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

To encourage small business inclusion in public procurement, the U.S. federal government has established the set-aside program that mandates government agencies to award a portion of their contracts 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. Analyzing a large dataset of federal R&D contracts, we find that despite restricting competition to small businesses, set-aside R&D contracts experience lower schedule and cost overrun than R&D contracts awarded through open competition. Furthermore, although set-aside R&D contracts experience lower schedule and cost overrun when they are awarded to more experienced contractor firms, this benefit arises 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 fiscal year experience lower schedule and cost overrun than those awarded later. Post-hoc analysis examining 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 set-aside R&D contracts awarded by the Department of Defense. While related-agency experience improves contract performance, unrelated-agency experience has a detrimental effect on contract performance. These findings demonstrate that small business inclusion policies may not necessarily compromise contract performance. Importantly, they emphasize the need for federal agencies and contracting officers to consider the underlying dimensions of contractor firm experience and contract award timing to improve contract performance and taxpayer money utilization.