Socio-economic Designations: Small Business

The Small Business Administration was created primarily to encourage and promote the advocacy interests of small businesses across the United States. Part of these interests are ensuring that federal agencies maximize procurement opportunities for small businesses. See, e.g., Section 8(a) Business Development program, Historically Underutilized Business Zone (HUBZone) program, Service-Disabled Veterans Owned Small Businesses, Women-Owned Small Businesses. Applying for small-business status also allows you to apply for these programs.
The current Government-issued goal for prime contracts is that 23% of these contracts are awarded to small businesses. To ensure these goals are met, the FAR requires agencies to set aside contracts specifically for small businesses.

The Government operates under a “rule of two,” which states that the contracting officer reserves certain contracts for small businesses when the agency (1) has a reasonable expectation that at least two responsible small businesses will submit bids, and (2) the award will be made at a fair market price. This rule allows for contracts to be set aside both for small businesses and the concerns referenced above (i.e., Section 8(a), etc.).

To be considered a small business, the business must be “independently owned or controlled” and “is not dominant in its field of operation.” The SBA promulgates “size standards” for each industry. If your business meets or is below these size standards, your business qualifies as a small business.

The business will be assigned a North American Industry Classification System (NAICS) code denoting the primary industry in which the business is operating. If your designation does not classify a business as “small” under the size standards, the business may appeal its NAICS designation to the SBA’s Office of Hearings and Appeals. However, a business lacks standing if it would be considered anything other than small under the other proposed NAICS designation. See Am. Sys. Corp., SBA No. NAICS-5060 (2009).

With respect to a business qualifying as small under revenue standards, the SBA will average a business’s annual receipts over the past three or five fiscal years depending on the program a small business wishes to qualify under. Business Loan and Disaster Loan Programs require the past three fiscal years; all other programs require five. If the business is a relatively new business without these fiscal years of receipts, the SBA will average the business’s weekly receipts and multiply this average by 52. The time period for three fiscal years is interpreted fairly broadly, including time in setting up the business and opening up an office.

The SBA will also consider the number of employees when determining the size of the business. Similar to the determination of revenue, the SBA will average the number of employees on each payroll for the preceding twelve months.

In addition, the SBA will consider and combine a business’s “affiliates” when making a size determination. The SBA considers an affiliation to be present when one business has the power to control another business, or both businesses are controlled by a third business or the third business has the power to control both businesses. The small business should ensure the businesses it is most closely associated with do not have common ownership and/or management to minimize the chances of being considered affiliated.

The small business must annually represent and certify its status as a small business. The size of a small business can be protested against in particular procurements by other offerors, the contracting officer, or the SBA. In set-aside procurements, “other interested parties” may also file a size protest, including large businesses or offerors who were disqualified based on size.

Getting certified as a small business is an important step to growing your business, establishing a foothold with government agencies, and maximizing annual profits. Given the vast regulations governing small businesses and procurements (including set-aside procurements), discussion with your legal counsel can ensure you are getting maximum value from your small business status.