Commentary by Timothy Sullivan
Partner, Thompson Coburn, LLP

This column was originally published on the Public Contracting Institute’s website and was republished here with permission from the organization. This post is the ninth in a 10-part series, “10 Myths of Government Contracting” and will be published weekly on FederalNewsRadio.com.

It is true that the media focuses on the big names in government contracting, and those big names are very successful; but, for a variety of reasons, it is also true that a small business can thrive in this market as well.

In our prior myths we have discussed a number of ways in which government contracting differs from the commercial sector, and we are about to discuss another one — socioeconomic goals.

Put simply, Congress recognized a long time ago that government contracting could be a very useful tool for enhancing social and economic changes that Congress deemed worthy. That is why the typical government contract contains numerous clauses and requirements that really have nothing to do with the quality of the product or service that is being provided. For example, a typical contract might contain requirements relating to small business subcontracting, clean air, clean water, a drug-free workplace, hiring veterans and non-discrimination. This is just the government exerting its leverage — in return for the privilege of performing a government contract, the contractor agrees to comply with all of these requirements.

Take a look at the table of contents for the Federal Acquisition Regulation(“FAR”). Subchapter D, “Socioeconomic Programs,” contains FAR Parts 19-26. FAR Part 19, “Small Business Programs,” is the starting point for understanding why a competent small business can do so well with this customer. Like so many other things in government contracting, the term “small business” is a term of art. For manufacturers, a firm is “small” if its average number of employees for the preceding completed 12 months of pay periods is below a number prescribed by the U.S. Small Business Administration (“SBA”). For service companies or construction companies, a firm is small if its average annual receipts for the most recently completed three fiscal years are below a number that SBA also establishes.

Congress ranks small business right up there with motherhood and apple pie, and the laws require the U.S. government to award a fair proportion of its contracts to small businesses. Following Congress’ lead, federal agencies are required to give special treatment to small businesses, small disadvantaged businesses, small woman-owned businesses, Alaska-Native-owned businesses and small, disadvantaged veteran-owned businesses, to name a few.

The mechanics for carrying out this congressional mandate are somewhat complicated, but it all starts by an agency determining that there is adequate competition available to justify “setting aside” a particular procurement for a particular class of small business. “Adequate competition” exists when two or more capable firms within the particular class are expected to respond to the solicitation. When the solicitation finally is issued, it will advise interested offerors exactly what class of small businesses may compete and it will contain a North American Industry Classification System (“NAICS”) code.

A company must then consult the SBA’s regulations to determine what the size standard is for that particular code. If they are small in relation to that standard, they are eligible to compete for that contract. For example, if the procurement is for security guard services and is set-aside for small businesses, it will be assigned NAICS 561612 and the size standard will be $19 million. Therefore, if your company’s average annual receipts for the past three fiscal years are below $19 million on the day your proposal is submitted, your company is eligible to compete under this set- aside. Depending upon the NAICS code in question, one company could be small for some procurements and “other than small” for others.

A business hoping to compete on a set-aside contract must “self-certify” to its small business size status. Most contracting officers will accept such a certification on its face, but if they have information to the contrary they may file a protest with the SBA and the SBA will proceed to determine the firm’s eligibility. This does not happen very often. What usually happens, and with great frequency, is that an agency will announce the name of the intended awardee and one or more competitors will file a small business size status protest. The SBA will review the matter and issue a decision. That decision may be appealed to the SBA’s Office of Hearings and Appeals (“OHA”). Although OHA’s decisions may be challenged in court, it usually has the last say.

An entire body of law has developed relating to small business size status protests and it makes for interesting reading. If you ever have the chance to review a sampling of the decisions issued by the SBA’s Office of Hearings and Appeals, you will surprised by the extraordinary and sometimes creative means by which some companies strive to maintain their small business size status. Whenever a program offers the possibility of preferential treatment, many companies will go to great lengths to qualify for the program and some will cross legitimate lines. Competitors will be watching at every step and they will be quick to protest if they suspect that a proposed awardee is not eligible.

Many small businesses fail to understand that prime contractors are wonderful targets of opportunity. Why? Because their agency customers must meet annual small business goals, and the primary way they can achieve these goals is on the backs of their prime contractors. Primes that are not small businesses must submit small business subcontracting plans, and they are expected to meet them.

Therefore, smart primes are always on the lookout for competent small businesses that can join their team as a subcontractor — a true win-win situation. Whether it is operating as a prime or a sub, a small business must be vigilant about its small business size status. It is ironic that the price of success for a small business might be that it is no longer small, but that is a fact of life in government contracting.

Finally, set-aside procurements offer opportunities for small businesses to grow in other ways because the solicitation requirements often necessitate teaming with a large-business subcontractor. As long as the small business does more than 50 percent of the work on the contract, it is permissible to have a large business teammate.

Once again, competitors watch these situations very closely, so strong contract administration is required to ensure that the small business prime is doing things by the numbers, thus protecting both its reputation and its customer. If the small business is able to gain the confidence of its large-business teammate in the process, it could bode well for the future.

Tim Sullivan is the chair of Thompson Coburn’s Government Contracts Group. He can be reached at tsullivan@thompsoncoburn.com or (202) 585-6930.

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