Small Businesses Get Locked Out of Prime Defense Contracts Despite Set-Aside Goals

The federal government sets a goal of awarding 23% of prime contract dollars to small businesses, with sub-goals for various disadvantaged categories. The DoD consistently reports meeting or nearly meeting these targets. But the reality is far more nuanced: a significant portion of 'small business' awards go to firms that are small in name only -- subsidiaries of large companies, firms on the verge of graduating out of small business size standards, or companies that serve primarily as pass-throughs to large subcontractors. Meanwhile, genuinely small and innovative firms face nearly insurmountable barriers to winning prime contracts. This matters because the defense industrial base is dangerously consolidated. Five companies -- Lockheed Martin, RTX (Raytheon), Northrop Grumman, Boeing, and General Dynamics -- receive roughly 30% of all DoD contract dollars. This concentration reduces competition, increases costs, and creates single points of failure in the supply chain. Small businesses are supposed to be the antidote -- bringing innovation, agility, and competitive pressure -- but they cannot fulfill that role if they are systematically excluded from meaningful work. The specific barriers are formidable. Security clearance requirements eliminate most startups before they can even bid. The cost of preparing a proposal for a major defense solicitation can run $500,000 to $2 million -- money that small firms cannot afford to spend on a low-probability bet. Past performance requirements create a catch-22: you cannot win a contract without past performance, and you cannot get past performance without winning a contract. The FAR and DFARS compliance burden requires specialized legal and accounting infrastructure that small firms lack. The structural reason this persists is that the prime contractors control the subcontracting ecosystem. When a small business does get work, it is typically as a subcontractor to a prime, at margins dictated by the prime. Primes have little incentive to develop small business capabilities because doing so creates future competitors. The Mentor-Protege program, designed to address this, is widely criticized as a mechanism for primes to claim credit for small business participation without genuinely building small business capacity. Congress and DoD leadership talk constantly about expanding the defense industrial base, but the acquisition system's structural features -- clearance requirements, compliance burdens, past performance gates, and the prime-sub power dynamic -- ensure that the same large firms continue to dominate. Without fundamental changes to how contracts are structured and how risk is allocated, small business participation will remain largely performative.