It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to ensure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government … be placed with small business enterprises, to ensure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the Nation.
- Small Business Act, Public Law 85-536 as amended 4/5/2004 (www.sba.gov/regulations/sbaact/sbaact.pdf)

Small businesses operate in the government environment in two ways: as direct providers of services and goods to the government, and as subcontractors to larger businesses supporting the government. In either case, small businesses play an important role both in the economy as a whole and in the federal acquisition mix.

As the table below indicates, according to the U.S. Census in 2002 (the most recent statistics available) more than one-third of US workers are employed in businesses with fewer than 100 employees.

Small Business Guidelines and Regulations
Small businesses are an important part of the national economy and protected entities in the federal acquisition ecosystem. For example:

• Current Administration guidelines direct agencies to award 23% of their prime contract dollars to small businesses.
• Federal Acquisition Regulations (FAR) Part 19 requires that, as long as the small business' price does not exceed the market price, all federal purchases between $2,500 and $100,000 are set aside for small business competition unless the contracting officer determines that finding two or more qualified small business competitors is unlikely.
• FAR requires large businesses to submit a subcontracting plan on awards over $500,000 and the plan should lay out how the large business will make participation opportunities available to small, disadvantaged, and women-owned businesses.

Small Business Definitions Are Murky
"Small Businesses" are defined by either the number of employees or the annual sales volume. The latter is most often used in the consulting and services industry as the basis for small business status. It is important to understand the North American Industrial Classification System (NAICS) code before attempting to understand how industries and small businesses are connected.

The Small Business Administration (SBA) web site (www.sba.gov/regulations/121/201.htm) provides the criteria for determining small business status. Determination is complex because the criteria are different from industry to industry and "exclusions" are frequent. For example, services organizations are capped at $5 million revenue per year-except that there are dozens of exclusions. Information systems services companies are, for the most part, capped at $18 million per year. Engineering services top out at $2.5 million, except that engineering for weapons systems are capped at $20 million. Clearly, it is important to understand the SBA rules before claiming to be a small business or awarding set-aside work to a purported small business.

The result of the complicated guidelines is that miscategorization is an ongoing problem. When a large business is mistakenly categorized as small, it removes benefits from legitimate small businesses, and could place its prime contractor partner at risk for failure to comply with small business set-aside requirements.

More than Just Protection for Protection's Sake
Making use of small businesses is not just a "social engineering" exercise-small businesses sometimes can outperform much larger, resource-rich companies. Small businesses are often able to provide pinpoint expertise, offer prices that are below those of companies that have higher overhead, and offer a level of enthusiasm and commitment that exceeds larger companies.

On the flip side, small businesses are rarely successful in taking on very large engagements, and may have difficulty scaling up from a small effort to a big one. However, the benefits of small businesses outweigh their shortcomings-in the right engagement and with the right relationships.

In Part 2 of this series, Pivotal Insight will look at how small businesses have been successful in both independent and subcontracting relationships, and how government has benefited from the specialized skills of small businesses.