With a contract budget approaching $650 billion a year, the United States government is the largest consumer of goods and services in the world. In 2020, the federal government spent $145 billion, or 26% of its total procurement spending, on small businesses. Getting into public procurement can be a great opportunity for small businesses and start-ups, but it also comes with significant challenges and risks. Government contracts often impose unique requirements and complex regulatory regimes that differ significantly from the commercial market.
The government is committed to working with small businesses and removing barriers that prevent or discourage small businesses from participating in the federal marketplace. The Small Business Administration (SBA) works with agencies and small businesses to ensure that at least 23% of prime government contract dollars are awarded to eligible small businesses. To ensure that this objective is achieved, the government will limit competition for certain contracts to small businesses. These contracting opportunities are called small business set-asides. For all the emerging companies who are planning to compete for these opportunities, this article outlines the basic steps to take to get started in the government market.
To be eligible to compete for government contracts reserved for small businesses, businesses must be for-profit, independently owned and operated, and generally physically located and operated in the United States or its territories. Businesses must also meet the size standards set by the SBA. Generally, manufacturing businesses with 500 or fewer employees and non-manufacturing businesses with average annual revenues of less than $7.5 million will be considered small businesses. The SBA maintains a list of size standards for different industries and provides tools for emerging businesses to check their size status on its website.
In addition to ensuring that agencies reserve contract opportunities for small businesses, the SBA operates several programs to help small businesses of different socioeconomic classes win federal contracts. These programs include:
- The Disadvantaged Small Business Program. This program ensures that 10% of all federal contract dollars, or about $50 billion in annual spending, are reserved for businesses owned by socially and economically disadvantaged people. The Biden administration has pledged to increase the share of contracts awarded to disadvantaged small businesses (SDBs) by 50% by 2025. SDBs may also be eligible to participate in SBAs. 8(a) Business Development Programa nine-year program designed to help Salesians compete for federal contracts.
- The Federal Contractors Program for Women-Owned Small Businesses. This program guarantees that 5% of federal contract dollars will go to Women-Owned Small Businesses (WOSBs) and Economically Disadvantaged WOSBs (EDWOSBs). The government will limit competition for federal contracts in certain sectors where WOSBs are underrepresented to achieve this goal.
- Veteran-Owned Small Business Programs. The government maintains several programs designed to ensure that Veteran-Owned Small Businesses (VOSB) and Veteran-Owned Small Businesses with Disabilities (SDVOSB) receive at least 3% of federal procurement dollars. The Department of Veterans Affairs (VA) also awards many contract dollars on veterans-only contracts.
- The HUBZone program. The federal government also sends 3% of federal contract dollars to historically underutilized business zones (HUBZones) by reserving contracting opportunities for companies that demonstrate that at least 20% of their employees are HUBZone residents.
Emerging companies must register their business with the government Rewards Management System (SAM) website to compete for federal government contracts. SAM is the government-wide entry point where agencies are required to post notices of all contract opportunities over $25,000.
To register for SAM, emerging companies must obtain a Dun & Bradstreet (DUNS) number and determine which North American Industry Classification System (NAICS) code correspond to their products and services. A DUNS number is a unique nine-digit identification number for each business’s physical location.
When registering for SAM, emerging businesses must self-certify as a small business to be eligible to compete for small business-only contracts. The SBA’s small business size standards depend on the NAICS code corresponding to a business’s major goods and services. Emerging companies should check size standards for their industry code to verify that they meet the size requirements for small businesses.
Emerging companies may need to meet additional registration requirements to compete for contracts reserved for SBA-administered socioeconomic programs. The SBA outlines the certification requirements for these programs on its website.
Look for opportunities
In addition to contracting opportunities posted on SAM, many agencies have Offices of Small Business and Disadvantaged Business Utilization (OSDBU) or Offices of Small Business Programs (OSBP). These offices work to identify opportunities to contract with small businesses.
The government also requires that the winners of large contracts subcontract part of the work to small companies. Small businesses competing for subcontract work with large government contractors must be certified as small for the NAICS code on the tender to be considered for the small business subcontracting target. The SBA maintains a list of directories to help connect small businesses with outsourcing opportunities.
Small businesses are subject to oversight by agency inspectors general and the Department of Justice (DOJ). Falsely claiming to be a small business may result in liability under the False Claims Act (31 USC §§ 3729 – 3733). To mitigate the risk of being misclassified as a small business, emerging businesses should adhere to the following:
- Make sure staff understand the rules.
- Stay alert to regulatory changes.
- Certify compliance.
Holders of small business-only contracts can also face significant protests from unsuccessful bidders. Protests challenging a company’s small business certification are handled by SBA government contracting area offices serving the area in which the challenged company’s headquarters is located. Protests challenging the award of a business under any of the SBA’s socioeconomic programs are adjudicated by the applicable program office within the SBA’s Office of Procurement and Business Development.
If the SBA determines that the winning business does not meet the size or classification requirements for contract award, the business is not eligible for that contract. The SBA Office of Hearings and Appeals handles appeals of size determinations and will render a final decision.
The author would like to thank our legal assistant Allison Moors for her valuable contributions to this article.
Series: Key Considerations for Emerging Businesses
Start-ups have special legal needs. Bass, Berry & Sims has advised these companies through all phases, from start-up to IPO. Our Emerging Companies Practice Group publishes a series of ‘Key Considerations’, in which we will share our experience outlining the most critical factors a company should consider in the most relevant areas.
Keep an eye out for future episodes of this series.