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

Help for Entrepreneurs-Small Business Jobs Act of 2010 –

On September 27, 2010 President Obama signed into law the Small Business Jobs Act.  This act is monumental is providing critical resources to small businesses, and as we all know, small businesses will drive economic recovery in our world today.  To see the signing, check this out – Small Business Signing

I recently was fortunate enough to attend the Denver Summit for Women Entrepreneurs hosted by the SBA.  The first of 10 regional summits to advertise changes SBA is seeing through and to listen to women small business owners. In this post, I’ll outline the Act’s highlights – stay tuned for a specific post on the new Women Owned Business set asides.

Here are the highlights – everything from loan changes, strengthening ability to compete, promotion of exports, more training and counseling and tax relief.

  • Extension of SBA Recovery loans through the end of the year, allowing 1,400 small businesses that have been waiting for funding to receive it in October.
  • Higher loan limits for the 7(a), 504, and microloans.
  • Increases alternate size standard for SBA loan eligibility.
  • Temporary increase in max amount of SBA Express loans.
  • Expansion of Dealer Floor Pilot program to help car, RV, boats and other titleable inventory dealers.
  • Small Business Intermediary Lending Pilot provides funding for an intermediary-facilitated loan program.
  • Reaffirming “parity” among federal small business contracting programs.
  • Government procurement officers will have a greater ability to provide large prime contracts and microcontracts to small businesses.
  • Discourages “bundling” of requirements by agencies and holds them more accountable for reaching small business goals.
  • Enforces stronger small business subcontracting plan requirements for prime contractors and discourages late payments to small business subcontractors.
  • Federal agencies will have greater ability to pursue companies that win contracts by misrepresenting their small business size status.
  • Funding for a new pilot that provides grants that help small businesses team up with each other to compete for larger and more complex contracts they couldn’t do on their own.
  • Export Express Pilot loan program becomes permanent.
  • Funding for competitive grants to help states help small businesses with exporting.
  • Increased staff and strengthened export counseling resources for small businesses to use.
  • More grants now available to Small Business Development Centers
  • Extension of 8 tax cuts

I’m particularly excited about the efforts to increase a Small Business’s ability to compete for contracts.  Closing loopholes, reaffirming parity, more accountability, integrity, transparency, and combating waste, fraud and abuse (see GTSI post) not allow provides for opportunity, but hope for small businesses who are so discouraged  right now with working with the federal government.  The government has money to spend and small businesses should be excited to step up and fulfill government needs and of course reap the payday!

GTSI – Example or just first in line?

With the news breaking last week that the SBA had suspended GTSI from winning future contracts, the buzz about the industry is one of shock, confusion, and unanswered questions. “Can’t believe that a big prime was suspended?”  “How did GTSI let this happen?” “Will they prevail in challenging the suspension?”  And most of all I’m hearing, “Will they go after other big primes next?”

The last question is the biggest question mark out there.  The practice of big defense contractor primes being a subcontractor to a small business is common practice.  You’ll see a solicitation out there for a huge IDIQ contract that would be a challenge for a large business to prime; yet it is a total small business set-aside.  I’m all for the set-asides.  Set asides allow innovation and efficiencies to thrive.  Small businesses deserve opportunities to pass these benefits on to the government and diversify the supply of goods and services to the federal government.

Buy why set aside such a huge purchase requests to small businesses that don’t have the resources to prime?  A big prime gets wind of a huge set-aside and immediately starts calling around, “We’d like to be your subcontractor.”  In GTSI’s case, they did this and then went further, by essentially using the small business as just a name. Pretending GTSI employees are the small business employees and performing essentially all the work on the contract.

Situations where a large business is a sub can often turn into a situation where small business money is being passed through the small business and ultimately just going to a large business. What’s the point of the set-aside then?  Yes, the small business gets the points for past performance and credit for the dollars, but does it fulfill the intention of what the set-aside what meant to do?  That is, to promote small businesses? If an agency wants the services of what only a large business can provide then they need to go to large business, yet promote and FOLLOW THROUGH on small business subcontracting requirements.

Other, obvious, large defense primes may be getting some sweaty palms right now.  Would love to be a fly on the wall in those offices.  This scheme is a money maker for big primes. They get their foot in the door regardless of set-asides, was GTSI just the first to have the hammer fall on them? Or, will the other big primes stay safe?