A new law just made big changes to federal small business size standards. Small businesses will be able to stay qualified as “small” for a longer period, despite growing revenue.
The big change is that companies can calculate their average revenue over five years, instead of over three years. This change diminishes the effect of high-revenue years. When this new rule is implemented, some so-called large businesses will qualify for small business set-aside contracts!
It pays to be considered a small business in government contracts
As the former senior policy advisor to the Department of Defense’s headquarters for small business contracting, I can tell you that it pays to be a small business in government contracting. Small business contracting has many advocates, stakeholders, and interest groups. We had to keep our fingers on the pulse of Congress, the Small Business Administration, and several different industry trade groups dedicated to small business.
Small business is as American as apple pie
Why will small business always be a hot topic in America? Because small businesses embody American values like entrepreneurship, aspirational success, self-sufficiency, risk-taking, and capitalism. Small businesses represent an important sector of the economy, producing new jobs and creating new marketplaces.
For these reasons and more, small businesses receive preferential treatment in government contracts. Did you know that nearly a quarter of all federal contracts are set aside, by law, exclusively for small business?
There’s also a preference for small business subcontractors through the larger, prime contractors who have a direct contract with the government. At certain dollar thresholds, even large contractors must submit a “small business subcontracting plan,” which requires the integration of small businesses into the supply chain.
The large and small business ecosystem
Pro tip: Do you have a relationship with your agency’s small business office? You should! Have you visited your local PTAC (Procurement Technical Assistance Center), which is dedicated to providing onsite, one-on-one counseling to small businesses? You have nothing to lose, and much to gain, even if you’re not a small business. Let both offices know that you’re interested in setting up teaming arrangements with small businesses to compete for government contracts.
Why the small business size rules matter
No matter if your company is large or small, you need to understand the small business rules. Even if you’re a large business, small business rules affect your supply chain, teaming arrangements, capture strategy, and competitive proposal analysis. In fact, you might actually qualify as a small business now!
The Small Business Runway Extension Act gives you five years instead of three
To qualify as a small business, you either count your employees or you count your revenue. Depending on the industry classification of the contract, these threshold standards change. Employee counts are simple. Determine if your company exceeds the employee limit. Revenue is more complicated. Under the old rules, you calculate the average revenue over three years.
Under the Small Business Runway Extension Act, small businesses can calculate their revenue based on the average of the last five years, instead of the last three years. This is good news for some, but not all, small businesses.
Congress’ intent for the “Small Business Runway Extension Act of 2018” is to “help advanced-small contractors successfully navigate the middle market as they reach the upper limits of their small size standard.” Translation: This new law gives most small businesses a way to qualify for set-asides for a longer period of time.
So, Congress wants small business contractors to have an easier transition into the big-boy leagues! Once those small business set-asides dry up, many contractors get crushed by the competition.
The growing pains of small to large
The transition from being considered a small business to suddenly being in the same league with Boeing and Booz Allen Hamilton is fraught with peril. Many small businesses choose to sell or be acquired by a larger company once they’re close to losing their size and set-aside status.
When is the last time you calculated your size status, and do you have a plan for the future? Email me to discuss ways to protect your #1 source of revenue!
What if I’m not small, but I’m not large?
I’ve got some bad news for you. If you’re not small, you’re “large!”
There is no middle ground. There is no Medium-Sized Business Administration. All we have is the Small Business Administration (SBA).
That’s why many small business advocates have asked for some form of relief for contractors who are not quite small yet definitely not large. This new law is meant to help.
Understand NAICS codes to understand the new law
To receive small business set-asides, you must qualify under the specific NAICS (North American Industrial Classification System) code for that particular contract. You can be “small” for one contract and its NAICS code, and “other than small” for another contract and its NAICS code. It all depends on the specific contract and the NAICS code that the contracting officer selects.
Calculating average revenue to determine small business status
The NAICS code qualification is tied to the number of employees or revenue. As described above, employee headcounts are easy, but revenue is tricky. The old rule was that you calculate the average of your last three years of revenue.
The new rule is to calculate the average of your last five years of revenue. Let’s run through two examples based on a NAICS code of $50 million. (To be eligible for set-aside contracts classified under that NAICS code, the average revenue cap is $50 million.)
Example: Up-and-Coming Corporation (UCC)
UCC has explosive, recent growth due to some big contracts in the last two years:
- 2013: $25 million
- 2014: $24 million
- 2015: $26 million
- 2016: $27 million
- 2017: $63 million
- 2018: $65 million
Under the old rules, UCC is not a small business. The average over the last three years is $51.7 million, greater than the $50 million limit.
Under the new rules, UCC is still a small business! The average over the last five years is $41 million, less than the $50 million limit. UCC loves the new law!
Example: Slowing Down Corporation (SDC)
SDC had some giant contracts in the past, but has recently slowed down. The crazy part is SDC actually turned down contracts so it can “stay small” and still qualify for set-asides! Can you imagine declining millions of dollars of revenue? It happens in the crazy world of government contracts!
- 2013: $41 million
- 2014: $60 million
- 2015: $71 million
- 2016: $49 million
- 2017: $48 million
- 2018: $49 million
Under the old rules, SDC is a small business. The average over the last three years is $48.7 million.
Under the new rules, SDC loses its small business status because it must take into account those high-revenue years in 2014 and 2015!
The average over the last five years is $55.4 million, which disqualifies SDC, even though it purposefully turned down contracts to “stay small.” SDC hates this new law!
When does this law take effect?
According to the Small Business Administration (SBA), this new law does not take effect until the SBA drafts regulations to get it done.
You would think a law is effective immediately. However, in the strange world of government contracts, it doesn’t always work that way. Typically, you have to wait for the regulations to “implement” the new law.
This also happens with changes to contracting laws, which must be “implemented” into the Federal Acquisition Regulation (FAR). Think about it. If the law changes, but there is no FAR clause to put in your contract, how can the new law affect a federal contractor? Email me for my free article explaining this concept. You’ll be shocked to learn that the FAR does not apply to federal contractors!
Making sense of it all– winners and losers
This new law benefits small businesses with recent, rapid growth, like the UCC example. However, it punishes businesses that recently turned down revenue to “stay small,” like the SDC example.
If you think about it, this makes sense. The new law “looks back further into the past.” If your past is full of giant contracts, this hurts you. If your past has smaller revenue years to offset your recent growth, this law helps you “stay small.”
Christoph Mlinarchik, JD, CFCM, PMP is the owner of www.ChristophLLC.com, providing expert advice in government contracts: consulting, professional instruction, and expert witness services. Contact Christoph at Christoph@ChristophLLC.com.
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