For a successful small contractor, a mid-year financial review can bring news that is both welcome and unsettling: revenue or headcount is approaching the size standard for the firm’s primary NAICS code. Growth is the point of building a business, but crossing a size standard changes which opportunities a firm can pursue. Planning the transition years in advance, rather than discovering it in a proposal’s representations, is one of the more important strategic decisions a growing contractor makes.
Project the date, code by code
Size standards are set for each NAICS code, usually as a limit on average annual receipts or average employment over periods defined in SBA regulations, with affiliates counted. Because the averages look back over several years, a firm can forecast with reasonable confidence when it will cross a given standard. Build a simple projection for each NAICS code that matters to your pipeline, using actual and expected receipts or headcount. Firms are often surprised to learn that one strong year keeps pushing the average up for years afterward, or that the code agencies usually assign to their work has a different standard than the one they think of as their own.
What happens to contracts you already hold
Size is generally determined as of the date a firm submits its initial offer that includes price, and a firm that was small when it offered usually remains small for the life of that contract, including options, even as it grows. Important exceptions exist. After a merger, acquisition or novation, the firm generally must rerepresent its size. For long-term contracts, rerepresentation is generally required before the end of the fifth year and before each option exercised after that. On multiple-award contracts, a contracting officer may request rerepresentation for a particular order. When a rerepresentation shows that a firm is no longer small, the work can generally continue, but the agency can no longer count it toward small business goals, and the firm may lose eligibility for future set-aside orders.
The middle stretch
The hardest period for many firms comes just after they outgrow small. They lose access to set-asides but are not yet large enough to compete comfortably against established mid-size and large firms in full and open competitions. Planning can shorten that stretch:
- Revisit your projection every year, and share it with leadership so the timing shapes strategy.
- Build past performance on unrestricted competitions and as a prime on larger contracts while you are still small.
- Pursue multiple-award vehicles in unrestricted pools where you can compete as other than small.
- Consider whether opportunities under codes with larger size standards fit your capabilities.
- Develop teaming relationships, including future mentor roles with small firms, that will matter after the transition.
Get advice before major decisions
Some owners consider slowing growth, restructuring or selling as they approach a standard. These are significant decisions with legal and financial consequences, including affiliation questions that can undo a structure that seemed straightforward. Talk with an attorney and a financial advisor who understand SBA size rules before acting.
Whatever path you choose, keep your representations accurate. Misrepresenting size carries serious consequences, and a size protest can surface a problem at the worst possible moment. SBA’s size regulations and tools are available at sba.gov, and the FAR provisions on representations are at acquisition.gov.