Small businesses are the economic engines of job creation and essential to strengthening our national economy. President Obama, Governor Inslee, and a whole gaggle of politicians are committed to helping America’s small businesses grow and prosper. The US government has cut taxes for small businesses, and helps them get access to the capital they need to expand and create jobs that the US needs now and for decades to come.

In construction, small business programs exist on both state and federal public works projects. At the state level, the small businesses are designated Disadvantage Business Enterprises (“DBEs”).  In Washington, DBEs are generally women and minority businesses that have been certified by the Office of Minority and Women’s Business (“OMWBE”). There are rumors that the state DBE program will eventually “morph” into a small business program that is both race and gender neutral. At the federal level, the small business programs are operated by the Small Business Administration (“SBA”) or Department of Veteran Affairs (“VA”).

A small business is not a “mom-and-pop” type local business with a handful of employees and a few thousand dollars in weekly revenues.  In the realm of federal government contracting, a small company may have millions of dollars in annual revenue.  It is not unheard of to find small businesses with annual revenues of over $100 million (Alaska native corporations are provided with statutory exemptions whereby the parent organization’s net worth is not counted against its subsidiary, making it possible for the company to have millions of dollars in revenue and still qualifying as a “small” business).

Given the federal government’s emphasis on contracting with small businesses, it is important for small government contractors to understand what is meant by “small business” for the purpose of government contracting:

A. Small Business Certifications. The SBA and VA have programs to assist small businesses by increasing contracting opportunities with the federal government, including SBA: 8(a); HUBZone; Veteran-Owned (VA); Service-Disabled Veteran-Owned (VA).  All these programs require that the small businesses apply for certification before the small business can benefit from the federal programs. The SBA/VA examines the size of the business to determine if it is “small” and thus, eligible for applicable certification. In determining the size limits, North American Industrial Classification System (“NAICS”) Codes come into play.

B.  NAICS Codes.  All US businesses are provided with a NAICS Code, irrespective of whether the business participates in the small business program or not.  To determine whether a business is “small,” the SBA/VA looks at the company’s primary NAICS Code. Based on the business’s NAICS Code, certain size standards exist.  The NAICS Code size standards are of two types: (1) revenue based standards – which look at the company’s annual revenue; and (2) employee base size standards – which look at the number of employees the company has. Most construction NAICS Codes are revenue-based size standards. 

For example, heavy construction general contractors and special trade contractors are classified in NAICS Code 237.  That size standard is $22 million (3 year average revenue).  Whereas special trade contractors primarily involved in building construction are classified in NAICS Code 238, which has a size standard of $14 million (3 year average revenue).

To be considered a small business, the subject company must fall under the applicable size standard for its NAICS Code industry. Once the NAICS Code is assigned to the company, it can compete for procurements under basically any NAICS Code, but every company has one primary NAICS Code that represents the majority of its work.  For DBE contractors, however, it is difficult to compete for projects that are outside its particular NAICS Code, since to do so often times may be construed as inconsistent with performing a “commercially useful function” (“CUF”).  To avoid fronts and fraud the SBA requires that small business contractor must be responsible for the execution of the work of the contract or a distinct element of the work by actually performing, managing, or supervising the work involved.

C.  Certification.  Once a small businesses is certified by the SBA or VA into one of the small business contracting programs, it is then eligible to compete for contracts set aside for that particular program. The certification, however, is only the first step in the process; the company must still meet the small business size standard applicable to whatever the procurement is pursuing.

D. Solicitation – Specific NAICS Codes.  For each of the individual federal government procurement, the contracting officer will generally designate in the solicitation one NAICS Code and corresponding size standard (either employee or revenue-based). Annual revenues or employee numbers are compared to the threshold specific to the NAICS Code listed in the solicitation, rather than the company’s primary NAICS Code. For instance, a company with $15 million in annual receipts and a primary NAICS Code with the size standard of $17 million can be certified as “small” under one of the SBA/VA programs. That company, however, would not be eligible as a small business on the individual procurement with the solicitation listing in NAICS Code with a $7 million size standard.  

E.  Conclusion.  Federal government has a goal that 23 percent of all federal contracting dollars go to small businesses. Washington State DOT projects, which involve federal funding, generally have a 10 percent to 12 percent DBE goal. The amount aimed for small business contractors is significant. The most recent data from the Federal Procurement Data System shows that nearly $90 billion went to small businesses in fiscal 2012. Therefore, understanding what qualifies as a “small business” is important for construction contractors. [i]

[i] See Bryan R. King, What is a “Small Business”, Practical Counsel Blog, January 10, 2014.

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