Feeling the pinch: small firms seeking federal contracts face uphill climb.

• Author: Rusling, Matthew
• Position: Small Business

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Pentagon officials are fond of saying that small businesses are critical engines of innovation that not only are essential to the military but to the larger U.S. economy. According to recent government statistics, however, the Defense Department awards fewer contracts to small firms than it is obligated under federal guidelines.

In 2007, approximately $269 billion in total Defense Department contracts were awarded. Of those, about $55 billion, or around 20 percent, were prime contracts to small businesses. That falls three points short of the statutory goals for the federal government to purchase at least 23 percent of all its goods and services from small businesses.

Because the Defense Department purchases about two-thirds of all goods and services the federal government buys, its purchasing practices greatly affect the success of federal procurement policy favoring small businesses, said a Rand Corp. study that was commissioned last year by the Defense Department. The Pentagon has had "mixed success" in meeting the procurement goal for small businesses, the study noted.

A recent industry conference on contracting opportunities for small businesses illustrated some of the challenges that small, disadvantaged firms face as they try to break into the arcane world of military contracting.

Several small business executives at the conference complained that the Defense Department often comes up short on its promises to increase participation by disadvantaged firms. A case in point is information technology contracts. Of several dozen contracts recently awarded by the Army, only eight were given to small businesses. There are no plans so far to increase the share of IT contracts that are awarded to small firms, said Simone Jackson, associate director of small business programs at the Army Contracting Command.

David Mugrage, president of Maintenance & Inspection Services, said that government rules often contain pitfalls for small businesses.

When a small company wins a prime contract, it may have to team up with a larger firm to share the workload. But that small entity must perform 51 percent of the work. If it is unable to do so, it could lose that contract. That hurts small companies, Mugrage said.

Part of the problem is that many contracts are structured so that only large corporations are capable of taking on the work. Under a practice known as "bundling," agencies consolidate multiple contracts into a single bid...