses as those with employees or revenue up to five times above  the size standard and large businesses as those with employees or  revenue more than five times the size standard.

Percentage of Competed Contracts Awarded in Fiscal Year 2017 by Size

Our analysis of Federal Procurement Data System-Next Generation  (FPDS-NG) data showed that mid-sized businesses received the smallest  share—9 percent—of competed contracts (compared with small and large  businesses) in fiscal year 2017 (see fig. 3). For purposes of this report,  competed contracts are those competed using (1) full and open  competition, (2) full and open competition after exclusion of sources, and  (3) simplified acquisition procedures.

Dominant Industry Sectors in Federal Contracting

We analyzed FPDS-NG data to determine the number of set-aside and  competed contracts awarded in fiscal year 2017 by industry sector. In  fiscal year 2017, the largest number of set-aside contracts were awarded  in the following sectors: manufacturing; professional, scientific, and  technical services; and construction (see fig. 4). In that same year, the  largest number of competed contracts were awarded in the following  sectors: manufacturing; professional, scientific, and technical services;  and wholesale trade.

Similarly, in fiscal year 2017 the largest contract obligations (set-aside  and competed) were awarded in the sectors of construction;  manufacturing; and professional, scientific, and technical services (see  fig. 5).

For competed contracts, we analyzed FPDS-NG data to determine if the  size of businesses awarded contracts varied by industry sector. In fiscal  year 2017, small and large businesses were generally awarded more  competed contracts than mid-sized businesses, regardless of sector (see  table 5). The industry sectors in which small and large businesses were  awarded the most competed contracts in fiscal year 2017 were  manufacturing; professional, scientific, and technical services; and  wholesale trade. Similarly, in fiscal year 2017, mid-sized businesses were  awarded the most competed contracts in the manufacturing and  professional, scientific, and technical services sectors. The third dominant  sector for mid-sized businesses was information.

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact name above, Paige Smith (Assistant Director),  Nancy Eibeck (Analyst in Charge), Edward Chiu, Sarah Garcia, Julia  Kennon, Jill Lacey, Barbara Roesmann, Jessica Sandler, and Jena  Sinkfield made significant contributions to this report.

Some federal contracts are set aside for small businesses (categorized by their number of employees or their revenue). But what happens when these businesses grow to become mid-size? We looked at how many small businesses grew to be mid-size, as well as options for increasing federal contracting opportunities for mid-sized businesses.

We found that, between 2008 and 2017, very few small businesses (about 2.5%) grew to mid-size and continued to receive some type of federal contract. However, stakeholders told us that implementing a mid-sized business set-aside would likely reduce opportunities for small businesses.