Selection of Small and Diverse Suppliers and Contractual Performance: Do Set-Asides Pay Off?

Abstract

Despite formal supplier diversity initiatives and lofty goals, corporate spending with diverse suppliers is about 7%. Conversely, the U.S. federal government's spending with these suppliers exceeds 25%. The government's use of set-asides, which limit the bidding on certain contracts to small or small and diverse suppliers, is one reason that might explain this difference. Although set-asides entail socioeconomic benefits for these suppliers, they are controversial. Our study contributes to this debate by investigating the types of federal procurement contracts typically awarded to small and diverse suppliers and whether set-asides help these suppliers win more complex contracts. We also examine contractual performance in terms of cost overruns and delays for contracts performed by small and diverse suppliers versus other suppliers and contracts awarded to small and diverse suppliers through set-asides versus no set-asides. We test these effects by analyzing 38,417 procurement contracts awarded by all U.S. federal departments and independent agencies between 2011 and 2022. Our results show that small and diverse suppliers are more likely to be selected for less complex contracts. Set-asides, however, have a boosting effect, increasing the likelihood that these suppliers are selected even for more complex contracts. Moreover, contracts performed by small and diverse suppliers exhibit (a) similar cost overruns and delays as contracts performed by other suppliers and (b) lower cost overruns and shorter delays when awarded through set-asides rather than without set-asides. Our results have implications for the sourcing literature, small and diverse suppliers, and procurement professionals.