DOD faces hurdles in hiring small businesses.

Small businesses' share of defense contracts is likely to shrink in the next few years, according to a Rand Corp. study.

Rand said the Defense Department's five-year procurement forecast, the Green Book, anticipates devoting a larger share of its dollars to big-ticket items such as weapons systems, while spending proportionately less in industries where small contractors are strong, such as military construction, family housing, and research, development, testing and evaluation. The researchers cautioned that their analysis assumes present spending trends will continue--"a big IF given the recent financial crisis," Nancy Young Moore, senior management scientist at Rand, wrote in response to emailed questions.

Rand, a government-funded think tank, produced its report on DOD contracting for the department's Office of Small Business Programs.

The Defense Department is by far the largest government buyer. In recent years it has awarded from 20% to 23% of its prime contract dollars to small firms. Rand says the best hope for increasing defense spending with small businesses may be to change the rules--by increasing size standards so more contractors qualify as small.

"A typical defense contract in many industries can push a firm over the size threshold," the report says. "As one DoD representative told us, the scale of a DoD requirement can bump up against' the size threshold. This can result in 'NAICS shopping,' that is, searching for an industry code in which a business can still qualify as small and provide the goods or services to DoD."

Moore said, "Our research found that the Department of Defense spends more within industries where there are fewer small businesses, and less within industries where small businesses are better represented."

Equipment and services the Defense Department purchases--such as aircraft manufacturing, engineering services and ship-building--are provided mainly by industries where large companies are dominant, according to the report.

The researchers said there is no adequate data to address such critical issues as the impact of contract bundling or the effectiveness of small business subcontracting programs.