Examining the Unintended Consequences of Expanding Small-Business Size Standards

Photo By: Tim Mossholder

Small businesses are an important part of the American economy. They create jobs, support local communities, and contribute to economic growth. To help these businesses succeed, the government offers programs such as loans, grants, and government contracts. To determine which companies can receive this support, the government uses size standards based on factors such as annual revenue or the number of employees. Companies that fall below these limits can qualify as small businesses.

Expanding these size standards can help growing companies that may still face challenges competing in the larger marketplace. However, increasing the limits can also create unintended problems. When the government raises the size standard, more companies become eligible for small-business programs. While this may create more opportunities, there are still only a limited number of contracts, grants, loans, and other resources available. As a result, smaller businesses may find themselves competing against companies that are significantly larger and have more resources.

Joanne M. Frederick, CEO of GMS, points to an important issue that can arise when size standards are expanded. “Raising the size standards may help more mature companies make the transition to full-and-open competition, but without also examining past-performance requirements, we could make it significantly harder for newer businesses to ever get the opportunity to grow.” Her point highlights an important concern. Simply allowing more companies to qualify as small businesses does not necessarily create equal opportunities for newer and smaller firms.

For example, imagine a five-person company competing for a government contract against a company with hundreds of employees that still qualifies as a small business under an expanded size standard. The larger company may have more money, employees, and experience with government contracts. It may have workers who specialize in writing proposals, managing contracts, and finding new business. The smaller company may not have those resources. Although both companies may legally qualify as small businesses, they may not have the same ability to compete.

Past-performance requirements can make this challenge even greater for newer businesses. A company that has been operating for many years may have a long history of successfully completing government contracts. A newer business may have the skills to perform the work but may not have the same record to show potential customers. If past performance is required for certain opportunities, newer businesses can have difficulty getting their first major contract. Without that first opportunity, they may struggle to build the experience needed to compete for future contracts.

This creates a difficult cycle for newer businesses. They need contracts to build past performance, but they may need past performance to win those contracts in the first place. Expanding size standards without addressing this issue could therefore benefit larger, more established companies while doing less for newer businesses that are still trying to establish themselves.

Small-business programs are designed to help companies overcome challenges that come with being small. Very small businesses may have trouble getting financing, hiring employees, purchasing technology, or finding the time and money needed to compete for government contracts. If larger companies become eligible for the same programs, the smallest businesses may have a harder time getting the support they need.

Another concern is that businesses in different industries have very different costs and needs. A manufacturing company may need expensive equipment, large facilities, and significant amounts of materials, while a professional services company may operate with fewer employees and lower costs. Because of these differences, revenue and employee numbers do not always provide a complete picture of a company’s financial strength or ability to compete.

There is also a concern that businesses could become too dependent on small-business programs. Growing a company should be positive. Businesses should be encouraged to hire more workers, increase revenue, and take on larger projects. However, if growing beyond a certain size means losing valuable government support, some businesses may become hesitant to grow. A better approach may be to create programs that help businesses gradually move from small-business assistance into full-and-open competition as they become stronger.

Policymakers should also consider how past-performance requirements affect new businesses. Past performance can help government agencies determine whether a contractor can successfully complete a project. However, requirements that are too restrictive can make it difficult for new companies to get their first opportunity. Creating more opportunities for newer businesses to demonstrate their capabilities could help them build the experience they need to compete for larger contracts.

This does not mean that size standards should never be increased. Businesses grow, costs change, and economic conditions evolve. Size standards should be reviewed regularly to make sure they reflect current business realities. However, policymakers should consider how changes affect businesses of different sizes and levels of experience before expanding eligibility.

One possible solution is to create different levels of support based on the size and needs of a business. The smallest and newest companies could receive greater assistance, while larger businesses that still qualify as small could receive a different level of support. Policymakers could also create more opportunities for newer businesses to establish past performance and demonstrate their capabilities.

Ultimately, the goal should not simply be to increase the number of businesses that qualify as small. The goal should be to make sure small-business programs help companies that truly need support and give newer businesses a realistic path to growth. Expanding size standards can provide valuable opportunities for growing companies, but it can also increase competition for limited resources and make it harder for the smallest and newest businesses to succeed.

A strong small-business policy should encourage companies to grow while still giving new and smaller businesses a fair opportunity to compete. As Joanne M. Frederick’s comments suggest, changing size standards is only one part of the larger issue. If policymakers want small businesses to become successful competitors, they must also consider the requirements that determine who gets the opportunity to win contracts, build experience, and prove what they can do.