Study Finds Small Businesses Entering Federal Market As Primes Remains Low Since 2013

The number of new small businesses entering the federal contracting market rose from 2001 until 2006, declined “dramatically” between 2007 and 2013, and has remained “relatively low and constant” since then, according to a study by the Center for Strategic and International Studies.

The increase in the number of small businesses in the federal prime contracting space coincides with the build-up of the U.S. military for wars in Afghanistan and Iraq and increased defense spending, “signaling that the DoD’s growing demand for procurements during this time period could be influencing the rice of new entrants in the federal contracting arena,” says the study, which was issued on Nov. 20.CSIS Logo

However, the report notes that when the entrance of new small businesses into the federal market began to decline, government spending was still rising and the nation’s financial crisis was two years away. From 2012 on, the decline in new entrants could be linked to tighter federal spending associated with the Budget Control Act of 2011.

The study also points to two initiatives of the Obama administration designed to boost small business participation in the federal space, QuickPay, which cut the time for the government to pay small companies for contracted services, and the Defense Innovation Unit Experimental, or DIUx, which makes it easier for small firms to do business with the Defense Department.  The report says the number of new small business entering the federal arena hasn’t increased despite these initiatives.

CSIS also looks at “survival and graduation rates” of small businesses in the federal market, saying survival rates are similar with those found by other studies examining entrants in other sectors of the economy. The study says “around 40 percent of new entrants exit the market for federal contracts after three years, around 60 percent after five years, and only about one-fifth of new entrants remain in the federal contracting arena after 10 years.”

The data examined by CSIS from the Federal Procurement Data System is mixed regarding the survival rates of small businesses versus non-small businesses. From 2001 through 2004, small business entrants have higher survival rates across the federal government and, in 2005, small businesses have higher survival rates after three years while new non-small business entrants have better survival rates over five and 10 years.

“Although these results suggest that small businesses tend to have higher survival rates than their non-small competitors across all federal agencies, the low graduation rates of small businesses that survived for 10 years rings alarm bells over the efficacy of small business set aside programs,” the report says.

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