According to the U.S. Small Business Administration (SBA), small businesses:  represent 99.7 percent of all employer firms; employ half of all private sector employees; pay 44 percent of total U.S. private payroll; have generated 65 percent of net new jobs over the past 17 years; and create more than half of the nonfarm private GDP.

Being small has its advantages.  To advance the interests of small businesses, Congress has authorized several programs involving the government’s procurement process.  The programs seek to involve small business concerns (1) located in historically underutilized business zones (HUBZones), (2) owned by service-disabled veterans (SDVO), (3) owned by woman (WOSB), and (4) owned by other socially and economically disadvantaged individuals (Section 8(a) program participants).

By various statutes, the federal government as well as many state and local governments provide noncompetitive preferences for small businesses, typically in the form of “set-aside” programs.  In a set-aside program, a percentage of the public contract is designated specifically for contractors qualifying as small business concerns.  Certain business entities that fall below specified average employment and average annual revenue limitations may qualify as a small business concern.  Set-aside programs typically require a contractor bidding on a contract with a set-aside provision to ensure that a sufficient amount of the contracted work is performed by qualified small business concerns.

The SBA defines a “small business concern” as any business entity that (1) is organized for profit, (2) has a place of business in the United States, (3) makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor, (4) is independently owned and operated, (5) is not dominant in its field, on a national basis, and (6) is no larger than SBA’s small business size standard for its industry.  A business concern is small if it is at or below a size standard.  Size standards can be based on either the small business concern’s average annual receipts, or its number of employees, or both.  In the construction industry, size standards are based on average annual receipts rather than by the number of employees.  To be considered a small business concern in the heavy construction industry, average annual receipts must be limited to $33.5 million.  For a specialty trade contractor to be considered a small business concern, the average annual receipts must be limited to $14.0 million.  Most federal agencies and many other political entities, such as state and local governments, use the size standards established by the SBA to procure goods and services from eligible small businesses.

Small business concerns that are eligible to compete for federal government set-aside construction projects sometimes work with larger contractors to secure the set-aside work.  Set-aside programs for small business concerns have specific requirements and limitations that must be closely followed in order to avoid problems.  For example, there are significant limitations in connection with small business “affiliations”, especially when the affiliated business is not itself a small business concern.  A small business concern and another business entity are considered affiliates of each other when one entity controls or has the power to control the other, or when a third party controls or has the power to control both business entities. 

In determining whether an affiliation exists, the SBA considers factors such as common ownership, common management, previous ties or relationships with another small business concern, and contractual relationships. In determining the size of the small business concern, the SBA counts the small business concern’s receipts, employees, or other measure of size, together with all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.  Thus, a small business concern can find itself ineligible for a set-aside program if the combined size of the small business concern and its affiliate exceeds the maximum threshold for the solicitation involved.

Navigating the maze of government regulations related to small business concerns can be a daunting task.  Small business concerns should consider seeking legal representation to help ensure compliance with all applicable regulations and policies related to the Small Business Act, including preference programs.  Similarly, large businesses should consider seeking legal representation to help in matters relating to their small business subcontracting plans.  An experienced lawyer can help by providing the following services.

  • • Analyze a company’s compliance with the requirements for participation in small business programs.
  • • Structure companies to meet the requirements for participation in small business programs.
  • • Defend companies whose size or preference status has been challenged by their competitors.
  • • Monitor agency compliance with small business set-aside programs and challenge agency action which fails to comply.
  • • Assist companies in obtaining small business certification.
  • • Obtain a Certificate of Competency (COC) from the Small Business Administration after a contracting agency has determined initially that a company is not eligible for contract award.
  • • Pursue challenges of companies who seek to avail themselves of the benefits of small business programs but who fail to meet the applicable size or ownership standards.
  • • Appeal adverse size status determinations to the Small Business Administration’s Regional Offices and to the Washington, DC Office of Hearings & Appeals.
  • • Assist companies in meeting their small business subcontracting goals.
  • • Draft Joint Venture, Mentor/Protégé and other agreements.

This article was originally published in the Construction Connection Newsletter.