With all the economic and non-economic uncertainty resulting from COVID-19, there is also opportunity. As Benjamin Graham put it, “At heart, ‘uncertainty’ and ‘investing’ are synonyms.”[1] For those companies feeling the slowdown in the private sector, now is as good an opportunity as ever to invest in your business while mitigating risk by diversifying your customer base and joining the many businesses that sell their products and services to the largest customer on earth—Uncle Sam. For those already working with the Federal Government, perhaps now is the time to expand your government market by pursuing research and development projects or expanding relationships and capabilities through programs like the Small Business Administration’s (SBA’s) Mentor-Protégé program.
The Government recently enacted the CARES Act to stimulate the economy and provide relief for small businesses through the Economic Injury Disaster Loan (EIDL) program and the Paycheck Protection Program (PPP), which are implemented by the SBA. Although the SBA loan programs are vital to many small businesses, this alert discusses the other opportunities available with the SBA and the Federal Government.
Opportunity
In 2019, the Federal Government spent nearly $4.5 trillion; $1.1 trillion of which through the Department of Defense. A massive amount of those dollars went directly to private companies under federal grants and contracts with civilian and defense agencies providing opportunities that are readily available and publicly announced. The Government procures a wide range of goods and services from private companies, whether it be IT helpdesk services for the Department of Health and Human Services, solid fuel ramjet propulsion for the Navy, lunch box meals for the Department of Justice or artwork for the Federal District Courts. These are just a few of the hundreds of opportunities announced in one day’s random sampling. The Government, like any business, must obtain goods and services and will enter into long-term, multi-million-dollar contracts to do so.
The Government is also in the business of funding the research and development (“R&D”) of innovative solutions for commercialization through a variety of programs, such as the Small Business Innovative Research (SBIR) and Small Business Technology Transfer (STTR) programs. Although the SBIR/STTR programs are for small businesses, the agencies and dollar amounts involved are anything but small. In fact, 11 federal agencies, including the Department of Defense, the Department of Homeland Security and the Department of Health and Human Services, with budgets exceeding $100 million currently participate in these programs. The stated goal of these programs is to “support scientific excellence and technological innovation through the investment of federal research funds in critical American priorities to build a strong national economy.” In furtherance of this goal, awards tend to go to companies offering high-tech and disruptive solutions for complex problems, such as the development of pharmaceuticals to fight off infectious diseases or implementing blockchain technologies in international supply chain management. For entrepreneurs, startups and companies looking to develop high-tech solutions, the SBIR/STTR programs may be a launching pad for commercialization and fundraising.
Developing innovative products and technologies through R&D grants and contracts is not the only place for small businesses in the federal marketplace. To the contrary, the Government has a goal of awarding at least 23 percent of its procurement dollars to small businesses, which it has reached for six consecutive years. Generally, the Government awards billions of dollars to small businesses by “setting aside” or “reserving” contracts for competition among only small business concerns. Even when contracts are not set aside exclusively for small businesses, the Government often establishes a small business subcontracting goal, which calls for the prime contractor to subcontract a certain portion of the work to small businesses. This allows a small business to gain valuable experience while indirectly working with the Government.
What Makes a Small Business “Small?”
In setting aside contracts and grants for small businesses, the Government determines the size of a company by assessing either the number of employees or the gross receipts of the company averaged over a three-year or five-year period. Generally, the Government assigns a North American Industry Classification System (NAICS) code to a contract based on the contract requirements, and each NAICS code has a corresponding size standard. As an example, if a company offers data processing or network hosting services, it can search for those terms and find the resulting NAICS code of 518210 “Data Processing, Hosting, and Related Services.” The company can verify a code’s applicability by reviewing the specific description and the illustrative examples such as “application hosting” or “video and audio streaming services.” Next, the size standard can be determined by reviewing the SBA’s size table for the corresponding NAICS code. A review of NAICS code 518210 reveals a size standard of $35 million. If your company has gross receipts of less than $35 million, on average, over the last three or five years, then it may qualify as a small business and be eligible to compete for set-aside contracts. Once you know the applicable NAICS code(s) that describe your business, you can search for opportunities by filtering for the applicable NAICS code.
Set-Aside Types
In addition to the opportunities set aside for the more generic term of “small business,” there are contracts that are set aside for more specific types of small business concerns. The following are examples:
- Woman-Owned Small Business (WOSB) – a small business concern that is owned and controlled by one or more females.
- Service-Disabled Veteran-Owned Small Business (SDVOSB) – a small business concern owned and controlled by one or more service-disabled veterans.
- 8(a) Business Development Program – a small business concern owned and controlled by one or more socially and economically disadvantaged individuals, that receives the SBA’s approval and admission.
- HUBZone – a small business concern that is located in, and has a certain number of employees that reside in, a Historically Underutilized Business Zone, which can be determined by exploring the SBA’s HUBZone Map.
Generally, in order to qualify under the above designations, a company’s organizational documents must address the applicable ownership, control and possession requirements, which can be quite difficult to navigate. We recently discussed the issue of negative control in the context of the affiliation rules for the EIDL and PPP programs and how these rules impact venture-backed startups. Further, some of these designations require SBA approval or third-party certification. Once a company is properly certified, it can compete for contracts set aside for companies that hold those designations.
Other Opportunities
For those already engaged in the federal marketplace, one valuable program that is often underutilized is the SBA’s Mentor-Protégé program. Generally, this program allows a large business (“mentor”) and small business (“protégé”) to form a joint venture to compete for small business contracts. Without the approval of a Mentor-Protégé relationship, a small business cannot partner (as a joint venture) with a large business and be able to bid on the contract because, due to the affiliation rules, the inclusion of the large business renders the joint venture “other than small.” Under the Mentor-Protégé program, however, the joint venture takes the identity of a small business and can bid on contracts that the small business is qualified to bid on (e.g., SDVOSB set-aside contracts). This is advantageous to both the mentor and the protégé, as it allows the mentor to perform up to 60 percent of the joint venture’s share of the work under the contract and also requires the mentor to provide the protégé assistance with developing specified capabilities. Further, because the joint venture (as a separate legal entity) is bidding on the contract, the joint venture may generally use the past performance of its members, which better positions the parties for an award. We will explore the benefits and mechanics of the Mentor-Protégé program further in a future alert.
State and Local Contracting
As with the Federal Government, state and local governments spend billions of dollars each year in obtaining goods and services from private companies. Similar to the federal space, state and local governments procure a wide variety of goods and services such as construction projects, data processing, the mapping of federal highways and even meals for schools. Nearly all states have goals designed to put state funds in the hands of small businesses, which may come in the form of set-aside contracts or competition preferences. In furtherance of these goals, states implement certification programs where a company can obtain a “small business enterprise” designation. One program I have written about frequently is the Virginia Department of Small Business and Supplier Diversity’s “SWaM” program, which you can read about here and here. Other states such as Maryland, North Carolina, South Carolina and Tennessee have small business programs, which, like their federal counterparts, include certification procedures that require a company’s organizational documents to demonstrate the requisite level of ownership, control and possession—which can often be trickier than one would expect.
Conclusion
There is no doubt that companies (and particularly, service-oriented small businesses) are experiencing significant disruption from COVID-19; however, the melody of opportunity is playing beneath the noise. For companies that have never explored the Government marketplace, opportunity may appear in the form of selling goods and services to state or federal customers. For government contractors that have been putting off pursuing R&D efforts or joint venture opportunities, now may be the time to expand your products, services and relationships. This is not to suggest that those who sell products and services to federal or state governments are immune to the current climate—that is not the case; however, many products and services are essential to the Government and must continue to be provided, as addressed in one of the Firm’s previous alerts. Further, any effort by the Government to stimulate the economy in these anxious times will certainly include significant contracting opportunities, especially for small businesses.
[1] The Intelligent Investor, Benjamin Graham (1949).
