A Case for Small Business Size Redefinition

I just finished reading the SBA’s “Size Standards Methodology” White Paper (yes, I do this for fun).  This white paper is relatively new with an April 2009 publication date. It clearly spells out how the SBA has determined size standards for NAICS codes.  Complete with fancy equations! Equations however do not fit our small business world. Logic should.

The reason I went looking for such a good read is that, here at Arrowhead, we have a constant discussion about the “real and true small businesses” lost in these SBA size standards.  The question keeps coming up, “How can XYZ company be SMALL?!”  The answer is – because SBA has determined either a dollar threshold or employee number they consider to be small. However, I submit that these numbers absolutely do not provide a fair battleground for small business.

Example – Army releases a total small business set-aside for an IT services contract. IDIQ, option years, CPFF terms, lots of labor categories, etc.  Nothing too huge, doable by a small business for sure. You get the picture.  There are a few interested parties (we’ll forego the large business with a small business front for now – we all know it happens). So that leaves us a couple good generic offerors.

Offeror #1 stats: Small Business, receipts of $4.5M, 200 employees.

Offeror #2: Small Business, receipts of $1M, 25 employees.

Both are small business, both fall under the size standard threshold for any NAICS you want to throw at it for IT Services. Who has the advantage?  Oh, but it is open competition – it is equal! Not in our book.  Offeror #1 has total advantage.

It’s like trying to determine who has a better chance of selling you your first car. Mr. Everyone-Knows-My-Name Auto in Denver or Mr. Pine Auto down the street from our office.  They can both fulfill the same need – they can sell you the same great car.  However, Mr. Everyone has full time salespeople who have experience, a fancy package in their building and lights, has more negotiating power, can dip into his overhead, tv commercials even.  Mr. Pine Auto has a car, him  and maybe his brother-in-law, a small Tuff-Shed looking office, and hand written sign.  Mr. Franchise and Mr. Pine Auto both have fantastic service and never have had a car returned.  For this analogy, we’ll say they’re both small in size standards, since SBA would. So, who has the one up?

According to the SBA, “If a business concern is small it is eligible for Federal government programs reserved for small business concerns.”  So  it is Mr. Everyone vs.  Mr. Pine Auto  competing for the same exact customer.  This is not what we consider to be fair.

There are so many VERY small businesses with amazing past performance, qualified people, competitive labor rates, and the whole bit who get kicked to the side for so many small business set-asides.  It is tough to go up against what we like to call a Large, Small Business.  They have proposal managers, contracts managers, subcontracts managers, capital to pay for proposals, printing, and business development guys to go schmooze around the country.

But what about the 25 person engineering firm where the CEO and VP are also the senior engineers on their client’s projects?  Who just barely have an office space, probably don’t have an administrative assistant, and when it comes to proposal time, don’t even try to propose on a government prime contract because they feel they can’t compete in a set-aside meant for them?

The current size standards, particularly for 541712 (R&D), is 500 employees and is the only Services NAICS with an employee size standard only. Seriously?  So, the  not-disadvantaged, male, ex-professor who has a team of amazing engineers doing amazing work, work that is necessary for the U.S. to compete in the global economy, has an uphill battle against 499 employee company XYZ.  All we can say is maybe it is time to create a new category of thresholds for these small, deserving businesses?  Here are some good stats from the U.S. Census Bereau – granted from 2002, but probably hasn’t changed too drastically.


Receipts Size of Enterprise Firms
Total Employer firms 5,697,759
Less than $100 thousand 1,291,552
$100 to $499 thousand 2,387,780
$500 to $999 thousand 819,513
$1 to $4.9 million 906,936
$5 to $9.9 million 138,195
$10 to $49.9 million 122,785
$50 to $99.9 million 15,895
$100 to $249.9 million 8,732
$250 to $499.9 million 2,880
$500 to $999.9 million 1,544
$1 to 2.499 billion 1,056
$2.5 billion or more 891