Securing federal contracts can be a game-changer for small businesses, offering opportunities for growth and stability. The Small Business Administration (SBA) is crucial in facilitating these opportunities by setting size and affiliation standards determining eligibility for various programs, including set-aside contracts.
In this article, we’ll explore the SBA’s size and affiliation requirements for small businesses.
What is a set-aside contract?
A set-aside contract is a type of government contract in which a certain percentage of procurement opportunities are exclusively reserved for specific groups of businesses. The primary goal of set-aside contracts is to promote the participation of small businesses, including those owned by disadvantaged individuals, in federal contracting. By setting aside contracts for specific categories of businesses, the government aims to ensure that a fair share of federal spending goes to small businesses and various socioeconomic groups.
Businesses must meet the eligibility criteria of the specific set-aside program to compete for set-aside contracts. Eligibility factors typically include size and affiliation.
What size business qualifies for SBA set-aside contracts?
The SBA recognizes that the size of businesses varies widely across industries: what is considered small in manufacturing may not be what is small in a retail operation. The SBA’s size standards are industry-specific and are based on one of two things: the number of employees or annual revenue. The criteria for each industry reflect that sector’s typical characteristics and economic realities.
To simplify this process, the SBA provides a table of size standards on its website and an SBA Size Standards Tool. This tool allows businesses to search for the size standard applicable to their industry based on their North American Industry Classification System (NAICS) code. Depending on the industry NAICS code, some of these size standards are based on total annual revenue, and others are based on employee count.
SBA size standards by number of employees
To calculate the number of employees, add the total number of employees on your payroll each pay period and divide that sum by the number of pay periods. Typically, the time span for this determination is the past 12 months, but in some industries, the SBA extends this period to three years.
The calculation generally included part-time and temporary employees. The SBA considers the total number of hours part-time employees work to calculate the equivalent number of full-time employees.
Independent contractors are usually not considered employees so long as they are classified correctly. For more information on employee classification, visit the IRS website.
SBA size standards by annual revenue
For industries where size is determined by annual revenue, as of January 2022, the SBA calculates the average annual receipts for all size-determined businesses over a five-year period. The calculation involves adding the total receipts of the concern over the most recently completed five-year period and dividing that sum by the number five. For businesses that have not been operating for the entire period, the SBA will add the total receipts for the time the concern has been in business, divided by the number of weeks in business, multiplied by 52.
Interest and investment income are generally included in annual receipts unless the firm is in the business of lending money. Additionally, fees paid by a franchisee to a franchisor and fees received by a franchisor from its franchisees are generally included in annual receipts. The SBA also includes the proceeds from the sales of assets in the calculation of annual revenue. However, the sale of capital assets, such as real estate or equipment, is generally excluded. The SBA also generally excludes taxes collected for and remitted to a government agency and subcontractor costs.
How does affiliation affect qualification for SBA set-aside contracts?
Affiliation refers to the relationships and connections between a business and its affiliates, including partnerships, joint ventures, and other business arrangements. If the combined size of the entities exceeds the size standard set for the industry, the business may not be eligible for certain set-aside contracts. Affiliation rules are in place to prevent businesses from manipulating their size to gain an unfair advantage in federal contracting.
Affiliation is determined based on the totality of circumstances, and the SBA considers various factors in making this determination. These factors may include the following:
- Ownership: Affiliation often arises through ownership relationships, such as majority shareholders, minority shareholders with significant control, or family relationships. If an individual or entity owns or has the power to control a significant portion of two or more businesses, those businesses are likely to be deemed affiliated.
- Control: Control affiliations arise when one business has the power to control another through contractual relationships or other means. For example, joint ventures and teaming agreements will likely be affiliate relationships. Even without majority ownership, control affiliations may exist if one business can influence or control the management and policies of another.
- Business interests: Affiliation may arise from an identity of interest, where individuals or firms have identical or substantially identical business or economic interests. This circumstance can include situations where there is shared management, common investments, or economic dependence.
Note that the SBA has a rule that prevents businesses from forming new entities to avoid size standards. If a newly organized concern is found to be affiliated with an existing business, the SBA may aggregate their sizes. If a business does not meet the size standards but would like the ability to bid on a set-aside contract, it should consider a teaming arrangement.
Your business must maintain accurate documentation of business relationships and organizational structure to maintain compliance with affiliation rules. This evidence can help you avoid potential roadblocks during the contracting process.
Next steps for small businesses
Your business should stay informed about changes to size standards and affiliation rules to ensure compliance with eligibility requirements. When in doubt, seek guidance from legal counsel specializing in government contracting.
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