Small businesses are the lifeblood of the U.S. economy: they create two-thirds of net new jobs while accounting for 44 percent of our country’s economic activity. However, in an ever-changing global economy, small businesses often struggle to compete against much larger rivals. Through the Small Business Act of 1953 and the Small Business Jobs Act of 2010, Congress and the Small Business Administration (“SBA”) have sought to even the playing field by establishing special programs to steer federal contracts to small businesses.
Among these programs are set-aside contracts, which are reserved exclusively for small businesses to bid on. These set-aside contracts relieve small businesses of the enormous burden of challenging much larger businesses with economies of scale that permit them to undercut their smaller competitors. The federal government also sets a goal of subcontracting 23% of work to small businesses each year and offers monetary incentives for large businesses to enter into such subcontracts.
The government often fails to meet these goals, partially because of widespread fraud. Large businesses, eager to earn lucrative contracts, sometimes self-classify as small businesses for contracting purposes. Prime contractors sometimes subcontract to large businesses that have fraudulently certified themselves as small so they can earn subcontracting incentives.
This fraud is doubly harmful. First, it means that government contracts—and taxpayer dollars—go to businesses that don’t deserve them. Second, it means that legitimate small businesses lose out on contracting opportunities.
What makes a business small?
The federal government publishes size standards that define the largest size a business can be to compete for contracts reserved or set aside for small businesses. These size standards vary by industry and are generally based on the company’s number of employees or the company’s annual receipts. Each industry has a code in the North American Industry Classification System (NAICS), with corresponding criteria regarding size limits.