Argy, Wiltse & Robinson, P.C.

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01.19.11

Small Business - The Basics of Government Contracting

Introduction

In the arena of U.S. Government contract acquisition, small businesses play a vital role, perhaps now more than ever. The U.S. Government acknowledges small and disadvantaged businesses by setting aside federal funds each year that must be spent on small businesses. This presents a great opportunity for many small businesses to expand revenues. However, many contractors do not understand the set-aside process or the regulations that govern small business Federal contracting. This article summarizes various considerations for small businesses relative to government contracting, including benefits, qualifications, types, forms and certifications, applicable regulations, as well as resources available to small businesses.

Benefits of Being a Small Business

The landscape of government contracting favors small businesses in many ways. Agencies are required to set small business contracting goals, which stipulate the percentage of contract awards each agency awards to small businesses. In addition to these considerations, the Federal Government has created a Small Business Set Aside (SBSA) program in which awards are competed exclusively between small businesses. This program helps ensure each Federal Agency’s small business goals are met.

In addition to favorable prime contract award opportunities from the Federal Government, many small businesses are afforded favorable subcontracting opportunities. Large prime Federal contractors are required to submit subcontracting plans to the Federal Government which contain small business goals. The Government then monitors the prime contractors for achieving the small business contracting goals and may assess damages if the prime does not show a reasonable attempt to achieve its goals.

Besides government contracts, small businesses also have access to favorable loans. Many times, small business loans allow a longer payback period under more favorable terms than a comparable bank loan. Additionally, small businesses are afforded certain tax incentives. For example, under the American Recovery and Reinvestment Act of 2009, a provision of the act allowed small businesses to carry back Net Operating Losses (NOLs) for a period of five years, as opposed to the two years statutorily allowed for other types of businesses.

Small Business Qualifications

The Small Business Administration (SBA) is an independent Federal agency set up to assist and protect the interests of small businesses and sets forth requirements for a business to be considered a small business. First, to be considered a small business, a business must meet the SBA’s definition of a business concern. The qualifications of a business concern are as follows1:

  • The business must be organized for profit;
  • The business must have a place of business within the United States;
  • The business must operate primarily within the United States or make a significant contribution to the United States economy through payment of taxes or use of American products, materials, or labor;
  • The business must be independently owned and operated;
  • The business must not be dominant in its field on a national basis; and,
  • The business must be either a sole proprietorship, partnership, corporation, or of another legal form.

In addition to defining a business concern, the SBA has also established size standards for all for-profit industries. Size standards represent the maximum size that a business (inclusive of its subsidiaries and affiliates) may be and remain classified as a small business. The size standards established by the SBA apply to the SBA’s financial assistance and other programs, in addition to Federal Government procurement programs directed towards small businesses. Under the Small Business Act, the SBA retains sole statutory authority to prescribe size standard metrics, unless specifically authorized by statute.

Small business size standards are established on an industry by industry basis2. Per FAR 19.102(b), small business size standards are applied by:

  • First, classifying the product or service being acquired in the industry whose definition, as defined in the North American Industry Classification System (NAICS), best describes the nature of the product or service being acquired. Note that when defining the NAICS industry for purposes of defining a business’ size standard, a product or service will be defined only to a single industry.
  • Second, after the appropriate NAICS code has been determined, identifying the size standard associated with the chosen NAICS code. Note that this information is provided in the NAICS Manual3.

The NAICS defines size standards using either an employee or receipts size metric. The measurement of employee count is based upon the number of employees for each of the pay periods for the preceding completed 12 calendar months4. Conversely, receipts are measured by (defined as “total income” plus cost of goods sold, excluding capital gains and losses) totaling receipts as reported on Federal Income tax returns for the previous three fiscal years and dividing that figure by three5. Additional regulatory guidance is provided for businesses that have not existed long enough to meet the appropriate measurement period criteria.

Businesses are responsible for self certifying that they meet the size standards specified for their NAICS code in order to qualify as a small business. Note that the penalties for misrepresentation of SBA status are severe. Under 13 CFR 121.108, penalties can include imprisonment for knowingly misrepresenting the small business size status of a business in connection with procurement programs.

Types of Small Businesses

FAR 19.201 lists several different types of small business concerns. The different small business concerns, as well as their unique requirements, are as follows6:

  • Small Business – a business concern (including its affiliates) that is independently owned and operated, not dominant in the field of operation in which it is bidding on Government contracts, and is qualified as a small business under the criteria and size standards of 13 CFR 121.
  • Veteran-Owned Small Business – a business concern in which at least 51 percent is owned by one or more veterans and whose management and daily business operations are controlled by one or more veterans.
  • Service-Disabled Veteran-Owned Small Business – a business concern in which at least 51 percent is owned by one or more service-disabled veterans and whose management and daily business operations are controlled by one or more service-disabled veterans, or in the case of a service-disabled veteran with permanent and severe disability, the spouse or permanent caregiver of such veteran.
  • Historically Underutilized Small Business (HUBZone) – a business concern that appears on the List of Qualified HubZone Small Business Concerns maintained by the SBA. A HUBZone is a historically underutilized business zone that is an area located within one or more qualified census tracts, qualified nonmetropolitan counties, or lands within the external boundaries of an Indian reservation.
  • 8(a)/Small Disadvantaged Business – a business concern that qualifies as a small business and has received certifications as a small disadvantaged business concern consistent with 13 CFR 124, Part B, has no material changes in disadvantaged ownership, has owners that fall under certain net worth limitations, and is identified as a certified small disadvantaged business concern in the database maintained by the SBA.
  • Women-Owned Small Business – a business concern in which at least 51 percent is owned by one or more women and whose management and daily business operations are controlled by one or more women.

The small business types listed above each receive their own set asides and small business goals are separately considered by Federal Agencies for each of the small businesses listed above.

Forms/Certifications

The SBA provides a variety of forms intended to assist small businesses. The forms offered include, but are not limited to: financial assistance forms, disaster assistance forms, technical assistance forms, contracting & surety bonding forms, 8(a) business development forms, IRS forms, and OSHA forms. A key form is SBA Form 355, Application of Small Business Size Determination.

SBA Form 355 should be filed by any business seeking a size determination for the purpose of receiving assistance available to small businesses under any program administered by the SBA (except for Small Business Investment Company (SBIC), which utilizes SBA Form 480 for the same purpose). SBA Form 355 requires information such as company name, location, products/services, purpose for requesting the size determination, affiliate information, and revenue and employee counts.

Regarding certifications, the small business process is currently self-certifying. Entities wishing to conduct business with the Federal Government must register with the Government in the contractor database through the Central Contractor Registration (CCR). In the CCR, a business can self-certify its status as a small business. Many state governments offer small business certifications which help businesses compete for contracts offered by state and local governments.

Resources

In addition to the SBA regulations listed throughout this article (notably 13 CFR 121, 13 CFR 124, and FAR Part 19), there are several other resources for small businesses. The SBA’s website provides extensive information and regulations, including forms, explanations, and rules for small businesses. The IRS’ website also provides information to small businesses. In addition to numerous free information resources found on the internet, many accounting and consulting firms offer services specifically geared towards small businesses.

Conclusion

The Federal contracting arena may appear to be saturated with large or multinational contractors that seem to be awarded most Federal contracts. However, it is important to remember that there are many advantages to being a small business in the world of government contracting. Not only is the Federal Government required to set aside federal funds for small businesses, large contractors are also required to subcontract a portion of their contracts to small businesses, in most cases. Small companies should properly align themselves in the marketplace and understand the resources available to them and the applicable regulations in order to take full advantage of the small business programs enforced by the Federal Government. Contractors are advised to consult with Government Contract professionals in order to gain a complete and comprehensive picture of the issues affecting small businesses.

1. http://www.sba.gov/size
2. 13 CFR 121
3. http://www.census.gov/epcd/www/naics.html
4. 13 CFR 121.106(b)(1)
5. 13 CFR 121.104(a)
6. FAR 2.101
 

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