The Government’s Role in Aiding Small Business Federal 

Subcontracting Programs in the United States

A Working Paper by 

Major Clark III, Chad Moutray, and Radwan Saade

U.S. Small Business Administration, Office of Advocacy. 2006. [31] pages.

Historically, small businesses in the United States 

have received a share of federal procurement dollars 

not quite commensurate with their relative importance in the U.S. economy. While 99.7 percent of all 

employer firms are small, they receive about 23 percent of direct federal procurement dollars and almost 

40 percent of subcontracting dollars. While subcontracting has been a part of the federal procurement 

framework, it has not received the same focus and 

attention as the prime contracting program.

The purpose of the paper is fourfold. First, it discusses the importance of the small business sector to 

the overall economy. Second, it lays out the policy 

framework for the federal government’s involvement 

in requiring “other than small” federal prime contractors to subcontract with small businesses. This policy 

discussion focuses on the period from 1958 to the 

present. Third, it examines the legislative and regulatory approaches that have been put forth to increase 

subcontracting opportunities for small businesses; 

and fourth, it discusses steps needed to improve the 

American small business subcontracting program 

to accommodate greater participation by these businesses in new and emerging global markets.

Major Recommendations

While procurement data are available in the United 

States, better data are needed to measure the true 

effectiveness of achieving procurement goals and 

policies. Current data cannot measure benefits from 

procurement. For instance, has discrimination been 

reduced or eliminated? Are local minority communities benefiting from government contract awards? 

A concerted effort must be made to produce a more 

comprehensive data set that will allow analysts to 

more fully examine procurement policy toward small 

business. Ideally, new regulatory policy should be 

introduced alongside data requirements specific to 

the policy’s goals and objectives.

The global economy is rapidly creating a need in 

America for greater flexibility in its small business 

programs. Public Law 95-507 was enacted in 1978 

and has changed very little. Section 211 of this law 

is not flexible enough to account for new practices in 

the procurement marketplace. For example, the policy still assumes that the prime contractor is doing 

all of the work, whereas the reality is quite different—hence the need for more flexible policies.

The traditional contract theory of “privity of contract” has a valid place in contract law to prevent 

interference in the business relationship between 

prime contractor and subcontractor. The federal government argues that because it is in contract with 

the prime contractor and not the subcontractor, it 

does not have “privity” to enforce a claim by the sub 

against the prime. While public policies aim to protect small entities, “privity of contract” prevents any 

intervention by the federal government in resolving 

disputes, for example, concerning prompt payment 

or nonpayment between sub- and prime contractors. A more consistent implementation of Congress’ 

intent and a more focused enforcement of set principles would be ideal in helping small subcontractors 

bring claims against larger primes. In other settings, 

mechanisms should be in place for the resolution of 

such disputes.

The federal marketplace is no longer national; 

it is international. International trade agreements 

between the United States and other countries have 

facilitated this transformation. On one hand, small 

September 2006 No. 281

The opinions and recommendations of the authors of this study do not necessarily reflect official policies of the U.S. Small Business 

Administration or other agencies of the U.S. government. This paper was accepted for presentation by Major Clark, III, at the International 

Public Procurement Conference in Rome, Italy, September 21-23, 2006.
and small disadvantaged businesses are encouraged 

to participate in exporting goods and services, but on 

the other hand, the government continues to impose 

undue restrictions. This inconsistency harms small 

entities. For example, FAR Part 19.000(b) does not 

require prime contractors to submit subcontracting 

plans for federal contracts where the work is being 

performed outside of the United States, as previously 

established. Such policies are a disincentive to small 

business owners who are ready, willing, and able to 

compete in the international marketplace. Moreover, 

these policies may place American small businesses 

on an uneven footing vis-à-vis their foreign competitors. A model international small business subcontracting program should encourage the free flow of 

business.

Comment

This report was peer-reviewed consistent with 

the Office of Advocacy’s data quality guidelines. 

More information on this process can be obtained 

by contacting the director of economic research at 

advocacy@sba.gov or (202) 205-6533.

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