GAO report offers little hope for mid-sized firms

A just-released Government Accountability Office report describes the challenges that middle-tier government contractors face in the market and whether anything can really be done about it.

GAO offers a couple solid ideas, especially for formerly small businesses that have recently moved out of that designation.

One solution is already in place under some large task order contracts that allow firms to move seamlessly from the small business portion of the contract to the unrestricted. The argument is that this allows companies to continue to use what has been a successful vehicle for them and one their customers want to use.

The General Services Administration's OASIS contract is one example that allows for a transition. But the Homeland Security Department’s EAGLE II vehicle does not, according to the report.

Another idea that seems practical is to change how past performance is used. Lowering quantitative requirements would increase contracting opportunities for mid-sized businesses and small businesses. This would lower the barrier to entry for some large contracts. Recall that small and mid-sized businesses are often shut out of competitions because they don’t have past performance that is large enough to qualify.

The report also describes the idea of allowing businesses to use subcontracting work as part of their past performance qualifications.

There also is some discussion of creating a set-aside program for mid-sized businesses, but you can tell from the tone of the GAO report that this idea doesn’t have legs. It would create a burden for government to administer and it would take opportunities away from small businesses. It is hard to imagine Congress supporting this anyway.

The report doesn’t make any recommendations. It’s just a review of the different options that have been discussed in the market around how to support the middle tier.

It’s an interesting read but really brings home the point that middle tier really is under a tremendous disadvantage but the solution really shouldn’t be another government program.

But every small business owner should read this report and shake in their boots because of one set of stats in the report.

In 2008, 5,339 companies won a small business set-aside contract. In 2013, only 104 of those 5,339 businesses had become what GAO defined as a mid-sized business. Of those 104, only 23 remained mid-sized as of 2017, and three had grown to the large business category.

That’s a horrible rate for companies to grow out of the small business designation.

GAO created its own definition for mid-size and large. A mid-size is a business with revenue of up to five times the small business threshold, and a large is a business whose sales exceed five times the small business threshold. GAO says at the end of the report that the definition of mid-size might need some work. The Small Business Administration said that a better calculation might be two or three times the size standard instead of five.

But that change doesn’t really impact the fact that so few transition out of the small business category, and that’s the concerning part.

The market doesn't just have a mid-sized business challenge, but a challenge with small businesses that can’t survive outside of the set asides.

More attention needs to be paid there but the onus really needs to fall on the business owners to prepare for the day they outgrow the designation. That’s the better solution than adding another layer of set asides to the small business program.