Shut Out: How Current Policies Deny Small Businesses Fair Access & Undermine Competition

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For over 70 years, U.S. law has mandated that small businesses receive a 'fair proportion' of federal contracts, recognizing their vital role in driving competition, innovation, and economic growth. Yet, a wave of recent policy shifts, an emphasis on 'commercialization,' and the dismantling of regulatory safeguards are actively eroding these hard-won opportunities, systematically shutting out small firms from the federal marketplace.

The Promise of Fair Opportunity vs. The Reality of Exclusion

The Small Business Act and the 'Rule of Two' were established to ensure that if at least two capable small businesses could perform federal work at a fair price, that opportunity must be set aside for them. This isn't about preference; it's about ensuring a level playing field and a diverse industrial base.

However, the reality is stark:

• Between FY2008 and FY2024, America lost 49% (nearly 71,000) of its unique small business federal suppliers, even as the total number of small businesses in the U.S. grew by 27.5%.
• While the total dollar amount awarded to firms classified as small businesses has increased, this masks a dangerous trend: fewer small businesses are receiving those dollars, indicating significant market concentration and larger contracts going to a shrinking pool of mostly larger 'small' businesses.
• The number of new small business entrants into federal procurement has dropped even more steeply, by 79% between 2005 and 2019, stifling the very innovation pipeline these reforms claim to support.

How Current Practices Systematically Shut Small Businesses Out

This exclusion is not accidental; it's the result of deliberate policy choices and procurement practices that favor large incumbents and consolidation:

• Contract Bundling & Over-Consolidation: Agencies increasingly combine multiple requirements into massive contracts that are far beyond the reach of most small firms, a practice that limits competition and often leads to higher long-term costs.
• Overuse of Large Contract Vehicles: Reliance on large, long-term Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, Government-Wide Acquisition Contracts (GWACs), and "Best-in-Class" (BIC) vehicles often locks out new or smaller businesses for years, especially when these vehicles lack meaningful on-ramps for new entrants.
• Weakening of Market Research: The recent FAR overhaul has dismantled key market research procedures (formerly in FAR Part 10) that were critical triggers for the 'Rule of Two'. Without these clear mandates, agencies have more discretion to bypass small business consideration.
• Misguided Push for "Commercialization" & "Efficiency": The Executive Order on Commercial Solutions (April 16, 2025) directs agencies to prioritize commercial products and services. While seemingly efficient, this often translates to favoring large, established commercial providers and overlooking specialized small businesses, even when the Rule of Two should apply. This 'efficiency' comes at the profound cost of a diminished small business supplier base.

The Devastating Impact on Competition

When small businesses are shut out, true competition vanishes.

• Reduced Bids & Higher Costs: Fewer bidders, especially the absence of agile and often more cost-effective small businesses, directly leads to less competitive pricing and potentially higher long-term costs for taxpayers. The 23% small business contracting goal, intended as a floor, has often acted as a ceiling, artificially limiting the competitive pressure small businesses can exert.
• Stifled Innovation: Small firms are primary drivers of innovation. Excluding them from federal contracting means agencies miss out on cutting-edge solutions, specialized expertise, and the nimbleness that larger, more bureaucratic firms often lack.
• Market Concentration: As fewer, larger firms dominate, the federal marketplace becomes less dynamic and more susceptible to the influence of a small number of mega-contractors, undermining the diversity and resilience of the U.S. industrial base.

It's Not a Level Playing Field – It's the Law

Small business set-asides and programs like the 'Rule of Two' are not 'preferences' or 'handouts.' They are legal and structural safeguards, established by Congress over decades with bipartisan support, to correct documented disparities and ensure a diverse, innovative, and competitive supplier base. These laws recognize that a healthy mix of small and large contractors is essential for a well-functioning federal marketplace that truly serves the public interest and delivers the best value to taxpayers.