Size Standards: Your Ticket to Set-Asides By Wayne Clark, CPA Many small businesses believe that they lose their small business status too quickly and are unable to compete against well established larger companies. It took about 25 years, but SBA is responding by starting a comprehensive review of all of the size standards. (SAA, 10/23)An April 2009 SBA white paper discusses the process and proposes to make more small businesses eligible for SBA programs so that these business are more likely to succeed. The SBA generally establishes an industry size standard based upon the average firm size, start up costs, industry competition, size distribution, size distribution of firms and Federal contracting dollars. There have been some recent proposed increases in certain NAICS codes, but there is no guarantee that all industry size standards will increase upon completion of the SBA review process. Where do I find my existing and new size standards? Your small business eligibility is determined by the NAICS (North American Industry Classification System) code assigned to each federal procurement. Contracting Officers may not be consistent in assigning NAICS codes, so it is possible to be a small business on one procurement and a large business on a similar procurement. For detailed information on the status of the size standard increases by each NAICS code, please see “What’s New” at the bottom of the SBA website page found at www.sba.gov/contractingopportunit ies/officials/size/index.html. Managing your primary size standard Do not assume that your primary NAICS code size standard will increase. For planning purposes you should calculate your revenue-based size standard using the instructions found in SBA Form 355, Information for Size Determination. The size standard is based on an average of the last three years of federal income tax based “gross receipts”. A company in business for less than three years must divide by the number of years in business. Do not make the mistake of using your accrual-based income from your internal books and records as a guide if you are a cash basis taxpayer. In general, if your company is growing, your cash basis gross receipts from your income tax return will be lower than your accrual based book revenues since revenues on the books are recorded in the month the services are performed while cash basis revenue is recorded upon subsequent receipt of customer payment. Managing your taxable income should include forecasting your size standard for next accounting year. For example, what is the maximum amount of gross receipts in the current year that will allow my business to retain its small business status in the following year? Gross receipts must also include gross receipts of affiliated companies. An affiliate is a business concern under the same control where control is direct or indirect ownership of 50% or more of the business. The rules for affiliates are complex and need to be understood before claiming small business status. Recent changes: Limitations on duration of small business status? In the past, the size standard was based on the date of the initial response to a solicitation. The small business status remained until the end of the contract. The SBA now requires re-certification after the fifth year of the contract to address abuses by contractors who were awarded ten- or twenty-year contracts. These long-term contracts are generally federal supply contracts that include GSA schedules. All small businesses must re-certify their size status after a merger or being acquired. Consequences for falsely representing a firm as a small business? The self certification process imposes penalties on person(s) who falsely claim small business status with possible penalties of a prison term of up to 10 years and a fine up to $500,000. A firm can also be debarred or prohibited from receiving any additional federal contracts. The SBA has a formal process where set aside awards can be protested to the SBA on the grounds of contractor ineligibility. The SBA also pursues whistleblower-type actions against companies that misrepresent themselves as small businesses. Summary To maximize your small business set-aside revenues you need to understand and monitor the increases to some of the small business size standards. An increase in the size standard could make you eligible for additional set aside awards. The Code of Federal Regulations (CFR) part 121 regulations that govern size standards are found at www.sba.gov/regulations/121/. Wayne Clark, CPA is a senior manager with Federal Strategies Group LLC. He provides government contract and management consulting, M&A advisory, forensic accounting and expert testimony to the government contracting industry. He can be reached at WayneC@FedStrat.com.