Fewer Small Firms - Is the SMB Base Shrinking?

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Over the past decade, the number of small businesses in federal contracting has fallen by about 40%
Over the past decade, the number of small businesses in federal contracting has fallen by about 40%1617Ă—972 271 KB

Fewer Small Firms, Fewer Dollars. Is the SMB Base Shrinking for Good?

The Context

On paper, FY25 was a win for small business contracting. Agencies beat the 23% statutory goal, awarding nearly 28% of all prime federal contract dollars, about $179 billion, to small businesses.

Look closer and the picture changes. That $179 billion is down from $183.5 billion in 2024, even as total federal procurement grew from roughly $755 billion to $793 billion. Prime awards went to just 56,725 small firms, down from 60,951 the year before and 65,428 in FY21. Over the past decade, the number of small businesses in federal contracting has fallen by about 40%. Every socioeconomic category declined in both share and dollars, and SBA’s first-ever audit of the 8(a) program removed around 800 firms.

Source: Federal News Network - Agencies award $179B to small firms in 2025, down from 2024 | Federal News Network

Why GovCons Should Care

The government spent more, and small businesses got less of it. Bundling, category management, and consolidation onto large vehicles keep raising the table stakes. If you’re an SMB, your growth plan now has to answer a structural question, not just a competitive one: is the addressable market for firms like yours growing or shrinking?

Two Sides of the Debate

One side sees a warning light. A 40% drop in participating firms over a decade is an exodus, not a rounding error. Bundled contracts have grown too large for small firms to take on, and a concentrated industrial base means less competition, less innovation, and less surge capacity. The 28% headline hides the erosion underneath.

The other side sees a correction. The goal was still exceeded, and dollars per firm are rising, meaning the small businesses that remain are winning more. Part of the decline reflects deliberate cleanup of firms that couldn’t document eligibility. A leaner base of stronger, verified small businesses may be healthier than a bigger one padded with pass-throughs.

Your Turn

Is the shrinking small business base a problem Washington needs to fix, or a market correcting toward stronger firms? And what would actually reverse the trend: unbundling, better on-ramps, or something else?

Tell us what you think in the comments below.

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The truth lies somewhere in the middle-auditing out pass-throughs and fraud was necessary, but using that to hand-wave a 40% drop in small business participation is dangerous.

The real culprit isn’t strict eligibility, it’s vehicle lock-out. Category Management has funneled procurement into massive, multi-year GWACs and IDIQs. If a small business misses a 5- or 10-year proposal window when they’re at $2M in revenue, they are effectively shut out of prime bidding until they’ve outgrown the small business standard anyway.

To reverse this, Washington doesn’t need to lower standards—it needs to fix the architecture:

  1. Dynamic On-Ramping: Make major vehicles open-enrollment every 12–18 months.

  2. Subcontracting Accountability: Hold primes strictly accountable for subcontracting performance, creating real pathways for smalls to build past performance before bidding prime.

Without off-ramps for giants and on-ramps for smalls, the numbers will keep shrinking regardless of headline percentages.

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The shrinking SMB base is a strategic risk, not just a market correction.

While stronger oversight and eligibility audits are healthy, a 40% decline in participating firms over a decade points to deeper structural barriers. The issue is less about who qualifies and more about who can realistically compete. Contract bundling, long vehicle refresh cycles, and limited pathways for new entrants make it increasingly difficult for emerging firms to gain traction.

A healthy GovCon ecosystem needs both accountability and accessibility. Dynamic on-ramps, more opportunities for small businesses to build past performance, and stronger subcontracting accountability could help expand competition without lowering standards.

The real question is: if fewer firms are competing today, what does that mean for innovation, resilience, and supplier diversity tomorrow?

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This is a massive risk for innovation and supply chain resilience."

Look at the Department of Defense: losing 40%+ of small business vendors over a decade directly shrinks our surge capacity and supply chain diversity. Nontraditional defense innovators—especially in AI, cyber, and dual-use tech—simply look at the 18-month procurement cycle, FAR compliance overhead, and high barriers to entry, and walk away to commercial markets.

When you squeeze out true entry-level smalls, you eliminate the pipeline for tomorrow’s prime contractors. If we don’t build fast, accessible on-ramps, we’re left with an oligopoly of massive primes and legacy incumbents.