In federal government contracting, qualifying as a small business can confer tremendous benefits, including access to set-aside prime contracts, eligibility for certifications such as 8(a) and HUBZone, and much more. Contrary to popular belief, however, recently-formed companies cannot use the same formulas as established companies to determine their small business eligibility. Instead, special rules apply. Let’s take a look.
Receipts-Based Size Status
For companies in the construction and service industries, small business status is determined by calculating the company’s average annual receipts, as that term is defined in the SBA’s regulation at 13 C.F.R. 121.104(a). It is commonly understood that the “average” in question is a five-year average.
With that understanding, contractors that have been in business for fewer than five years sometimes plug in “zero” for the missing years. For example, a contractor in business for two years with total receipts of $30 million might divide its receipts by five (assuming zeros for the three years before it was in business) and arrive at a small business size status of $6 million.
However, the SBA’s regulation at 13 C.F.R. 121.104(c)(2) requires an alternate formula when a company has been in business for fewer than five years. The regulation states that “annual receipts of a concern which has been in business for less than 5 complete fiscal years means the total receipts for the period the concern has been in business divided by the number of weeks in business, multiplied by 52.”
In the case of our $30 million business, let’s assume that it has been in business for exactly two years, or 104 weeks. To calculate the company’s size, it must divide the $30 million by 104, then multiply that figure by 52. The result is an official small business size status of $15 million, not $6 million!
Employee-Based Size Status
For companies in the manufacturing industry, small business status is determined by calculating the company’s average number of employees, as that term is defined in the SBA’s regulation at 13 C.F.R. 121.106(a). The count ordinarily is “based upon numbers of employees for each of the pay periods for the preceding completed 24 calendar months.”
As is the case with receipts-based size standards, however, the SBA’s regulation at 13 C.F.R. 121.106(b)(3) requires an alternative calculation if the company has not been in business for 24 months. In that case, the regulation specifies that “the average number of employees is used for each of the pay periods during which it has been in business.”
A Few Final Words
Small business size status is powerful in federal contracting, but incorrect self-certification as a small business can carry serious consequences. It’s important to get it right, including understanding that newer small businesses must apply alternative formulas when running their numbers.
For more information about Government Contracting, contact your CIRAS Government Contracting Specialist or complete our Request for Counseling form.