Advancing Small Business Inclusion in Public Procurement: Evidence from U.S. Federal Government R&D Contracts

Abstract

To encourage the inclusion of small businesses in public procurement, the U.S. federal government has established the set-aside program, a preference program that mandates government agencies to award a portion of their annual contracting dollars to small businesses. We study whether and to what extent the performance of R&D contracts awarded through this program differs from those awarded through open competition. Our results based on a large dataset of federal R&D contracts indicate that, despite restricting competition to small businesses, set-aside R&D contracts experience lower levels of schedule and cost overrun compared to R&D contracts awarded through open competition. Furthermore, although set-aside R&D contracts experience lower levels of schedule and cost overrun when they are awarded to more experienced contractor firms, the benefits of experience arise primarily from a contractor firm's experience in executing R&D contracts across different agencies compared to the firm's experience with the same agency. Finally, set-aside R&D contracts awarded early in a federal fiscal year experience lower levels of schedule and cost overrun compared to those awarded later in the fiscal year. Additional post-hoc analysis focusing on the underlying dimensions of different-agency experience highlights the asymmetric effects of related-agency experience and unrelated-agency experience of contractor firms on the performance of setaside R&D contracts awarded by the Department of Defense. We find that while related-agency experience improves contract performance, unrelated-agency experience has a detrimental effect on contract performance. Taken together, the study findings demonstrate that policy initiatives for encouraging the inclusion of small businesses in public procurement may not necessarily compromise contract performance. Importantly, our findings emphasize the need for federal agencies and contracting officers to pay greater attention to the underlying dimensions of contractor firm experience and the timing of awarding a set-aside R&D contract as these factors can translate into improved contract execution and efficient utilization of taxpayer money.

Keywords: preference programs, small business, R&D contracts, public procurement, inclusive supply chains