The 2011 U.S. federal budget consists of approximately $3.82 trillion of expenditures. With a projected U.S. Gross Domestic Product of $15.3 trillion, federal government expenditures account for nearly 25 percent of our economy. As a business owner, if one customer type accounts for 25 percent of your potential sales universe then you shouldn’t ignore them. On the other side of the equation are the federal agencies that have to spend their budgets. The current policy is to increase procurement from small businesses whether through direct contracting or subcontracting.
A key way that this directed procurement takes place is through small business set-aside programs. These procurement programs typically limit the scope of companies that can bid on a contract to those qualified as “small businesses." By competing for these contracts, small business owners avoid the challenge of competing against large, entrenched government contractors.
What exactly is small?
The Small Business Act defines “small” in the context of federal government procurement. There are two components to being classified as small.
First, your company cannot be “dominant in the field of operation for which it is bidding on a government contract."
Second, it must fall below the size standards listed in Title 13, Code of Federal Regulations, part 121. Part 121 lists the size standard in terms of annual revenues or number of employees for each NAICS code. For example a rice farm (NAICS code 111160) is considered small if it generates less than $750,000 a year in revenues. A fresh fruit and vegetable wholesaler is considered small if it has fewer than 100 employees. There are some exceptional cases that use a different metric for “small." An international trade finance company is considered small if it has less than $175 million in assets.
In cases where employee count is the determining standard, “employees” is used broadly. It includes everyone employed on a full-time, part-time or other basis. This means temporary workers also count. Part-time employees are counted the same as full-time employees.
The challenge with small business set-asides
What may have been considered small 10 years ago may not be considered small today. Many businesses that are still small for all intents and purposes and do not dominate their industry have brushed up against the size limits that disqualify them for small business set-asides. This can lead to a perverse incentive whereby a company may choose to avoid new hires or actually turn business away to continue its eligibility. If your company's revenues are just below the threshold for the "small" designation, then you could be forced to turn away smaller contracts that would put you over that threshold if you hope to compete for larger set-aside contracts. Instead of rewarding small businesses for being successful, it forces them to make decisions that could hurt them.
How the SBA is helping your company get small
The SBA has recognized this challenge and is making recommendations to adjust the small benchmarks for 36 industries and one sub-industry. This is the first comprehensive update in more than 25 years. Some of the changes recommended for size standards include:
- Law firms: from $7 million to $10 million
- Engineering services firms: from $4.5 million to $19 million
- Tax preparation services firms: from $7 million to $14 million
- Advertising agencies: from $7 million to $14 million
- Human resources consulting firms: from $7 million to $14 million
In many cases the changes in standards are significant. “Bigger companies” would once again be seen as small in the eyes of the federal government. For companies that currently compete for small business set- asides this of course means that there will be greater competition.
These changes are currently in the commenting period. This means that you have the opportunity to voice your opinion as to whether or not they should be enacted. The comments can be made via Regulations.gov where you can also download a copy of the proposed changes. The commenting period ends May 16, 2011.