Does your firm qualify as a small business for competitions for federal contracts?
by Dave Alexander, Lincoln Strategies, LLC
The solicitation for every federal contract specifies the small business size standard that applies. The standard defines the maximum size that a business together with all of its affiliates can be to qualify as a “small business” for the purposes of the solicitation. A firm can be “small” for the purposes of some federal procurements while being “large” for others, in the same time period.
To assign the size standard to a solicitation, the Contracting Officer (CO) assigns it to a “North American Industrial Classification System” (“NAICS”) Code. (“NAICS” rhymes with “lakes.”) For example, consider a solicitation for the construction of a federal courthouse.
- In a typical case, the CO will assign this solicitation to NAICS Code 236220 (Commercial and Institutional Building Construction).
- This NAICS Code has a small business size standard of $33.5 million. Therefore, that is the size standard that applies for this solicitation.
- For this procurement, therefore, a construction firm will qualify as “small” if it has average annual revenues that do not exceed $33.5 million (average of the firm’s three most recently completed fiscal years, taking into account its gross revenues and those of its “affiliated” business concerns).
- If the solicitation is a “full and open competition,” any qualified construction firm can submit a proposal. But if the solicitation is a “small business set-aside,” only “small” firms can propose as prime contractors (i.e., firms that do not exceed the $33.5 million standard).
Because every federal solicitation is assigned to an NAICS Code, an individual firm might simultaneously qualify as a “small business” for some federal solicitations, while being a “large business” for others. For example, consider a firm that has two specialties, management consulting and software programming. The firm has average annual revenues of $16 million, taking into account all affiliates.
- The firm would qualify as a small business for a federal procurement that is assigned to NAICS Code 541511 (Custom Computer Programming Services), because that Code has a $25.5 million size standard.
- The firm would not qualify as small for a federal procurement that is assigned to NAICS Code 541611 (Administrative Management and General Management Consulting Services), because that Code has a $14.0 million size standard.
Many NAICS Codes have size standards that relate to a firm’s employee headcount. This is computed as the average headcount per pay period for the past 12 months for a business and its affiliates. Size standards for most manufacturing sectors are defined in terms of headcounts. For example, NAICS Code 334511 (Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing) defines a firm as “small” if the firm and its affilitates have an average headcount of no more than 1,000 employees. Many of the NAICS Codes with employee-based size standards use thresholds set at 100, 200, 750, or 1,000 employees.
There are many potential benefits a firm can gain by qualifying as “small” for a particular procurement. For example, the federal government:
- Restricts competitions for some contracts exclusively to firms that qualify as small. In these cases, small offerors can have large business subcontractors on their teams, but only small offerors can propose to be the prime contractor.
- Gives large prime contractors incentives to add “small” firms to their proposal teams in cases where the competition is not a small business set-aside. When a large contractor submits a proposal in an unrestricted competition, in almost all cases the large contractor will be evaluated, in part, on its commitment to sharing work with “small” firms. Including small businesses in its team as proposed subcontractors can help add credibility to the large contractor’s statements about its commitment to sharing work with “small’ firms. This can help the large contractor gain evaluation points in the competition.
- Requires large prime contractors that are awarded contracts to make good faith efforts to share work with “small” subcontractors. The specific dollar and percentage goals are specified in the awardee’s “Small Business Subcontracting Plan” that is negotiated with the government and incorporated into the contract that is awarded to the prime contractor. Failure to achieve these goals during the performance of a contract can harm the prime contractor’s “past performance” score, which will hurt it in future competitions. If your firm qualifies as small for a particular federal contract, this can give you an important competitive advantage in seeking work as a subcontractor, even if your firm was not on the original team named in the proposal.
- Provides direct benefits to small firms, such as making them eligible for various SBA loan programs.
The preceding is a simplified summary of federal size standards. Some key complications include the following:
- Some NAICS codes have several size standards. For example, consider NAICS code 541330 (Engineering). The size standard for this code is $14 million—but there are exceptions. If a procurement is assigned to NAICS code 541330, but the engineering services are for Military and Aerospace Equipment and Military Weapons or certain other subsets of services, the size standard is $35.5 million. It is important for potential offerors to seek guidance from the Contracting Officer if there is any ambiguity with respect to which exceptions (if any) are being invoked for those NAICS codes that include these types of variations.
- In computing their average annual revenues or employee head counts, firms have to be very careful in defining “affiliated business concerns.” The pertinent federal definitions of “affiliation” are wide-reaching.
- For size standards that are expressed in terms of a firm’s total number of employees, firms must take care in how they count “employees.” SBA’s guidelines cast a wide net. If a full or part-time employee worked for the firm in a particular pay period, for no matter how few hours, that person is counted as one employee in computing that pay period’s headcount.
- Special rules apply in the case of firms that do not yet have three years’ worth of operations (for the purposes of computing average revenues) or have been in business for less than one year (for the purposes of computing the firm’s employee headcount).
- A non-profit organization is not a “business concern organized for profit” and, therefore, cannot be classified as a “small business” under any NAICS code.
- A foreign-owned firm in some cases can qualify for “small business status,” but only if it meets certain criteria (e.g., if the firm pays U.S. taxes, or uses U.S. products, materials or labor).
Contact Lincoln Strategies for more information or advice.
- We can help you determine your firm’s size status with respect to various NAICS codes.
- If your firm is considered “small” with respect to some or all of the federal market segments in which you participate? If so, are you reaping optimal competitive advantage from this status? We can help you assess this issue and make strategic adjustments.
- Is your firm “other than small” in the parts of the market in which you participate? What steps are you taking to develop relationships with “small” firms as part of your overall strategy for these market segments?
- Is your firm barely over a relevant size standard? Firms that are too big to be small, but among the smallest of the big firms can face tough competitive disadvantages in the federal market. Lincoln Strategies can help you develop compensating strategies.
- Perhaps you are looking at a recently announced federal procurement and you believe that the CO assigned it to an inappropriate NAICS Code: one that renders your firm “other than small” for the purposes of this competition. Or perhaps you believe that the CO erred in deciding which of the exceptions applied for a particular NAICS code. Lincoln Strategies can help you assess your options and map a plan (e.g., to present a case to the CO to assign a different NAICS Code).
- Are you contemplating a Joint Venture to pursue a particular procurement, and you need help in deciding whether and how the JV can qualify for small business status? Lincoln Strategies can help you identify and assess the issues.
- Are you involved in a merger or acquisition where the issue of small business status has arisen? For example, perhaps the firm you are acquiring has an ongoing federal government contract that the firm had won as a result of a small business set-aside competition. If you acquire the firm, what will happen to that contract? What if the acquisition is an asset purchase, not a stock purchase? Lincoln Strategies can help you assess the issues and identify and analyze your options.